Unlimited liability corporation
Encyclopedia
Unlimited Liability Corporations exist in three of Canada's 10 provinces - Alberta
(AULCs for Alberta Unlimited Liability Corporation), Nova Scotia
(NSULCs for Nova Scotia Unlimited Liability Company), and British Columbia.
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 is the case because following the January 1, 1997 introduction of the entity classification rules in the US Internal Revenue Code
which provided specific exceptions in certain cases such that “[w]ith regard to Canada . . . any . . . company or corporation all of whose owners have unlimited liability pursuant to federal or provincial law” will not be treated as a corporation (Reg. Section 301.7701-2(b)(8)(ii)(A)), US parent companies have generally been able to consolidate the activities of a Canadian ULC (heretofore only a Nova Scotia ULC) for US income tax purposes. In essence, the ULC acts as a “flow-through
” or “disregarded” entity for US tax purposes as the US tax rules “look through” the ULC to its shareholder(s).
Changes to the Canada-US tax treaty have made ULCs irrelevant as of Jan 1, 2010.
.
A NSULC must have a registered office in Nova Scotia
There are no Canadian residency requirements for directors of a NSULC
Under section 135 of the NSCA, shareholders are liable for all debts and liabilities of the NSULC 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).
The NSCA gives shareholders power to manage the corporation (and the authority to delegate that power to directors).
Dividends must be declared and paid out of the profits of the company
NSCA prohibits a corporation from providing financial assistance in connection with a purchase of any shares of the corporation unless the corporation satisfies a solvency test or another exemption is available.
Under the NSCA, a limited corporation cannot convert into a ULC (unless it is an NSCA corporation and amalgamates with a NSULC – subject to shareholder and court approval)
.
The Bill makes Alberta the second jurisdiction in Canada (after Nova Scotia) to provide for the creation of unlimited liability corporations under its business corporations legislation.
The wording of Bill 16 with respect to the creation of the AULC is as follows:
“The liability of each of the shareholders of a corporation incorporated under the Act as an unlimited liability corporation for any liability, act or default of the unlimited liability corporation is unlimited in extent and joint and several in nature.”
The result of this wording is a broadening of the liability for shareholders of an AULC as compared with either the traditional limited corporation or the Nova Scotia ULC (NSULC) . The AULC’s shareholders’ liability for “any liability, act or default” of the ULC is unlimited in extent and joint and several in nature. This broader liability will likely necessitate interposing a US corporation
between the AULC and the US parent corporation in those states where corporate groups can prepare consolidated tax return
s or a single-member limited liabilty company in those states where consolidation is not available.
There are several key differences between the Nova Scotia Companies Act (NSCA) and the Alberta Business Corporations Act (ABCA)
Alberta
Alberta is a province of Canada. It had an estimated population of 3.7 million in 2010 making it the most populous of Canada's three prairie provinces...
(AULCs for Alberta Unlimited Liability Corporation), Nova Scotia
Nova Scotia
Nova Scotia is one of Canada's three Maritime provinces and is the most populous province in Atlantic Canada. The name of the province is Latin for "New Scotland," but "Nova Scotia" is the recognized, English-language name of the province. The provincial capital is Halifax. Nova Scotia is the...
(NSULCs for Nova Scotia Unlimited Liability Company), and British Columbia.
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 is the case because following the January 1, 1997 introduction of the entity classification rules in the US Internal Revenue Code
Internal Revenue Code
The Internal Revenue Code is the domestic portion of Federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large, and separately as Title 26 of the United States Code...
which provided specific exceptions in certain cases such that “[w]ith regard to Canada . . . any . . . company or corporation all of whose owners have unlimited liability pursuant to federal or provincial law” will not be treated as a corporation (Reg. Section 301.7701-2(b)(8)(ii)(A)), US parent companies have generally been able to consolidate the activities of a Canadian ULC (heretofore only a Nova Scotia ULC) for US income tax purposes. In essence, the ULC acts as a “flow-through
Flow-through entity
A flow-through entity is a legal entity where income "flows through" to investors or owners; that is, the income of the entity is treated as the income of the investors or owners. Flow-through entities are also known as pass-through entities or fiscally-transparent entities...
” or “disregarded” entity for US tax purposes as the US tax rules “look through” the ULC to its shareholder(s).
Changes to the Canada-US tax treaty have made ULCs irrelevant as of Jan 1, 2010.
Nova Scotia
NSULCs are formed under the Nova Scotia Companies Act, R.S.N.S. 1989, c. 81 (NSCA), which is based on the United Kingdom Companies ActsUnited Kingdom company law
United Kingdom company law is the body of rules that concern corporations formed under the Companies Act 2006. Also regulated by the Insolvency Act 1986, the UK Corporate Governance Code, European Union Directives and court cases, the company is the primary legal vehicle to organise and run business...
.
A NSULC must have a registered office in Nova Scotia
There are no Canadian residency requirements for directors of a NSULC
Under section 135 of the NSCA, shareholders are liable for all debts and liabilities of the NSULC 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).
