Carrying on Business in British Columbia

A Guide for Foreign Investors Carrying on Business in British Columbia A Guide for Foreign Investors

This manual describes the general options available to a foreign investor, particularly a corporation, looking to establish or acquire a business in Canada, particularly in the province of B.C. The discussion includes the tax consequences under the federal Income Tax Act (“ITA”), and other federal and B.C. taxation statutes. Immigration and corporate law issues are also addressed. Foreign legal and tax consequences are not addressed.

Please contact our office if you have any questions or require further information about anything discussed in this manual.

Frank Schober Fasken Martineau DuMoulin LLP Tel: +1 604 631 3142 Email: [email protected]

August 2013

This manual is intended to provide general information and is not intended to provide legal advice to any particular reader. Readers should seek qualified professional advice before acting on any information provided in this manual. Even though the information contained in this manual is regarded as true and correct at the date of publication, changes after the time of publication may influence its accuracy.

ii Fasken Martineau DuMoulin LLP Table of Contents

CHAPTERS

1. introduction 1

2. federal System 1

3. Corporate Issues 1

4. taxation of Employees in Canada and Withholding Requirements 2

5. visiting, Working In and Immigrating to Canada 2

6. Alternative Business Structures 3

7. repatriation of Profits 6

8. financing of Canadian Operations 6

9. transfer Pricing 7

10. other Taxes 7

Fasken Martineau DuMoulin LLP iii 1. Introduction 3. Corporate Issues

The purpose of this manual is to highlight some key concepts Registration Procedures to be considered. The discussion is quite general in nature Corporations may be incorporated under the laws of Canada and should not be interpreted as legal or tax advice to any or the laws of any particular province, including B.C. In order particular prospective investor. for a corporation to carry on a business in a province in which it is not incorporated, it must obtain provincial registration (“extra-provincial registration”, which is discussed below) in that province. A federally incorporated corporation is entitled 2. Federal System to carry on business in every province in Canada.

A corporation can usually be incorporated within a few days. Canada is a federal system of government, similar to the Neither federal nor B.C. corporate laws require corporations United States. Governmental powers are shared between to maintain a minimum capitalization amount. the federal government and the governments of Canada’s ten provinces, including B.C. In addition, the provincial governments have delegated some regulatory responsibility to Qualifications of Directors municipal governments. As a result, businesses may be subject Directors of Canadian corporations generally need not be to regulation by any or all of the federal, provincial shareholders of the corporation. Most jurisdictions require, and municipal governments. however, that at least twenty-five percent of the directors be Canadian residents. B.C. is an exception, having no residency requirements. A director must also be an individual who is at least 18 years of age. Some provinces have additional requirements.

1 Fasken Martineau DuMoulin LLP to Canada to purchase or sell goods or services, or for employees 4. Taxation of of corporations or other organizations outside Canada who come to Canada to consult with other employees or members of that corporation or organization or to inspect a Canadian Employees in branch office or headquarters on behalf of that corporation Canada and or organization. Immigrating to Canada Withholding There are generally three types of applicants for permanent residence in Canada.

Requirements Family-sponsored Immigrants. Persons with close relatives in Canada, such as a spouse, parent or dependent child, are Employees of a Canadian subsidiary corporation or branch who permitted to establish permanent residence in Canada if their work in Canada are generally subject to Canadian tax on their close relative sponsors the application by signing an undertaking income. with the Canadian government promising to be financially responsible for the immigrant for a specified period of time. Tax is payable at the graduated marginal rates applicable to Canadian residents. The employer is generally required to Business Immigrants. Business immigrants are people who withhold amounts for Canadian Income Tax, provincial Medical can apply to immigrate to Canada based upon their intention Service Plan contributions, Canadian Pension Plan to invest in a business in Canada, or to establish their own and Employment Insurance contributions. businesses in Canada. There are three categories of business immigrants:

