Generally, most foreign investors looking to develop or purchase a business in Ontario will enjoy many of the free-market benefits afforded to resident investors. Incentives are available to foreign investors almost on the same basis as resident investors. There are no restrictions on the repatriation of profits or capital, and no specific types of currency accounts are required. In addition, there are no exchange or regulatory restrictions on borrowing from abroad, and no restrictions on the ability to remit dividends, profits, interest, royalties, management fees, loan repayments, or on the settlement of trade debts.
The Ontario government’s pro-business agenda includes greater efficiency in service delivery, restoration of a balance in labor relations, increased strides in tax reduction and job creation, and elimination of unnecessary market and business regulation. Within this pro-business environment, an investor considering developing or purchasing business operations in Ontario, still must consider a myriad of other regulatory issues.
Foreign-Owned Business Registration
The Investment Review Division of Industry Canada regulates certain foreign investment in Canada under the Investment Canada Act. The Act contains provisions for the review of acquisitions for control of significant Canadian businesses by international investors. In addition, all new business names must be registered with Ontario Ministry of Consumer and Business Services, including sole proprietorships, partnerships, and corporations. Business name registration is regulated under the Business Names Act, and the registration is valid for 5 years, after which time it must be renewed. Corporations conducting business in more than one province must also register and incorporate both provincially, under the Business Corporations Act, and federally with Industry Canada, under the Canada Business Corporations Act.
Some of the taxation issues that a foreign investor in Ontario must consider include taxation rates, sales taxes, tax incentives, and remittance issues. Taxation is regulated by both Canada Customs and Revenue Agency (Revenue Canada), and the Ontario Ministry of Finance under the Income Tax Act. Corporations in Canada are taxed on their worldwide income, and the tax rates are determined by the source of income (business, property, etc ).
In addition to the corporate tax rate, almost all goods and services are subject to a federal Goods and Services Tax (GST) of 7%. Ontario also imposes a provincial sales tax (PST) which varies depending on the type of taxable activity. Businesses that sell taxable goods and services on a regular basis must apply for a Retail Sales Tax Vendor Permit through the Ontario Ministry of Finance. If an investor purchases an established Ontario business with a vendor permit, the vendor permit may not be transferred, and the investor must obtain a Clearance Certificate from the vendor confirming that all taxes collectable or payable have been paid.
There are no restrictions on a foreign investor’s ability to repatriate investments or profits from Canadian or Ontario based operations. However, withholding taxes do exist on the payment to non-residents of certain dividends, interest, salaries, bonuses, commissions, and other amounts for services rendered.
Research and Development Tax Incentives
One of the larger benefits of locating a new business or investing in Ontario, is the considerable research and development (R&D) tax incentives available. In Ontario, tax legislation provides for a 100% deduction for all current research and development expenses and for capital expenses on R&D machinery and equipment. In addition, the deductions can be claimed immediately or carried forward indefinitely to reduce taxable income. The tax credits provided for apply to all R&D, including overhead, incremental R&D, and salaries. There is also a bonus tax credit for incremental R&D. The Canadian federal rates of tax credits are currently 25-35%.
In comparison, in the U.S., tax credits are usually only available on wages, materials, and a percent of consulting fees. In addition, if the R&D does not increase in amount as a percent of sales, then no tax credit applies. There is no bonus tax credit for R&D in the U.S., and the tax credit is only available on incremental R&D.
Land Use Regulation
When considering the purchase of land for development, a foreign investor must consult both the local and provincial level of government. The Province of Ontario sets policy, while the municipalities make land development decisions. The Ontario Municipal Board adjudicates disputes between the bodies.
The Ontario Ministry of the Environment is responsible for the development, administration and enforcement of environmental legislation. Environmental approvals with respect to air and water quality, and waste disposal can be initiated through the nearest district office. Environmental approvals with respect to air quality are required for new equipment or modifications to existing equipment which may lead to a discharge of a contaminant. There are detailed exceptions to the approval requirement which can be found in the Environmental Protection Act.
Immigration and Foreign Employee Issues
Investors looking to develop a business within Ontario are often concerned about the ability to transfer key personnel to manage their developing operations. The Ministry of Citizenship and Immigration Canada (CIC) oversees immigration issues under the Immigration and Protection Act and the Citizenship Act. Immigration to Canada, for business purposes, can be established in a variety of ways. Business Immigrants can be classified as Investors, Entrepreneurs, or Self-Employed Persons. Skilled Workers also may qualify to become permanent residents if they are able to become economically established in Canada. To temporarily work in Canada, an employment authorization is usually required, but there are exceptions to this rule that are applicable to international companies looking to set up operations in Ontario. The Business Immigration Programs administered by the CIC seek to attract people experienced in business to Canada, and these individuals are selected based on their ability to become economically established in Canada.
The Ontario market represents a diverse and skillful workforce for a potential investor. However, this workforce is heavily regulated, and requires specific employer compliance in a variety of legislated employment benefit areas. Under federal law, employers are responsible for deducting personal income tax, Canada Pension Plan, and employment insurance premiums from the employee’s paycheck. Some remittances, such as Canada Pension, and employment insurance, are shared by both the employer and employee. The employer must also make the necessary deductions on behalf of the employee and place the deductions into a trust account until remittances are made.
The Ontario Health Insurance Plan (OHIP) covers the cost of all necessary medical treatment to Ontario residents at no cost. OHIP is funded primarily through personal income taxes and an Employer Health Tax. The tax rate for an employer is based on the actual remuneration paid by the employer during the year. There are nine graduated tax rates, ranging from .98% to 1.95%, with the first $600,000 CDN exempt from the tax. In comparison, employees in the U.S. each pay approximately 1.45% of payroll to support Medicare, which is not a universal plan like OHIP. As well, most U.S. employers pay for private health insurance for their employees at considerable expense. Employers in Canada also have the option of providing additional benefits for medical prescriptions and other voluntary medical services not covered by OHIP.
Employees with at least thirteen weeks of service with the same employer preceding delivery are entitled to at least 17 weeks of unpaid pregnancy leave. In addition to the 17 week leave for a mother, either working parent can take up to a 35 week unpaid parental leave to care for a new born or newly adopted child. The Employment Insurance program of Canada pays employment insurance benefits to the individuals while on leave, and some collective agreements contain clauses providing an additional stipend to the legislated employment insurance benefits.
Employer Successor Provisions
Under theOntario Labour Relations Act, an investor that purchases a business that is bound by or is a party to a collective agreement, will in turn, become a party to the original collective agreement until the Labour Board otherwise declares. Transactions covered under this section include not only sales of businesses, but leases, transfers or any other manner of disposition. The trade union relationship with the employees covered under a collective agreement will also remain intact until the Labour Board otherwise declares.
Both Ontario and Canada in general, represent attractive markets for foreign investment. The complexity and diversity of regulations will depend on the nature of the business transaction. Contact attorneys Randy Wright or Scott Relf in our Birmingham office if you wish to discuss the planning issues faced in developing or purchasing business operations in Ontario.