How to Manage and Pay Contractors in Canada
In this guide, we’ll give you a background on independent contractors in Canada as well as an overview of how to hire, pay, and manage them compliantly.
Janelle Watson provides content marketing for the international team at Justworks. With a background in higher education and journalism, Janelle helps tell stories that make international expansion and EOR accessible.
Small and large businesses, both inside and outside of Canada, want to work with Canadian contractors due to their surplus of tech talent. For businesses based in countries like Mexico or the US, this also means finding an effective way to make payments across borders without having to deal with transaction fees for wire, digital, and other money transfers when paying contractors.
What is the difference between an independent contractor and employee in Canada?
Hiring in Canada means understanding the distinction between full-time employees and
independent contractors in the eyes of the Canadian government.
In the province of Quebec, the Québec Civil Code regulates how businesses classify independent contractors. In other jurisdictions around the country, the Canada Revenue Agency (CRA) sets out the guidelines for distinguishing employees and independent contractors.
Some general distinctions between employees and contractors are:
Employees are on payroll while contractors are paid per project
Contractors file and deduct their own taxes
Employees are entitled to benefits while contractors are not
Contractors are not entitled to notice or severance
Contractors set their own hours and completion of projects while employees have a set schedule
In general, employees work directly for a company, while independent contractors are hired to complete a service or project in a specific industry.
Contractors have more freedom with building the projects they take on and how they complete their projects. However, contractors are responsible for deducting their own taxes at the end of the year and finding their own benefits. Full-time employees in Canada, on the other hand, already have taxes taken out of their paycheck and are entitled to specific benefits.
How to determine if you need a contractor in Canada
Determining whether you need to onboard a contractor in Canada will depend on the scope of the project and your industry, as well as the amount of time you need the contractor for.
Ask yourself these questions before you decide to classify a worker as an independent contractor:
Is this person going to be working enough hours to be entitled to benefits and other compensations from my company?
What qualifications does this person have that make them specialized to complete a specific project?
Do they need to put in bids to compete for these projects or can I assign them everyday tasks like an employee?
Can I give this person independence to complete this project without inserting managerial opinion along the way?
How long will it take to complete this project?
It can be helpful to consult CRA resources for additional guidance. If you determine that you’ll need an independent contractor (instead of hiring a full-time employee), then you can begin the search.
Where to find contractors in Canada
Once you build up your business, it may be easy enough to source contractors from word-of-mouth referrals and recommendations.
If you don’t have any referrals starting off in Canada, check out job board sites like:
You can also use online directories and digital bid boards designed for businesses to find independent contractors.
How to onboard contractors in Canada
An easy way to prevent problems when hiring independent contractors is to create a strong independent contractor agreement that details the scope of the relationship.
Putting a clear and detailed independent contractor agreement in place protects both you and the contractor, as well as helps you avoid any future misclassification or liability problems.
Independent contractor agreements outline important details between the contractor and client, including:
Description of the services being provided
Length of the project or service
Payment and other billing details (keep track of these payments through your payroll in Canada)
Dispute resolutions
If a problem arises between either party during the project, the courts in Canada will be able to use the agreement to settle disputes.
How to pay contractors in Canada
As the first invoice hits from the contractor, you’ll need to know exactly how to pay them.
You generally shouldn’t put a contractor on your payroll in Canada, as it causes problems with misclassification and compliance. One of the simplest ways to avoid payment and transaction fees when paying contractors is to use a service like Justworks International Contractor Payments. We take the headache out of paying contractors abroad. Partnering with Justworks is also a good strategy for avoiding unexpected fees, bad conversion rates, and high foreign transaction (FX) fees.
You have a few options to legally pay independent contractors in Canada:
Justworks International Contractor Payments. If you are a PEO or EOR customer at Justworks, you can make international contractor payments to workers in Canada.
Set up a bank account. You can set up a bank account in Canada to pay your contractors. However, you’ll normally need to set up an entity within the country and register with the proper bureaucratic organizations (which can take months).
International money order. One of the common ways to pay a Canadian contractor without an entity is to set up an international money order. They can take a while to process, and the contractor will have to physically deposit them. This is a good option when you’re only paying someone one time.
