1. INTRODUCTION
There are a number of different legal vehicles through which a foreign corporation or other foreign entity may carry on business in Canada. In choosing a particular legal vehicle, the tax consequences in Canada and in the relevant foreign jurisdiction should be considered. Non-tax factors such as limited liability and registration requirements should also be taken into account. The most frequently used business organization in Canada is a corporation with share capital. Partnerships, limited partnerships, business trusts and co-ownerships are also common.
2. CORPORATIONS
A Canadian corporation is a separate legal entity. A corporation also generally has the capacity of a natural person. This means that a corporation can enter into contracts or own property in its own name, separate and apart from the individual owners of the corporation. This generally provides limited liability protection to the shareholders as owners of the corporation.
Most corporations in Canada are incorporated as corporations with share capital under the federal, provincial or territorial business corporations’ statutes. These statutes provide comprehensive legislative rules dealing with incorporation, amalgamation, liquidation, other fundamental corporate structure changes, share capital, the rights and obligations of shareholders and directors, books and records and other matters.
Incorporating under a business corporation’s statute is usually a simple process effected by filing Articles of Incorporation (or a similar document) with the relevant government authority and paying a filing fee. The Articles of Incorporation generally set out the name of the corporation, the authorized share capital, the terms of different classes of shares, restrictions on the transfer of shares, the number of directors who are to control the corporation and the names of the first directors along with certain other provisions.
The Articles of Incorporation are a public document and can often be filed electronically. Other than in British Columbia, more detailed rules for the operation of the corporation (for example, quorum for directors and shareholders’ meetings, notice requirements for such meetings, etc.) are contained in the by-laws, which are typically not a public document.
A corporation is not permitted to incorporate using a name which is the same as or similar to the name of another corporation or entity. A corporation carrying on business in Quebec must use a French version of its corporate name. A corporation may incorporate under a number name (e.g. 123456 Ontario Inc.) whereby the number is assigned on incorporation by the governmental authority. Incorporating under a specific name provides some rights with respect to that name, but this is not equivalent to the rights that flow from a trademark registration.
Corporations with share capital incorporated under the business corporations’ statutes can have different classes of shares with different rights. The business corporations’ statutes provide significant flexibility in setting the terms of different share classes. There is no minimum or maximum dollar amount of share capital required.
a. Federal or Provincial/Territorial Incorporation
Corporations incorporated under the federal Canada Business Corporations Act (the “CBCA”) or under the business corporations’ statutes of the provinces and territories can carry on business throughout Canada. The choice of jurisdiction of incorporation will therefore often depend on convenience of dealing with the relevant government department for filings, requirements in the applicable corporate statute for Canadian resident directors and similar factors.
If a corporation is incorporated in a jurisdiction and carries on business in another jurisdiction, then it generally must register to carry on business in the other province or territory. This registration is a simple process, but usually must be renewed annually and requires payment of registration or filing fees.
Often, corporations will choose to incorporate federally under the CBCA. This is because the corporation may have greater mobility in moving its operations or registering a new business location through the Canada Business Corporations Act. Lawyers and other professionals are often well-versed with the federal Act, making it easier to attain professional assistance with greater ease. Still, Canadian jurisdictions offer corporations ample flexibility when choosing a jurisdiction for incorporation.
b. Types of Corporations
Federal and provincial legislation allow for corporations with share capital (which are generally incorporated under the business corporations’ statutes) and non-share capital corporations. The latter are used for charitable and non-profit activities.
Nova Scotia, Alberta, Prince Edward Island and British Columbia have legislation allowing for the incorporation of unlimited liability companies. The unlimited liability company (“ULC”), as the name suggests, does not provide limited liability protection for the shareholder in the same way as a business corporation. A ULC is a separate legal entity under Canadian corporate law and is treated as a separate corporation for Canadian income tax purposes. The hybrid nature of the ULC for Canadian and US income tax purposes has proven to be a popular tool for cross border tax planning. The Canadian income tax consequences of using a ULC should be carefully considered because of the anti-hybrid rules in the Canada-U.S. Income Tax Convention, and rules that Canada recently announced will be introduced to deny the deductibility (or result in an income inclusion) of certain cross border payments made by ULCs where there is, for example, no corresponding inclusion in the income of a non-resident recipient of the payment. Canada enacted similar legislation that came into affect on June 20, 2024 to deny the tax benefits associated with “hybrid instruments”.
