Canada: Doing Business In Canada - Part One


This publication provides general information that should be considered when acquiring or establishing a business in Canada. We recommend that you seek the advice of one of our lawyers on the specific legal aspects of your proposed investment and that you do not base your decisions solely on the information contained in this summary.


Canada is the second largest country in the world, with an area of approximately 10 million square kilometres and a population of approximately 33 million. The developed portion of Canada represents less than one third of its total territory.

Close to 75 per cent of the Canadian population resides within approximately 150 kilometres of the country’s southern boundary with the United States in the highly industrialized corridor between Windsor, Ontario and Québec City, Québec. Canada has two official languages — English and French.

Canada is one of the eight largest economies of the industrialized countries by virtue of its membership in the Group of Eight (G8) industrialized nations. The Toronto Stock Exchange ranks as seventh among world stock exchanges in terms of market capitalization and continues to rank among the world’s top exchanges in terms of market capitalization and trading volume. Currently, approximately 7 per cent of Canada’s exports go to the European Community, 2 per cent to Japan and 79 per cent to the United States.

Canada is a federal state with governmental jurisdiction divided between a national government, 10 provincial governments and three territorial governments. The Constitution Act, 1867, provides the federal and provincial governments with exclusive legislative control over enumerated lists of subjects and also provides exclusive legislative control to the federal government over those residual subjects not clearly assigned to the provincial governments. Each of the two levels of government is supreme within its particular area of legislative jurisdiction, subject to the limits provided by the Canadian Charter of Rights and Freedoms.

The federal government has legislative jurisdiction over, among other things, the regulation of trade and commerce, banking and currency, bankruptcy and insolvency, intellectual property, criminal law and national defence. The provincial governments have legislative jurisdiction over, among other things, real and personal property, civil rights, education, health care and intra-provincial trade and commerce. Certain aspects of these provincial powers have been delegated to municipal governments that enact their own bylaws.

Both levels of government are based on the British parliamentary system. The prime minister, at the federal level, and the premiers, at the provincial level, are the heads of government. These individuals are the leaders of the political parties that either have the most number of seats in the House of Commons or the provincial legislatures respectively, or at a minimum have the support of a majority of the members of the House of Commons or provincial legislatures, respectively.

When establishing or acquiring a business in Canada, one must be concerned with the federal laws as well as the laws of the provinces within which the business will be conducted. In nine of the 10 provinces and in the three territories, the legal systems are based on common law. In Québec, the legal system is based on civil law. In this publication, we have chosen to refer primarily to Ontario legislation on the basis that the other provinces have similar legislation and programs that should be reviewed when considering setting up a business that will operate in such provinces. We have included references to Québec legislation, in particular, under the heading Language. Members of the various offices of McCarthy Tétrault would be pleased to conduct a review of the federal and provincial laws and regulations and municipal bylaws relevant to your particular business operation.

Business Organizations

A wide variety of legal arrangements may be used to carry on commercial activity within Canada. Some of the more commonly used arrangements are sole proprietorships, partnerships, limited partnerships, co-ownerships, joint ventures, corporations and unlimited liability companies.

The selection of the appropriate vehicle to carry on commercial activities will depend in each case upon the circumstances of the investor, the nature of the activity to be conducted, the method of financing, income tax ramifications and the potential liabilities of the activities.

Generally, one of the first issues faced by a foreign entity contemplating carrying on business in Canada is whether to conduct the business as a Canadian branch of its principal business or to create a separate Canadian entity to carry on the business. In addressing this question the following issues should be considered:

  • the treatment of Canadian business income for tax purposes in the proponent’s home country;
  • the advisability of isolating the assets of the principal business from claims arising out of the Canadian business;
  • whether one or more parties will own the Canadian enterprise;
  • criteria for the availability of federal, provincial and municipal government incentive programs; and
  • Canadian tax considerations.

A branch operation must be registered in each of the provinces in which it carries on business. In addition, branch operations must complete many of the same disclosures and filings with the federal and provincial governments as are required of Canadian corporations.

Of the business vehicles referred to above, the corporation with share capital is the entity most often used to carry on commercial activities in Canada. Unlike the sole proprietorship, partnership, co-ownership or joint venture, the corporation is a legal entity separate from its owners. 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.

In addition to the advantages of limited liability, the securities of a corporation are generally more readily marketable and, as a result, corporate shares (and debt instruments) are thought to be more attractive investments than units in partnerships or joint ventures. Finally, in some situations there may be tax advantages to incorporation.

