Spotlight On: Establishing or Acquiring a Business in Canada
December 15, 2022
Canada is open for business! Here are some of the main considerations to think about when doing business in Canada.
We work with many foreign clients expanding into Canada. Whether establishing a new entity or acquiring an existing business, there are some important matters to consider early on that we outline below.
The SkyLaw team has prepared a number of helpful articles, including a handy checklist of things to consider when you are incorporating a company in Canada, and a detailed guide on acquisitions in Canada that we have written for highly respected international legal publisher Chambers and Partners. Our team can be your principal Canadian point of contact for all of your questions about Canada.
First, Obtain Tax Advice
It is critical to get Canadian tax advice at the outset as well as tax advice in your local jurisdiction. We can help you find the right tax advisor in Canada. As an example, we often work with Crowe Soberman together with their global offices. You can find their guide to investing in Canada here.
Determining the Form of Your Canadian Business
Your tax advisor can help suggest the right structure for your Canadian business to take. There are two principal routes:
- Establish a new entity in Canada: There are a number of different types of entities in Canada, including corporations, unlimited liability companies and limited partnerships. See our Spotlight blog on incorporations for more details.
- Registering a foreign entity to do business in Canada: It may be desirable to have the foreign entity conduct business in Canada without setting up a new entity. This may take the form of a branch office. In order to do business in most provinces, an extra-provincial license will need to be obtained by the existing company from the applicable ministry. In addition, the foreign entity will need to appoint an agent for service in the province (either a corporation or an individual) who can receive correspondence on behalf of the Corporation.
How Decisions Get Made
Regardless of the form of your Canadian business, you should consider how decisions will get made and document important governance matters. For example, who will be signing the formation documents and government filings? Who will have the power to make decisions with respect to your Canadian operations? Who will be a signatory on the Canadian bank accounts?
If you are incorporating in Canada, consider who your directors will be. Some jurisdictions still require a percentage of the directors to be resident Canadians. More details about director residency requirements are available in our Spotlight blog about directors here.
The power of the directors to manage and oversee the business and affairs of a company may be transferred to the company’s shareholders through a unanimous shareholder agreement (where the company is wholly owned by one shareholder, this is called a “declaration”). More details are available in our Spotlight blog about shareholders’ agreements here.
Regulatory Review: Investment Canada Act and Competition Act
Every time a new business is started in Canada, consideration must be given to two key pieces of Federal legislation:
- The Investment Canada Act (similar to CFIUS legislation in the United States) applies where a non-Canadian makes an investment in a Canadian business, as defined in the statute. Acquisitions of a Canadian business where defined financial thresholds are exceeded are subject to review, which vary depending on the nature of the business. If the applicable thresholds will not be met, the purchaser must file an administrative notification with basic information regarding the transaction within 30 days of closing. The filing is also required any time a new business is established in Canada. The government has published a helpful overview with frequently asked questions here.
- Under the Competition Act (Canada) (similar to the Hart-Scott-Rodino Act in the United States), all parties to transactions that exceed the prescribed statutory threshold are required to file pre-merger notification filings with the federal Competition Bureau. A transaction that does not require pre-merger notification may still be subject to review by the federal Competition Tribunal where the transaction is considered to prevent or lessen competition substantially. More information can be found in the government’s procedures guide here.
In addition, the Federal government can conduct a national security review under the Investment Canada Act. The government’s guidelines for a national security review are here. If your business is in a sensitive area such as precious minerals or national defense, advice should be obtained at an early stage.
In June, 2023, amendments to the Competition Act will come into force which restrict unaffiliated businesses from agreeing not to hire or solicit each other’s employees, and from agreeing to fix salaries, wages, and other terms of employment of their respective employees. The Competition Bureau has issued explanatory guidelines about the changes, and is accepting comments on them until March 3, 2023.
Other Regulatory Matters
Certain industries are regulated in Canada and require permits to operate, including banks, airlines, telecommunications companies, mining operations, and other businesses. Furthermore, certain of these businesses also have limits on foreign ownership.
Other laws apply to all businesses and can impose significant requirements and should be considered at an early stage, including environmental legislation. Certain provinces have strict franchise law disclosure regimes.
Financing Your Canadian Business
Consider discussing with your tax advisor the best options for financing your Canadian business. Some considerations may include:
- How money should flow between your Canadian entity and non-Canadian entities;
- Transfer pricing; and
- Interest payments on debt and withholding tax.
GST and HST Registration
Consider if you (or any Canadian subsidiary) may need to register under the Excise Tax Act (Canada) with respect to goods and services tax and harmonized sales tax. Consider speaking with your Canadian tax advisor about which program accounts to add to your business number. More information about program accounts can be found here and here.
Employment and Immigration
Canada is an employee-friendly jurisdiction and advice should be obtained before entering into an employment relationship. Unlike the United States, Canada does not have a concept of “at-will” employees. Each province has strict workplace safety regulations and requires employers to obtain worker compensation insurance.
Consider if you may require any employment or corporate immigration advice in respect of any of your company’s representatives based outside of Canada who may be travelling to or working in Canada.
Privacy and Anti-Spam Legislation
Consider if you may require any advice around privacy and data protection, or commercial messaging.
In Ontario, the collection, use, and disclosure of “personal information”, which is any information about an identifiable individual, is regulated by the Federal Personal Information Protection and Electronic Documents Act (PIPEDA), which also governs data protection, privacy, and the rules applicable to using electronic documents in private sector commercial activities.
Most provinces also have specific legislation governing the privacy of personal health information.
Canada’s federal anti-spam law, known as “CASL”, strictly regulates commercial electronic messages, including emails, text messages, and other electronic messages sent with a business purpose. CASL provides for administrative monetary penalties for non-compliance.
Consider if any federal, provincial, or municipal business licences are required to engage in the types of business activities you plan to conduct.
If you plan to conduct import or export activities, obtain advice regarding the required permits and consider discussing the import/export program account with your tax advisor.
If you are considering acquiring or investing in real estate in Canada, obtain advice in the local jurisdiction, particularly in Quebec where real property is governed by the Civil Code of Quebec.
Consider confirming that any existing insurance policies are in force and adequate to cover your Canadian business and assets. Consider confirming that any director and officer insurance policies you have in place provide appropriate coverage of the board and management of any Canadian subsidiaries.
Corrupt Practices Legislation
Canada has legislation in place aimed at combating bribery and corruption, similar to the Foreign Corrupt Practices Act in the United States. Canada’s legislation can apply to acts outside of Canada.
We are happy to serve as the principal point of contact for clients from around the world when it comes to establishing a business in Canada. We can take care of the corporate and financing matters, and we can draw from our broad network of experts for any other considerations.
This blog post is not legal or financial advice. It is a blog which is made available by SkyLaw for informational purposes and should not be used as a substitute for professional advice from a lawyer.
This blog is subject to copyright and may not be reproduced without our permission. If you have any questions or would like further information, please contact us. We would be delighted to speak with you.
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