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US businesses that establish operations or acquire businesses in Canada often make use of a Canadian unlimited liability company (ULC). This newsletter highlights some recent ULC developments.

WHAT IS A ULC

A ULC is a company whose shareholders have unlimited liability. For Canadian income tax purposes, a ULC is treated as a regular corporation, subject to Canadian tax on its worldwide income. For US income tax purposes, a ULC is treated either as a partnership or is disregarded entirely, causing it to be a flow-through entity. This hybrid status enables the US parent of the ULC to consolidate the ULC's income or loss and claim a US foreign tax credit for any Canadian income tax paid by the ULC.

ALBERTA ULCs

Until recently, the province of Nova Scotia was the only Canadian jurisdiction that permitted the incorporation of ULCs, commonly referred to as "NSULCs". The province of Alberta has become the second Canadian jurisdiction to permit the creation of a ULC, an "AULC". This presents interesting opportunities, primarily because an AULC will be formed under the Business Corporations Act (Alberta), a modern corporate statute that will be familiar to many US practitioners.

COMPARISONS BETWEEN AN NSULC AND AN AULC

A comparison between an NSULC and an AULC reveals several important differences:

• Formation: Conversion to an NSULC is generally accomplished by continuing a corporation into Nova Scotia and amalgamating with an existing shell NSULC, which requires a court order. Alternatively, a target company's shares can be transferred to an existing NSULC, followed by a winding-up of the target into the NSULC. These methods can have direct or indirect income tax consequences and can precipitate the application of taxes other than income taxes. An Alberta corporation can be converted to an AULC simply by filing articles of amendment or amalgamating with an existing AULC. In addition, a corporation formed outside Alberta can be continued into Alberta as an AULC in one step (that is, without the need to amalgamate with, or wind up into, an AULC).
• Directors: The directors of an NSULC do not have to be resident Canadians. One quarter of the directors of an AULC will have to be resident Canadians.
• Reorganizations: An NSULC is required to obtain the approval of three quarters of its shareholders and a court order for actions such as amalgamations and reductions of capital. An AULC will require the approval of only two thirds of its shareholders and a court order is not required for such actions. An AULC will also be able to hold its own shares and allow subsidiaries to hold its shares for a period of 30 days, thus facilitating various corporate reorganizations.
• Meetings: An NSULC is not required to hold meetings in Nova Scotia. An AULC's directors may meet anywhere and shareholders meetings may be held outside Alberta provided all voting shareholders consent. Regard should be had for the impact the place of meetings may have on a corporation's residence.
• Unlimited Liability: There are fairly well-defined limits on the liability of former shareholders of an NSULC. The extent of the liability of members of an AULC appears to be significantly broader.
• Corporate Name: An NSULC is not required to have a name ending with the words "unlimited liability company", although it is permitted to do so. An AULC will be required to use those words or the abbreviation ULC in its name, and will be required to include a statement as to unlimited liability in its articles of incorporation and on its share certificates.
• Cost: A $4,000 incorporation or amalgamation tax plus a $2,000 registration tax are levied on an NSULC. In addition, there is an annual $2,000 renewal fee. The Business Corporations Act (Alberta) sets a $100 fee for incorporation of all companies and there is no annual filing fee.

Simplified NSULC Conversion

In order to address some of the income and other tax consequences referred to above upon conversion to an NSULC, it may be possible to use the plan of arrangement provisions contained in the Nova Scotia Companies Act to accomplish the conversion. The limited company would continue into Nova Scotia as a limited company and, instead of pursuing the amalgamation or winding-up methods, would apply to the court for an order altering the company's memorandum of association to remove the provision conferring limited liability. This method would appear to have the added benefit of reducing the cost of converting to an NSULC.

The purpose of this document is to provide information as to developments in the law. It does not contain a full analysis of the law nor does it constitute an opinion of Ogilvy Renault or any member of the Firm on the points of law discussed.

For further information, please contact one of the following lawyers:

Montréal

Jules Charette
(514) 847-4450
jcharette@ogilvyrenault.com

Toronto

Adrienne F. Oliver
(416) 216-1854
aoliver@ogilvyrenault.com

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Personnes-ressources

Jules Charette
Montréal
514.847.4450
jcharette@ogilvyrenault.com
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Adrienne F. Oliver
Toronto
416.216.1854
aoliver@ogilvyrenault.com
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