Unlimited Liability Corporation (ULC)

A ULC is a corporation in every ordinary sense. It has shares and directors, a separate legal existence, and it can own property, sign contracts and sue. The difference is that its shareholders give up the shield that normally protects the owners of a corporation. Depending on the province, creditors can pursue them for the company's obligations while it operates, or when it is liquidated or dissolved.

ULCs exist only under provincial statutes that provide for them:

• Nova Scotia: unlimited companies under the Companies Act, the longest-established Canadian ULC.
• Alberta: unlimited liability corporations under Part 2.1 of the Business Corporations Act, since 2005.
• British Columbia: unlimited liability companies under Part 2.1 of the Business Corporations Act.
• Prince Edward Island: unlimited liability corporations under Part III of its Business Corporations Act, enacted in 2018.

Neither the OBCA nor the CBCA provides for ULCs, so an Ontario business that wants one forms or continues it in one of those provinces and registers it here. Canada also has no LLC. When owners ask for a "Canadian LLC", they usually need an ordinary corporation or, if a US owner wants flow-through treatment, a ULC. Our guide to the US LLC versus the Canadian corporation explains why a US LLC is a poor vehicle for Canadian owners.

The liability model differs by statute:

The practical answer to unlimited liability is to make the shareholder itself a limited liability entity. US groups often hold a ULC through a US corporation or LLC formed only for that purpose, so creditors who reach past the ULC generally stop there. The names signal the risk: Alberta and PEI ULCs must end with "Unlimited Liability Corporation" or "ULC", and British Columbia ULCs with "Unlimited Liability Company" or "ULC". Alberta and British Columbia also require a liability warning on the face of every share certificate.

The attraction is a deliberate mismatch between two tax systems.

In Canada, a ULC is an ordinary corporation resident in Canada. It files a T2 return, pays federal and provincial corporate tax, and withholds tax on payments to non-residents. A ULC controlled by a US owner is not a Canadian-controlled private corporation, so it pays general corporate rates.

In the US, the entity classification ("check-the-box") regulations list Canadian corporations and companies as corporations per se, but expressly exclude a Nova Scotia ULC and any other Canadian company or corporation all of whose owners have unlimited liability under federal or provincial law. A ULC is therefore an eligible entity. By default, a foreign eligible entity whose owners lack limited liability is disregarded if it has one owner and a partnership if it has two or more, and the owners can elect a different classification.

For a US parent, a disregarded ULC works like a branch: its income and the Canadian tax it pays generally appear on the owner's US return, which helps line up US foreign tax credits with the Canadian tax. That is why ULCs are common for US companies expanding into Canada and for US buyers of Canadian businesses. Alberta's statute, for example, lets a corporation from another jurisdiction continue as a ULC, with its shareholders becoming liable without limit for its existing liabilities. An Ontario corporation can be exported only with a special resolution and the Ontario Director's authorization, and shareholders entitled to vote on it have dissent rights; see our guide to corporate continuance.

For Canadian-resident owners with no US tax exposure, a ULC generally has no tax advantage. Canada taxes it as a corporation, and the unlimited liability is pure downside. A ULC is also a different tool from a Delaware flip, which puts a US parent over a Canadian startup but usually leaves the Canadian company as an ordinary corporation.

The hybrid treatment that makes a ULC useful also costs it treaty benefits on some payments. Article IV(7)(b) of the Canada-US tax treaty, added by the Fifth Protocol, says an amount is not considered paid to a US resident if Canadian tax law treats the US resident as receiving it from a Canadian-resident entity, but because the US treats that entity as fiscally transparent, the US tax treatment differs from what it would be if the entity were not transparent.

A dividend from a disregarded ULC to its US owner is the classic case. For US tax, the payment is a non-event; if the ULC were a corporation for US purposes, it would be a dividend. Because the treatments differ, the treaty's reduced dividend rate, 5% for a company owning at least 10% of the voting stock, can be denied, leaving the 25% Part XIII withholding rate under the Income Tax Act. Interest and royalties the ULC pays to its US owner can raise the same issue.

Advisers use specific techniques to manage this, and the right approach depends on the facts. The repatriation plan should be settled before the ULC pays its first dividend or interest payment.

A ULC formed in Alberta, British Columbia, Nova Scotia or PEI is a Class 1 extra-provincial corporation in Ontario. It does not need an extra-provincial licence, but it generally files an initial return under the Corporations Information Act within 60 days after it begins carrying on business in Ontario and keeps that information current. Our entry on extra-provincial registration covers the filing. The ULC also keeps its home-province filings current, such as Nova Scotia's annual renewal.

Before choosing a ULC, compare the alternatives:

• OBCA or CBCA corporation: limited liability and the simplest administration; the US treats it as a corporation.
• Limited partnership: a limited partnership is generally flow-through in both countries, with limited liability for limited partners who stay out of management.
• Limited liability partnership: in Ontario, an LLP is available only to certain regulated professions.
• ULC: flow-through for US tax only, with unlimited liability that must be contained by the ownership structure.

Lamba Law's incorporation and structuring service handles the corporate side alongside the client's cross-border tax advisers.

Megan Thornton is chief financial officer of a Michigan auto-parts manufacturer that is opening a 15-person warehouse in Mississauga. The company's US tax advisers want the Canadian operation treated as a branch for US purposes, so the group forms an Alberta ULC owned by a newly formed US holding LLC rather than by the manufacturer itself. If the ULC's debts ever exceeded its assets, creditors could pursue the holding LLC, but generally not the manufacturer's other assets.

Kofi Boateng, the Canadian general manager, files the ULC's Ontario initial return within 60 days of opening and registers it for HST and payroll. In its first full year, the ULC earns C$400,000 of taxable income and pays Canadian corporate tax at general rates, because it is foreign-controlled and not a CCPC.

In year two, the parent wants to bring home C$300,000. If Article IV(7)(b) applies, Canadian withholding is 25%, or C$75,000, instead of 5%, or C$15,000. That C$60,000 difference is why the group's Canadian and US advisers agree on the repatriation method before the ULC declares anything.