Geoffrey S. Belsher, Partner, Blake, Cassels & Graydon LLP and Christopher Kozub, Associate, Blake, Cassels & Graydon LLP (Location Canada 2012)
Canada has weathered the recent period of international uncertainty and volatility better than most other advanced industrialized nations. Forbes magazine recently ranked Canada as the best country in the world in which to do business, and it is also the fastest-growing G-7 nation. Abundant natural resources, a highly skilled work force, and a robust financial sector make Canada an attractive place to invest.
Canada is also a natural first point of entry for U.S. firms that are looking to expand internationally due to its proximity, the existing cultural and legal similarities, and because of the high level of cooperation and coordination between the U.S. and Canadian governments. U.S. businesses and their counsel, however, need to know that the Canadian legal regime is in some cases significantly different than local requirements. This article is intended to provide general guidance on doing business in Canada. Particular businesses or industries may be subject to specific legal requirements not referred to here. For this reason, anyone planning to conduct business in Canada should seek the advice of qualified counsel before embarking on any specific transaction or undertaking.
A corporation with share capital is the most common form of business entity in Canada and enjoys advantages - such as limited liability and statutory shareholder rights and remedies - that make it the most practical form of business organization in most instances. Corporations may also be incorporated without share capital, generally for not-for-profit purposes.
Provincial law generally governs the forms of business organization, although corporations wishing to carry on business in more than one province may prefer to incorporate under federal law. Federal incorporation permits the corporation to carry on business in every province in Canada without being licensed by the provinces, although registration may still be required. When a company incorporates provincially, it must register and may be required to obtain an extra-provincial license in other provinces where it carries on business.
There may be additional factors affecting the decision of whether to incorporate federally or provincially. For example, differences in residence requirements for directors may be relevant. Previously, certain advantages could flow from incorporating as an "unlimited liability company"; however, changes to the Canada-U.S. Tax Convention make such structures more difficult to put in place.
Corporations and individuals are free to enter into partnerships in Canada. The relationship of the partners is established by contract and is also subject to applicable provincial laws. Generally, a partnership may take one of two forms: a "general partnership" or a "limited partnership."
Subject to the terms of their agreement, all partners in a general partnership are entitled to participate in ownership and management, and each assumes unlimited liability for the partnership's debts and liabilities. In a limited partnership, there is a separation between the partners who manage the business (general partners) and those who contribute only capital (limited partners). A limited partnership must have at least one general partner, who will be subject to unlimited liability for the debts of the partnership. Limited partners are liable only to the extent of their capital contribution, provided they do not participate in the management of the business. No Canadian jurisdiction has adopted the "limited liability company" or "limited liability partnership" forms of business organization sometimes seen in the United States.
Two or more parties may engage in a joint venture or syndicate in Canada, where they collaborate in a business venture. Joint ventures are governed entirely by contract, as there is no specific statutory definition or regulatory scheme for joint ventures at either the provincial or federal level.
Organizations with foreign ownership may also conduct business in Canada through branch offices, so long as they are in compliance with the Investment Canada Act and provincial registration and licensing requirements. A branch office operates as an arm of the foreign business, which may enjoy tax advantages from such an arrangement. However, the foreign business' liability for the debts and obligations incurred in its Canadian operations is not limited, as it would be if the Canadian operations were conducted by a separate corporation of which the foreign business was the shareholder.
General Rules on Foreign Investments
The Investment Canada Act is a federal statute of broad application regulating investments in Canadian businesses by non-Canadians. Except with respect to certain sectors, the Investment Review Division of Industry Canada administers the act under the direction of the federal Minister of Industry. Investments by non-Canadians to acquire control over existing Canadian businesses or to establish new ones are either reviewable or notifiable under the act, depending on the value of the assets being directly or indirectly acquired and the status of the investor. The rules relating to acquisition of control and whether an investor is a "Canadian" are complex and comprehensive.
The acquisition of control of an existing Canadian business or the establishment of a new one may also be reviewable, regardless of asset values, if it falls within a prescribed business activity related to Canada's cultural heritage or national identity.
The Competition Act, administered by the Commissioner of Competition, is Canada's antitrust legislation. The act addresses three principal areas: criminal offenses, civil reviewable conduct, and merger regulation.
The general criminal offense prohibits agreements, formal or informal, that prevent, limit, or lessen competition unduly. Illegal trade practices - such as price discrimination, predatory pricing, bid-rigging, pyramid-selling schemes, deceptive telemarketing, double ticketing, price maintenance, and misleading advertising - are prohibited.
Certain non-criminal conduct regulated by the act may be subject to investigation by the Competition Bureau and review by the Competition Tribunal. Reviewable practices are not prohibited until made subject to an order of the tribunal. Matters reviewable by the tribunal include refusal to deal, consignment selling, exclusive dealing, tied selling, market restrictions, abuse of dominant position, and certain other "anticompetitive" acts.
