What you Need to Know to Incorporate a Canadian Subsidiary Corporation

September 4, 2012


One option for a foreign entity seeking to do business in Canada is to create a Canadian Subsidiary Corporation. An advantage of a subsidiary over a branch structure is that a subsidiary allows the foreign entity to portray a “made in Canada” business to the Canadian public, who would generally prefer doing business with a Canadian entity over a foreign entity, all other things being equal.

Corporations in Canada are primarily of three types: (a) business corporations with share capital; (b) non-share capital corporations (not-for-profit or charitable); and (c) statutory corporations (banks). Many jurisdictions in Canada also have legislation that governs the incorporation and operation of cooperative corporations which are found most often in connection with agricultural undertakings. The predominant form of business organization in Canada is the corporation with share capital. Corporations with share capital are the focus of this posting.

Corporations in Canada can be incorporated either under the federal Canada Business Corporations Act (“CBCA”) or under the equivalent provincial or territorial legislation. Both federal and provincial corporations can be privately held corporations or can be publicly held corporations. Public corporations, or reporting issuers, are governed by the applicable provincial securities legislation. It is important to keep in mind that a corporation need not necessarily be traded on a securities exchange such as the TSE to be considered a public corporation. Once a corporation meets certain criteria (including the requirement to file a prospectus or an offering memorandum) it will be considered a “public corporation” and will in turn be required to adhere to provincial securities legislation.

Incorporation under a provincial jurisdiction will entitle a corporation to operate within that particular province and obtain the exclusive right to use its registered business name within that province. A provincially incorporated corporation, however, will be required to register extra-provincially in all other provinces in which they are carrying on business in and such extra-provincial registration will only be permitted if the name is available for use in that province. A screening process exists to ensure that business names are not too general or misleading with names being pre-cleared for use prior to incorporation.

In contrast, incorporation under the federal jurisdiction allows the Canadian Subsidiary Corporation to carry on business in each province or territory across Canada (as long as it extra-provincially registers in each such province that it has activities), as well as securing the exclusive use of its business name in all provinces and territories across the country. Another way to protect a business name or logo across Canada is to register that name or logo as a trademark under the federal Trademarks Act.

While at a first glance, provincial registration may seem a bit onerous and less attractive, provincial registration may in fact be advantageous to a foreign entity, especially since certain provinces do not have residency requirements in respect of a corporation’s directors. Directors’ residency requirements are discussed in detail below.

Incorporation procedures for both federal and most provincial corporations include the filing of the articles and by-laws of the corporation with the applicable corporate registry office and can generally be completed within a day provided that the corporation’s name has been approved. Provincial and federal corporation filing fees are moderate and consistent with the incorporation costs in most countries.[1]

Directors and Directors’ Liability

The directors are responsible for the management of a Canadian Subsidiary Corporation and have a fiduciary duty which requires that they act honestly, in good faith and in the best interest of the corporation. Provincial and federal legislation provides that directors are expected to act with due care, diligence and skill and can be found to be personally liable in a variety of circumstances, including, causing or permitting environmental damage or offences, any unpaid employee wages, vacation pay or pension contributions, as well as a corporation’s failure to remit source deductions or income taxes deducted from employees wages to any of the federal, provincial or territorial levels of government.

Recently, changes were made to Canada’s Criminal Code in order to deal with an organization’s (which definition includes, inter alia, both corporations and partnerships) accountability for the commission of criminal offences. Some of the highlights of these changes include:

  • criminal liability of organizations will no longer depend on a senior member of the organization with policy-making authority (i.e. the “directing mind” of the corporation) having committed the offence;
  • the physical and mental elements of criminal offences attributable to organizations will no longer need to be derived from the same individual;
  • the class of personnel whose acts or omissions can supply the physical element of a crime attributable to an organization was expanded to include all employees, agents and contractors;
  • for negligence based crimes, the mental element of the offence will be attributable to organizations through the aggregate fault of the organization’s senior officer (including members of management
    with operational and policy making authority);
  • for crimes of intent or recklessness, criminal intent will be attributable to an organization where a senior officer is a party to the offence or where a senior officer has knowledge of the commission of the offence by other members of the organization and fails to take all reasonable steps to prevent or stop the commission of the offence; and
  • an explicit duty was established on the part of those with responsibility for directing the work of others, requiring such individuals to take all reasonable steps to prevent bodily harm arising for such work.

Another area that can attract liability is conflicts of interest. As a director of a Canadian Subsidiary Corporation, a fiduciary duty is owed by the director to the corporation and as a result, a director is required to disclose all situations where he or she is in a conflict of interest position by virtue of a personal interest in a material contract with the corporation or in situations where opportunities have been gained as a direct result of information learned in the course of being a director of the corporation. Failure to disclose a conflict of interest and to refrain from voting on such issues may result in a director being held personally liable if they attempt to take advantage of a business opportunity that the corporation was seeking even if the director resigns prior to pursuing the opportunity and the corporation suffers no demonstrable loss.

