Considerable flexibility is permitted in the design of a corporation’s share structure under Canadian federal or provincial corporate statutes. For example, shares can be voting or nonvoting, they can have limited or unlimited participation in equity and they can be redeemable for a fixed price at the option of the corporation or the holder. Shares can also be given special voting rights with respect to certain matters, such as the appointment of directors and the acquisition or disposal of significant assets.
By careful selection of share characteristics, it is possible to separate capital contributions and control from participation in future profits. This possibility is particularly useful in designing share structures for joint ventures and in addressing taxation issues.
On occasion, foreign parents may wish to capitalize their Canadian subsidiaries through debt rather than share capital. In general, Canadian corporate legislation does not require any minimum investment by way of share capital. However, the financing of a corporation largely by debt may lead financial institutions to require a guarantee from the foreign parent. It may also have income tax implications, as discussed below. </p?
In most provinces, the authorized capital of a corporation does not affect either the incorporation or the registration fee. Accordingly, a company’s authorized capital should not be a major factor in determining its share structure.
Interest is generally deductible in computing the income of a corporation for tax purposes,while dividends are not. However, there are income tax rules which limit the deductibility of interest paid to non-resident shareholders. These “thin capitalization” rules provide in general that where the debt owing to certain non-resident shareholders exceeds 1.5 times the equity investment of those shareholders, interest on the excess debt will not be deductible for tax purposes. Such denied interest expense will also be deemed to be a dividend paid to the non-resident and subject to Canadian withholding tax.
The tax rules governing the capitalization of non-resident controlled corporations are complex and accordingly, professional advice should be obtained before an enterprise is established and capitalized.
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