Top 10 Questions About Expanding Your Business into Canada

What laws influence the relationship between local agents and distributors and foreign companies?

Foreign companies doing business in Canada will be influenced by legislation, the common law and various international treaties. Canada’s Constitution creates mutually exclusive jurisdictions for federal and provincial legislation.

For example, Canada’s intellectual property, competition, bankruptcy and criminal laws are solely within the purview of the Federal Government. Provincial legislative authority is granted for the regulation of trade and commerce, education and health within the province.

This provincial authority includes legislation, common law and, in the case of Québec, civil law affecting property and civil rights in the province. The jurisdictional distinctions are often blurry, and the subject matter of federal and provincial legislation sometimes overlaps.

In addition, Canada has entered into many international trade and tax treaties with other countries which will influence foreign companies doing business in Canada.

For more information about jurisdictional questions, please contact our Commercial Litigation Group.

How does the Canadian government regulate commercial joint ventures between foreign investors and local firms?

Legislation by the Federal Government and each of the provincial governments regulates ventures between foreign investors and local firms, including agents and distributors. From a contracting perspective, there is no material distinction between business parties who are foreign and those who are local.

The foreign investor will have to comply with the direct investment provisions noted below in question 3. In addition, many obstacles to foreign investment have been removed as a result of the various free trade agreements that Canada has negotiated with other countries, such as the Canada-United States-Mexico Free Trade Agreement (CUSMA).

For more information about foreign investment in Canada, please contact our Business Group.

What role does the government of Canada play in approving and regulating foreign direct investment?

Non-Canadians who acquire control of an existing Canadian business or who wish to establish a new unrelated Canadian business are subject to the federal Investment Canada Act (ICA). In either case the non-Canadian investor must submit either a Notification or an Application for Review to the Federal Government.

A Notification must be filed each and every time a non-Canadian commences a new business activity in Canada and each time a non-Canadian acquires control of an existing Canadian business where the establishment or acquisition of control is not a reviewable transaction. Only in certain circumstances does the ICA seek to review or restrict new investments by non- Canadians.

In general terms, the transactions which are subject to review under the ICA are larger transactions, and transactions in certain politically and culturally significant sectors (as noted below in question 5).

Securities transactions and venture capital deals, acquisitions of control in connection with realization on security, certain financing transactions and certain direct and indirect acquisitions of control by insurance companies are exempt from the ICA. For all other transactions a Notification needs to be filed.

For more information about direct foreign investment in Canada, please contact our Securities Group.

Can foreign investors conduct business in Canada without a local partner? If so, what corporate structure is most commonly used?

There is nothing preventing a foreign investor from conducting business in Canada without a local partner. All businesses, foreign or local, must register in the appropriate jurisdiction to conduct business; however, these are administrative filings.

Most foreign investors, however, would incorporate a new company in a Canadian jurisdiction in order to carry on their business. This Canadian subsidiary may be a standard limited liability corporation or it might be an unlimited liability corporation, depending on the tax characteristic of the parent’s jurisdiction.

For more information about partnership agreements in Canada, please contact our Business Group.

What steps does the Canadian government take to control mergers and acquisitions with foreign investors of its national companies or over its natural resources and key sectors (e.g., energy and telecommunications)?

As discussed in question 2, non- Canadians who acquire control of an existing Canadian business, or who want to establish a new unrelated Canadian business, are subject to the federal Investment Canada Act (ICA).

The transactions subject to review include businesses within a prescribed type of business activity that is related to Canada’s cultural heritage or national identity, and transactions where the Minister responsible has reasonable grounds to believe that an investment by a non-Canadian could be injurious to national security.

Notice of the transaction is given to the Review Division of Industry Canada. When a transaction is reviewable under the ICA, the investor is required to file an extensive pre-closing filing called an Application for Review with supporting documents. When a review is conducted, the investor is prohibited from closing the transaction until the Minister’s approval is obtained. Investment reviews under the ICA proceed in tandem with reviews under the Competition Act.

Merger or antitrust review and prenotification in Canada are governed by the Competition Act. Mergers that exceed a certain size threshold require the Commissioner of Competition to be notified prior to completion. Whether a notification filing is required is determined by the value of the assets in Canada and the annual gross revenues from sales in, from or into Canada of the parties to the transaction, and of the target corporation itself.

There are sectors in Canada, such as telecommunications and other broadcast-related sectors, that have ownership restrictions imposed by the Federal Government. In addition, Canada has anti-dumping legislation which imposes duties to prevent unfair competition with domestic Canadian goods.

For more information about Canadian Merger & Acquisitions, please contact our Business Group.

How do labour statutes regulate the treatment of local employees and expatriate workers?

For employers in Canada, the employment relationship is governed by various federal and provincial acts that provide minimum standards for most employees. In most cases, individual or collective agreements will be governed by these minimum standards.

Accordingly, Canada cannot be considered a jurisdiction in which there is employment at will. There are minimum standards which mandate that employees are entitled to receive either notice of the termination of their employment or pay in lieu of notice if their employment is terminated without cause. The legislative requirements are minimum standards only and do not restrict an employee’s right to sue for breach of contract, wrongful dismissal or other damages arising from the termination of his or her employment.

In the absence of a written contract to the contrary, termination of employment without cause generally requires significantly longer notice periods than those provided by the legislation. Appropriate reasonable notice periods have been established by common law through the litigation process on a case-by-case basis. The courts consider various factors, including the employee’s age, length of service, position, remuneration, how the employee came to be employed, their chance of finding replacement employment and the manner of dismissal.

The judge will consider all of these factors to determine the appropriate “reasonable notice” period. Reasonable notice established by the common law in Canada often greatly exceeds the obligations of U.S. employers to their employees.

