Business Formation in Canada

One of the threshold issues for a foreign entity wishing to establish a business in Canada is whether that business should be carried on directly, as a branch of the foreign entity, or should be created as a separate Canadian business organization, such as a subsidiary corporation (with either limited liability or, in some provinces, unlimited liability). Other forms of business include a proprietorship, a partnership (which may be a general partnership or limited partnership, or possibly a limited liability partnership) or some form of joint venture. Generally speaking, a foreign entity may carry on business directly in Canada through a branch, but will be subject to the same sort of federal and provincial registration requirements that would apply to a corporation.

Banch or Subsidiary

A number of issues should be considered in choosing whether to operate as a branch or as a subsidiary.

If the Canadian operation is expected to incur significant losses in its early years of operation, the foreign entity may wish to carry on business in Canada directly through a branch, in order to deduct those losses for foreign tax purposes, if possible. A Canadian
branch structure might also be relevant to enable a better matching of the Canadian corporate tax paid with the foreign tax credits available in the home jurisdiction.

Many foreign investors prefer to carry on business in Canada through a Canadian subsidiary. The use of a Canadian subsidiary is more convenient for administrative purposes. For example, having a Canadian subsidiary can make the process of contracting in Canada simpler.

The use of a Canadian subsidiary generally limits the liability of the foreign parent corporation to its capital investment in the Canadian subsidiary. In conducting business through a branch office, however, the foreign parent corporation exposes itself directly to all of the liabilities of the Canadian operation.