In each case, the selection of the business organization best suited to carry on business in Canada will depend entirely on individual circumstances.

Where a corporation is the preferred vehicle for carrying on business within Canada, consideration must be given to the appropriate jurisdiction for incorporation. While the nature of a corporation’s particular undertaking (e.g. banking) may be such that it falls within the exclusive legislative purview of either the federal or provincial governments with an attendant requirement to incorporate under a specific statute, corporations not specifically subject to such legislation may be incorporated under the federal laws of Canada or under the laws of any one of the provinces or territories.

The Canada Business Corporations Act (CBCA), which applies to federally incorporated companies, is modeled on modern business statutes in the United States. Most provinces and territories in Canada also have their own corporate legislation that is based largely on the CBCA. There are minor differences between these statutes that can affect the choice of jurisdiction of incorporation depending upon the particular circumstances.

From the perspective of a foreign investor, the following features of Canadian corporate legislation are often of interest:

  • generally, 25 per cent of a Canadian corporation’s directors must be "resident Canadians" (i.e. individuals who are either Canadian citizens or Canadian permanent residents). Corporations established under the laws of the provinces or territories have differing residency requirements depending on the jurisdiction; although British Columbia, Québec, Nova Scotia, New Brunswick, Prince Edward Island and the territories — Yukon Territory, Northwest Territories and Nunavut have no such requirements;
  • the board of directors of a Canadian corporation may consist of one individual (in which case, he or she must be a resident Canadian) and there is no limit to the number of directors that a corporation may have;
  • directors must be individuals and may not appoint alternates to serve in their place;
  • generally, the shareholders of a Canadian corporation can pass a "unanimous shareholders’ resolution," which has the effect of transferring the powers of the board of directors, as well as many of the liabilities and obligations of the directors to the shareholders;
  • single shareholder corporations are permitted and directors need not hold shares in the corporation;
  • minority shareholders of a Canadian corporation have significant statutory rights and remedies, and eliminating minority shareholders can often be extremely difficult and costly;
  • the board of a Canadian corporation must approve the corporation’s financial statements at least once every year and present them to the corporation’s shareholders, although this can be done by unanimous written resolution rather than in meetings;
  • generally, there is no requirement to file a Canadian corporation’s financial statements with a government body (except in the case of a public company);
  • the requirement to have the corporation’s financial statements audited varies by jurisdiction, but in most cases it is possible for the corporation’s shareholder(s) to consent to exempt it from the audit requirement (except in the case of a public company);
  • the identities of a Canadian corporation’s shareholders are not a matter of public record and, except in the case of public companies, a corporation is not obliged to disclose the names of its shareholders;
  • meetings of the board of directors and, in certain limited circumstances, the shareholders of a Canadian corporation, need not take place in Canada; and
  • the statutory books and records of a Canadian corporation, including those kept in electronic form, must be kept in Canada.

U.S. businesses coming to Canada have been attracted to unlimited liability corporations (ULCs) as a vehicle for their commercial operations because of the favourable treatment afforded to ULCs as ‘flow-through’ entities under U.S. tax law. An unlimited liability corporation, though with separate legal existence, does not permit the shareholders to limit their liability for any debts of the corporation upon its liquidation or winding up. At present, ULCs may be incorporated under provincial statutes in Nova Scotia and Alberta.

Foreign Investment Laws

The Investment Canada Act (ICA) is the only federal foreign investment law of general application. Certain statutory provisions restrict foreign investment and ownership in specific areas, including the financial services, air transportation, broadcasting and telecommunications sectors. Foreign investment disincentives also exist in respect of media and publishing.

One of the stated purposes of the ICA is to encourage investment in Canada by non-Canadians, which contributes to economic growth and employment opportunities. Two federal ministers are responsible for administering the ICA: the Minister of Industry and the Minister of Canadian Heritage. The Minister of Industry has appointed a Director of Investments to advise and assist the Minister in administering the ICA for non-cultural matters.

If an investment by a non-Canadian relates to a cultural business, the Minister of Heritage will be responsible. Consequently, any required review process for cultural businesses as defined under the ICA will be done through Canadian Heritage instead of the Department of Industry. The Minister of Heritage has appointed a Director of Cultural Sector Investment Review to advise and assist the Minister in administering the ICA for cultural matters.