Digital wallets. You can set up a digital wallet through multinational peer-to-peer lending companies like PayPal or Duel that help you deposit and transfer money into your contractors' accounts. This is one of the quickest ways to pay contractors without partnering with an EOR service like Justworks. Most of these services do charge fees, so be aware of that before choosing this option.
Money transfer services. Another popular option for employers looking to send large amounts of money across borders is using a money transfer service like Payoneer. This option has a high transfer limit, quick transfer time, and different options for sending money. These transfers can occur relatively fast and usually ensure a prompt payment. But, if you transfer money in a different currency than Canadian dollars, there usually is a conversion fee. Payoneer, for example, charges $1.50 for domestic transfers and a 2% fee for non-currency transfers.
Converting Canadian contractors to full-time employees
If you’ve had a good working relationship with your Canadian independent contractor and are satisfied with their work, you may be thinking about bringing them on as a full-time employee.
Determine a new hourly rate/annual salary
Using an EOR like Justworks can easily help you figure out the contractor's hourly rate as an employee. Setting a new payment rate might be the most difficult step when deciding how to transition contractors to full-time employees. As contractors normally charge more for their services because they pay their own taxes, the rate that they charge may not easily align with how much someone performing those same tasks would be paid at your company as a full-time employee.
Employers take on a lot more expenses for their full-time employees, and an EOR can help you figure out what expenses are required for employees in Canada.
Employment taxes
Using an EOR can help you determine exactly what taxes need to be deducted from your employees paychecks.
Remember, in Canada, tax practices and withholdings operate differently than they do for full-time employees. You shouldn’t be withholding taxes or paying payroll taxes for contractors.
To ensure you’re properly paying your employees and following tax laws, you’ll need to pay employment insurance and Canadian Pension Plan premiums. Employment insurance is 2.21% of insurable earnings. The contribution rate for the Canadian Pension Plan is 11.4%.
The average tax rate in Canada for income tax is 27% of the total salary, with a 35% marginal tax rate. So, if your salary increases $100, you will be taxed 35% on that additional salary increase.
Determine benefits and bonuses
Another crucial component when converting contractors to employees is determining their benefits and bonuses.
Examples of mandatory benefits in Canada:
Two weeks of paid time off after the first year, three weeks of paid time off after five years, and four weeks of paid time off after 10 years
Sick leave
Paid maternity and paternity leave
Canadian Pension plan for retirement
Canadian medicare
As a global EOR service, Justworks knows what additional compensation and benefits full-time employees are entitled to in Canada. With our keen knowledge of employment, tax, and labor laws in Canada, we can help you figure out a competitive salary for contractors that you want to convert to full-time employees.
Justworks Can Help Manage International Hiring
Choosing the right EOR to help you expand your business internationally can be a game changer. Justworks’ global EOR services enables small businesses to hire international employees quickly, pay them in the local currency, and provide local benefits. It’s hard to know where to start and what to put in place abroad to protect business and your employees. At Justworks, we have in-country legal teams and entities set up to ensure that your payroll is protected and that you’re remaining compliant abroad.
From access to top talent pools around the world to streamlined international hiring processes, the advantages of working with an EOR (and using Justworks) are undeniable. Get started today.
FAQ
What does independent contractor mean in Canada?
An independent contractor in Canada is a Canadian resident or citizen who is providing services to a company to complete a project or service. You’ll need to make sure that you’re properly classifying your independent contractors, which means ensuring you’re paying the right taxes and correctly classifying workers.
How are independent contractors paid in Canada?
Independent contractors are paid a few different ways in Canada including: partnering with an EOR service like Justworks, setting up a bank account and paying them from a Canadian bank, or using wire transfers and digital wallets.
Are independent contractors considered self-employed in Canada?
Yes, independent contractors are considered self-employed in Canada. They are allowed to set their own schedule, determine the pricing of their services, and dictate how work is completed. If a company onboards an independent contractor in Canada and treats them as an employee, they could face legal and tax repercussions.
How much tax do independent contractors pay in Canada?
Independent contractors contribute 11.4% of their self-employed earnings for taxes.
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