Generally speaking, standard liability insurance will generally cover a director’s liability provided that they acted honestly, in good faith and with a view to the corporation’s best interest. A director who can demonstrate that they conducted an appropriate level of due diligence prior to the conduct or action in question will generally not be found personally liable except in the case of unpaid employee wages.

Corporations can indemnify officers and directors for actions taken on behalf of the corporation; however, breaches of an officers or directors fiduciary duty owed to the corporation cannot be indemnified. Corporations can also obtain liability insurance which will protect directors and officers from any liability incurred so long as the officer or director acted honestly and in good faith with a view to the best interests of the corporation. While liability insurance policies are a critical tool in protecting officers and directors, liability insurance policies will not cover all situations, including cases of fraud, criminal acts, conspiracy or human rights violations, as well as claims that arise out of statutory liabilities and claims for fines or penalties imposed by law.

Canadian Residency Requirements for Directors

Currently, five provinces and three territories (British Columbia, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Yukon, Northwest Territories and Nunavut) do not require a majority of a corporation’s directors be resident Canadians. Other provinces require 25% majority or at least 50% of the directors be residents of Canada. Under Alberta, Saskatchewan and the federal jurisdiction, 25% of a corporation’s directors must be resident Canadians except where the corporation has fewer than 4 directors, in which case at least one director must be a resident Canadian. Recently, there has been evidence of a trend towards easing the residency requirements for directors at both the federal and provincial level.

The issue of residency of a corporation’s directors is generally dealt with in one of three manners by foreign entities. One option is to have professional advisors serve as nominee directors of the Canadian Subsidiary Corporation with the appropriate indemnity agreement and directors liability insurance to cover the directors’ potential liability. The second option is to simply select a jurisdiction in which no directors’ residency requirements exist (and extra-provincially register in the province(s) where the business activities are being carried on) thereby avoiding the issue altogether. The third option is to incorporate under a provincial jurisdiction that does have directors’ residency requirements but to have what is known as a unanimous shareholder agreement (“USA”) put into place which removes all of the directors powers and confers them onto the shareholders of the corporation.

One feature of the corporate law of Canada and most of its provinces and territories is the availability of a USA. A USA is generally put into place at the time of incorporation and sets out procedures for the management of the business of the corporation, regulates the rights and obligations of shareholders to each other and can include mechanisms for dealing with the sale or transfer of a shareholder’s shares. Unlike a voting trust agreement which is often employed in the US, a USA does not function as an agreement between shareholders with respect to how they will vote; rather, a USA can also limit the powers of a corporation’s directors to manage the corporation’s business by transferring the powers of the corporation’s directors into the hands of the corporation’s shareholder(s). This effectively results in a corporation’s shareholder(s) having control and responsibility for the management of the corporation. Foreign entities that are forced to nominate certain directors in order to comply with the Canadian residency requirements often elect to institute a USA.

Shareholders and Shareholders Limited Liability

A corporation under Canadian law is recognized as a legal person in its own right, separate and distinct from its shareholders and having a perpetual existence. As such, the general rule is that shareholders in Canada enjoy limited liability. The corporate statutes expressly stipulate that shareholders are not generally, in that capacity, liable for any liability, act, or default of the corporation.[2] The corporate statutes, however, also expressly create a number of exceptions to a shareholder’s limited liability protection, such as receipt by a shareholder of an improper return of capital, an improper dividend or share redemption payments. In addition, the courts have developed mechanisms for finding shareholders to be personally liable for certain acts or omissions. These incursions by the courts into limited shareholder liability are loosely tied together under the expression “piercing the corporate veil”. The courts have generally held that the remedy of piercing or lifting the corporate veil is to be used only in the most exceptional circumstances, such as cases involving fraud or flagrant injustice, a corporation being used as a sham for the individuals behind it, or based on principals of agency where a person is held liable as principal for the acts of a corporation.

Shareholders of a corporation have a variety of remedies available to them in circumstances where they believe the corporation’s interests are not being served adequately by its current management. In certain provinces, including Ontario and Alberta, the holders of not less than 5 percent of the issued shares of a corporation that carry the right to vote at a shareholder meeting, may requisition the directors to call a meeting of shareholders for the purposes stated in the requisition and upon receiving such a requisition, the directors must call a meeting of shareholders within twenty-one days. If a corporation’s directors do not call a meeting upon receiving a shareholder’s requisition within twenty-one days, any shareholder who signed the requisition can call the meeting.

