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Important Note for Company Incorporation in Canada

Business entities in Canada

The company incorporation in Canada is governed by CBCA and all the companies, incorporated under federal level or provincial level, is governed by the body. The company incorporation laws at the federal and provincial/territorial level are almost same but the federal act offers complete protection to the company’s name at the country level. There are separate laws for the private and public companies but the standard process for incorporating both the companies is same. By filing the documents like article of incorporation with CBCA or state act, the company can be incorporated.

Depending on the nature and type of the business incorporated in Canada, the process and requirements can be different from each other, and accordingly differ from province to province. The most famous form of incorporating a business in Canada is the Limited Liability setup. It is commonly known as the private company in the market. The company structure of LLP (Limited Liability Partnership) has been increasingly popular for the simplified structure to form and incurring minimal corporate tax over the company’s income. Companies which have more than one director should ensure than 25% of their directorships are resident of Canada. Companies which are to be formed under the state level have different rules depending on the state where it is incorporated. It is not mandatory for the directors of the companies to be also the shareholders. As per the standard process of the Canadian company federal act, it is important that 25% of the directors in the company’s annual meeting are residents of Canada. The meeting can also organized on telephone. It is not mandatory to have a representative of the labour in the board structure of the company.

Canada limited liability company (private corporation)

Any private company registered in Canadian province can be incorporated with one or two shareholders depending on the state registration norms where it is to be registered. The Canadian company act does not have any condition of minimal capital requirement so the company can be formed even with 1 Canadian dollar as the initial capital amount for the company. The list of States of Canada in which the company formation does not require a resident director is as follows:

  1. British Columbia
  2. New Brunswick
  3. Quebec
  4. Yukon
  5. Nova Scotia

If you are planning to incorporate your company in any of the five above states mentioned then AbroadBiz can assist you with the nominee services for the directorship, who can act as the resident director of your company and comply to the mandatory requirements of the government to incorporate the company.
After the incorporation of the company in Canada, the business has to follow the standard process of filing tax on income and submission of financial statements. There are different rules of auditing in each province, so based on the incorporation of the company in specific state, it can get the exemptions.

Exchange controls

Canada has formed stringent rules to curb the anti-money laundering activities but there are no direct rules to restrict the capital moving out or coming into Canada. Any transaction that involves more than 10000 CAD sent out or coming inside the country has to be recorded.

Price Control

There is no defined pricing restriction for products and services in Canada but any company that offers specific service like the telecom or cable tv services then the price will as defined by the regulatory authority of CRTC (Canadian Radio-television and Telecommunications Commission). In the case of power usage the pricing may vary largely as re defined by each of the states’ jurisdiction.

Transfer pricing

As per the standard norms mentioned in the Canada’s transfer pricing, any non-resident company that buys the products and services at a different prices than the amount mentioned in the arm’s length price list then the required upscale or downscale of price will be made to ensure that the price structure are followed as per the standard.

As per the standard process of the central government, it important that the tax payers fulfil the documentation required for the transactions made by the foreign companies as well as non-arm’s length companies. In case the documentation are not prepared as per the procedure or within the timeline, then the company will incur penalties over the exceeding amounts. An annual report of the corporate has to be submitted for all the non-arm’s length transactions that are made with the foreign companies by the Canadian company. The non-arm’s transactions should be segregated in seven different methods (exempting the dividends and shares) of transfer pricing as explained below:

a) comparable uncontrolled price
b) cost-plus
c) resale
d) profit split
e) transactional net margin
f) qualifying cost contribution arrangement, and
g) others

Apart from the income received from sales and purchase of goods, like:

a) Rents
b) Royalties
c) Fees charged over the licenses and franchisees
d) Commissions,
e) Services as well as other intangibles

must also be classified under the pricing methods explained above. Every Canadian company has to file all the non-arm’s length transactions as per the forms in the above list

Thin capitalization

The condition of no minimum limit capital clause to incorporate company in Canada leads to reduced limit of internet payment on the loan for non-residents to the Canadian company. The particular rule is majorly applied on the interest that is paid or the non-resident shareholder who is has 25% ownership. The interest on such debts cannot be collected by the Canadian resident company until and unless the loan has exceeded till the ratio of 1.5:1 debt to equity. If the specified ratio exceeds the limit then in that case the prorated interest or additional amount is paid in the form of dividend which is subject to the withholding tax. In case the loans are availed by the arm’s length third parties then in that case they are affected by the rule of back to back loan. The formation of such rules actually helps in preventing the misuse of minimal capital regulations.

Controlled foreign companies

As part of the Foreign Affiliate rules defined in Canada, FAPI has set of rules which governs the foreign accrual property income. Individuals who are residents of Canada and associated with the foreign company incorporated in the country (Controlled Foreign Affiliate – CFA) need to follow the standard practice of paying income tax on the share earned as per the FAPI rule. In case the CFA acquires shares or disposes it in order to avoid the CFA status and if it is their principal objective then the anti-avoidance rule will be applied.

The FAPI rule has been designed to prevent the CFAs earning any type of illegal income. All the CFAs are controlled by the Canadian entities and it is considered under the Foreign Affiliates. The definition of Foreign Affiliate is a Canadian company which has at least 10% of the equity with the related people and 1% of the same is owned by the Canadian entity. De Jure is applicable on the individual(s) who have sufficient number of shares to form the majority of vote at the board of directors. Such type of control is majorly exercised by the taxpayer or the individual who is not working at the arm’s length with the taxpayer.

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