Hiring Your First Employee in Canada: A Small Business Guide

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Hiring in Canada means navigating federal and provincial rules simultaneously. Employment Insurance is federal. Labour standards are provincial. Minimum wage? Provincial. Workers' compensation? Provincial (with different systems in each province).

It sounds complicated because it is. But thousands of Canadian small businesses figure it out every year — and so will you.

Employee vs Contractor in Canada

The CRA Test

The Canada Revenue Agency looks at several factors:

• Control over work methods
• Ownership of tools
• Chance of profit/risk of loss
• Integration into business

If you control how work is done and provide tools, you likely have an employee.

Why It Matters

Misclassifying an employee as a contractor means:

• Owing back CPP and EI contributions
• Potential HST/GST issues
• Penalties and interest
• Liability for unpaid vacation, stat holidays

When in doubt, classify as employee. The paperwork is more, but the risk is less.

True Cost of an Employee

Beyond the Wage

For a $50,000/year employee, budget $55,000-60,000 total:

Mandatory employer contributions:

• CPP (employer share): ~5.7% up to the yearly maximum
• EI (employer share): ~1.4× employee premium
• Provincial health tax (some provinces)
• Workers' compensation

Expected costs:

• Vacation pay (minimum 4% of earnings)
• Statutory holiday pay
• Potential group benefits

Use our salary calculator for accurate numbers.

The Revenue Test

Your employee should generate at least 2x their total cost in value. If you're paying $60K all-in, they should contribute $120K+ in revenue or freed time value.

Provincial Variations

Employment Standards

Each province sets its own:

• Minimum wage
• Overtime rules
• Vacation minimums
• Statutory holidays
• Termination requirements

Examples:

• Ontario minimum wage: $16.55/hour
• BC: $16.75/hour
• Alberta: $15.00/hour
• Quebec: $15.25/hour

Workers' Compensation

Each province runs its own system:

• Ontario: WSIB
• BC: WorkSafeBC
• Alberta: WCB
• Quebec: CNESST

Registration is mandatory when you have employees (with some exemptions for sole proprietors).

Setting Up as an Employer

CRA Payroll Account

Register for a payroll account with CRA before your first payday. Do this through:

• CRA My Business Account
• By phone
• Through your accountant

You'll receive a payroll account number (15-character number ending in RP).

Provincial Registration

Register with your province's:

• Workers' compensation board
• Health tax authority (if applicable)
• Provincial employment standards branch

Payroll Setup

Options:

• Payroll software (Wave Payroll, QuickBooks)
• Payroll service (ADP, Ceridian)
• Accountant-managed

For one employee, software is usually sufficient. Budget $20-50/month.

Required Paperwork

From the Employee

• SIN (Social Insurance Number)
• TD1 (federal personal tax credits)
• Provincial TD1 (if applicable)
• Banking information for direct deposit
• Emergency contact

From You

• Offer letter or employment contract
• Employee handbook (even basic)
• Job description

Record of Employment (ROE)

When an employee stops working (any reason), you must file an ROE within 5 calendar days. Electronic filing through CRA is mandatory for most employers.

Payroll Obligations

Each Pay Period

• Deduct CPP contributions
• Deduct EI premiums
• Deduct income tax (federal and provincial)
• Track vacation accrual

Remittance Schedule

Depends on your average monthly withholdings:

• Under $3,000/month: Due 15th of following month
• $3,000-25,000: Due 15th (or 25th) of following month
• Over $25,000: Multiple remittances per month

Year-End

• T4 slips to employees by end of February
• T4 Summary to CRA
• Reconcile all deductions

Provincial Labour Standards

Vacation Entitlements

Minimums vary:

• Most provinces: 2 weeks after 1 year
• Saskatchewan: 3 weeks after 1 year
• Some increase with tenure

Statutory Holidays

8-10 days depending on province. Employees usually get the day off with pay or premium pay if working.

Termination Rules

Unlike US at-will employment, Canadian employers need cause or must provide notice/pay in lieu:

• Under 3 months: Usually no notice required
• After 3 months: Notice periods escalate
• Each province has specific rules

Common Mistakes

Misclassifying as Contractor

The "I'll pay them by invoice" approach works for genuine contractors. For ongoing work under your direction? That's an employee. CRA audits catch this regularly.

Ignoring Vacation Accrual

Vacation pay is owed from day one (as a percentage of earnings). Not tracking it creates liability.

Informal Arrangements

"We'll work out the details later" leads to disputes. Put it in writing from the start.

Missing ROE Deadlines

When someone stops working, you have 5 days to file the ROE. Missing this creates problems for their EI claim — and potential penalties for you.

Alternatives to Hiring

Independent Contractors

For genuinely project-based work, contractors work. Just ensure the relationship passes CRA's tests.

Temp Agencies

Someone else handles payroll and employment. You pay a markup but avoid administrative burden.

Shared Employees

Some businesses share part-time employees through cooperatives or informal arrangements.

First Hire Checklist

Before hiring:

• Register CRA payroll account
• Register with provincial workers' comp
• Choose payroll solution
• Prepare employment agreement

Day one:

• Collect SIN and TD1 forms
• Complete employment paperwork
• Set up direct deposit
• Review job duties and expectations

First pay:

• Run payroll correctly
• Provide pay stub
• Remit deductions on schedule

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