Welcome to the Lawson Lundell guide to Doing Business in Western Canada: 2014.
As a firm with deep roots in Western Canada we can assist you in navigating the laws and regulations to establish, acquire or invest in a business operating in the region. Western Canada is among the most robust economic areas of the country with extensive resource activity in energy, mining and forestry.
This guide has been prepared by Lawson Lundell as a concise resource outlining certain key relevant laws and regulations that companies should consider when doing business in Canada. The laws set out in this guide are current to March 1, 2014. Certain industries may also be subject to other laws or requirements that are not set out in this guide. We would be pleased to speak with you about your specific plans and are delighted to welcome you to Western Canada.
DESTINATION: WESTERN CANADA
When we talk about Western Canada, we refer to the four western provinces of Canada, namely (from west to east):
- British Columbia
- Saskatchewan and
British Columbia is known as "the Pacific province," while Alberta, Saskatchewan and Manitoba are collectively known as "the Prairie provinces." British Columbia and Alberta are also often jointly known as "the Mountain provinces."
Western Canada comprises almost a third of Canada's vast landmass and around 2% of the world's total landmass. If Western Canada were a country, it would be the eighth largest country in the world, after India and displacing Argentina.
Western Canada accounts for 32% of Canada's GDP with economic growth outstripping the Canadian average. It has highly developed infrastructure with 9 major airports (6 of which are international), comprehensive road, rail and shipping networks and stable, affordable water and electrical utilities.
Western Canada has a highly developed service industry. Creativity and innovation are encouraged. Western Canada is at the forefront of the global knowledge economy, supported by various universities and colleges, and a robust healthcare sector.
Western Canada's abundant natural resources, educated and skilled workforce, modern transportation and communications infrastructure, and close proximity and historic ties to the large and growing markets of the United States and Asia all contribute to Western Canada's vibrant business community. Foreign investment is generally welcome in Western Canada, with all levels of government keen to promote a diversified business sector, economic development, and skilled employment.
Western Canada ranks top in lifestyle which, combined with a progressive immigration process, enables businesses to attract and retain talent from around the world. Vancouver, BC is consistently ranked one of the top five cities in the world for livability and quality of life.
The provinces of Western Canada form part of the federal Dominion of Canada, established by the Act of Union on July 1, 1867. Manitoba was the first Western Canadian province to join the new Dominion of Canada on July 15, 1870. British Columbia joined on July 20, 1871, with Saskatchewan and Alberta joining on September 1, 1905.
Canada is a constitutional monarchy, with Queen Elizabeth as the formal Head of State. A constitutional monarchy retains a sovereign as Head of State, but only as a symbol of national unity and with no power to influence government policy. The Crown's interest is represented in all federal matters by the Governor General of Canada. The Crown's interest at the provincial level is represented by the Lieutenant Governor of the province.
Canada is a parliamentary democracy with a federal system of government broadly similar to the United States' federal model. Legislative powers are divided between the Federal Parliament (which sits in Ottawa, the capital of Canada) and the ten provincial parliaments. Generally, matters of national and international importance are the concern of the Federal Parliament, while matters of a local or provincial nature rest with provincial parliaments. The Federal Parliament, for example, has responsibility for international trade and commerce, defence, banking and currency, bankruptcy and insolvency, intellectual property, criminal law and interprovincial transportation, while the provincial parliaments retain responsibility for property law, contract law and the provincial transport infrastructure.
This division of legislative power between federal and provincial governments is enshrined in the Constitution Act, 1867. Therefore, anyone doing business in Western Canada should be aware that laws can be enacted at either level of government, depending on the nature of the power. Occasionally, there can also be an overlap of laws and it is left to the courts to decide which parliament has the relevant power.
The federal and provincial governments operate on the "Westminster model" of government, where the executive (government) is drawn from the legislature (parliament) and is directed by, and reports to, the parliament. It is usual for Members of Parliament to belong to a political party, to whom they generally owe their allegiance. Members of Parliament represent single seat constituencies (or "ridings") and serve for a maximum five year term.
The Westminster model tends to produce stable and predictable governments with broad authority to make laws and take executive action, without further consensus being required.
Independence of the judiciary from the legislative and executive branches is a fundamental tenet of the Canadian legal system. All government actions, including statutes, regulations, rules, and administrative action are subject to judicial review. The judiciary also enforces Canada's constitution, including the Charter of Rights and Freedoms.
The legal systems in Western Canada are based on the English "common law" system, where laws are developed and shaped not just by the federal and provincial parliaments, but also through court decisions, which are binding law on lower courts.
