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Canada
Company formation in brief
All businesses are incorporated and registered in Canada either under the Federal Corporations Act, ten different provincial corporation laws, or three different territorial corporation laws.
Canadian legislation provides for the possibility of establishing enterprises of such organizational and legal forms as Partnership and Corporation.
A partnership in Canada is an agreement between two or more persons who agree to combine their efforts to carry out business activities for the purpose of making a profit.
It is an unlimited partnership that can be established by an unlimited number of partners without any permission from the Government of Canada and has the following features:
• can be established by an unlimited number of partners without obtaining any permission from the Government of Canada;
• the establishment of a partnership does not require payment of any minimum authorized capital;
• all partners bear unlimited liability for the debts and obligations of the enterprise in accordance with the partnership agreement.
• each partner bears unlimited liability to third parties for all debts of the enterprise in such a way that if the partnership's assets are insufficient to meet the claims of creditors, the latter has the right to choose any partner to collect the debt from him;
• the financial year coincides with the calendar year;
• Partnership profits are treated as income of individual partners, which are taxed at the appropriate income tax rates.
It is a partnership that is registered with the relevant Provincial Agency and has the following features::
• the partnership is subject to registration with the appropriate provincial agency;
• the establishment of a partnership does not require payment of any minimum authorized capital;
• a partnership includes one or more general partners with unlimited liability and one or more partners with limited liability who contribute capital and participate in the sharing of the profits and losses of the enterprise within the limits of their shares;
• partners with limited liability do not take part in the management of the enterprise, otherwise they will lose the status of limited liability;
• the financial year coincides with the calendar year;
• Partnership profits are treated as income of individual partners, which are taxed at the appropriate income tax rates.
Canadian corporations can be conditionally divided into two groups - open and closed corporations, which, in turn, have the following features::
• Canadian-Controlled Private Corporation is a closed corporation, the majority of the capital of which is owned by residents of Canada and is not controlled by non-residents or public Canadian corporations. This is very important from a tax point of view. For example, in order to be eligible for small business tax benefits in Canada, at least 51% of the corporation's capital must be owned by residents of Canada;
• Other Private Corporation is a closed corporation, the majority of the capital of which is not owned by residents of Canada and is not controlled by residents of Canada;
• Public Corporation is a public corporation, whose shares are freely traded on the Canadian stock markets;
• Corporation controlled by a Public Corporation is a corporation controlled by a public corporation (subsidiary of a public corporation);
• Other Corporation is any other corporation other than the four types of corporations listed above, for example, a cooperative.
For a potential investor in Canada, the choice of one or another type of corporation is very important, since a number of administrative and organizational factors can significantly distinguish one corporation from another. For example, a federal corporation is allowed to conduct business throughout Canada, while a provincial or territorial corporation is only allowed to operate within the province or territory of registration (and must maintain an office in the province or territory of registration). In order for provincial and territorial corporations to operate outside their jurisdictions, they need to obtain the appropriate permits and licenses.
A corporation can be incorporated without paying any minimum share capital and has the following features::
• shareholders (with the only exception, which will be discussed below) have limited liability for the debts and obligations of the enterprise;
• the issue of shares with par value is not permitted under most corporate incorporation laws in Canada;
• in order to issue shares for public sale, the public corporation must comply with various requirements of the Federal and Provincial Securities Commissions of Canada, for example, issue a preliminary prospectus;
• closed corporations may include no more than 50 shareholders who are not entitled to offer shares for public sale;
• the number of shareholders of open corporations is not limited;
• Generally, all corporations are subject to an annual audit requirement. Exceptions apply (in some cases) to small, closed corporations. For public corporations, there are additional reporting requirements, including a quarterly report;
• There is no fixed fiscal year for corporations, although for public corporations it usually ends on December 31st. Many closed corporations opt for the end of the year between August and December for this purpose for more efficient income tax planning;
• corporations are governed by a board of directors. Provincial and federal corporations may have one director, but a majority on the board of directors must be Canadian residents, except as noted below (*). The directors have absolute authority over the appointment, position, and dismissal of agents, officers and employees of the corporation;
• the director is personally liable to shareholders or creditors for negligence in work or breach of obligations.
The exceptions (*) we have referred to above are a corporation registered in the province of Quebec and a corporation with unlimited liability registered in the province of Nova Scotia - Nova Scotia Unlimited Liability Corporation. Nova Scotia is the only province in Canada where unlimited companies can be established.
When a foreign company needs to open a branch in Canada, investors can consider this form of presence as an extra-provincial corporation in the province of Ontario, where more than half of Canadian financial and manufacturing corporations are concentrated.
Upon proper registration in Ontario, the foreign company receives an Ontario extra-provincial license with an Ontario Corporation number and Ontario extra-provincial corporation status. The license entitles you to open an office, bank account and conduct business in and from Ontario with all other Canadian provinces and foreign companies.
To register in Ontario, every foreign company must have an Ontario service agent who is a resident of Ontario.
It is important to understand that a Canadian extra-provincial registration does not create a separate Canadian legal entity. As such, a foreign company incorporated as an Extra-Provincial Corporation in Ontario has no Canadian tax liability when the company does business outside of Canada.
• offshore and onshore companies from any jurisdiction can be registered in Ontario and receive EPC status
• EPC status in Ontario improves the image of foreign companies
• No restrictions on the residency of directors, officers and shareholders of the EPC in Ontario
• EPC can open a bank account and office and run their business in Ontario
• No tax liability in Canada when an EPC does business outside of Canada
• No tax return required when the EPC is doing business outside of Canada
• All business expenses (advertising, salary, office rent, etc.) are deducted from taxable income earned in Ontario
• No need to hold an annual meeting in Ontario
An EPC in Ontario is required to pay Canadian income tax on all income earned in Canada.
When a company operates outside of Canada, it does not have a Canadian tax liability as a foreign entity.
All business expenses, including salaries paid to employees, directors' fees, contractual payments paid to sole proprietorships, partnerships, and corporations, advertising and other business expenses are deducted from corporate taxable income.
The EPC is required to file an annual corporate tax return in Canada if it does business in Canada.
The declaration must be filed within 6 months after the end of the corporate financial year. Income tax is payable 2 months after the end of the corporate financial year.
If Ontario EPC does not do business in Canada, filing a return is not required.
Taxation in Canada is based on the principle of residence, that is, it depends on where exactly (in Canada or abroad) directors make decisions, manage and control the activities of a Canadian enterprise.
Corporate and personal income (including capital gains and excise duties) is taxed in Canada at the federal and provincial levels.
Municipal governments in Canada do not have the authority to tax profits, mainly by levying tax on property only.
In general, all income earning expenses are deductible in Canada from taxable income. Non-deductible expenses include interest charges on taxes, fines, 50% of the cost of creating comfortable conditions in the interests of the business, depreciation of fixed capital and fixed capital expenses.
Canadian-Controlled Private Corporation (a closed corporation with Canadian participation) is eligible to some tax deductions for small business.
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