Canada and the United States enjoy an economic partnership unique in the world, sharing one of the world’s largest and most comprehensive trading relationships. Growth in bilateral trade between Canada and the U.S. increased by almost 10 percent between 2009-2010. In 2010, total trade between the two countries exceeded C$502-billion, with C$1.38-billion worth of goods crossing the border every single day. For this reason, businesses looking for their first international foothold invariably look to Canada first.
While Canada is geographically proximate and closely tied to the U.S. by a common language and culture, there are distinctive legal, business and regulatory differences of which any business looking north of the border should be aware.
Tax considerations will drive the structure of virtually any expansion into Canada. If it is desired to consolidate the Canadian operating results with those of a U.S. parent for U.S. tax purposes, consideration may be given to using a fiscally transparent entity, such as an Alberta or Nova Scotia unlimited liability company, having regard for the anti-hybrid rules in Canada’s tax treaty with the U.S. Such entities are taxed in Canada in the same manner as any other Canadian corporation. It is also possible to carry on business in Canada through a branch of the U.S. parent. There may be Canadian withholding tax on cross-border payments of dividends, interest or royalties. Canada’s tax treaty with the U.S. contains certain exemptions from and reductions in Canadian withholding and other taxes that may be applicable in certain circumstances. Canadian transfer pricing rules require cross-border payments for goods and services to be made on arm’s-length terms.
Foreign investment review
Every acquisition of control of a Canadian business or the establishment of control of a new Canadian business by a non-Canadian is notifiable or reviewable under the Investment Canada Act. Generally speaking, an investment that is reviewable cannot be completed until the responsible federal minister has declared the investment likely to be of “net benefit to Canada.” A monetary threshold test applies to the determination of whether an investment is reviewable. A higher threshold applies to investments by non-Canadians that qualify as “World Trade Organization (WTO) investors” or to acquisitions from WTO investors that are not Canadians. This higher threshold does not apply to investments in the following sensitive areas: uranium production, transportation services, financial services and culture businesses.
Beyond the Investment Canada Act, there are Canadian ownership and licensing restrictions on businesses providing, among others, telecommunications, transportation and financial services. Canada has also identified certain culturally sensitive areas, such as publishing and broadcasting, that may be subject to ownership restrictions.
Corporate and securities laws
Canadian corporate legislation exists at both the federal and provincial levels while securities legislation only exists provincially. Mergers and acquisitions transactions are broadly similar to those in the U.S. Private transactions are effected as share or asset purchases while public transactions proceed as take-over bids (tender offers), amalgamations (mergers) or plans of arrangement (a court-supervised process more flexible than a merger).
Canada is a member of the World Trade Organization and a party to the various WTO trade agreements. Canada and the U.S. are both parties to the North American Free Trade Agreement (NAFTA). Therefore, many of Canada’s customs and trade laws should be similar to those applicable in the U.S.
All goods imported into Canada are subject to Canada’s customs and sales tax laws. Issues such as tariff classification, valuation, origin, marking and labeling should be considered before commencing to ship goods to Canada. It is important to properly structure the Canadian business in order to minimize or eliminate customs duties and taxes whenever possible. Determining whether NAFTA rules of origin are satisfied (and supplying documentation if they are) will avoid potential civil liability for non-compliance with customs laws and manage customs costs.
As Canada’s Export and Import Permits Act imposes significant restrictions on the movement of goods into, around and out of Canada, it may impact the valuation of operations and strategic planning. However, virtually all domestic regulation in Canada is subject to NAFTA, and certain American parties may request review of an alleged violation by a NAFTA panel.
Mergers that exceed certain prescribed thresholds are subject to mandatory pre-merger notification under the Competition Act. These mergers cannot be completed until the parties have submitted their respective notifications and the mandatory waiting period has expired, been waived or terminated early. All mergers, regardless of whether they are subject to pre-merger notification, are subject to the substantive provisions of the Competition Act.
Canada’s patent eligibility is based on “first to file,” unlike its American “first to invent” counterpart. Novelty bars, the obviousness test and prosecution history all differ vastly from the U.S.
The importance of licenses is heightened in Canadian trademark law, which requires licenses even for wholly owned subsidiaries. Canada has not adopted the Nice International Classification System, which provides a distinct cost advantage. Registrants can also renew trademark registrations without proof of use.
Canadian privacy legislation requires informed consent to the collection, use and disclosure of personal information, instead of merely notice of those purposes as permitted in the U.S. Public as well as non-public personal information is covered by legislation, which applies to affiliated organizations and third parties. There are both provincial and federal privacy standards that apply to the collection, use and disclosure of personal information before, during and after a transaction.
Federal misleading advertising, provincial consumer and French language protection laws may apply when parties use the Internet for sales or advertisement purposes. Provincial sales taxes may apply to software licenses depending on the server and user locations. This may result in double tax if not structured strategically. Custom software use by an affiliate may result in loss of provincial sales tax exemptions.
Blake, Cassels & Graydon LLP (Blakes) is one of Canada’s leading business law firms with more than 550 lawyers in offices in Montréal, Ottawa, Toronto, Calgary, Vancouver, New York, Chicago, London, Bahrain, Beijing and associated offices in Al-Khobar and Shanghai.
John Kolada is the Chicago Office Managing Partner of Blake, Cassels & Graydon LLP. Reach him at (312) 739-3612 or email@example.com.
Stefan Timms is an Associate of Blake, Cassels & Graydon LLP. Reach him at (312) 739-3625 or firstname.lastname@example.org.