What actually changes once a foreign business starts hiring in Canada through its subsidiary? From the first Canadian hire, the subsidiary takes on local employment obligations that apply regardless of how the parent company hires elsewhere.
This article explains the employment standards, classification rules, employment agreements, and payroll obligations that apply. It also covers how the subsidiary can run payroll and HR, what to consider when sending staff from the parent, and a checklist to work through before the first hire.
Key Takeaways
- Hiring in Canada through a subsidiary creates local employment obligations from the first employee.
- Ontario has no "at-will" employment. Ending employment without proper notice or cause carries real legal exposure.
- Contractor vs employee status is decided under Canadian law, not the parent's home-country rules.
- Employment agreements need to be drafted for Canadian law, especially termination clauses and restrictive covenants.
- The subsidiary must withhold and remit income tax, CPP, and EI, and usually register with WSIB.
- Rules vary by province, and Quebec runs some of its own programs alongside the federal ones.
- Staff sent from the parent company may need work permits, and their costs should be documented between the companies.
What Changes When Hiring in Canada Through a Subsidiary
Once the Canadian subsidiary hires its first employee, it becomes an employer under Canadian law. Employment standards, payroll requirements, and statutory benefits all apply from that point.
These obligations apply to the subsidiary itself, independently of the parent company's practices in its own country. One of the biggest adjustments for many foreign parents is that Ontario has no equivalent to "at-will" employment. An employer can end employment, but unless there is serious cause, the employee is entitled to notice or pay in lieu, and potentially much more.
Employment Standards for Canadian Employees
In Ontario, employees are covered by the Employment Standards Act, 2000 (ESA). It sets minimum standards that cannot be contracted out of, including:
- minimum wage, hours of work, and overtime pay where it applies
- vacation time and vacation pay
- public holidays and public holiday pay
- protected leaves, such as pregnancy, parental, and sick leave
- notice of termination or termination pay, and severance pay for eligible employees
Ontario employers with 25 or more employees also have additional obligations, such as written policies on disconnecting from work and electronic monitoring. Each province has its own employment standards legislation, so the rules differ if the subsidiary hires outside Ontario.
Contractor vs Employee Classification in Canada
Whether a worker is a contractor or an employee is decided under Canadian law, not the parent company's home-country rules.
In some countries, contractor status depends largely on how the parties describe the relationship. Canada looks at how the relationship actually works. A worker who signs a contractor agreement can still be an employee if they take daily direction, use company equipment, and work exclusively for the subsidiary.
Our article on the CRA's test for contractors in Ontario explains how status is assessed. Getting it wrong can lead to contractor vs employee misclassification liability, including unpaid ESA entitlements, CPP and EI contributions, and termination exposure.
Treating early Canadian hires as contractors because that worked in the parent's home market is one of the fastest ways for a new subsidiary to build up liability.
Employment Agreements for Canadian Employees
Employment agreements should be drafted for Canadian law. A template from the parent company's home country is unlikely to work.
Termination Clauses
A termination clause that does not meet the ESA can be unenforceable. If it fails, the employee is entitled to common law reasonable notice, which is often far greater than the clause intended. Our article on termination clauses in Ontario employment contracts explains why so many clauses fail.
Non-Competes and Restrictive Covenants
Ontario prohibits most non-compete agreements with employees, with narrow exceptions for defined executives. Non-solicitation and confidentiality clauses can still be used if drafted reasonably. Our article on non-compete agreements in Ontario explains what still works.
IP and Confidentiality
The agreement should confirm that intellectual property created in the course of employment belongs to the employer, and protect confidential information. Where the parent's IP is involved, the subsidiary's rights to use it should also be documented between the two companies.
Signing Before the Start Date
Agreements should be signed before the employee starts work. Terms introduced after employment begins may not be enforceable without fresh consideration.
Payroll, Benefits, and Workplace Insurance
Payroll obligations apply as soon as the subsidiary has employees.
Source Deductions
The subsidiary must withhold and remit income tax, Canada Pension Plan contributions, and Employment Insurance premiums, and issue annual tax slips. The CRA's payroll deductions guide explains how this works. The subsidiary will need a payroll program account with the CRA.
Workplace Safety Insurance
In Ontario, most employers must register with the WSIB under the Workplace Safety and Insurance Act, 1997 once they have employees, depending on their industry.
Employer Health Tax
Ontario employers may also need to pay the Employer Health Tax on their payroll, depending on its size and whether an exemption applies.
Hiring Across Provinces
Payroll and employment rules vary by province. Quebec, in particular, runs its own pension and parental insurance programs alongside the federal system.
A subsidiary planning to hire in several provinces should plan for these differences early, rather than assuming one Canadian payroll setup covers everything.
How the Subsidiary Will Run Payroll and HR
The subsidiary's structure affects how these obligations are met in practice.
A subsidiary with its own payroll and HR function can use Canadian systems from the start. A subsidiary that relies on the parent's global systems needs a clear plan, because those systems often do not handle Canadian remittance schedules, tax slips, or provincial rules correctly.
