Advantages of company formation in Canada
Canada is one of the most attractive countries for conducting business, whether you are a resident or a foreign national. The demand for this jurisdiction is growing year after year. Company registration in Canada offers the following advantages:
- Canada boasts an attractive tax environment. The country has a system that reduces the corporate tax rate by more than half, making it a popular choice among business owners and enabling them to optimize taxation for their Canadian companies. The three-tier tax system also comes with its benefits;
- It is one of the G7 countries with the most promising economic conditions for investment. Canada is known for its stable financial position, standing out among the G7 nations;
- Companies registered in Canada are well-respected globally and benefit from its strategic geographical location, which can be utilized for international trade and the supply of goods and services to other countries;
- Canada is politically stable, competitive, and productive. Moreover, Canadian legislation is flexible and aligns with modern realities.
Legal forms of business organization in Canada
It’s worth noting an important aspect of Canadian corporate law: the choice of the legal structure of a business entity affects both the registration procedure and business operations. Additionally, Canada’s division into provinces means that certain legal forms may not be available in certain provinces. In practice, you can set up a company in Canada using these primary organizational and legal structures:
In Canada, corporations established for profit purposes come in various types:
- Private Corporation Controlled by Canadian Residents (Canadian-controlled private corporation – CCPC)
This type of corporation is primarily controlled by Canadian residents and cannot be 100% owned by non-residents or public companies. It is a private company with restrictions on the number of participants who must be Canadian residents. If, for example, some shareholders become non-residents (or shares are sold to non-residents), resulting in non-residents owning more than 50% of the voting rights in the company, the corporation will no longer qualify as a CCPC.
- Other Private Corporation
This type of corporation is also mainly formed by residents and does not allow public companies in its structure.
- Public corporation
Allows for the free trading of corporation shares on the stock exchange.
- Extra-Provincial Corporation (EPC)
In certain provinces of Canada, such as Ontario, Quebec, and others, you have the option to register an Extra-Provincial Corporation (EPC). EPCs are exempt from paying taxes on profits earned outside of Canada. Moreover, there are no residency requirements for directors and shareholders of EPCs. These features make EPCs a highly advantageous choice when considering company registration in Canada.
This form of conducting business is highly sought after by non-residents in Canada. Typically, it is employed to expand businesses that are already operating in another jurisdiction.
Partnerships are a common form of conducting business in Canada.
There are three main types of partnerships:
- General Partnership
In a general partnership, each partner bears full personal responsibility for the debts, contractual obligations, and legal issues arising from the partnership’s activities, similar to sole proprietorships.
- Limited Partnership (LP)
LPs consist of one or more general partners with unlimited liability and one or more limited partners, whose liability is limited based on their contribution to the partnership.
A limited liability partner contributes to the partnership and may occasionally provide advice but does not actively participate in the actual management of the business. Limited partners who become actively involved in managing the business risk losing their limited liability status.
- Limited Liability Partnership (LLP).
As the name suggests, LLPs offer a higher level of liability protection for partners. In the event of a lawsuit, only the assets of the partner involved with the plaintiff are at risk. The assets of other partners are protected, which is not the case in a general partnership.
LLPs are available in all Canadian provinces but are primarily used in high-risk professional environments, such as law firms, accounting firms, architectural practices, or medical offices.
Each province regulates LLPs differently, so it’s essential to review the partnership laws for each province: Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, Prince Edward Island, Quebec, Saskatchewan.
LLP is also convenient for various purposes, such as conducting trade operations, buying and selling goods in Europe, and subsequently distributing them globally; for remote service provision, accepting payments worldwide, engaging in online commerce, and much more.
- Sole proprietorship
In a sole proprietorship, all risks and responsibilities rest with the individual who registers as a sole proprietor.
There are other types of companies in Canada that we have not covered in this list, such as Cooperatives. However, their popularity is relatively low, so we have chosen not to discuss them in this article. If you are interested in registering a company in Canada using a specific form that we have not mentioned, feel free to get in touch with our specialists, so we can assist you in navigating the intricacies of your chosen company type.
The process of company registration in Canada
The process of registering a company in Canada is straightforward and convenient. To begin the registration process, you will need to prepare a standard set of documents, which you can request from our advisers.
In addition to company memebers’ documents you will need to furnish the following information:
- 2-3 preferred company names in order of priority;
- the company’s structure (the director, shareholder, and beneficiary);
- the type of activity the company will engage in.
Once all the necessary information and documents are gathered, the company registration process will commence. The entire process, from obtaining the required documents to preparing the final package of corporate documents for the established company, includes the following stages:
- Selecting and verifying the company name.
Since identical company names are not allowed, it is advisable to provide several desired company names (2-3 options). In case the first name is rejected, you can choose the second or third option. Names can be in English, French, or a combination of both languages. The name verification process takes 1-2 days.
- Preparing forms and other documents for submission to the Corporate Registry.
