One of the most recent amendments to the Business Corporations Act (British Columbia) (the “BCA”) is the ability for a company to be incorporated in B.C. as an unlimited liability company (ULC). There are only two other jurisdictions in Canada that permit ULCs, namely Alberta and Nova Scotia.
Key Tax Advantages of ULCs for U.S. Corporations
The primary benefit of ULCs will be for U.S. corporations with operations in Canada because ULCs are meant to fall within the “check-the-box” rules under the Treasury Regulations to the U.S. Internal Revenue Code (the “Code”). Generally speaking, “check-the-box treatment allows U.S. resident investors access to a combination of Canadian and U.S. tax benefits that would not otherwise be available for investments in Canada using other corporate vehicles. More specifically, the ULC corporate vehicle allows for the flow through of income and losses of the ULC to its shareholders. It also allows a U.S. corporate group to achieve the same tax result as if a group tax return was permitted.
These key features can result in very significant tax deductions of the ULC, including interest expense, being treated as having been incurred by the shareholders of the ULC for U.S. federal income tax purposes.
Benefits of a B.C. ULC over ULCs from other Canadian Jurisdictions
A BC ULC has a number of advantages over ULCs formed under in either Alberta (AB ULC) or Nova Scotia (NS ULC).
Under the Business Corporations Act (Alberta), the liability of each shareholder of an AB ULC for any liability, act or default is unlimited and is joint and several in nature during the existence and operation of the AB ULC. On the other hand, the liability of a shareholder of a BC ULC arises only if that ULC itself is unable to pay its debts and liabilities on dissolution or liquidation. Anther big difference is that in Alberta, at least 25% of the directors must be resident in Canada. There is no similar requirement in B.C., therefore making it easier for non-residents to establish and operate a BC ULC.
The tax benefits of the NS ULC are similar to the BC ULC. The main difference is cost. The annual renewal fee for an NS ULC is CAD $2,750.00, whereas the annual renewal fee for a BC ULC is nominal.