Canada and the U.S. are close neighbors that share a border, a common language and have similar political and financial systems. So it makes sense that it’s commonplace for U.S. companies to look to expand into the Canadian market. There are, however, many things that a U.S. company in this position needs to understand. A previous blog post, Northward Bound: Registering a U.S. Company To Do Business in Canada, discussed filing requirements for U.S. companies registering in Canada, but there are many other considerations. We recently chatted with Elisabeth Colson, an attorney at Devry Smith Frank LLP, an Ontario law firm, to answer questions we often hear, focusing on Ontario.
1. When a U.S. company is looking at expanding its business into Ontario, Canada, what are the main things it should consider?
Some key factors include:
(a.) Will the company have dedicated Canadian staff and office/warehousing? Canadian employees and a physical presence are key indicators of carrying on business in Ontario. A person is generally considered to be carrying on a business if the person holds himself or herself out to others as engaged in the selling of goods or services in Ontario. An entity carrying on business in Ontario generally must establish a presence in Ontario, whether by means of an extra-provincial registration or by the incorporation of a separate entity. Sometimes a company does not plan on having a physical presence in Ontario, but instead intends to hire Canadians as independent contractors working from home. In those cases, it may not need to apply for an extra provincial license. However, it’s important to discuss the company’s specific business plans and their respective tax implications with an attorney to determine whether an extra provincial license or a corporation would be required and which option best suits the U.S. parent company's needs.
(b.) Payroll/Sales Tax Compliance: If the company is going to hire Canadian staff, it will need to consider using a Canadian payroll service or setting up a Canadian bank account to handle payroll. It will also need to register for GST (HST), which is similar to U.S. sales tax. As its name suggests, GST, or goods and services tax (harmonized with provincial sales tax where applicable), applies to services such as professional services which are often not subject to sales tax in the U.S. A company should not assume that it doesn’t need to register for GST (HST) just because it doesn’t need to collect sales tax in the U.S.
(c.) WSIB Compliance: The Workplace Safety and Insurance Board (WSIB) provides workers’ compensation. Any company that plans to have Canadian employees must determine whether or not it has to register with the WSIB. If so, it must comply with WSIB requirements.
(d.) Employment Law Differences: If a company has Canadian employees, it should understand the differences in employment law between the U.S. and Canada. Canada does not have an “employment at will” doctrine (i.e. that employment is for an indefinite period of time and may be terminated by the employer or employee). In Ontario, it is in the employer’s best interest to ask its employees to agree to the termination of employment provisions set out in the Employment Standards Act, as common law standards are often more generous to the employee than those provided under the legislation. Under Ontario's Employment Standards Act, an employer need only provide as little as one week and up to eight weeks’ notice of termination or pay in lieu thereof, depending upon the duration of the employee's tenure. Under common law, one month’s notice for each year of employment can often be required. Employees are also entitled to be paid for vacation time and to receive benefits coverage during a period of working notice. In the event that the employee receives pay in lieu of working through the notice of termination period, they are entitled to any vacation time and benefits coverage that they would have had for a period equal to the notice period.
(e.) Location: As with any business, the location of the office comes into consideration, based on expense and business needs. For example, a recent U.S. firm we worked with decided upon a downtown location because its employee would be called upon to travel frequently and it wished to provide easier access to the airport.
2. What factors are important when deciding whether to register for an extra provincial license or form a Canadian subsidiary? Are there any residency requirements for directors?
(a.) There are residency requirements and this can be an issue for U.S. companies wishing to incorporate a Canadian subsidiary in Ontario. Ontario law requires that 25% of the board of directors be Canadian residents, i.e. permanently resident citizens or permanent residents. An option for a company that wants to have a Canadian subsidiary in Ontario, but can’t easily comply with the residency requirement, is to form in a province that does not have a resident director requirement. For example, we work with a firm in British Columbia (B.C.) to enable entities in this situation to incorporate in B.C. (which has no resident director requirement) and then to register the B.C. entity extra-provincially in order to enable it to carry on business in Ontario.
(b.) Cost is a factor when deciding whether to have the U.S. company register to do business (an extra provincial license) or to form a subsidiary. Compliance, initial set-up costs and ongoing corporate costs will be higher for a Canadian subsidiary. Legal fees will be higher initially, as forming an entity is more complex than registering an existing entity. Additionally, Ontario corporations must file annual income tax returns and will likely need to hire an accountant to help with this. A U.S. company registered to do business extra-provincially in a Canadian province would declare its Canadian income on its U.S. return and avoid these additional costs. In spite of this, there may be tax benefits to forming a subsidiary that outweigh the higher administrative costs. Consultation with an accountant regarding tax implications is an important first step in making this decision.
(c.) The company may find it is easier to arrange leasing and employment matters via a Canadian subsidiary. For example, a recent client decided to incorporate in Canada to help ease the concerns of its landlord. The landlord wanted the full year’s rent to be paid in advance by the U.S. entity, but was willing to work on a more standard payment schedule if dealing with a Canadian entity.
3. After a corporation registers or forms in Ontario, what other things does it need to do to ensure compliance?
(a.) As mentioned earlier, a company may need to look into registering for payroll or sales tax, depending on its business operation. It must also file an annual return with the Ontario Ministry of Finance.
(b.) Companies must also register for a Business Identification Number with the Canadian Revenue Agency which should occur immediately after forming or registering.
(c.) To remain compliant, the extra-provincial registration must be updated if any of the company's details are changed (location of head office in the U.S., whether or not there's a representative in Ontario, agent for service, etc.). A company's Articles of Incorporation may have to be amended to reflect certain changes as well. The corporate record books need not be stored in Ontario, but must be stored in a place accessible to the shareholders. Commonly, the corporate books and records are stored in the registered office in Ontario.
As you can see, there are many factors to consider when planning expansion into another country, even one as close to the U.S. as Canada. We would like to thank Ms. Colson for her sharing her time and experience to help us answer these commonly asked questions.
This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice.