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With its strong economy, geographically favorable location, ideal tax conditions, and access to numerous international markets through trade treaties, Canada is an attractive place for companies to grow globally. However, as your company builds teams in Canada, you’ll need to know the difference between employees and independent contractors and how to hire, manage, and pay them.
Classifying and paying your independent contractors correctly is critical, so let’s define what makes independent contractors in Canada distinctive and explore a few options for paying them.
The difference between an employee and a contractor in Canada
In Canada, as in many other countries, the difference between an employee and a contractor comes down to critical variations in work and benefits. In Quebec, the Quebec Civil Code determines the worker’s status. In other jurisdictions, the Canada Revenue Agency (CRA) examines the factors below holistically.
1. Payroll and taxes
When you hire employees in Canada, you generally pay them regularly and take payroll taxes out of their paychecks. These taxes typically go into social security programs, to which the employer and employees both contribute.
On the other hand, when you hire contractors, they generally submit invoices for payment at the end of their work. When you pay them, you do not withhold payroll taxes from their paychecks or contribute to any social security funds. Contractors are responsible for making their own contributions to social security through their taxes without the benefit of employer contributions.
Employees in Canada typically receive specific compensation and benefits from their employers. They get paid vacation time, paid state holidays, and additional leave such as sick leave and maternity leave. Employees in Canada generally receive their health insurance through the provinces they live in — still, many employers choose to provide their employees with additional benefits to supplement the free provincial care.
Contractors are not entitled to any of the benefits that employees in Canada usually receive from their employers. If they become ill and need to take time off, they take that time unpaid. They do not receive official paid state holidays, retirement, or health benefits from companies.
Because they must pay their own payroll taxes and go without employer benefits, contractors in Canada often request and receive higher pay than employees. The higher compensation they can command helps to offset some of the financial disadvantages of working as contractors.
3. Notice and severance
Since Canada does not have at-will employment, employees in Canada are usually entitled to a notice period if the company wishes to terminate their contracts. In many jurisdictions, they are entitled to severance pay as well.
On the other hand, contractors in Canada usually do not receive a notice period or severance pay, so companies can terminate their contractor relationships more easily than their employee relationships. Contractor relationships are also more likely to be short-term arrangements that terminate naturally.
4. Type of working relationship
Another essential difference between contractors and employees in Canada is that employees usually have a subordinate relationship to the company, whereas contractors do not.
Canadian courts and tax authorities often consider multiple factors in determining the type of relationship that exists between a company and its workers:
- The parties’ subjective intentions: This criterion assesses the initial plans of the two parties to the relationship, including what the written agreement or contract states.
- The objective facts about the relationship: This criterion involves evaluating the relationship in practice to determine whether it adheres to the two parties’ stated intentions.
- Control over the work: This factor includes whether the workers have flexibility in how they perform their work — that is, whether they receive company direction or are able to work autonomously. Workers with greater flexibility and control are more likely to be contractors.
- Ownership of tools: Contractors provide and use their own tools more often than employees. Workers who use company-provided resources are more likely to be in an employer-employee relationship.
- Chance of profit: This factor assesses the potential for the worker to profit more from higher-quality work. Employees, who receive set hourly wages or salaries, typically have less chance to profit. Contractors can often boost their profits by working more efficiently or having the reputation and experience to charge higher fees.
- Risk of loss: This factor assesses the risk that the worker could lose money by performing the work. Employees who receive predetermined pay usually incur little risk of loss in their daily work. On the other hand, contractors lose money if the expenses of performing a job are higher than the pay they will receive for it.
In general, employees work for a company directly. They have work assigned to them through the company, and they receive training and oversight from a superior.
On the other hand, contractors work for themselves. They generally have a portfolio of clients, and your company is one of those clients. They can choose the work they want to take on, often bidding for it by submitting an estimate of how long the job will take and how much it will cost.
Importance of classifying contractors and employees in Canada correctly
Determining whether the workers you hire in Canada are legally employees or contractors is critical. Misclassifying your employees as contractors in Canada often has serious legal and financial consequences for a company.
If the CRA investigates a company and determines it has illegally classified its employees as contractors, the company will need to make financial reparations to those employees and pay back taxes to the government. It will also have to pay its employees the equivalent of the paid time off and benefits they missed while misclassified. A company based in a country other than Canada could also make its Canadian workers personally liable for some of the taxes owed.
Fortunately, you can prevent these financial losses by doing the research necessary to classify your employees and contractors correctly. That way, you can provide them with the pay and benefits they deserve.
However, in many cases, the work you need to have performed is genuinely contract work. In that case, you’ll need to know the basics of hiring and paying contractors so you can do so in compliance with the law.
How to hire contractors in Canada
Hiring an independent contractor in Canada is often more of an art than a science. As you hire contractors in Canada, you’ll want to keep a few questions in mind:
- Will you pay your contractors through your company payroll, withholding payroll taxes in compliance with the law, or will they be responsible for their own taxes?
- Will your contractors receive benefits from your company, such as paid time off, employer-sponsored retirement plans, or supplemental health insurance?
- Will your contractors receive their assignments through your company or be able to bid for their work?
- Will your contractors receive management and direction from your company, or will they be able to choose where, when, and how they complete their work?
The answers to these questions will help you determine whether you actually need an employee versus a contractor.
