Employer of Record vs Canadian Subsidiary Cost Calculator
An employer of record charges per head every month, while a Canadian subsidiary carries a largely fixed compliance cost, so there is a headcount at which the subsidiary becomes the cheaper answer. Work out that break-even, the month it arrives, and the permanent establishment and Regulation 105 exposure that staying on the platform does nothing to remove.
three-year difference
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What Each Model Costs at Today’s Headcount
| Cost | Employer of Record | Canadian Subsidiary | Difference |
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Where the Break-Even Sits Across Headcounts
| Canadian Employees | Annual EOR Cost | Annual Subsidiary Cost | Annual Difference | Cheaper Model |
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Setting Up, the Break-Even Month and Three Years Out
| Item | Basis | Amount |
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Exposure the Cost Comparison Does Not Show
What to Do Next
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Disclaimer: A non-resident corporation is taxable in Canada under subsection 2(3) and section 115 of the Income Tax Act on income from carrying on business in Canada, and section 253 extends the meaning of carrying on business in Canada to solicitation of orders and offers of anything for sale through an agent. Relief is then given by the applicable treaty, and under Article V of the Canada–United States Tax Convention a permanent establishment includes a fixed place of business through which the business is wholly or partly carried on and, under the dependent agent test, a person acting on behalf of the enterprise who has and habitually exercises authority to conclude contracts in its name. Whether the foreign company has a permanent establishment is judged on its own activities in Canada and is not determined by the identity of the legal employer of the workers, so engaging an employer of record does not itself remove the exposure. Regulation 105 of the Income Tax Regulations requires a payer to withhold 15 per cent from fees, commissions or other amounts paid to a non-resident in respect of services rendered in Canada unless a waiver has been granted, and Regulation 102 governs withholding on remuneration for employment performed in Canada. Amounts withheld are a credit against the non-resident’s eventual Canadian tax, not a final tax, but they are cash held back until a return is assessed. Employee stock option treatment under section 7 depends on an agreement to issue securities between a qualifying person and an employee of that person or of a non-arm’s-length corporation, and the deduction in paragraph 110(1)(d) is subject to its own conditions, so where the workers are legally employed by an unrelated employer of record both the section 7 timing and the deduction should be examined before options are granted. Employer health tax is imposed by the Employer Health Tax Act (Ontario), where the exemption is available only to eligible employers, is shared among associated employers and is denied above a payroll threshold; other provinces impose their own payroll levies at their own rates and Alberta imposes none. Premiums under the Workplace Safety and Insurance Act, 1997 depend on the classification of the business and on an annual maximum insurable earnings ceiling, and coverage is not mandatory for every classification. Registration for GST/HST under section 240 of the Excise Tax Act may be required whether or not a Canadian entity exists. Every rate, fee, threshold and ceiling used here is an input rather than a fixed constant, and the amounts pre-filled are examples for illustration that should be replaced with your own quotes and the current published figures before any decision is taken. This page is general information, not tax advice.
What an Employer of Record Actually Buys You
An employer of record is a Canadian company that becomes the legal employer of your Canadian workers. It runs the payroll, opens and operates the CRA payroll account, remits source deductions, files the T4s, registers for the provincial payroll levy and the workers’ compensation board, and carries the employment contract. You pay it the salary, the employer statutory costs and a fee per head per month, and in exchange you get a Canadian hire in days rather than months without incorporating anything.
For one or two people that is excellent value. The platform is absorbing a fixed compliance burden across thousands of clients, and you are paying a small share of it instead of the whole thing. The problem is that the fee scales with every head you add while the compliance burden of your own subsidiary does not, so somewhere between a handful of hires and a proper Canadian team the arithmetic reverses.
The fee is not the only thing you are buying, and not the main thing you should be comparing. Three questions sit outside the monthly invoice entirely: whether your company has a permanent establishment in Canada, whether your Canadian revenue attracts withholding at source, and whether your option plan works for the people you have hired. None of the three is answered by who runs the payroll.
The Cost Curve and Why the Answer Changes With Headcount
Set the two models side by side and most of the cost is identical. Salary is the same. The employer share of the Canada Pension Plan, the second additional contribution and employment insurance is the same, because those are statutory and follow the employment, not the structure. Workers’ compensation premiums are broadly the same for the same work. What differs is a per-head monthly fee on one side and a largely fixed annual compliance cost on the other.
