Doing Business in Canada – Part 3 – Business Structures
Foreign persons (individuals and corporations) wishing to
establish a business in Canada must decide whether to do so as a sole
proprietorship, a partnership of some form, a joint venture or as a corporation
of some form. A decision as to whether to establish a branch office or a
separate Canadian business organization also must be made. A wide variety of legal arrangements may be
used to carry on business activity in Canada. Factors in the decision-making
will include the circumstances of the investor, the nature of the business
activity, the tax implications and the potential liabilities related to the
business undertaken.
Corporations with Share Capital
Branch Operations
A branch operation in Canada must be registered in each of the
provinces in which it carries on business. In addition, foreign entities must
complete many of the same disclosures and filings with the federal and
provincial governments as are required of domestic entities.
Generally, if the Canadian operation is expected to incur significant losses
in its early years of operation, the foreign entity may wish to carry on
business in Canada directly through a branch, in order to deduct those losses
for foreign tax purposes, if possible. A Canadian branch structure might also
be relevant to enable a better matching of the Canadian corporate tax paid with
the foreign tax credits available in the home jurisdiction.
Provincial or Federal Corporate
Registration?
Most provinces and territories in Canada have their own corporate
legislation. In limited circumstances (for example, banking) the incorporation
must be done federally. The federal legislation is the Canada Business Corporations Act (“CBCA”). The provincial and
territorial legislation is similar with minor differences. Some provinces and
territories, for example, have no requirements for the directors of a
corporation to be resident in Canada.
Under the Federal CBCA, foreigners should be aware of the
following:
1. A Canadian
corporation must have twenty-five percent of its directors being resident
Canadians. A resident Canadian can be either a Canadian citizen or a Canadian
permanent resident. Each corporation is required to have a minimum of one
director. A director must be an individual person. Directors need not own any
shares in a corporation.
2. A director of a
Canadian corporation is subject to a number of liabilities and obligations
under corporate law and under federal and provincial legislation. These include
liabilities involving environmental, payroll, securities, pensions and tax.
3. Single
shareholders are permitted in a Canadian corporation. The identities of a
Canadian corporation’s shareholders are not a matter of public record and a
corporation is not obliged to disclose the names of its shareholders, unless it
is a public company or a company carrying on business in Québec.
4. It is common for
shareholders to enter into a unanimous shareholders’ agreement to govern the
relationship between the shareholders, and to restrict the powers of directors.
Minority shareholders have statutory rights and remedies.
5. Annual financial
statements must be approved by the shareholders at an annual meeting properly
constituted.
6. Financial
statements are only required to be filed with government bodies for public
corporations.
7. Statutory books
and records of a Canadian corporation must be kept in Canada.
The advantages of a corporate structure include:
1. Liability is
limited to the assets of the corporation. The shareholders do not own the
property of the corporation, and the rights and liabilities of the corporation
are not those of the shareholders. The liability of the shareholders is
generally limited to the value of the assets they have invested in the
corporation to acquire their shareholdings.
2. The corporation is
treated as a separate entity for tax purposes and there may be tax advantages
to using a corporation.
3. Corporate shares
are more readily marketable compared to partnership units/interests or joint
venture interests.
Partnerships
Another form of
carrying on business in Canada is in a partnership. A partnership is not a
separate legal entity. The “partnership” is usually subject to a partnership
agreement where one or more individuals carry on business in common with a view
to profit. On dissolution of the partnership, the individual partners share in
the profits, losses and net proceeds. The partnership agreement typically also
deals with events such as death, selling interests in the partnership,
retirement, management and other common issues to a business.
In Canada profits
and losses flow through to the individual partners subject to some rules under
the Income Tax Act. A general
partnership’s disadvantage is that each partner is personally liable for the
liabilities of the partnership. Each partner’s assets are exposed in the event
of the assets being insufficient to cover the liabilities. Limited partnerships
are available in some instances to be used. The liability of a limited partner
is limited to the extent of the partner’s investment in the partnership,
provided that the partner does not take an active role in the business that
could attract liability for a decision or action.
Unlimited Liability Corporations
An unlimited liability company (“ULC”)
can be formed under the laws of Alberta, British Columbia or Nova Scotia.
Legislation in each province is different so an assessment of the advantages
and disadvantages of the legislation for the particular business activity is
necessary. A ULC is
a form of corporation where the shareholders of the ULC can be liable for the
obligations of the ULC. In this respect, a ULC can be similar to a general
partnership and is different from the common form of corporation where the
corporation’s shareholders are not, in general, liable for the liabilities,
acts or omissions of the corporation. This unique nature of the shareholder liability under an ULC
also requires that the liability be assessed and mitigated. Some advantages may arise from
tax perspectives. In the U.S., for example, the IRS treats the ULC as a flow-through.
In Canada, an ULC is treated as any other corporation. The end result is that a
ULC is generally a hybrid entity – a corporation for Canadian tax purposes and
a flow-through entity for U.S. tax purposes. For U.S. businesses operating in
Canada, there may be some advantages in the right situation. Professional
advice should be sought.
Proprietorships
The simplest form of business organization, a
proprietorship, exists when an individual person carries on business as the sole owner without incorporating. At
law, there is no distinction between
the proprietorship and the owner; the proprietorship’s income is the owner’s
income and the proprietorship’s liabilities are the owner’s personal
liabilities. For tax purposes, the proprietorship is not treated as a separate
taxpayer.
Joint Ventures
The term “joint venture” does not have a precise legal definition in Canada. It typically refers to any situation where two or more legal entities share in a common venture. It can refer
to joint venture corporations, to partnerships of corporations or, most
commonly, to a structure (usually referred to as a contractual joint venture)
under which separate corporations own certain assets in common, in the
expectation that the venture does not constitute a partnership, at least for
tax purposes. The relationship is usually governed by a joint venture
contractual agreement.
Corporate and Trade Names
posted by Rui Fernandes @ 4:49 AM
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