In recent months, U.S. investors seeking to make investments and acquisitions in Alberta and elsewhere in Canada have been using Alberta’s newest entity – the unlimited liability corporation (ULC). Many U.S. investors have historically structured northbound deals through Nova Scotia, in order to utilize the Nova Scotia ULC because of its tax efficient status for U.S. tax purposes. Now, however, Alberta has become the second Canadian jurisdiction, after Nova Scotia, to allow for the incorporation of a ULC. While the desired U.S. tax efficiencies can be accomplished by using either a Nova Scotia or Alberta ULC, there are significant differences between the Nova Scotia Companies Act (NSCA) and the Alberta Business Corporations Act (ABCA), many of which may make an Alberta ULC an attractive alternative to its Nova Scotia counterpart.

The attractiveness of a ULC to U.S. investors stems from the fact that the ULC is a hybrid entity that can afford its U.S. owners "flow-through" taxation similar to that often achieved in the U.S. through the use of a limited liability company (LLC) or the making of an S corporation election. In Canada, a ULC is treated as any other corporation for Canadian tax purposes. In the U.S. however, a ULC will be treated as a partnership (if it has two or more owners) or a disregarded entity (if it has only one owner) unless it elects to be treated as a corporation under the IRS "check-the-box" regulations. If the entity agrees to its default classification as either a partnership or disregarded entity, it is considered a "flow-through" entity that is not subject to any entity-level U.S. federal income tax; instead, its owners are liable for any such income tax at their respective rates.

This hybrid status of the ULC provides numerous opportunities for cross-border tax planning, including (1) consolidating losses from a U.S. federal tax standpoint; and (2) maximizing the availability of U.S. foreign tax credit.

An Alberta ULC is generally formed in the same manner as any other Alberta corporation, except that its articles of incorporation (or amalgamation, amendment, continuance, or conversion, as applicable) must contain an express statement that the liability of each of the shareholders of the ULC for any liability, act or default of the ULC is unlimited in extent and joint and several. It is still uncertain whether creditors or other claimants against an Alberta ULC, as a matter of course, will join the ULC’s shareholders in any action based on such joint and several liability. This unlimited liability is more expansive than that of a Nova Scotia ULC, where the members or shareholders of the ULC have no direct liability to creditors, but rather, their liability arises only when the ULC is wound up or liquidated with insufficient assets to satisfy its obligations. Liability under the ABCA extends to present and past shareholders. In Nova Scotia, only shareholders at the time of the winding-up or liquidation are exposed to liability. The more expansive potential shareholder liability is likely ameliorated by the fact that a U.S. investor will often interpose a separate limited liability entity between the ULC and itself, such as a corporation or limited liability company. Note however, that if the U.S. shareholder of a ULC is a limited liability company that is a "flow-through" entity for U.S. tax purposes, the Canada Revenue Agency takes the position that the shareholder is not a "U.S. resident" eligible for protection under the Canada-U.S. Tax Convention because it is not itself subject to tax in the United States.

The ABCA provides a variety of ways to form a ULC, including:

  • converting an existing corporation to a ULC by amending its articles of incorporation (conversely, a ULC can become a limited liability corporation through the same process);
  • amalgamating with an existing ULC (this can occur through a short-form amalgamation requiring only board approval, or through a long-form amalgamation requiring two-thirds shareholder approval, depending on the circumstances); and
  • continuing a Nova Scotia ULC into Alberta as if it were incorporated in Alberta.

In Alberta, the incorporation fee for all companies, including ULCs, is $100.

In contrast, the formation of a ULC in Nova Scotia can be somewhat onerous. Conversion would typically require continuing an existing corporation into Nova Scotia and either winding up into, or amalgamating with, an existing ULC. The Nova Scotia Companies Act only permits long-form amalgamations, which require approval from both three-quarters of shareholders and the Nova Scotia Supreme Court. It is also possible to form a Nova Scotia ULC through a plan of arrangement, although this involves both court hearings and shareholder approval and is therefore only desirable when an amalgamation is impractical. In Nova Scotia the fee for incorporation is $6,000 and there is a $2,000 annual tax.

In Alberta, there exists a statutory requirement that directors, in addition to the codification of their fiduciary duty, must exercise the care, diligence, and skill that a reasonably prudent person would exercise in comparable circumstances. Further, the liability of directors is expressly codified under the ABCA. The ABCA mandates that at least one-quarter of all directors must be Canadian residents.

The NSCA has not similarly codified directors’ duties and liabilities. The duty of care and associated liability imposed on directors is based on concepts of common law fiduciary duty and duty of care. The NSCA does not mandate any Canadian residency requirement for directors.

An Alberta corporation may declare dividends so long as the board of directors has reasonable grounds for believing that the pertinent solvency and liquidity tests have been met. This can permit greater flexibility as compared to a Nova Scotia company, which is subject to the common law rules with respect to the payment of dividends and can declare and pay dividends only out of profits. Additionally, an Alberta corporation may give financial assistance to any person for any reason, while a Nova Scotia corporation is prohibited from providing direct or indirect financial assistance in connection with a purchase of any shares of the corporation unless a solvency test is satisfied or another exemption is available. The restrictions do not apply to an issuance of new shares by a Nova Scotia ULC.

Other differences in the power and authority of the corporation, its directors and its shareholders also exist between the NSCA and the ABCA. These stem from the fact that the ABCA is based on U.S.-style business corporation statutes, while the NSCA has its origins in the English Companies Act. For instance, under the ABCA, directors are given the power to manage "or supervise the management of" the business and affairs of the corporation whereas the NSCA grants this power to the shareholders (who may then delegate that power). The ABCA codifies director liability, whereas the NSCA relies on the directors’ fiduciary duty at common law. Court approval is required for a NSCA limited liability company (but not a Nova Scotia ULC) to reduce its share capital (often increasing risk and delay) whereas the ABCA only requires shareholder approval (usually two-thirds of the votes cast). Other important distinctions exist with respect to dividends, distributions, the types of shares that may be issued, indemnities provided to directors, and continuance.

Finally, it might be noted that lenders continue to have issues with taking pledges of stock in both Nova Scotia and Alberta ULCs because of the potential liability issues.

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.