The judiciary consists of the federal and the provincial judiciary, although ultimate judicial authority rests with the nine justices of the Supreme Court of Canada. The federal courts are concerned with federal law matters, such as immigration and tax. The provincial courts are structured in a hierarchical manner with the Court of Appeal being the highest provincial authority. It is possible to appeal from the provincial Court of Appeal to the Supreme Court of Canada, but only if the question of law is of national importance and leave is granted by the court. The Supreme Court of Canada is selective as to the cases that will be heard: leave to appeal to is only granted in around 10-15% of cases.
The Supreme Court of Canada retains the power to declare that federal or provincial legislation violates principles of the constitution and is therefore invalid.
FORMS OF BUSINESS ORGANIZATIONS
A number of issues arise in choosing the appropriate form of business organization through which to carry out Canadian operations. Corporations have the choice of operating through:
- a branch corporation
- a subsidiary corporation
- an unlimited liability corporation
- a partnership, or
- a joint venture.
Each vehicle presents some advantages, according to the circumstances.
Branch or Subsidiary Corporation?
Business or investment activities can be carried out either directly through a branch of the existing business or through a subsidiary corporation or other entity established in Canada. There are a number of features that attach to either:
Features of a branch
- Possibility to offset losses of the Canadian branch against taxable profits of the parent corporation in other countries
- Direct applicability of parent corporation to federal and provincial laws
Features of a subsidiary
- The subsidiary may benefit from a lower Canadian tax rate than may be available to the parent country in its home country
- The "thin capitalization" rules (see p. 11) do not apply to foreign corporations
- Possibility of accessing federal and / or provincial government assistance
Unlimited Liability Corporation (ULC)
Unlimited Liability Companies (in British Columbia) and Unlimited Liability Corporations (in Alberta) have become useful vehicles for the acquisition of Canadian businesses by US investors. An ULC is a separate legal entity and like any other corporation has the capacity, rights, and powers of a natural person. It is treated as an ordinary corporation for Canadian tax purposes but is treated as the equivalent of a partnership in the US, which has tax advantages, so US investors often consider unlimited liability companies. Separate advice on US tax law should be sought before using an ULC.
In Canada it is customary for partners to enter into a detailed partnership agreement in order to avoid any unwanted provisions of the partnership legislation applying by default. The partners of a partnership may be a subsidiary or a branch of the parent corporation, in which case the considerations above will apply. Partners have unlimited joint and several liability for the debts of the partnership, with the potential that any one partner might have to shoulder the entire partnership debt.
Limited partnerships are commonly used for investment purposes to permit the limited partners to obtain the benefit of tax deductions while retaining limited liability. The limited partner is generally the investor and the general partner the executive. If appropriately structured such that the general partner (with unlimited liability) is a corporation, then all liability is effectively limited.
True joint ventures or co-ownership arrangements avoid the unlimited joint and several liability applicable to partnerships. They also permit the venturers and co-owners to regulate their tax deductions without being forced to use the same basis as other co-venturers, which would not be possible in the case of partnership. However, as noted above, partnership legislation can apply to partnerships even without an agreement, so a joint venture agreement must be carefully drafted to avoid this possibility.
The different jurisdictions under which a Canadian subsidiary can be incorporated have different requirements, which may be important to foreign businesses operating in Canada. The subsidiary may be incorporated under the federal Canada Business Corporations Act (the CBCA) or under the laws of one of the provinces or territories of Canada.
Generally, a federal corporation has the capacity and power of a natural person and may carry on business anywhere in Canada without restriction by a province or territory. However, all provinces and territories regulate in some manner the corporate activities of a federal corporation through laws requiring registration, the filing of returns and the payment of fees by every corporation doing business in the province or territory.
The amount and type of authorized capital does not affect the incorporation fee or the corporation's capacity to carry on business. While no set percentage of authorized capital needs to be issued, the amount of subscribed or paid-up capital must be considered because of the "thin capitalization" rule described later on under Taxation.
The requirement for the number of directors varies according to the jurisdiction and there may also be a requirement for directors to be resident in Canada, depending on the chosen domicile of the corporation. There are no residency requirements under the British Columbia Business Corporations Act, which is often helpful for foreign parent corporations.
Incorporation is accomplished by filing copies of charter documents in the prescribed form, together with the required supporting material and fee. Prior to incorporating, it is necessary to obtain a name search report to determine whether the desired name is available. The name must not be the same as, or similar to, any known entity if the use of the name would be likely to confuse the public (see Intellectual Property).
