Canada: Establishing A Business In Canada

Doing Business in Canada 2019
Last Updated: July 2 2019
Article by Fasken Martineau

There are several different structures available when forming a business in Canada. Foreign companies operating in the country may do so through a branch office or by establishing a separate business enterprise.

Often, the tax considerations and liability determine what business structure is best. The most common business structures used to establish operations in Canada are

  • Corporations
  • Sole proprietorships
  • Partnerships
  • Joint ventures
  • Franchises
  • Co-operatives

Corporations

A corporation is a business entity with a legal status that is independent of its shareholders. As a result, the corporation's debts, liabilities, and obligations are not the responsibility of its shareholders.

Corporations used by foreign investors are typically created through incorporation under the Canadian Business Corporations Act (CBCA) or a similar provincial law. Some types of corporations can be formed through other federal legislation, such as the Trust and Loan Companies Act, or under provincial equivalents. Both federal and provincial corporations are created by filing articles of incorporation with the appropriate government authorities and paying a nominal fee. The articles must include details of the rights, restrictions, privileges, and conditions attached to each class of share. Any number of shares of one or more classes can be created; however, at least one class must have full voting rights.

The articles of a federally registered corporation must name the first directors, and a minimum of 25% of these must be Canadian residents. While the directors generally exercise management authority on behalf of the shareholders, their power can be restricted through a unanimous shareholder agreement. The corporation, its shareholders, or third parties can hold the directors personally liable for certain aspects of their decisions.

For transactions or events occurring after February 26, 2018, the application of an existing anti-surplus stripping rule has been generally expanded to prevent a non-resident  shareholder of a Canadian corporation from extracting (either now or in the future), without withholding tax, the corporation's retained earnings that exceed the amount of capital that has been contributed to the corporation by the shareholder. The rule has been expanded to include a look-through rule where a partnership or trust is used to avoid the purposes of the anti-surplus stripping provision.

Provincial incorporation is often used when a corporation intends to restrict its activities to one province. The provincial acts governing corporations vary somewhat, and while many of their provisions are similar to those of the CBCA, there are a number of differences among the provinces.

Some recent province-specific updates for corporations are included below.

British Columbia corporate tax avoidance – The BC government has introduced updates to  its anti-avoidance rule and other amendments that require corporations in the province to disclose aggressive tax avoidance transactions to the Canada Revenue Agency. This parallels the federal approach on reportable transaction rules and applies to a reportable transaction entered into after February 20, 2018, or a reportable transaction that is part of a series of transactions completed after February 20, 2018.

Manitoba small business venture capital tax credit – Effective March 12, 2018, the minimum investment to be eligible for this credit has been lowered from $20,000 to $10,000. Also, the $15 million maximum revenue that applies to an eligible corporation has been eliminated.

Ontario interactive digital media tax credit – Eligibility for this credit has been extended to film and television websites that are purchased or licensed by a broadcaster and embedded in the broadcaster's website. This change applies to products that had not received a certificate of eligibility or a letter of ineligibility as of November 1, 2017.

While most foreign investors elect to conduct business in Canada through a Canadian corporation, there are two other options available.

  • Branches of foreign corporations– A foreign entity can carry on a business in Canada directly through a branch operation. A branch is an extension of the foreign parent corporation and must be licensed or registered in each of the provinces in which it will operate. The taxation of branches and subsidiary corporations varies considerably, and differences also exist in the liability of the parent companies. A non-resident corporation carrying on business in Canada through a Canadian branch is liable for income tax on its Canadian-source business income at the same rates that apply to Canadian residents.
  • strong>Unlimited liability company– Nova Scotia, British Columbia, and Alberta allow for the incorporation of an "unlimited liability company" as the Canadian subsidiary of a foreign corporation. A Canadian subsidiary of a non-resident corporation will be considered a resident of Canada for the purposes of the Income Tax Act and will be subject to Canadian income tax on its worldwide income. Under Canada's domestic rules, there is no withholding tax on non-participating interest paid to arm's length persons, and under the Canada-US Income Tax Convention, withholding tax on arm's-length or non-arm's-length non-participating interest paid to US persons is generally nil.This type of structure can be used as an alternative to a branch.Though it allows for losses incurred by the corporation in Canada to be deductible by the foreign corporation, it still provides certain advantages of corporate status in Canada. It is important to note that shareholders can be held liable for corporate obligations.The advantages and disadvantages of forming an unlimited liability company in each province differ and should be considered when deciding whether or not to use this vehicle.

Sole Proprietorships

A sole proprietorship is a business owned by one person. The owner is entitled to all the  profits and is personally liable for all the debts and other liabilities of the business. This liability can be limited by contract or covered by insurance.

There is no registration requirement for a sole proprietorship, which operates under its owner's legal name. Nonetheless, in some jurisdictions an operating licence may be required to conduct certain types of business.

If the sole proprietorship will operate under a business name other than its owner's legal  name or if plurality of ownership is implied (such as by adding "and Company"), a declaration must be filed in each province in which the business operates.

Partnerships

A partnership is an association or relationship formed by a contract between two or more individuals, corporations, trusts, or partnerships. It is governed by provincial legislation and generally must be registered with provincial authorities. In addition, a partnership has no distinct legal personality from its partners and is thus considered a pass-through entity for tax purposes.

There are three types of partnerships.

  • General
  • Limited
  • Limited liability

In a general partnership, all partners are subject to unlimited liability. Unless otherwise agreed upon, the partners have an equal claim on the capital and profits and are equally responsible for all the losses, debts, and liabilities of the partnership.

A limited partnership consists of both general and limited partners. One or more general partners are responsible for managing the business. Limited partners contribute capital and may work for the business but do not participate in its management. Unlike general partners, limited partners are not exposed to unlimited liability – unless they take part in the control or management of the business.

In a limited liability partnership, a partner is generally not liable for the actions of the other partners not under his or her direct supervision or control. The legislation of most provinces and territories provides for the creation of limited liability partnerships.

Joint Ventures

A joint venture is an association of two or more business entities for the purposes of carrying on a single enterprise or specific venture. Joint ventures take several forms. They can be set up through a separate corporation or a general or limited partnership, or the parties in a joint venture can jointly own business assets.

Joint ventures between Canadian and foreign companies are excellent vehicles for combining the strengths of the participating firms while reducing the risk of taking on new markets

Franchises

A franchise is a business relationship in which a franchisee contracts for the right to sell proprietary products or services using business names and/or trademarks, styles, and methods developed by the franchisor.

The franchisee generally agrees to comply with performance standards set by the franchisor and is granted a licence to use the intellectual property and business methodology of the franchisor.

In return, the franchisee normally pays an upfront fee and ongoing royalties. Need to learn more about franchising? For more information, see Chapter 15.

>>Download this chapter

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Aird & Berlis LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Aird & Berlis LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions