Canada: Doing Business In Ontario

Last Updated: April 25 2019
Article by Houser Henry & Syron LLP

HOW DO YOU

Establish a business in Ontario? Purchase a manufacturing plant or lease office space? Hire employees? Decide on the type of business entity to operate as? Acquire a local business?

Houser Henry & Syron has developed a guide to provide business owners, both from within Canada and outside of the country, with an overview of important business and legal issues to consider to successfully establish and operate a business in Ontario.

We understand that there are many facets to starting a business in a new location. Our intention with this guide is to highlight the important information business owners should know as they begin the process. This publication examines the main areas critical to operating a business in the province: selecting the type of business entity, tax considerations, employment, and real estate. We hope it serves as a valuable primer to proceeding with your business plans.1

ABOUT ONTARIO

Ontario is Canada's most populous province with about 13 million people. It is home to Canada's federal capital, Ottawa. Ontario's provincial capital is Toronto, Canada's most populous city and its financial centre.

Economically, Canada has outperformed most other countries in recent years and Ontario has traditionally been its engine. Companies are often attracted by Ontario's well-educated and skilled workforce, its environment of innovation, and its central location within North America. Several studies have found that Ontario is a great place to do business. KPMG's 2012 "Competitive Alternatives" study of international business costs confirmed Canadian business costs are among the lowest in the G7, and Forbes.com recently named Ontario a top destination for foreign direct investment in North America. Other advantages which Ontario offers to foreign investors or businesses seeking to expand include a sound banking sector, large and active capital markets, a simple and inexpensive process of incorporation, few import restrictions, and easy access to other North American markets. There are also government incentive programs which involve financial assistance and/or tax incentives, such as competitive corporate income tax rates, tax-free inter-corporate dividends, and reduced withholding tax rates for treaty countries.2

ABOUT OUR FIRM

Our firm is centrally located in the heart of downtown Toronto. Our business lawyers have been helping entrepreneurs and companies grow their businesses since 1934.

Simply put, we help businesses thrive, from incorporation onwards. Our services are tailored to an organization's business goals. This includes assistance with corporate and real estate transactions, commercial agreements, employment law, and a myriad of other issues that owners and entrepreneurs face every day.

We have gained extensive experience advising foreign companies looking to do business in Ontario. We have worked with clients in a wide range of industries setting up Ontario-based operations for manufacturing, distribution and sales of their products in Canada.

Our business clients are based both in Canada, as well as across Europe, the US and Asia. Our experienced team works seamlessly with all key stakeholders to navigate through both regulatory and cross-cultural business environments.

Creating a truly exceptional experience for our clients is the cornerstone of our service philosophy. Every client, regardless of their size or the complexity of their transaction, receives a high level of personal care, responsive service and expert legal advice delivered by an experienced lawyer, at a reasonable price.

ESTABLISHING A BUSINESS IN CANADA: BUSINESS PRESENCE AND FORM

Expansion Methods

There are numerous methods available to foreign businesses looking to expand into Canada. Before committing to any one method, it is important to discuss the ramifications with both legal and tax counsel. As opportunities and obligations evolve, the foreign entity can be adapted from one form to another to meet changing business needs. The methods of expansion include:

Licensing

Licensing is the simplest method of expanding into Canada. A company can avoid establishing a physical presence in a geographical area in which it wants to conduct business by way of license agreement. A license is a business arrangement where one party (the licensor) gives specific rights in some or all of its property, usually intellectual property (IP), such as its trade-mark, patent or industrial design, to another party (the licensee). The licensee is then allowed to use the IP or other property in exchange for a fee or royalty. License agreements protect the business interests and intentions of each of the parties. Some of the more important factors that should be considered in the negotiation of a license agreement are:

