A growing economy and an international mindset are just some of the reasons Canada is an attractive place to set up an international office. Here's what you need to know.

• Overview
• Setting up a company
• Visas and permits
• Taxes
• Links

OVERVIEW

With the eighth largest economy in the world and close trading ties to the US, Canada is one of the largest trading nations. However, don't confuse Canada with its more dominant southern neighbour.

English is one of the two official languages, the government is relatively stable and there is a thriving free-market economy, all of which make Canada an easy choice for doing international business. The French-speaking province of Quebec is also a top choice for many Europe-based firms.

For many years, Canada has actively sought out skilled immigrants who can contribute to the country's economic growth. While most immigrants have settled in Canada's main cities (particularly Toronto and Vancouver), the government is encouraging new arrivals to move to smaller cities to maintain and catalyse local economies.

In contrast to the US, Canada has managed to maintain a healthcare system with public and private funds that covers all residents, an achievement that makes Canadians quite proud. But it's not clear how the system will weather rising costs and striking medical workers.

Overall, the economy continues to show signs of prosperity – third quarter growth rate in 2002 was 3.5 percent, consumer spending is healthy, and employment and income levels remain buoyant.

SETTING UP A COMPANY

Canada has three common types of companies: sole proprietorship, partnership and corporation.

Each has different and important implications for liability, taxation and succession. A lawyer or accountant can advise you on which is suited to your needs, and undertake the necessary formalities.

Proprietorship

This is the simplest and easiest way to set up a business in Canada. A sole proprietor is fully responsible for all debts and obligations related to his or her business. A creditor with a claim against a sole proprietor would normally have a right against all of his or her assets, whether business or personal. This is known as unlimited liability.

In a proprietorship, one person performs all the functions required for the successful operation of the business. The proprietor secures the capital, establishes and operates the business, assumes all risks, accepts all profits and losses, and pays all taxes. The proprietor is said to be self-employed.

The advantages of a proprietorship include low start-up costs, the greatest freedom from regulation, and tax advantages to the owner.

Disadvantages include unlimited liability, a lack of continuity in business organisation, and difficulty in raising capital.

Partnership

The second-largest country in the world by land mass, Canada borders the North Atlantic Ocean on the east, North Pacific Ocean on the west, and the Arctic Ocean on the north, and is north of the conterminous US. GOVERNMENT: Constitutional monarchy. POPULATION: 31.9 million (July 2002 estimate). Ethnic groups: British Isles origin 28 percent, French origin 23 percent, other European 15 percent, Amerindian 2 percent, other, mostly Asian, African, Arab 6 percent, mixed background 26 percent. CAPITAL: Ottawa CURRENCY: Canadian dollar (CAD) ECONOMY: As an affluent, high-tech industrial society, Canada closely resembles the US in its market-oriented economic system, pattern of production, and high living standards. Since World War II, the impressive growth of the manufacturing, mining, and service sectors has transformed the nation from a largely rural economy into one primarily industrial and urban. The 1989 US-Canada Free Trade Agreement (FTA) and 1994 North American Free Trade Agreement (NAFTA) (which includes Mexico) touched off a dramatic increase in trade and economic integration with the US. KEY TRADING PARTNERS: Exports: US 86 percent, Japan 3 percent, UK, Germany, South Korea, Netherlands, China (1999). Imports: US 74 percent, EU 9 percent, Japan 3 percent (2000) LANGUAGES: English 59.3 percent (official), French 23.2 percent (official), other 17.5 percent. Source: CIA World Factbook

A partnership is an agreement in which two or more persons combine their resources in a business with a view to making a profit. In order to establish the terms of the partnership and to protect partners in the event of a disagreement or dissolution of a partnership, a partnership agreement should be drawn up. Standard-form partnership agreements can also be purchased for about CAD 5 at stationary stores. Partners share in the profits according to the terms of the agreement.

In a general partnership, two or more owners share the management of a business, and each is personally liable for all the debts and obligations of the business. This means that each partner is responsible for, and must assume the consequences of, the actions of the other partner(s).

A second type of partnership is a limited partnership which involves limited partners who combine only capital. They are not involved in managing the business and cannot be liable for more than the amount of capital they have contributed. This is known as limited liability.

A limited partnership also involves general partners who are involved in management. They are fully liable for the debts and obligations of the business, but may be entitled to a greater share of the profits.

Advantages: easy to form, low start-up costs, additional sources of investment capital, possible tax advantages, limited regulation, broader management base

Disadvantages: unlimited liability, divided authority, difficulty in raising additional capital, hard to find suitable partners, possible development of conflict between partners, partners can legally bind each other without prior approval, lack of continuity.

