While investors considering cross-border investment or expansion into British Columbia, Alberta, Saskatchewan and/or Manitoba may be somewhat familiar with doing business in Western Canada, there are many unique differences that may exist among the federal and provincial legal systems that investors should be aware of.
The following offers a high-level summary of some of the legal issues that organizations should consider when investing in the Western Canadian market.
ONE – BUSINESS STRUCTURE
There are numerous avenues for foreign investors to expand their business interests into Western Canada. The most common approach is incorporating a federal or provincial business corporation. Other options include unlimited liability corporations, partnerships (general, limited and limited liability) and joint ventures. Each option may have significant effects on an entity’s regulatory requirements and tax obligations, as well as liability exposure for its investors.
A. Corporations and Unlimited Liability Corporations
A corporation may be incorporated under the federal Canada Business Corporations Act (“CBCA”) or the equivalent provincial corporate statute of one of the Western Canadian provinces. The CBCA and the equivalent corporate statute of each province generally impose similar requirements with respect to a corporation. However, there are differences which may make certain jurisdictions more attractive than others. A few of the key distinctions that foreign investors may want to keep in mind when considering doing business in Western Canada through a business corporation are:
- The CBCA and the equivalent corporate statute for the province of Manitoba mandate that 25% of a corporation’s directors must be resident Canadian (and where there are less than four directors, at least one director must be a resident Canadian). The equivalent corporate statute for each of Saskatchewan, Alberta and B.C. do not include any such residency requirement.
- The CBCA and the equivalent corporate statute for each of Manitoba, Saskatchewan and B.C. require privately held corporations to prepare and maintain a register of “individuals with significant control” (“ISC”) over the corporation. Failure to comply with the ISC register requirements under applicable corporate statute may result in fines and penalties for corporations, directors, officers and shareholders. Notably, the corporate statute in Alberta does not currently require an ISC register be prepared and maintained for a corporation. However, the five largest voting shareholders must be identified annually on a corporation’s annual return filed with the Corporate Registrar in Alberta and made available to the public.
- An ISC is generally regarded as an individual who either (a) is a registered holder of, beneficial owner of, or has direct or indirect control over, interests or rights in respect of 25% or more of the voting shares of a corporation, or (b) has any direct or indirect influence that if exercised would result in control of the corporation. Depending on jurisdiction, the ISC register for a corporation may be required to include some or all of the following information for each ISC: full legal name, date of birth, residential address, jurisdiction of residence for tax purposes, citizenship, date that the individual became or ceased to be an ISC, and description of how such individual qualifies as an ISC. Except as described in the following paragraph, the information contained in a corporation’s ISC register is filed confidentially and not available to the public.
- The CBCA was recently amended to require that corporations publicly disclose certain information contained in their ISC register, namely: the full legal name, address for service, date on which an individual became or ceased to be an ISC, and a description of how such individual qualifies as an ISC. There is currently no requirement to publicly disclose ISC register information under equivalent corporate statute for each of Manitoba, Saskatchewan and B.C. However, in B.C. a bill that proposed a publicly accessible ISC register received royal assent on May 11, 2023. It is expected that certain ISC information will need to be publicly disclosed for B.C. corporations by 2025.
- Alberta’s corporate statute is currently the only legislation in Western Canada that provides a corporation with an ability to include a corporate opportunity waiver in its articles or unanimous shareholder agreement. Generally, the corporate opportunity doctrine precludes directors and officers from personally benefitting from, or seizing for the benefit of another person or corporation, opportunities that belong to the corporation. This can raise issues in certain contexts, such as directors that are appointed by investors with interests in multiple businesses in the same industry. Under Alberta’s corporate statute, directors and officers may now obtain waivers whereby the corporation waives any interest in an opportunity to participate in a particular business opportunity that is offered to a director, officer or shareholder of the corporation, provided that the articles of the corporation or a unanimous shareholders agreement enable the corporation to give such waiver.
- Business corporation legislation in both Alberta and B.C. allow for the incorporation of unlimited liability corporations (ULCs). A Canadian ULC may offer advantageous tax treatments for a U.S. entity carrying on business in Canada, as it is treated as a pass-through entity (i.e. disregarded as a separate legal entity from its owner(s) for tax purposes). Canadian ULCs are the only form of corporate pass-through entity, as Canada does not have limited liability companies (LLCs). As its name implies, ULC status requires that the shareholders be liable for all debts and liabilities of the corporation.
B. Partnerships
In Western Canada, partnerships are governed by provincial law. A partnership is not considered a separate legal entity – that is, the income and losses of a partnership are considered to flow through directly to the partners for tax purposes. There are three types of partnerships recognized under provincial law in each province:
General Partnership – features unlimited personal liability of each partner for the liabilities of the partnership, and the exposure of each partner’s personal assets in the event the partnership’s assets are insufficient to cover its obligations. A general partnership is not required to be registered.
