International expansion can be a crucial step toward growth and success. Canada is an ideal alternative for establishing a subsidiary office due to its solid economy and favourable business climate. Starting a subsidiary office in Canada, on the other hand, necessitates careful planning and adherence to legal regulations. In this guide, we will explain how to start a subsidiary office in Canada, Its benefits, legal requirements, and required documents and How OnDemand International helps you in the smooth incorporation process.
How to Open a Subsidiary Office in Canada?
The following process you need to follow to open a subsidiary in Canada are:
1. Choose a Business Structure
- Typically, subsidiaries are incorporated as corporations, which are separate legal entities from their parent company.
- You can incorporate the subsidiary federally (operating across Canada) or provincially (limited to a specific province).
2. Choose a Business Name
- The subsidiary’s name must be unique and compliant with Canadian naming rules. Conduct a NUANS (Newly Upgraded Automated Name Search) report to ensure the name isn’t already taken.
- The name must end with “Ltd.,” “Inc.,” or “Corp.” to signify its corporate status.
3. Incorporate the Subsidiary
- Federal Incorporation: Register with Corporations Canada. This allows the subsidiary to operate across Canada. File online at the Corporations Canada website, submit the required forms, and pay the incorporation fee (around CAD 200 to CAD 250).
- Provincial Incorporation: If you want to operate in a specific province, incorporate with the province’s business registry (e.g., Ontario Business Registry, Registraire des entreprises du Québec).
4. Appoint Directors
- At least 25% of the directors must be Canadian residents for federal corporations. For some provinces (e.g., British Columbia), there is no residency requirement.
5. Prepare and File Articles of Incorporation
- File the Articles of Incorporation with the federal or provincial government. This document outlines the structure of the subsidiary, including share classes, company purpose, and governance rules.
6. Register for Taxes
- Obtain a Business Number (BN) from the Canada Revenue Agency (CRA). This will serve as the subsidiary’s tax identifier for corporate income tax, payroll, GST/HST, and import/export.
- If the subsidiary’s sales exceed CAD 30,000 annually, register for GST/HST.
7. Obtain Required Licenses and Permits
- Depending on the nature of the subsidiary’s business, specific licenses or permits may be required at the federal, provincial, or municipal level.
8. Open a Canadian Bank Account
- Open a business bank account in Canada, which is essential for handling the subsidiary’s financial transactions.
9. Comply with Ongoing Requirements
- Maintain corporate records, file annual returns, and meet tax filing obligations with the CRA. Provincial corporations may have additional filing requirements.
Required Documents to Register a Subsidiary Office in Canada
Registering a subsidiary office in Canada involves submitting various documents to comply with legal requirements. The specific documents you need may vary depending on the province or territory where you plan to establish your office. However, some common documents are typically required.
Here are the essential documents you should prepare:
- Certificate of Incorporation: If you choose to incorporate a federal corporation, you will need a certificate of incorporation issued by the federal government. This document confirms that your subsidiary office is legally incorporated and recognized as a separate entity.
- Articles of Incorporation: The articles of incorporation outline the basic details of your subsidiary office, including its name, address, purpose, and share structure. These articles need to be filed with the appropriate government authority as part of the registration process.
- NUANS Report: A NUANS report is a crucial document that verifies the availability of your chosen business name. This report shows if there are any existing businesses with similar names. It is necessary to ensure that your subsidiary office’s name is unique and distinguishable from other entities.
- Proof of Identity and Address: You will need to provide proof of identity and address for the individuals associated with the subsidiary office. This may include copies of passports, driver’s licenses, and utility bills. The specific requirements may vary, so check with the relevant authorities for acceptable documents.
- Shareholder and Director Information: If your subsidiary office has multiple shareholders or directors, you will need to provide their information, including names, addresses, and citizenship. This information helps establish the ownership and management structure of your business.
Requirements to Start a Subsidiary Office in Canada
Starting a subsidiary office in Canada comes with certain requirements that must be met to ensure compliance with the law. These requirements may vary depending on the province or territory where you plan to establish your office.
Here are some common requirements you should consider:
- Business Name Registration: Before you can register your subsidiary office, you need to choose a unique and distinguishable business name. This name should comply with the regulations set by the relevant government authority. Conduct a thorough search to ensure that your chosen name is available.
- Business Permits and Licenses: Certain industries in Canada require specific permits and licenses to operate legally. Research the permits and licenses relevant to your business and ensure that you obtain them before commencing operations. Failure to comply with these requirements can result in penalties and legal complications.
- Financial Obligations: As a business owner, you are responsible for fulfilling various financial obligations. These include paying taxes, maintaining accurate financial records, and complying with accounting standards. Familiarize yourself with the tax laws and regulations applicable to your business to avoid any issues.
