Foreign businesses wishing to establish a presence on Canadian soil have two primary choices: to open a branch office or incorporate a Canadian subsidiary. Deciding between the two depends on various legal implications, such as tax consequences, the ability to raise capital, special programs available through the Canadian government, and the parent company’s willingness to be exposed to liability.
Today we’ll discuss the two options to help you decide.
Branch registration vs incorporating a subsidiary
Branch registration
A branch is an extension of the existing corporation, allowing the foreign company to open a Canadian office. To operate a business, these businesses must register or apply for an extra-provincial/foreign license. Each province has its set of rules and regulations. In Quebec, the request to register is filed with the Registraire des Entreprises du Québec (the “Registraire”) Upon acceptance, the Registraire will issue a Quebec Enterprise Number (known as an “NEQ”). The registration fees for a business vary depending on the jurisdiction and the legal status of the parent company.
Under the federal Income Tax Act (the “ITA”) branches are responsible for paying provincial and federal taxes on the amounts earned in Canada and an additional branch tax of 25%. This branch tax is applied to the Canadian after-tax income that is not reinvested in Canada. Despite the ITA, certain tax treaties may exempt the first $500,000 of after-tax Canadian income of a non-resident branch operation.
Canadian subsidiary
The second option is incorporating a Canadian subsidiary. The parent company will own 100% of the issued and outstanding shares. Most of our clients prefer opening a Canadian subsidiary as it allows for a separation of liability between the parent company and the Canadian operations. However, in this case, the subsidiary will be responsible for paying corporate taxes on its worldwide income in Canada.
Federal or provincial incorporation
For those that decide to operate through a Canadian subsidiary, the next part is deciding whether to incorporate federally or provincially. If you decide on provincial incorporation, then with which province do you file the articles of incorporation? Choosing the appropriate jurisdiction is both a strategic and legal decision since certain jurisdictions have director residency requirements.
The following provinces have no Canadian residency requirements for the corporation’s directors:
Quebec
British Columbia
Alberta
Ontario
New Brunswick
Nova Scotia
Prince Edward Island
In the following jurisdictions, at least 25% of the corporation’s directors must be Canadian residents.
Federal corporations
Manitoba
Saskatchewan
Newfoundland
Registered head office
Regardless of the province selected, the incorporated subsidiary of the foreign business must have a registered head office in Canada. For a federally incorporated subsidiary, it must register with each of the provinces in which it wants to operate and provide a local address. In Quebec, Astre Legal acts as the registered business agent for many extra-provincial and international businesses. We also handle the annual maintenance requirements for Quebec which allows entrepreneurs to focus on growing their businesses.
This post is not legal advice and is for general informational purposes only. Always speak with a lawyer before acting on any of the information contained herein.