Corporations which offer their shares to the public are subject to additional rules and regulations under the relevant securities legislation in each province. For more information, please refer to Securities Law.
c. Residency Requirements for Directors
In Saskatchewan and under the federal CBCA, at least 25% of a corporation’s directors must be resident Canadians; where there are less than four directors, at least one must be a resident Canadian. A Canadian resident for corporate purposes includes a Canadian citizen ordinarily resident in Canada or a permanent resident as defined in the Immigration Act who is ordinarily resident in Canada. Alberta, Ontario, British Columbia, Quebec, Yukon, Nova Scotia, New Brunswick, Prince Edward Island, Nunavut, and the Northwest Territories do not have a residency requirement for directors. The elimination of residency requirements is said to improve the business environment and attract a greater number of investors in these jurisdictions.
d. Rights and Obligations of Directors
A non-offering corporation does not need to have more than one director. Directors are not required to own shares in the corporation.
Directors have a duty to act honestly and in good faith with a view to the best interests of the corporation. They must also exercise their powers with the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. Their decisions must be in accordance with the governing statutes, regulations, incorporating documents and any shareholder agreements that the corporation may be subject to. If there are any conflicts of interests between the directors and the corporation, these must be disclosed by following stringent disclosure requirements in the governing legislation.
Directors can be personally liable in certain circumstances, including to employees for unpaid wages owing, and to the tax authorities for unremitted employee source deductions, non-resident withholding tax and HST. Directors’ and officers’ liability insurance is often purchased by corporations in respect of these and other potential liabilities.
e. Directors’ and Shareholders’ Meetings
Both shareholders’ and directors’ meetings can be held in person inside or outside of Canada, via telephone or via other electronic means. Meetings of directors can be held at any time as long as they comply with the notice requirements set out in the governing documents of the corporation. Meetings of shareholders are held at least annually at a place determined by the directors or as indicated in the corporation’s governing documents. All jurisdictions governing corporations in Canada mandate an annual shareholder meeting for matters of fundamental importance to the corporation. This often includes the election of directors, the appointment of an independent auditor and a review of the corporation’s financial health. Apart from this mandatory, annual meeting, shareholders may requisition a meeting under certain circumstances and by following the guidelines stipulated by the corresponding legislation that governs the corporation.
The annual meeting is when a corporation’s financial statements are presented to its shareholders. The financial statements of a private corporation can be audited or unaudited, while offering corporations (i.e., a corporation that offers its securities to the public) must have audited financial statements. The financial statements of an offering corporation are required to be filed with the applicable securities regulatory authorities. A business corporation’s statutes allow directors’ and shareholders’ resolutions to be passed by written resolution signed by all the directors or shareholders, as the case may be. Written resolutions in lieu of meetings are commonly used for private corporations.
Shareholders’ and directors’ resolutions are typically not available to the public. Directors’ resolutions are the formal decisions formed by a vote that are made at a directors’ meeting. The board of directors are charged with handling the organization’s daily operations and thereby discuss and decide on matters such as past performance, strategic goals and formal plans of action. Shareholders’ resolutions are the decisions made in a shareholders’ meeting which, as with directors’ resolutions, are made by vote.
There are two different types of resolutions in shareholder meetings – an ordinary resolution and a special resolution. The former requires a simple majority and involves matters of a lesser degree of importance, such as electing directors or appointing an auditor. A special resolution requires the approval of two-thirds of the votes cast by either group of voters. This latter form of resolution involves making a fundamental change in the corporation, such as an amalgamation of corporate entities or amending the Articles of Incorporation.
f. Shareholder Agreements
Shareholders’ agreements are commonly used to address corporate governance issues. They are much like by-laws that require no public disclosure. Topics often covered in the shareholders’ agreement include the management, control and governance of the corporation. A sub-category of shareholders’ agreements is the unanimous shareholder agreement (“USA”). A USA may cover a multitude of topics which include a limitation on the powers of the directors as per the governing legislation. If a USA were to restrict certain powers of the directors, the shareholders would then become liable for the fulfillment of these directors’ duties instead. In other words, a USA may simultaneously limit the liability of directors while expanding the potential liability of shareholders.
g. Disclosure Requirements in Public Corporate Filings
A non-offering corporation is generally not required to publicly file its financial statements. An offering corporation is generally required to file its financial statements with the relevant provincial securities regulatory authority.
