Canada Payroll: Hiring Workers in Different Provinces

Research suggests that in March 2021, around 5 million employees had been added to Canada’s remote worker population since the introduction of lockdown restrictions, bringing the total number of remote workers in Canada to around 6.8 million - around 40% of the country’s workforce. With more employees than ever working remotely, employers in Canada have had to adapt to the task of maintaining employee populations that are stretched across different Canadian provinces and territories.

Remote Work Challenges

In the current climate, and with public health restrictions still in effect, the hiring of remote workers is an important way for employers to ensure their businesses are staffed with the best talent. However, since employment in law in Canada’s provinces and territories entails different employee rights, workplace insurance scheme rules, and income tax rules, the increased number of employees working from locations across the country may also make the payroll process more complex.

Given the penalties associated with payroll compliance, employers in Canada must be familiar with the rules regarding their remote employees. To help you understand your responsibilities, we’ve put together a number of remote employee payroll scenarios:

Scenario 1

An employer with a head office in Ontario takes on an employee who works from home in British Columbia.

Tax: From a tax perspective, as long as the employer does not have a ‘Permanent Establishment’ in British Columbia, that employee will be taxed under Ontario’s tax system - which also means the employer should include their earnings in their Ontario Employer Health Tax calculation.

Social security: The employee’s rights under the Ontario Employment Standards Act (ESA) and coverage under Workers’ Compensation Insurance are based on the place in which they physically work. This means that the employer must register with WorkSafe BC and ensure that ESA rules, such as overtime rates and pay frequency, are applied for British Columbia.

Taking into account all employment considerations, an employee may have up to 3 different provinces applied under their payroll software listing;

• The province in which they live (home address)
• The province in which they work - for the purposes of WCB and ESA applicability
• The province from which they are paid - for the purposes of tax

If an employee does not have to physically report to their place of work, their province of employment is considered to be the one from which their salary or wages are paid.

Scenario 2

An employer based in Saskatchewan has an employee who works from home in Alberta. The employer outsources payroll to an Ontario-based company. The employee’s province of employment is Saskatchewan since it is the source of their salary deductions.

If an employer does not not have a Permanent Establishment in Canada, but has employees that work in Canada, they must refer to the ‘Payroll Deductions Supplementary Tables’ applicable to their province when deducting income at source. The tax tables essentially provide an average of provincial tax rates, and are required to inform employees’ tax returns when they file annually in their home provinces.

The crucial factor for employers when deducting income at source is to determine whether they have a Permanent Establishment under the rules of a given province or territory. It is important to remember that ‘Permanent Establishment’ does not necessarily mean having a physical building.

Employers should consult the Canada Revenue Agency (CRA) if they are unsure about their employees’ province of employment:

• Call the CRA from within Canada: 1-800-959-5525
• Call the CRA from outside Canada: 613-940-8497

The Canadian government hosts a number of online resources to help employers with remote employees understand their obligations:

• Guidance on Permanent Establishments
• Guidance on provincial tax tables
• Guidance on Employer Health Tax obligations for businesses in Quebec

If you are interested in doing business in Canada, find out everything you need to know about payroll, tax, social security, employee benefits, work permits, employment law and more in the activpayroll Guide to Doing Business in Canada. This is available as a free PDF to download.