One of the principle difficulties in operating a business is dealing with tax considerations. If you're a US-based business operating in Canada, those tax considerations are doubled. You have the tax codes of two countries to deal with, along with multiple provinces, as well as treaties that can affect tax considerations. Trying to sort it all out, and keep it sorted, can consume an inordinate amount of time and energy.
Federal Income Tax
Typically, a US business will owe taxes to the Canada Revenue Agency if they are deemed to be "carrying on business in Canada." The definition of "carrying on business" is not always clear, and can be affected by numerous factors like gross sales, number of days conducting business, office locations, and employees. If you are deemed to be carrying on business in Canada, you will be regarded as a permanent establishment (PE) for tax purposes.
If you are deemed to be a PE, you will owe withholdings on your gross sales, employee withholdings, Canada Pension Plan, Employment Insurance, and Workers Compensation contributions. You will also be required to make regular filings, and may be required to pay a security against future withholdings.
Determining when, and how much, to withhold from employees' paychecks is one of the more cumbersome tax considerations. If you're business is deemed to be a PE, you will be responsible for collecting taxes from resident and non-resident employees. The amount of taxes withheld from each paycheck, as well as yearly maximum withholdings, vary from year to year, and province to province.
Any mistakes made concerning withholdings will largely rest on you. If you withhold too much, you will be responsible for reimbursing the employees, and filing for a refund from the CRA. If you withhold too little, you are responsible for making up the difference. You can then attempt to collect the missed withholdings from the employees' future paychecks. If they are no longer with you, or if it has been longer than a year, you're pretty much stuck with the bill.
Social Safety Net
Canada has a variety of programs designed to ensure the long-term health and safety of employees. The Canada Pension Plan (CPP), Employment Insurance (EI), and Worker's Compensation (WCB) programs are all designed to provide employees with monetary support when they aren't working. The funding for these programs comes from a combination of employee and employer contributions.
As an employer, it's your responsibility to determine whether you need to be making these contributions, and how much you need to be paying. The amounts differ from year to year and, to make things more complicated, Quebec operates under a different system. There is a yearly maximum for withholdings and premiums, and it's up to you to monitor the contributions you've made yourself, and on behalf of your employees.
The Tip of the Iceberg
These are some of the simplest, most basic tax considerations for a US-based business operating in Canada. Even these tax requirements have varying degrees of difficulty and evolving applications. Digging deeper into the tax code reveals a cumbersome, convoluted tax code that can only be understood by experienced professionals.
The payroll professionals at The Payroll Edge have years of experience in navigating Canadian tax laws for US businesses. They provide a wide range of services that help US companies hire workers in Canada without having to try to learn an entirely new tax code. With their help, you can ensure that your US company is in full compliance with all applicable Canadian tax, labor, and payroll regulations.