Canada/U.S. Cross-Border Bulletin: Foreign Enterprises Establishing Canadian Subsidiaries: PEO Considerations

Last Updated: March 2, 2020

Non-resident businesses often enter the Canadian market prior to forming a domestic legal entity. Without valid incorporation, however, non-resident businesses operating in Canada may risk impeding their business operations by limiting their ability to perform key functions or may risk running afoul of Canadian tax laws. As such, given the relative expediency of incorporation in Canada, both federally and provincially, foreign enterprises looking to operate in Canada should consider incorporation as a possible market entry strategy.

This bulletin provides a summary of the overall process and some key considerations concerning incorporating a business in Canada both federally under the Canadian Business Corporations Act (“CBCA”) and provincially under the Ontario Business Corporations Act (“OBCA”).

PRELIMINARY CONSIDERATIONS IN DETERMINING WHETHER TO INCORPORATE:

In determining whether to incorporate a subsidiary in Canada, two considerations are especially relevant:

(a) the tax consequences of incorporating a corporate subsidiary in Canada versus setting up a Canadian branch of a foreign entity without incorporation; and

(b) the ease of winding up a corporation if the shareholders wish to exit the market.

Tax Implications

From a tax perspective, incorporated subsidiaries are treated differently than non[1]incorporated branches of a foreign entity. Incorporated subsidiaries are considered residents of Canada and are thus subject to tax on the Canadian entity’s income. Canadian subsidiaries are also not subject to branch profits tax. However, a 5% withholding tax is payable on dividends paid to U.S. recipient parent companies, provided that certain conditions in the Canada-U.S. tax treaty are met.

Branches of foreign corporations carrying on business in Canada are subject to income tax on Canadian-source business income at the same rates that apply to Canadian residents and are also subject to branch profits tax generally levied at a rate of 25%. These and other tax implications should be considered in-depth before making a decision to form and organize a corporation.

Winding Up the Corporation

Some foreign enterprises may be deterred from incorporating subsidiaries in Canada by the fear of a complicated wind up process if and when the company decides to exit the Canadian market. The voluntary winding up of a corporation in Canada, however, is a relatively simple process. To wind up a corporation formed in the Province of Ontario, Articles of Dissolution must be filed in-person or via mail along with the consent of the Ministry of Revenue, a cover letter, and a $25.00 fee. Conversely, Articles of Dissolution can be filed online on the Government of Canada’s website to wind up a federal corporation. In considering a potential wind-up of a corporation, it is important to bear in mind other corporate requirements that may also be relevant in the circumstances, such as paying outstanding debts and filing a final tax return.

Jursidiction of Incorporation: Federal vs. Provincial (Ontario)

Business owners looking to incorporate in Canada must decide whether to incorporate federally or provincially. There are advantages and disadvantages to each type of incorporation, and the decision should evolve around whether the jurisidiction of incorporation meets the needs of the subsidiary’s intended operations. Federal incorporation, for instance, allows the entity to carry on business in any province or territory in which it is registered under the same business name but entails more annual paperwork and higher costs. Provincial incorporation is generally sufficient for businesses looking to establish a Canadian presence or perform specific functions solely in Ontario.

STEPS TO INCORPORATING A CANADIAN SUBSIDIARY

1. Naming the Corporation

The first step in incorporating a subsidiary is to select a business name. A corporate name search known as a “Nuans” search geared towards the relevant federal or provincial jurisdiction is needed to use a non-numbered corporate name (or a “word name”). These searches can be conducted online, with results available within 3 hours and valid for 90 days, and pre-approval of the proposed name can also be requested. Business names for Ontario corporations must be registered and a Master Business Licence granted. This process can be completed online and may take up to two business days.

To use a numbered corporation name, a Nuans search is not needed — instead, a 9-digit numbered company name can be requested on the articles of incorporation form.

2. Filing the Articles of Incorporation

The process for filing the subsidiary’s Articles of Incorporation is much the same for federal and provincial incorporation. In both instances, filing can be done online by following the instructions on the applicable form or, if preferred, filed in[1]person. Federal Articles of Incorporation can be filed on the Government of Canada’s website for a $200.00 filing fee, while Ontario articles of incorporation can be filed through one of the Ministry of Government and Consumer Services’ authorized providers for a $300.00 filing fee.

When preparing to file your company’s Articles of Incorporation, ensure you are prepared with the required information, namely, the business name, registered office address, structure of directors, officers and shareholders (and names and titles thereof), and intended capital structure. It should also be noted that any elected or appointed directors must meet the requirements of office, i.e. being a capable individual at least 18 years of age and not of bankrupt status, and that 25% of the company’s directors must be resident Canadians as defined in the relevant CBCA or OBCA provisions.

3. Obtaining a Business Number

Subsidiaries incorporated in Ontario or federally will be automatically assigned a 9-digit business number from the Canadian Revenue Agency (“CRA”) that is required to perform certain functions, i.e. charging customers GST/HST where the business makes over $30,000.00 per year, making payroll deductions, and engaging in import/export activities. Generally, the Business Number will be automatically mailed to the registrant within 3-5 Business Days upon the formation of the corporation without any further action by the incorporator. Depending on the type of activities the corporation will engage in, the CRA’s Business Registration Online tool should be used to apply for the following CRA program accounts, as applicable:

• GST/HST (RT): required if the subsidiary will be collecting GST/HST;
• Payroll Deductions (RP): required if the subsidiary pays employees;
• Corporation Income Tax (RC): required for all corporations; and
• Import-Export Program (RM): required if the subsidiary imports goods or sells goods/services abroad.

It should be noted that other CRA program accounts exist which may be required for businesses operating in niche areas, i.e. air carriers, registered charities, or exporters of softwood lumber.

CONCLUSION

Overall, forming a corporate subsidiary or other entity in Canada is relatively expedient and should be considered by foreign enterprises looking to establish or expand their business operations in the Canadian market.

To discuss how incorporation of a subsidiary and other inbound investment activities might affect your legal compliance and business strategy or how we can help you with your cross-border legal issues, please contact Allan Ritchie or any member of our cross-border team.