4 Reasons to Hire Employees Directly in Canada

Expanding your business into Canada comes with a variety of strategic decisions. One crucial choice is whether to hire employees directly or through an Employer of Record (EOR). Here are four compelling reasons to hire employees directly in Canada through your own Canadian company:

1. Favorable Tax Treatment for Stock Option Gains

Lower Tax Rates on Stock Option Gains:

Stock options are an attractive component of compensation packages, especially for startups and tech companies. In Canada, stock option gains for employees are generally taxed more favorably. When employees exercise stock options, the difference between the market value of the shares and the exercise price is considered a taxable benefit. However, if certain conditions are met, employees can qualify for a 50% deduction on this benefit, significantly reducing the tax the employee has to pay on this stock option gain. This favorable tax treatment can make stock options a more appealing incentive for attracting top talent.

However, if you use an EOR to hire employees in Canada, this 50% stock option deduction will simply not be available and your Canadian employees will pay significantly more tax on their option gains.

2. Enhanced Employee Experience

Integrated Onboarding and Training:

Hiring employees directly allows for a comprehensive and consistent onboarding process. Employees can receive in-depth training and have access to all company resources from the start. This integration helps new hires understand the company's culture, processes, and goals more effectively.

Stronger Relationships:

When employees are directly hired, they feel more connected to the company. Regular interaction with peers and management, participation in company events, and a sense of belonging can lead to higher engagement and productivity.

3. Mitigate Permanent Establishment Issues

What is a Permanent Establishment (PE)?

The Canadian tax authorities generally define a PE as a “fixed place of business” through which the business of an enterprise is wholly or partly “carried on”. To give an example: If a US company hires employees in Canada through an EOR, the Canadian tax authorities may consider the US company to have a PE if (a) these “EOR employees” regularly work out of an office (including a co-working space) located in Canada or (b) these EOR employees “habitually” exercises the authority to conclude contracts on behalf of the US company or “regularly” conducts significant business activities on behalf of the US company.

The ambiguity in the way PE is defined for Canadian tax purposes, despite best of intentions, creates some degree of risk that a tax auditor may arbitrarily take a position that a particular EOR arrangement creates a PE in Canada for the US company. We highly recommend that you consult with a tax advisor to discuss your particular situation.

What happens if an EOR arrangement creates a Canadian PE for its US Client?

Corporate Income Tax

If a US company is considered to have a PE in Canada via its EOR arrangement, it will be required to file Canadian corporate income tax returns for the PE and pay tax on the profits that are “attributed” to the activities of the PE. Generally, the more significant the activities carried on from the PE or the more senior the employees are that are employed via an EOR, the Canadian tax authorities will expect more profits to be “attributed” to the PE. Again, we recommend that you consult with a tax advisor to discuss your particular situation.

HST

If your EOR arrangement creates a PE in Canada and those activities include sales and marketing activities, then there is a risk that you should be charging and collecting HST on your Canadian sales. This risk generally increases as you hire more senior sales/marketing people via your EOR arrangement. However, you may be able to reduce this risk if you register your PE for HST purposes in Canada. Please consult with your tax advisor to discuss your particular situation.

Hiring employees directly via a Canadian company

By establishing a Canadian subsidiary and hiring employees directly, you can better manage and plan for these tax implications. “Transfer pricing agreements” can be put in place that govern the activities being carried on by the employees in your Canadian subsidiary and, more importantly, how much income that is “attributed” to these activities. The Canadian subsidiary can easily register for HST purposes to reduce the above HST risk.

Operating with a clear legal presence in Canada simplifies many tax and administrative processes. It allows your business to comply with Canadian tax laws, which can protect your company from legal and financial risks.

4. Easier Access to Government Incentives

Ontario Co-operative Education Tax Credit:

Employers who hire students enrolled in co-operative education programs in Ontario can benefit from the Co-operative Education Tax Credit (CETC). This credit allows employers to claim 25% (up to 30% for small businesses) of eligible expenditures, up to a maximum of $3,000 per student per work term.

Scientific Research and Experimental Development (SR&ED) Tax Credit:

The SR&ED program offers tax incentives for businesses conducting research and development in Canada. Direct hires working on eligible R&D projects can help your company qualify for these credits, reducing your overall tax burden and fostering innovation.

Government Grants and Subsidies:

Various federal and provincial grants and subsidies are available to companies that hire employees directly in Canada. These programs can support training, development, and business expansion, providing significant financial benefits and helping your business grow.

Conclusion

By establishing your own Canadian company to hire employees directly in Canada, you can build a strong, committed workforce and leverage various financial benefits to support your growth and innovation. Speak to us at IncorpCan on how we can make this easy and cost-effective for you.