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In this post, we break down why foreign companies choose to incorporate subsidiaries in Canada, how the process works, and the key legal and tax considerations to keep in mind.
Canada continues to attract growing interest from foreign tech companies looking to expand internationally. I’ve recently helped several U.S. and Indian companies establish Canadian entities and wanted to share some of the core issues that come up.
Extra-Provincial Registration vs. Incorporation
One option for U.S. companies looking to do business in Ontario is to avoid forming a new Canadian entity and instead register their existing foreign corporation as an “extra-provincial” (EP) corporation in Ontario. This allows the foreign company to carry on business in Ontario without creating a Canadian subsidiary.
However, many companies find this approach less desirable. Ontario law requires a foreign corporation to appoint and maintain an agent for service in the province, adding a layer of compliance. There are also legal and commercial reasons to create a separate entity — including isolating liability, simplifying local contracts, and facilitating banking, employment, and government registrations. As a result, many companies opt to incorporate a Canadian subsidiary.
Whether the goal is to hire local talent, serve the market, or facilitate an acquisition, incorporating a subsidiary is often the first step.
Why Set Up a Canadian Subsidiary?
Here are some of the most common reasons foreign companies — especially from the U.S. and India — establish Canadian entities:
1. Access to Canadian Talent
Canada is home to a highly skilled, diverse, and relatively affordable tech workforce — especially when factoring in the USD exchange rate. Many companies incorporate here to hire Canadian engineers, developers, and operations staff directly.
2. Easier Hiring and Compliance
Hiring employees in Canada typically requires a local legal entity. This allows for proper registration with the Canada Revenue Agency (CRA), provincial employment insurance systems, and workers’ compensation boards.
3. Establishing a Local Presence
A Canadian subsidiary can help build trust with Canadian clients, partners, and suppliers. Many public institutions and private businesses prefer — or require — dealing with a Canadian-incorporated company.
4. Market Expansion
Canada offers a stable, tech-forward, and strategically located market. A local entity signals commitment and enables more seamless operations across time zones and legal systems.
5. Facilitating Work Permits and Immigration
Having a Canadian subsidiary can make it easier to sponsor work permits and support intra-company transfers for key talent. It also improves compliance with immigration rules and increases the likelihood of visa approval for executives, technical staff, and other key personnel.
Key Legal Advantage: No More Director Residency Requirement in Ontario
One of the most significant recent legal changes is Ontario’s removal of the 25% Canadian residency requirement for corporate directors. This change eliminates a common barrier for foreign companies and brings Ontario in line with British Columbia (which never had such a rule). As a result, Ontario and BC are now the two most popular jurisdictions for foreign-owned subsidiaries, each offering flexibility and a clear legal framework.
Structuring the Subsidiary
Incorporating a subsidiary usually involves forming a federal or provincial corporation with the foreign parent as the sole shareholder. Key steps include:
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Choosing a jurisdiction (Ontario and BC are most common)
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Filing Articles of Incorporation
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Appointing at least one director (no Canadian residency requirement in ON or BC)
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Registering for tax numbers (BN, GST/HST, payroll as needed)
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Opening a Canadian business bank account
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Preparing employment or contractor agreements
A Note on Banking
Opening a business bank account in Canada can present practical hurdles. Most major banks require at least one director to attend in person to open an account. However, some fintech platforms like Wise offer online onboarding and virtual accounts, which can help bridge the gap for remote founders.
Legal Considerations
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Parent-subsidiary structure: The foreign parent usually owns 100% of the Canadian company. Corporate resolutions and bylaws must reflect this and be maintained properly.
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Employment law: Employment in Canada is governed by provincial legislation, which differs significantly from U.S. and Indian frameworks.
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IP ownership: Any IP created in Canada should be properly assigned. If IP is to be centralized in the parent company, use a clear assignment agreement. Consider who will own trademarks, copyrights, and other IP assets used in Canada.
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Corporate maintenance: Subsidiaries must meet annual filing, record-keeping, and compliance obligations under federal or provincial law.
Tax and Financial Considerations
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Corporate tax: The Canadian subsidiary must file its own corporate tax return and is subject to Canadian corporate tax.
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Transfer pricing: Intercompany transactions — such as IP licensing or service arrangements — must be documented at arm’s length rates under Canada’s transfer pricing rules.
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Withholding taxes: Payments to the foreign parent (e.g., dividends, interest, royalties) may be subject to withholding tax. Tax treaties (such as those with the U.S. and India) can reduce or eliminate these taxes.
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GST/HST registration: If the company earns more than $30,000 CAD in taxable revenue, it must register for GST/HST.
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CCPC status: Foreign-owned subsidiaries generally do not qualify as Canadian-controlled private corporations (CCPCs). This means they miss out on several tax benefits — including the small business deduction, refundable investment tax credits, and enhanced SR&ED (Scientific Research and Experimental Development) credits. While non-CCPCs can claim SR&ED, they are limited to the non-refundable portion, which may have limited value for startups or early-stage entities.
Final Thoughts
Setting up a Canadian subsidiary is a strategic move for many tech companies. With Ontario’s removal of the director residency rule, the process is more accessible than ever. Whether you’re hiring locally, expanding your market, or establishing a long-term presence, getting the legal and tax structure right from the start is essential.
Wires Law can help with:
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Incorporating Ontario or Federal corporations with foreign shareholders
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Drafting customized bylaws and shareholder resolutions
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Preparing employment and contractor agreements for Canadian staff
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Drafting intercompany agreements and IP assignment documents
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Providing ongoing general counsel support for your Canadian operations.
John Wires
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