Corporation

A corporation, also known as a limited company, is a legal entity separate and distinct from its members (shareholders). Each shareholder has limited liability. A creditor with a claim against the assets of the company would normally have no rights against its shareholders, although in certain circumstances shareholders may be held liable. It is recommended that legal advice be sought. This type of business can be incorporated at either the federal or provincial level.

Ownership interests in a corporation are usually easily changed. Shares may be transferred without affecting the corporation's existence or continued operation.

Advantages: limited liability, possible tax advantage, specialised management, ownership is transferable, continuous existence, separate legal entity, easier to raise capital

Disadvantages: closely regulated, most expensive form to organise, charter restrictions, extensive record keeping necessary, double taxation of dividends, shareholders may be held legally responsible in certain circumstances, personal guarantees undermine limited liability advantage.

Registering a proprietorship or partnership

Proprietorships and partnerships are regulated by the provincial government.

Registering a Corporation

A corporation can incorporate at a provincial level or at a federal level. If a company intends to carry on its activities solely in one province, provincial incorporation may be preferable. If the company wishes to expand its activities outside of its provincial jurisdiction at a later date, it must obtain an extra-provincial license from every other province in which it wishes to open an office or obtain a presence.

Under the Canada Business Corporations Act, any individual or corporation may receive a certificate of incorporation for any legal purpose with the exception of operating such institutions as banks, insurance companies, and trust and loan companies. In several provinces, a federally incorporated company will still have to obtain extra provincial registration to operate.

Choice of business entity: branch or subsidiary?

A corporation wishing to set up a foreign enterprise in Canada can operate the enterprise as a branch or a subsidiary.

A branch is simple to organise and operate, and therefore is probably the preferable structure. A corporation simply needs to establish an office in Canada and register in each province where it plans to conduct business. Under this scenario, a corporation would be taxed in Canada on income derived from carrying on business there. For Canadian tax purposes, the branch's start-up losses are deductible from the parent company's earnings. In addition, the Canadian branch must file tax returns as required by the Canadian federal, provincial and municipal authorities.

Investment Canada Act

The purpose of the Investment Canada Act is "to provide for the review of significant investments in Canada by non-Canadians in order to ensure such benefit to Canada".

The legislation describing the "review function" and associated rules are complex.

For more information on the Act and to see if it applies to your business, see http://icnet.ic.gc.ca/investcan/main.htm

VISAS AND PERMITS

Visas

Citizens of EU countries, Switzerland, Norway, Iceland, Japan, Singapore, the Republic of Korea, Australia, New Zealand, as well as US nationals and permanent US residents, do not need a visa to enter Canada.

For a full list of countries whose citizens require visas, see http://www.cic.gc.ca/english/visit/visas.html

Most visas are valid for a maximum of six months.

Citizens of countries requiring a visa must apply at least one month before the intended departure date.

A visa may be for a single entry, for multiple entries or for transit purposes. A single-entry visa allows an individual to enter Canada only once. Such entries must occur within the time validated for the individual's stay in Canada.

A multiple-entry visa allows an individual to enter Canada from any country multiple times during the validity of the visa.

A transit visa is required for travel through Canada to another country for persons whose flights stop in Canada for less than 48 hours. To obtain a travel visa, an individual must provide specific evidence of travel arrangements from a transportation company or travel agent.

Requirements for a temporary resident visa include satisfying an officer that the individual will leave Canada and showing that the individual has enough money to maintain himself and family members in Canada and to return home.

Work permits

People coming to Canada on business do not need a work permit. Business visitors must work for a company located outside of Canada. Business visitors cannot directly enter the Canadian labour market.

Some types of entrepreneurs, intra-company transferees and other types of workers who will provide significant benefit to Canadians or permanent residents by working in Canada do not need a confirmation from Human Resources Development Canada (HRDC.)

North American Free Trade Agreement professionals, traders and investors entering under regulation also do not need a confirmation from HRDC. This regulation also allows the issuance of work permits to people who enter Canada under other types of international agreements.

HRDC provides advice to Citizenship and Immigration Canada (CIC) regarding the impact on the Canadian labour market that the entry of a foreign worker will have. The organisation administers various labour-related laws, including the Employment Insurance Act, the Canada Pension Plan, the Old Age Security Act and the Canada Labour Code.

For a full list of jobs exempt from work permits, click here.

Spouses

Spouses and common-law partners of skilled foreign workers, spouses and common-law partners of certain foreign students, spouses and common-law partners of a person doing post-graduation employment for certain foreign students and post-doctoral fellows do not need a confirmation from HRDC in order to work.