Whether or not a foreign investor establishes a Canadian operation through an acquisition or by starting up a new Canadian business, the investment may be subject to the foreign investment review requirements of the ICA. Investments to establish a new Canadian business and acquisitions of control of existing businesses that do not exceed applicable thresholds are subject to ‘notification,’ which requires only the filing of a short information form either before or shortly after completion of the transaction. However, investments to acquire control of Canadian businesses that exceed applicable thresholds are subject to ‘review,’ which requires the filing of more detailed information concerning the target business and the investor’s plans for it. The review process generally takes at least 45 days and focuses on whether or not the proposed transaction is likely to be of net benefit to Canada.

Review Thresholds

Generally, when a non-Canadian is acquiring control of a Canadian business, review by the Director and approval by the Minister are required where:

  • in the case of a direct acquisition of control of a Canadian business through the acquisition of voting shares of a corporation incorporated in Canada or through the acquisition of voting interests of a non-share capital corporation, partnership, trust or joint venture carrying on that business, or by the acquisition of substantially all of the assets used to carry on that business, the book value of the assets of the Canadian business is$5 million or more; or
  • in the case of an indirect acquisition of control of a Canadian business; for example, the acquisition of the foreign parent corporation of a corporation incorporated in Canada, the Canadian business has assets of $50 million or more in value or if the Canadian business represents more than 50 per cent of the assets of the acquired group of entities, the Canadian business has assets of $5 million or more in value.

The value of the assets is usually calculated by using book values based on the most recent audited financial statements for the relevant entity.

As a result of the North American Free Trade Agreement (NAFTA), the Agreement Establishing the World Trade Organization (WTO), amendments made pursuant to the renegotiation of the General Agreement on Tariffs and Trade (GATT) and the policy of the Director, the thresholds for review referred to above are modified in some instances with respect to the acquisition of control of a Canadian business by what the ICA defines as a "WTO Investor" (a person or entity from countries that are members of the WTO), or by another non-Canadian where the Canadian business is controlled by a WTO Investor. The modifications are:

  • in the cases of the direct acquisitions referred to above, and the threshold value of assets of the Canadian business that will trigger the review requirement is increased from $5 million to $281 million (for 2007), subject to annual adjustment for inflation and economic growth; and
  • in the cases of indirect acquisitions by a WTO Investor, there will be no review, regardless of the value of Canadian assets.

The higher thresholds described above do not apply if the investment is to acquire control of a Canadian business in certain specified industries, including uranium production, financial services and transportation services.

Review may also be required if the investment involves the acquisition of control of a Canadian business (regardless of the value of the assets) or the establishment of a new Canadian business in an area concerning Canada’s "cultural heritage or national identity." Areas of "cultural heritage and national identity" include book publishing, film production and distribution, television and radio, and music production and distribution.

With certain exceptions, a non-Canadian cannot implement a reviewable investment until the investment has been reviewed and the Minister is satisfied, or deemed to be satisfied, that the investment "is likely to be of net benefit to Canada." If the Minister initially decides that the investment will not be of such benefit, the non-Canadian will be given an opportunity to make representations and submit undertakings with respect to the investment with a view to satisfying these requirements.

In determining "net benefit to Canada," the Minister is required to give consideration to:

  • the effect of the investment on the level and nature of economic activity in Canada;
  • the degree and significance of participation by Canadians in the Canadian business and the industry of which it forms part;
  • the effect of the investment on productivity, industrial efficiency, technological development and product innovation and variety in Canada;
  • the effect of the investment on competition within an industry in Canada;
  • the compatibility of the investment with national industrial, economic and cultural policies; and
  • the contribution of the investment to Canada’s ability to compete in world markets.


Not all investments in Canadian businesses by non-Canadians will be subject to review or notification under the ICA. For example, the ICA contains a number of exempt transactions, such as the acquisition of shares by a person whose business is dealing in securities. An investment to acquire an interest in an existing Canadian business that does not result in an acquisition of control under the ICA will also generally not be subject to notification or review.

Information submitted under the ICA is treated as confidential and, subject to certain exceptions, will not be disclosed to the public.

Compliance with provisions of the ICA does not bar review or action by the Competition Bureau under the merger provisions of the Competition Act.

As indicated, care must be taken to ensure not only that the requirements of the ICA are met, but that compliance is achieved with any legislation relating to foreign investment restrictions applicable to specific industries or activities.