• Investors An applicant must have successfully operated, controlled 5. Visiting, Working or directed a business for two years, have a net worth (accumulated as a result of the applicant’s own endeavours) In and Immigrating of at least $1,600,000, and make a minimum deposit to the CIC of $800,000. The deposit will be returned, without to Canada interest, five years and two months after payment. • Entrepreneurs An applicant must demonstrate that they have experience Introduction in managing a qualifying business (one in which the entrepreneur owns sufficient equity and does not simply Generally, all persons who are not Canadian citizens or create investment income) for at least two years in the past permanent residents of Canada must apply for and obtain a visa five, and have a minimum net worth of $300,000. before seeking to visit or immigrate to Canada. However, there are exceptions to this general rule. Also, the entrepreneur must satisfy certain conditions within three years after entering Canada: they must actively manage a qualifying Canadian business (one which creates non- Temporary Visits to Canada investment income), own at least one-third of the equity in Visitors to Canada must generally apply for and obtain a that business, and create full-time employment for one or visitor’s visa before appearing at a port of entry to Canada; more non-family members. Certain monitoring reports must current residents may send the Department of Citizenship and also be filed with the CIC at the six-month, two-year and Immigration Canada (the “CIC”) a letter of invitation to increase three-year marks. the visitor’s chance of obtaining a visa. Students and workers must also apply for and must obtain student or employment • Self-employed Immigrants authorizations. However, there are over 50 countries whose An applicant must intend to establish his or her own business citizens do not require visitors’ visas to enter Canada. Non- in Canada. This category is generally reserved for artists, Canadians who seek entry to Canada to attend school or engage athletes, or others who are self-employed and who, because in employment will still need to obtain student or employment of their abilities will make a significant contribution to the authorizations. To qualify for an employment authorization, cultural or athletic development of Canada. the Canadian employer must establish that qualified Canadian citizens or permanent residents will not be adversely affected Skilled Worker Immigrants. Successful applicants in this by the admission of the non-Canadian citizen to the Canadian category are generally those people who have the skills to labour market and the employer cannot fill the job with a fill job vacancies in Canada for which there are no qualified suitable Canadian or permanent resident. Canadian applicants. The selection criteria takes into account Canada’s labour market needs as well as an immigrant’s age, Employment authorizations are generally not required for education, occupation, work experience and knowledge of representatives of businesses outside of Canada who come French or English.

Fasken Martineau DuMoulin LLP 2 If there is no permanent establishment and no Treaty applies, 6. Alternative Business the foreign corporation’s taxable income earned in Canada will generally be subject to a combined federal and B.C. Structures corporate tax rate of approximately 25%. Permanent Establishment. A permanent establishment is a fixed place of business through which a business is wholly or Although a Canadian corporation is the most common, partly carried on, including: business operations in Canada may be carried on through a variety of legal entities, including the following: • a place of management • Registration of a foreign corporation without establishing • a branch a branch office or other “permanent establishment” in Canada • an office

• Canadian subsidiary corporation • a factory

• Canadian branch office • a workshop, or

• Non-resident partnership, or • a mine, an oil or gas well, or any other place of extraction of natural resources • Non-resident trust A permanent establishment will also exist where a These are discussed below. corporation carries on business in Canada through an agent who has the authority to conclude contracts in the name Registration of Foreign Corporation of the foreign corporation, except where the agent is an independent broker or agent acting in the ordinary course Introduction. In limited circumstances it may be possible for of its business. a foreign investor to carry on business activities in Canada without a Canadian “permanent establishment”. This may Registration. In order to carry on business in Canada be attractive from a Canadian tax point of view, depending without a permanent establishment, a foreign corporation on the country of residence of the investor. If the investor is will need to register as an “extra-provincial corporation” a resident in a country with which Canada has negotiated a in all the provinces in which it intends to do business. In bi-lateral tax treaty (a “Treaty”), the Treaty may provide that completing the registration process, the foreign corporation the business profits of the foreign corporation carrying on will be required to designate an attorney resident in the business activities in Canada will only be subject to Canadian province who can accept service of legal documents on income tax on such activities if the foreign corporation carries behalf of the foreign corporation, and a “head office” of the on business in Canada through a “permanent establishment”. corporation in the province through which business may or That is, if a Treaty applies and if activities can be carried on in may not be conducted. Extra-provincial registration will not, Canada without a permanent establishment, no Canadian tax in and of itself, amount to a permanent establishment for will be payable. income tax purposes.