When specified financial thresholds are exceeded, parties to certain merger transactions are required to provide pre-merger notification to the Competition Bureau. If, in the course of reviewing a proposed transaction, the commissioner identifies any market in which she believes the transaction will substantially lessen competition, she will normally try to negotiate alterations to the transaction. If the commissioner chooses to challenge a proposed transaction, she will apply to the tribunal to make such orders as it deems appropriate.
It is possible for a U.S. entity to extend the scope of its business to Canada without becoming subject to Canadian tax on its business profits if the types of activities carried on in Canada are sufficiently limited. Subject to certain exceptions, the Canada-U.S. Tax Convention ("the Convention") provides that U.S. entities that carry on business in Canada will only become subject to tax in Canada to the extent that the business profits are attributable to a permanent establishment in Canada.
Although the rules governing permanent establishment are complex and should be reviewed carefully, U.S. entities will generally not have a permanent establishment by reason only of having sales representatives in Canada to offer products for sale, provided the agents do not have the authority to conclude contracts on behalf of the U.S. entity or are independent and acting in the ordinary course of business.
As discussed previously, the most common forms of business organization for U.S. businesses entering Canada are subsidiary corporation, partnership, and branch operation. The principal advantage to the use of a branch operation would normally arise when it is anticipated that the branch will incur substantial losses in the first several years of operation. In this case, organization through a branch might enable such losses to be included in the U.S. consolidated tax return of the parent corporation and deducted against income from other sources.
It is clear that if a U.S. enterprise were to establish a divisional branch in Canada, it would have a "permanent establishment" within the meaning of the Convention, and would be required - pursuant to the Income Tax Act (ITA), the Convention, and Canadian provincial tax legislation - to pay Canadian income tax on taxable income earned in Canada that is attributable to the branch. Any employees resident in Canada and, subject to certain exemptions in the Convention, branch employees not resident in Canada would be required to pay Canadian income tax, and the U.S. enterprise would be required to deduct and remit to applicable Canadian taxation authorities amounts from the wages and salaries of such persons.
If the Canadian business enterprise is carried on through a corporation incorporated in Canada (including by means of an unlimited liability company), the corporation will be a "resident" within the meaning of the ITA and will be required to pay Canadian income tax on its world income each taxation year. Canadian provincial income taxes will also apply.
A foreign corporation would generally enter into a partnership only if it wished to establish a joint venture arrangement with another person or corporation. The income or loss of the business would be calculated at the partnership level as if the partnership were a separate person, but the resulting net income or loss will then flow through to the partners and be taxable in their hands. Partnerships themselves are not normally taxable entities for Canadian tax purposes. A partnership might be appropriate if a joint venture business is expected to generate losses in its early years, because the partnership structure would allow the individual partners to take advantage of the tax write-offs arising from these expenses. In the case of a limited partner (which for tax purposes has an extended definition), the amount of losses that may be available is limited by the amount of money that the limited partner has "at risk" in the partnership.
Employment and Labor Law
Employment and labor law in Canada is designed to regulate both the conditions of employment and the relations between employers and employees. While labor relations and employment are principally matters within provincial jurisdiction, the federal government does have jurisdiction over certain industries that are viewed as having a national, international, or interprovincial character. These industries include banking, air transport, pipelines, telecommunications, television, and interprovincial trucking.
As a result of the differences in provincial employment legislation, companies that are subject to provincial jurisdiction and operate in more than one province must ensure that each office maintains employment practices that satisfy local requirements. Each province and the federal government have employment standards legislation that prescribes the minimum conditions of employment on such matters as wages, hours of work, holidays and vacation periods, pregnancy and parental leave, and notice of termination of employment.
As Canadians become ever more vigilant about the state of the environment and insistent that offenders of environmental laws be held accountable, we have witnessed an increasing degree of government regulation intent upon protecting the environment, and there is increasing government activity in this area. All levels of government across Canada have enacted legislation to regulate the impact of business activities on the environment. Environmental legislation and regulation is complex and often provides environmental regulators with considerable discretion in the enforcement of the law.
The environment has become such an important issue that it is imperative that anyone in a business venture be fully informed on what the relevant environmental laws allow and prohibit, and how to respond to the demands of both governments and the public.
The Charter of the French Language makes French the official language of the Province of Quebec and confers on every person the right to be communicated with in French, including by businesses that carry on business in Quebec. Thus, business names used in Quebec must be French, subject to important exceptions where trademarks are involved.
For companies operating in Quebec, given that the majority of the population is French-speaking, the charter requires that such companies have products and services available in French and use French in commercial documentation, subject to permitting use of another language pursuant to regulated exceptions. This requirement also applies to websites. In practice, most Canadian packaging will be fully bilingual.
As previously stated, anyone planning to conduct business in Canada should seek the advice of qualified counsel before embarking on any specific transaction or undertaking.