A corporation is the most common form of legal entity for businesses. Most foreign businesses operating in Canada adopt a corporate form. Because a corporation is a legal entity that is separate and distinct from the shareholders who contribute to the corporation’s capital, generally shareholders are not responsible for the debts, liabilities or obligations of the corporation. In addition, the corporation enjoys perpetual succession, continuing despite the death of any or even all of its shareholders.
Corporate income is taxed at a combined federal and provincial flat corporate rate rather than at the marginal individual rates.
Federal or Provincial Incorporation
Corporations may be created in Canada under either federal or provincial legislation. They may also be created under the laws of Canada’s three northern territories, which is less common. Accordingly, assuming a decision has been made to incorporate in Canada, a choice must then be made regarding the jurisdiction under which the entity should be incorporated. In most cases, the jurisdiction of incorporation does not affect whether federal or provincial laws will apply in areas of dual jurisdiction, as in the case of Canada’s labor laws. Corporations established under federal or provincial legislation may carry on business anywhere in Canada as of right but are required to comply with provincial requirements such as extra-provincial registrations.
In most Canadian jurisdictions, governing legislation permits corporations to adopt a unanimous shareholders’ agreement. Such agreements have the effect of transferring certain of the directors’ powers to the shareholders. To the extent that these powers are transferred to the shareholders, the directors are generally relieved of liability and the shareholders are then subject to the duties and liabilities normally attributed to the corporate directors.
This arrangement can be useful in the case of a foreign corporation that wishes to limit the powers of the Canadian subsidiary’s directors over subsidiary operations, especially where the subsidiary and the foreign parent have different directors.
Public and Closely Held or Private Corporations
Canadian law distinguishes between public corporations, which distribute their securities to the public, and closely-held or private corporations, which have a limited number of shareholders and restrict the transferability of their securities in some manner. Although public corporations are subject to more stringent requirements concerning public disclosure and to potentially differing income tax rules, the most fundamental principles of corporate law, including limited liability of shareholders, apply to all limited liability corporations.
Alberta, British Columbia, and Nova Scotia Unlimited Liability Companies
An unlimited liability company (or a ULC) is a form of corporation where the company shareholders can be held liable for the ULC’s obligations. In this respect, a ULC is similar to a general partnership and differs from the common form of corporation where the corporation’s shareholders are not, in general, held accountable for the liabilities, acts or omissions of the corporation.
A ULC can be formed under the laws of Alberta, British Columbia or Nova Scotia. The corporate legislation in each provincial jurisdiction is different, so creating a ULC requires an assessment of the advantages and disadvantages of each jurisdiction before the ULC is formed. Additionally, the possibility of shareholder liability under a ULC should also be carefully assessed and mitigated.
The viability of forming as a ULC must also be considered from a tax perspective. For U.S. tax purposes, a ULC is generally regarded as a flow-through entity. The U.S. Internal Revenue Service generally treats a ULC as a branch, if there is only one shareholder, or as a partnership if there is more than one shareholder. However, in either case, the ULC will generally be “looked through” for U.S. tax purposes so that shareholders will be responsible for taxes. This is different from the position in Canada, where a ULC is taxed like any other corporation. The end result is that a ULC is generally a hybrid entity – a corporation for Canadian tax purposes and a flow-through entity for U.S. tax purposes.
This hybrid tax treatment has resulted in a ULC being used in a variety of situations, including by U.S. businesses operating in Canada. The Canada – U.S. Tax Treaty can adversely affect the treaty benefits applicable to ULCs, but the Canada Revenue Agency has issued interpretations that suggest that certain transactions involving interest payments and deemed dividends paid by a ULC to a U.S. resident will still be eligible for a reduced rate of withholding tax. Professional advice should be obtained to fully consider the tax implications of establishing a ULC.
Company Formations provides fast and easy Company Registration in Canada for non-Canadians residents and provides all the documents your new Canada corporation will need to stay up-to-date and in compliance with your province of registration corporations law.
Our Canada Incorporation Service includes:
- Name Search Report
- Preparation of Articles of Incorporation and Incorporation Documents
- Incorporation Agreement
- By-Laws, Company Minute Book, Share Certificates
- Canada Registered Agent Service for 1 year
- Government Fees
- Our Service Fees
- Original Certificates
- Copy of Documents in PDF
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