Posted on May 19th, 2021 in Cross-Border Tax, Domestic Tax, General Business

Structuring Options for Foreign Corporations Doing Business in Canada

Maple leaves arranged beautifully to create the Canada Flag

If your company is looking to expand into Canada, there are options as to how you go about structuring your business.  The two most common structures are to operate in Canada via a branch or to incorporate a Canadian subsidiary.

There are many things to consider when deciding on how to enter the Canadian market, such as legal liability, tax rates, governments access to information upon audit, and the ability to access government programs that should factor into your decision.

A branch is not a separate legal entity but is an extension under an already existing company operating in another jurisdiction.  As a result, if you are choosing to operate as a branch in Canada, it would subject the US company to Canadian liability.  In addition to this, your company will be subject to filing what can be a complex branch tax return in Canada and will require separate financial statements for said branch to be created.

There are various types of corporations available in Canada, which we will explore in a future post (for example: Business Structures ).  In Canada, you will have the option of incorporating Federally or Provincially.  If you plan on operating in only one province, a provincial company may make the most sense.  Certain provinces such as Alberta, Nova Scotia and British Columbia allow for an unlimited liability corporation; which is a common entity for US companies investing into Canada.  In addition, only certain provinces allow for all Directors of a corporation to be non-residents of Canada.

Below is a summary of some of the differences between using a branch versus a corporation in Canada:

Canadian Branch
Canadian Subsidiary Corporation
Foreign company may have liability in Canada for legal issues of the Canadian Branch Foreign investor would have liability limited to the equity of the Canadian Subsidiary only (unless ULC is used)
Canadian sourced income tax in Canada Worldwide income of the subsidiary only taxed in Canada
Branch tax is payable on after tax income no reinvested in Canada Withholding tax is payable on dividends paid out to foreign parent company
Branch tax eligible may be eligible for foreign tax credit in your home country Withholding tax may be available as a foreign tax credit in your home country
Interest on debts paid to foreign residents are deduced from the branch profits earned in Canada Interest on debts owned to foreign residents may be limited due to the thin capitalization rules
Government incentives may only pertain to Canadian resident companies
On audit, information for the US company in addition to the branch may be requested On audit, information request should be limited to the Canadian company

Overall, it is relatively straightforward to establish a business in Canada, but there may be unique tax implications beyond the scope of this article. For that reason, we suggest you contact an accounting professional for individual advice.