  1. The term or length of the agreement, as well as any rights or options to renew the agreement, and rights to terminate the agreement;
  2. The territorial or geographical boundaries that are covered by the agreement;
  3. The specific IP or other property being licensed;
  4. How payment will be made, including the amounts to be paid, as well as payment dates and bonuses and/or penalties;
  5. Whether the license is to be exclusive or non-exclusive, the permitted uses and any limitations or exclusions with respect to how the IP or other property is used;
  6. Any support or training provided by the licensor;
  7. Whether the licensee is required to provide a warranty on the licensed goods, and any limitations on the licensor's responsibility;
  8. How the licensed goods are to be marketed and sold, as well as how much money is to be spent in doing so;
  9. The requirement for non-disclosure of confidential information, as well as non-compete conditions;
  10. Who is responsible for defending potential IP infringement claims?
  11. What happens when the agreement is terminated?
  12. How and where disputes will be resolved.

Distributor and Agency Agreements

If a foreign company wants to sell goods in Canada, but wants to avoid establishing a physical presence, then a distributor or agency agreement may work. In an agency relationship, an agent acts on behalf of the principal (the foreign company). Agents may or may not have the ability to legally bind the principal for which they are acting.

Agency differs from a distribution relationship. A distributor is an independent party that typically buys the goods and then offers them for re-sale. Normally distributors cannot bind their suppliers. If engaging a distributor, the foreign company should enter into a written agreement with the distributor that sets out the parties' respective rights and obligations, including how the agreement can be terminated and what notice is required. For more information on supplier-distributor agreements, please see our article on Supplier and Distributorships – Common Problems Can Be Avoided.

Foreign Branch

A foreign company that wishes to establish a physical presence in Canada but avoid creating a separate legal entity may want to consider opening one or more foreign branch offices. The foreign branch will likely need a license in Ontario in order to carry on business in the province (an extra-provincial license) and may need to register its business name (discussed later).

This form of expansion can have tax advantages, as Canadian losses can be claimed by the parent company in its home jurisdiction. However, it also means the foreign company will be subject to Canadian income tax on its Canadian branch income and all the liabilities of the Canadian branch.

Canadian Subsidiary

Another option is to incorporate a Canadian subsidiary. Unlike a foreign branch, liabilities incurred would be limited within the subsidiary, and not imposed on the parent foreign company (except in the case of ULCs which are discussed below).

In Canada, companies can be incorporated at either the provincial or federal level. For most purposes, federal and provincial business corporations can conduct business anywhere within Canada and abroad. When choosing to incorporate provincially or federally, it is important to be aware of the differing rights and obligations that exist. These include requirements involving the location of the head office, Canadian residency requirements for directors, and shareholders rights. You should discuss your particular situation with legal counsel to ensure you choose the appropriate jurisdiction for incorporation.

An unlimited liability corporation (ULC) is a special type of corporation that currently only exists in three of Canada's provinces: Alberta, British Columbia and Nova Scotia (not Ontario). Unlike limited liability corporations (LLCs), the shareholders of a ULC can be liable for any liabilities of the company. However, ULCs also allow some flow-through tax benefits to shareholders.

Partnerships

A partnership involves two or more persons carrying on a business in common with a view to profit. Partnerships are either general partnerships or limited partnerships.

In a general partnership, each partner is entitled to participate in the ownership and management of the organization. Each partner also assumes unlimited liability for the debts and obligations of the partnership. This relationship can arise without a formal written agreement; however, it should be set out in a written partnership agreement. A limited partnership requires at least one general partner. The general partner is subject to unlimited liability for the debts of the partnership and manages the partnership's business. General partners can be, and usually are, corporations with no other purpose or assets. Limited partners, however, are only liable to the extent of their capital contribution and are not permitted to take part in the management of the business (or they risk losing their limited liability).

All forms of partnership can offer some flow-through tax benefits to partners which are not available to shareholders of corporations.

Buying a Canadian Business

Finally, another option is to buy an existing Canadian business. Buyers interested in acquiring a business in Ontario will need to complete due diligence on the potential acquisition, plan the financing required to complete the purchase, and determine how the business will be integrated with the buyer's other business or assets. For more information, please see our guide on Buying or Selling a Business.

