How to pay employees in Canada (Updated 2024)

Running payroll for remote employees in Canada for the first time? Get it right, and you can hit the ground running with your employees in Canada. But if you miss a step, you could rack up thousands of dollars in penalties—or even risk legal action from the Canada Revenue Agency. 

Here’s a step-by-step guide to running payroll in Canada, with everything you need to get it right every time.

Step #1: Decide whether or not to create your own entity in Canada or use an Employer of Record (EOR)

To hire and pay employees in Canada, first you need to establish a business entity in Canada. You can do this by either creating your own local entity, or by using what’s known as an “Employer of Record” (EOR).  

EORs allow you to hire and pay employees through their own entities. They’re responsible for calculating and withholding the appropriate taxes (more on that below), and for paying your taxes to the Canada Revenue Agency (CRA).

When, why, and how do companies use an EOR? 

When companies expand their operations to Canada—and around the world—they typically use EORs like Deel, Papaya Global, and Rippling to run payroll, issue benefits, and navigate international compliance issues. 

This is because EORs can take up to six months to set up, depending on how you apply, and whether the CRA manually reviews your registration. It’s a significant administrative load, and most smaller companies don’t have the time or resources to spare.

When, why, and how do companies create their own entity?

If you create your own entity, that replaces the EOR as the legal entity hiring employees and running payroll. Companies typically create their own entities once the costs of an EOR outweigh the costs of creating their own entities.

In most cases, you have to switch systems when you scale—except with Rippling. Rippling’s EOR is built on top of our native payroll rails, which means that when the time comes, you can move from our EOR to Global Payroll through your own entities—in minutes.  

Here are the steps to set up your own entity:

First, you need to register with the CRA to get a Business Number; you can do this online. This will ensure you can remit statutory deductions for your full-time employees. 

Once you have a Business Number, you can register for a payroll account by calling the CRA’s business enquiries line or by filling out an RC1 form. 

Make sure you have all the following information when you register:

• The date employees will get their first paycheck.
• The pay period. In Canada, employees are typically paid on a bi-weekly or semi-monthly basis (the 15th and the last day of the month).
• The number of employees you’re paying. See the full list of requirements here.

With Rippling, you can hire and pay Canadian employees with either method:

• Rippling offers a native global payroll system, which allows you to pay employees who work in Canada—and around the world—in a single pay run. 
• We also have our own native EOR service, which allows you to hire and pay employees in Canada even if you haven’t set up an entity there.

Step #2: Pick a global payroll software solution

First, it’s vital to understand the two kinds of international payroll solutions: global payroll processors and global payroll aggregators. You can learn about both in our guide.

• Global payroll processors, like Rippling, actually process your payroll, transmit funds, and calculate and file taxes in every country through their own software. Put simply: global payroll processors allow you to pay your international employees just as easily as your local employees: together in a single pay run.
• Global payroll aggregators, like Deel and Papaya Global, aggregate local payroll providers in every country and manually transmit your payroll files to them. These come with many limitations: You’re forced to submit payroll up to 30 days in advance. You can’t track, and automatically sync, employees’ time in the same system.

Remember: Payroll aggregators can’t process payroll through companies that use their own entities. But with native global payroll providers, like Rippling, you won’t have to switch systems as you scale. You can move employees from our EOR to your own local entity, without ripping out and replacing systems to accomplish this.

See Rippling 

Step #3: Determine your workers’ employment status

Before onboarding your workers, and certainly before you run payroll, it’s crucial to understand who you’re paying in the eyes of Canadian law: Are your workers employees or contractors? 

It’s essential to classify them correctly to avoid big fines. Also, if they’re employees, there are payroll deductions you’re responsible for, including Federal Income Tax, Employment Insurance, and pension plans (which vary by region)—see the tables below for the full list.

Canadian courts have created a series of "tests" to determine whether a worker is an employee or a contractor, including:

• The level of control the employer has over the worker's activities
• Who owns their tools and equipment
• Whether they ‎incur expenses for services performed
• Exclusivity of service
• Degree of integration into your company

Step #4: Capture your new hires’ Canadian payroll information

Once you’ve decided whether to use an EOR or your own entity, picked a payroll solution, and ensured that your employees are correctly classified, you should be able to automatically collect (and then pay) your team in Canada. Under Canadian law, you’ll also need to request tax credits forms to ensure you calculate each full-time employee’s payroll deductions just right.

Here’s the information you need to collect:

• Name (matching the account where you’ll deposit their pay).
• Date of birth and date of hire.
• Contact information, including their mailing address in Canada.
• Social Insurance number.
• Bank account information.
• Amount to be paid in CAD (including any bonuses).
• Completed TD1 forms. Every full-time employee needs to fill out a Personal Tax Credits Return (TD1 form), and they’ll need to submit a new one any time they make changes to their personal tax credits.

Step #5: Choose to pay in your local currency or in Canadian dollars (CAD) 

You have to pay Canada-based employees in Canadian dollars (CAD) unless you’ve specifically obtained their written permission to pay them in another currency.

Of course, there are challenges for companies based outside Canada that need to pay Canada-based employees in CAD: The exchange rate between your local currency and CAD can vary (see exchange rates here). If the rate is unfavorable, you’ll end up paying more USD to cover your employees’ wages. You may also need to account for fluctuations in the exchange rate when calculating your financial statements, which can create accounting complexities.

With Rippling, you can pay everyone in Canadian dollars, in minutes, without waiting on transfers or conversion.

