7 Tips for Foreign Entities Seeking to Incorporate a Canadian Subsidiary

7 Tips for Foreign Entities Seeking to Incorporate a Canadian Subsidiary

Incorporating a Canadian subsidiary can offer access to new markets, increased business opportunities, and potential tax advantages. However, the process of incorporating a subsidiary in Canada can be complex, with several legal and regulatory requirements to consider.

To help you navigate the process of incorporating a Canadian subsidiary, we've put together our top seven tips for foreign entities seeking to incorporate a Canadian subsidiary:

1. Hire a Canadian Lawyer and Accountant

Incorporating a Canadian subsidiary can be complex, so hiring a Canadian lawyer and accountant is important to help you navigate the process. A lawyer can help you understand the legal and regulatory requirements of incorporating a Canadian subsidiary. In contrast, an accountant can help you manage your finances, ensure compliance with Canadian tax laws, and seek to apply tax treaties to avoid double taxation.

2. Choose the Right Corporation

The first step in incorporating a Canadian subsidiary is to choose the right type of Canadian corporation. There are several types of corporations in Canada, each with its advantages and disadvantages. Some of the common types of Canadian corporations include:

1) Federal Corporations;
2) Provincial Corporations; and
3) Unlimited Liability Corporations ("ULC").

Each type of corporation has its own legal and regulatory requirements, so it's important to carefully consider your options before deciding.

For example, while Federal Corporations are frequently used within Canada, a significant disadvantage is the requirement that at least one director must be a Canadian resident. Thus, if a resident of Canada is not participating as a director of the Federal Corporation, the foreign entity will be unable to incorporate a Federal Corporation. Alternatively, a foreign parent company may incorporate a Provincial Corporation in British Columbia, as there are no director residency requirements.

The use of a ULC is a unique corporation for U.S. businesses expanding into Canada. A ULC can only be formed under the laws of Nova Scotia, British Columbia and Alberta. Shareholders of a ULC are generally insulated from liability for the debts and activities of the company. However, shareholders are liable for the ULC's debts and liabilities if the ULC liquidates or dissolves and cannot pay its debts and liabilities. Under certain circumstances, ULC's are deemed to be flow-through entities by the Internal Revenue Service ("IRS") for U.S. taxation purposes. In some cases, the flow-through tax benefit to a U.S. parent corporation can ease IRS reporting obligations and apply Canadian income tax as a foreign tax credit against any US income taxes payable.

3. Investment Canada Act Notification

If you are a non-Canadian, defined as an individual who is not a Canadian citizen or a permanent resident of Canada, you must file an Investment Canada Act Notification within 30 days of incorporating a new business in Canada. The Investment Canada Act Notification provides additional disclosure to the federal government to ensure that certain activities will provide a net benefit to Canada and do not interfere with our national security.

4. Register with Provincial and Federal Authorities

Depending on the type of business you plan to operate in Canada, you may need to register with provincial and federal authorities. This may include registering with the Canada Revenue Agency, as well as with provincial tax authorities and other regulatory bodies.
Further, you may need to obtain additional permits and licenses. This may include permits for importing and exporting goods and licenses for certain types of businesses, such as restaurants, bars, and other food establishments.

5. Obtain a Business Number and Register for GST/HST

To operate a business in Canada, you'll need to obtain a business number and register for the Goods and Services Tax/Harmonized Sales Tax (GST/HST). The business number is a unique nine-digit number that identifies your business to the Canadian government, while the GST/HST is a value-added tax that applies to most goods and services in Canada.

6. Open a Canadian Bank Account

To operate a business in Canada, opening a Canadian bank account will allow you to pay bills, receive payments, and manage your finances in Canadian dollars. Canadian banks' have vigorous procedures in place to identify and verify their clients. To ensure that your bank account is opened smoothly, you may need to employ the services of a local notary to assist in verifying your identity.

7. Consider Hiring Local Employees or Local Independent Contractors

If you are planning to operate a business in Canada, it may be beneficial to hire local staff. This can help you navigate the local business environment and provide access to local expertise and knowledge. Your lawyer can help you develop Employment Agreements, Non-Disclosure Agreements, and Independent Contractor Agreements which are governed by the laws of the province where the employee ordinarily resides.

Incorporating a subsidiary in Canada can be a wise business decision for foreign entities looking to expand their operations. While these tips provide some insight into the complexities, we understand that incorporating a subsidiary in Canada can be a daunting task. However, the process can be seamless and rewarding with the right approach and guidance.

A Cautionary Note

This article provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.


About the Author

Sankar Nair - Business Lawyer Victoria - Velletta, Pedersen, Christie

Written by Sankar Nair

Meet Sankar Nair, a skilled corporate lawyer and successful e-commerce entrepreneur. With over 14 years of experience in international business, Sankar has a proven track record of providing expert legal counsel to businesses of all sizes. From contract review to intellectual property protection, Sankar has the knowledge and experience to effectively navigate the legal landscape for his clients.