A shareholder who wants to bring an action against a director or officer of a corporation can do so in one of the three fashions:

  • by way of oppression remedy whereby a shareholder must demonstrate that management of the board have acted in a manner in which was oppressive or prejudicial to the interests of the shareholders;
  • by way of a derivative action whereby a shareholder will seek redress on behalf of the corporation in cases where it can demonstrate the corporation’s rights have been breached; and
  • by way of a compliance order whereby a shareholder will seek to compel or restrain certain actions of the corporation, its directors or officers.

Unlimited Liability Corporations

An unlimited liability corporation (“ULC”), either a Nova Scotia ULC, an Alberta ULC or a British Columbia ULC is one type of corporation that can be used to set up a Canadian Subsidiary Corporation structure for inbound investments. A ULC is considered a corporate entity for Canadian tax purposes but can be considered a flow through entity for other jurisdictions, namely the US. This type of business entity has become increasingly popular among US corporations seeking to enter Canada since US tax authorities treat the ULC as a partnership for tax purposes thereby allowing a “flow-through” of income, deductions, gains and losses to a US parent corporation.

It should be recognized that, just as its name implies, a ULC has “unlimited” liability for its shareholders. This can be contrasted with a federally or other provincially incorporated corporations where the shareholder(s) have “limited” liability. Because of this “unlimited” liability feature, a US corporation would typically incorporate a wholly-owned US subsidiary which would in turn be the ULC’s sole shareholder in order to shield itself from liability.

Recent changes to the Canada-US Tax Treaty can negatively impact the benefits of structuring investments using ULCs in certain situations. For example, ULCs are no longer eligible for reduced withholding tax rates on distributions made to US residents. As a result, any payments made will be subject to 25% withholding tax on interest, dividends, royalties and other payments. The most obvious impact of these new rules is an increase in Canadian withholding taxes as follows:

  • from 5% to 25% on dividends from a ULC to a US-resident corporate shareholder owning at least 10% of the voting stock of the ULC;
  • from 0% to 25% on interest paid by the ULC to US-resident persons; and
  • from 0% (or 10% in some cases) to 25% on royalties paid by the ULC to certain US-resident persons.

CRA has confirmed, however, that the withholding tax problem relating to dividends can be circumvented in the case where a sole shareholder of a ULC is a US Corporation, such as an S. Corp. In such a case, the 5% withholding rate can be obtained by having the ULC increase its paid-up capital (“PUC”) by capitalizing its retained earnings and then making a cross-border payment in reduction of that capital. The increase in PUC would create a deemed dividend for Canadian tax purposes, but would have no relevance for US tax purposes. As a result, because the  treatment of the deemed dividend under the taxation laws of the United States would be no different than it would have been if the ULC were not a disregarded entity for US purposes, the deemed dividend triggered on the increase of PUC will be eligible for tax treaty relief. CRA has also indicated that it would not apply the Canadian general anti-avoidance rule in these circumstances to tax this type of transaction for Canadian tax purposes.

Watch for a future blog on this site addressing whether ULCs are still a viable investment structure for US entities wishing to establish business in Canada in light of the Fifth Protocol to the Canada-US Tax Treaty.

For more information on Carrying on Business in Canada see: Business Laws of Canada (2011 Edition) Miller Thomson LLP, Thomson Reuters, ISBN-13: 9780314602305. Call 1-800-328-4880.


It should be noted that we are members of the Law Society of the various provinces of Canada and, as such, we are only qualified to express our views and opinions, and we have confined our views and opinions, with respect to the laws of the various provinces of Canada and the federal laws of Canada applicable therein, and accordingly we have made no investigation of the laws of any other jurisdiction. We specifically note that we have not considered the laws, including tax laws, of any foreign jurisdiction. Accordingly, prior to proceeding with the Canadian operations, we strongly recommend that you obtain foreign legal and tax advice.

If you would like more information on establishing a business in Saskatchewan please contact the author of this posting, Crystal Taylor at (306) 667-5313 or cltaylor@millerthomson.com.

If you would like specific legal advice based on your particular circumstances, please contact one of the following lawyers at Miller Thomson LLP:

William Fowlis
Calgary, National Leader

Cheryl Teron

Joseph W. Yurkovich

Crystal Taylor

George Nystrom

James Hutchinon

Aaron Rodgers


[1] Note, however, the filing fees associated with the incorporation of a Nova Scotia ULC have recently increased to $6,000 CDN.

[2] See, for example, s. 3 of the CBCA.


This blog sets out a variety of materials relating to the law to be used for educational and non-commercial purposes only; the author(s) of this blog do not intend the blog to be a source of legal advice. Please retain and seek the advice of a lawyer and use your own good judgement before choosing to act on any information included in the blog. If you choose to rely on the materials, you do so entirely at your own risk.