By: Luis Gerardo Ramírez Villela
Following up to the trade relationship between Mexico and Canada changing due to the current trade situation in North America and the review of the United States-Mexico-Canada Agreement (T-MEC) and growing with the nearshoring era below is a brief description of the most relevant type of corporations in Canada for determining which would be the best strategy depending on the nature of each corporation and their tax benefits with Mexican subsidiaries.
Canada1
There are different types of corporations for tax purposes, and you have to select the one that accurately describes your corporation type at the end of the tax year. The corporation type determines whether or not the corporation is entitled to certain rates and deductions from a tax perspective.
- Canadian-controlled private corporation (CCPC);
- Other private corporation;
- Public corporation;
- Corporation controlled by a public corporation; and
- Other corporations.
Business Structures2
In this particular case, we will focus specifically in the types of business structures available in Canada which could be like he structures used in Mexico and analyzed in the Part I of this article.
Sole Proprietorship
A sole proprietorship is an unincorporated business owned by one individual and is the simplest kind of business structure in Canada.
The owner of a sole proprietorship has sole responsibility for making decisions, receives all the profits, claims all losses, and does not have separate legal status from the business. Therefore, the sole proprietorship will assume all the risks of the business, even regarding personal property and assets.
Partnership
A partnership is an association or relationship between two or more individuals, corporations, trusts, or partnerships that join together to carry on a trade or business.
Each partner contributes money, labour, property, or skills to the partnership and, in return, each partner is entitled to a share of the profits or losses of the business as agreed in the partnership agreement.
A simple verbal agreement is enough to form a partnership; however, most partnerships are governed by a written agreement setting out rules for partners entering or leaving the partnership, income distribution and other matters.
The partnership is bound by the actions of any member of the partnership, as long as these are within the usual scope of the operations.
Corporation
A corporation is a separate legal entity which can enter into agreements and own property in its own name, separately and distinctly from its owners.
When forming a corporation, the owners transfer money, property, or services to the corporation in exchange for shares, acting then as shareholders. A corporation continues to exist unless it winds up, amalgamates, or gives up its charter for reasons such as bankruptcy.
A corporation is set-up through the establishment of articles of incorporation and sending the documents to the appropriate provincial, territorial, or federal governments.
Tax Considerations
Each of the types of corporations and business structures have specific tax treatments in Canada. From a Mexican perspective, the S. de R.L. is an entity that qualifies as a pass-through entity in certain cases in Canada and therefore analyzing such corporation and structures will be beneficial to have an efficient tax strategy upon incorporating Mexican subsidiary.
1 Public business information taken out as available in the website of the Government of Canada
2Public business information taken out as available in the website of the Government of Canada