That makes the comparison a straight line crossing a flat line. The employer of record cost rises with every hire. The subsidiary cost is a bookkeeping engagement, a T2 return with financial statements, payroll administration, an annual return and a registered office, and those barely move between four employees and fourteen. The crossing point is the break-even headcount the calculator reports.
| Cost Element | Employer of Record | Your Own Subsidiary | Scales With Headcount |
|---|---|---|---|
| Salary | Passed through | Paid directly | Yes, identically |
| Employer CPP, CPP2 and EI | Passed through | Paid directly | Yes, identically |
| Provincial payroll levy | At the platform’s marginal rate | Exemption possible if eligible | Yes, with a threshold |
| Workers’ compensation | Passed through | Paid directly | Yes, to the earnings ceiling |
| Platform fee per head | Every month, every person | None | Yes, linearly |
| Bookkeeping, T2, payroll admin | Included | Largely fixed | Barely |
| Incorporation and set-up | None | One-off | No |
| Wind-up if the experiment ends | Cancel the contract | Dissolution and final returns | No |
One quiet asymmetry is worth naming. The provincial payroll levy carries an exemption in Ontario and in several other provinces, and a platform with an enormous Canadian payroll has long since used its own up, so the levy it passes to you is charged at the full marginal rate. A small subsidiary can sometimes shelter its first tranche of payroll behind the exemption. Sometimes, not always, which is why the calculator asks rather than assumes.
An Employer of Record Does Not Shield You From a Permanent Establishment
This is the point that most often goes unsaid, and it is the one that matters most. Whether your company has a permanent establishment in Canada is decided by what your company does in Canada. It is not decided by who signs the payroll cheques.
The treaty test looks for a fixed place of business at the disposal of the enterprise through which its business is carried on, or for a dependent agent in Canada who has and habitually exercises authority to conclude contracts in the name of the enterprise. A Canadian salesperson who negotiates and closes deals for the foreign parent can satisfy the second limb whether that person is on the parent’s payroll, on a platform’s payroll, or on nobody’s payroll at all. The employer of record is not a party to the analysis.
Several platforms market themselves as removing permanent establishment risk. That claim does not survive contact with the treaty. What the platform removes is your obligation to register as an employer and operate Canadian payroll. It does not change the location of your business activity, the authority you have given your Canadian people, or the premises they work from. If a permanent establishment arises, the consequence lands on the foreign company: a Canadian return, Canadian tax on the profits attributable to it, and in some cases branch tax as well.
A Canadian subsidiary does not make the risk disappear either, but it changes its shape usefully. Activity conducted by a properly resourced Canadian corporation on its own account is taxed in that corporation, at Canadian corporate rates, on a return that is expected. The dispute you are avoiding is not about tax being payable, it is about an unexpected assessment on the parent years later, with penalties and interest, over profits nobody had attributed to Canada. If you want to test where you sit today, our permanent establishment risk checker walks the treaty tests, and the branch versus subsidiary calculator compares the two ways of holding a taxable Canadian presence once you accept that you have one.
Regulation 105 and Invoicing Canadian Customers From Abroad
Regulation 105 requires a payer to withhold fifteen per cent from fees, commissions and similar amounts paid to a non-resident for services rendered in Canada. The obligation sits on your Canadian customer, not on you, and Canadian customers with any tax sophistication apply it.
So if your Canadian team performs services in Canada and your foreign parent invoices the Canadian customer for that work, the customer may quite properly hold back fifteen per cent of every invoice and remit it to the CRA. The amount is not lost. It is a credit against whatever Canadian tax is eventually assessed, and a waiver can be applied for in advance where the treaty protects the income. But applying for waivers on each engagement is slow, and in the meantime fifteen per cent of your Canadian revenue is sitting with the Receiver General rather than in your bank account.
A Canadian subsidiary solves this cleanly. A Canadian-resident corporation invoicing a Canadian customer is not a non-resident, so Regulation 105 does not apply to the payment at all. That is usually the single most persuasive cash-flow argument for incorporating, and it is entirely separate from the headcount arithmetic. Our non-resident employee withholding calculator covers the parallel rule in Regulation 102 for remuneration paid for employment performed in Canada.
Withholding is a timing problem, not a tax problem, and that is exactly why it gets underestimated. A company with thin margins on Canadian work can find that fifteen per cent of gross revenue held at source exceeds its entire profit on the contract, and it will stay held until a Canadian return is filed and assessed.
Stock Options Are the Problem Nobody Prices
If your Canadian hires are in the option plan, please read this section before anything else on the page. It decides the question more often than the cost does.
The favourable Canadian treatment of employee stock options rests on an agreement to issue securities between a qualifying person and an employee of that person, or of a corporation that does not deal at arm’s length with it. Workers legally employed by an unrelated employer of record are employees of the employer of record. They are not employees of your parent company, and the employer of record is not a member of your corporate group.
That puts both the timing rules and the deduction that halves the effective rate on the option benefit into question. The practical outcomes range from awkward to expensive: a benefit that may be treated as ordinary compensation rather than an option benefit, a deduction that may not be available, withholding and reporting that may fall to a party with no visibility of your cap table, and a Canadian engineer who discovers at exercise that their options were taxed quite differently from a colleague’s in another country.
For a venture-backed company this factor alone frequently settles it. If equity is part of how you pay Canadian people, the cleanest structure is a Canadian subsidiary that is not at arm’s length with the issuer, and the cost comparison becomes secondary. Please take advice on the specific plan documents before granting, because the treatment turns on who the issuer is, who the employer is, and the relationship between them.
