Corporate structuring for Canadian businesses

Most structuring advice arrives either too early, as a complicated diagram for a business with no revenue, or too late, after a transaction has fixed the options.

Federal or provincial

A federal corporation under the Canada Business Corporations Act carries name protection across the country and is well understood by investors. A provincial corporation is often simpler and cheaper to maintain. The practical differences that matter are name protection, director residency requirements, which vary by jurisdiction and change from time to time, and extra-provincial registration obligations.

Note that incorporating federally does not remove the need to register extra-provincially in each province where you carry on business. Companies routinely discover this when a bank, a landlord or a customer asks for proof of registration in a province where they have been operating for two years.

When a holding company earns its keep

A holdco above the operating company is a genuinely useful structure in several situations: moving surplus cash out of the operating company to protect it from operating creditors, allowing different shareholders to hold their interests through their own holdcos with different distribution needs, facilitating estate and succession planning, and preparing for an eventual sale.

It is not useful when the operating company has no surplus, no meaningful creditor risk and a single shareholder, and the structure simply adds a second set of filings, financial statements and accounting fees.

Ask what problem the structure solves this year. If the answer is theoretical, the structure is premature.

Moving assets without triggering tax

Transfers of appreciated assets between related corporations can often be effected on a tax-deferred basis using the rollover provisions of the Income Tax Act, but the mechanics are exacting and the elections have deadlines. This is tax work with corporate documentation attached, and it should be led by tax counsel or an accountant with corporate counsel implementing. The failure mode, an intended rollover that does not qualify, is expensive and often discovered years later.

Subsidiaries and expansion

Expanding into another country usually means a subsidiary, and the reasons are practical: local employment, local banking, local regulatory registration and limiting liability to the local entity. The mistakes are consistent. Directors are appointed without regard to local residency requirements. Intercompany arrangements are undocumented, which is a transfer pricing problem waiting to happen. Local governance is nobody's job, so filings lapse.

A subsidiary is a corporation with all the obligations of one. If nobody in the group owns its minute book, its filings and its board cycle, the entity will drift out of good standing quietly.

Separating IP

Holding intellectual property in a separate entity that licenses it to the operating company is a legitimate structure with real benefits, principally insulating the group's most valuable asset from operating liabilities. It requires actual substance: a written licence, arm's length terms, royalties that are actually paid, and decisions genuinely made by the IP entity. A structure that exists only on paper tends to be disregarded by the parties who matter, including tax authorities and courts.

The shareholders' agreement is part of the structure

Two or more shareholders without an agreement is not a simpler structure, it is an unallocated one. The agreement is where you decide how decisions get made, what happens when a shareholder wants out, dies or becomes disabled, how shares are valued, whether there are drag-along and tag-along rights, and what restrictions apply to competing. Negotiating it while everyone is aligned takes weeks. Negotiating it during a dispute takes months and costs multiples.

This article is general information, not legal advice, and does not create a solicitor-client relationship. The law changes and its application depends on your circumstances. Speak to a lawyer about your situation.