- Employment Laws: When hiring employees for your subsidiary office, you must comply with Canadian employment laws. Familiarize yourself with the regulations regarding minimum wage, working hours, vacation entitlement, and other employment standards. This ensures that you create a fair and compliant work environment.
- Compliance with Regulatory Agencies: Depending on the nature of your business, there may be additional regulatory agencies that you need to comply with. For example, if you operate in the healthcare or food industry, you may need to meet specific health and safety standards. Identify the relevant regulatory bodies and ensure that you meet their requirements.
Types of Subsidiaries a Foreign Company can Open in Canada.
In Canada, subsidiaries can be categorized based on ownership and structure. The key types include:
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Wholly-Owned Subsidiary: This subsidiary is 100% owned by a foreign parent company, giving the parent full control over operations and decision-making. The subsidiary operates as a separate legal entity, offering liability protection for the parent.
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Partially-Owned Subsidiary: In this case, the parent company owns a majority share (over 50%) but not 100%. This gives the parent control, while allowing other investors or partners to hold minority shares. It provides access to local capital and expertise while maintaining decision-making power.
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Joint Venture (JV) Subsidiary: A JV subsidiary is established by two or more parent companies, often for a specific project or strategic purpose. Ownership and control are shared as per the agreement, allowing for collaboration in resources and market entry.
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Holding Company Subsidiary: In this structure, a parent company sets up a subsidiary mainly to hold shares of other companies, managing investments rather than actively operating a business. This structure helps with tax planning and managing risks across different business ventures.
Benefits of Opening a Subsidiary Office in Canada
Opening a subsidiary office in Canada offers numerous benefits for businesses looking to expand their global presence.
Here are some advantages of establishing a subsidiary office in Canada:
1. Access to a Stable Economy
Canada is known for its stable and resilient economy. By opening a subsidiary office, you can tap into the country’s economic growth and stability. The Canadian market offers ample opportunities for businesses to thrive and expand.
2. Proximity to the United States
Canada’s proximity to the United States provides businesses with a strategic advantage. It allows for easier access to the large American market, enabling businesses to cater to a broader customer base.
3. Skilled Workforce
Canada boasts a highly educated and skilled workforce. By establishing a subsidiary office, you can leverage this talent pool to enhance the productivity and innovation of your business. The availability of skilled professionals across various industries makes Canada an attractive destination for foreign businesses.
4. Business-Friendly Environment
Canada offers a business-friendly environment with favourable regulations and policies. The country promotes entrepreneurship and provides various incentives and support programs for businesses. This encourages investment and facilitates the growth of subsidiary offices.
5. Access to International Markets
By setting up a subsidiary office in Canada, you gain access to international markets through the country’s numerous free trade agreements. These agreements provide businesses with preferential access to global markets, making it easier to expand your reach beyond Canada.
Tax implications for Subsidiary in Canada
When a company establishes a subsidiary in Canada, there are several tax implications it needs to be aware of. These tax considerations affect the subsidiary’s operations, profitability, and cross-border transactions. Below is a breakdown of key tax aspects:
1. Corporate Income Tax
- A subsidiary in Canada is treated as a separate legal entity from its parent company. This means it is subject to Canadian corporate tax laws.
- Federal Corporate Income Tax Rate: The general corporate tax rate at the federal level is 15%.
- Provincial Corporate Income Tax: In addition to the federal rate, provinces apply their own corporate income tax rates, which vary (e.g., 11.5% in Ontario, 12% in Quebec, 8% in Alberta, etc.).
- The combined federal and provincial corporate tax rate typically ranges from 23% to 31%, depending on the province of operation.
2. Transfer Pricing
- Transfer pricing rules apply to any transactions between the Canadian subsidiary and its foreign parent or other related parties. These transactions must be conducted at arm’s length, meaning prices should reflect market rates.
- The Canadian tax authorities, the Canada Revenue Agency (CRA), scrutinize these transactions to ensure that profits are not being artificially shifted out of Canada to avoid taxes.
- Proper documentation is required to support transfer pricing policies, or the CRA may impose adjustments and penalties.
3. Withholding Tax on Dividends and Other Payments
- When a Canadian subsidiary distributes dividends to its foreign parent, a withholding tax applies. The standard rate is 25%, but it can be reduced under tax treaties (e.g., the Canada-US Tax Treaty reduces the rate to 5% if the parent company owns at least 10% of the subsidiary).
- Interest, royalties, and management fees paid to non-residents may also be subject to withholding tax, usually at a rate of 15%, though tax treaties can reduce this as well.
4. Goods and Services Tax (GST) / Harmonized Sales Tax (HST)
- The subsidiary will likely be subject to GST/HST on the sale of goods and services in Canada. The GST rate is 5% at the federal level, while HST applies in certain provinces at rates ranging from 13% to 15%.