The NSCA gives shareholders power to manage the corporation (and the authority to delegate that power to directors).
Dividends must be declared and paid out of the profits of the company
NSCA prohibits a corporation from providing financial assistance in connection with a purchase of any shares of the corporation unless the corporation satisfies a solvency test or another exemption is available.
Under the NSCA, a limited corporation cannot convert into a ULC (unless it is an NSCA corporation and amalgamates with a NSULC – subject to shareholder and court approval)
Alberta Unlimited Liability Corporations (AULCs)
On May 17, 2005, Bill 16 – Business Corporations Amendment Act, 2005, was proclaimed in force in AlbertaAlberta
Alberta is a province of Canada. It had an estimated population of 3.7 million in 2010 making it the most populous of Canada's three prairie provinces...
.
The Bill makes Alberta the second jurisdiction in Canada (after Nova Scotia) to provide for the creation of unlimited liability corporations under its business corporations legislation.
The wording of Bill 16 with respect to the creation of the AULC is as follows:
“The liability of each of the shareholders of a corporation incorporated under the Act as an unlimited liability corporation for any liability, act or default of the unlimited liability corporation is unlimited in extent and joint and several in nature.”
The result of this wording is a broadening of the liability for shareholders of an AULC as compared with either the traditional limited corporation or the Nova Scotia ULC (NSULC) . The AULC’s shareholders’ liability for “any liability, act or default” of the ULC is unlimited in extent and joint and several in nature. This broader liability will likely necessitate interposing a US corporation
Corporation
A corporation is created under the laws of a state as a separate legal entity that has privileges and liabilities that are distinct from those of its members. There are many different forms of corporations, most of which are used to conduct business. Early corporations were established by charter...
between the AULC and the US parent corporation in those states where corporate groups can prepare consolidated tax return
Tax consolidation
Tax consolidation is a regime adopted in the tax or revenue legislation of a number of countries which treats a group of wholly owned or majority-owned companies and other entities as a single entity for tax purposes...
s or a single-member limited liabilty company in those states where consolidation is not available.
There are several key differences between the Nova Scotia Companies Act (NSCA) and the Alberta Business Corporations Act (ABCA)
- Alberta Business Corporations Act (ABCA) based very closely on modern US corporations statutes.
- A NSULC must have a registered office in Nova Scotia vs. AULC must have a registered office in Alberta.
- There are no Canadian residency requirements for directors of a NSULC vs. an ABCA corporation must have ¼ of all directors be Canadian residents
- Liability of directors to a NSULC arises mainly from a fiduciary duty at common law (no statutory outline) vs. ABCA expressly codifies director liability (improper issuance of shares, improper payments to shareholders, unpaid wages, etc.)
- In Nova Scotia, the directors' duty of care is determined by the common lawCommon lawCommon law is law developed by judges through decisions of courts and similar tribunals rather than through legislative statutes or executive branch action...
, whereas in Alberta directors are statutorily bound to exercise “the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances” (s. 123(3) as amended by Bill 16). - Under section 135 of the NSCA, shareholders are liable for all debts and liabilities of the NSULC 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). In Alberta shareholder liability is unlimited for obligations of the AULC arising from actions and proceedings commenced by or against the AULC before its dissolution or within 2 years.
- NSCA gives shareholders power to manage the corporation (and the authority to delegate that power to directors), whereas in Alberta, the ABCA charges directors to 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).
- In Nova Scotia only long-form amalgamations requiring approval of ¾ of shareholders AND approval of Supreme Court are available, whereas in Alberta no court approval is necessary (both short-form: - parent and subsidiary amalgamation with only board approval required, and long-form: - 2/3 shareholder approval are available)
- Reductions in Stated Capital: in Nova Scotia ¾ of shareholders and Supreme Court approval required, whereas in Alberta 2/3 shareholder approval is needed and no court approval necessary
- Dividends must be declared and paid out of the profits of the company in Nova Scotia vs. ABCA allows a corporation to declare dividends if the board has reasonable grounds to believe that a corporate solvency test is satisfied.
- NSCA prohibits a corporation from providing financial assistance in connection with a purchase of any shares of the corporation unless the corporation satisfies a solvency test or another exemption is available, whereas there are no restrictions on an ABCA corporation from providing financial assistance to anyone.
- Other than redeemable shares, any acquisition by an NSCA corporation of its own shares must have requisite shareholder approval. In Alberta, without shareholder approval, any ABCA corporation may hold shares in itself and allow subsidiaries to hold its shares for a maximum of 30 days (without cancellation). This greatly eases corporate reorganizations.
- Continuance: A NSULC can amalgamate with a AULC in Nova Scotia under the ABCA, but shareholder and court approvals are required. Under the ABCA a NSULC can continue into Alberta as a AULC as if it were incorporated in Alberta. All property of the NSULC will become property of the AULC upon continuance.
- Conversion: Under the NSCA, a limited corporation cannot convert into a ULC (unless it is an NSCA corporation and amalgamates with a NSULC – subject to shareholder and court approval). AULCs may convert to limited corporations and limited corporations may convert to AULCs