2. Canada: Basic Business Law Overview
Corporation
– Business Corporations Acts
Both the federal and provincial governments have enacted legislation
providing for the incorporation and regulation of business corporations
(known as “companies” under some statutes). A business corporation
incorporated under provincial law may carry on business as of right in the
province of its incorporation and also has the capacity to carry on business
beyond the limits of that province. A federal business corporation is subject
to provincial laws of general application, although it has the basic right to
carry on business in any province. Most provinces require corporations
incorporated in other jurisdictions to register or be licensed before doing
business in that jurisdiction and to file initial and annual returns and notices
reporting certain basic corporate changes.
– Differences Among the Acts
Although federal and provincial business corporation statutes are quite
similar in most respects, there are some differences that can affect the
decision of whether to incorporate federally or provincially. Examples
include ease and timeliness of incorporation, flexibility in carrying out
corporate proceedings, licensing requirements, fees and taxes and the
extent of continuous disclosure requirements. One consideration often
relevant to non-resident investors is the requirement, found in many
corporation statutes, of having a minimum number or percentage of
resident Canadian directors. It is usually easier for a non-resident to
incorporate under a statute with a minimal Canadian residency
requirement or no requirement at all. Otherwise, everything else being
equal, non-residents are often advised to incorporate federally rather than
provincially on the theory that a federal corporation will be more readily
recognized and accepted – as a practical rather than a legal matter –
outside Canada.
– Sector Specific Legislation
Certain types of business corporations (for example, banks, trust and loan
companies, credit unions or associations, and insurance companies) are
governed by sector-specific legislation rather than the general federal or
provincial business corporation’s statutes.
– Unlimited Companies
An interesting hybrid of corporation and partnership is the “unlimited
company”
(ULC), unique to Nova Scotia, British Columbia and Alberta law in respect
of which, among other things, the “members” or shareholders have
unlimited liability in certain circumstances. ULCs gained popularity in the
mid-1990s, as a ULC that is a subsidiary of a U.S. parent was able to
produce certain tax advantages, as a tax flow-through vehicle, for its
parent. Effective January 1, 2010, the Fifth Protocol to the US-Canada
Income Tax Treaty limited many of the tax advantages enjoyed through
ULCs.
Partnerships
Partnership law in Canada is a matter of provincial jurisdiction. While a
partnership is generally formed under the laws of a particular province,
partnerships carrying on business in more than one province will be required to
comply with the laws of, and may be required to register in, each such province.
In the absence of an agreement to the contrary, the rights and obligations of
partners are those found in the governing provincial legislation.
Canadian jurisdictions generally recognize two forms of partnership: general and
limited. General partnerships have most of the characteristics of sole
proprietorships, except that they include more than one person. Like sole
proprietorships, general partnerships can be attractive by virtue of their simplicity
and informality, but they also share the characteristic of unlimited liability, which
in the case of a general partnership attaches jointly and severally to each
partner. The only filing normally required with respect to a general partnership is
a registration of the business name where the partners are not using their own
names.
Limited partnerships are creatures of statute and are formed by the filing of a
declaration of partnership under the relevant partnership statute. Limited
partnerships alleviate liability concerns to some extent by allowing the creation,
within a partnership arrangement, of limited partners whose liability is limited to
their respective contributions to the partnership. The price of this, however, is a
prohibition on participation by a limited partner in the “control” of the business of
the partnership.
The limited partnership (LP) is distinct from the “limited liability partnership”
(LLP), a special form of partnership recognized in most Canadian jurisdictions.
The LLP form is designed principally for law firms and other professional services
firms.
Joint Ventures
A joint venture may have tax advantages as an alternative to partnership.
Because Canadian law does not recognize such an arrangement as a distinct
form of business association, a joint venture must take the form of a recognized
business organization such as a corporation or partnership, or be carried out
through a contractual relationship. In particular, because there is no specific joint
venture legislation, parties entering into a joint venture who do not wish to form a
partnership must make it clear that they do not intend to be associated in
partnership.
Sole Proprietorships
Although the sole proprietorship is free from most government regulations that
apply to business corporations, certain registration requirements must be
complied with in the jurisdiction in which the business is to be carried on. For
example, a sole proprietor who uses as his or her business style a name or
designation other than his or her own is required to register the name under
applicable provincial legislation.
Franchises and Licensing Arrangements
Franchising and licensing arrangements are generally governed by the
applicable law of contracts, although Alberta, Ontario and Prince Edward Island
have specific franchising statutes.
Federally, the Competition Act addresses certain practices with particular
relevance to franchises and licence arrangements. In addition to a prohibition on
pyramid selling, the Competition Act subjects certain trade practices to review,
including pricing practices, refusals to deal, exclusive dealing, tied selling and
market restrictions. Also relevant in some cases are the Trade-marks Act and the
Patent Act.
Alberta, Ontario, Prince Edward Island, New Brunswick and Manitoba have
enacted specific disclosure legislation with respect to franchising. These acts
mandate fair dealing in the franchise relationship and provide special remedies to
franchisees in the event of abusive conduct by a franchisor. Other provinces
indirectly regulate certain aspects of franchising through their consumer
protection and securities laws, as well as through laws relating to fair trade
practices, pyramid selling, referral selling and advertising.
