Canada has weathered the recent period of international uncertainty and volatility better than most other advanced industrialized nations. It is among the world’s leading industrialized nations and is home to some of the globe’s most innovative and largest businesses. Canada has a highly skilled workforce and is a world leader in a variety of sectors, including manufacturing, high technology, energy, and natural resources.
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 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. However, this article is intended to provide only general guidance about doing business in Canada. Particular businesses or industries may also be subject to specific legal requirements not referred to in this article. For this reason, the reader should not rely solely upon this article in planning any specific transaction or undertaking, but should seek the advice of qualified counsel.
A corporation with share capital is the most common form of business entity in Canada and enjoys advantages 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 or in foreign countries may prefer to incorporate under federal law. This permits the corporation to carry on business in every province in Canada without being licensed by the provinces, although registration may still be required. Also, federally incorporated corporations may be more widely recognized and accepted outside Canada, though there is no legal basis for this perception.
When a corporation incorporates in a province, it must register and may be required to obtain an extra-provincial license in any other province 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 in some cases. Also, U.S. investors may be interested in the possibility of incorporating an “unlimited liability” corporation or company in British Columbia, Alberta, or Nova Scotia to achieve certain U.S. tax objectives. The Canada–U.S. tax treaty contains some adverse provisions that need to be dealt with in the case of unlimited liability companies.
Corporations and individuals may enter into partnerships in Canada. The relationship of the partners is established by contract and is also subject to applicable provincial laws. Some provinces require that partnerships be registered. 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.
Two or more parties may engage in a joint venture or syndicate where they collaborate in a business venture. Joint ventures are entirely a construct of contract law as there is no specific statutory definition or regulatory scheme for them. They are frequently used in industries such as construction and natural resources.
Organizations with foreign ownership may conduct business in Canada through branch offices, so long as theInvestment Canada Act and provincial registration and licensing requirements are complied with. A branch office operates as an arm of the foreign business, which may enjoy tax advantages from such an arrangement. However, the foreign business’s 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 (other than a British Columbia, Alberta, or Nova Scotia unlimited liability corporation or company) 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 cultural businesses, the Investment Review Division of Industry Canada (Investment Canada) administers the Investment Canada Act under the direction of the Minister of Industry. The Minister of Heritage is responsible for cultural businesses (i.e., business activities relating to Canada’s cultural heritage, such as publishing, film, video, music and broadcasting). In some cases investments are reviewed by both the Minister of Industry and Minister of Heritage where only part of the business activities of the Canadian business involve Canada’s cultural heritage.
Investments by non-Canadians to acquire control over existing Canadian businesses or to establish new ones are either reviewable or notifiable under the Investment Canada Act. The rules relating to an acquisition of control and whether an investor is a “Canadian” are complex and comprehensive. A reviewable transaction may not be completed unless the investment has been reviewed and the relevant minister is satisfied that the investment is likely to be of “net benefit to Canada.” The non-Canadian proposing the investment must make an application to Investment Canada setting out particulars of the proposed transaction. There is then an initial waiting period of up to 45 days; the minister may unilaterally extend the period for up to 30 days, and then only with the consent of the investor (although, in effect, this can be an indefinite period since, with a few exceptions, the investor cannot acquire the Canadian business until it has received, or is deemed to have received, the minister’s “net benefit to Canada” decision). If the waiting period is not renewed and the transaction is not expressly rejected, the minister is deemed to be satisfied that the investment is likely to be of net benefit to Canada. Failure to comply with these rules opens the investor to enforcement proceedings that can result in fines of up to C$10,000 per day.
Special review requirements and timing considerations apply to transactions, whether already implemented or proposed, which potentially raise national security considerations. The term “national security” is not defined in the Investment Canada Act. Where the minister has reasonable grounds to believe that an investment by a non-Canadian to acquire all or part of an entity (or to establish an entity) carrying on business in Canada could be injurious to national security, the minister may notify the non-Canadian that the investment may be reviewed for potential national security concerns.
The Competition Act is Canada’s antitrust legislation. It is legislation of general application and reflects classical economic theory regarding efficient markets and maximization of consumer welfare. It is administered and enforced by the Competition Bureau (Bureau), a federal investigative body headed by the Commissioner of Competition (Commissioner). The Competition Act may be conveniently divided into two principal areas: criminal offenses and civilly reviewable conduct (which includes merger regulation).
The main criminal offences in the Competition Act relate to conspiracy and bid-rigging. The conspiracy provisions prohibit competitors (or persons who would be likely to compete) to conspire or enter into an agreement or arrangement to fix prices; allocate sales, territories, customers, and markets; or fix or control production or supply. The bid-rigging provisions prohibit two or more bidders (in response to a call or request for bids or tender) to agree that one party will refrain from bidding, withdraw a submitted bid, or agree among themselves on bids submitted.
Certain non-criminal conduct may be subject to investigation by the Bureau and review by the Tribunal. The Tribunal is a specialized body that is comprised of both judicial and lay members. Reviewable practices are not criminal and are not prohibited until made subject to an order of the Tribunal specific to the particular conduct and party. Matters reviewable by the Tribunal include, among other things, non-criminal competitor collaborations, anticompetitive refusals to deal, exclusive dealing, tied selling, market restrictions, price maintenance, and abuse of dominant position.
All mergers are subject to the Competition Act, and thus to substantive review provisions and to enforcement procedures (mergers fall under the civilly reviewable matters provisions of the Competition Act). Additionally, mergers that satisfy certain prescribed thresholds must be notified to the Bureau, and certain statutory waiting periods must have expired (subject to certain exceptions) before a merger can be completed.
