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:
-
- Alberta,
- Nova Scotia, and
- British Columbia.
Video Unlimited liability corporation
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:
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.
Maps Unlimited liability corporation
Applicable law by jurisdiction
See also
- 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.
References
Source of the article : Wikipedia