To carry on business in any of the Western Canadian provinces, a federal or provincial corporation must be extra-provincially registered there. In addition to filing annual returns and notices of change of directors and registered office as required by the CBCA or home provincial statute, the corporation must also file similar notices as required by the relevant provincial Business Corporations Act. Extra-provincial registration may not be granted.
Unanimous Shareholders' Agreements (USA)
Unanimous shareholders' agreements essentially transfer some or all of the general powers to manage the business and affairs of the corporation from the directors of the corporation to the shareholders. The shareholders assume the powers and liabilities. Where there is a residency requirement for directors adopting a USA, the business and affairs of the subsidiary can be controlled by non-resident shareholders rather than its directors.
Directors' meetings may be held either inside or outside Canada. However, depending on the jurisdiction, there may be a quorum of resident Canadian directors to transact business.
The corporation's Articles or By-laws will normally direct where the shareholders' meetings may be held. Absent such direction, the relevant legislation would normally specify that the meeting requires to be held in the province or within Canada.
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REGULATION OF INVESTMENT
Canada welcomes foreign investment and there are few restrictions placed on foreign investors by government. In general, foreign investment is subject to the federal Investment Canada Act (see below) by non-Canadians.
Under other federal statutes, there are also specific limitations on the degree of foreign ownership in particular businesses, for example in banking, telecommunications and airline businesses. Canada, the US and Mexico are parties to the North American Free Trade Agreement, which protects investments. in Canada by members of NAFTA countries Canada has also reached agreement in principle with the European Union for a Comprehensive Economic and Trade Agreement (CETA) late in 2013. We look forward to seeing more detail of the terms of the agreement in 2014.
World Trade Organization
Under an agreement establishing the World Trade Organization (WTO), a special status is conferred upon nationals of WTO member states and the entities controlled by them. There are two primary advantages. First, indirect acquisitions by a WTO investor are not reviewable unless they involve a cultural business. Second, the investment threshold limit that triggers review is higher for WTO investors. For the 2013 year, the threshold is $344 million. The 2014 threshold will be set by Industry Canada in the first quarter of 2014.
Investment Canada Act (ICA)
The Investment Canada Act is a federal statute that applies broadly to the regulation of investments by non-Canadians in Canadian businesses. Under the Investment Canada Act, Industry Canada, a department of the federal government, will review the foreign investment where:
- the value of the acquired assets used in the Canadian business is equal to or greater than C$5 million for a direct acquisition;
- there is an indirect acquisition of a foreign parent, whose Canadian subsidiary has assets of $50 million or more; or
- the Canadian business represents more than 50% of the assets of the group of acquired entities.
Are you non-Canadian?
You are Canadian for the purposes of the Investment Canada Act if you are:
Otherwise, you are non-Canadian.
Any transaction below the applicable thresholds is not reviewable unless the Canadian business is a "cultural business," in which case the review and approval is carried out by the Minister of Canadian Heritage. The potential investor need only file a notice.
Any transaction above the applicable thresholds will trigger a review.
If a proposed investment is subject to review, and is not in respect of a "cultural business," the Minister of Industry will, on recommendation of Investment Canada, either approve or reject the proposed investment. Where a proposed investment is rejected, the Investment Canada Act allows for negotiations to take place between Industry Canada and the investor to amend the terms of the application. Review generally takes 45 days, subject to extension. A transaction may not be completed until the review is complete and the investment is approved.
In order for a reviewable transaction to be approved by Industry Canada, it must result in a net benefit to Canada. The Investment Canada Act, sets out a number of factors that are to be taken into account in determining whether the proposed investment is of net benefit to Canada, including the effect of the investment on the level and nature of economic activity in Canada and the degree and significance of participation by Canadians in the existing and proposed businesses. Factors such as continued employment and the infusion of capital by the investor are particularly significant to Investment Canada and assist in meeting the "net benefit test."
The National Security test
In addition to the general "net benefit test," there are guidelines with respect to the acquisition of control of a Canadian business by enterprises controlled directly or indirectly by foreign governments (a "state-owned enterprise"). Where a state-owned enterprise proposes an acquisition, the Minister will assess such factors as whether the state-owned enterprise's governance and reporting are aligned with Canadian standards. Other factors will include where the manufacturing or processing will take place, the participation of Canadians in operations both in Canada and abroad, the support of research and development, and where exports will go.
An investment by a non-Canadian will be blocked where the Minister considers that national security may be at risk, regardless of the size of investment or whether or not there is a change of control.
