Doing Business in Canada: The Legal Way
Author: Asif Anwar
Canada is a federal state, with ten provincial and three territorial governments. Each has its unique legislative jurisdiction and control over a recognized list of business matters. Different among them is Quebec, which has a codified governing Civil Law. The rest of the provinces and territories, however, have a system of Common Law. The Federal Government under The Constitution Act, 1867 extends its jurisdiction to all matters including and relating to the regulation of Trade and Commerce; Banks, Currency and incorporation of Banks; Banking and Insolvency; Trademarks, Copyrights, Patents of Invention and Discovery; Airlines and Railways; and Criminal Law and Defence. The Provincial legislatures diversely have exclusive power over Incorporation of provincial companies; Intra-provincial Trade and Commerce; Civil, Real and Personal Property rights including jurisdiction over Securities, Contracts, and Municipal laws, and authority over consumer protection and labor relations.
With a futuristic approach, be it: at the outset, reorganization or growth, you must make informed business decisions about the structure of your business. It is not one size fits all, but the most appropriate and effective method of carrying a viable and profitable business. Depending on the structure and type of your business, there are several issues, advantages, and disadvantages for each entity in conjunction with attributes.
In Canada, the businesses are organized in an extensive variability. Preferred, it is, to hinge on an appropriate business framework, based on investor’s circumstances, commercial activity, business acumen, investment, financing, jurisdiction, and relating magnitude, costs, viability, taxes, and liabilities. There are numerous complexities for businesses not started, acquired, organized, or expanded, disregarding the formational and legal implications of federal, provincial, and territories’ laws. For a considerable period, vigilance may save your valuable time, money, and any inconvenience and unforeseen circumstances. There are also some corporate ownership restrictions, especially in the case of some sensitive sectors like Financial Institutions, Telecommunications, Broadcasting, and Air Transportation.
The businesses mainly are categorized into five main structures and couple of sub-categories:
Franchise and Licensing
Agency and Distribution
1. SOLE PROPRIETORSHIP
The most inexpensive basic and easier structure with fewer formalities. Apart from mandatory business name registration, there may be regulatory obligations and business-specific licenses, and municipal, provincial or federal requirements. One could be the sole owner of a business with a minimal working capital without the involvement of any other individual (except any retained employee). Although this privilege is attractive to draw all income or profits but comes with full responsibility for all debts, liabilities, and obligations of the business or assets.
A sole proprietor is vulnerable to all claims, be it contractual or tortious liabilities, against the business, its assets and even personal assets of the sole proprietor. However, personal liability exposure limits can always be secured by a contract or insurance. There may also be some impediments to generate capital for subsistence.
If the business is not doing well, the sole proprietorship has the advantage of being in a lower tax bracket. The business losses can be used to off-set the sole proprietor’s other income, with an advantage of losses carried back to sole proprietor’s income in the set number of previous years (Ontario). Conversely, the higher the income, the higher will be the applicable tax brackets.
There are three types of legally recognized partnerships:
General Partnership (or simple Partnership and Ordinary Partnership in some of provinces and Territories);
Limited Liability Partnership (LLPs); and
Limited Partnership (LP)
With inconsiderable formalities but a common view of profits, this is also a non-incorporated and inexpensive business structure. It comprises of at least two or more individuals, partnerships, corporations, organizations, associations, trusts or other bodies known as “Partners.” The flexible relationship is established based on a “Partnership Agreement” and titled and recognized collectively as “Firm” to carry on any trade, occupation, or profession for profits.
Sharing gross returns, Joint tenancy, tenancy in common, joint property, common property or part ownership, etc., does not constitute a partnership. Each partner makes a capital contribution and investment in the Partnership. Resultantly, each partner has management control and right on assets and is qualified to get an equal share of profits from the business according to the specifically drafted terms and conditions of the Partnership Agreement. Any property, rights, or interest in the property contributed towards the capital stock or for the partnership business is Partnership Property. There are many drafting considerations, amongst others, like management, structure, capital contributions, profit and loss distributions, dissolution, bankruptcy, rights, duties, expulsion, and retirement of the partners, etc. In the technologies business perspective, there could be numerous covenants like proprietary and intellectual property rights, non-competition, non-solicitation, non-disclosure, and loads of other significant rights specifically drafted in the governing agreements.
If not ascertained by the governing agreement or defined in the applicable partnership law, this business structure also has unlimited liability for the debt and other obligations of the Partnership. Each partner of the firm is an agent of the other partners for the business of the firm. The partners are jointly and severally liable; no matter business decisions made by any partner conducting the business of the firm. The individual Partner’s personal assets even are also vulnerable to all claims, contractual or tortious liability. The Partners have fiduciary obligations to each other. The GP is not an independent taxable legal entity or person. The income or losses are distributed, after deduction of all expenses, capital cost allowance, and other deductions and the partner’s income determined as though the partnership was a separate person resident of Canada.
