Canadian income tax source deductions and payroll taxes: what every foreign employer needs to know  

Who this is for: HR directors, CFOs, and operations leads at companies outside Canada who are hiring Canadian employees, sending staff to work in Canada temporarily, or allowing remote employees to work from Canada. The obligations described here apply to you as the foreign employer, not only to Canadian subsidiaries. 

The obligation that applies before your first Canadian hire: The most important fact for any foreign company to understand: Canadian payroll obligations begin the moment an employee performs employment duties from a location situated in Canada, regardless of whether the employer has a Canadian subsidiary, a Canadian office, or any other Canadian presence. Every employer, resident or non-resident, who pays remuneration to an individual performing employment duties in Canada needs to consider if it is required to register for a CRA payroll account, apply income tax source deductions, withhold for Canada Pension Plan (“CPP”) and Employment Insurance (“EI”) premiums from that employee’s pay, and remit both the withheld deductions and premiums to the CRA. The fact that your company is incorporated and based outside of Canada does not create an exemption. The obligation follows the employee’s work location, not the employer’s.  

Remote work arrangements that allow existing employees to work from Canada, even temporarily, trigger these obligations from the first day of Canadian employment duties. This has become one of the most common payroll compliance gaps among foreign companies entering Canada. 

In this article:

1. Income tax source deductions 

Every employer who employs an individual to provide employment services from a location within Canada is required to remit income tax source deductions on that employment income, unless an exemption were to apply. 

The remote work trap: whether an employee working from their Canadian home or so-called “home office” triggers Canadian tax remittance obligations 

This is the highest-urgency topic for any foreign company with mobile employees. 

An employee of a foreign company who relocates to Canada, or who simply works remotely from Canada for an extended period, is performing employment duties in Canada. From that first day of Canadian work, the foreign employer owes Canadian income tax source deductions and CPP and EI premiums unless an exemption were to apply. 

The employer’s physical location is irrelevant. The place of work of the employee, and specifically whether that employee is working in Canada, is the critical measure. 

An employee working in Canada, particularly a senior employee with authority to conclude contracts on behalf of the foreign employer, can simultaneously create a Canadian permanent establishment for income tax purposes. This means payroll non-compliance and corporate income tax exposure for the foreign company can arise from the same fact pattern.  

Non-resident employer certification: the income tax source deduction relief mechanism 

Foreign employers with employees working temporarily in Canada may qualify for non-resident employer certification (“NREC”). NREC is a CRA-administered mechanism that eliminates the requirement to withhold and remit Canadian income tax on the covered employees, provided conditions are met. 

To qualify: 

• The non-resident employee must work in Canada for fewer than 45 days in the calendar year, or be present in Canada for fewer than 90 days in any 12-month period including the time of payment; and 
• The foreign employer must be exempt from Canadian income tax on its business income under an applicable income tax treaty. 

The benefit of the NREC is that it can apply to all employees of the affected foreign company, without that employer having to apply for an individual income tax waiver for every single employee working in Canada.  

The foreign employer applies to the CRA for certification in advance of the first required payroll remittance in respect of its non-resident employees who are assigned to work in Canada. Crucially, the foreign employer cannot stop Canadian income tax source deduction withholdings until the CRA approves the certification; the Canadian withholding obligations do not cease when the application is submitted. Foreign employers who stop the source deduction remittances on the assumption that certification will be granted expose themselves to the same unremitted source deductions liability as employers who never applied for the exemption. 

Where NREC does not apply, because the employee does not meet the days in Canada presence thresholds or the foreign employer is not exempt under a tax treaty on its business income, each employee may still be able to apply for a Regulation 102 waiver if a treaty exemption were available. A separate Regulation 102 waiver application must be filed for each affected non-resident employee, and there is no group filings possible under the Regulation 102 application. Again, withholding must continue until the CRA grants the waiver. 

2. Federal Canada Pension Plan and Employment Insurance 

Employers in Canada are required to pay CPP contributions and EI premiums to the CRA. These payments are calculated as a percentage of payroll, subject to yearly maximums.  

CPP 

CPP is a mandatory social insurance program providing retirement, disability, and survivor benefits. Both employer and employee contribute at the same rate. There are two components for CPP premiums, the “Basic” CPP premiums and the enhanced CPP premiums. 

With respect to the Basic CPP premiums, the premium rates for the 2026 calendar year are as follows: 

• Basic annual exemption (earnings below which no CPP premiums applies): CAD $3,500; 
• Year’s Maximum earning threshold for premium contributions: CAD $74,600; 
• The Basic CPP contribution rate: 5.95% of pensionable earnings for both employer and employee, after the basic annual exemption on the first CAD $3,500 of earnings;  
• Maximum annual employee contribution on first earning threshold: CAD $ 4230.45; and 
• Maximum annual employer contribution on first earning threshold: CAD $ 4230.45. 

