Canada’s Constitution combines the Westminster model of parliamentary democracy with a federal system of government, which distributes powers between the central and provincial governments. Both levels of government have constitutional authority to regulate various aspects of business.

Federal jurisdiction includes the right to make laws relating to patents and trade-marks, competition, banking, international trade, transportation, telecommunications, criminal law and immigration.

The provinces regulate matters pertaining to “property and civil rights” within their respective jurisdictions. For example, provincial laws govern local marketing and services, regulation of trades and professions, the transfer of real and personal property, and land-use planning. The provinces do not have exclusive jurisdiction over businesses that involve inter-provincial trade. In addition, airlines, national railroads and inter-provincial pipelines are all subject to federal regulation.

Both the federal and provincial governments have taxation powers. In addition, municipal governments are able to tax certain activities, such as land use and ownership.

Canada is receptive to foreign ideas and capital. Canada actively participates in many international organizations including the United Nations and its specialized agencies, the World Trade Organization and the Organization for Economic Cooperation and Development. Canadian courts often look to foreign judicial decisions for guidance and both the federal and provincial legislatures have frequently adopted foreign legislative models. Because of this level of interest in international legal developments, many of Canada’s laws and governmental policies reflect internationally accepted norms.
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Investment Review Thresholds:

Where the Investment Canada Act applies to a transaction, it must be determined whether the transaction will simply require notification to the Investment Review Division or will require a formal application and approval by the Minister of Industry.

Transactions involving assets that exceed a certain monetary threshold require an application and are subject to review. In determining this threshold, the Investment Canada Act distinguishes between non-Canadian investors that are from a country that is a member of the World Trade Organization (”WTO”) and those that are not. For WTO investors who are directly acquiring a Canadian business, an application will not be required unless the assets of the Canadian business being acquired (as shown in the financial statements for the most recently completed fiscal year) exceed C$265 million. Indirect acquisitions of Canadian businesses by WTO investors (such as where an investor purchases a foreign subsidiary that controls a Canadian business) are not reviewable.

However, even if the investor is controlled in a WTO country, where the business activity of the target is related to Canada’s cultural heritage, the transaction may be reviewable. Acquisitions of such cultural businesses require the approval of the Minister of Canadian Heritage. Further, acquisitions by WTO members of certain types of Canadian businesses do not benefit from the increased thresholds, such as businesses engaged in uranium production, financial services or transportation services. Where a Canadian business is engaged in any of these sensitive activities, the applicable threshold for review is only C$5 million for a direct acquisition and C$50 million for an indirect acquisition.

For non-WTO members, a direct acquisition of a Canadian business will require an application for review where the assets of the Canadian business exceed C$5 million. For indirect acquisitions by non-WTO members, an application is required where the value of the business’ assets located in Canada amount to more than C$50 million, unless the Canadian assets represent greater than 50% of the total asset value of the transaction.

A notification must be submitted for those transactions that fall below the thresholds for an application discussed above.

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On receipt of a review application, the Investment Review Division will review the proposed investment and determine whether the investment will be of “net benefit” to Canada. The Investment Review Division has 45 days after receiving a completed application to conduct a review. At the end of the 45 days, the investor is notified as to whether or not the Minister of Industry is satisfied that the investment will be of net benefit to Canada. Alternatively, the investor may be notified that the Minister requires an extra 30 days to review the proposed investment.

Where the Minister is not satisfied that the investment will be of net benefit to Canada, the investor has the right to appeal. If the Minister is still not satisfied on further review, the investor may not proceed with the investment, or, if the investment has already been implemented, must relinquish control of the investment.

The Government of Canada can order the review of any foreign investment affecting Canada’s cultural heritage or national identity (such as where the investment concerns the publication, distribution or sale of books, magazines, film or sound recording). To review an otherwise non-reviewable transaction because of cultural heritage or national identity, the Government of Canada must issue an order calling for review within 21 days of the filing of the notice by the investor.

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In addition to the provisions of the Investment Canada Act, both the federal and provincial governments impose corporate ownership restrictions in certain strategic or sensitive industries. For example:

Financial Institutions: Generally speaking, without ministerial approval a foreign bank cannot own more than 10 percent of any class of shares in any Canadian bank, including a Canadian bank subsidiary. There are various exceptions to this general rule.

Telecommunications: In an effort to promote the ownership and control of telecommunications common carriers by Canadians, Parliament has enacted a general rule that to be eligible to operate a telecommunications common carrier in Canada, the carrier must be a Canadian-owned and controlled corporation incorporated or continued under the laws of Canada or a province. “Canadian-owned and controlled” means, in part, that Canadians beneficially own not less than 80 percent of the corporation’s issued and outstanding voting shares, and that the corporation is not otherwise controlled by persons that are not Canadians.

