In the context of cross-border business transactions, the term
hybrid entity is often mentioned. Generally, a hybrid entity
is considered, for tax purposes, as one type of entity (e.g., a
corporation) in one jurisdiction while being considered another
type of entity (e.g., a partnership) in another jurisdiction.
One example of a hybrid entity is an unlimited liability
corporation (ULC). These are Canadian corporations that are
offered in Alberta, British Columbia and Nova Scotia. Shareholders
of ULCs are liable for the debts and liabilities of the company.
For Canadian income tax purposes, ULCs are considered corporations
and are subject to Canadian income taxation. However, for US tax
purposes ULCs may be considered "flow-through entities"
(i.e., the ULC is disregarded and the earnings of the ULC are
flowed through to the ultimate owners of the ULC). This tax
treatment may be useful since the income of the ULC may be
consolidated with that of its US parent for US tax purposes.
This may be more tax efficient.
Another example of a hybrid entity is a limited liability
company (LLC). An LLC is a type of entity that is offered in
the US, and for US tax purposes, is a flow through entity.
Again, the earnings of the LLC are flowed through to the ultimate
owners of the LLC for US tax purposes. On the other hand, for
Canadian income tax purposes, an LLC is considered a corporation
and is subject to Canadian income taxation if it carries on
business in Canada. This is definitely a factor that American
businesses need to consider if they want to do business in Canada
through an LLC.
Hybrid entities certainly have a place in devising tax-efficient
business structures, especially when Americans are considering
doing business in Canada. However, there should be careful
consideration of the tax consequences if these vehicles are used as
tax treaties may provide for restricted benefits for these types of
The author would like to thank Joe Bricker, articling
student, for his assistance in preparing this legal
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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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