Canada presents a clear opportunity for foreign businesses seeking to establish a North American presence, offering a stable legal system, a skilled workforce, and access to extensive trade agreements. A threshold distinction worth noting at the outset is the difference between doing business “in Canada” and doing business “with Canada.” The former typically triggers a Canadian tax presence, while the latter may not.
Canada’s Legal Environment
Canada operates as a federal system with ten provinces and three territories. The constitution divides powers between federal and provincial governments. Federal authorities cover matters of national dimension, including banking, criminal law, immigration, and international trade, as well as specific industries like airlines and telecommunications. Provinces hold jurisdiction over regional matters such as property rights, natural resources, securities regulation, and business corporations. Joint federal-provincial responsibilities exist in several areas. While federal statutes apply nationwide, much daily business regulation falls under provincial and territorial law. Corporations may be incorporated under federal or provincial law.
Except for the province of Québec, all Canadian jurisdictions follow the common law tradition. Québec applies civil law to private matters and common law to public matters like criminal law. Businesses operating in Québec must account for unique requirements, including French language obligations and other provincial compliance rules.
Choosing a Structure
The first decision for a foreign entity is typically the business structure. Common options include corporations, unlimited liability companies, general partnerships, limited partnerships, joint ventures, and branch offices.
The most common route for foreign expansion is incorporating a Canadian subsidiary. A subsidiary is a legal entity distinct from its shareholders and management, capable of owning property, borrowing, and being sued. Shareholders’ liability is limited. A Canadian subsidiary is a tax resident and must pay Canadian tax on its worldwide income and file separate tax returns.
Unlimited liability companies exist in Alberta, British Columbia, and Nova Scotia. In these structures, shareholders are liable for the company’s debts. ULCs are often used by U.S. investors because they may qualify as “disregarded entities” for U.S. tax purposes, allowing income to flow through to the U.S. parent.
A partnership arises when two or more persons carry on business together with a view to profit. General partnerships involve joint and several liability, while limited partnerships include both general partners with unlimited liability and limited partners with liability capped at their contributions. Limited partners risk losing this protection if they take an active management role.
Joint ventures are contractual arrangements rather than statutory entities. A foreign entity collaborating with a Canadian party should ensure the agreement explicitly disclaims any intention to form a partnership.
A branch office is an extension of the foreign parent rather than a separate legal entity. Establishing a branch involves registering as an extra-provincial corporation in each province where business occurs. This structure exposes the foreign parent to direct liability for Canadian operations. While generally less expensive than incorporation, a branch faces a Canadian branch profits tax, typically 25 percent, unless reduced by a tax treaty. This tax approximates the withholding tax on dividends from a subsidiary.
Key Considerations
Jurisdictional considerations play a major role in the formation of a corporate entity. The Canada Business Corporations Act is available federally, and each province and territory has its own corporate statute, many of which are similar. Factors influencing the choice include where the entity will operate, director residency requirements, and corporate naming rules. For instance, the federal act and the statutes of Manitoba, Saskatchewan, and Newfoundland and Labrador require that at least 25 percent of a corporation’s directors be resident Canadians. Most other provinces no longer impose this requirement.
Regardless of the chosen structure, an entity that carries on business in a province other than its home jurisdiction must generally register or obtain a license as an extra-provincial entity. This applies to a foreign branch and to a Canadian corporation incorporated elsewhere. In some regulated industries, the entity may be required to incorporate a Canadian subsidiary instead of simply registering. A corporation may be found to be carrying on business in a province if it has a resident agent, representative, or employees; it holds an interest in real property; or it carries on a regulated activity.
Failure to obtain a required license may result in penalties and could prevent the entity from maintaining proceedings before Canadian courts concerning its contracts. The licensing process is generally straightforward, provided the entity’s name is not confusingly similar to an existing name in that jurisdiction.
Capitalizing Operations
Canadian subsidiaries can be capitalized with equity, debt, or a combination of both. There is no minimum or maximum amount of share capital that a corporation can issue, unless specified in its incorporating documents. Share structures are highly flexible. Shares may be voting or nonvoting, with different dividend or liquidation rights. Corporations may also borrow funds and grant security interests over their property.
Canadian banks require extensive documentation to set up a bank account. This includes identification, proof of ownership, and incorporation documents. How a business chooses to capitalize its Canadian subsidiary is driven by tax considerations, in consultation with financial and tax advisers.
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