An unlimited liability corporation (ULC) within Canadian corporate law 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.

By 1997, unlimited liability corporations had been abolished in Canadian corporate law in all Canadian jurisdictions except for the province of Nova Scotia, where ULCs remain available. However, due to their increased use in American companies' tax planning since then, ULCs were permitted in Alberta and British Columbia starting in the mid-2000s.

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—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 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.

Applicable law by jurisdiction

+ Relevant rules relating to ULCsDescriptionFrameworkBased very closely on modern US corporations statutesClosely modelled on the United Kingdom Companies ActsLocation of head officeIn the provinceIn the provinceIn the provinceNature of liabilityUnlimited for obligations arising from actions and proceedings commenced by or against the ULC before its dissolution or within 2 years thereafter.Unlimited for obligations arising from actions and proceedings commenced by or against the ULC before its dissolution or within 1 year thereafter.Shareholders are liable for all debts and liabilities upon winding up. This liability is unlimited for past or present shareholders (but for past shareholders it is extinguished one year after he ceases to be a shareholder).Residency requirements for directors¼ of all directors must be Canadian residentsNoneNoneDirectors' duty of careStatutorily bound to exercise “the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances”As for AlbertaDetermined under the common lawPower to manage corporationDirectors can manage “or supervise the management” of the business and affairs of the corporation (with authority to delegate that power to shareholders through a USA corporation or LLC)Directors must manage or supervise the management of the business and affairs of the companyShareholders have power to manage the corporation (and the authority to delegate that power to directors)Amalgamation of corporationsBoth short-form (parent and subsidiary amalgamation with only board approval required), and long-form (2/3 shareholder approval) are availableForeign corporations may not amalgamate with BC ULCsNo Court approval is required if all shareholders approve the amalgamationSection 134 (10A)(b)Reductions in stated capital2/3 shareholder approval is neededBy court order or special resolution2/3 shareholder approval is requiredSection 57(4)Declaration of dividendsThe board may declare dividends if it has reasonable grounds to believe that a corporate solvency test is satisfiedAs for AlbertaDividends must be declared and paid out of the profits of the companyPurchase of own sharesA corporation may hold shares in itself and allow subsidiaries to hold its shares for a maximum of 30 days (without cancellation)Purchased shares must be cancelled, but none may be purchased if it may make the corporation insolvent. Subsidiaries are allowed to purchase its parent's shares.Other than redeemable shares, any acquisition by a corporation of its own shares must have requisite shareholder approvalContinuanceOnly Alberta and Nova Scotia ULCs, and other corporations prescribed by regulation, may migrate to BC, and a foreign ULC may not migrate into BC as a limited liability corporationForeign corporations can continue into Nova Scotia as a ULC, with approval of all shareholders. Section 133(1A) Nova Scotia ULCs can export to foreign jurisdictions upon 2/3 shareholder approval.Section 133(5)Conversion between limited and unlimited liability statusNo restrictionsNo restrictionsNo restrictions (but subject to shareholder approval)Sections 19(1)(b), 19(3), and 68)

See also List of acts of the Parliament of Canada

References