3 Fasken Martineau DuMoulin LLP Branch versus Subsidiary Advantages of a Branch Introduction. Where Canadian business activities will be carried out by a foreign corporation through a permanent • Losses incurred by the branch may (depending on foreign establishment situated in Canada, the corporation could tax rules) be deductible by the foreign corporation for establish a branch office in Canada or incorporate a separate foreign tax purposes; Canadian subsidiary corporation. • The movement of cash and certain other assets between Canadian Subsidiary. Where a foreign corporation the branch and its foreign head office may be free from incorporates a subsidiary in Canada and the subsidiary Canadian tax because the branch has made sufficient carries on business in B.C., the subsidiary’s taxable income investments in Canadian property to offset branch tax will, generally speaking, be subject to a combined Canadian on its earnings with the investment allowance described federal and B.C. corporate income tax rate of approximately above; 25%. Different provinces have marginally different rates of corporate income tax. • A branch may repatriate its profits after payment of income tax and branch tax without further tax costs. The subsidiary will also be subject to a second tier of tax, Additional monies may be repatriated indirectly by way a withholding tax, if and when it pays out after-tax profits of reasonable management, and administrative expenses in the form of dividends to its foreign parent corporation. and allocations of reasonable head office expenses to the The withholding tax is 25% of the dividends, unless reduced Canadian branch; and under a Treaty. • As only the taxable portion of a capital gain less the Canadian Branch Office. Where a foreign corporation related tax is subject to branch tax, 50% of all capital gains carries on business in B.C. through a branch office, the recognized by a branch essentially escape branch tax. branch’s taxable income will generally be subject to the same combined federal and B.C. corporate income tax rates Disadvantages of a Branch outlined above with respect to subsidiaries. • The foreign corporation may encounter some procedural The Canadian branch will also be subject to a second tier or administrative delays in setting up a Canadian bank of tax, commonly called a “branch tax”. The purpose of the account, obtaining business licenses and complying with branch tax is to equalize the Canadian tax consequences other governmental restrictions and requirements; to a foreign corporation of carrying on business in Canada through a branch or through a subsidiary. The branch tax is • Once earned, the after-tax profits attributable to a branch 25% of after-tax income, unless reduced under a Treaty. (which are not reinvested) are subject to branch tax. Thus, unlike dividends, the payment of branch tax cannot be While branch tax succeeds in doing away with most of the tax delayed and must be paid each year; differences resulting from carrying on business as a branch or as a subsidiary, there remain variations which may make one • A branch must retain two sets of books, one for foreign business structure more favourable than the other. tax and accounting purposes and one for Canadian tax and accounting purposes; For example, certain organizations, including banks and corporations engaged in communications, mining and • A corporate reorganization abroad may constitute a transportation in Canada, are exempt from branch tax. In deemed disposition of Canadian assets and thereby give addition, an investment allowance provides the opportunity rise to Canadian tax consequences; to defer branch tax to the extent that profits are reinvested in Canadian business assets and other qualifying assets. As • The foreign corporation’s books and records relating to its a result, cash can flow more easily between the Canadian non-Canadian operations may become open to inspection branch and its foreign head office than between a Canadian and audit by Canadian tax authorities; and subsidiary and its foreign parent, provided that a sufficient • All of the foreign corporation’s assets are potentially investment allowance is maintained. exposed to any liabilities arising from its branch operation Finally, branch tax is levied only against the branch’s in Canada. “earnings”. For this purpose, earnings means the amount by Advantages of a Subsidiary which the business profits of the branch exceed its business losses, taxes and reinvested profits. • Dividends and interest payable by a Canadian subsidiary to its foreign parent corporation are subject to Canadian Choosing Between a Subsidiary and a Branch. The withholding tax, as described above. However, payment principal tax and commercial advantages and disadvantages of this withholding tax, unlike the branch tax, can be of carrying on business through a branch or a subsidiary can postponed indefinitely by postponing the payment of be summarized as follows: dividends;

• The use of a subsidiary is usually more convenient for administrative and governmental compliance and registration purposes;