However, before a spouse or partner who comes with a foreign worker may apply for a work permit without HRDC confirmation, the employed partner must meet two requirements:

1. The partner must be authorised to work in Canada for six months or longer.
2. The work the partner is doing must meet a minimum skill level (usually work which would require at least a college diploma.) Specifically, the job must be listed in Skill Level O, A or B in the National Occupational Classification. (see http://www23.hrdc-drhc.gc.ca/)

If the employed partner meets these two requirements, the spouse may apply for a work permit that is "open" and will allow them to accept any job depending on whether or not a medical exam was taken. The spouse's permit will be valid for the same period as the employed partner's authorisation to work in Canada.

Temporary work permits

If a job is not work-permit exempt and an individual wishes to temporarily work in Canada, he or she will likely require an employment authorisation.

After HRDC confirms that a foreign national may fill the job, the individual may apply to CIC for a work permit.

Additional procedures may be required for working in Quebec. For further information, contact the Canadian Embassy abroad or a Canada Immigration Centre in Canada. (http://www.cic.gc.ca/english/work/index.html)

An employer must give details of a job offer to a Human Resources Canada Centre (HRCC).

An employment counsellor will determine if the offer of employment meets the prevailing wages and working conditions for the occupation concerned. A check will also be made to see if the job cannot be filled by a suitably qualified and available Canadian or permanent resident.

If these conditions are met, the HRDC will approve the job offer. They will then issue a confirmation of offer of employment and send this to the Canadian Embassy, High Commission or Consulate in the home country.

The employer will be provided with a copy of the confirmation of offer of employment, to be forwarded to the individual. The employer is responsible for arranging worker's compensation and medical coverage in Canada.

Most foreign workers must apply for employment authorisation outside of Canada. Residents of the United States, Greenland, or St. Pierre and Miquelon can apply for an employment authorisation upon arrival at a port of entry to Canada.

To apply this way, an individual must produce a confirmation of offer of employment and other papers when at the port of entry. Check with the Canadian Embassy, High Commission or Consulate General to find out what papers are needed before arriving in Canada. 

TAXES

Direct taxes and indirect taxes

"Direct taxes" are taxes on the income of Canadian resident individuals, Canadian corporations and other entities residing in or conducting business in Canada.

Income taxes are levied at the provincial level. For the most part, Canada's federal government collects these taxes on behalf of the provinces. Only Quebec has a separate income tax regime at the individual level, while Quebec, Ontario and Alberta have their own corporate income tax laws and administration.

"Indirect taxes" are generally consumption taxes on property and services. The term "commodity taxes" is often used in place of indirect taxes.

Indirect taxes include the sales taxes of general application as well on commodities such as fuels, tobacco products and alcoholic beverages. They also include excise taxes and customs duties.

Non-residents

A person's liability for income tax is based on his or her status as a resident or a non-resident of Canada. A person who is resident in Canada during a taxation year is subject to Canadian income tax on his or her worldwide income from all sources.

Generally, a non-resident person is only subject to Canadian income tax on income from sources inside Canada. A person may be resident in Canada for only part of a year, in which case the person will only be subject to Canadian tax on his or her worldwide income during the part of the year in which he or she is resident; during the other part of the year, the person will be taxed as a non-resident.

Although the term “resident” is not defined in the Income Tax Act, the Courts have held “residence” to be “a matter of the degree to which a person in mind and fact settles into or maintains or centralises his ordinary mode of living with its accessories in social relations, interests and conveniences at or in the place in question.”

The Courts have held that an individual is “ordinarily resident” in Canada for tax purposes if Canada is the place where the individual, in the settled routine of his or her life, regularly, normally or customarily lives.

In making a determination of residence status, all of the relevant facts in each case must be considered, including residential ties with Canada and length of time, object, intention and continuity with respect to stays in Canada and abroad. 

LINKS

Canadian Tax Guide for Non-residents: http://www.taxca.com/Cantxgde.htm

Citizenship and Immigration Canada: http://cicnet.ci.gc.ca/

Working Temporarily in Canada Overview: http://cicnet.ci.gc.ca/english/work/index.html

Canada Business Service Centres: http://www.cbsc.org/osbw/busforms.html

Investment Canada Act: http://investcan.ic.gc.ca/main.htm

Canada's business and consumer site: http://strategis.ic.gc.ca/

Human Resources Development Canada: http://www.hrdc-drhc.gc.ca

Canada-UK Chamber of Commerce: www.canada-uk.org

Economist overview: http://www.economist.com/countries/Canada/index.cfm

December 2002