In this article, you can read about the advantages (and prices) that registering a business in Canada can have. You will find solutions for freelancers and small businesses, as well as for all types of offshore companies.
Jurisdictions that combine both tax-exemption and few accounting obligations for companies with a good reputation are one of the most sought-after assets in tax planning since these generally have no trouble with acquiring customers and securing good bank accounts.
Unfortunately, reputation is often coupled with bureaucracy, and this greater reputation and reliability go hand in hand with a stricter accounting policy.
In the offshore world, a solution that provides a good reputation, total tax-exemption as well as good value for money does not exist. You will only ever be able to select two out of these three elements.
Even so, the country which we are going to talk about today, Canada, offers three corporate organisation options that come very close to that perfect solution.
Canada is a member of the OECD and the G7, and as such, does not have a reputation as a tax haven. It does, however, offer almost better options than its neighbouring country, the United States.
After recent modifications to the regulations for US Limited Liability Companies (LLC) (which we spoke about here), establishing companies in Canada is currently preferable to doing so in its more famous neighbour.
Of course, only if you choose the correct legal structure. Since in a Canadian corporation, just as in the US, profits are taxed at very high rates and these taxes cannot be reduced there as easily as in the US.
Canada has certain fiscally transparent corporate structures that can be very usually for foreigners.
Canadian Limited Partnerships in Ontario
Regarding starting a Canadian business in Ontario, we will be talking about a Limited Partnership, a type that can be established beneficially in the province of Ontario. The most populous federal province in Canada allows you to run a business in a place with an excellent reputation, such as in Toronto.
Generally, a Limited Partnership is comparable to a US Limited Liability Company (LLC) but, if we take a close look at the details, we will find some differences. Nevertheless, as a fiscally transparent entity, taxation does not fall on the company, but rather on the partner. If the partner is exempt from income taxes, the company will also be exempt.
Revenue earned in Canada is an exception to this rule. If you have a Limited Partnership, you will have to pay taxes on this revenue in full.
Of course, if there is no income deriving from Canada, no accounting will be necessary. Furthermore, as opposed to what happens with US LLCs, you do not usually have to prepare an annual report.
Once you have established the LP in Canada, it can continue to exist with practically no form of administrative work.
Another fundamental difference to the LLC is the corporate structure. LPs are made up of a General Partner and a Limited Partner, who in this exceptional case can be the same person.
Whilst the Limited Partner has only limited liability, the General Partner must settle in full with their private assets. Therefore, if you want to run an LP as a sole individual, you should keep in mind that you lose your limited liability.
Although, in principle, any company from any jurisdiction can be incorporated as a partner, this is only straightforward in the case of the Limited Partner.
If a foreign company wishes to become a General Partner with full responsibility, it has to acquire Extra Provincial Corporation Status (read on for more details).
Given that this is relatively expensive, we generally disregard this or use EPC status to start as individuals.
Without limited liability, a Limited Partnership in Ontario is essentially comparable to an individual enterprise that is exempt from taxes and has no accounting obligations.
In reality, the classic freelancers are those who decide upon an LP. After all, thanks to Canada’s excellent reputation, they will have no problems in getting the companies that they work for to eliminate the tax on their invoices.
Unlike known tax havens, such as Delaware or Wyoming, Canada does not suffer from a bad reputation. It is certainly not the best option for companies with “shady” purposes since the Commercial Registry is public and Canada co-operates with the rest of the world (meaning it does not generally oppose to sharing information about its companies).
Thanks to this, having a Limited Partnership means you will rarely encounter problems opening bank accounts outside of Canada. The majority of European banks willingly accept LPs as clients, provided that they comply with standard procedures. In contrast, Canadian banks are more critical.
As a general rule, if you cannot prove that you have Canadian clients, it will be difficult for you to open a Canadian business account. And, of course, having Canadian clients means that you are obligated to pay taxes on income earned in the country and, therefore, must submit accounting records to regulate the situation.
