CHAPTER 02 Types of Business Organizations
A corporation may indemnify its directors and officers for personal liability they may incur when acting in such capacities, or it may purchase insurance for their benefit to cover such liability. However, indemnification will generally cover only those acts that were performed by the directors and officers in good faith. The CBCA, OBCA and QBCA permit broader insurance coverage to be maintained, even in respect of acts contrary to directors’ and officers’ fiduciary duties, although such insurance may not, in practice, be obtainable at a reasonable cost.
There are important differences between ULCs, depending on the province in which they are incorporated. In particular, the shareholders of an Alberta ULC are liable for any liability, act or default of the ULC, whereas in Nova Scotia and British Columbia, the shareholders of a ULC have no direct liability to creditors, and their liability arises only when the ULC is wound up and there are insufficient assets to satisfy its obligations. Subsidiary If the incorporation of a subsidiary is chosen, the cost of incorporating the corporation and the ongoing expenses of maintaining it must be taken into account. If it is incorporated under the CBCA, consideration must be given to whether appropriate resident Canadians are available to serve as directors. Certain corporate records must generally be maintained in Canada. Since the subsidiary is a separate legal entity from its parent, the parent will not generally be liable for obligations incurred by the subsidiary (unless the subsidiary is a ULC).
SUBSIDIARY OR BRANCH? A foreign corporation may carry on business in
Canada either through a branch or by setting up a new corporation as a Canadian subsidiary. Tax considerations will be important in making this choice, but the non-tax considerations discussed below may also be relevant. Most provinces in Canada do not provide for hybrid forms of corporate entity with certain partnership-like characteristics. In particular, no Canadian jurisdiction provides for limited liability companies (LLCs). However, some provinces permit the formation of unlimited liability companies (ULCs), the shareholders of which do not have limited liability, but which are otherwise similar to ordinary corporations. Although a ULC is treated as a corporation for Canadian tax purposes, it is eligible for flow-through treatment for U.S. tax purposes. Therefore, ULCs are sometimes used in cross-border transactions. However, as a result of the amended Canada-U.S. tax treaty, careful planning may be required for U.S. residents to obtain beneficial tax treatment through the use of a ULC (see the Tax Considerations chapter of this guide).
A foreign corporation may carry on business in Canada either through a branch or by setting up a new corporation as a Canadian subsidiary.
9
Davies | dwpv.com
Powered by FlippingBook