Once you’ve determined that your contractors are truly contractors, you’ll want to bring them on board formally. Best practices for hiring contractors in Canada are to put a strong written independent contractor agreement in place to define and clarify the terms of the relationship.
The law does not require one, but a court or authority such as the CRA can examine the relationship at any time at the contractor’s or company’s request. A robust written contract is highly advisable — it delineates expectations and requirements and makes sure both parties understand their responsibilities clearly.
Your company should also consider any Collective Bargaining Agreements (CBAs) that apply to your industry. In Canada, if a CBA allows a union to control bargaining rights for a particular category of workers, having independent contractors complete the work may violate the law. You will need to check with any relevant CBAs to determine their rules.
Where to hire contractors in Canada
Now that you know the details of how to hire contractors in Canada, you’ll need to know the best places to seek out qualified candidates.
Some companies turn to sites like LinkedIn or Craigslist to connect with qualified contractors. When considering how to source contractors in Canada, other companies use online directories or digital bid boards tailored to industries like construction. These directories contain extensive listings of service providers that companies can browse to see which services meet their needs.
Tax considerations for paying contractors in Canada
Hiring contractors in Canada involves different tax practices than hiring employees. Remember that when you pay your contractors in Canada, you will not generally withhold or pay payroll taxes as you would with your employees.
With your employees, you would withhold taxes, and you would pay employment insurance (EI) and Canada Pension Plan premiums. For employment insurance, the employer premium rate is CAD 2.212 per CAD 100 of insurable earnings, or 2.212 percent. For the Canada Pension Plan, the contribution rate for pensionable earnings is 11.4 percent, which is split between the employer and the employee.
With independent contractors, the process is simpler — you will pay them without withholding any taxes. Your contractors will be responsible for their tax payments and social security payments if they choose to opt in or qualify for a non-employer-sponsored program.
Income tax payments
When you hire contractors in Canada, you should also ensure they will not have to pay two sets of income taxes on the same income.
If your home country is the United States, know that the United States-Canada Income Tax Convention eliminates the need for Canadian contractors to pay U.S. Internal Revenue Service (IRS) taxes in addition to Canadian CRA taxes. In this case, Canadian contractors will need to submit IRS form W-8 BEN to the company for which they have performed work. If your home country is not the United States, check to see whether similar tax treaties apply to protect contractors from double taxation.
Companies that work with contractors must submit several tax forms to their workers and the CRA:
- T5018, due to construction subcontractors
- T4A slip, due to subcontractor services
- T4A summary, due to the CRA
- T4A-NR, due to cross-border contractors
The nuances of which forms to send when can be tricky, so you may want to engage the services of tax professionals or other experts to ensure your practices are correct.
How to pay contractors in Canada
When the time comes for paying contractors in Canada, you have a few different options. Let’s investigate common payment methods to see which ones are best for contractor payments:
- Payroll services: Generally, you will not use your company’s payroll department to pay your contractors in Canada. Because you do not withhold payroll taxes from your contractors or pay into social security programs for them, your contractors cannot go onto your traditional payroll. Instead, they will submit invoices for payment through your accounts payable department. However, some third-party payroll services have solutions that enable your company to pay your contractors through their platforms. If you use these services, you should be aware that they can be relatively expensive, and they may not work effectively for all global transactions.
- Banks: Your company might choose to set up a corporate Canadian bank account and use it to deposit funds into your contractors’ accounts, or you might use your bank to send payments through a global wire transfer service. To take advantage of the first option, you may need to register your company officially in Canada, which can be a complex and time-consuming process. The paperwork and delays often associated with company incorporation and registration may lead your company to prefer more efficient options.
- International money orders: International money orders are traditional and reliable, but they are relatively slow compared with other options for paying contractors in Canada. The company must physically purchase them, and the contractors must physically deposit them, so they can be more inconvenient than digital alternatives. Fees and unfavorable exchange rates can also make them expensive options.
- Digital wallets: Digital wallets are sometimes appealing alternatives to international money orders. Using a digital wallet, such as PayPal, your company can transfer money quickly and conveniently. Your contractors will appreciate receiving prompt payments, so this is an ideal option when you want to make a positive impression on your contractors with your timeliness. PayPal and other digital platforms face restrictions in some countries, but many should work in Canada, though they may impose fees for international transactions.
- Money transfer services: In some cases, money transfer services provide an ideal solution for paying your contractors in Canada. They offer flexible options, dependable security, and high transfer limits, so you can send large payments and be sure they reach your contractors as intended. The transfers occur quickly, saving time and ensuring prompt payments. However, money transfer services often impose high currency transfer fees if you pay your contractors in a currency other than Canadian dollars.
- Cryptocurrency: Cryptocurrency is legal in Canada. However, Canadian authorities do not consider it legal tender or subject it to tax laws and regulations. Officially, cryptocurrency transactions are bartering transactions. Cryptocurrency may complicate your contractors’ finances if they wish to declare all their income as taxable income. They may also be unfamiliar with handling cryptocurrency.
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THIS INFORMATION IS FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL OR TAX ADVICE. You should always consult with and rely on your own legal and/or tax advisor(s). Globalization Partners does not provide legal or tax advice and the information is not tailored to the specific situations of your company or your workforce. Globalization Partners makes no representations or warranties concerning the accuracy, completeness or timeliness of this information. Globalization Partners shall have no liability arising out of, or in connection with, the information, including any loss caused by use of, or reliance on, the information.