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fast facts

• ULCs offer tax planning advantages

• ULCs can be created in Alberta, British Columbia, and Nova Scotia

• Shareholder liability is not limited

use of hybrid/fiscally transparent entities in CanadaIn Canada, certain provinces allow for the incorporation of an Unlimited Liability Company (“ULC”). Unlike the traditional limited liability corporation, the shareholders of a ULC may be held liable for the company’s debts. ULCs have been frequently employed by American investors as vehicles through which to carry on business in Canada.

pass-through for US tax purposesA ULC can be created under the laws of Alberta, British Columbia, and Nova Scotia. U.S. residents have used ULCs to secure preferential U.S. tax treatment for their Cana-dian business activities. By virtue of the entity classification rules under the U.S. Internal Revenue Code and the regulations thereunder, a Canadian corporate entity that does not provide limited liability protection to any of its shareholders can elect to be treated as a pass-through entity (i.e., a disregarded entity or partnership) for U.S. income tax purposes. As a pass-through entity, losses incurred by a Canadian ULC may be applied by its U.S. resident shareholder(s) when computing U.S. taxable income.

corporation for Canadian tax purposesEven though ULCs can be treated as pass-through entities for U.S. income tax purposes, they remain corporations under Canadian income tax law. Thus, they are subject to the same Canadian tax treatment as most other Canadian corporations. Accordingly, ULCs must, among other things, file Canadian income tax returns reporting their worldwide income.

The applicable statutes in Alberta, British Columbia, and Nova Scotia allow for the conversion of existing corporations into ULCs, as well as the conversion of ULCs into corporations with limited liability. The processes for effecting such conversions are

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unique to each province, so local counsel should be consulted when attempting to undertake such transitions.

liability of shareholders not limited The biggest risk to an investor in utilizing a ULC is that the shareholders of the company are generally subject to unlimited joint and several liability for the obligations of the company. This liability remains even after the company’s dissolution. Often, additional intermediary corporate entities can be created to limit this potential risk. These entities can serve as shareholders of the ULC and reduce the risks of an indirect shareholder being held liable for the debts of the ULC. Nevertheless, it is important to be aware of this risk and account for it when deciding whether Canadian operations should be run through a ULC.

The Fifth Protocol to the Canada-United States Income Tax Convention (1980) (the “Treaty”) established an obstacle, effective as of January 1, 2010, to obtaining many of the historical benefits attributable to the use of a ULC. In general terms, a U.S. resident shareholder may not be considered to be a resident of the U.S. for purposes of the Treaty when assessing whether Treaty-reduced withholding tax rates may be applied in respect of certain payments received from a ULC (e.g., dividend payments). However, approaches have been developed to mitigate the impact of the Fifth Protocol to the Treaty on cross-border structures involving ULCs. Every situation is unique, and it is important to consult with local counsel to discuss the implications of the revisions to the Treaty on any proposed or existing structure utilizing a ULC.

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained. For more information contact your regular McMillan advisor or go to http://www.mcmillan.ca.

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