All corporations must generally make information filings (which are available to the public) identifying their directors, officers and registered office. Shareholders generally do not have to be disclosed in these information filings.
3. PARTNERSHIPS
A partnership, unlike a corporation, is not a separate legal entity but rather a relationship between persons carrying on business together with a view to profit. Partnerships are governed by partnership legislation (which is all provincial) and, where one exists, a partnership agreement. Partnership agreements are generally not public documents.
A detailed partnership agreement is advisable in order to clearly set out the governance and operational rules for the partnership and to oust certain legislative rules that apply in the absence of agreement to the contrary.
There are three types of partnerships in Canada:
- general partnerships
- limited partnerships
- limited liability partnerships
In a general partnership, all partners are jointly and severally liable for the liabilities of the partnership.
In a limited partnership, the general partner is liable for the liabilities of the partnership. Limited partners are only liable for their agreed upon capital contribution, unless they lose their limited liability protection by becoming involved in the management of the partnership business. It is common to use a sole-purpose corporation as the general partner of a limited partnership that will have a nominal profit/loss participation in the limited partnership. Formation of a limited partnership also requires a public filing.
A limited liability partnership may only be used by certain regulated professionals (e.g., law firms and accounting firms), and it provides certain limited liability to its partners with respect to the negligence of other partners.
4. OTHER WAYS TO CARRY ON BUSINESS IN CANADA
a. Branch
Instead of forming a Canadian corporate subsidiary, a foreign entity can conduct business in Canada by establishing a branch (i.e., a fixed place of business like an office). In this case, the foreign entity is carrying on business in Canada directly. Although opening a company in Canada is not inexpensive, a branch is a suitable option for those looking to invest a smaller sum of money into a project.
b. Carrying on Business in Canada Directly Without a Branch
Some foreign entities conduct business in Canada without establishing a fixed place of business. This may be done by way of electronic commerce and/or by use of employees or agents who come to Canada for short periods to see customers and potential customers. The Canadian tax consequences of this approach are discussed further below.
c. Business Trusts
Business trusts are mostly encountered as mutual fund trusts, real estate investment trusts, and income trusts, which issue securities in the public securities markets. A business trust may operate as a partner in a partnership or as a shareholder in a corporation with accompanying tax consequences.
d. Co-ownerships
Co-ownerships are commonly used in the real estate joint venture context, and provide for each co-owner to hold an undivided percentage interest in the whole.
5. REGISTERING A BUSINESS
Corporations, partnerships and certain other forms of businesses may have varying registration requirements, depending on the governing jurisdiction. All forms of businesses, save for sole proprietorships operating under the sole proprietor’s name, are required to register their business’ name. Apart from naming requirements, registration of the businesses itself may be required depending on the type of business and various other factors.
a. Corporations
A corporation is required to research its corporate name prior to governmental approval by using the corresponding search system of the provincial or federal jurisdiction. Corporate names must end with a legal element indicating the business is a corporation. This includes one of the following: Limited (Ltd.), Incorporated (Inc.), or Corporation (Corp.).
Each name search, the Articles of Incorporation, and the corresponding filing fee must be submitted to the appropriate government agency before the corporation is created. Barring any statutory compliance failures, the corporation will be registered by the government. A Certificate of Incorporation will be issued to the corporation by the relevant jurisdiction on the date the corporation comes into existence.
b. Partnerships
Much like corporations, partnerships are required to register their business name in their relevant jurisdiction. Some jurisdictions may penalize partnerships that have failed to comply with such requirements such as refusing to uphold court actions initiated by unregistered businesses.
