Expanding into Canada – Some key considerations for your business
Canada has continued to be an attractive market to businesses looking to expand. Even during the ongoing COVID-19 pandemic, many business owners have expanded their businesses into Canada, and others are considering Canadian expansion. If you own and operate a business in another country and are contemplating entering the Canadian market, there are a number of legal and business considerations to keep in mind, including areas where the legal and regulatory requirements may differ from those of your business’s home jurisdiction.
HOW WILL YOU EXPAND YOUR BUSINESS?
Are you looking to grow your business through an acquisition, a physical presence, e-commerce or digital presence, or a combination?
Establishing a Canadian subsidiary or acquiring an existing Canadian business—structural considerations. Ultimately, when establishing a business in Canada, the structure of the business (e.g., carrying on a business as a branch versus a subsidiary, whether to incorporate a subsidiary, establish a partnership, or acquire an existing business) is driven by tax, corporate, and numerous other considerations, discussed in additional detail below. Tax considerations – as well as many of the additional considerations set out below - will inevitably figure into the analysis of how to best structure the business or the acquisition.
Whichever path you determine is best for your business will require consideration of the application of the Competition Act (Canada), the Investment Canada Act and potential licensing and registration requirements.
Expanding through Digital Transformation
Many businesses have been able to expand during the pandemic by making greater use of online platforms and leveraging technology to reach a broader customer base or increase efficiency. Additional considerations for this approach include potentially obtaining a “.ca” domain name and ensuring your online operations comply with applicable legislation. A Canadian web address shows customers and clients that your business has a presence in Canada and that you charge in Canadian dollars. Business owners should be aware that there is a Canadian presence requirement when registering for a “.ca” domain name. Additional considerations for businesses that sell goods and services online include ensuring that the website and other online operations comply with federal and provincial legislation regarding, among other things, e-commerce, consumer protection, marketing and advertising and privacy.
Familiarize yourself with the Canadian tax regime. In Canada, taxes are imposed at the federal, provincial/territorial, and municipal levels of government, and include the following.
Income tax. Businesses in Canada may be subject to both federal and provincial/territorial income tax. The combined federal and provincial rate of income tax imposed on corporations varies widely depending on the nature and size of the business activity carried on, the location of the activity, and other factors. In 2021, the highest combined federal and provincial rate of income tax applicable to the active business income of non-Canadian controlled private corporations was 31%, while the lowest rate for active business income applicable to such a corporation was 23%. Tax credits and other incentives are available in certain circumstances to reduce the effective tax rates.
Sales taxes. The Goods and Services Tax (“GST”) is a value-added tax implemented federally that applies to supplies of most goods and services in Canada, as well as to supplies of certain types of real property and intangible personal property. In some provinces, GST is combined with a provincial sales tax component into a single Harmonized Sales Tax (“HST”). Most businesses must register for GST purposes and collect, report, and remit GST/HST. Most of the provinces and territories without HST, with some exceptions, have a form of provincial sales tax in addition to GST.
Withholding Tax and Branch Tax. Canada levies a 25% withholding tax on the gross amount of certain types of Canadian source income of non-residents. Payments subject to withholding tax include dividends, certain types of interest, rents, royalties, and certain management or administration fees. For non-residents carrying on business in Canada through branch operations, a branch tax may apply. The branch tax essentially takes the place of the withholding tax that would have been payable on dividends paid by a Canadian subsidiary carrying on the business. Tax treaties affect the application of withholding tax and branch tax in certain circumstances.
MARKETING AND ADVERTISING
Comply with Canadian advertising standards. When devising marketing and advertising campaigns for the Canadian market, legislation at both the federal and provincial/territorial level may apply, including competition and consumer protection statutes. It is also important to understand the role that bodies like Ad Standards and the Competition Bureau play in regulating advertisements, including online advertisements. Ad Standards, for example, is a nonprofit organization which administers the Canadian Code of Advertising Standards, as well as advertising trade disputes. It also provides pre-clearance services to support advertisers to comply with applicable regulations and industry standards. The Competition Bureau is a federal independent law enforcement agency, with a branch that investigates false or misleading representations and deceptive marketing practices under both civil and criminal regimes. Under the Competition Act, the Competition Bureau investigates specific instances of non-compliance and/or performs broader industry-wide reviews.
PRIVACY, CYBERSECURITY, AND ANTI-SPAM
Do not run afoul of Canadian anti-spam legislation. If you plan to send commercial electronic messages such as promotional emails or text messages advertising product offers to Canadian consumers, it is important to be aware of Canada’s anti-spam legislation, which requires businesses to obtain Canadian customers’ consent before sending them commercial electronic messages, even if the business is not incorporated or otherwise resident in Canada. It also requires businesses to include an unsubscribe mechanism in their messages. Businesses that do not comply with the legislation may be subject to penalties of up to $10 million.
SUPPLY CHAIN, CUSTOMS, AND TRADE
Make supply chain arrangements. Before expanding your business into Canada, consider whether your supply chain has been organized and you have agreements in place with the requisite parties across the supply chain. With a myriad of supply chain issues arising in part due to the COVID-19 pandemic, it is important to be aware of potential delays and inefficiencies that you may encounter when increasing the scale of your operations.
Consider the impact of customs officials and free trade agreements on the importation and exportation of supplies. Canada Border Services Agency monitors goods being imported into and exported from Canada, and has authority to collect duties and taxes on those goods. It is important to keep in mind the costs associated with importing or exporting goods when assessing supply chain design and projections. In addition, Canada has various free trade agreements with other nations, which may have implications for your supply chain.
There is no “at-will” employment in Canada. Unlike the United States and some other countries, Canadian employers must provide reasonable notice of termination to their employees (or pay in lieu thereof) when terminating employees, unless there is just cause for dismissal—there is no concept of “at-will” employment in Canada.
Gauge the labour market. Consider the job market in the industry and provincial or territorial jurisdiction in which you will be hiring employees. The COVID-19 pandemic, together with the measures and supports the federal and provincial/territorial governments have implemented in response to the pandemic, have caused labour shortages in some industries. Employers who are in tune with the relevant job market trends will be better suited to adapt their hiring processes accordingly.
Ensure your intellectual property is registered. In order to protect your business’s intellectual property rights in Canada, consider registering any trademarks, copyrights, patents, or industrial designs pursuant to the applicable federal statute.
McCarthy Tétrault’s team of highly regarded legal professionals has experience in all of the above-noted aspects of expanding your business into or within Canada. If you are thinking about expanding your business, consider contacting McCarthys.