Limited Liability Partnership (LLPs)
In Ontario, the Partnership Act governs the GPs and LLPs. It is only available to a group of professionals like lawyers, doctors, or accountants, who do not consider or find incorporation advantageous. Due to the nature of activities, these professionals have a highly vulnerable professional environment against claims. For a reason, the governing LLP should be drafted setting out rights, duties, and rules of doing partnership business. The Partnership Act, however, enumerating the liability of the Partners, outlines that the Partners are only liable for their own negligence or negligence of employees, agents, or representatives, who are working under their direct control and supervision. Unless, there is gross negligence or wrongful act, or omission, and each partner is a contributory or limited partner may only be liable for debts and obligations or ordinary trade debts of the firm.
Under the partnership arrangement, a partner may not be a proper party to a proceeding whether it is initiated by the partnership or against it. Any judgment against the LLP enforcing obligations arising out of the negligent or wrongful act or omission is not enforceable against non-negligent partners or limited partner who fulfilled all obligations towards the partnership. In the absence of fixed term, the partnership may operate in perpetuity until dissolved for any reason including, death of any partner. The death of any partner may not make executor or administrator’s estate or effects liable for any business conducted or insolvency, or debts incurred after the death of such a partner.
Limited Partnership (LPs)
The Limited Partnership Act is the governing law for LPs. The LP can be initiated on a private document known as “Limited Partnership Agreement,” and registered in the form of the declaration by the general partner with the designated Registrar. However, the Limited Partnership Act does not require the partners of LP to formally execute a Limited Partnership Agreement. The provisions of the Limited Partnership Act, the Partnership Act, and general partnership law may interpret the relationship of the partners. Though, it is risky not to articulate the capital contributions, rights, obligations, relating control, management, and working of this partnership in the Limited Partnership Agreement.
The business structure comprises one or more General Partners, with unlimited liabilities and one or more Limited Partners with limited liability that may include individuals, sole proprietors, partnerships, unincorporated associations, unincorporated syndicates, unincorporated organizations, trusts, body corporates, and may also include natural person in personal capacity or as trustee, executor, administrator or legal representative of that person. A person may be a general partner and a limited partner in the partnership at the same time. However, with rights and powers, there are also restrictions and liabilities. The LPs, like venture capital, private equity, and real estate investment, has a multifaceted business and operational structures.
In LPs, the liability of each Partner for debts and other obligations is limited to a specific partner. A limited partner is not liable for the obligations of the LP more than that. The Limited partner’s liability is limited to the amount of investment agreed to contribute or contributed toward the business of the LPs.
The Limited Partnership Agreement sets out General Partner’s obligations, powers, and restrictions to run the partnership business. The details of each Limited partner and contributions are recorded in the record of the LP. The limited partner has the right to demand and receive the return on contributions. The Limited Partner is not involved in the control of partnership business but could act as a trustee for the LP for specific property or money. The Limited Partner may be permitted to advise the business of the Partnership. All contracts with the third parties are conducted through the General Partners, who act as agent of the Firm and its other Partners to carry on the business and bind the firm. This authority of General Partner is extended by the Limited Partners and can also be rectified.
Under the Ontario Limited Partnership Act, all or a significant number of partners should be residents of Ontario. The firm should carry on business only in Ontario or under a special arrangement act as an extra-provincial limited partnership operating in another province(s). However, the governing law for the extra-provincial limited partnership is where the partnership is organized. The LP is dissolved on the general partner’s retirement, death, or incapacity to manage property unless other general partners continue to be operational.
A Corporation is the most recognized and expensive to operate among all business structures. It has a closely regulated formation with on-going record keeping and filings requirement. In a comforting prospect, Corporation has limited liability, continuous existence, lower taxes, and a convenient form of business to raise capital.
A corporation can be incorporated Federally, Provincially and in Territorial jurisdictions and on incorporation is considered a legal entity, separate from its shareholders with a separate tax structure (from owners and shareholders). A Corporation has the autonomy to own property, possess rights, incur liabilities, sue in its name, and to carry on business. Federal corporations can carry-out their business and operations through its directors and officers in more than one province and even abroad. The provincial corporations; however, must comply with extra-provincial license requirements and registrations to operate in other provinces and territories.