Step #6: Run payroll

You have an entity (either your own or via an EOR), you’ve set up your global payroll system, and you’ve ensured your employees are correctly classified under Canadian law.

Time to run payroll! Here’s a preview of how Rippling’s global payroll system works:

Step #7: File your taxes in Canada (T4s) annually

Once you’re up and running paying your employees in Canada, you’re obliged to pay taxes to the CRA. 

Canadian employers must issue their employees with a T4 form no later than the last day of February following the end of each calendar year, and submit it to the CRA. 

The T4 form reports an employee's income and payroll deductions for the previous calendar year, including:

• Total income.
• Employment income.
• Taxable benefits.
• Income tax deducted.
• Canada Pension Plan (CPP) contributions—or regional pension plans like the Quebec Pension Plan (QPP).
• Employment Insurance (EI) premiums.

Employers who fail to issue T4 forms, or submit them late, can face penalties and interest charges. Rippling can reduce your busy work by automatically calculating and filing your taxes in Canada.

What is the average salary for employees in Canada?

The average hourly wage for employees in Canada was CAD 34.68 in 2023, according to data from Statistics Canada—but this varies widely by industry and occupation. 

For example, in 2023 (the most recent year for which industry-specific statistics are available), the average hourly wage for employees in the healthcare and social assistance sector was CAD 31.99, while the average wage for hourly employees in the accommodation and food services sector was CAD 19.68. Experience level also plays a significant role in employee pay rate.

What are the minimum wages in Canada?

The minimum wage in Canada differs by province and territory. For people working in provinces or territories where the minimum wage rate is higher than the province where they live, the higher rate applies.

What information is needed from employees to run payroll in Canada?

Here’s the information you need from salaried employees to process their payroll:

• Name (matching the account where you’ll deposit their pay). 
• Date of birth and date of hire.
• Contact information, including their mailing address in Canada.
• Social Insurance number.
• Bank account information.
• Amount to be paid in CAD (including any bonuses).
• Completed TD1 forms. Every full-time employee needs to fill out a Personal Tax Credits Return (TD1 form), and they’ll need to submit a new one any time they make changes to their personal tax credits. 

How much does it cost to run payroll in Canada?

Most payroll software is priced on a per-employee basis, or per pay run. Payroll service pricing varies according to:

• Payroll frequency.
• The number of employees on your payroll.
• The number of provinces and territories where you employ Canadian workers.
• How often you add and remove payees.
• Any additional services you need, such as year-end processing (like T4s) or mailing out pay stubs.

Can I manually run payroll for workers in Canada?

Some small business owners choose to run payroll themselves, using a payroll calculator and making a direct deposit to employee accounts, in an attempt to cut costs. But running payroll can be a time-consuming process, especially as your business grows. If you go this route, there are potentially risks to keep in mind:

• Compliance: Running payroll manually in Canada, without using native global payroll software, puts you at risk of manual errors and omissions. Rippling handles your compliance work for you—enforcing Canadian minimum wages and overtime rules, which can save you from heavy fines.
• Security: Processing payroll manually can pose security risks, especially if you are using spreadsheets or paper records. This increases the risk of sensitive employee information being lost, stolen, or misused.

Rippling syncs all your business’s HR data with payroll so you never have to use a calculator or manually enter data, like hours and payroll deductions. Rippling also handles your tax and compliance work, from work authorization to T4s, plus we’re an authorized payroll provider by Canada Revenue Agency, Canada’s revenue service for federal and most provincial and territorial governments. 

What are payroll taxes in Canada?

Employers are responsible for deducting certain costs from their full-time employees’ paychecks, including Canada Pension Plan, Employment Insurance, Employment Health Tax, and Workers’ Compensation. Some of these charges vary by province—see our employer cost tables. 

Rippling can automatically sync tax deductions to payroll, and handles your tax and compliance work for you.

What are the late tax filing penalties in Canada?

• Failure to file penalty: If you don’t file your payroll tax return, the CRA will charge you a penalty of 1% of the total amount owing for each month the return is late, up to a maximum of 12% of the total amount owing.
• Late remittance penalty: If you don’t pay your payroll taxes on time, the CRA will charge you a penalty of 3% of the amount owing on the day after the due date, plus an additional 1% for each complete month the payment is late, up to a maximum of 10% of the amount owing.
• Interest charges: The CRA will also charge interest on the amount owing, starting the day after the due date. The interest rate charged is based on the CRA's prescribed rate, which changes quarterly.

In addition to these penalties and interest charges, late filing and remittance can also result in delays in receiving refunds or credits, and can trigger audits or other compliance actions by the CRA.

How do you pay contractors in Canada?

• First, ensure you’re correctly classifying your workers as a contractor (you can use Rippling’s free Worker Classification Analyzer).
• Next, agree on the payment terms with the contractor: the hourly or project rate, the payment cadence, and the method of payment. 
• Collect their payroll information, including their name, date of birth, contact information, bank account information, and business number—you’ll need this later, when reporting the payments to the CRA on a T4A form.
• Use your chosen payroll software to pay the contractor in CAD. With Rippling, you can pay both contractors and employees in Canadian dollars, in a single pay run, without waiting on transfers or conversion.

Remember, when hiring Canadian contractors, employers are not responsible for deducting taxes from their paychecks. Instead, the contractor is responsible for tax remittance to the CRA. But employers must still keep an accurate record of employment and payroll information for each worker.