Why do business in Canada?
As the second-largest country in the world, Canada is host to an array of business opportunities. This is reflected in the nation’s economy, which features in the global top ten for nominal GDP. Canada also placed at #6 on the Forbes Best Countries for Business list in 2019.
Canada boasts a strong and stable economy, a skilled international workforce, and preferable corporate tax rates. This all serves to make Canada a hugely appealing country in which to establish an overseas presence.
GMT (-2:30) to GMT (-7)
World Bank Ease of Doing Business Ranking (1-190)
Tax rates 2020
5% + provincial tax
How to set up payroll in Canada
To start payroll in Canada you would need a federal level business vehicle such as a subsidiary, branch, or payroll registration. Please review what extra-provincial registrations you may need in addition to this.
Choose your location carefully – all provinces in Canada have different laws and regulations. Canadian common law applies on a federal level, but most regulations that require compliance are assigned at a provincial level. You’ll need an address in Canada before you start the process.
There are two major social programs in Canada that employers must pay into. The first of these is the Canada Pension Plan, or CPP. All Canadian employers must withhold 5.25% of an employee’s salary to pay into the CPP. You must also match these contributions.
In addition, an employer is responsible for payments to an Employment Insurance policy, or EI. This is deductible to the tune of CA$1.58 per every CA$100 of deductible pay. Again, these contributions must be matched.
You will also need to withhold income tax repayments for your employees. Income tax rates start at 15%, and peak at 33%, varying according to the employee’s salary. Earnings of CA$214,368 or over qualify for this highest tax bracket. The minimum wage in Canada varies between provinces. Saskatchewan has the lowest basic minimum wage, at CA$11.45 per hour. Ontario has the highest, at CA$14.25.
These funds must be submitted to the Canadian Revenue Agency, or CRA, on an annual basis. This will naturally impact the total cost of hiring in Canada. It is advisable to allow an additional 1.5% in your hiring budget to accommodate these fees.
Canadian employment law & HR considerations
In addition to CPP and EI repayments, all Canadian employees are legally entitled to certain statutory rights. Some of these are assigned under federal common law, while certain nuances are province specific.
The most important considerations include:
- An employee’s right to work in a safe environment, devoid of hazards or harassment
- A minimum of 10 days paid holiday leave each year
- A minimum of 5 paid sick days per year
- A minimum of 12 weeks of unpaid leave for new parents, though lengthier agreements can be negotiated
You must also ensure that all employees have a Social Insurance Number, or SIN. If an employee’s SIN begins with the number 9, ensure they have the legal right to work in Canada. These numbers are typically assigned to temporary and short-term employees.
Setting up a subsidiary entity in Canada
Your first decision when you settle upon doing business in Canada is location. All ten provinces in Canada have their own laws and regulations, which work alongside Canadian federal law. Learn which province will meet your business needs best.
You also need to consider whether to open a branch of your global business or set up a subsidiary business. These will have varying financial implications, based upon taxes payable.
If you open a branch of a global corporation in Canada, you will need to pay income tax on your local business income, at both provincial and federal levels. This will be charged at the same rate as a native Canadian business. Different provinces have varying tax codes, which is another reason why location is so important.
In addition, a branch will be liable for repayments of the branch profits tax. This is an additional payment on any dividends that would be applicable if the company was a subsidiary, not a global branch. This sum will be applied under the Income Tax Act and will typically run to around 25% of the branch profits – minus any tax payments already made, and any investment in the local economy.
A subsidiary, meanwhile, will be liable to pay income tax on a corporation’s global profits. A subsidiary will not need to pay the branch profits tax, but any non-resident corporation will potentially be charged an additional 25% of local income as a dividend.
There are also a handful of legal differences between branches and subsidiary companies. If a branch of a global corporation experiences legal difficulties or acquires debts, the overseas parent company will be responsible for these. A subsidiary company, meanwhile, will be responsible for its own, local affairs. In addition, a subsidiary company may be eligible for governmental business incentives that are not open to a branch.
There are a handful of nuances that should be taken into consideration when doing business in Canada.
- Your company must be registered to a Canadian place of business, which can provide financial and legal information to the authorities upon request
- There is no minimum capital requirement to start a business in Canada
- Annual tax returns must be filed on a Federal and Provincial level in Canada
- At least 25% of directors of a business registered in Canada must be Canadian citizens. If you have three directors or less, one Canadian national is usually sufficient. However, depending on the nature of your business, some corporations may require a majority of directors to be Canadian residents
- You can start a business as a non-resident in Canada, but your hands will be comparatively tied, and you will have fewer legal rights and options. It is always advisable to have at least one local agent acting on behalf of your business
Above all, learn the legislature of the province that your business is registered within. The regulations differ according to location, so never assume that following federal law to the letter will be sufficient to remain compliant.
