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Hiring independent contractors in Canada can seem daunting. There’s so much to learn and understand about employing contractors in a different country — labor laws, taxes, and compliance to name a few. You’ll even have to figure out how to set up payroll and make payments in the local currency.
Luckily, you’re in the right place. In this article, we will address everything you need to know about hiring and paying independent contractors in Canada. We’ll give you an overview of Canadian labor laws, tax and compliance practices, and explain the risks that can come up if you misclassify your workers.
Ready? Let’s dive in.
The first step to hiring and paying an independent contractor in Canada is understanding the unique contract management requirements in the country. You’ll also have to learn about relevant tax and compliance regulations.
While hiring from Canada, the employer needs to decide on whether they want to hire workers as an employee or independent contractor, as there are different definitions for each. Remember that if you fail to classify workers correctly, it can lead to fines, penalties, and legal liabilities for the company (more on this below).
A few pointers to keep in mind while hiring in Canada:
Canada distinguishes between employees and independent contractors by reviewing how, when, and by whom work is performed.
Generally, independent contractors pay their own taxes and do not receive benefits.
US-based companies do not need to submit a 1099 form for Canadian contractors.
The following are some of the criteria mentioned on the Canadian government website that make a distinction between an employee and a contractor:
Control: How much authority an employer has over a worker, including their control over the work done.
Tools and equipment: Whether a worker supplies their own tools and equipment or an employer supplies them.
Financial risk: Contractors can incur a profit and suffer losses, whereas employees have their costs covered.
Responsibility for investment and management: Whether the independent contractor is required to make an investment so that they can provide their services.
If you misclassify an independent contractor, you could face penalties and fines, as well as legal issues. Of course, not every misclassification is intentional, but your business can still be penalized for it.
But, why does understanding the difference between these two types of workers matter?
Well, because Canada enforces specific, and sometimes severe, penalties for contractor misclassification. Besides hefty fees, you could be subject to business bans in the location where the misclassification took place. This can be a blow to businesses that want to expand internationally.
If a worker you set up as a contractor is deemed by Canadian law to be in an employee relationship, you could risk the subsequent loss of ownership of any intellectual property (IP) developed by that worker. Misclassification can raise the question of who owns the rights to produced work, potentially leading to long and costly legal battles that could also impact your company’s reputation.
Importantly, a statement or contractual agreement that states that a worker is an independent contractor is not sufficient. You have to ensure that the facts of the working relationship align with the definition of what it means to be classified as an independent contractor.
In recent years, Canada has tightened its rules surrounding the difference between employees and independent contractors. Ongoing compliance is a challenge for any company looking to build a globally distributed team.
Remote's guide to employee and contractor misclassification covers every aspect of the employee-contractor relationship and provides expert tips on how to avoid misclassification or rectify misclassification issues if they arise.
Our employment experts can protect you and your contract workers from incurring fines and penalties as a direct result of misclassification. Take a look at our contractor compliance checklist to avoid miscalculation, and protect your business.
Labor laws differ between employees and independent contractors in Canada. The most important considerations are as follows:
Taxes: With independent contractors, employers aren't required to withhold taxes or additional funds for Canadian social security programs. The independent contractor is responsible for paying their own taxes.
Pension plans: Independent contractors making more than CAD 3,500 are liable to pay into the Canadian Pension Plan (CPP). Independent contractors living in Quebec must instead pay into the Quebec Pension Plan (QPP).
Benefits: Independent contractors do not typically receive benefits, including paid leave, sick leave, or holiday pay, among others. Moreover, they are not eligible for Employment Insurance (EI) benefits if they become unemployed.
For specific information about growing your team in Canada, head to our Canada Country Explorer page.
Tax laws and compliance practices can get complicated when hiring in Canada, but it's imperative to stay on top of taxation requirements to avoid any fines or penalties.
If your business is US-based, there are a few tax forms you’ll need to consider, and potentially submit to the Internal Revenue Service (IRS).
The first is 1099-NEC. Because Canadian workers are typically not US taxpayers, you are not required to submit this 1099 form on their behalf. Instead, independent contractors in Canada must complete a W-8BEN form or W-8BEN-E form (if they're providing services as a business entity), and submit this form if their employer is based in the US.
The employer must additionally send the international contractor a 1042-S form to summarize the income paid out to them and declare if any taxes have been withheld. Our article on tax compliance for US companies, covers common questions around compliance and regulations inside and outside the US.
US-based employers also need to consider a 1096 form, which acts as a printed copy of payments made to the contractor during the tax year. The 1096 form is the responsibility of the employer and not the contractor, as it is related to the company's finances. It is used both in the United States and in other countries, though each country may have its additional rules and regulations.
Generating one or two tax forms for your contractors may seem doable, but collecting and generating tax forms can get out of hand if you’re hiring multiple contractors globally.
Remote can help you stay organized with your tax compliance and ensure that you’re on top of each country’s laws with our efficient contractor management system.
There are certain benefits to hiring independent contractors over full-time employees. Making payments tends to be easier since contractors are responsible for filing their own taxes. You probably wouldn’t need to put your contractors through onboarding, so you can get them to begin working for you quickly.
While independent contractors may be ideal for some businesses, there are several reasons why a company might consider converting a contractor to an employee.
These could include:
The ability to offer independent contractor benefits, such as paid time off and health insurance.
Increased savings that an employee offers in the long run, as contractors tend to charge more for their work.
A tighter grip on IP rights, as you have greater control over an employee’s work.
The assurance that you are complying with local laws and regulations.
However, it’s not easy to convert your contractors to employees because you’ll have to learn about compliance requirements, offer employee benefits, and implement onboarding procedures.
If you’re looking to make the switch, Remote can help you seamlessly convert contractors to employees while ensuring compliance with Canadian laws.
You can make direct payments to an independent contractor in Canada via bank transfer, international check or money order, or other digital payment methods.
Contractors are usually paid when they submit an invoice at the end of a project, hourly, or at contractually-agreed points through the working relationship. The company is not required to withhold taxes or social security contributions from their payments.
When you’re dealing with a globally distributed team, it can be a hassle to stay on top of this process. From managing invoices and payroll to paying out salaries in the local currency — payroll management takes time and resources.
There’s an alternative solution to consider in the form of a global contractor management platform like Remote. Remote can handle all your payroll processing needs and help you minimize risk and cut costs when you’re looking to hire and pay independent contractors in Canada.
Not only will your business be compliant with relevant payroll legislation while hiring from Canada, but payroll processing in itself becomes easier. Remote allows you to manage payments and invoices with a single click and offers payment methods in more than 100 currencies.
There are several rules, regulations, and compliance practices you’ll need to keep in mind while hiring independent contractors in Canada. If you fail to comply with employment laws or misclassify your workers, you may face hefty fees, penalties, or legal difficulties.
Fortunately, Remote’s global contractor management platform can help you take care of every aspect of hiring and paying contractors, including onboarding, payments, and taxes.
If you’re ready to take the plunge, sign up now and begin onboarding contractors in Canada in minutes!
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