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.
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 are able to 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, in some cases.
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.
Limited Partnership
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.
If you are thinking about expanding your business to Canada and need help defining the best way to register your new business in Canada, we can help you. You just have to write us an email to the following address: [email protected]