Competition Law

The federal Competition Act provides for criminal sanctions against persons involved in agreements that unduly lessen competition (e.g. price fixing), or who are involved in resale price maintenance, price discrimination, predatory pricing, deceptive telemarketing or wilful or reckless misleading advertising offences. A civil regime regulates the less egregious forms of misleading advertising. The Act also contains non-criminal or administrative provisions that allow the Competition Tribunal, on application by the Commissioner of Competition, to review certain business practices and, in certain circumstances, to issue orders prohibiting or correcting conduct so as to eliminate or reduce its anti-competitive impact. Reviewable practices include mergers, abuse of dominant position or monopoly and a number of vertical practices between suppliers and customers such as tied-selling, refusal to supply and exclusivity arrangements. Private parties are now also able to apply to the Tribunal to challenge certain types of reviewable conduct, such as exclusive dealing, tied selling and refusal to deal.

Merger Regulation

Mergers, meaning the acquisition of control over a significant interest in the whole or a part of a business, do not require advance approval under the Act, although they may be subject to pre-merger notification requirements (described below). If the Commissioner of Competition believes that a merger is likely to prevent or lessen competition substantially and the Commissioner challenges the merger before the Competition Tribunal, the merger is then subject to review by the Tribunal. If an adverse finding is made, the Tribunal may issue an order preventing or dissolving the merger in whole or in part.

The Act includes a list of criteria to be considered by the Competition Tribunal when determining whether or not a merger substantially lessens competition. Such criteria are generally similar to those found in United States case law, although the application of such criteria may be significantly different. Because of the small size of the Canadian domestic market, greater concentration will be acceptable in industries where even a relatively high percentage of the Canadian market would still not allow for optimum efficiency and international competitiveness. This is why the thresholds that could trigger government review, such as those relating to market share, will in many industries be higher in Canada than in the United States.

Larger mergers require pre-merger notification and the filing of information with the Commissioner. Generally, for a merger to be notifiable two threshold tests must be met: the ‘size of parties test’ and the ‘size of transaction test.’ Under the ‘size of parties test’ the parties to the transaction together with their respective affiliates (defined to include all corporations joined by a 50 per cent plus voting link) must have assets in Canada or gross revenues from sales in, from and into Canada in excess of $400 million in the aggregate. Under the ‘size of transaction test’ the target entity must, in most cases, have assets in Canada or gross revenues from sales in and from Canada in excess of $50 million. If both tests are met, the transaction is subject to pre-notification. In general and with certain exceptions, these asset and revenue values are calculated using book values based on the most recent audited financial statements for the relevant entity.

Pre-merger notification involves the filing of either a long or short-form notice with the Commissioner. Initially, the choice between the long and short form lies with the parties to the transaction, but the Commissioner may request that a long form be filed if the short form provides insufficient information or insufficient time in which to make a decision. While the long form requires significantly more detailed disclosure, both the long and short forms generally require disclosure from all parties to the transaction, including descriptions of the businesses involved, financial data and lists of significant suppliers and customers. It is possible however, to exclude any information that is not relevant to an assessment of the competitive impact of the proposed merger.

A transaction that is subject to pre-merger notification may not be completed until the applicable waiting period has expired. If a short-form notification is filed, the Commissioner has 14 days within which to decide whether or not to oppose the merger by referring it to the Competition Tribunal. Within the 14-day period, the Commissioner may also request that a long-form notification be filed. The waiting period applicable to a long-form filing is 42 days. Unlike the Investment Canada Act, where the Minister approves the proposed transaction, the passing of the applicable waiting period under the Competition Act does not preclude the Bureau from subsequently opposing the merger at any time within the next three years. Accordingly, while a transaction may be completed after the expiry of the relevant waiting period, the parties will generally wait until they receive an indication from the Commissioner that the transaction will not be challenged before completing the transaction. The Commissioner’s review of complex mergers may take considerably longer than the applicable statutory waiting period.

It is possible in some circumstances to obtain an Advance Ruling Certificate (ARC) from the Commissioner and thereby avoid the pre-merger notification process. If an ARC is issued in respect of a proposed transaction, the Commissioner will thereafter be precluded from challenging the transaction, assuming there are no material changes in circumstances. It should be noted, however, that the granting of an ARC is discretionary and ARCs are typically issued only when it is clear that the merger raises no competition issues.

A $50,000 filing fee is payable in respect of any transaction that is subject to pre-merger notification.

Abuse of Dominant Position

Abusing a dominant position in a market constitutes a reviewable practice that could give rise to an order by the Competition Tribunal if it results in a substantial lessening of competition. To start with, there must be a dominant position or control of a market. A monopoly is not a prerequisite, but there must be a relatively high market share such that the dominant firm or firms can, to a substantial degree, dictate market conditions and exclude competitors. There must also be an abuse of such dominant position by the practice of anti-competitive acts. There is nothing wrong with market dominance as such; what causes a problem is adoption by a dominant player of predatory or exclusionary business tactics. When a dominant firm attempts to exclude potential competitors or to eliminate existing competition, the Competition Tribunal could be called upon to intervene.

It is not always easy to distinguish competitive from anti-competitive practices. There is nothing wrong with tough competition even from a dominant firm, but when its intention is to eliminate competition or prevent entry into or expansion in a market, there could be an abuse of dominant position. The Act includes a non-exhaustive list of anti-competitive acts. These include selling at prices lower than acquisition costs in order to discipline or eliminate a competitor, inducing a supplier to refrain from selling to competitors, or a vertically integrated supplier charging more advantageous prices to its own retailing divisions. Practices that might be contrary to other provisions of the Act, such as predatory pricing or price discrimination, could also constitute anti-competitive acts. Such practices allow the Commissioner the choice between a criminal prosecution for predatory or discriminatory pricing, as described below, or a proceeding before the Competition Tribunal under the abuse of dominant position provision. All such practices become anti-competitive acts when they are adopted with a predatory or exclusionary intent.

Criminal Violations

The Act makes it a crime to enter into an agreement that prevents or lessens competition unduly. Under this provision, an agreement that lessens competition, such as a price fixing or market sharing agreement, is not illegal as such, but only becomes a crime when it lessens competition to a significant degree. The degree of lessening of competition necessary to constitute a criminal offence is uncertain and, accordingly, prudence dictates that all price fixing, market sharing or similar agreements be avoided. Other criminal provisions in the Act prohibit certain practices, regardless of their effect on competition. Bid-rigging, resale price maintenance and price discrimination are examples of such practices.

Penalties for persons found guilty of such activities involve imprisonment for up to five years and/or multi-million dollar fines. In addition, a violation of the criminal provisions of the Act can also result in a civil suit for damages by the person or persons who have suffered a loss as a result of such violation.

Corporate Finance and Mergers and Acquisitions

Canada has well developed and sophisticated capital markets. The main sources of capital are Canadian chartered banks, other financial institutions (including pension and mutual funds, and insurance companies), public markets and government agencies. Securities of Canadian and foreign public companies can be listed and traded on one or more of Canada’s stock exchanges, of which the TSX is the largest. Canada also has active over-the-counter markets for a variety of other securities, including short-term debt (commercial paper), mortgage-backed securities and other securitized instruments. Canadian chartered banks are the principal source of revolving lines of credit and term loans.

Public Offerings and Private Placements

In Canada, securities law is a matter of provincial jurisdiction. Consequently, there is no national securities commission, but rather each Canadian province and territory has its own separate securities regulator as well as its own securities legislation. Nevertheless, securities legislation in Canada is largely harmonized, through the use of national and multilateral instruments adopted by an umbrella organization comprised of all of the provincial securities regulators (the Canadian Securities Administrators or CSA) and implemented as law by the provinces. Furthermore, with the recent adoption of the ‘principal regulator’ or ‘passport’ system by each province of Canada (other than Ontario with Canada’s largest capital market), many aspects of securities law, including the review and receipt of prospectuses, compliance with continuous disclosure obligations and obtaining exemptions from certain provisions of securities law, are effectively regulated by only one participating jurisdiction, in addition to Ontario.

When debt or equity securities are offered to the public in Canada, whether as part of an initial public offering or otherwise, a prospectus must be filed with the securities regulatory authorities in those provinces and territories where the securities are being offered, subject to the ‘passport’ system referred to above. A copy of the prospectus must also be provided to potential investors. The prospectus must contain full, true and plain disclosure of the nature of the securities being offered and the business of the issuer. Where securities are being offered in Québec, the prospectus must be translated into French.

The requirement to prepare a prospectus can be avoided where the securities are offered to institutional or other "accredited investors" by way of a private placement, although market practice may dictate the delivery to investors of an "offering memorandum" containing disclosure substantially equivalent to a prospectus. There are a number of other prospectus exemptions, including those for the issue of securities by "private issuers" or to employees. Issuers should obtain legal advice in connection with any offering of securities by way of private placement since securities sold in this manner are generally subject to resale restrictions.

Shareholders of Canadian public companies are not generally afforded statutory or contractual pre-emption rights and, accordingly, new equity issues are typically effected by way of public offering or private placement, rather than by way of rights offerings to existing shareholders. In the case of more senior issuers, it is common for Canadian underwriting syndicates to enter into a ‘bought deal’ arrangement in which the syndicate incurs the risk of price fluctuations in the market from the time of signing the ‘bought deal’ letter with the issuer (up to four business days before the filing of the preliminary prospectus) until the closing of the offering.

