Canada: Why Multinationals And Their Advisors Should Consider Including Nova Scotia Companies In Their Structures

Last Updated: May 30 2018
Article by Cox & Palmer

Nova Scotia can deliver significant benefits to multinational entities as a result of the province's unique corporate law framework, multinational-friendly tax regime, abundance of government incentives and enticing geographic advantages. Here are some of the factors to consider.

I. The Companies Act - Nova Scotia has the Most Flexible Canadian Incorporation Statute

  • The Nova Scotia Companies Act ("NSCA") follows the historic English system of incorporation in which the constating documents (the memorandum of association and the articles of association) are contractual in nature, providing tremendous flexibility to drafters.
  • The NSCA is markedly less comprehensive than typical modern incorporation statutes and consequently, far more of the governance and regulation of Nova Scotia companies is left to common law jurisprudence and to the internal provisions contained in each company's articles of association.
  • There is no director residency requirement.
  • Broad indemnification by companies to officers and directors is available.
  • Unlike many modern incorporation statutes, the NSCA does not explicitly confer management power on directors of a company which allows for flexibility when creating a corporate governance framework under a company's articles of association and allows for greater efficiency when entering into international transactions.
  • Unlimited liability companies ("ULCs") are available under the NSCA, which are of particular interest to US investors because of the favourable US tax treatment they can receive.
  • There are no statutory restrictions on companies acquiring shares in their parents.
  • The concept of share warrants under the NSCA is similar to that of "bearer shares" in other jurisdictions. Rather than representing an option to purchase shares from a company, share warrants under the NSCA represent ownership of shares by the bearer of the warrant.

II. International Tax Considerations

  • Canada's "exempt surplus" tax regime allows certain dividends from active business to be paid from foreign affiliates to a Canadian parent company on a tax-free basis.
    • Cayman Islands, Bahamas and Bermuda resident companies recently became entitled to this regime pursuant to each jurisdiction entering a Tax Information Exchange Agreement ("TIEA") with Canada.
    • The attractiveness of the regime is evidenced by the rapid increase of Canadian foreign direct investment ("FDI") in the Cayman Islands, Bermuda and the Bahamas. TIEAs came into force between Canada and each of the three jurisdictions late in 2011. Canadian FDI in the three island economies increased from an aggregate CAD 62 billion in 2012 to an aggregate CAD 108 billion in 2017. There has been nothing to indicate a slowdown in this trend.
    • Canada now has 93 comprehensive tax treaties and 23 TIEAs in force making its treaty network among the most extensive in the world, with all treaty and TIEA partner jurisdictions benefiting from the exempt surplus regime.
  • Nova Scotia ULCs can elect for US tax purposes to be treated as a "disregarded entity", thereby "flowing through" income, deductions, gains and losses of the ULC to the US parent for US tax purposes. This may entitle the US parent to US foreign tax credits in respect of Canadian taxes paid by the ULC.

III. Ease of Doing Business in Nova Scotia's Capital – The City of Halifax

  • Located directly North of Bermuda, and between New York and London, Halifax is conveniently positioned geographically for international business.
    • Halifax has direct flights to both London and New York.
    • Halifax time (Atlantic Time) is one hour ahead of New York and four hours behind London.
  • The Nova Scotia government has many business-favourable programs and incentives in place to attract a larger multinational corporate presence. Some of these programs and incentives include:
    • Payroll Rebate Incentive
    • Innovation Rebate program
    • Graduate to Opportunity (salary contributions for hiring recent graduates)
    • Scientific Research and Experimental Development Program (a federal program)
    • Nova Scotia Research and Development Tax Credit
    • Atlantic Innovation Fund
    • Digital Media Tax Credit
  • Halifax is one of Canada's fastest-growing cities, with booming financial services, technology and oceans sectors.
  • Operating costs are low in the city. KPMG ranked Halifax 6th for business costs among over one hundred mature markets in its 2016 Guide to International Business Locations Costs.
  • Canada's Ocean Supercluster was just announced, making available many hundreds of millions of dollars of private and public sector investment for businesses operating in the region.
  • Halifax is home to five Canadian universities, including Dalhousie & Saint Mary's, and boasts a deep talent pool for businesses looking to hire.
  • Halifax is the eastern hub for healthcare and government services in Canada.

IV. Access to Capital

  • Canada is home to major stock exchanges with combined market capitalization of approximately USD 2 trillion (most notably the TSX, TSXV and CSE).
  • The Canadian financial services sector is regarded as one of the strongest and most stable in the world. All five major Canadian banks have footprints in Halifax.

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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