I have a growing number of US clients exploring the opportunities that the Canadian market has. In this blog I will provide some basic important information for US companies considering expansion into Canada.
- Incorporating a Canadian corporation is relatively straight forward. If you are looking to expand into the Ontario market, your two main options are to incorporate a company under the federal legislation – Canada Business Corporations Act or the provincial legislation – the Business Corporations Act (Ontario). Both pieces of legislation are substantively very similar. However, if a business intends to be in Ontario, the simplest option is to incorporate under the Ontario legislation because no further provincial registration is required in order for the company to carry on business in Ontario.
- If you want to use a specific name for the Corporation, you must obtain a NUANS name reservation report. This is a report that confirms that the exact corporate name is not currently in use (otherwise you would not be able to use this corporate name). It provides a list of similar names that are in use. Even if the proposed name is not used by someone else, you should still consider whether the proposed name is confusingly similar to any other name so that you avoid any kind of trademark or trade name dispute. You may also incorporate a “numbered” company. This just means that the name of the company will be a number – such as 1234567 Ontario Inc. In order for that company to then carry on business under a different name, it must register a business name which is done through the Province. A “master business license” is obtained which contains the business name that the corporation now owns.
- Just to clear up some confusion – there is no such thing as an “LLC” in Canada. An LLC – a “limited liability company” is commonly used in the United States. It is confusing because a regular Canadian corporation also provides the shareholders with limited liability. However, it is not actually called a “limited liability company” – it is simply referred to as a corporation. The main feature of an LLC in the US is that it carries limited liability for shareholders, but can be treated for tax purposes as a flow through entity (and not taxed as a regular corporation would be taxed). In Canada, we have something called a “ULC” which stands for “UNlimited liability company”. Why would you want a company that specifically does not provide limited liability for the shareholders? Great question. The answer is that it can be used in certain circumstances for beneficial tax planning.
- One issue that a US person/company needs to address is the requirement under the federal and provincial legislation for a Canadian company to have Canadian resident directorship. Specifically, one quarter of the board of directors must be a Canadian resident individual. In the case of a board of directors that is less than 3, at least one must be a Canadian resident. Some of my clients expanding to Canada already have Canadian resident individuals involved in the business. Others did not, and there is always a solution for that.
- In Canada, our sales tax is called the Harmonized Sales Tax (the “HST”). HST applies to supplies to many goods and services, but some types of goods and services are exempt or “zero-rated” (which means that they are technically taxable, but the tax rate is 0% (good deal!)). A company that will be making taxable supplies in excess of $30,000 per year must become registered for HST, and must collect and remit that HST to the Canada Revenue Agency (the “CRA”). HST is reported/remitted either monthly, quarterly or annually, depending on the circumstances.
- Back to the topic of directors. Directors of Canadian companies can be potentially subject to person liability in respect of a corporation’s obligations to remit certain types of taxes, such as employee source deductions and HST. This means that a director of a Canadian company must be very vigilant to ensure that all the reporting and remitting of these taxes is taken care of properly, otherwise the CRA may pursue a director in his or her personal capacity for those obligations of the corporation. Note that there is no director liability for corporate income tax.
- The Canadian corporation will, of course, be subject to corporate income tax on its profits. The corporate income tax rate in Ontario (combined Federal and Provincial) is currently 26.5% for a “general” corporation that is not a “Canadian Controlled Private Corporation” (a “CCPC”). A CCPC receives a reduced corporate tax rate on its first $500,000 of net income each year. For 2018, this reduced corporate tax rate is a combined federal and provincial rate of 13.5%. For 2019, it will be 12.5%.
There are, of course, many other things to consider when doing business in Canada. These are just some basic corporate starter points to be aware of.