Air Transportation: Generally speaking, a licence to operate a domestic airline service will only be issued to a corporation if the corporation is controlled in fact by Canadians and if 75 percent of the voting interests in the corporation are owned and controlled by Canadians. Licences for international airline service may be issued to a non-Canadian provided that the non-Canadian applicant satisfies certain eligibility requirements.Canadian ownership restrictions applicable to the telecom and air transport sectors in Canada are matters of public debate and may be liberalized in the coming years.

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Business can be carried on in Canada through many types of legal entities, such as proprietorships, partnerships or limited liability corporations.

The simplest form of business organization, a proprietorship, exists when an individual carries on business as the sole owner without incorporating. At law there is no distinction between the proprietorship and the owner; the proprietorship’s income is the owner’s income and the proprietorship’s liabilities are the owner’s personal liabilities. For tax purposes the proprietorship is not treated as a separate taxpayer. Rather, the income of the proprietorship is included in the calculation of the owner’s taxable income. While the requisite formalities for creating a proprietorship are minimal, in some cases there may be licensing and registration requirements. Also, if the owner wishes to carry on business using a name that is different from his or her own individual name, that name may first need to be registered with the applicable provincial government.

A partnership generally exists when two or more individuals or entities carry on business together without incorporating. In an ordinary partnership, the partnership is not a separate legal entity and all the liabilities of the partnership are the personal liabilities of the partners. A number of provinces and territories recognize a second type of partnership: the limited partnership, where the liability of at least one partner (the “general partner”) is unlimited and the liability of any other partner (a “limited partner”) is limited to the amount of the limited partner’s contribution to the business.

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The most common form of legal entity for businesses is the corporation. Most foreign businesses operating in Canada adopt the corporate form. A corporation is a legal entity that is separate and distinct from the shareholders who contribute to the corporation’s capital. Generally speaking, the liability of a shareholder is limited to the amount of that shareholder’s contribution to the corporation. In addition, the corporation enjoys perpetual succession, meaning that the existence of the corporation continues despite the death of any or all of its shareholders.

Corporate income is taxed at combined federal and provincial flat corporate rates rather than at the marginal individual rates. For more on the taxation of corporations.

Corporations may be created in Canada under either federal or provincial legislation. Accordingly, assuming a decision has been made to incorporate in Canada, a choice must then be made regarding the jurisdiction under which the entity should be incorporated. In most cases, the jurisdiction of incorporation does not affect the question of whether federal or provincial laws will apply in areas of dual jurisdiction, as in the case of Canada’s labour laws. Corporations established under federal or provincial legislation may carry on business anywhere in Canada as of right, but are required to comply with provincial filing requirements.

In most Canadian jurisdictions, governing legislation permits corporations to adopt a unanimous shareholders agreement. Such agreements have the effect of transferring certain of the directors’ powers to the shareholders. To the extent that these powers are transferred to the shareholders, the directors are generally relieved of liability and the shareholders are then subject to those duties and liabilities. This can be useful in the case of a foreign corporation that wishes to limit the powers of the Canadian subsidiary’s directors over the operation of the subsidiary, especially where the subsidiary and the foreign parent have different directors.

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Considerable flexibility is permitted in the design of a corporation’s share structure under Canadian federal or provincial corporate statutes. For example, shares can be voting or non-voting, they can have limited or unlimited participation in equity and they can be redeemable for a fixed price at the option of the corporation or the holder. Shares can also be given special voting rights with respect to certain matters, such as the appointment of directors and the acquisition or disposal of significant assets.

By careful selection of share characteristics, it is possible to separate capital contributions and control from participation in future profits. This possibility is particularly useful in designing share structures for joint ventures and in addressing taxation issues.

On occasion, foreign parents may wish to capitalize their Canadian subsidiaries through debt rather than share capital. In general, Canadian corporate legislation does not require any minimum investment by way of share capital. However, the financing of a corporation largely by debt may lead financial institutions to require a guarantee from the foreign parent. It may also have income tax implications, as discussed below.

In most provinces, the authorized capital of a corporation does not affect either the incorporation or registration fee. Accordingly, this should not be a major factor in determining the share structure for a corporation.

Interest is generally deductible in computing the income of a corporation for tax purposes, while dividends are not. However, there are income tax rules which limit the deductibility of interest paid to non-resident shareholders. These “thin capitalization” rules provide in general that where the debt owing to certain non-resident shareholders exceeds two times the equity investment of those shareholders, interest on the excess debt will not be deductible for tax purposes.

The tax rules governing the capitalization of non-resident controlled corporations are complex and accordingly, professional advice should be obtained before an enterprise is established and capitalized.

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