Fasken Martineau DuMoulin LLP 4 • The liability of the foreign parent corporation will be Unlimited Liability Subsidiary Company limited to its investment in the subsidiary; B.C., as well some other provinces, allows for the incorporation of an Unlimited Liability Company (“ULC”) as • The use of a subsidiary allows greater flexibility on the sale the Canadian subsidiary of a foreign corporation. This type of of a Canadian business in that either assets or shares can be corporation may be used as an alternative to a branch, as it sold; may allow for losses incurred by the corporation in Canada to • A subsidiary offers the advantage of a clear separation be deductible by the corporation, while still providing certain and stronger “Canadian presence”, which may assist in advantages of corporate status in Canada. marketing, accumulation of goodwill, and generally in the Essentially, a ULC is treated for most Canadian purposes as a carrying on of business in Canada; and regular corporation (with certain special name requirements) • A subsidiary can utilize Canadian corporate reorganization except that the shareholders of the company are jointly and rules which permit corporate reorganizations without severally liable with the ULC for specific liabilities. However, immediate tax consequences. in B.C., that excess liability is limited to any debts or liabilities upon dissolution or liquidation of the company. Disadvantages of a Subsidiary

• A specified portion of the directors must usually be Non-Resident Partnership resident Canadians, although, as indicated above, there are In Canada, a partnership is not recognized as a legal entity no director residency requirements for B.C. corporations; which is separate from the persons who are the “partners” in the partnership. As a result, a foreign partnership carrying • Thin capitalization rules provide that the deductibility in on business in Canada is effectively considered a Canadian Canada of interest expense of a subsidiary will be denied branch of a foreign business and is subject to the same tax to the extent the debt-to-equity ratio exceeds 1.5:1, as as a Canadian branch of a foreign corporation. discussed further below; and

• There are obvious extra expenses associated with a Non-Resident Trust separate corporation such as expenses associated with A foreign investor may also carry on business in Canada incorporation, and separate annual financial statements through an offshore trust under which the investor is a and income tax returns. beneficiary. The trust could be established in the foreign Summary country or in another jurisdiction. Where a trust carries on business in Canada, it is subject to the highest individual It may be preferable from a strict Canadian income tax marginal rates of Canadian income tax. There is however perspective to initially carry on business through a Canadian no second tier of tax such as a branch tax. There are also branch office of the foreign corporation rather than through no “thin capitalization” restrictions, as discussed below. a Canadian subsidiary, at least in the start-up phase where losses may be incurred. The business can then generally be transferred to a Canadian corporation on a tax-deferred basis where appropriate.

However, there are non-tax reasons related to limited liability, financing and other factors noted above which often make the use of a Canadian subsidiary the preferred choice.

5 Fasken Martineau DuMoulin LLP 7. Repatriation of 8. Financing of Profits Canadian Operations

From Canadian Branch Canadian Branch A Canadian branch’s “earnings” will be subject to branch tax As the financing of a Canadian branch generally presents no as discussed above. There is no further tax payable on profits particular difficulties, the discussion below is limited to the repatriated to the foreign country. However, profits subject to financing of a Canadian subsidiary corporation. tax and branch tax in Canada may be reduced by reasonable allocations of expenses between the branch and the foreign Debt Financing of Canadian Subsidiary head office. Alternatives. Debt financing of a Canadian subsidiary corporation can be secured through a loan from a Canadian From Canadian Subsidiary lender, an offshore lender, or the foreign parent corporation. Alternatives. A Canadian subsidiary will generally repatriate its profits by paying dividends, by making interest payments or Withholding Tax. A withholding tax of 25%, unless reduced by paying management fees. Profits may also be repatriated by under a Treaty, will apply to interest payments made by making loans to the foreign parent corporation or by paying a Canadian subsidiary corporation to its foreign parent royalties. corporation. No withholding tax will generally be levied on interest payments made by a Canadian subsidiary corporation Dividends. A withholding tax will be levied on dividends, as to an unrelated foreign lender. described above. The tax is 25% of the dividends, unless reduced under a Treaty. The Thin Capitalization Rule. Where a Canadian subsidiary corporation has outstanding debts owing to certain related Management Fees. In the case of management fees, no non-Canadian residents which exceed one and one-half times withholding tax will be levied if the foreign parent corporation the amount of the subsidiary’s equity, any interest payments providing the management services does not have a permanent on the excess debt cannot be deducted by the subsidiary for establishment in Canada. Management fees not meeting tax purposes. these tests are generally subject to a 25% withholding tax. Management fees will be deductible from the Canadian Equity Financing of Canadian Subsidiary subsidiary’s income only to the extent that they are reasonable in the circumstances. Reasonableness may be evaluated by Introduction. Canadian corporate and tax laws provide the Canadian tax authorities with reference to the nature and virtually complete discretion in structuring an equity financing. amount of the benefits derived in respect of the management Essentially, any type of shares in the capital of a Canadian services performed by the foreign parent corporation. corporation, with any types of rights attached, can be issued. Of course, the sale or issuance of stock will be subject to laws Interest. In the case of interest payments made by a Canadian governing the issuance of securities. subsidiary to its foreign parent corporation in respect of a loan made by the parent to the subsidiary, a withholding tax of 25% Repatriation of Capital. Under Canadian tax laws, it is will apply, unless reduced under a Treaty. not necessary to first return retained earnings in the form of taxable dividends before you are able to return capital. Royalties. In the case of royalty payments made by a Canadian It may therefore be useful to finance a Canadian subsidiary subsidiary to its foreign parent corporation, a withholding tax of corporation by way of a subscription for preferred shares, 25% will generally apply, unless reduced under a Treaty. having paid-up capital and a redemption or retraction price equal to the aggregate subscription price. A small amount of Loan to a Foreign Parent Corporation. In the case of a capital can be invested in common shares so that all future loan which a Canadian subsidiary grants to its foreign parent increases in value of the Canadian subsidiary accrue to such corporation which is not repaid by the end of the year following shares. In this way the majority of the original capital can be the year in which the loan is made, the tax consequences to the returned to the foreign parent corporation on a tax-free basis parent are the same as if the subsidiary had declared and paid a simply by repurchasing or redeeming the preferred shares. dividend to the parent in the amount of the loan. Accordingly, withholding tax, as described above in the case of dividends, Withholding Tax. Withholding tax, as described above, will will apply. apply to dividends paid by a Canadian subsidiary to its foreign parent corporation.