An issuer that files a prospectus or has its securities listed on a Canadian stock exchange will generally become a "reporting issuer" and thereby become subject to various continuous and timely disclosure obligations. These include the requirement to prepare and file quarterly and annual financial statements and the related management’s discussion and analysis, an annual information form and reports with respect to material changes in the affairs of the issuer. Directors, officers and other "insiders" of the issuer will be required to file reports with respect to any trading by them in securities of the issuer. Information circulars for shareholder meetings must contain prescribed disclosure, including comprehensive disclosure on executive compensation.

Foreign issuers that meet certain conditions and which have become reporting issuers in Canada by listing on a Canadian exchange or by acquiring a Canadian reporting issuer through a share exchange, may generally satisfy their ongoing continuance disclosure obligations in Canada by filing their home jurisdiction documents.

In the wake of the Enron and WorldCom accounting scandals in the United States, the CSA has adopted various instruments modeled on U.S. Sarbanes-Oxley legislation, including: a national instrument on auditor oversight, a multilateral instrument requiring CEO and CFO certifications and a multilateral instrument on audit committees. In addition, two national instruments have been adopted on corporate governance, one which sets out guidelines for corporate governance and another which requires issuers to disclose, on an annual basis, their corporate governance practices.

Issuers with equity securities listed on certain Canadian exchanges can take advantage of Canada’s short-form prospectus distribution system that enables capital to be raised in the public markets quickly and inexpensively by preparing a short-form prospectus. Generally, issuers eligible for this system can clear a prospectus with the provincial securities authorities in four business days. For issuers that do not qualify under the short-form system, prospectus clearance can often take from three to six weeks, and sometimes longer.

Canadian and U.S. securities regulatory authorities have implemented a multijurisdictional disclosure system (MJDS) that enables securities of large U.S. issuers to be offered to the public in Canada using a U.S. registration statement that has been reviewed only by the SEC.

Corporations with securities listed on a Canadian stock exchange are subject to the rules and regulations of that exchange.

Mergers and Acquisitions

Tender Offers

Provincial and territorial securities laws regulate the conduct of any public take-over bid, which is defined as an offer made to a person in a Canadian province or territory to acquire voting or participating equity securities of a class of securities, which if accepted, would result in the acquiror (and persons acting in concert with it) owning 20 per cent or more of the outstanding securities of such class of a target company. Generally, a take-over bid must be made to all shareholders on equal terms, and must be open for acceptance for 35 days. The bidder must provide shareholders of the target with a circular containing prescribed information about the offer as well as prospectus-level disclosure on the acquiror (including pro forma financial statements) if its shares form part of the consideration being offered. The directors of the target company must also send a circular to shareholders setting out the board’s recommendation as to whether the shareholders should accept the offer.

When the bid is made by an "insider" of the target, special rules apply. A formal valuation of the target shares prepared by an independent valuator under the supervision of an independent committee of the target’s board will generally be required.

Certain take-over bids are exempt from compliance with the foregoing requirements, including transactions involving the acquisition of securities from not more than five shareholders of the target (provided that the price paid does not exceed 115 per cent of the prevailing market price), normal course purchases on an exchange, the acquisition of securities of a private company (and certain other non-reporting issuers with fewer than 50 shareholders) and foreign take-over offers where the number of Canadian shareholders (and their shareholdings) is quite small and the bid is being conducted according to foreign laws and regulations which are recognized for such purpose by the provincial securities regulators.

Generally, under corporate statutes, where a bidder successfully acquires 90 per cent of the voting shares of a target (other than shares it held prior to making the offer) pursuant to a public take-over bid made to all shareholders, the shareholdings of the minority can be acquired at the public offering price pursuant to a statutory compulsory acquisition procedure. Where this procedure is not available because the 90 per cent threshold has not been reached, but at least 66 2/3 per cent of the outstanding shares have been acquired under the bid, the remaining shareholders may generally be acquired by way of a business combination (see below) at the offering price.

Business Combinations

Acquisitions of Canadian public companies are frequently effected not by way of tender offer but through a ‘business combination,’ that is, a statutory procedure, such as an amalgamation, consolidation or plan of arrangement, under the target’s corporate statute and which requires approval by the target’s shareholders at a meeting held for such purpose. The plan of arrangement is the most common form of business combination, as it provides maximum flexibility for various aspects of a transaction that might not be possible to effect under another statutory procedure. Plans of arrangement require court approval in addition to shareholder approval (generally by a majority vote of 66 2/3 per cent vote).

