Payroll & Employment Guide Canada

In Canada, employment contracts can be written, verbal, or implied. However, written contracts are highly recommended and often required to clearly outline the terms of employment and mitigate legal risks.

Notice periods: 1 week to 8 weeks, depending on the service period

Termination of employment: Termination can be with or without cause. For cause, the employee can be dismissed immediately without notice or severance due to serious misconduct. Without cause, the employer must provide notice or pay in lieu of, and severance if applicable.

Employers in Canada must provide all the mandatory benefits, with specific requirements varying by province and employment type. Many companies go beyond the minimum by offering optional benefits to attract and retain talented employees.

Mandatory benefits: Canada Pension Plan (CPP), Employment Insurance (EI), paid vacation
Common perks: Health & dental insurance, wellness programmes, retirement plans
Leave policies: Maternity leave, paternal leave, annual leave, public holidays, medical leave, and critical illness leave.

Canada has a well-structured tax system that applies to both employers and employees. Employers are required to deduct personal income tax and social security contributions from employees’ salaries and submit them to the tax authorities.

A person is a tax resident of Canada if they have significant residential ties, such as a home, spouse, or dependants in the country, along with other personal and economic connections. Spending 183+ days in Canada also makes someone a tax resident.

If residency overlaps with another country, tax treaties use tie-breaker rules to decide based on where stronger ties exist.

Personal income tax:

• 15% on taxable income up to $57,375
• 20.5% on income $57,375 – $114,750
• 26% on income $114,750 – $177,882
• 29% on income $177,882 – $253,414
• 33% on income over $253,414

Withholding and contributions: Below are the standard withholding rates for Canada.

• Dividends: Non-residents: 25 % - may be reduced by the application of a double tax treaty; Residents: no withholding tax
• Interest: Non-residents: 25 % - may be reduced by the application of a double tax treaty; Residents: no withholding tax
• Capital gains: Non-residents: 25% (may be reduced by tax treaties); Residents: nil (no tax in this category). 50% of the gain is taxable (only half is added to income and taxed at your marginal rate)

Tax allowances and non-taxable benefits: Canada uses tax credits (not allowances) to reduce tax, including a basic personal credit and credits for dependants, seniors, disability, education, medical costs, donations, and contributions like CPP/EI.

For 2025, the basic personal amount is CAD 16,129, meaning this income is not federally taxed (reduced for higher incomes and phased out at very high levels). These credits are non-refundable, so they can reduce tax to zero but not generate a refund.

Deductions and tax reliefs:

• Employment expenses: Limited deductions allowed
• Not deductible: most taxes/interest, life insurance premiums, casualty losses
• Deductible (if required for work): certain travel and job-related costs

Retirement savings (RRSP/RPP/PRPP):

• Contributions are tax-deductible within limits
• RRSP limit (2025): 18% of prior income up to CAD 32,490 (reduced if you have other pension plans)
• Investment growth is tax-deferred until withdrawal
• PRPPs: optional pension plans for workers without employer pensions

TFSA:

• Annual limit: CAD 7,000 (2024–2025)
• Contributions are not deductible, but growth and withdrawals are tax-free
• Unused room carries forward (up to ~CAD 102,000 total potential room in 2025)

FHSA (First Home Savings Account):

• For first-time homebuyers
• Contributions are tax-deductible, and withdrawals for a home are tax-free
• Unused room carries forward (up to CAD 8,000; lifetime limit CAD 40,000)
• Must be closed within set timelines if not used for a home purchase

Canadian employers must process payroll in accordance with both federal and provincial laws. Payroll frequency, contributions, and deadlines can vary.

Payroll currency: CAD (Canadian Dollar)

Canada Pension Plan (CPP) – 2026

Employment Insurance (EI): Effective January 1, 2026.

For all workers

• Maximum insurable earnings: $68,900 (up from $65,700 in 2025)
• EI premiums apply only up to this amount

Outside Quebec

• Premium rate: $1.63 per $100 (was $1.64)
• Maximum annual employee premium: $1,123.07
• Employers contribute at the same rate until the maximum is reached

In Quebec

• Premium rate: $1.30 per $100 (was $1.31)
• Maximum annual employee premium: $895.70
• Lower rate due to Quebec Parental Insurance Plan (replacing national maternity/parental EI)

Canadian employment is governed by both federal and provincial laws. Key areas include wage requirements, working hours, health & safety, and termination practices.

Total employment cost:

• Employer’s social security contributions: General up to CAD 6,353.52 and for employees in Quebec, higher total contributions due to QPP and QPIP.
• Employees’ social security contributions: General up to CAD 5,353.52 and for employees in Quebec, higher due to QPP and QPIP participation.

Minimum wage: $16.55/hour (general); $15.60/hour (students)

Probation period: Not legally mandatory.

Using EOR services in Canada allows you to legally employ individuals in the country without opening legal entities there. The EOR takes over all the legal responsibilities as an official employer, including:

• Legal employment and contracts
• Payroll processing
• Tax withholding
• Benefits administration
• Onboarding/offboarding employees

Using PEO services in Canada provides HR and administrative support, while you remain the legal employer. PEO services are ideal for employers who already have legal entities in Canada but need support to manage their workforce operations, including:

• HR support and workforce administration
• Payroll and benefits management
• Compliance and local labour law guidance
• Employment contracts assistance

Native Teams provides a payroll calculator adjusted per Canada’s labour laws. Estimate gross-to-net salaries, tax withholdings, and employer costs in Canada with our localised calculator. Designed to meet all payroll and compliance requirements.

Here is a list of public holidays in Canada: