Often the determination of what type of entity to acquire a
business with is driven by the most tax efficient structure. Here
we will review some of the most commonly used entities and how
amounts that are extracted from a business by those entities are
taxed in Canada. The most commonly used entity is the corporation.
In Canada, a corporation is considered a separate legal entity from
its shareholders and is taxed accordingly. Where a corporation
acquires business assets and generates income from those assets,
that income will be subject to corporate income tax. Where a
corporation has acquired shares of a Canadian corporation,
generally, dividends paid to the acquiring corporation from the
Canadian corporation are deductible in calculating the acquiring
corporation's income for the year.
In recent years, the use of unlimited liability companies
(ULC) has increased. ULCs are different from
ordinary corporations because a ULC's shareholders are directly
liable for the ULC's debts and liabilities. Alberta, British
Columbia and Nova Scotia are jurisdictions that offer ULCs. In
Canada, the ULC is taxed as a regular corporation, but in the U.S.,
it may be treated as a disregarded entity or a partnership
depending on the number of shareholders in the ULC. The ability to
be treated as "fiscally transparent" for U.S. tax
purposes but as a corporation for Canadian tax purposes has
increased the popularity of ULCs for Canada-U.S. cross-border
transactions. However, the Canada-U.S. tax treaty has eliminated
some of the tax benefits for Americans acquiring Canadian ULCs
(treaty reduced rates may not be applicable for dividends
repatriated to the U.S.).
Joint ventures and partnerships are useful where more than one
acquiring party is involved. Joint ventures are not legal entities
but are situations where two or more parties enter into an
agreement to carry out, typically, a discrete project, with the
parties normally intending to profit from the venture. Each party
to the joint venture will recognize its own share of revenue and
expense from the project when filing for taxes and preparing
financial statements; the joint venture is treated as a flow
Another popular vehicle is a general or limited partnership (the
liability of limited partners are limited to their investment in
the partnership). Again, partnerships are technically not entities
but are relationships where persons carry on a business in common
with a view to profit. For tax purposes, a partnership is not
considered a person, but unlike a joint venture its income is
calculated as if it were a person (at the partnership level) and is
then allocated to its partners who are responsible for reporting
and paying tax on that income.
The selection of the most tax efficient acquisition vehicle is a
complicated endeavour but can provide prospective buyers
significant tax savings in the long run.
Norton Rose Fulbright Canada LLP
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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.
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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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