Most Corporations have a share capital, except for non-profit Corporation without any share capital. A shareholder cannot be personally held liable. The personal assets of a shareholder are protected against debts, liabilities, and act or business operations of the corporation. The liabilities, however, are only protected if the shareholder has not issued any instrument or personal guarantee to fulfill the obligations of the corporation. In exchange for shares, the shareholder’s liability is limited to the value of assets in the form of money, property, or past services. With the exception of breach of any fiduciary duty, the directors and officers of the corporation may also have corporate indemnity, limited liability by any shareholder agreement, protection covered under the liability insurance and all the due diligence defenses the director may have against liabilities.
In a tax perspective, the applicable corporate income tax is a combination of federal and provincial corporate rates, based on residency and source. There are different types of corporations with different tax entitlements, rates, deductions. For instance, all income earned by Canadian residents that are sourced in Canada or earned elsewhere could attract tax on Income. The non-residents, however, are only responsible for income sourced in Canada, if they were physically present in Canada for a total of 183 days or longer (Income Tax Act).
In the Federal and each Canadian jurisdiction, there are many steps involved in forming a corporation with various pre-incorporation and post-incorporation requirements. Choosing the right functional business entity from the different types of the corporation is far-reaching in fulfilling the objectivity. The determining factors may include the type of business, management structure, commercial viability, raising capital, incurring liabilities, legal requirements, and tax consequences. It is essential to be aware of governing law, provincial licenses, statutory and regulatory requirements in the jurisdiction of incorporation and place of business operations.
The types of Corporations are:
Corporation Controlled by Public Corporation
Other Corporation, if it does not fall in other categories like General Insurance and Crown Corporation
Canadian Controlled Private Corporation
Other Private Corporation not controlled by one or more corporations; one or more prescribed federal Crown corporations; and any combination of corporations described in the two previous condition
In this business formation, two or more persons align their interests to jointly own assets, tangible or intangible with a goal to generate profits. The tangible assets may comprise real property, equipment, machinery, equipment or vehicle, etc. The intangible may be non-physical assets like goodwill, intellectual property or brand recognition, etc. The Partnership Act reckons it as a simple arrangement and not the creation of a partnership. In the absence of specific legislative provisions, the terms and conditions of this arrangement should be put into writing, with provisions on rights, responsibilities, contingencies, investment and trust conditions. Most importantly, if the rights are not curtailed by any contract, the co-owners are not agents of each other and can individually deal in respect of their interest in the property (if divided or dividable). Otherwise, in the case of undivided property, the percentage interest in the property may be on the title or some deed. There may be some hiccups to get financial assistance from the conventional banks or for real property from Canada Mortgage and Housing Corporation (CMHC) to co-owning a property, leading parties to approach private lenders. One may, however, get some tax benefits in a claim for Capital Cost Allowance (CCA) for having a separate interest in the property.
Another un-common cohesive business structure known as Co-operatives serves as an association of members for profits or as a non-profit organization. The members may have democratic control (one member, one vote) and own shares (instead of property) in any organization/corporation who own the land or the building (with units). There could also be situations where the member or businesses pool in their resources to deliver and sale of products and services or employment. In real property perspective, depending on the percentage of share, the member has no fee simple interest and may be given right of occupancy. The share transactions are also different from the shares in a Corporation, especially in the real estate Co-operatives. The rights, duties, and liabilities are determined based on Corporation owner’s incorporating documents, its by-laws and shareholder’s agreement (if applicable). In Ontario, Co-operatives are governed by the Co-operative Corporation Act, and there is similar legislation in other provinces.
6. JOINT VENTURES
The Joint Venture has no precise definition or a regulatory scheme under Canadian Law. However, depending on the ventures’ commercial collaboration, activity, and the jurisdiction of business, it is regulated in Canada. It is a business formation where two or more parties or entities by a contract, partnership or corporation pool in their resources and expertise with a common goal of carrying out a commercial activity by working in a special project, continuing or new business. The structure of joint venture may be governed by Joint Venture Agreement, Research & Development Agreement, Collaboration Agreement, Development Agreement or established business entities like a simple or LP; and, limited or unlimited corporation.
There are many forms of common ventures. The JV requires conspicuous structures in a particular jurisdiction. Contingent upon the structure and objectives, for instance, like in a corporate joint venture, various corporate laws are applicable in its formation, registration, and business operations. The relationship is developed by a written contract between the co-venturers’ setting out the rules to govern the venture, which is mostly interpreted according to the contract law of the jurisdiction. A teaming arrangement may or may not be a joint venture. Similarly, a joint venture may or may not be termed as a partnership.
Joint venture can be a direct contractual relationship and be used as a Special Purpose Vehicle (SPV) of a newly established partnership or corporate joint venture or and may comprise and involve foreign individuals, partnerships and companies. The entities could be formed as a partnership or joint venture of two partnerships or a corporate joint venture with any corporation with two or more shareholders’ venture or may be a combination of a different form of businesses and entities.
