Options for Foreign Corporations Wishing to Do Business in Canada
- Branch versus Subsidiary
- Branch Registration
- Subsidiary Incorporation
- Comparison of Tax Results
- Corporate Directors Residency Requirements
- The Special Cases of British Columbia, Quebec, Prince Edward Island, Nova Scotia and New Brunswick
There are several legal business structures available to foreign entrepreneurs and businesses wishing to conduct business in Canada. This article will concentrate on corporations, because they represent the most common form of legal business structure for foreign companies seeking to establish operations in Canada.
Foreign entrepreneurs and businesses can incorporate a subsdiary corporation for their Canadian operations, either federally or provincially. For more information on the differences between federal and provincial incorporation, please refer to the article on Selection of Corporate Jurisdiction. They may also choose to carry on business in Canada through a branch office.
2. Branches versus Subsidiaries
The two most common ways in which foreigners register to operate ther businesses in Canada are through the registration of a Canadian branch or the incorporation of a Canadian subsidiary.
A branch office is an extension of the parent corporation’s business, while a subsidiary is a separate corporation which is controlled by the parent corporation. It should be noted that a parent company may be held liable for the actions of the subsidiary, despite the latter’s self-sufficiency.
There are many aspects to consider in deciding whether to register a branch or incorporate a subsidiary including: tax implications, the ability to raise capital, access to the special programs available through the Canadian government and the parent company’s level of exposure to liabilities. Foreign investors may wish to obtain advice from qualified legal and accounting professionals in order to determine the most desirable business structure based on their specific situation.
3. Branch Registration
Branch registrations permit foreign corporations to operate branch offices in Canada. Branches are registered provincially in each Province in which the foreign business proposes to operate. The foreign company establishes a branch by applying for registration as an Extra-provincial or Foreign Corporation. A registered Canadian address and a Canadian resident attorney/agent for service are generally required, so that the corporation has local representation in order to receive service of documents and to deal with administrative matters locally. New Business Now.com is able to provide registered offices and Canadian residents to act as local agents/attorneys for service throughout Canada.
It should be noted that annual branch taxes are imposed by Canadian tax statutes governing foreign corporations that operate through a branch. Branch taxes are generally equivalent to approximately 25% of the profits earned by the branch, unless reduced by treaty.
4. Subsidiary Incorporation
Most non-resident investors prefer to incorporate a subsidiary chiefly because a subsidiary allows for a division of liability between the Canadian operation and the foreign operation. A subsidiary is simply a Canadian corporation whose controlling or sole shareholder is another corporation.
An incorporated subsidiary of a foreign corporation is entitled to many of the same rights as a Canadian-owned corporation, such as limited liability.
Foreign corporations have the option of incorporating a subsidiary in a federal or provincial jurisdiction. They may also apply for Extra-provincial Registrations that will allow them to operate in other provinces outside their jurisdiction of incorporation. Click here for more information on How to Select a Jurisdiction for Your Corporation.
5. COMPARISON OF TAX IMPLICATIONS – BRANCH VERSUS SUBSIDIARY
|CANADIAN BRANCH OFFICE||CANADIAN SUBSIDIARY COMPANY|
|Income resulting from Canadian operations is taxable in Canada||Income resulting from worldwide operations is taxable in Canada|
|When computing taxes in the country of residence, losses may be offset against income. Losses may be carried back 3 years and carried forward 7 years against income earned in Canada by the Canadian branch||Losses are not generally deductible by the parent. Losses may be carried back 3 years and carried forward 7 years against income earned in Canada by the Canadian subsdiary|
|Branch tax is normally payable annually on any after-tax profit not reinvested in Canadian property||Withholding tax is normally payable annually on any after-tax profit distributed as dividends to non-Canadian shareholders|
|If branch is taxable, foreign jurisdictions may give credit for Canadian income and branch taxes paid||Foreign jurisdictions may give credit for withholding tax on interest and dividend payments. Some countries may also provide extra relief for the underlying foreign taxes paid on income earned in Canada|
|Branch tax which was previously deferred is payable upon the discontinuance of business, except for dividends on certain reorganizations that involve the formation of a Canadian subsidiary||Withholding tax is payable on deemed dividends resulting from the discontinuance of the company|
|Licensing fees must be paid in provinces where a branch is established and the corporation operates. Apart from extra-provincial registration fees, no incorporation fees need to be paid||In provinces where the subsidiary does business other than the province of incorporation, incorporation fees must be paid and licensing fees generally must be paid|
|Rules for allocating income may vary by jurisdiction, creating problems that affect tax credits|
|Interest, royalties and like expenses which are paid to non Canadian residents and are deducted when determining Canadian branch profits may be subject to a withholding tax (unless reduced by treaty)||The deductibility of interest on debts owed to non Canadian residents may be limited|
|Depreciation of fixed assets is calculated at Canadian rates in order to determine Canadian taxable income. Foreign rates may govern in the foreign jurisdiction. This may create timing issues or other problems with claiming a credit for Canadian taxes paid||Depreciation of fixed assets is calculated at Canadian rates in order to determine Canadian taxable income|
6. Corporate Director Residency RequirementsEach jurisdiction has its own requirements concerning the residency of a corporation’s directors. Residency requirements by jurisdiction are as follows:
|Jurisdiction||Director Residency Requirement|
|Federal (Canada)||25% resident Canadian Directors Required|
|Alberta||25% resident Canadian Directors Required|
|British Columbia||No Canadian Directors Required|
|Manitoba||25% resident Canadian Directors Required|
|New Brunswick||No Canadian Directors Required|
|Newfoundland||25% resident Canadian Directors Required|
|Nova Scotia||No Canadian Directors Required|
|Ontario||25% resident Canadian Directors Required|
|Prince Edward Island||No Canadian Directors Required|
|Quebec||No Canadian Directors Required|
|Saskatchewan||25% resident Canadian Directors Required|
Please note that it is only directors which are specified, not officers or shareholders. Officers and shareholders do not need to be Canadian residents. Note also that Canadian residents are specified, not Canadian citizens.
7. The Special Cases of British Columbia, Quebec, Prince Edward Island, Nova Scotia and New Brunswick
British Columbia, Quebec, Prince Edward Island, Nova Scotia and New Brunswick are the only Provinces in Canada that waive the corporate directors' residency requirements. This is especially important for foreign individuals and businesses wishing to register businesses in Canada, as they will not have to appoint resident Canadian directors if they incorporate in any of these Provinces.
Please note: Although it is relatively straightforward to establish a business in Canada, there are laws and tax implications beyond the scope of this article that may need to be addressed by legal and accounting professionals. Consult a competent lawyer in your Province or Territory for specific legal advice, or click here to contact Eric P. Cohen, Barrister & Solicitor, an Ontario lawyer.
The information presented in the document above is provided for reference purposes only and is
not intended to be a substitute for the appropriate legal advice of a competent, professional lawyer.
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