Beyond the eventual lack of liability limitation, there is little to complain about when it comes to Canadian LPs. Even the costs are quite affordable: around €1,600 for the set-up and €1,000 from the second year onwards. If you also have local contacts in Canada, setting up a Canadian company will undoubtedly be even cheaper.
All in all, for the same price as a low-cost offshore company, the Canadian LP offers a complete package that should be liked by many freelancers and small-scale entrepreneurs.
Limited Liability Partnerships in British Colombia
Those who do not want to give up their limited liability have another option. Similar to what happens in the UK, in Canada, you can also choose between establishing a Limited Partnership or a Limited Liability Partnership.
In principle, the LLP operates in a very similar way and differs only in the corporate structure. The LLP requires two partners, who, unlike those in an LP, both have limited liability.
The partners’ level of involvement can be chosen freely, although, in reality, third parties often join in with 1% so as to be able to take advantage of the limited liability feature.
Apart from a natural person acting as trustee, the best alternative to acting as a partner here is simply a company, which (unlike LPs) even if established abroad, would not need additional EPC status.
Establishing this type of Canadian LLP is only possible in the federal province of British Colombia. Therefore, the company’s headquarters is usually in Vancouver, which offers as much prestige as an LP in Ontario.
The LLP and LP also overlap in other aspects and the price does not vary much either. They are also a great alternative to true partnerships (i.e. enterprises of more than one person) and, of course, can include as many partners as needed.
Extra Provincial Corporations in British Colombia
British Colombia has another special type of company to offer: the EPC. The Extra Provincial Corporation does not have its own legal status nor is it considered to be a vehicle for avoiding taxes.
Despite this, a correctly-used EPC can be a real success. It can ultimately be used as a front for any “mischief”.
The EPC cannot exist on its own. It is not an independent legal entity, but, as its name suggests, it relates to the registration of a company in a Canadian province, in this case in British Colombia (although it can be also established in other provinces).
Any foreign company that wants to do business in the province (or wants to be a General Partner in an LP) must obtain EPC status. By doing so, a company subsidiary will be established in Canada.
This subsidiary then has its own tax identification number, a Canadian business address and is able to open a Canadian bank account (in reality, only if the company has local customers). However, the subsidiary can only be established based on a pre-existing capital company (since it has to be a branch of something).
Canada, as a high taxation country, is not a bad front at all, it is actually a very useful cover for almost all types of offshore companies.
So, if you want to combine the favourable protection enjoyed by offshore companies in the Island of Nevis with the possibility of issuing approved invoices and opening beneficial bank accounts, you could establish an LLC in Nevis and link it to a Canadian EPC.
Generally, an EPC can be connected to any capital company (also to an LLC), provided that these are independent legal entities.
The two main disadvantages of offshore companies – the inability to issue approved invoices and the difficulty of accessing bank accounts – are, therefore, eliminated, while you are left with all of the advantages of these companies.
Of course, Extra Provincial Corporations are completely tax-free and do not have to keep records, provided that they do not have income stemming from Canada.
Even though earning income in Canada could, of course, be the aim of registering an EPC there, operating in Canada is not mandatory.
The only thing left to talk about is the costs.
On the one hand, the EPC requires there to be a pre-existing capital company, with its own establishment and maintenance expenses. On the other, the expenses for the EPC are added, which for the few existing suppliers, amounts to at least €2,000 for the set-up and around €1,000 per year.
To conclude this section, we can say that, despite its advantages, the EPC is not well-known and only offered by a few international agencies and law firms. If you have local contacts in Canada, you will be able to set up an EPC at a much lower cost.
Limited Partnerships in international tax planning
Canadian LPs, LLPs and EPCs are three different structures that make a life free of taxes possible, along with reduced bureaucracy and without the strategic disadvantages that this usually entails. In fact, there are probably very few people, even Canadians, who know about the options that these structures offer to foreign companies or nationals.
This is one more example of how choosing the right jurisdiction and structure can make it possible to legally have a company that does not pay taxes.
If you need help with setting up your company in Canada or you want to talk to us about the best option for you, you can get in touch with us.