The forms and documents will contain the necessary information about the company name, its structure, type of activity, and other required details.
- Choosing between federal or provincial registration and the registration process itself.
All companies in Canada can be registered at the federal or provincial level.
- Federal incorporation:
Federal registration allows you to conduct business under the same name in all provinces and territories. It’s worth noting that this registration process is more complex in terms of setup and maintenance.
- Provincial incorporation:
Provincial registration is a more suitable option if your company’s primary activities will be outside of Canada.
- Obtaining the company registration number (BN/NEQ).
- BN is a 9-digit company number that identifies it in federal and provincial government agencies.
- NEQ is the number for companies registered in Quebec, which is unique to that province.
- Preparing corporate documents for the registered company and ordering a corporate seal (if necessary).
The preparation of a set of corporate documents for a Canadian company takes no more than 1-2 days.
- Notarization and legalization of documents if required.
The notarization process takes 2-3 days, while legalization can take from 7 to 10 days.
After registering the company, an important step is trademark registration.
Tips to keep in mind when conducting business in Canada
- The following services are in high demand in Canada:
- automobile servicing;
- legal support;
- accounting services;
- real estate services;
- Residency plays a significant role in the registration and taxation of companies in Canada. Canadian legislation stipulates that at least 25% of the board members who exercise management functions in a corporation must be Canadian residents. If there are fewer than four directors, at least one of them must be a Canadian resident. However, it is worth pointing out that this rule might not apply in certain provinces.
- Canada offers various business immigration programs that are more straightforward and attractive in comparison to many other G7 countries. While company registration in Canada alone cannot be the basis for immigration to the country, it does play a significant role when combined with other measures.
Taxation in Canada
According to international researchers, Canada has the lowest business tax burden among all G7 countries. A transparent tax system and numerous options for fiscal optimization collectively provide favorable conditions for business owners wishing to conduct entrepreneurial activities in this country.
Canada operates on a three-tiered tax system, with taxes being federal, provincial, and territorial (or local), which means that overall tax rates can vary between provinces. Additionally, tax rates depend on the type of business activity and the company’s turnover.
The tax treatment in Canada is significantly influenced by a company’s residency. Resident companies are subject to taxation on worldwide income, while non-resident companies are taxed only on income earned within Canada’s territory.
- Corporate income taxThe Government of Canada website contains information about tax rates. For instance, the corporate income tax rate is variable and depends on the eligibility for tax reduction.The nominal corporate income tax rate for corporations is 38%. However, there are opportunities to reduce the effective rate, such as a 10% reduction in the federal tax rate. Canadian corporations that earn income in a Canadian province or territory for past tax years may qualify for this reduction.
Additionally, there is the possibility to further reduce the corporate tax rate by 13%, resulting in a final rate of 15% in such a case. Please note that this reduction to 15% is not applicable to corporations that are eligible for preferential corporate tax treatment, such as:
- income eligible for the small business deduction and manufacturing and processing income in Canada;
- income eligible for the deduction for generating electric power or producing steam for sale;
- investment income eligible for refund under Canadian tax law.
Reduction also does not apply to income derived from the provision of personal services and in some other cases.
For Canadian-controlled private corporations claiming the small business deduction, the net corporate income tax rate as of January 1, 2019, is 9%.
Provincial Corporate Income Tax is imposed at various rates ranging from 0% to 16%, depending on the province (check out the chart below).
* – Quebec and Alberta do not have agreements with the Canada Revenue Agency under which they would be required to collect corporate income tax.
- Goods and services tax (GST) / Harmonized sales tax (HST)
The federal rate of 5% is added to provincial rates ranging from 0% to 10%.
- Customs Tariff
Tariffs are established based on the type of imported product, following international product coding approved by the World Customs Organization.
Preparation and submission of reports in Canada
All companies and legal entities registered in Canada are required to file annual returns. The reporting period in Canada generally spans 12 months, calculated from the date of company incorporation. The annual report must be filed within six months from the end of the reporting year.
Tax information in Canada must be provided to the relevant authorities in all cases, even if the company had no sources of income in Canada and is not required to pay taxes in Canada.
It’s necessary to maintain proper accounting records and keep accounting materials in Canada. Companies with a stated capital not exceeding 5 million Canadian dollars are not obligated to conduct an audit of their financial accounting.
All reports and declarations are prepared based on primary documentation and accounting records.
Returning to the importance of choosing the legal form of your business, it is essential to consider financial reporting requirements as well. For example, when operating as an LP (Limited Partnership) in the province of Ontario, the owner is exempt from the obligation to submit annual financial reports, which simplifies the process of conducting business.
Company registration in Canada is a prestigious option chosen by many entrepreneurs worldwide to establish their businesses, branches, and subsidiaries. Canada is a popular choice for starting a company because it is known for being a reliable place to invest and run a business with low taxes and minimal risks. If you are interested in company registration in Canada, please contact the experts at GFLO Consultancy. We will be pleased to assist you with any cases.