How can a US company hire a Canadian employee or contractor?

Route one: register as a non-resident employer and run Canadian payroll

A US company can employ someone in Canada directly without forming a Canadian entity. Canadian law requires any employer, resident or not, to withhold income tax, CPP and EI from salary paid for employment performed in Canada, and to remit those amounts to the CRA. That obligation comes from Regulation 102, and it applies in full to a Canadian resident employee. The setup is:

• Obtain a Business Number with a payroll (RP) program account.
• Calculate and withhold federal and provincial tax, the employee's CPP and EI, and add the employer's share: CPP matched dollar for dollar and EI at 1.4 times the employee premium.
• Remit on the CRA's schedule, issue a T4 by the end of February, and file the T4 Summary.
• Register with WSIB where the work is covered, and assess the Ontario Employer Health Tax, which turns on whether the arrangement gives the company a permanent establishment in Ontario.

The Regulation 102 waiver and the non-resident employer certification (Form RC473) that US companies sometimes hear about apply to non-resident employees sent into Canada briefly, not to Canadian residents hired to work here. A Canadian resident on your payroll gets full source deductions from day one. Our first-employee payroll guide walks through the same registration steps a domestic employer follows.

Route two: an employer of record for a small or first hire

An employer of record (EOR) is a Canadian company that becomes the worker's legal employer, runs payroll, handles source deductions, statutory benefits and Employment Standards Act compliance, and bills the US company a monthly fee per employee. The US company directs the work day to day. A PEO is a co-employment version of the same idea, more common where the client already has a local entity.

For one to a handful of hires, the EOR route removes the CRA registration, the Ontario filings and the year-end slips from the US company's plate. It does not remove the permanent establishment question: an employee who habitually negotiates or concludes contracts in Canada can still give the US company a taxable presence here. Fees vary widely by provider, so compare the total cost against the fully loaded cost of direct payroll using our true cost of hiring in Ontario figures.

Route three: engage a contractor, if the relationship is genuinely independent

Contracting is the simplest route on paper. The worker invoices the US company, provides a W-8BEN (or W-8BEN-E for a corporation) so the company can document that no US withholding or 1099-NEC is required for services performed outside the US, and handles their own Canadian tax, CPP and any GST/HST registration. Services supplied to a non-resident client are generally zero-rated for GST/HST, so the invoices usually carry 0% tax.

The risk is classification. The CRA looks at the substance of the relationship: who controls the work, who owns the tools, whether the worker can profit or lose money, and how integrated they are into the business. A full-time worker with set hours, company equipment and a single client is an employee under those tests, and the label in the contract does not change it. If the CRA reassesses, the company owes both portions of CPP and EI for past years plus penalties and interest, and the worker can pursue Employment Standards Act entitlements such as vacation and termination pay. The tests and the consequences are laid out in employee or contractor: how the CRA decides.

Route four: a Canadian subsidiary once the team grows

Incorporating a federal or Ontario subsidiary makes a Canadian company the employer. It is the natural step once there are several Canadian staff, a Canadian office, or Canadian customers, because at that point the US parent likely has a permanent establishment in Canada regardless. The subsidiary files its own T2 corporate return, runs payroll under its own accounts, and charges the parent for its services under a written intercompany agreement with transfer pricing support. Our incorporation and compliance service handles the setup and the annual filings.

The four routes compare like this:

Ontario employment law applies whichever route you choose

An employee working in Ontario is protected by the Employment Standards Act even if the employer has never set foot in the province. Minimum wage, overtime after 44 hours a week, vacation pay of at least 4% rising to 6% after five years, public holidays and written notice or pay in lieu on termination all apply. There is no at-will employment: an offer letter drafted on a US template that promises termination at any time is unenforceable here and leaves the company exposed to common-law notice, which can be months of pay. Have the employment agreement drafted for Ontario before the start date.

How we help US companies hire in Canada

We usually meet the US company after its first Canadian hire has already started and someone has asked how to pay them. We assess the role against the CRA's classification tests, recommend direct payroll, an EOR or a subsidiary based on the plan for the next two years, register the payroll account and WSIB where needed, and run the ongoing remittances and T4s through our payroll service. Where the arrangement raises a permanent establishment question, our cross-border team prepares the treaty-based Canadian corporate filing that protects the US parent.

Source: CRA — Payroll; Ontario — Your guide to the Employment Standards Act.