Business owners looking to expand their venture in Canada can enjoy numerous advantages concerning taxation and opportunities. However, before you do so, you must determine your business structure. For instance, you may wish to operate your business as a branch of the parent company situated in another country or set up a subsidiary with a separate entity.
A branch office enjoys lower costs for setting up and can be started only by applying for an extra-provincial license that is easy to obtain and affordable. However, a subsidiary system in Canada offers multiple benefits such as limited liability, separate filing of tax returns, greater impact on the market, and more stability for employees.
Hence, if you have decided to start a subsidiary in Canada, the next thing is to learn about the types of subsidiaries in Canada. Now, let’s look at Canada’s various forms of subsidiary businesses.
What are the Types of Subsidiaries in Canada?
When setting up a subsidiary in Canada, you may set it up as a Corporation, a Partnership, a Proprietorship, or Extra-Provincial Corporation.
- ~Corporation: Incorporation of a wholly-owned subsidiary in Canada as a Corporation can be done either at the provincial or federal level. For a corporation, the entity is taken as separate, and the corporation's shareholders are not responsible for any of its liabilities, debts, acts, or other obligations.
- ~Partnerships: You can either take up a general partnership or make your business a limited liability partnership.
- ~Extra-Provincial Corporation: Incorporating a foreign subsidiary in Canada at the provincial level encompasses an extra-provincial corporation with its specific requirements. It can be entirely directed and controlled by a foreign company. There is no set number of Canadian workers needed in this subsidiary type.
- ~Sole proprietorship: This includes a business wholly owned by a proprietor. In this case, you are liable for all obligations, but you also get to enjoy the subsidiary's revenues.
How to Set Up Subsidiary in Canada?
Once you have decided on the form of business for your subsidiary in Canada, you need to meet specific requirements and considerations.
The prerequisites for incorporation of a subsidiary of a foreign company in Canada include:-
If you seek to set up a subsidiary in any of the provinces of Manitoba, Newfoundland, Saskatchewan, Ontario, Alberta, or Labrador, you need to adhere to the jurisdiction of the place of incorporation of your wholly-owned subsidiary. In the case of these places, at least 25% of your Board of Directors must be residential Canadians.
Registration requirements for provincial corporations
In sync with the market of operation and address and the company's seat, the registration must be done in the specific federal or regional legislation office.
All subsidiary businesses in Canada are tax residents of the nation. Hence, they must pay the relevant taxes as mandated by the taxation of foreign subsidiaries in Canada.
Benefits of Setting Up a Canadian Subsidiary
As a company seeking to incorporate a subsidiary in Canada, you can enjoy many advantages.
- ~Fewer liabilities: One of the most incredible benefits of setting up a subsidiary in Canada is the limited liabilities that make it free of all claims. In addition, only directors of the specific subsidiary will be liable to bear any responsibilities, while the authorities will impose no claims on the parent corporation.
- ~Adherence to Canadian Laws: A parent corporation outside Canada setting up a branch office may be liable to adhere to many Canadian Laws. However, for a subsidiary, only directors of the subsidiary are subject to limited liability. Even for Canadian tax legislation, the liabilities are limited for foreign corporations that need to open the books of records in front of a Canadian tax audit.
- ~Separate tax returns: Subsidiaries in Canada are liable to file their returns, and the parent foreign corporation will be free of any such liabilities.
- ~Seamless communication with local authorities: It is much easier to obtain loans and contracts to form a subsidiary company in Canada, and regulatory approvals come as seamless procedures.
- ~Stable employment: Candidates hired by a Canadian subsidiary feel more secure and safe than those recruited by a branch. Potential creditors also find it safer to offer loans for subsidiary company formation in Canada, as obtaining repayment may be more difficult in the branch office.
- ~Impact on the market: Canadian subsidiaries have a better market impact as they tend to have a more permanent status than a branch.
Documents to Prepare When Opening a Subsidiary in Canada
Name of the subsidiary
Once the area of jurisdiction is decided, you need to determine the subsidiary's name. You must also complete and file the articles of incorporation. If you wish to confirm if the name occurs anywhere else in Canada, the incorporation might take longer.
Process for incorporation
The incorporation of the wholly-owned subsidiary in Canada can occur once all documents are duly signed and ready. You can incorporate the documents in a digital format. The cost for the entire process will depend on the time required to determine the appropriate jurisdiction, name reservation, allocation of shareholdings, and obtaining capital.
The organizational issues that require attention at this stage are approving the subsidiary’s bylaws, appointing directors and executive officers, obtaining banking authority, and issuing shares.