General partnerships may come into existence in spite of any registration requirement in certain Canadian jurisdictions. For instance, in Ontario, a partnership is formed when two or more people conduct business in common with a view to profit. Other forms of partnerships do require registration. A limited partnership must be registered with the relevant government authority. The registration requirement would include such details as the names of the minimum number of required general and limited partners in the limited partnership. A limited liability partnership similarly requires registration. Prior to registering this form of business, permission must be obtained from the governing body of the profession (only a limited number of professions may register as an LLP in Canada).
Each province has its own registration requirements. As such, when conducting business through an extra-provincial form of business, the relevant jurisdiction’s legislative registration requirements must be adhered to.
6. QUEBEC’S CORPORATE TRANSPARENCY REQUIREMENTS
The Act respecting the legal publicity of enterprises (the “LPA”), among other things, sets rules relating to which entities must be registered and the information required to be recorded by enterprises in the Quebec Enterprise Register (the “REQ”). Its objective is to increase the transparency of enterprises operating or registered in Quebec and to optimize the reliability of the information contained in the REQ, in an effort to prevent and combat against tax evasion, money laundering and corruption.
The Act mainly to improve the transparency of enterprises (Bill 78), which came into effect on March 31, 2023, brought significant amendments to the LPA. As part of the new corporate transparency requirements that came into force, enterprises operating in Quebec, including federal, provincial, and foreign enterprises, must respect the obligations set out below.
a. Declare an Ultimate Beneficiary; Obligations Concerning Ultimate Beneficiary Information
The LPA creates an obligation for any person or group of persons registered voluntarily or for any corporations, trusts operating a commercial enterprise, cooperatives, sole proprietorships and/or partnerships required to be registered in Quebec (each, a “Registrant”), including entities constituted under a regime other than that of the laws of Quebec, to disclose information on its ultimate beneficiaries.
The following information must be reported in respect of every ultimate beneficiary:
- The ultimate beneficiary’s name, including any other name(s) they use to identify themselves in Quebec, as applicable;
- Their date of birth (this information will not be published or publicly available in the REQ);
- The address of their domicile (this information will not be published, and publicly available, in the REQ if their professional address is reported);
- The nature of the “significant control” exercised by the ultimate beneficiary or the percentage of shares or units held by or of which each one is a beneficiary; and
- The date on which each person because an ultimate beneficiary and, when applicable, the date on which each person ceased to be an ultimate beneficiary.
Reporting issuers, not-for-profit corporations, certain financial institutions pursuant to the Insurers Act, trust corporations, banks and associations within the meaning of the Civil Code of Quebec are exempt from this reporting requirement.
Who Is an Ultimate Beneficiary?
- An ultimate beneficiary is a natural person or an entity that exercises “control in fact” of the enterprise or that ultimately holds at least 25% of its shares or units, by satisfying one or more of the following conditions:
- The person is a holder, even indirectly, or a beneficiary of a number of shares or units of the Registrant, conferring on the person at least 25% of the voting rights or at least 25% of the fair market value of all the shares or units issued by the Registrant;
- Two or more persons have agreed to jointly exercise their voting rights so that together they have the capacity to exercise at least 25% of the voting rights;
- The person has any direct or indirect influence that, if exercised, would result in control in fact of the Registrant;
- The person is the general partner of the Registrant or, if a general partner of the Registrant is not a natural person, the person meets one of the conditions described in items (i) and (iii) or is a party to an agreement referred to in the following paragraph in respect of the general partner; and/or
- The person is the trustee of the Registrant, noting that a legal person acting as a trustee is considered to be a natural person.
Entities that belong to a category of exempted Registrants as described above, as well as a legal person acting as a fiduciary, are considered natural persons for the purpose of determining ultimate beneficiaries.
How to Declare the Ultimate Beneficiary?
The ultimate beneficiary information is to be reported by means of an annual updating declaration or a current updating declaration filed directly with the REQ, by the end of the production period of the annual updating declaration.
Who Will Have Access to This Information?
