An unlimited liability corporation (ULC) within
Canadian corporate law is a Canadian
corporation
A corporation or body corporate is an individual or a group of people, such as an association or company, that has been authorized by the State (polity), state to act as a single entity (a legal entity recognized by private and public law as ...
designation, wherein
shareholders
A shareholder (in the United States often referred to as stockholder) of corporate stock refers to an individual or legal entity (such as another corporation, a body politic, a trust or partnership) that is registered by the corporation as the ...
are liable up to unlimited amounts for any
liability, act or
default of the corporation. By comparison, in most corporations, shareholders are not usually liable due to a limited liability model. ULCs can be used by American corporations for
tax planning, as ULCs are treated as corporations for Canadian tax purposes but as flow-through entities for American tax purposes.
By 1997, unlimited liability corporations had been abolished in Canadian corporate law in all Canadian jurisdictions except for the province of
Nova Scotia
Nova Scotia is a Provinces and territories of Canada, province of Canada, located on its east coast. It is one of the three Maritime Canada, Maritime provinces and Population of Canada by province and territory, most populous province in Atlan ...
, where ULCs remain available. However, due to their increased use in American companies' tax planning since then, ULCs were permitted in
Alberta
Alberta is a Provinces and territories of Canada, province in Canada. It is a part of Western Canada and is one of the three Canadian Prairies, prairie provinces. Alberta is bordered by British Columbia to its west, Saskatchewan to its east, t ...
and
British Columbia
British Columbia is the westernmost Provinces and territories of Canada, province of Canada. Situated in the Pacific Northwest between the Pacific Ocean and the Rocky Mountains, the province has a diverse geography, with rugged landscapes that ...
starting in the mid-2000s.
Usefulness in foreign direct investments by US corporations
ULCs have commonly been used by US companies investing in Canada on a
greenfield basis or through corporate acquisitions of Canadian entities or assets, especially if those Canadian assets or operations are expected to generate business losses. This became especially significant after the 1997 introduction of the
entity classification rules in the US
Internal Revenue Code
The Internal Revenue Code of 1986 (IRC), is the domestic portion of federal statutory tax law in the United States. It is codified in statute as Title 26 of the United States Code. The IRC is organized topically into subtitles and sections, co ...
which provided that:
In essence, the ULC can act as a “
flow-through” or “disregarded” entity for US tax purposes as the US tax rules “look through” the ULC to its shareholder(s). In contrast, the ULC is treated as a corporation, and is subject to tax at the corporate level, for Canadian tax purposes.
Nova Scotia had been the last of the Canadian jurisdictions to allow the incorporation of such corporations at that time. Since then, Alberta allowed such formations in 2005, followed by British Columbia in 2007, to take advantage of this niche provided by US tax law.
Changes to Canada–US tax treaty, 2010
Effective January 1, 2010, the Canada–US
tax treaty—formally, the Canada–United States Convention with Respect to Taxes on Income and on Capital, signed September 26, 1980
—was amended by inserting a new Article IV(7):
As a ULC is generally considered for US tax purposes to be considered "fiscally transparent" under this provision, this will mean that payments (such as interest, royalties and dividends) from a Canadian ULC to its US parent will be subject to a 25%
withholding tax
Tax withholding, also known as tax retention, pay-as-you-earn tax or tax deduction at source, is income tax paid to the government by the payer of the income rather than by the recipient of the income. The tax is thus withheld or deducted from the ...
under Part XIII of the ''Income Tax Act'' (Canada). However, technical guidance issued by the
Canada Revenue Agency
The Canada Revenue Agency (CRA; ; ) is the revenue service of the Government of Canada, Canadian federal government, and most Provinces and territories of Canada, provincial and territorial governments. The CRA collects Taxation in Canada, taxes, ...
has indicated that certain strategies are available to mitigate the impact of such changes.
Applicable law by jurisdiction
See also
*
List of acts of the Parliament of Canada
*
*
References
{{DEFAULTSORT:Unlimited Liability Corporation
Types of business entity
Canadian corporate law