Canadian Subsidiary of a Foreign Parent Corporation

Doing what is legally best for your business and its advancement into Canada, as opposed to protecting prior legal work.

Contact Neufeld Legal PC at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com

A Canadian subsidiary of a foreign parent corporation is a legally separate entity that is incorporated in Canada and is subject to Canadian laws and regulations. Unlike a branch office, it is recognized by the law as a distinct legal person, which generally limits the liability of the foreign parent corporation.

The key attributes of a Canadian subsidiary of a foreign parent corporation, as distinguished from a branch, include:

• Legal and Regulatory Structure

  • A key attribute is its separate legal identity. The subsidiary is either a Canadian federal or provincial corporation, with its own articles of incorporation, bylaws, and share capital. This separation means that claims made against the subsidiary corporation typically don't extend to the foreign parent.

    • Director Residency and Disclosure Requirements: Incorporating a subsidiary corporation in certain jurisdictions (i.e., federal, Manitoba, Saskatchewan) imposes a Canadian resident director requirement, together with other pervasive disclosure requirements about ownership (including actual foreign ownership), while other jurisdictions do not have such requirements / disclosure obligations (i.e., Alberta, Ontario, British Columbia), making them a popular choice for foreign companies.

    • Legal Compliance: The subsidiary must comply with Canadian laws, including corporate, employment, and intellectual property laws. An important step is a notification under the Investment Canada Act for certain investments by non-Canadians.

• Taxation and Financial Obligations

  • A Canadian subsidiary is considered a resident of Canada for tax purposes and is subject to Canadian income tax on its worldwide income. This is a significant difference from a branch office, which is taxed on its Canadian-source income and also subject to a "branch profits tax."

    • Separate Tax Filings: Each Canadian entity within a corporate group must file its own separate tax returns; Canada doesn't permit group filing or consolidated returns.

    • Withholding Tax: When a Canadian subsidiary pays dividends to its foreign parent, a withholding tax is applied. The rate can be reduced by a relevant tax treaty between Canada and the parent corporation's country [more on the withholding tax].

    • Financial Reporting: The subsidiary must prepare and maintain its own financial records and statements, which are subject to Canadian accounting principles. Many corporations are required to appoint an auditor to audit their financial statements.

• Corporate Governance and Reporting

  • The subsidiary must establish its own corporate governance framework, including appointing directors and officers. It's crucial for the subsidiary's board to ensure that its policies and practices align with the company's strategy while also complying with Canadian regulatory requirements.

    • Corporate Records: The subsidiary is obligated to maintain corporate records, often in a "minute book," which includes articles of incorporation, bylaws, and a register of its shareholders and directors.

    • Public Safety Reporting: In certain sectors, the subsidiary may have to file reports on forced labor or child labor in its supply chains as required by Public Safety Canada.

To learn more about how our law firm stands apart when it comes to expanding your business into Canada, in what we do differently from most larger law firms and how this can properly protect and advance your Canadian commercial venture, contact our law firm today for a confidential initial consultation at Chris@NeufeldLegal.com or 403-400-4092 / 905-616-8864.  

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