The CPP also includes an enhanced premium component which requires an additional contribution for higher employment earnings earned by the employee. An additional maximum pensionable earnings (being a “second” earnings threshold) requires employers and employees to make an additional CPP contribution (known as “CPP2”) on these earnings, beginning at the first earnings threshold (being CAD $74,600 for the 2026 calendar year) and going up to the second earnings threshold (of CAD$ 85,000). The CPP2 contribution rate is 4% of additional employment earnings. This results a maximum CPP2 contribution by each of the employer and employee of CAD $416 for the 2026 calendar year. 

The employer is required to withhold the employee portion of the CPP and CPP2 premiums from the employee’s wages and salary and remit these contribution amounts to the CRA, together with the employer portion of the premiums.  

In certain cases, the CPP and CPP2 contributions to these plans may not be necessary in respect of employment earnings paid to a non-resident of Canada who is working in Canada. Specifically, if there is a social security agreement between Canada and a non-resident employee’s home jurisdiction, there may be no CPP premiums required to be withheld and remitted to the CRA. In most cases, the non-resident employee will need to obtain a certificate evidencing social security coverage in their home jurisdiction.  

If the employee’s province of employment is Quebec, different rules may apply, including participation in the Quebec Pension Plan (“QPP”) instead of the CPP. 

EI 

EI provides temporary income replacement for job loss, parental leave, illness, and certain other circumstances. The contribution amounts for the 2026 calendar year are as follows: 

• Employee EI premium rate: 1.63% of insurable earnings; 
• Maximum annual employee premium: CAD $1,123.07; 
• Employer EI premium rate: 1.4 times the employee’s premium; and 
• Maximum annual employer premium: CAD $1,572.30. 

The employer always pays more than the employee on EI. This asymmetry surprises foreign employers accustomed to symmetric social contribution structures. 

The employer is required to withhold the employee portion of the EI premiums from the employee’s salary, and remit these to the CRA together with the employer portion of the premiums. In certain cases, an exemption from EI premiums will be available in respect of the non-resident employee. 

Timing of remittances for CPP and EI premiums 

Most new employers remit by the 15th of the month following the payroll period. However, employers with larger annual payrolls are required to remit the premiums on an accelerated basis with more frequent deadlines. Failure to remit on time triggers penalties and interest, and personal director liability as described below. 

In certain cases, contributions to the CPP and EI programs may not be necessary from non-resident employees who are working in Canada. However, the non-resident employee will generally need to obtain a certificate evidencing social security coverage and, as applicable, the unemployment insurance coverage in their home jurisdiction. This certificate must be obtained before the first pay period, not at year end when the T4 tax information slip is being prepared by the employer. Without the certificate in hand by the employer, the premiums will still need to be remitted to the CRA, regardless. 

What to do before any employee works from Canada

• Assess whether the employee’s role and authority level creates permanent establishment risk for income tax purposes.
• Assess CPP, EI, as well as income tax source deduction remittance before the commencement of any Canadian-source employment duties, and evaluate whether any exemptions would be available in respect of the remuneration payable to the non-resident employees. 
• Register for a CRA payroll account before the first Canadian payroll. 

CPP and EI are separate from the NREC: NREC covers income tax source deductions only. CPP contributions are separately exempt only when a certificate of coverage from the employee’s home country social security authority is issued. EI premiums may be exempt under certain conditions. These are three separate assessments, not a single determination. 

3. Provincial payroll taxes  

The Canadian provinces may require Employer Health Tax (“EHT”) premiums to be paid, as well as workers compensation premiums  

Ontario 

Ontario imposes EHT based on the employer’s payroll. Employers with annual Ontario payroll above CAD $1 million are subject to EHT at a rate of 1.95% on the excess above the exemption threshold and the payroll exemption amount is clawed back once the annual employment income paid to Ontario employees exceeds CAD $5 million in respect of a calendar year.  The EHT applies to all employers who have employees who report to work in Ontario. This can include foreign employers without a physical Ontario office, if they have employees performing duties in Ontario. As the amount of the annual payroll grows, employers must monitor their compliance requirements and in particular their position with respect to the annual CAD $1 million exemption threshold. 

British Columbia 

Employers who have employees reporting to work in British Columbia have an obligation to pay British Columbia EHT if the annual payroll exceeds CAD $1 million. There is a formulaic premium rate for payroll between CAD$1 million and CAD $1.5 million, and the premium rate is 1.95% for all British Columbia payroll in excess of CAD $1.5 million. 