Limited Partnership – are structurally similar to limited partnerships in the U.S. They feature both limited and general partners and are required to be registered under applicable provincial legislation. General partners are responsible for the management of the business and face unlimited personal liability just as they would in a general partnership. A limited partner’s liability is generally limited to its investment in the partnership, provided that the limited partner is not actively involved in the management of the partnership (although Manitoba’s Partnership Act is considered more favourable to limited partners than the equivalent legislation in the other Western Canadian provinces, as it includes knowledge-based qualifications to the potential liability of a limited partner that takes an active part in the business of the partnership).
Limited Liability Partnership (LLPs) – this form of partnership generally limits a partner’s exposure by protecting partners from liabilities arising from the acts of another partner (or an employee, agent or representative of the partnership) that is not directly under their duty of care or supervision. LLPs must be registered under applicable provincial legislation, in the same fashion as a Limited Partnership. LLPs have many of the same advantages as limited partnerships, although they do not require the appointment of a general partner and they provide the added benefit that partners of the LLP can take an active role in the business of the partnership without exposing themselves to personal liability for the acts of other partners (beyond the value of their investment in the partnership). Except for B.C., provincial legislation in Western Canada only permits LLPs to be utilized by eligible professionals. In B.C. the LLP structure may be used for any business and, therefore, offers foreign investors another option for structuring their investment in Western Canada.
C. Joint Ventures
A joint venture generally denotes an association of two or more persons for the purpose of carrying out a specific undertaking, and may be conducted by separate corporations, general or limited partnerships, or simply by parties engaging in the joint ownership of assets. The parties may pool capital, property, knowledge, skills and other resources for the purpose of carrying out a specific undertaking, typically agreeing to share the profits and losses, with each party having some degree of control over the venture. There is no specific statutory definition or regulatory regime for joint ventures at either the provincial or federal level, rather a joint venture is typically governed by a contract between the parties. Parties to a joint venture arrangement should take care to ensure that the joint venture agreement and relationship is properly structured to avoid a presumption that a partnership has been formed by the parties.
TWO – OTHER CONSIDERATIONS
In addition to structuring considerations, foreign investors looking to expand their business interests into Western Canada should be mindful of the various federal and/or provincial laws and regulations that may impact the conduct of business. Additional legal considerations that may be relevant to a foreign investor’s decision include:
D. Securities Laws
- Canada currently does not have a federal securities regulator and each Western province has its own set of laws, regulations, rules and policies and its own regulator. However, provincial and territorial securities regulators work together to harmonize regulation across the country through “national instruments.”
- The distribution of securities in Canada requires the filing of a prospectus, unless certain exemptions are available such distributions to exempt classes of investors, including accredited investors and close friends or business associates.
E. Taxation
- Income tax is levied by both the federal and provincial governments in Canada.
- Canada’s taxation system imposes taxes based on residency, not citizenship. Residency is determined differently for individuals and corporations.
- Canadian residents are taxed on their worldwide income. In contrast, non-residents are generally subject to Canadian income tax on their Canadian-source income.
- Sales of property and services in Canada are generally subject to the federal goods and services tax (GST). The current GST rate is 5%.
- Except for Alberta, each Western Canadian province levies a retail sales tax on the sale of property and services in such province. The current retail sales tax rate in Manitoba and B.C. is 7%, and in Saskatchewan it is 6%.
F. Employment
- Employment law in Canada departs significantly from laws in the U.S. All jurisdictions in Western Canada (both federal and provincial) have enacted legislation governing various aspects of the employer-employee relationship, including with respect to mandatory minimum terms of employment for issues such as minimum wages, hours of work, overtime, statutory holidays, vacation pay, termination pay and leaves of absence. With limited exceptions, the parties cannot contract out of or below such minimum standards.
- There may be significant variations from province-to-province in relation to minimum wage, hours of work, overtime pay, statutory holidays and vacation entitlements, leaves, entitlements upon termination, employment equity, human rights, workers’ compensation, privacy and basic health and safety.
- A business must comply with the laws of each applicable jurisdiction if it is operating in more than one province.
- Employers (whether resident or non-resident) are generally required to deduct, withhold and remit various payroll taxes in respect of their employees performing work in Canada, including federal and provincial income tax on employment income, Canada Pension Plan contributions and employment insurance premiums.
MLT Aikins is a full-service law firm with extensive experience in various legal service areas. With offices in Winnipeg, Regina, Saskatoon, Calgary, Edmonton and Vancouver, we provide a one-stop service for all your legal needs in Western Canada, regardless of the scale or structure of your potential investment. Contact our private equity and venture capital practice area for more information about investing in Western Canada.
Note: This summary was developed to provide potential foreign investors with a high-level overview of some the legal aspects of Western Canadian business operations. The information in this summary is current as of April 16, 2024, and is for general information purposes only. It does not constitute a legal opinion or other professional advice. This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.