There are several different vehicles available for conducting a business in Canada, each with its own advantages and disadvantages. A foreign entity looking to carry on business here should consider key factors, such as tax and liability issues, in selecting the most appropriate one.

For foreign entities looking to carry on business in Canada, recent amendments to Canada’s business statutes have (among other things) eased director residency requirements and further facilitated setting up a branch or subsidiary in Canada. Below, we provide an overview of the pros and cons of various forms of business organization in Canada.

Branch versus Subsidiary Operation

A Canadian subsidiary may not generally be consolidated with other operations for foreign tax purposes. Consequently, in the initial period when losses may be expected, starting a business through a branch operation would permit losses in Canada to be offset against income in the home jurisdiction.

Use of a branch operation would require an application for an extra-provincial licence describing the structure of the applicant and designating an “agent for service” in the province. The business or corporate name under which the licence is to be granted must be approved by the applicable provincial authority.

Since the use of a branch subjects the foreign corporation to provincial and federal laws, consider first creating a wholly owned subsidiary in the home jurisdiction of the foreign corporation. That subsidiary would then carry on business in Canada through a branch. Depending on the laws in the home jurisdiction, the foreign parent might then avoid direct liability for actions of the Canadian operation, and might still be able to consolidate any losses of the Canadian branch into its own financial statements for tax purposes.

Flow-through Entities

In some situations, for U.S. tax reasons, a U.S. investor will want to hold its Canadian interests through a “flow-through entity.” While this objective is not usually possible with a Canadian or provincial corporation, the provinces of Alberta, British Columbia and Nova Scotia permit the creation of an “Unlimited Liability Company” (ULC). We understand that a ULC is treated in the U.S. as the equivalent of a partnership or “check the box” flow-through entity.

Federal versus Provincial Incorporation

If the foreign entity decides to incorporate a Canadian subsidiary, the subsidiary could be incorporated as a federal corporation under the laws of Canada, or as a provincial corporation under the laws of one of the provinces of Canada. Such incorporation is, generally speaking, a very simple process and does not require any substantive government approvals. A simple filing is necessary and the corporation must be registered with various tax (and other government) bodies. The capitalization of a corporation is a matter of private choice. No approvals are required, although there are tax rules that affect these choices. Share capital and other financial information about the corporation does not have to be publicly disclosed unless the corporation is a publicly-listed company.

The Canada Business Corporations Act (CBCA), which was extensively revised in 2001, applies to federally incorporated businesses. Canada’s 10 provinces have comparable legislation, although their laws differ in various respects. Generally, a federal corporation has the capacity and the power of a natural person and may carry on business anywhere in Canada and use its name in any province. Note that all provinces regulate the corporate activities of federal corporations operating in their jurisdiction through laws of general application requiring registration, the filing of returns and the payment of fees.

A federally or provincially incorporated business must register or obtain an extra-provincial licence in each province in which it carries on business (other than, for a provincially incorporated business, the province in which it was incorporated). If the name of the corporation is not acceptable in the province where the application or licence is being made (for example, because a corporation with a similar name is already registered in that province), registration may not be granted. In the Province of Québec, a corporation must either have a bilingual name or a French version of its name. For more information, see Chapter 17, "Doing Business in Québec".

Meetings of the directors of both federal and, for example, Ontario corporations may be held either in or outside of Canada; however, in the case of Ontario corporations, the articles or bylaws of the corporation must specifically provide for such meetings.

Directors’ Residency Requirements

For most CBCA (federally incorporated) corporations, the Canadian residency requirement is 25% at the board level. (There is no residency requirement at the board committee level.) The minimum number of resident Canadian directors that must be present for business to be transacted at a board meeting is also 25% for CBCA corporations unless the absent Canadian director (whose presence would otherwise be required) approves the business transacted at the meeting in writing or by electronic means.

For boards with fewer than four directors, there must be at least one resident Canadian on the board. For business to be transacted at a board meeting, this member must be present or, if absent, he or she must approve the business conducted at the meeting in writing or by electronic means. For CBCA corporations to which statutory or regulatory Canadian ownership requirements apply, a majority of the board (and board committee) members must be resident Canadians.

Note that some foreign investors choose to incorporate in New Brunswick, Yukon or Nova Scotia. The applicable business corporation statute in each of these provinces does not have a director residency requirement.

For more information on directors’ responsibilities in Canada, you can download a copy of our guide, “Corporate Governance in Canada” by visiting the “Publications & News” section of

Partnerships and Joint Ventures

The use of a partnership or joint venture, in combination with one or more persons or corporations in Canada, may be an attractive option primarily for tax reasons. If a non-resident holds its partnership or joint venture interest through a subsidiary incorporated in Canada, the same tax considerations as are noted above for subsidiaries are relevant. Participation of a non-resident in a partnership or joint venture directly (for foreign tax or other reasons) is equivalent to operating through a branch in Canada. The non-resident partner must obtain an extra-provincial licence in each province where the joint venture or partnership carries on business.

A detailed partnership agreement is customary in the case of a partnership, in part to avoid certain legislative provisions that would otherwise apply. Limited partnerships are commonly used for investment purposes to permit tax deductions for limited partners while retaining their limited liability. Structuring the partnership so that the general partner (with unlimited liability) is a corporation preserves all of the limited liability aspects of the corporate form. Ontario’s Limited Partnerships Act, for example, is similar to comparable statutes in other provinces and in various states in the United States.

True joint ventures or co-ownership arrangements, commonly involving one or more corporations, avoid the unlimited joint and several liability applicable to partners. They also permit the venturers or co-owners to regulate their tax deductions without being forced to do so on the same basis as other co-venturers. (This would not be possible in the case of a partnership.) A joint venture agreement must be carefully drafted to ensure that the venture is not considered a partnership.

Franchising and Licensing

A licence or franchise may be granted directly by a non-resident carrying on business in a foreign country to a Canadian licensee or franchisee. The operation would be run from outside Canada, with the licensee or franchisee in Canada being an arm’s-length entity operating in Canada. There would be no need for a separate Canadian business structure. Provided that the non-resident did not carry on business in Canada for Canadian income tax purposes, the non-resident would receive income from its Canadian resident licensee or franchisee, less any applicable Canadian withholding taxes.

Alternatively, a Canadian entity could be set up through which Canadian licences or franchises may be granted; this entity would parallel its foreign parent’s activities. For a non-Canadian not already operating in Canada in this field, the creation of such an entity would require notification under the Investment Canada Act and may require review. For more information, see Chapter 5, "Regulation of Foreign Investment in Canada". Regardless of the method chosen, the licensor’s or franchisor’s intellectual property (such as trade-marks, patents and copyright) must be properly protected in Canada.

Franchise Disclosure

The provinces of Alberta, Ontario and Prince Edward Island require a franchisor to deliver a prescribed form of disclosure document to a prospective franchisee before it can grant a franchise. (The province of New Brunswick has enacted franchise disclosure legislation that is not yet in force.) Current business practice for many national franchisors is to prepare a combined disclosure document for use in the three disclosure provinces and on a voluntary basis in other provinces in Canada.