Workers Compensation 

The employer may also be required to pay premiums to the provincial Workplace Safety and Insurance Board. Every province operates its own workplace safety and insurance regime. Employers with employees working in a province are generally required to register with the provincial workplace safety board and pay premiums based on the industry classification of the work performed by the employees and the annual payroll amounts. Failure to register exposes the employer to uninsured employer penalties in each province, which can be significant. Generally, these registrations cannot be completed retroactively without penalty. 

4. Exposure for compliance omissions 

Worker classification 

Canada’s CRA distinguishes between employees and independent contractors. The consequences of misclassification in Canada reach further than most foreign companies expect.  

If a worker the foreign company has treated as an independent contractor is determined by the CRA to be an employee, the employer owes: 

• Both the employer’s and the employee’s share of CPP contributions; 
• Both the employer’s and the employee’s share of EI premiums; 
• The income tax source deductions for non-resident employee;  
• Arrears interest on all of the above; and 
• Potential penalties. 

The employer generally cannot recover from the employee of the employee’s portion of CPP and EI premiums that the employer failed to withhold from the wages and salaries paid to the affected employees. The exposure would then fall entirely on the employer.  

The CRA applies a multi-factor test to evaluate an individual’s status as an independent contractor: control over the work, who provides tools and equipment, chance of profit and risk of loss, and integration into the business. The test does not depend simply on the label provided in the employment contract. A worker called a “contractor” in a contract who is functionally managed as an employee will be reclassified. Foreign companies using Canadian contractors to avoid setting up a payroll account should have each relationship assessed against CRA criteria before the first payment.  

Director liability: personal exposure for unremitted payroll deductions  

Directors of Canadian corporations are personally liable for unremitted payroll source deductions, such as CPP, and EI, that the corporation fails to withhold and remit and income tax source deductions in respect of non-resident employees working in Canada. (As an aside, the CRA can recover the unpaid income taxes directly from employees who are resident of Canada). This liability for unpaid payroll remittance applies to non-resident directors of Canadian subsidiaries exactly as it applies to Canadian-resident directors.  

A foreign executive serving on the board of a Canadian subsidiary who allows payroll source deductions to go unremitted can be assessed personally for the full amount, plus interest and penalties, subject to a two-year limitation period from the date they ceased to be a director.  

This is the same personal liability mechanism that applies to unremitted GST/HST covered in the sales tax section of this Guide. The CRA actively pursues director assessments where corporate assets are insufficient to cover the liability.  

5. Quebec income tax source deductions and payroll taxes 

The province of Quebec operates a parallel payroll reporting system in respect of employees who work in that province, and this provincial reporting system is in addition to any Canadian Federal payroll compliance provisions.   

QPP instead of CPP

Employees working in Quebec contribute to the QPP, not the CPP. QPP contribution rates and maximums are set separately and differ from CPP. Employers in Quebec register with Revenu Québec for QPP, not with the CRA for CPP. 

Quebec Parental Insurance Plan (“QPIP”)

Quebec operates its own parental benefits program separate from federal EI. Both employer and employee contribute to QPIP. The employee’s EI premium rate in Quebec is subsequently reduced from the EI premium rate of 1.63% that applies to employees who work in the other provinces and territories of Canada. The reason is that QPIP covers parental leave benefits that federal EI covers elsewhere in Canada. However, the employer must contribute to both QPIP and the reduced-rate EI program.  

Quebec also impose health care payroll taxes (being the Quebec Health Services Fund or “Cotisation au Fonds des Services de Santé”). The premium rate ranges from 1.25% for an employer in the primary and manufacturing sectors with annual Quebec payroll less than CAD $1 million to a maximum rate of 4.26% for all employers with annual Quebec payroll in excess of CAD $7.8 million. The Quebec payroll calculation will specifically include the salaries and wages paid to non-Canadian  employees temporarily posted to Québec and who are covered by a social security agreement.  

Employers with employees working in Quebec must register with the Commission des normes, de l’équité, de la santé et de la sécurité du travail (“CNESST”), which administers workplace health and safety and workers’ compensation. Contribution rates are assessed based on industry classification and payroll. This is Quebec’s equivalent of the Workplace Safety and Insurance Board in Ontario, but it is a separate registration, a separate contribution, and a separate compliance regime. 

Implications to employers with employees working in multiple provinces

Employers with both employees based inside and outside of Quebec will be managing two parallel payroll remittance obligations simultaneously, one to the CRA for federal obligations and one to Revenu Québec for provincial obligations. 

How Miller Thomson can help  

Miller Thomson’s Labour and employment lawyers and Tax Lawyers advise foreign companies on Canadian payroll registration, non-resident employer certification, social security agreement exemptions, worker classification, and Quebec-specific compliance, including CNESST and Revenu Québec obligations that require practitioners with genuine Quebec expertise to navigate correctly.  

Speak with a Miller Thomson lawyer about your Canadian payroll obligations.