Unlimited Liability Companies for British Columbia

This article is left here for historical reference. On the whole, amendments to the US/Canada Tax Treaty that came into effect in early 2010 generally make Canadian ULCs undesirable. That said, as of October 2012, we still have some demand for these vehicles, based on current advice. Be sure that you've got good income tax advisers on each side of the US/Canada border if you're going to use a Canadian ULC in your business structure.

Good news for US businesses or US residents looking to do business in Canada!

On March 29, 2007, the BC government passed into law amendments to the Business Corporations Act (BC) that will allow the incorporation of unlimited liability companies (ULCs) in BC. The amendments aren't in effect as of yet; a staffer we spoke to at the BC Corporate Registry said to expect this for the fall of 2007. (It is possible right now to register in BC an out-of-BC created ULC. In Canada, this means either an Alberta ULC or a Nova Scotia ULC.)

Highlights of the new amendments include:

• The filing process will be simple. As with ordinary corporations, an online filing will be available, so the creation process for ULCs should be as smooth as it is for ordinary corporations now. The bad news is that the government will charge a premium for a ULC incorporation: a filing fee of $1,000 compared to the regular corporation filing fee of $350. Compare Nova Scotia, which used to charge $4,000 to incorporate a ULC, plus annual filings of $2,000, but which in light of competition from BC and Alberta for ULCs has recently dropped the incorporation filing fee to $1,000, though they raised the annual filing fee of $2,750. Alberta does not charge a premium for a ULC. Only the ordinary corporate filing fee ($100) and annual report filing cost ($0, but you have to pay a service provider to do the filing) apply.
• BCULCs will be required to have either "Unlimited Liability Company" or "ULC" in their corporate name. The terms are interchangeable with each other for all purposes. A numbered BCULC must use the phrase "B.C. Unlimited Liability Company" in its name.
• The notice of articles for the ULC and all share certificates issued by the ULC must contain the statement: "The shareholders of this company are jointly and severally liable to satisfy the debts and liabilities of this company to the extent provided in section 51.3 of the Business Corporations Act."
• The amendments do allow conversions. An existing BC limited liability corporation can file to convert into an unlimited liability company (with the shareholders thus becoming liable for all debts and liabilities existing whether before or after the date of conversion). And a BCULC can convert into a regular corporation, but the legislation seems to keep the shareholders liable (when the company eventually liquidates or dissolves, if it ever does) as if the conversion had not taken place.
• Foreign corporations are prevented from amalgamating into British Columbia with a BCULC and continuing as either a regular BC company or BCULC. Amalgations that result in a BCULC are restricted to existing BC companies. This means that a foreign corporation would first have to continue into BC as an ordinary BC limited company and then amalgate with another BC company to effect the creation of an amalgamated BCULC. It is also possible to amalgamate a BCULC with another corporation (a broader term than "company") to end up with an amalgamated BC limited liability company, but the same rules about shareholder liability apply to the amalgamated entity.
• Transfer into BC (continuance in) of foreign ULCs is allowed only if they come from Alberta, Nova Scotia or another jurisdiction specified by regulation.

Advantages of ULCs arise primarily for US corporations and individuals who want to carry on business in Canada. The advantages are primarily tax-driven (from a US tax perspective only). In Canada, any ULC will be treated as a regular corporation for corporate taxation and other purposes.

As to the unlimited liability of shareholders, BC has gone for the Nova Scotia approach, which is more favourable than the Alberta approach. Under the Alberta ULC legislation, shareholders are on the hook from day one. In BC and Nova Scotia, shareholders of a ULC are only on the hook once the company decides to stop operations and wind up.

For BCULCs, note that all existing and even former shareholders bear the liability. There are exceptions for former shareholders who transferred their shares one year or more before the date the company goes into liquidation (a formal court process for winding up the company) or dissolution (a less formal process for winding up the company).

"Joint and several" liability means that the existing and qualifying former shareholders as a group must make good on the debts and liabilities and each particular shareholder is also liable. This allows the creditors to go after the shareholder with the deepest pockets. That shareholder would then in turn have a right to claim contribution from the other shareholders. Note that this liability does not depend on the class of shares held by a particular shareholder. However, one wonders whether, as between different classes of shareholders themselves, share rights could specify how the various classes of shareholders contribute to the liability.

In practice, a Canadian ULC is often set up so that the only shareholder is an intermediary US corporation or LLC with limited liability itself, and whose only role is to hold the shares in the ULC. However, where a US individual holds the ULC shares directly, they will want to be careful about the umlimited liability aspect of Canadian ULCs.

The new amendments are good to see. They show a certain level of competition between provinces for business, and a general openness to foreign, particularly US, business in Canada. We'd be pleased to help with any inquiries about forming a ULC whether in BC or another part of Canada.