Business Registrations

Extra-Provincial License (EXPL)

A corporation that was incorporated in a jurisdiction outside of Canada must obtain an EXPL to carry on business in Ontario.3 "Carrying on business" is defined broadly and covers most business/commercial activities. It includes, but is not limited to, having an agent, representative, warehouse, office, and/or an interest in real property (such as a land mortgage) in Ontario. For more information on obtaining an EXPL, please see our FAQ and worksheet on Extra-Provincial Registration in Ontario.

Canadian non-Ontario companies seeking to carry on business in Ontario do not need an EXPL, but will need to file information with the Ministry of Government Services.

LLCs (familiar to many US businesses) cannot be created under Ontario law. They are a hybrid between a corporation (in that they offer limited liability to stakeholders) and a partnership (for some tax benefits). Foreign LLCs can carry on business in Ontario, but the requirements for them are different than for foreign corporations. While an LLC is usually regarded as an "unincorporated organization" for corporate purposes in Ontario, it may still be treated like a corporation for tax purposes.

Business Number (BN)

All businesses need to apply for a BN with the Canada Revenue Agency (CRA) if the business needs one or more of these CRA program accounts: (1) goods and services tax/harmonized sales tax (GST/HST); (2) payroll; (3) import/export; or (4) corporation income tax (discussed later). The BN acts as the business's single account number for dealing with the federal government.

Trade-marks

Registration under the federal Trade-marks Act is optional. However, registration will help a business protect its trade-name(s) and/or business name(s).

Business Name

Under the Ontario Business Names Act (BNA), if a business uses a business name that differs from the individual's name (in the case of a sole proprietorship), the names of the partners (in the case of a partnership), or from its corporate name (if a corporation), it must register that business name in Ontario.

Before deciding on a business name, you should make sure that the name is not already used by, or could be confused with the name of, another entity. The BNA does not grant any rights to the registered name in Ontario. However, a business may be able to protect a trade name by registering a trade-mark under the federal Trade-marks Act. The BNA also does not prohibit the registration of identical names. However, if a business decides to use a name that is the same as or confusingly similar to that of an existing business, it can result in a lawsuit.

Ontario Employer Health Tax (EHT)

Ontario's employers are required to pay tax on remuneration paid to its employees, known as the EHT. Some employers are exempt from EHT on the first $450,000 of their annual Ontario payroll.

Currently, the EHT tax rates range from 0.98% on total remuneration less than $200,000 to 1.95% for total remuneration over $400,000. This tax is intended to fund the Ontario Health Insurance Plan (OHIP).

Ontario Workplace Safety & Insurance Board (WSIB)

Most employers in Ontario must report the earnings of employees working in Ontario and pay WSIB insurance premiums on those earnings. The WSIB provides insurance for injuries and illnesses incurred in workplaces and supports early and safe return to work for injured workers. WSIB coverage also protects employers from lawsuits related to work injuries and from the direct cost of these injuries. Workers injured on the job cannot sue their employer, but they can be paid by the WSIB to replace lost earnings and health care costs resulting from work-related injuries and illnesses.

If a business employs people and does not register with the WSIB, it will face financial and legal penalties. This includes fines up to $100,000 and/or imprisonment. Workers are covered even if the employer is not registered, in this situation the employer will also have to pay the full costs of any workplace injury or illness claim. Some employers are exempt from WSIB premiums. Their employees are not entitled to WSIB benefits.

To read this article in full, please click here.

Footnotes

1. The information in this publication is current as of February 8, 2013. The content should not be taken as legal advice. It is not exhaustive and is subject to change. Please speak with us for information or advice specific to your situation.

2. For information on tax credits, please visit: www.sse.gov.on.ca/medt/investinontario/en/pages/government_programs_tax.aspx (for provincial tax credits), and www.canadabusiness.ca/eng/page/2738/ (for federal tax credits)

3. s. 4(2), Extra-Provincial Corporations Act (EPCA)

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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