A joint venture is a virtuous form for all those Start-ups, especially technology entrepreneurs developing new products, technologies, concepts, designs, and ideas. The joint ventures could leverage their combined efforts and expertise to commercially launch and market products, diffusing the risks and costs of a viable venture. The structure may involve many intellectual property rights either contributed to the joint venture involving exclusivity rights or jointly developed and owned by the joint venture. The intellectual property rights may be accruing to the joint venture in the form of a license (exclusive or non-exclusive) or affinity with the joint venture after the rights are contributed or transferred to the joint venture.
Although, the Joint Ventures are mostly subjected to the provincial laws; however, certain areas of businesses come under the purview of federal legislation. To structure and formulate an appropriate Joint Venture vehicle, the co-ventures must be decisive on objectives, purpose, activities, jurisdiction, and level of participation, administration, financing, investment, profit, and loss sharing. Duration of the joint venture could be defined in the governing documents, and the dissolution may be either after fulfillment of objectives or because of inevitable circumstances.
In a tax perspective, it all depends on the ventures’ structure. For instance, Corporate joint venture taxation would be different from partnerships. If a joint venture owns any property and on sale, the joint venture’s net income from the portion of the share in the property shall be taxed separately.
7. FRANCHISE AND LICENSING
The franchise is a special business arrangement or license to set-up and operates a unique product or services of franchisor’s business (mostly member of Canadian Franchise Association) using franchisors know-how and expertise, and its goodwill and trademark, according the standards set by the franchisor. The contractual relationship is developed under the Franchise or License Agreement, granting franchisee right to sell, offer for sale or distribution of goods or services, associated with brand name or trademark and distinct know-how linked to the franchise business. The franchisor in return gets initial franchising fee and ongoing royalty on the sale of goods or services. As a requirement of law in Alberta, Ontario, Manitoba, New Brunswick, and PEI, the franchisor must provide franchisees with the Financial Disclosure Document (FDD), i.e., the information and meaningful material facts and financial statements relating to franchise to the prospective franchisees, 14 days before the execution of Franchise Agreement.
In Ontario, may it be a Master Franchising arrangement for operating many outlets or a single outlet under the Franchising Agreement, there is an onerous disclosure requirement under the Arthur Wishart Act. Franchise law has many complexities. Inadequate information about the franchise may entitle franchisee to rescind the franchise agreement, claim initial investment fee, inventory and equipment costs, compensation for losses for expenditures in acquiring, setting up and operating franchise business, within two (2) years and franchisee may also claim damages. British Columbia, Saskatchewan, Nova Scotia, Newfoundland, and Quebec have no statutory FDD requirement and therefore have no remedies available to franchisees if inadequate material facts are passed on to the franchisees relating to franchisors' businesses.
In either FDD disclosure and non-disclosure provinces, to protects interests of the franchisee, the franchise agreement needs to be legally reviewed and financially scrutinized for viability. Most Agreements are often stipulated for franchisor’s benefits. Once the Franchise Agreement executed and business is operational, there are numerous Franchisor’s proprietary restrictions, limitations, guarantees, renewals, rights, and terms and conditions for doing business, including tax consequences depending on a proper business structure to carry out the franchise and license arrangement. Also, there are further tax rules for the franchise, license, etc., which should be discussed with a financial adviser before executing the franchise agreement.
The licensing, on the other hand, is a contractual relationship, between the licensor of the Intellectual Property and the licensee who has been given limited or unlimited, or exclusive Intellectual Property rights. The terms and conditions of the contract normally establish how the business is to be carried out.
8. AGENCY AND DISTRIBUTION
This form of business may be a subsidiary of the main business structures or foreign businesses. The agent or distributor is appointed by any contract, to act on behalf of the parent company. This arrangement may give limited authority and scope to the designated agent or distributor to market, sell, distribute the products, and provide services.
Other business-related issues
Depending on the business structure, jurisdiction, operations, and relating factors, amongst others, the business may have to deal with:
Laws, Regulations, and Byelaws;
Licenses, Registrations, Governances, Permits, and Permissions;
Financing, Equity, Debt, and liabilities;
Restructuring, Bankruptcy, and Insolvency;
Litigation and Alternative Dispute Resolution; and
Specific laws like Labour, Employment, Environmental, Competition, E-commerce, Consumer Protection, Privacy, Intellectual Property, Data Protection etc.
The contents of this paper are intended to provide a general guide to the subject matter.
Depending on the business and specific circumstances, for all queries and legal advice, please contact Asif Anwar