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Business formation and entity choice in Canada

What are the most common types of businesses that can be established in Canada?

The two main types of companies in Canada are Limited Liability Companies (“LLCs”) and Unlimited Liability Companies (“ULCs”). The shareholders of LLCs have limited liability whereas the shareholders of ULCs do not.

LLCs can be incorporated federally or under the laws of any of Canada’s 10 provinces and 3 territories. ULCs are only available to be formed under the provincial laws of British Columbia, Alberta and Nova Scotia. Regardless of which province or territory a company is formed in, that company may apply to operate or carry on business in any province or territory (extra-provincial registration) for a nominal amount.

Depending on the type of business and level of investment, foreign-owned businesses may decide to initially set up a Branch business in Canada rather than a separate legal entity. When creating a Branch, consideration should be given to both risk and tax issues. A Branch business is more cost-efficient to establish and maintain, as the Canadian filing and administrative obligations are considerably less than that of a company structure.

Residency of Directors

Some provinces do not require any resident directors (ie. Nova Scotia, New Brunswick, British Columbia and Quebec).

This does not mean that for tax residency under common law principles that a majority of directors need not to reside in Canada. However, certain treaties (i.e. between Canada and the US) only look to the jurisdictions of incorporation to determine residency for tax purposes. In that case, you would not necessarily need a resident director.

How long does it take to establish a legal entity in Canada?

Typically, it takes approximately one week to complete the incorporation of a subsidiary once all the relevant documentation has been assembled.

There are not any minimum capital requirements to establish a Canadian company.

Filing fees for incorporation are quite reasonable and should not exceed $1500 CAD.

Tax registration in Canada

What are the tax filing requirements in Canada?

Corporation Tax

A company must file a corporation tax return Form T2, within 6 months after the end of its fiscal year.

The company should pay monthly tax instalments to avoid interest on deficient instalments. The balance of tax is due 2 months after the end of its fiscal year. To avoid late-filing penalties, the balance of tax is due 6 months after the end of its fiscal year.

Branches of foreign companies that are otherwise exempt from corporate income by virtue of a Double Tax Treaty must file a treaty-based T2 return (essentially a short form corporate tax return) within 6 months of the end of its fiscal year.

VAT

Canada has a federal VAT (Goods and Services Tax or GST). In those provinces which align with the federal VAT the tax is referred to as the Harmonized Sales Tax or HST. Those provinces that do not align with the federal VAT levy a separate tax referred to as the PST or Provincial Sales Tax. The combined rate of HST or GST/PST ranges from 5-15% depending on the province.

The filing frequency for VAT returns is based on the annual turnover of the company. If the annual turnover is less than $1.5M the filing frequency is annual and the return is due three months after the end of the year. If the annual turnover is between $1.5M and $6M then the filing frequency is quarterly with the return due one month after the end of the quarter. If the annual turnover is in excess at $6M, then the filing frequency is monthly with the return due by the end of the following month.

Payroll Taxes

All employers must remit deductions at source by the 15th day of the month after the month you paid your employees. Certain smaller employers (i.e. whose average monthly remittance is less than $3000) need only remit quarterly. Conversely, larger employers may have to remit twice or even four times a month depending on how frequently the employees are paid.

What is the tax authority in Canada?

Customs and Revenue Agency (CRA) administers taxes for the federal government and those provinces that have opted-in. Certain provinces, namely Quebec (Minister of Revenue of Quebec) and Alberta (Alberta Treasury Board) administer their provincial corporate taxes separately.

What is the process of applying for a tax identification number in Canada and what is it called?

All companies must apply for a Business Number and the same number can be used for corporate income (RC) tax, GST/HST (RT), Payroll Deductions (RP) and Import-Export (RM). If you have incorporated federally or in British Columbia, Manitoba, Nova Scotia, Ontario, Saskatchewan, New Brunswick or Prince Edward Island the CRA will automatically issue a Business Number. If not, then you will have to apply to the CRA for one.

Key contacts 

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Tim Nakai

Global Growth Leader
E: [email protected]

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Stan Zinman

Tax Partner
E: [email protected]