The information respecting ultimate beneficiaries will be accessible to the public (with the exception of dates of birth, domicile of natural persons if a professional address has been disclosed, and names and domiciles of minors who are ultimate beneficiaries). However, the government may, by regulation, determine any other information contained in the REQ that may not be available for consultation.
b. Provide Copies of Directors’ IDs as Proof of Their Identity
Registrants will need to provide the REQ with copies of valid identification, with or without a photo, issued by a governmental authority for each director.
c. Declare the Dates of Birth of Natural Persons
Registrants will also need to declare to the REQ the dates of birth of the three shareholders holding the most voting rights, the president, the secretary and the chief executive officer who are not members of the board of directors. For partnerships, Registrants will need to declare to the REQ the dates of birth of each partner or, if the partnership is a limited partnership, of each general partner and of the three largest contributors to the partnership among the special partners.
Compliance and Issues with Non-Compliance
Existing penalties and administrative measures under the LPA will be applicable for Registrants who fail to comply with the new transparency requirements. Consequently, non-compliance with the new LPA requirements may result in the cancellation of the registration of the offending enterprise as well as in fines ranging from between $500 to $25,000. The same applies in respect of the Registrant’s obligation to provide, for each director, a copy of identification issued by a government authority in support of any declaration concerning the directors.
7. QUEBEC’S PRIVACY REQUIREMENTS FOR BUSINESSES
An Act to modernize legislative provisions as regards the protection of personal information (Bill 64), received assent on September 22, 2021, with a majority of its provisions coming into force over the following two years. Bill 64’s objectives are to modernize the framework applicable to the protection of personal information in Quebec, alongside providing the regulator tools to enforce the requirements of the new regime, including the imposition of penalties. Bill 64 brings Quebec law in close alignment with those of other jurisdictions, including, the European Union’s General Data Protection Regulation (GDPR).
Bill 64 applies to organizations based in Quebec and to any collection of personal information that takes place in Quebec, whether or not the organization is established in the province. Bill 64 may also apply to businesses in the province that are federally regulated and otherwise subject to the Canadian federal privacy law, the Personal Information Protection and Electronic Documents Act (“PIPEDA”).
Bill 64 amends a number of different Quebec acts, including Quebec’s private sector privacy legislation, the Act respecting the protection of personal information in the private sector (the “Quebec PI Act”). The following constitutes a review of the new requirements for organizations who collect personal information in Quebec.
a. Rules for the Collection, Use and Disclosure of Information
New rules governing the collection, use and disclosure of personal information were introduced. Organizations that collect personal information in Quebec are required to:
- obtain meaningful consent, including express consent in some situations;
- provide information in clear and simple language (including by way of a privacy policy) upon collection of personal information;
- where technological means are used to identify, locate or profile individuals, provide additional information in that respect;
- inform individuals when personal information is used to render a decision based exclusively on an automated processing of that information; and
- destroy the personal information once the purpose for its collection is achieved or anonymize it, but only for legitimate purposes.
b. Governance Requirements Surrounding Privacy Oversight and Breach Reporting
In addition, there are governance requirements for organizations collecting personal information in Quebec. As of September 22, 2022, organizations collecting personal information in Quebec are required to appoint a Privacy Officer who is tasked with ensuring that the organization implements and complies with the Quebec PI Act. The Privacy Officer will be deemed to be the CEO unless the role has been delegated in writing. The Privacy Officer’s contact information must be published on the organization’s website.
As of September 22, 2022, organizations must also report breaches to the regulator, the Commission d’accès à l’information (CAI), where the breach poses a risk of serious injury to an individual. The “risk of serious injury” assessment includes the sensitivity of the information concerned, the anticipated consequences of its use, and the likelihood that the information will be used for injurious purposes. Like in PIPEDA, organizations must keep records of breaches.
c. Policies and Privacy Impact Assessments
By September 22, 2023, organizations must publish governance rules and, if information is collected by technological means, a confidentiality policy. Bill 64 also requires organizations to conduct privacy impact assessments of systems that handle personal information and when personal information is transferred across the Quebec border.
Organizations will also need to enter into written agreements containing specific provisions with third party service providers that act as data processors by way of data processing agreements.
d. Enforcement Mechanisms and Penalties
To ensure compliance with these changes, Bill 64 contains enforcement mechanisms that will come into force on September 22, 2023. This includes: administrative monetary penalties up to $10 million or 2% of worldwide turnover for non-compliance, penal offences for contravention of the Quebec PI Act in some circumstances and a private right of action for individuals impacted by a contravention of the Quebec PI Act.