If the acquiror in the business combination is related to the target, certain special rules will generally apply. In particular, a formal valuation of the target shares prepared by an independent valuator under the supervision of the target’s board or an independent committee may be required. Approval by a majority of minority shareholders (i.e. shareholders unrelated to the acquiror or who otherwise have no special interest in the transaction) will also generally be required, in addition to the shareholder approval required under applicable corporate law.

Related Party Transactions

The securities laws and policies of certain Canadian provinces contain complex rules governing transactions between a public company and its related parties which are of a certain threshold size. These rules are designed to prevent a majority shareholder from operating a public company to the detriment of its minority shareholders.

Bank Loans and other Loan Capital

Bank loans in Canada are readily available from well capitalized and sophisticated domestic banks as well as from non-Canadian foreign bank subsidiaries and Canadian branches of non-Canadian banks. Canada also has competitive non-bank lenders, particularly active in the asset- based loan, mezzanine debt and project finance markets. Large Canadian borrowers have access to the U.S. term loan B market.

Short and long-term loans in Canada can be unsecured or secured against the real or personal property of the borrower. Lenders may insist that unsecured loans be supported by a parent company guarantee, or by a ‘negative pledge’ in which the borrower agrees (with some exceptions) not to grant security over its assets. All provinces provide an electronic registry for the recording of security interests over personal property and all provinces have established land registry systems to record interests in real property.

Canada has no currency restrictions and loans may be made available in multiple currencies, most commonly in Canadian and U.S. dollars.

Due to the competitive nature of Canada’s loan markets, interest rates are often lower for comparable credits compared to other jurisdictions, particularly those of the United States. Where Canadian tax rates are higher than those of a foreign jurisdiction, the benefits of deducting interest expenses for loans in Canada are correspondingly higher. Other tax advantages for borrowing in Canada exist. For example, thin capitalization rules do not apply to arm’s length third party debt to limit the deductibility of interest. As well, Nova Scotia and Alberta have unlimited liability companies which are hybrid entities that create tax planning opportunities for U.S. cross-border transactions. See Business Organizations.

There are a number of federal and provincial programs and agencies that provide grants and/or loans to Canadian businesses. The availability of government assistance will depend upon a number of factors, including the location of the proposed investment, the number of jobs that will be created, the export potential for the product or service, whether the investment would be made without the government assistance and the amount of equity being invested by the owners of the business. Foreign ownership of a corporation does not generally preclude the availability of government assistance programs.

In addition, certain scientific research and resource exploration activities may qualify for federal and provincial investment tax credits which may apply to reduce income tax otherwise payable.


Income Tax

Income taxes are imposed by the federal government, as well as by the various provinces and territories. The combined federal and provincial rate of income tax imposed on corporations varies widely depending on the nature and size of the business activity carried on, the location of those activities, and other factors. Notably, the federal government enacted legislation in June 2006 that provides for a gradual reduction of the federal general corporate income tax rate through 2010. In 2006, the highest combined corporate rate of income tax was about 39 per cent, while the lowest such rate, applicable to ordinary business profits, was about 32 per cent. Tax credits and other incentives are also available in certain circumstances, which reduce the aforementioned effective tax rates.

Individuals are subject to graduated rates. These rates depend on the type of income, the province of residence and other factors. In 2006, the highest combined federal and provincial rate of tax on taxable income of an individual was about 48 per cent while the lowest top marginal combined federal and provincial rate was about 39 per cent.

Canada levies income tax on the worldwide income of every Canadian resident. It also levies income tax on the Canadian source income of every non-resident who is employed in Canada, carries on business in Canada or who realizes a gain on the disposition of certain types of Canadian property. Income includes business and professional income, salaries and 50 per cent of capital gains.

In addition, Canada levies a withholding tax on the gross amount of certain types of Canadian source income of non-residents.

The following comments highlight some of the principal tax matters that should be considered in deciding whether to carry on business in Canada through a Canadian subsidiary or as a branch operation.

Carrying on Business through a Canadian Subsidiary

A subsidiary corporation newly incorporated in Canada will be resident in Canada and subject to Canadian income tax on its worldwide income. As noted, each province and territory of Canada imposes an income tax in addition to the federal income tax. Neither level of income tax is deductible in computing income subject to the other level of tax.

The combined federal and provincial/territorial income tax rate to which the subsidiary is subject will depend on the provinces or territories in which it conducts business, the nature and size of the business activity carried on and other factors.