Common options include a Canadian payroll provider, a professional employer organization, or an in-house Canadian hire responsible for compliance. Whatever the approach, the subsidiary remains responsible for meeting its obligations. Our overview of setting up a subsidiary in Canada explains how these choices fit into the wider setup.
Sending Employees From the Parent to Canada
Many subsidiaries start with staff transferred or seconded from the parent company. This raises immigration, tax, and employment questions at the same time.
Foreign employees working in Canada generally need immigration authorization, such as a work permit. The right category depends on the person’s role and circumstances.
One common route for parent-to-subsidiary transfers is the intra-company transferee category. It has its own eligibility requirements. Immigration advice from a licensed representative should be obtained before anyone starts working in Canada.
Payroll is the issue most often missed. The CRA applies the same withholding and reporting rules to non-resident employees working in Canada as to residents.
This holds even where a foreign employer pays the salary, unless a waiver or non-resident employer certification applies. Other payroll obligations, such as CPP and EI, may also arise depending on the situation.
Some employees remain on the parent’s payroll while working for the subsidiary. The arrangement and how their costs are charged should be documented. This belongs in the intercompany agreements between the foreign parent and Canadian subsidiary. The charge between the companies should also be priced as if they were dealing at arm’s length.
It is also worth confirming which company is the employer for Canadian employment law purposes. That is not always the company that issues the paycheque.
A subsidiary that directs the work may be treated as an employer, or joint employer, in some respects. Ontario employment standards generally apply to work performed in Ontario, whichever company is the employer.
A posting can also raise questions about whether the parent has a taxable presence in Canada. That depends on the facts and the applicable tax treaty, so tax advice is worth getting early.
A Checklist Before Hiring in Canada Through a Subsidiary
Before the first hire, most subsidiaries should work through these steps:
- Confirm whether each role should be an employee or a contractor under Canadian law.
- Prepare Canadian employment agreements, including compliant termination, restrictive covenant, and IP terms.
- Register a CRA payroll program account and set up Canadian payroll.
- Register with the WSIB if your industry is covered, and check Employer Health Tax obligations.
- Put required workplace policies in place, and post required employment standards information.
- Confirm immigration status for anyone transferring from the parent company.
- Keep the subsidiary's ongoing compliance and corporate records current as the team grows.
When to Involve a Lawyer
The best time to involve a lawyer is before the first Canadian hire, while employment agreements, classification, and the payroll structure can be set up correctly.
It is also worth getting advice before converting contractors to employees, terminating a Canadian employee, hiring in a new province, or transferring staff from the parent company.
The Bottom Line on Hiring in Canada Through a Subsidiary
Hiring in Canada through a subsidiary is not simply a matter of adding people to the parent company's existing systems. It creates Canadian employment obligations from the first hire, regardless of how employment works elsewhere in the group.
Employment standards, classification, employment agreements, payroll, and workplace insurance all need to be built around Canadian law. Getting this right at the start is far easier than correcting agreements, payroll, and classifications after employees are already relying on them.
If your business is hiring in Canada, our team at Levine Law can help. We can prepare Canadian employment agreements, confirm classification, and set up the structure your subsidiary needs before the first hire.
Frequently Asked Questions
What obligations apply when a Canadian subsidiary hires its first employee?
The subsidiary becomes an employer under Canadian law. In Ontario, the Employment Standards Act, 2000 applies, covering minimum wage, overtime, vacation, public holidays, leaves, and termination. The subsidiary must also withhold and remit income tax, CPP, and EI, and usually register with the WSIB. These obligations apply from the first hire, regardless of how the parent company employs people elsewhere.
Can a foreign parent use its own employment contract template in Canada?
Usually not without significant changes. A template from another country is unlikely to meet Canadian requirements, particularly for termination clauses and restrictive covenants. A termination clause that does not comply with the ESA can be unenforceable, entitling the employee to common law notice. Our article on termination clauses in Ontario employment contracts explains why so many clauses fail.
Can a Canadian subsidiary hire workers as contractors instead of employees?
Only if the relationship genuinely works as an independent contractor relationship under Canadian law. Calling someone a contractor is not enough. If the business controls their work, provides their equipment, and treats them as part of the team, they may be an employee. Our article on the CRA's test for contractors in Ontario explains how status is assessed.
Can a Canadian subsidiary use the parent company's payroll system?
Only if that system can meet Canadian requirements, which many global systems cannot. Canadian payroll must handle source deductions for income tax, CPP, and EI, Canadian remittance schedules, tax slips, and provincial differences, including Quebec's separate programs. Many subsidiaries use a Canadian payroll provider or a professional employer organization, but the subsidiary remains responsible for compliance.
Do employees transferred from the parent company need work permits?
Generally, yes. Foreign employees working in Canada usually need appropriate immigration authorization, and the right category depends on their role and circumstances, so immigration advice should be obtained first. If they stay on the parent's payroll, the arrangement and cost charges should be documented in intercompany agreements.