Contractor’s guide to contracting in Canada
As a post on the ContractorUK Forum points to, Canada is an increasingly popular market for foreign workers due to the dynamic economy and relatively high levels of contractor pay,
But unfortunately, being a limited company contractor, in the way that is possible in the UK and much of continental Europe, is not an option in Canada, writes Kevin Austin, managing director of Access Financial.
As with the US, the restriction on the use of corporate entities is not linked to visa requirements. Indeed, agencies and management companies can sponsor visas. However, in Canada people do not operate through Personal Service Companies -- they must be directly employed, if not by the end-user, then by an agency or other employment intermediary.
In practice, most contractors operating in Canada are employed by a management company on behalf of the end-user client. The management company typically withholds payroll taxes from the first day of employment in Canada.
The rules differ somewhat by province but most foreign contractors are based in Ontario, Canada’s most populous province, which contains the greater Toronto conurbation.
Canadian payroll obligations
- Pay frequency for Ontario is to be monthly and salary is paid to the employee on the last working day of each month
- Contractors must email his/her signed timesheet to the management company on the last working day of each month. If there are any reimbursable business expenses, these will be paid the following month after receiving payment from the agency/client
- Net salary will be remitted in Canadian dollars in the Canadian bank account of the contractor. It is advisable to agree the contract rate in CAD with the agency
- An employee is entitled to two weeks’ vacation time (which is equal to 4% of gross salary). As per the labour law of Ontario, it is possible that the employer can agree with the employee that the 4% vacation pay is paid with each pay cheque as it is earned, instead of vacation time-off
- If the vacation pay is not paid out with the regular salary, the employee will be entitled to two weeks’ vacation time-off only after completing each 12-month vacation entitlement year (which starts from the date of hire). An employee who does not complete the vacation entitlement year, does not qualify for vacation time, however the 4% vacation pay still must be remitted
- Notice of termination: The minimum notice period required under the law to terminate the employment is none for employment of less than 3 months; 1-week notice for employment of 3 months but less than one year and 2 weeks’ notice for employment of 1 year but less than 3 years
- Severance pay: An employee qualifies for severance pay when his or her employment is served and he or she has worked for the employer for five or more years. This is unlikely to be relevant for most contractors
- If the contractor is working in one province and residing in another province, then the rules of the province where the contractor is working will apply for payroll purposes
An entry visa is not required by the nationals of the following countries:
Andorra, Antigua and Barbuda, Australia, Austria, Bahamas, Barbados, Belgium, Botswana, Brunei, Croatia, Cyprus, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel (national passport holders only), Italy, Japan, Korea (Republic of), Latvia, Lithuania, Liechtenstein, Luxembourg, Malta, Monaco, Namibia, Netherlands, New Zealand, Norway, Papua New Guinea, Poland, Portugal, St. Kitts and Nevis, St. Lucia, St. Vincent, San Marino, Singapore, Slovakia, Solomon Islands, Spain, Swaziland, Sweden, Slovenia, Switzerland, United States, United Kingdom and Western Samoa.
All foreign nationals are obliged to possess a work permit before commencing their work activities in Canada.
The processing time needed to apply for a work permit varies, depending on the type of work to be done and can range from approximately 2-5 months (including job advertisement time).
If a Labour Market Opinion (LMO) is required to support the work permit, which normally is the case, the employer must demonstrate that they have undertaken sufficient recruiting efforts in Canada before the LMO can be issued. The employer is required to advertise the available position in Canada (at least in three different media) for at least 4 weeks before applying for the LMO. In addition, the advertisement must remain posted to actively seek qualified Canadian and permanent residents in Canada until the date the LMO is issued.
On receipt of a valid Canadian work permit, contractors should apply for a Social Insurance Number (SIN). The Social Insurance Number is a nine-digit number that is required to work in Canada or to have access to government programmes and benefits.
Provincial Health Insurance
Upon completion of three months in Canada, contractors can apply for health coverage at the local province (territory) where they are residing. Upon being granted health coverage, a health card is issued which provides coverage in that province or territory.
The tax period is the calendar year.
Canadian law establishes the following criteria to determine the tax residency of the individual:
Habitual residence of the person or family in Canada;
A person is physically present in Canada for 183 days or more in a calendar year;
Centre of vital interests (for example, immediate family relations and economic ties) in Canada.
For 2018, the federal progressive income tax rates are:
|Taxable income (CAD)||Tax rate (%)|
|Up to 46,605||15|
|46,606 – 93,208||20.5|
|93,209 – 144,489||26|
|144,490 – 205,842||29|
In addition to federal tax rates, the provincial tax rates are charged according to provinces and territories.
The provincial tax rates for Ontario are as follows:
|Annual taxable income bracket (CAD)||Marginal tax rate (%)|
|0 – 42,201||5.05|
|42,202 – 84,404||9.15|
|84,405 – 150,000||11.16|
|150,001 – 220,000||12.16|
There are surtaxes being taxes on the taxes beyond certain thresholds increasing the overall tax rates.
Federal and provincial tax rates are calculated on the taxable income.
Employer Health Tax (EHT)
All employers are required to pay EHT if the total annual remuneration paid to employees exceeds the exemption limit of CAD 450,000. Various EHT rates apply based on the level of remuneration. The top EHT rate of 1.95% will apply, if the total annual Ontario remuneration paid by the employer is CAD 400,000 or more.
Workers’ Compensation Insurance
Each province and territory in Canada has its own exclusive Workers’ Compensation Board/Commission (WCB). WCB are funded by the employer (not by government) and employers are charged a certain dollar amount per $100 of payroll. Individual employers’ assessment rate or premium are based on the type of industry, classes and occupation.
It is mandatory for all business in Ontario that employ workers to register with the Workplace Safe and Insurance Board (WSIB) within 10 days of hiring their first full-or-part time worker.
The deadline to file a tax return is April 30th of the year following the tax year. There is no provision to extend the deadline unless it falls on a weekend, in which case the filing deadline is usually extended to the next business day. Any balance of tax due is payable by April 30th of the year following the tax year in question.
Double Taxation Agreements
Canada has Double Taxation Agreements (DTA) with many countries. The DTA between Canada and the home country of the contractor will allow the contractor to avoid double taxation on his income.
Employment Insurance (EI)
Employee EI contribution rate is 1.66% of gross salary, with a maximum annual contribution limit of CAD 858. The maximum annual earnings limit for EI contribution is CAD 51,700.
Employer EI contribution rate is 1.4 times the total of employee’s contribution, i.e. 2.324% of gross salary, with a maximum annual contribution limit of CAD 1,202.
Contributory Pension Plan (CPP)
Employees must also contribute into a pension plan (CPP). The employee CPP contribution rate is 4.95% of earning more than CAD 3,500, up to a maximum of CAD 55,900. The maximum employee and employer contribution to pension plan is CAD 2,594.
Employer and employee contributes an equal amount in CPP.
The income retention rate depends upon many factors, contract duration, marital status, income level, withholding allowances among other factors that are too complicated to cite here, bearing in mind there are ten provinces!