Employer Health Tax, WSIB and the Costs That Do Not Change
Ontario’s employer health tax is charged on total Ontario remuneration at rates rising to 1.95 per cent, with an exemption for eligible employers. Two details are routinely missed. The exemption is shared among associated employers rather than given to each, and it is denied entirely once payroll passes a threshold, so a group that looks small in Canada but large globally may get none of it. A foreign-controlled group should assume the exemption is unavailable until it has been confirmed, which is why the calculator defaults to treating the payroll as fully taxable and lets you switch that on rather than applying a rate quietly. The Ontario employer health tax calculator works the exemption through in detail.
Other provinces are not Ontario. British Columbia and Manitoba impose their own payroll levies with their own thresholds, Quebec’s health services fund contribution is charged at rates that depend on total payroll and sector and sits alongside several other Quebec-specific payroll obligations, and Alberta imposes no payroll levy at all. If your team is spread across provinces, please run the calculator once per province rather than trusting a single blended figure.
| Statutory Cost | Driven By | Differs Between an EOR and a Subsidiary? |
|---|---|---|
| Employer CPP and CPP2 | Pensionable earnings, annually reset | No |
| Employer EI premium | Insurable earnings and the employer multiple | No |
| Provincial payroll levy | Total provincial remuneration | Yes, through the exemption |
| Workers’ compensation premium | Industry classification and the earnings ceiling | Only through classification |
| Vacation pay and statutory holidays | Provincial employment standards | No |
| Termination and severance | Provincial standards and the contract | Yes, the liability moves to you |
Workers’ compensation deserves a specific caution. The premium rate follows the classification of the business rather than the job title, and many office and professional classifications are not in a mandatory coverage class at all. Treating a generic rate as if it applied to a team of software engineers overstates the cost, and assuming no coverage is required understates the risk. It is worth confirming the classification for the actual activity before either model is priced.
When Staying on an Employer of Record Is the Right Answer
The honest answer is: more often than a calculator with a cost-saving headline would suggest. An employer of record earns its fee when the Canadian presence is small, new or provisional.
A subsidiary is a corporation with obligations that continue whether or not the Canadian experiment works. Directors take on statutory duties and personal exposure for source deductions. Returns must be filed for every year the company exists, including years with no activity. Dissolving it properly costs money and takes time, and an abandoned corporation left undissolved accumulates filing defaults. Some jurisdictions require a resident director and others do not, which is a real constraint for a company with no Canadian nationals on its board; the resident director requirement and nominee cost checker sets out where the requirement bites and what the alternatives cost.
| Situation | Usually Points To |
|---|---|
| One or two hires, testing the market | Employer of record |
| Hiring needed within weeks | Employer of record first, incorporate in parallel |
| Headcount above the break-even and still growing | Canadian subsidiary |
| Stock options granted to Canadian staff | Canadian subsidiary |
| Canadian customers invoiced for work done in Canada | Canadian subsidiary |
| Canadian salespeople closing contracts | Take advice, the exposure exists either way |
| Genuine chance of exiting Canada within a year | Employer of record |
| Team split across several provinces | Either, but price each province |
The sensible sequence for most companies is not one or the other. It is an employer of record to get the first hires working, incorporation once the second or third hire is committed, and a planned transfer of employment at a payroll period boundary. Our company registration service handles the incorporation, the CRA payroll and corporate accounts and the provincial registrations, and the cost to hire an employee in Ontario calculator gives you the fully loaded cost of a Canadian hire once you are running the payroll yourself.
What This Calculator Does Not Cover
- Immigration and work permits, which are a separate question from tax and payroll, and which neither model resolves for a worker who is not already entitled to work in Canada
- Employment standards and termination liability, where notice, severance and common-law reasonable notice differ by province and move onto your balance sheet when the employer of record steps out
- The cost of winding up a subsidiary, including final returns, clearance, dissolution filings and the tax on any distribution out of Canada
- Transfer pricing on the intercompany charges between the parent and the subsidiary, the documentation those charges require, and the related-party information return
- GST/HST registration, which can be required whether or not a Canadian entity exists and is not driven by where the payroll sits
- Group benefits and pension arrangements, which are usually cheaper through a platform at low headcount and cheaper directly once the group is large enough to be rated
- Provinces other than the one selected, including Quebec’s separate payroll, sales tax and language obligations
- Currency and the exchange risk on a fee quoted in one currency against payroll in another
The cost comparison is the easy half of this decision. Please send us your platform invoice, your Canadian headcount plan and a note on what your Canadian people actually do, and we will work through the break-even, the permanent establishment position and the option plan together rather than in isolation.
Frequently Asked Questions
Employer of record fees, Canadian subsidiaries and the exposure neither the invoice nor the sales deck mentions.
Related Calculators and Guides
More tools for foreign companies building a Canadian team.
We Will Tell You Which Side of the Break-Even You Are On
Send us your platform invoice, your Canadian headcount plan and a note on what your Canadian people do. We will price the subsidiary properly, work the break-even on your own numbers, and give you a straight answer on the permanent establishment and option-plan questions before you commit either way.