Unlimited liability corporation
An unlimited liability corporation (ULC) is a Canadian corporation designation, wherein shareholders 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.
Unlimited liability corporations have been abolished in Canadian corporate law in most Canadian jurisdictions, but they still exist in three provinces:
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 which provided that:
[(b)(8)(ii)(A)] The following entities will not be treated as corporations under paragraph (b)(8)(i) of this section:
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 was amended by inserting a new Article IV(7):
- 7. An amount of income, profit or gain shall be considered not to be paid to or derived by a person who is a resident of a Contracting State where:
- (a) The person is considered under the taxation law of the other Contracting State to have derived the amount through an entity that is not a resident of the first-mentioned State, but by reason of the entity not being treated as fiscally transparent under the laws of that State, the treatment of the amount under the taxation law of that State is not the same as its treatment would be if that amount had been derived directly by that person; or
- (b) The person is considered under the taxation law of the other Contracting State to have received the amount from an entity that is a resident of that other State, but by reason of the entity being treated as fiscally transparent under the laws of the first-mentioned State, the treatment of the amount under the taxation law of that State is not the same as its treatment would be if that entity were not treated as fiscally transparent under the laws of that State.
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 under Part XIII of the Income Tax Act (Canada). However, technical guidance issued by the Canada Revenue Agency has indicated that certain strategies are available to mitigate the impact of such changes.
Applicable law by jurisdiction
|Description||Alberta||British Columbia||Nova Scotia|
|Framework||Based very closely on modern US corporations statutes||Closely modelled on the United Kingdom Companies Acts|
|Location of head office||In the province||In the province||In the province|
|Nature of liability||Unlimited for obligations arising from actions and proceedings commenced by or against the ULC before its dissolution or within 2 years thereafter.||Unlimited for obligations arising from actions and proceedings commenced by or against the ULC before its dissolution or within 1 year thereafter.||Shareholders are liable for all debts and liabilities upon winding up. This liability is unlimited for past or present shareholders (but for past shareholders it is extinguished one year after he ceases to be a shareholder).|
|Residency requirements for directors||¼ of all directors must be Canadian residents||None||None|
|Directors' duty of care||Statutorily bound to exercise “the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances”||As for Alberta||Determined under the common law|
|Power to manage corporation||Directors can manage “or supervise the management” of the business and affairs of the corporation (with authority to delegate that power to shareholders through a USA corporation or LLC)||Directors must manage or supervise the management of the business and affairs of the company||Shareholders have power to manage the corporation (and the authority to delegate that power to directors)|
|Amalgamation of corporations||Both short-form (parent and subsidiary amalgamation with only board approval required), and long-form (2/3 shareholder approval) are available||Foreign corporations may not amalgamate with BC ULCs||Only long-form amalgamations requiring approval of ¾ of shareholders, and approval of the Supreme Court, are available|
|Reductions in stated capital||2/3 shareholder approval is needed||By court order or special resolution||Same as for amalgamations|
|Declaration of dividends||The board may declare dividends if it has reasonable grounds to believe that a corporate solvency test is satisfied||As for Alberta||Dividends must be declared and paid out of the profits of the company|
|Purchase of own shares||A corporation may hold shares in itself and allow subsidiaries to hold its shares for a maximum of 30 days (without cancellation)||Purchased shares must be cancelled, but none may be purchased if it may make the corporation insolvent. Subsidiaries are allowed to purchase its parent's shares.||Other than redeemable shares, any acquisition by a corporation of its own shares must have requisite shareholder approval|
|Continuance||Only Alberta and Nova Scotia ULCs, and other corporations prescribed by regulation, may migrate to BC, and a foreign ULC may not migrate into BC as a limited liability corporation||Shareholder and court approvals are required in order to migrate to another jurisdiction|
|Conversion between limited and unlimited liability status||No restrictions||No restrictions||A limited corporation cannot convert into a ULC (unless it is an NSCA corporation and amalgamates with a NSULC – subject to shareholder and court approval)|
- Glass, Leonard (29 April 2005). "The Benefits of Using an Unlimited Liability Company" (PDF). Lawson Lundell LLP. Retrieved 11 January 2010.
- Singer, Aaron (January 2011). "Doing Business in Canada - Advantages of Incorporating in British Columbia". Clark Wilson LLP. Retrieved 28 July 2013.
- "Part 2.1 — Special Rules Respecting Unlimited Liability Corporations (Business Corporations Act, RSA 2000, c. B-9)". Retrieved 2013-07-28.
- "Companies Act, RSNS 1989, c. 81". Retrieved 2013-07-28.
- "Part 2.1 — Unlimited Liability Companies (Business Corporations Act, SBC 2002, c. 57)". Retrieved 2013-07-28.
- 26 C.F.R. 301.7701-2
- "Protocol Amending the Convention Between Canada and the United States of America". Canada Revenue Agency. 21 September 2007. Retrieved 28 July 2013.
- "Fifth Protocol to the Canada-U.S. Income Tax Treaty — Reflections" (PDF). PriceWaterhouseCoopers. 3 October 2007. pp. 8–9. Retrieved 28 July 2013.
- "Canada-US Tax Treaty: Important CRA Guidance on Scope of Article IV(7)(b)". McCarthy Tétrault. 14 December 2009. Retrieved 28 July 2013.