By Christopher J. Steeves, Partner; Fraser Milner Casgrain LLP

Canada offers a variety of business and investment opportunity, as recognized by a growing number of foreign investors and businesses. According to Statistics Canada, foreign direct investment has doubled in Canada since 1990. A skilled work force, strong economy, the NAFTA advantage, cost competitiveness, sophisticated infrastructure, and business and tax incentives are merely some of the reasons that make Canada an attractive place to do business. This article summarizes some of the legal considerations of interest to foreign businesses wishing to conduct operations in Canada.

Forms of Business Organization
A business may be carried on in Canada in various forms. Most commonly, a business conducted in Canada by a foreign corporation uses a corporate vehicle. Depending on the nature and scope of the activity, the degree of limited liability required, and tax considerations, the business activity could also be conducted through a sole proprietorship, a partnership, or a joint venture.
• Corporations: A corporation is a separate legal entity constituted by one or more persons who become its shareholders. Corporations have perpetual existence and may own property, carry on business, possess rights, and incur liabilities. The liability of shareholders is usually limited to the amount of their capital investment in the corporation. A corporation is taxed as a separate legal entity at the rate applicable to corporations, and the income or loss generated by the corporation accrues to the corporation and not to the shareholders. Foreign businesses will operate through a corporation either as a Canadian subsidiary corporation or as a branch operation of a foreign corporation.

a) Canadian subsidiary corporation: A Canadian subsidiary may be incorporated federally or provincially. The principal distinction between a federal and a provincial corporation is that a federal corporation is usually entitled to carry on business under its corporate name throughout Canada. In contrast, a provincially incorporated corporation is required to obtain an extra-provincial license or become registered in each province in which it carries on business. Federal and provincial statutes permit a flexible number of directors, being not fewer than one. However, federal corporations require that 25 percent of directors be resident Canadians (unless there are less than four directors, in which case there must be one resident Canadian). Provincial residency requirements vary and must be considered by corporations planning to incorporate provincially.

b) Branch operation: If a branch operation is to be established, the foreign corporation is required to register as an extra-provincial corporation in each province in which it “carries on business.” Whether any particular activity or group of activities constitutes “carrying on business” will depend on specific facts and circumstances. However, registration will be required in any province in which the corporation maintains a resident agent, representative, or an office or other fixed place of business.
• Sole proprietorships: Where an individual solely owns a business, all benefits gained and obligations incurred from the sole proprietorship accrue to the sole proprietorship. All income and losses also accrue to the sole proprietor and are taxed at the rate applicable to the individual. There is no limited liability for sole proprietorships.
• Partnerships: A partnership involves two or more persons (including corporations) that carry on business together with a view to profit. Partnerships may be general or limited partnerships and are governed by provincial legislation. In a general partnership, the liability of each of the partners is unlimited. In a limited partnership, the liability of one or more of the partners is unlimited and the liability of the limited partners is limited to the amount they contribute to the partnership. For both limited and general partnerships, the income or losses of the partnership are determined for income tax purposes at the partnership level, and then allocated to the members of the partnership in whose hands the income or losses are taxable.

Taxation
Canada imposes corporate and personal income tax on its residents, and on non-residents who carry on business in Canada, are employed in Canada, or sell property situated in Canada. Canadian residents are taxable on their income earned anywhere in the world. Non-residents of Canada are generally only taxable on their income from Canadian activities and investments, including gains on the sale of certain types of Canadian investments.
Every province of Canada imposes income taxes on corporations and individuals residing or carrying on business within the province. Some provinces also impose a capital tax on corporations. Canada also imposes a withholding tax on non-residents who receive dividends, interest, rents, royalties, or management fees from Canada. However, Canada has entered into tax treaties with numerous countries that provide favorable treatment and reduced withholding rates on certain forms of income to residents of those countries.
• Taxation of a Canadian subsidiary corporation versus a Canadian branch operation: A subsidiary incorporated in Canada will be considered to be a Canadian resident for income tax purposes. It will be subject to Canadian income tax on its income earned anywhere in the world from any source, subject to a credit for foreign taxes paid on non-Canadian income. In addition, the subsidiary will generally be subject to provincial income taxes on income earned in each province in which it carries on business through a permanent establishment. The fact that a foreign business enterprise has a Canadian subsidiary carrying on business in Canada will generally not subject the foreign entity itself to Canadian income tax.
A foreign company that is not resident in Canada is subject to Canadian income tax on income earned from any business carried on in Canada. If a business is carried on in Canada through a branch operation, the income attributable to that branch will be subject to income tax in much the same way as if it had been earned by a subsidiary. However, the majority of Canada’s bilateral tax treaties provide generally that business profits of a foreign enterprise from carrying on business in Canada will only be taxable in Canada if they are attributable to a permanent establishment situated in Canada. “Permanent establishment” is defined to include branches, offices, agencies and other fixed places of business of an enterprise. An additional tax known as “branch tax,” roughly equivalent to the withholding tax that would be payable on dividends paid by a Canadian subsidiary to its foreign parent organization, will also be payable by branch operations, though the rate is reduced under certain tax treaties.
On a long-term basis, the use of a subsidiary may be preferable, if for no other reason than the existence of a separate legal entity in Canada, to facilitate the separate accounting necessary for Canadian purposes, and for the determination of acceptable cross-border transfer pricing.
• Commodity tax considerations: In addition to an income tax, both goods and services are taxed in Canada. For the most part, a consumption tax is levied at the federal and provincial level, although some provinces levy this tax through a harmonized structure. In addition, most provinces levy a tax when land is transferred.