Fasken Martineau DuMoulin LLP 6 Other Financing Considerations Assistance Programs. New businesses incorporated in 10. Other Taxes Canada may take advantage of numerous governmental assistance programs, which may involve financial assistance or managerial and technical advice. Many provinces also provide Goods and Services Tax and Harmonized Sales Tax tax incentives in order to encourage economic growth and The federal Goods and Services tax (“GST”) is a form of value- employment opportunities in particular industries and areas. added tax levied at the rate of 5% on the supply of most Statutory Restrictions. A corporation carrying on business in goods and services in Canada or imported into Canada. (In Canada should also be aware that there are special corporate some provinces the GST has been combined with the provincial law prohibitions regarding certain forms of financing. For sales tax, resulting in one Harmonized Sales Tax, or “HST”. The example, the Canada Business Corporations Act prohibits a HST rates range from 12% to 15%.) company from providing financial assistance for the purpose Designed to be paid by the ultimate consumer or purchaser, of acquiring the company’s own shares. A company’s financing GST/HST is paid and collected throughout the production requirements, however, can generally be structured to avoid and distribution chain of goods and services. Businesses and these prohibitions or to take advantage of certain statutory vendors generally receive a refund of GST/HST paid in the exceptions. form of input tax credits, provided they register and regularly file tax returns with the federal government.

9. Transfer Pricing Property Transfer Taxes Provincial taxes on the transfer of real property or interests in The amount paid by a Canadian branch or subsidiary real property are levied in a number of Canadian provinces, corporation to a non-resident for goods and services cannot including B.C. The B.C. Property Transfer Tax is 1% of the first exceed a reasonable amount, determined as if the parties $200,000 of the purchase price of the transferred property or had been dealing at arm’s length. Similarly, amounts charged interest, and 2% of the balance of the purchase price. In some by Canadian taxpayers to related non-residents for goods cases this tax can be avoided or deferred through the use of a and services may not exceed a reasonable amount in the nominee or ‘bare trust’ relationship. circumstances. Such transactions are scrutinized by the Canadian tax authorities. Sales Taxes B.C., as well as some other provinces, imposes a provincial sales tax at a rate of 7% of the purchase price or importation value of tangible personal property and specified services acquired or imported.

Customs Duties Importers of goods into Canada from foreign countries may be required to pay Customs duties under Canada’s tariff rate scales, calculated on the value of the goods being imported. The GST and B.C. sales tax will also generally be payable on the duty-paid value.

7 Fasken Martineau DuMoulin LLP Our Locations

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