Canada: Doing Business In Canada — A Legal Overview

Last Updated: January 31 2019
Article by Torkin Manes LLP

INTRODUCTION

Canada has always been a great place for non-Canadians to do business. Moreover, during the last twenty years, it has stood out among the world's nations as one of the most stable business environments, whether measured in terms of its currency, political climate, highly educated and trained workforce or ability to both develop and attract world-class talent.

At Torkin Manes LLP, we are proud of our involvement in working with our clients on developing new, and acquiring existing, Canadian businesses. We believe that foreign investment benefits both Canadians and the global economy. With this in mind, we have created Doing Business in Canada: A Legal Overview to highlight some of the fundamental issues that foreign businesses and decision-makers need to consider when evaluating Canada as a possible investment destination.

A SNAPSHOT OF CANADA

Canada is one of the most unique and enjoyable places in the world for a non- Canadian to explore. The same can be said of its business opportunities and economic landscape. Here we highlight certain elements that comprise the Canadian investment environment that may be relevant to any potential foreign investor's consideration of Canada as a place to do business.

The Land

In size, Canada is the second largest country in the world. It has more coastline than any other country reaching north to the Arctic, west to the Pacific Ocean and east to the Atlantic Ocean. Of perhaps greater interest is that its southern border with the United States is the longest two-nation border in the world and stretches for almost 8,900 kilometres or just over 5,500 miles.

Canada is made up of ten provinces and three territories. The provinces are (from west to east): British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Quebec, New Brunswick, Nova Scotia, Prince Edward Island and Newfoundland and Labrador. The territories are (from west to east): Yukon, Northwest Territories and Nunavut.

The Population

The population of Canada (as of the 2016 census) is approximately 35,000,000. Over two-thirds of Canadians live within 200 miles (or 322 kilometres) of the United States border, including those that live in the three largest Canadian cities: Toronto, Montreal and Vancouver, which together represent about one-third of the entire Canadian population.

The Economy

Canada has the tenth largest economy in the world with an affluent, high-tech industrial society, the overall output of which exceeds 1.5 trillion dollars. Canada is a party to various free-trade agreements, which includes the United States-Mexico-Canada Agreement (USMCA). It is one of the United States' largest trading partners and foreign supplier of energy, including oil, gas, uranium and electric power. Further, Canada's major banks are among the strongest in the world, owing to the Canadian financial sector's tradition of conservative lending practices and strong capitalization.

The Political and Legal Structure

Canada operates as a western style democracy built upon the British parliamentary system of government. Each of the provinces and territories has its own legislature and Canada's constitution delineates responsibilities and rights between its national and provincial/ territorial governments, with the bulk of such responsibilities and rights falling into one sphere or the other (although some areas of regulation are shared). The English Common Law underpins the federal law of Canada and the laws of all provinces and territories, save for the laws of Quebec which are based on the Napoleonic Civil Code.

The Language

Canada has two official languages, English and French, with its residents largely being able to demand services from the federal government in either language. However, the vast majority of French speaking Canadians reside in the Province of Quebec.

BUSINESS STRUCTURES

Canada, like most jurisdictions, provides for various vehicles through which a person can conduct business. Although it is possible to do business in Canada without establishing a formal presence here, there are often regulatory, tax and/or practical reasons why one should adopt a formal Canadian structure. The following is a brief summary of different types of business structures available in Canada.

Sole Proprietorship

A sole proprietorship is a business method by which an individual conducts business on his/her own account. All benefits, including assets and income, as well as all obligations and liabilities, belong exclusively to the sole proprietor.

Corporations

A foreign enterprise seeking to conduct business in Canada may wish to establish a subsidiary corporation in Canada that is owned, in whole or in part, by the foreign enterprise. Generally, a foreign enterprise can elect to incorporate its subsidiary either federally under the laws of Canada or provincially under the laws of any one of its provinces or territories, however, certain corporate statutes impose a minimum residency requirement for directors.

Unlimited Liability Companies (ULC)

In contrast to the general form of corporations, where the shareholders do not incur liability for the debts and liabilities of the corporation, in a ULC, the shareholders will be liable for the debts and liabilities of the ULC if the assets of the ULC are insufficient to satisfy the debts and liabilities of the ULC upon liquidation, dissolution or bankruptcy. Generally speaking, ULCs are utilized by Americans to hold Canadian assets due to the more favourable tax treatment that results than if the assets were held by a corporation. Only the statutes of three Canadian provinces, Alberta, British Columbia and Nova Scotia, provide ULCs.

Branch Operation

Operating a Canadian branch of a foreign business does not involve the creation of a separate entity, rather, it is the establishment of a Canadian-based office. For a foreign business to operate through a branch operation in Canada, the branch must be registered as an extra-provincial entity in each province and territory in which it carries on business. Branch operations are subject to many of the same federal and provincial or territorial disclosure and filing obligations which apply to Canadian corporations.

Partnerships

A partnership is a contractual relationship between two or more persons carrying on business together with a view to earning a profit. There are three types of partnerships typically utilized to conduct business depending upon the degree and type of liability exposure of the partners, namely, general partnerships, limited partnerships and Limited Liability Partnerships.

General Partnerships

In a general partnership each partner is an agent of, and can create legal obligations for, the other partner(s). Given that the partnership is not a separate legal entity, creditors of the partnership can look to the partners and their personal assets to satisfy the obligations owing to the creditor. Unless the partnership agreement provides otherwise, the law assumes that the partners will share equally in the profits and losses of the partnership.

Limited Partnerships

The limited partnership and general partnership are similar and, generally speaking, the laws governing general partnerships also apply to limited partnerships. The key difference however is that a limited partnership requires a general partner and a limited partner(s). The general partner is responsible for the operation of the partnership business and is liable for all of the obligations and debts of the partnership. The limited partner(s) is essentially a "silent partner", that is, an investor who invests money into the business but does not participate in the active management of the business. The limited partner(s) liability is limited to its investment in the partnership but its personal assets will not be at risk.

Limited Liability Partnerships

The limited liability partnership has similarities to both the general partnership and the limited partnership. All partners may participate in the active management of the business but a partner will not be liable for the negligent acts or omissions of any other partner. This limitation does not extend to breach of contract or the debts or liabilities of the limited liability partnership generally. A limited liability partnership is used only in the context of professional partnerships such as those of accountants and lawyers.

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