The calculation of income is subject to specific rules contained in the Income Tax Act (Canada). For example, the expenses of carrying on business are deductible only to the extent that they are reasonable. In general, transactions between related parties must be carried out on the basis of fair market value. Generally, dividends can be paid between related Canadian corporations on a tax-free basis. Groups of corporations may not, however, file consolidated income tax returns.

Withholding tax at a rate of 25 per cent will be imposed on certain payments made by a subsidiary to non-residents of Canada, including dividends, interest, rents, royalties and certain management or administrative fees. Withholding tax can also apply to payments made between non-residents if the payments relate to certain types of Canadian property. While withholding taxes are imposed on the non-resident recipient, the payer is responsible for withholding the tax from amounts paid to the non-resident and for remitting the withheld amount to the government.

Canada is party to a large number of bilateral income tax treaties that may reduce the relevant rate of withholding tax depending on the relevant treaty and the nature of the payment. United States limited liability companies (LLC) and certain other hybrid entities may not be entitled to the benefits of the provisions of Canada’s tax treaties.

Carrying on Business in Canada Through a Branch Operation

A non-resident corporation will be subject to Canadian income tax on business profits from carrying on business in Canada through a branch operation.

In addition, a non-resident carrying on business in Canada must also pay a branch tax. The branch tax essentially takes the place of the withholding tax that would have been payable on dividends paid by a Canadian subsidiary carrying on the business. This factor may, in some circumstances, favour the establishment of a subsidiary by the foreign business rather than a branch.

The bilateral tax treaties to which Canada is a party impact the requirement to pay tax on income generated through a branch operation and may affect the rate of branch tax payable. A thorough review of the applicable treaty is crucial in determining the relative merits of establishing a branch or a subsidiary business in Canada.

In appropriate circumstances, a Nova Scotia or Alberta unlimited liability company (ULC) may be used to access the advantages of both a branch and a subsidiary operation since an ULC is treated as a corporation in Canada while we understand it may be treated as a branch for U.S. purposes.

Foreign Currency Controls and Repatriation of Income

There are no foreign exchange or currency controls in Canada, nor are there exchange restrictions on borrowing from abroad, the repatriation of capital or on the ability to remit dividends, profits, interest, royalties and similar payments from Canada.

However, as noted above, there may be a withholding tax payable on the repatriation of certain types of earnings. In addition, any amount paid by a Canadian subsidiary to its foreign parent in excess of a reasonable amount in respect of interest on loans, management fees, license fees and similar charges will be disallowed as a deduction by the Canadian subsidiary in computing its income for tax purposes. In particular, interest deductions of the Canadian subsidiary may be disallowed to the extent the Canadian subsidiary is ‘thinly capitalized.’

The subsidiary is deemed to be thinly capitalized where the amount of debt owed to the non-resident shareholder is more than twice the aggregate of the retained earnings of the corporation, the corporation’s contributed surplus that was contributed by the non-resident shareholder, and the paid-up capital of the shares owned by the non-resident shareholder. Transactions between non-arm’s-length persons may be subject to transfer pricing restrictions and contemporaneous documentation requirements.

Sales Tax

The federal government and most of the provinces have sales tax regimes.

Federal Goods and Services Tax

The federal government imposes a 6 per cent (reduced in July 2006 from 7 per cent), multi-stage tax called the goods and services tax (GST) on the supply of most goods and services made in Canada. The GST rate is 14 per cent in the three harmonized provinces, Nova Scotia, New Brunswick and Newfoundland. Certain goods and services, including most financial services, do not attract GST. As the GST is a value-added tax, it applies at each stage of the production and distribution chain. Businesses making taxable supplies of goods and services must collect and remit the applicable GST and are entitled to claim credits for any GST paid in providing such goods and services. Whether supplies made to or by non-residents of Canada attract GST is not always an easy determination to make and requires consideration of specific rules. For example, recent e-commerce developments require close examination as to whether GST applies.

Provincial Sales Tax

Five of the 10 provinces impose a retail sales tax on the end-users of most tangible personal property and some services. Rates of tax vary from 5 to 10 per cent. Alberta does not impose a retail sales tax. Québec imposes a 7.5 per cent value-added tax that closely mirrors the federal GST in its operation. As noted above, Nova Scotia, New Brunswick and Newfoundland impose a harmonized GST in lieu of a retail sales tax.

Other Tax

The federal government imposes other taxes, including customs duties and excise duties. Various provinces also impose other taxes, including provincial capital taxes (often limited to financial institutions) and real estate transfer taxes. Most municipalities impose annual taxes on the ownership of real estate.

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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