- The subsidiary must register for a GST/HST number and collect and remit this tax if its annual taxable sales exceed CAD 30,000.
5. Thin Capitalization Rules
- These rules limit the ability of a Canadian subsidiary to deduct interest expenses on loans from its foreign parent company. If the subsidiary’s debt-to-equity ratio exceeds 1.5:1, the interest on the excess portion of the loan may not be tax-deductible.
- The goal is to prevent excessive debt financing, which can erode the Canadian tax base through large interest deductions.
6. Permanent Establishment (PE)
- A Canadian subsidiary is typically considered a permanent establishment in Canada. As a result, all of its profits from Canadian activities are taxable in Canada.
- If the foreign parent company also has a branch or carries out activities directly in Canada (without a subsidiary), these may also be considered a PE, and thus the parent could be taxed on income attributed to its activities in Canada.
7. Loss Carrybacks and Carryforwards
- Canadian subsidiaries can generally carry back losses for up to three years or carry forward losses for up to 20 years to offset taxable income. This allows flexibility in managing taxes over time, especially in the early years of operation.
8. Tax Treaty Benefits
- Canada has a wide network of tax treaties with over 90 countries, which help reduce tax burdens on cross-border transactions. Treaties often reduce withholding taxes on dividends, interest, and royalties and provide guidelines to avoid double taxation.
- A Canadian subsidiary can take advantage of these treaties to lower tax liabilities when repatriating income to the parent company.
9. Capital Gains Tax
- If a Canadian subsidiary sells capital assets, such as real estate or shares in another company, it may be subject to capital gains tax. Half of the capital gain (i.e., 50% of the profit) is included in taxable income.
- If the foreign parent sells its shares in the Canadian subsidiary, the capital gain may also be subject to Canadian tax, depending on the nature of the asset and any applicable tax treaties.
10. Scientific Research & Experimental Development (SR&ED) Tax Credits
- Canadian subsidiaries engaged in research and development (R&D) may be eligible for SR&ED tax credits. These incentives can help reduce taxable income or even result in refundable credits, which can be beneficial for tech, biotech, or manufacturing companies operating in Canada.
Conclusion
Opening a subsidiary office in Canada can be a rewarding endeavour for businesses seeking to expand internationally. By carefully following the required steps, preparing the necessary documents, and fulfilling the legal requirements, you can establish a successful presence in the Canadian market. The benefits of operating a subsidiary office in Canada, such as access to a stable economy, a skilled workforce, and a business-friendly environment, make it an attractive destination for global businesses. So, if you are considering expanding your business internationally, Canada should be at the top of your list. You can consult with OnDemand International if you have any queries regarding the subsidiary office setup.
Frequently Asked Questions
What is the difference between a subsidiary and a branch in Canada?
A subsidiary is a separate legal entity incorporated in Canada, while a branch is an extension of the foreign parent company operating in Canada. A subsidiary offers more legal separation, while a branch directly ties the parent to liabilities.
Do I need a Canadian resident director for my subsidiary?
For federal incorporation, at least 25% of directors must be Canadian residents. Some provinces, like Ontario and Alberta, also have similar requirements, while others like British Columbia do not.
What are the tax implications for a subsidiary in Canada?
A Canadian subsidiary is subject to corporate income tax (federal and provincial), withholding tax on dividends, GST/HST, and transfer pricing rules for transactions with the parent company. The combined federal and provincial corporate tax rate typically ranges from 23% to 31%.
Should I incorporate my subsidiary federally or provincially?
Federal incorporation allows the subsidiary to operate across Canada with greater brand name protection. Provincial incorporation is suitable if the business is limited to one province and can be simpler administratively.
What is the difference between a wholly-owned and a partially-owned subsidiary?
A wholly-owned subsidiary is 100% owned by the parent company, giving it full control, while a partially-owned subsidiary has minority shareholders, allowing shared control and risk.
Can a foreign company fully own a subsidiary in Canada?
Yes, foreign companies can fully own a subsidiary in Canada, known as a wholly-owned subsidiary.
What is required to register a subsidiary in Canada?
You need to conduct a name search (NUANS), file Articles of Incorporation, appoint directors, register with the Canada Revenue Agency (CRA) for tax purposes, and may need to obtain local licenses or permits.
What are the capital requirements for establishing a subsidiary in Canada?
There are no minimum capital requirements to incorporate a subsidiary in Canada. The amount of capital invested depends on the business needs and nature of the industry.
Do I need to file taxes separately for the subsidiary in Canada?
Yes, a subsidiary is a separate legal entity and must file its own corporate income tax returns in Canada. It may also be subject to other filings such as GST/HST and payroll taxes.
What are the ongoing compliance requirements for a Canadian subsidiary?
Subsidiaries must file annual returns, maintain updated corporate records, comply with tax filing deadlines, and may need to meet additional provincial or industry-specific regulations.