a) Goods and services tax: The federal goods and services tax (GST) is a form of value-added tax imposed on the final domestic consumption of virtually all goods and services supplied in Canada. The GST applies to each transaction in the production and distribution chain, including the importation of most goods and services into Canada. The GST is intended to be a consumption tax, which is ultimately borne by the final consumer since each supplier in the production and distribution chain is given a credit or refund of the GST paid on imports and domestic purchases of goods and services.
b) Provincial sales taxes: Other than Alberta and the provinces that have adopted a harmonized sales tax (which combines the GST and provincial sales tax component), all provinces impose some form of retail sales tax on purchases or users of certain goods and services within the province. Vendors of taxable goods and services are required to be registered and to collect and remit the sales tax. Exemptions from sales tax are available for certain goods and services, as well as for certain purchases made by identified classes of purchasers.

Labor and Employment Law
In Canada, labor and employment relations are for the most part governed by the laws of the province in which an employee works.
Each province in Canada enacts comprehensive minimum standards legislation as the basis for all labor and employment relations, including the employment of salaried managers. These standards generally cannot be contracted out of by private negotiation. The minimum standards legislation in each province addresses such issues as minimum wage, hours of work, overtime, vacation, termination, severance pay, and other legislative requirements, in respect of remuneration and benefits. In addition to minimum standards requirements, employers must also be cognizant of the provincial legislation governing occupational health and safety, human rights, and pay equity.
An employer may enter into a written employment contract with an employee. As well as clearly identifying the terms and conditions of employment, written contracts can limit employer liability in the event employment is prematurely terminated, and can also include covenants limiting competition after dismissal and guarding against solicitation of his employer’s customers. Without a written contract, the employer will be determined to have entered into an oral contract generally of indefinite hire, which can be terminated only on provision of reasonable notice, to be determined by the courts or administrative tribunals.
In addition, all Canadian jurisdictions have labor relations legislation enacted to promote the practice of collective bargaining between employers and trade unions as representatives of non-managerial employees. Trade unions have considerable freedom to organize employees, with limited rights of employer interference or opposition.

Regulation of Foreign Investment
The Investment Canada Act is concerned with the establishment of new Canadian businesses and the acquisition of control of operating Canadian businesses by non-Canadian interests.
• Establishment of new business: The establishment of a new business generally requires only a filing of a short notice for information purposes by the foreign investor, and may be given at any time up to 30 days after the new business becomes operative.
• Direct or indirect acquisitions of established business: In a direct acquisition of an established business, the foreign acquirer may be required to file a notice or an application for review and approval, depending on the circumstances. Neither obligation will be required if the transaction falls within one of the general exceptions under the act. If none of the exceptions apply, the acquisition of control will be subject to a review if the Canadian business acquired, has assets in excess of certain limits. These limits differ depending on the nature of the Canadian business and whether the foreign investor is from a country that is a member of the World Trade Organization (WTO). Indirect acquisitions are treated somewhat differently. The review threshold is higher and differs based on whether the investor is from a country that is a member of the WTO and whether the assets of the Canadian business represent more than 50 percent of the assets involved in the total international transaction.
Notwithstanding the above provisions, there are certain business sectors for which the Canadian government has maintained policies that are, to a lesser or greater extent, restrictive of foreign investment. Some policies are implemented through the review and approval process under the act. Other policies take specific statutory form, operate without reference to the act, and are prohibitive of foreign investment above a fixed level.

French Language Requirements
Canada requires the bilingual labeling of most products. In Québec, the Charter of the French Language requires the use of French in many business situations. For instance, contracts, catalogs, brochures, product labeling, public signs, and commercial advertising in Québec must be translated into French, and French must be displayed at least as predominantly as the English translation. Québec law also requires all businesses doing business in Québec to have a French name.

Christopher J. Steeves is an attorney and partner in the Toronto office of Fraser Milner Casgrain LLP, specializing in the area of corporate restructurings and acquisitions involving Canadian businesses. Mr. Steeves can be reached at (416) 863-4479 or christopher.steeves@fmc-law.com. Fraser Milner Casgrain LLP is one of Canada’s leading business law firms, with more than 500 lawyers in six full-service Canadian offices and an office in New York. For more information, please visit the firm’s website, www.fmc-law.com.