Although information submitted to Industry Canada is generally confidential, the Minister may disclose the information to other government ministries or agencies where such disclosure is necessary for the purpose of the administration and enforcement of the Investment Canada Act, and to certain investigative bodies where information is produced with respect to a national security review.
The federal Competition Act is Canada's antitrust legislation enforced by the Competition Bureau. The Act provides for the general regulation of trade and commerce in respect of conspiracies, trade practices and mergers affecting competition.
A "Cultural Business"
The Investment Canada Act defines "cultural business" as a Canadian business that carries on activities such as:
The Competition Act defines a merger as one or more persons taking control, or a significant interest in another business, whether direct or indirect or in whole or in part. Therefore, a merger is broader than an acquisition of voting control. All mergers are subject to the provisions of the Competition Act and the substantive review principles set out below.
The Commissioner of Competition may apply to the Competition Tribunal for a review of any merger or proposed merger. If the Tribunal determines that a merger or proposed merger prevents or lessens or is likely to prevent or lessen competition substantially, then the Tribunal has the power to prohibit or dissolve the merger or order divestiture of assets or shares. The Commissioner may make the application at any time up to three years after a merger has been consummated if, in the Commissioner's opinion, the merger raises concerns of substantial lessening of competition in the relevant market.
Generally, mergers that raise concerns are dealt with by extensive negotiation and agreement between the Commissioner's staff and the parties involved.
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The Competition Act contains a non-exhaustive list of factors that the Tribunal may consider in an assessment of the likely competitive impact of a merger as follows:
- the extent of effective foreign competition
- whether one of the merging parties is a failing business
- the likely availability of acceptable product substitutes
- the extent to which effective competition would remain in a market affected by the merger
- the likelihood that the merger would result in the removal of a vigorous and effective competitor
- any barriers to entry into a market including tariff and non-tariff barriers to international trade and any effect of the merger on such barriers
- the nature and extent of change and innovation in a relevant market and
- any other factor that is relevant to competition in a market affected by the merger.
In assessing whether a merger will or is likely to substantially prevent or lessen competition, the Tribunal will first identify the relevant markets from two perspectives: (i) the product or products with respect to which a merged firm acting alone or in concert with others is likely to be able to exercise market power; and (ii) the geographic area within which such power is likely to be exercised.
The parties to a proposed merger must notify the Commissioner prior to completion of the transaction where the transaction exceeds two threshold tests, being:
- if the parties to the transaction, together with their affiliates, have assets in Canada, or gross annual revenues from sales in, from or into Canada, that exceed C$400 million, and
- if the transaction is an acquisition, direct or indirect, of an operating business that has assets in Canada the value of which exceeds C$80 million or gross revenues from sales in, from or into Canada generated from those assets exceeding C$80 million. (This threshold is adjusted every year based on growth in GDP. The 2014 threshold has not yet been announced.)
Where notification is required, the obligation falls to all parties to the transaction to notify and provide the prescribed information, in accordance with prescribed statutory waiting periods and filing fees.
In circumstances where the parties wish to avoid the extensive information requirements and time delays associated with notification, an advance ruling certificate (ARC) may be sought. The Commissioner is required to consider any request for an ARC as expeditiously as possible. An ARC can also be obtained when the parties desire a high degree of comfort that the Commissioner will not challenge their transaction.
Free Trade Agreements
Canada is party to a number of international trade agreements including the North American Free Trade Agreement (NAFTA), which deeply integrates the Canadian economy with that of the United States and Mexico.
In addition to NAFTA, Canada recently concluded free trade agreements with eight countries: Colombia, Peru, Jordan, Panama and the European Free Trade Association states of Iceland, Liechtenstein, Norway and Switzerland.
Canada has recently been invited to join the Trans- Pacific Trade Partnership (TPP) talks. The TPP is an Asia-Pacific economic integration pact that now has 11 members: the United States, Australia, Brunei, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam. Japan has also reportedly expressed an interest in joining the talks, which would eclipse NAFTA in size and scope.
Furthermore, the Comprehensive Economic and Trade Agreement (CETA), a free trade agreement with the European Union (EU), is currently close to being finalized. The EU had a population of 500 million and a GDP of $16.8 trillion in 2010. As an integrated block, the EU represents Canada's second largest trading partner.
Canada is also a party to World Trade Organization (WTO) Agreements, including the General Agreement on Tariffs and Trade and the General Agreement on Trade in Securities. These agreements provide excellent opportunities for businesses located in Canada.
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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.