The grounds for termination for cause in Canada are also very limited and reserved for the most serious misconduct (for example, where the termination results from acts of dishonesty of the employee, or where the employee has been warned in writing various times and provided with assistance, yet continues to perform below expectations).

For more information on Canadian Employment, please contact our Employment Group.

How do local banks and government regulators deal with the treatment and conversion of local currency, repatriation of funds overseas, letters of credit and other basic financial transactions?

Banking, currency and negotiable instruments are regulated uniformly in Canada by the Federal Government. Specifically, all banks in Canada are regulated by the Federal Government. The Bank Act, S.C. 1991, c. 46 is the main federal statute which regulates Canadian banking. Canadian banks are divided into three distinct categories.

Schedule I banks are domestic banks that are allowed to accept deposits which may be eligible for deposit insurance. Schedule II banks are foreign bank subsidiaries that are authorized to accept deposits which may be eligible for deposit insurance. Foreign bank subsidiaries are controlled by eligible foreign institutions. Schedule III banks are foreign bank branches of foreign institutions that are authorized to do banking business in Canada.

For more information on Canadian Banking, please contact our Banking Group.

What types of taxes, duties and levies should a foreign investment in Canada expect to encounter?

When doing business in Canada, you can expect to encounter sales and transfer taxes, income and capital taxes, and custom and excise duties. Canada has a 5% goods and services tax (GST) which applies to most goods and services on the purchase price. Those engaged in commercial activity in Canada having worldwide sale of goods and services subject to GST greater than $30,000 per year must register to collect GST. Registration entitles businesses to input tax credits (ITCs) equal to the full amount of GST paid by them on all business purchases.

Some non-residents carrying on business in Canada are also required to register to collect GST. Most Canadian provinces charge a sales tax ranging between 5% and 10% on tangible property and certain services. Harmonized Sales Tax (HST) has been implemented in Nova Scotia, New Brunswick, Newfoundland, British Columbia and Ontario. HST applies to all goods and services that are subject to GST and ranges between 12% and 15%.

Registrants for HST are entitled to claim ITCs. The province of Québec administers its own sales taxes together with the GST. The rate of the Québec sales tax is 9.975%. In addition, a land transfer tax, ranging from .02% to 2%, is payable on the acquisition of real property in each province. Canada imposes a federal income tax on non-residents who conduct business or sell real property in Canada.

Canada also imposes a federal non-resident withholding tax on certain Canadian source payments. This requirement can be waived if the non-resident is carrying on business through a permanent establishment. Canada has entered into bilateral treaties with many countries which contain tax relief provisions. A foreign tax credit may be available in the non-resident’s own jurisdiction. A corporation incorporated in Canada will be considered a resident of Canada for income tax purposes. This means the corporation will be subject to Canadian income tax on its worldwide income. Foreign businesses can also be carried on through branch operations.

Provinces and territories typically impose income tax on corporations carrying on business within the province and some impose a capital tax on corporations. All goods entering Canada go through a customs inspection at the point of entry. Documentation accompanying goods ascertains the transaction value of the goods (the price paid for the goods by the importer, subject to adjustments for royalties, shipping fees and transportation).

The amount of customs duty is determined by the customs tariff that sets out a specific list describing the class of goods and setting out the corresponding rate of duty. Member countries of Canada-United States-Mexico Free Trade Agreement (CUSMA) receive a preferential duty rate. Imported goods, such as alcohol and tobacco, are subject to a special duty under the customs tariff that is equal to the excise duty paid by Canadian producers.

There are special anti-dumping duties for imported goods sold in Canada at prices that are below the prices in the home market. Dumping occurs when the “normal value” of the imported goods exceeds the “export price.” These anti-dumping duties are imposed to provide Canadian producers with relief from unfair import competition.

For more information on Cross Board Tax question, please contact our Tax Group.

How comprehensive are the intellectual property laws of Canada, and do the local courts and tribunals enforce them objectively, regardless of the nationality of the parties?

Canada offers a fully developed and modern intellectual property law regime. Through federally based legislation that governs the acquisition and enforcement of intellectual property rights throughout Canada, parties are able to register and protect all aspects of intellectual property, including trademarks, copyright, patents of invention and industrial designs.

Canada is also a party to all of the major world intellectual property law treaties and conventions, including the Patent Cooperation Treaty, the Berne Convention and the various World Intellectual Property Organization treaties. Parties, including those based in foreign jurisdictions, have the ability to enforce their intellectual property rights in either the superior courts of the Canadian provinces, or, more often, in the Federal Court of Canada, which courts are required to enforce Canada’s laws fairly and objectively, regardless of a party’s national origin.

For more information about IP in Canada, please contact our Intellectual Property Group.

If a commercial dispute arises, will local courts or arbitration offer a more beneficial forum for dispute resolution to foreign investors?

Whether or not foreign investors will benefit more from bringing a dispute to private arbitration or to the courts will depend on the nature of the dispute. For example, a foreign investor may benefit from having a complex commercial matter arbitrated privately, as the parties can attempt to select an arbitrator who has experience and knowledge related to the subject matter at issue.

Private arbitration can also be beneficial because it is generally a much faster process than court proceedings. In either case, Canadian law, and in particular Canada’s Charter of Rights and Freedoms, guarantees equality under the law, which extends to foreign participants in court or arbitration proceedings, such that neither party to a dispute should benefit (or suffer) from the fact of their national origin.

For more information about legal dispute resolution in Canada, please contact our Commercial Litigation Group.

For more details on doing business in Canada, please see the full Meritas^®  Canada Business Guide