An unlimited liability corporation (ULC) within

Canadian corporate law Canadian corporate law concerns the operation of corporations in Canada, which can be established under either federal or provincial authority. Federal incorporation of for-profit corporations is governed by Corporations Canada under the '' Canad ...

is a Canadian

corporation A corporation is an organization—usually a group of people or a company—authorized by the state to act as a single entity (a legal entity recognized by private and public law "born out of statute"; a legal person in legal context) and ...

designation, wherein

shareholders A shareholder (in the United States often referred to as stockholder) of a corporation is an individual or legal entity (such as another corporation, a body politic, a trust or partnership) that is registered by the corporation as the legal ...

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 Tax avoidance is the legal usage of the tax regime in a single territory to one's own advantage to reduce the amount of tax that is payable by means that are within the law. A tax shelter is one type of tax avoidance, and tax havens are jurisdic ...

, 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

in most Canadian jurisdictions, but they still exist in three provinces:

Alberta Alberta ( ) is one of the thirteen provinces and territories of Canada. It is part of Western Canada and is one of the three prairie provinces. Alberta is bordered by British Columbia to the west, Saskatchewan to the east, the Northwest T ...

Nova Scotia Nova Scotia ( ; ; ) is one of the thirteen provinces and territories of Canada. It is one of the three Maritime provinces and one of the four Atlantic provinces. Nova Scotia is Latin for "New Scotland". Most of the population are native Eng ...

, and

British Columbia British Columbia (commonly abbreviated as BC) is the westernmost province of Canada, situated between the Pacific Ocean and the Rocky Mountains. It has a diverse geography, with rugged landscapes that include rocky coastlines, sandy beaches, for ...

Usefulness in foreign direct investments by US corporations

ULCs have commonly been used by US companies investing in Canada on a

greenfield Greenfield or Greenfields may refer to: Engineering and Business * Greenfield agreement, an employment agreement for a new organisation * Greenfield investment, the investment in a structure in an area where no previous facilities exist * Greenf ...

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 Corporate tax is imposed in the United States at the federal, most state, and some local levels on the income of entities treated for tax purposes as corporations. Since January 1, 2018, the nominal federal corporate tax rate in the United States ...

rules in the US

Internal Revenue Code The Internal Revenue Code (IRC), formally the Internal Revenue Code of 1986, is the domestic portion of federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large, and separately as Title 2 ...

which provided that: 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 A tax treaty, also called double tax agreement (DTA) or double tax avoidance agreement (DTAA), is an agreement between two countries to avoid or mitigate double taxation. Such treaties may cover a range of taxes including income taxes, inheritan ...

—formally, the Canada–United States Convention with Respect to Taxes on Income and on Capital, signed September 26, 1980—was amended by inserting a new Article IV(7): 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 Tax withholding, also known as tax retention, Pay-as-You-Go, Pay-as-You-Earn, Tax deduction at source or a ''Prélèvement à la source'', is income tax paid to the government by the payer of the income rather than by the recipient of the incom ...

under Part XIII of the ''Income Tax Act'' (Canada). However, technical guidance issued by the

Canada Revenue Agency The Canada Revenue Agency (CRA; ; ) is the revenue service of the Canadian federal government, and most provincial and territorial governments. The CRA collects taxes, administers tax law and policy, and delivers benefit programs and tax cre ...

has indicated that certain strategies are available to mitigate the impact of such changes.

Applicable law by jurisdiction

References

{{DEFAULTSORT:Unlimited Liability Corporation Types of business entity Canadian corporate law

Usefulness in foreign direct investments by US corporations

Changes to Canada–US tax treaty, 2010

Applicable law by jurisdiction

See also

References