You may also need to inform Industry Canada officially, a federal department that looks after the global fair market and mandates trade on the global platform creating a competitive market for new foreign companies in Canada. This notification has to be sent within 30 days of initiating the business.
What Business Forms can Canadian Subsidiaries Take?
Canada offers the option of multiple legal entities for establishing a subsidiary in the country. Canada’s most popular business entity is a corporation, equivalent to a limited liability company. However, other business entities like partnerships, trusts, and extra-provincial corporations.
The choice of entity depends on whether the subsidiary is federal or provincial in terms of incorporation. For provincial level operability, a subsidiary needs to be registered in every province it wants to offer its products and/or services.
Canadian Subsidiary Laws
The Canadian subsidiary laws differ from one province to another. Hence, while setting up a subsidiary in Canada, it is vital to choose a location whose jurisdiction is in sync with your business requirements. If you have incorporated under the country's federal laws, you must undergo registration in all the provinces where you wish to conduct your business.
You must also consider the nationality of the provincial headquarters, specific trade agreements of the province, and the language of communication. For instance, French is the dialect used in many Canadian provinces.
Suppose you find it difficult to appoint resident Canadians as directors according to Canadian law. In that case, you can set up a subsidiary in Canada under Provincial Acts that does not have specific residency requirements.
An Unlimited Liability Company or ULC can be advantageous for American companies wherein your business can enjoy specific tax advantages related to US business entities. Unlike other Canadian entities, these ULCs are considered flow-through businesses and can enjoy overall tax advantages.
Post Incorporation Compliance
Once your subsidiary gets incorporated, you must fulfill the following steps to receive the benefits of incorporation under CBCA:
- ~File annual returns
- ~File changes in the registered office address
- ~File director related changes to the board
- ~Amend the articles containing the basic information about your company
Taxes on Subsidiaries in Canada
- ~Subsidiaries are subject to income tax that may be applied at the federal or provincial level.
- ~Subsidiaries must adhere to Canadian accounting and reporting mandates.
- ~They can enjoy benefits like tax credits against taxes paid on remuneration generated in foreign countries.
- ~The Canadian double taxation agreement is also applicable for subsidiaries.
- ~Subsidiaries also enjoy tax benefits for the repatriation of capital gains.
Tax Incentives for Businesses Setting Up a Subsidiary in Canada
The Canadian government rolls out various tax incentives at the provincial, federal, and territorial levels for multiple industries, such as research and development, manufacturing and processing, environmental sustainability, film, and media.
In specific regions in Canada, a 10% income tax credit is offered for different types of capital investment. Plus, you can enjoy Income Tax holidays for certain subsidiaries in Canada in specific provinces.
Other Important Considerations
- ~If you choose to form an unlimited liability company, you can gain many favorable outcomes in the tax domain.
- ~Corporate law for several Canadian jurisdictions needs that all records of the corporation are kept in the jurisdiction of formation.
- ~Registering your office space and opening a corporate bank account in Canada are time-consuming processes. This could keep your human resources waiting. So, it’s best to consider professional help.
How Multiplier's Employer of Record Can Help You Hire & Expand in Canada?
To conclude, for international businesses contemplating establishing an entity in Canada, a subsidiary system is one of the most reliable structures. Parent corporations can be free of liabilities while enjoying the Canadian government's income tax credits and incentives.
Partnering with a third-party service provider may help you launch your subsidiary smoothly. A global employment solution partner like Multiplier can help you. Establishing local entities overseas is time-consuming, so we strive to make the process seamless. We could be your best bet for expanding your business in Canada.
With Multiplier, you can quickly employ, onboard, and pay full-time employees while ensuring compliance with the local labor rules. You won't have to bother forming a local entity or figuring out how to stay up with the changing labor laws.
Frequently Asked Questions
Is setting up a subsidiary a cumbersome process?
In Canada, the subsidiary incorporation process is not complicated and involves steps similar to a corporation. One may register a subsidiary at both the provincial and federal levels.
Can a subsidiary be registered in any other form?
In certain provinces in Canada, such as Nova Scotia, British Columbia, and Alberta, you can set up your subsidiary as Unlimited Liabilities Company, while other provinces have trusts and partnerships.
Do subsidiaries require bank accounts?
Yes, Canadian subsidiaries need to open a corporate bank account and decide on a physical space to operate in Canada. All these need to be planned well so that the hiring process is not delayed and you get the desired skilled workforce for your company.