In addition, many Canadian nationals identify strongly with their province. This will be reflected in their behaviour and the way they do business. Learning how different citizens like to interact based on geography will greatly enhance your chances of success and retaining the services of any hires.
Setting Up in Canada FAQs
Every province in Canada has its own set of employments laws and regulations. This means that any employment contract must be carefully worded to ensure that it remains legally compliant.
The wording of Canadian common law is unhelpfully vague. This simply expresses that, “reasonable notice” must be provided by any employee wishing to wilfully terminate their employment. Two weeks is usually considered reasonable, but this is not ascribed in any legal doctrine.
Notice periods vary from province to province. Most territories protect loyalty with additional notice periods. For example, the Employment Standards Act 2000 of Ontario dictates that any employee with 3 years of service or longer is entitled to 1 week of notice for each year of service before their role can be terminated.
For the avoidance of doubt, “under one year” could be at late as 11 months and 31 days. Once an anniversary is reached, however, the employee is entitled to an additional week of notice.
Most provinces will follow a similar timetable. Be sure to investigate before taking any action toward terminating employment, though. In lieu of notice, many provinces will permit a business to make a lump sum salary payment to the employee that matches this statutory notice period.
To successfully launch your business in Canada, you will be required to pay a, “nominal initial investment.” This is far as the legal requirement extends. There is no minimum sum, so this could be as little as a single Canadian dollar.
Once we have completed the preliminary work and filed the relevant applications to the Canadian authorities it can be up to five business days before your entity is legally able to trade in Canada. This is the length of time the registration process often takes to be completed and approved. It may be as short as three business days, though. It depends upon how busy the authorities are and the complexity of your application.
This depends upon which province you will be operating within. Every territory in Canada has its own legislature on what paperwork is required to start operating a business. Wherever you choose to trade, expect to be quizzed on your financial solvency and business practices.
A federal incorporation gives you the freedom to conduct business all over Canada. A provincial incorporation will be restricted to trading in the province in which your business is registered. You can trade with other provinces under this banner. They will just need to come to your location to strike a deal, and all payments must be registered with your province to remain tax compliant.
Federal incorporations also typically run at lower cost, but greater restrictions are applied in terms of business naming. If an existing national company has a similar name to your own, you are unlikely to be permitted to trade under that identity. If your business is named Apple Enterprises, for example, you are unlikely to be granted status as a federal incorporation due to the risk of marketplace confusion.
Yes, an existing overseas corporation may make an application to open a Canadian branch. This is done by making separate applications to each province that the business aims to operate within. You cannot make one, single application to the national Canadian authorities as a whole.
It is highly advisable to open a business bank account in your Canadian province. Mingling your local business costs with other expenses, whether personal or pertaining to global business, may attract unwelcome attention from the Canada Revenue Agency and result in a tax audit.
If a business has three directors or less, at least one must be a Canadian resident. If you have more than three directors, 25% of these individuals must be Canadian residents.
The standard working week in Canada is 40 hours, divided into five 8-hour days. The laws of each particular province vary. Different provinces also dictate varying lengths of legally mandated rest breaks.
The total cost is typically 1.1 times the employee’s salary. This will factor into the total of any contributions to the Canada Pension Plan and premiums attached to employment insurance. Also remember to budget for any equipment (computer, cell phone, company car) and training expenses incurred upon arrival.
The most common supplementary benefits offered to Canadian employees are:
• Contributions to the Canada Pension Plan
• Contributions to the Employment Insurance
• Health and dental insurance policies
• Life insurance
• Training expenses
• Vehicle and cell phone allowances
• Healthcare spending accounts, such as gym memberships
No, this decision will be overturned in a court of law. Under Canadian common law, unless a business has just cause for instant dismissal, “reasonable notice” (usually considered to be two weeks) is required before terminating a contract.
Examples of just cause under Canadian law include:
• Gross incompetence leading to damage to the business. Note that this is not mere underperformance
• Refusal to follow reasonable instructions
• Fraud, embezzlement or other forms of dishonesty that breach trust between employer and employee
• Persistent, avoidable tardiness or absenteeism
• Harassment, whether sexual in nature or the use of verbal or physical intimidation
• Physical violence in the workplace, especially when intent to harm can be proven
• Conduct off-duty that compromises the reputation of the business, leaves the employee unable to perform duties safely and efficiently (such as intoxication that extends into working time), or leaves other employees unwilling to work alongside the individual (such as abusive or unlawful behaviour – personal differences, such as political persuasion, are not applicable)
As a business, the latter in particular must be handled with particular sensitivity. You will need to prove that the employee’s conduct impacts your ability to do business. A business is not considered the moral or ethical arbiter of an employee’s off-duty behaviour.
As with all matters concerning employment law in Canada, this varies according to province. In most cases, however, two weeks of vacation time his usually granted, in addition to any public holidays. You are welcome to offer more annual leave in an employment contract, but two weeks is usually considered the minimum.