Entity set up
Canada
Corporate subsidiary
Corporation form (limited liability corporation)
- Incorporate under either federal or provincial/territorial law
- Most foreign businesses choose this form rather than branch office
- Certain industries are subject to specific legislation and must incorporate under these laws (eg, banking or insurance companies)
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For corporations which are incorporated under the federal statute, and in some provincial jurisdictions, at least 25 percent of directors must be residents of Canada. There are several jurisdictions in Canada which do not have residency requirements, including British Columbia, Alberta,Nova Scotia and Ontario. Certain corporations in prescribed activities require a majority of resident Canadian directors
- Cannot consolidate income and loss with operations in other corporate entities for Canadian tax purposes.
Flow-through form
- Unlimited liability companies (ULCs) may be created by incorporating in the provinces of Nova Scotia, British Columbia, Alberta or Prince Edward Island.
- For Canadian income tax purposes, ULCs are treated as regular corporations, subject to Canadian tax on their worldwide income; however, for US tax purposes, ULCs may be treated either as partnerships or "check-the-box" flow-through entities, possibly offering cross-border opportunities.
Branch (permanent establishment)
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A corporation or a foreign (ie, non-Canadian) corporation must register in each province or territory where it plans to own real property located in such province or territory or if its intended business falls under the definition of “doing business.”
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Must have a Canadian place of business or address where corporate records are kept. Books and records must also be available for audit by the Canadian Revenue Agency.
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Canadian branch operations of foreign corporations are subject to Canadian federal and provincial/territorial tax on income and gains sourced in Canada (primarily income from a business carried on in Canada). The branch is required to calculate income or loss from the business carried on in Canada and may deduct expenses only in respect of that business carried on in Canada.
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A 25 percent branch tax (subject to reduction under an applicable tax treaty) is levied on after-tax Canadian earnings from business carried on in Canada less amounts that are re-invested in the Canadian business (which is intended to mirror the 25 percent withholding tax that would be payable on taxable dividends from a Canadian subsidiary corporation). Financial and tax accounting and reporting obligations may be more complex as the branch is not a legal entity. The rate of branch tax may be reduced under certain tax treaties between Canada and the country of residence of the foreign corporation.
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The parent company remains liable for debts and obligations of the branch.
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It is common to create a wholly-owned subsidiary in home jurisdiction to consolidate losses from the Canadian branch operations but avoid direct liability.
Note 1: The mechanics and operation of corporations are governed by the federal or provincial/territorial laws of incorporation.
Note 2: The shareholders of a federal corporation or the shareholders of most provincial/territorial corporations may enter into a unanimous shareholder agreement which provides for, among other matters, the regulation of the rights and liabilities of the shareholders, the regulation of the election of directors and the management of the business of the corporation including the right to restrict in whole or in part the powers of the directors.