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. The four most commonly considered forms of organization used by a U.S. entity in establishing a Canadian business enterprise are (i) Sales representatives based in Canada; (ii) a Canadian branch of the U.S. entity; (iii) a Canadian subsidiary corporation; or (iv) a partnership.
Under the Canadian Income Tax Act (ITA) every non-resident person who carries on a business in Canada is required to file a Canadian tax return and to pay an income tax on its taxable income earned in Canada. However, subject to certain exemptions, U.S. enterprises qualifying for benefits under the Canada–U.S. Tax Convention (Convention) 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 generally will not have a permanent establishment in Canada by reason only of having sales representatives in Canada to offer products for sale, provided that these agents (i) do not have the authority to conclude contracts on behalf of the U.S. entity or (ii) are independent and acting in the ordinary course of their business. An 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 consolidated tax return of the parent corporation and deducted against income from other sources. In general, a branch may be useful where a “flow-through” structure is desirable from the U.S. tax perspective. An alternative would be to consider incorporation of an entity which might be treated as a branch for U.S. tax purposes, such as a British Columbia, Alberta, or Nova Scotia unlimited liability company. The use of such entities, however, may be adversely affected in some cases as a result of “anti-hybrid” rules in the Convention.
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 ITA, by the Convention and Canadian provincial tax legislation, to pay Canadian income tax on taxable income earned in Canada which 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 the Receiver General amounts from the wages and salaries of such persons.
If the Canadian business enterprise is carried on through a corporation incorporated in Canada (including a British Columbia, Alberta, or Nova Scotia 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. Where dividends are paid by the subsidiary corporation to a qualifying U.S. resident parent corporation that owns 10 percent or more of the voting stock, the Canadian withholding tax rate applicable to the dividends under the Convention is 5 percent (except in some cases where the subsidiary corporation is an unlimited liability company).
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 Labour Law
Employment and labour law in Canada is designed to regulate both the conditions of employment and the relations between employers and employees. While labour and employment matters are principally within provincial and territorial jurisdiction, the federal government has jurisdiction over certain industries that are viewed as having a national, international, or interprovincial character, such as banks, air transport, pipelines, telephone systems, television, and interprovincial trucking. All other employers are provincially regulated for the purpose of labour and employment matters. As a result, the vast majority of employers in Canada are required to comply with the employment standards, labour relations, and other employment-related legislation of each of the provinces in which it has operations.
In addition to these statutory obligations, employers are often also required to satisfy common law obligations owed to their employees in Canada’s common law provinces, and to abide by the Civil Code of Québec in Quebec. The most significant of these obligations is to provide employees with reasonable notice of the termination of the employment relationship without cause, which requires employers to provide written notice or pay in lieu of notice. Generally, an employee’s entitlement to notice of dismissal increases with his or her length of service.
Canada has comprehensive federal privacy legislation that applies to the private sector. In addition, certain provinces have enacted both comprehensive and sector-specific private-sector privacy legislation. The federal Personal Information Protection and Electronic Documents Act (PIPEDA) applies generally to all collection, use, or disclosure of personal information by organizations in the course of a commercial activity. “Personal information” is broadly defined in PIPEDA, and includes any “information about an identifiable individual,” whether public or private, with limited exceptions.
All organizations subject to PIPEDA must comply with a range of obligations when collecting, using, disclosing, and otherwise handling personal information. In addition, compliance with PIPEDA is subject to an overriding reasonableness standard whereby organizations may only collect, use, and disclose personal information for the purposes that a “reasonable person would consider are appropriate in the circumstances.” This reasonableness requirement applies even if the individual has consented to the collection, use, or disclosure of their personal information.
As Canadians become ever more vigilant about the state of the environment and insistent that offenders of environmental laws be held accountable, there has been an increasing degree of government regulation and corresponding activity intent upon protecting the environment. As a result, 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.
All levels of government across Canada have enacted legislation to regulate the impact of business activities on the environment. Environmental legislation and regulation is not only complex, but all too often exceedingly vague, providing environmental regulators with considerable discretion in the enforcement of the law. Consequently, courts have been active in developing new standards and principles for enforcing environmental legislation. In addition, civil environmental lawsuits are now commonplace in Canadian courtrooms involving claims over chemical spills, contaminated land, noxious air emissions, noise, and major industrial projects. The result has been a proliferation of environmental rules and standards to such an extent that one needs a “road map” to work through the legal maze.
The Charter of the French Language (Quebec) makes French the official language of Quebec, confers on every person the right to be communicated with in French, and imposes obligations on corporations and other entities (referred to as “enterprises”) carrying on business in Quebec. Thus, business names used in Quebec must be French, subject to exceptions allowing that a portion of the business name be in English. Laws and regulations are drafted in French and English, and legal proceedings may be taken or defended in French or English.
The French Language Charter also deals with the use of French in public areas, in social and public services, and in professional corporations as well as in labour relations and in day-to-day business. Enterprises that reach the 50-employee threshold in Quebec are also subject to francization requirements. Although Quebec government bodies will use French in dealing with Quebec residents and businesses, and local contracts will often be drafted in French, dealings with foreign investors and entities can take place in another language, particularly English as the prevalent language of international business. Additionally, most government services may be provided in English to English-speaking residents upon request.
This article originally appeared in Location Canada 2015, published by Area Development Magazine.