For a purchaser acquiring real property for the purposes of carrying on a business, the choice of the acquisition vehicle is usually driven by income tax considerations.
Modes of Business Organization
Foreign entities acquiring real property for the purpose of the conduct of business generally organize themselves as a sales representative based in Canada; a branch of a foreign U.S. entity in Canada; or a Canadian subsidiary corporation.
Since consolidation of a Canadian subsidiary corporation with the other business operations of its parent is generally not permitted for tax purposes, a branch operation may be favoured if utilization of losses is important. A branch office does not provide the benefit of limited liability and as such, consideration will have to be given to shielding the foreign parent from liability of the Canadian operation. This can be accomplished by the foreign entity incorporating a single purpose subsidiary corporation in its home jurisdiction which would shield the parent from liability. The subsidiary corporation will carry on business in Canada by means of a branch office.
Subsidiaries in Canada
Most commonly, foreign businesses are conducted by subsidiary corporations incorporated federally in Canada or under the laws of one of its provinces. Whether incorporated federally or provincially, corporations seeking to do business in provinces in which they are not incorporated are subject to provincial regulations, filings and fees and must obtain extra-provincial licences (which can be easily and routinely obtained).
A federally incorporated company does have the distinct advantage of being able to use its name anywhere in Canada. A corporation incorporated in Canada will be a "resident" within the meaning of the Income Tax Act, (Canada) and will be required to pay Canadian income tax on its worldwide income (with some foreign tax credits) each taxation year. Canadian provincial income taxes will also apply.
Nova Scotia Unlimited Liability Companies
Generally speaking, for income tax purposes, corporations incorporated either federally or provincially are not permitted to flow profits and losses through to their U.S. shareholders. The one exception to this general rule is an entity called an unlimited liability company, which may be incorporated under the Companies Act, Nova Scotia. It is an anomaly and basically works as follows: a Nova Scotia unlimited liability company is treated as a Canadian corporation for Canadian tax purposes. However, for U.S. tax purposes, a U.S. shareholder of a Nova Scotia unlimited liability company may elect to treat it as a "flow through" entity/partnership. In other words, from a U.S. tax perspective, the income or loss of the Nova Scotia unlimited liability company will be attributed to the U.S. shareholder. Because a Nova Scotia unlimited liability company is taxed as a corporation in Canada and may be treated by a U.S. shareholder as a flow through entity, Nova Scotia unlimited liability companies are frequently used for tax purposes by U.S. entities carrying on business in Canada. The downside is that the shareholders do not have the benefit of protection from the corporation’s debts. There is full recourse to shareholders. Liability is "unlimited".
Corporations are subject to, among other things, capital tax both at the federal and provincial levels. Increasingly, an ownership structure that involves the establishment of a trust entity is being utilized in an effort to exclude the asset and related debt financing from the owner’s capital for capital tax purposes. The trust holds the real property and raises the financing. The "real" or beneficial owner often acts as trustee for purposes of administering the affairs of the trust. Though there are structuring and management complexities associated with the use of a trust, it can be a vehicle well worth exploring for the right project.
The determination of whether to own and conduct business as a partnership, a limited partnership or a co-ownership comprised of individuals and/or corporations (see discussion above) will again be driven by income tax considerations. Limited partnerships offer the double advantage of permitting the limited partners individual tax treatment and, if properly structured, limited liability. Co-ownerships are used where the joint and several liability of partnerships is not desirable or where the entities do not wish to be seen as carrying on business in partnership.
Each business venture which wishes to acquire interests in real property in Canada should first settle on the form of acquisition vehicle. As outlined above, this will usually be determined by tax considerations, both in Canada and the country of origin.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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