There are many reasons for wanting to do business in Canada including the availability of a skilled workforce, low corporate tax rates, abundant natural resources and a stable political system and economy. This article describes, in very summary form, some of key legal issues you should be aware of when deciding to start a new business or acquire an existing business in Canada.
Foreign Investment Regulation
All foreign investment into Canada above certain financial thresholds is subject to a federally-administered investment review process. The process generally seeks to assess whether the investment will result in a “net benefit to Canada” taking into consideration all relevant factors. Obtaining the necessary approvals may require investors to enter into legally binding undertakings with the Canadian government relating to matters such as maintenance or creation of jobs or facilities in Canada or expansion of existing Canadian facilities after completion of the investment.
In addition, investments into businesses which involve national security or culturally sensitive industries (such as telecommunications, air transportation and radio and television) are subject to more extensive review processes and additional requirements and restrictions.
In Canada, taxes are imposed at both the federal and provincial levels on both individuals and corporations. These include taxes on income, capital gains and sale of goods and services. The rates and exact types of taxes payable by a business will depend in part on which jurisdictions in Canada the business carries on its operations.
In general, Canada currently has one of the lowest corporate tax rates in the OECD. As an example, the combined federal/provincial corporate rate in the Province of British Columbia is approximately 25% as compared to 35% in Washington State and 39-41% in California, New York and Oregon.
In addition, Canada has an extremely generous and attractive regime to provide tax credits for qualifying scientific research and development expenditures by Canadian-based companies.
Finally, payroll taxes payable by employers in Canada are typically about half of what employers would expect to pay in the United States.
Business Formation and Structuring
United States based investors can operate Canadian businesses either as a branch of the existing U.S. business or as a separate subsidiary incorporated under Canadian law. Each Province in Canada and the federal government have established statutes under which corporations can be incorporated. The terms of each statute can vary and, in particular, may impose requirements for a minimum number of Canadian resident directors. However, the relevant corporate statute in the Province of British Columbia imposes no such restrictions on director residency and, as such, the directors of a British Columbia company may be 100% foreign residents.
Recent changes to Canadian tax laws have eliminated Canadian withholding tax on interest payments made by Canadian subsidiaries to their U.S. parent companies (subject to compliance with some applicable thin capitalization rules). As a result, U.S. parent companies can structure the financing of their Canadian subsidiary with a combination of equity and interest-bearing debt to permit them, through the payment of the interest on that debt, to move significant amounts of cash from their Canadian business back to the United States without having to pay Canadian tax on the amount paid. In addition, a long-standing requirement for non-residents to obtain a Canadian clearance certificate from tax authorities when they sell their Canadian investment has also generally been eliminated making such a subsequent sale much less complicated.
Unlike many U.S. jurisdictions, Canada does not generally recognize the concept of “at will” employment. In the absence of a specific contract which sets out the terms of compensation upon termination, Canadian law generally imposes an obligation to provide adequate notice of termination of an employee without cause or, in the absence of such adequate notice, payment of the salary and other amounts the employee would have earned during the notice period (called “payment in lieu of notice”).
The length of the period determined to constitute “adequate notice” will depend on a number of factors including the employee’s age, seniority and length of service with the company. However, in extreme cases the period can extend up to 2 years. As such, the process of terminating employees without cause can be very expensive and must be carefully considered at the time of any initial investment if significant changes in employees are part of the investor’s plan for the business after completion of the investment.
Generally, work permits are only granted to foreign workers if there are no qualified Canadians available to fill available positions. However, there are a number of exceptions to this general rule and they must be carefully considered in light of the particular circumstances. However, the general availability of skilled and well-educated workers is one of Canada’s key strengths as a destination for doing business.
While this article sets out, in summary form, some basic considerations for anyone considering doing business in Canada, the way these and other issues are dealt with depends on the particular facts involved in any particular investment or business.