Canada

Forms of business enterprise

Canadian law is based on the British common-law system, except in Quebec where a civil-law system prevails. The principal forms of business enterprise available in Canada are the following.

• Corporation: A legal entity distinct from its shareholders, whether public or private, incorporated federally, provincially, or territorially.
• Partnership: A business relationship between two or more 'persons' (i.e. individuals, corporations, trusts, or other partnerships) formed for the purpose of carrying on business in common. Not treated as a legal entity distinct from its partners.
• Sole proprietorship: An unincorporated business operated by an individual that is carried on under the individual's own name or a trade name.
• Trust: A relationship whereby property (including real, tangible, and intangible) is managed by one person (or persons, or organisations) for the benefit of another. May hold commercial enterprises.
• Joint venture: Generally, the pursuit of a specific business objective by two or more parties whose association will end once the objective is achieved or abandoned. Not treated as a legal entity distinct from the participants.

Foreign investors usually conduct business in Canada through one or more separate Canadian corporations, although operation as a branch of a profitable foreign corporation may be preferable during the start-up period. In addition, foreign investors may participate as partners in partnerships carrying on business in Canada or as joint venturers.

Cross-border tax compliance

Convention on Mutual Administrative Assistance in Tax Matters

Under the Convention on Mutual Administrative Assistance in Tax Matters, Canada exchanges tax information with other signatories to the convention (member states of the Council of Europe and the member countries of the OECD), based on OECD standards, but is not required to collect taxes on behalf of another country, or provide assistance in the service of related documents. Canada will continue to negotiate a provision on helping to collect tax on a bilateral basis and has agreed to include such a provision in some of its bilateral tax treaties.

Common Reporting Standard (CRS)

The CRS for the automatic exchange of financial account information between foreign tax authorities requires Canadian financial institutions to have procedures to identify accounts held by residents of any country other than Canada or the United States, and to report the required information to the CRA. Having satisfied itself that each jurisdiction has appropriate capacity and safeguards in place, the CRA will formalise exchange arrangements with other jurisdictions leading to the exchange of information on a multilateral basis. On 10 October 2022, the OECD released amendments to the CRS, which will:

• require financial institutions to include additional information in their annual CRS reporting
• align the CRS with the new Crypto-Asset Reporting Framework (CARF) (see 'Crypto-asset reporting' below) and include crypto-assets in relevant CRS definitions, and
• integrate certain frequently asked questions into the body of the CRS text and guidance.

Participating jurisdictions, including Canada, will need to agree to these amendments and update their domestic legislation to implement the more significant changes. The 2024 federal budget proposes, starting the 2026 calendar year, to implement amendments to the Canadian rules relating to the CRS that have been endorsed by the OECD in connection with the CARF, including changes relating to electronic money products and central bank digital currencies.

US Foreign Account Tax Compliance Act (FATCA)

Canada reports enhanced tax information to the United States under an intergovernmental agreement between Canada and the United States to improve international tax compliance and to implement the US FATCA. For calendar years 2022, 2023, and 2024 FATCA reporting, the US competent authority will not consider a reporting Model 1 foreign financial institution to be in significant non-compliance of its requirements under the intergovernmental agreement solely because of its failure to report US taxpayer identification numbers for its pre-existing accounts (certain conditions apply).

Crypto-asset reporting

The OECD has developed a framework for the automatic exchange of tax information relating to transactions in crypto-assets, the Crypto-Asset Reporting Framework (CARF). The 2024 federal budget proposes to implement the CARF in Canada, starting the 2026 calendar year. The new reporting rules would apply to crypto-asset service providers that are resident in Canada, or carry on business in Canada, and that provide services effectuating exchange transactions in crypto-assets. These service providers will need to report certain information regarding their customers and crypto-asset transactions.

Factual control

The Canadian Income Tax Act recognises two forms of control of a corporation: de jure (legal) control and de facto (factual) control. The concept of factual control is broader than legal control and is generally used to restrict access to certain corporate tax advantages. Legal control of a corporation is determined generally based on the right to elect the majority of the board of directors. Factual control is defined to exist where a person has directly or indirectly, in any manner whatever, influence that, if exercised, would result in control in fact of the corporation. Many court cases have discussed which specific factors may be useful in determining whether factual control exists.