September 05 2005
On May 17 2005 the province of Alberta amended its Business Corporations Act to modernize its corporate legislation and make it consistent with most other North American jurisdictions. At the same time, Alberta added a number of provisions to permit the incorporation, continuance and amalgamation of unlimited liability corporations (ULCs) in Alberta.
This move by Alberta into the ULC area is a direct assault on what has been a bread-and-butter source of revenue for the province of Nova Scotia and its law firms. Prior to the changes to the Alberta Business Corporations Act, Nova Scotia was the only jurisdiction in Canada that permitted the creation of ULCs. Therefore, US investors have traditionally used Novia Scotia ULCs (NSULCs) when they wish to have a disregarded entity or partnership for US tax purposes to acquire or hold a business, enter into a joint venture or otherwise invest in Canada. In a number of cases ULCs have been formed under Nova Scotia law but with the head office in Alberta (due to Alberta's favourable tax environment). US investors and their advisers now have the choice of using either Alberta or Nova Scotia to create their ULCs. For an analysis of the tax advantages of ULCs please see "Alberta ULCs Offer New Tax Options to US Investors".
Alberta's new ULC legislation has raised questions as to whether the Alberta ULC (AULC) will replace the NSULC. This has resulted in advisers on both sides taking strong positions advocating one form of ULC over the other.
A ULC is a company in which the shareholders have unlimited liability, much like partners in a general partnership. This is different to the common form of a corporation, which is a separate legal entity from its shareholders who are generally not liable for the liabilities, acts or omissions of the corporation. This is illustrated by the requirement in the Alberta Business Corporation Act that the articles of a ULC state that "the liability of each of the shareholders of the corporation for any liability, act or default of the corporation is unlimited in extent and joint and several in nature".
The comparison of an AULC to an NSULC requires a comparison of the provisions
of the Alberta Business Corporations Act with those of the Nova Scotia Companies
Basis of Legislation
In Alberta, the legislation is based on the modern US-style business corporation statutes, which are more enabling for corporate planners and less regulatory in nature. This is similar to most other provincial statutes. In Nova Scotia, the legislation is based on the UK Companies Act, where a detailed memorandum and articles of association are used to create and regulate corporate activity. In Nova Scotia, judicial regulation and approval is more pervasive. Alberta has the advantage in this case.
Director residency requirements
In Alberta, one-quarter of the directors of an AULC must be resident Canadians. However, in Nova Scotia there are no Canadian residency requirements for directors, giving Nova Scotia the advantage.
In Alberta, the incorporation fee is C$100 and there is no annual renewal fee. By contrast, in Nova Scotia the incorporation fee is C$6,000, with an annual renewal fee of C$2,000. Alberta clearly holds the financial advantage.
In Alberta, the name of the corporation must end with 'Unlimited Liability Corporation' or 'ULC'. In Nova Scotia there is no legal requirement to refer to the company's unlimited liability status in its name. Therefore, Nova Scotia has the advantage.
Continuance of extra-provincial corporation
An extra-provincial corporation is allowed to continue into Alberta as an AULC regardless of whether it was a ULC or a traditional corporation. However, in Nova Scotia a corporation from another jurisdiction cannot continue into Nova Scotia as an NSULC. The corporation must continue into Nova Scotia as a limited company and then implement an amalgamation, winding-up or arrangement to convert to an NSULC. Thus, Alberta has the advantage in this case.
Nature and scope of shareholder liability
In Alberta, the shareholder of an AULC has direct liability, on a joint and several basis, for any liability act or default of the AULC. However, the act is silent on the scope of liability of a shareholder for liabilities either before or after the shareholder obtained or disposed of its shares. In Nova Scotia, the shareholders of an NSULC are liable for any debts or liabilities only if there is a shortfall after the NSULC has been dissolved. There is no direct liability. Shareholders that cease to be shareholders more than a year before the commencement of the winding-up of the NSULC are not liable for any NSULC deficiency. Likewise, prior shareholders are not liable if the existing shareholders can satisfy the shortfall. In addition, a shareholder is not liable for the debts incurred by the NSULC after the shareholder has disposed of its shares. Therefore, Nova Scotia has the advantage.
In Alberta, both short-form and long-form amalgamation procedures are permitted. The short-form procedure may be used by a parent and its subsidiary, or two or more subsidiaries, and only board approval, rather than shareholder approval, is required. The long-form procedure must be approved by the requisite number of shareholders (usually two-thirds of the votes cast) but there is no requirement for court approval. By contast, in Nova Scotia all amalgamations are long form and must be approved by the requisite number of shareholders (three-quarters of the votes cast) and by the court. Alberta has the advantage.
In Alberta, corporations can issue shares without nominal or par value only. They may issue only fully paid shares, and shares cannot be issued in consideration of a debt instrument. In Nova Scotia, corporations may issue par value shares in addition to shares without nominal or par value, and they may issue shares that are not fully paid. Shares can be issued in consideration of a debt instrument. Thus, Nova Scotia has the advantage.
In Alberta, corporations may give financial assistance to any person for any purpose without regard to a solvency test. However, the Nova Scotia act prohibits corporations from providing financial assistance, whether directly or indirectly, for the purpose of or in connection with a purchase made or to be made of any shares in the corporation, unless the corporation satisfies a solvency test or an exemption is available. Therefore, Alberta has the advantage
In Alberta, the articles of incorporation of an AULC must contain an express statement that the liability of each shareholder for any liability, act or default of the AULC is unlimited in extent and joint and several in nature. Each share certificate must display, in a prominent position, a statement that the liability of the owner of the shares represented by the certificate is unlimited. In Nova Scotia, the articles of association do not have to indicate that the liability of the members is unlimited, although it is permissible to do so. As a result, Nova Scotia has the advantage
In both Alberta and Nova Scotia, the registered office of an AULC and an NSULC respectively must be maintained within the province - neither province has an advantage in this case.
Location of meetings
In Alberta, shareholders' meetings must be held at a place in Alberta stipulated in the bylaws or determined by the directors, unless all of the voting shareholders agree to hold meetings outside Alberta. As Nova Scotia has no requirements regarding where shareholders' meetings take place, it has the advantage.
In Alberta, the power to manage the corporation resides with the directors but may be delegated to shareholders through a unanimous shareholders agreement. In Nova Scotia, power to manage the corporation rests with the shareholders, which may delegate that power to the directors. Thus, Alberta has the advantage.
The Alberta act codifies directors' liability by providing expressly for such liability in the case of:
The scope of directors' indemnity is limited to specifically enumerated matters. In Nova Scotia, directors' liability arises from a fiduciary duty at common law and there is no limitation on the scope of indemnification that an NSULC can provide to its directors. Therefore, neither province has an advantage.
Duty of care
In Alberta, there is a statutory requirement for directors to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. In Nova Scotia, there is a common law duty of care for directors, which is a subjective test as determined by the courts. Alberta has the advantage.
In Alberta, a corporation may declare dividends if the board has reasonable grounds to believe that the applicable solvency test is satisfied. There are statutory restrictions related to declaration of dividends. In Nova Scotia, dividends must be declared and paid out of the profits of the company, and there are no statutory restrictions related to declaration of dividends. Instead, common law rules apply. Neither province has an advantage in this case.
Holding own shares
In Alberta, a corporation may hold shares in itself (without cancellation) and permit subsidiaries to acquire its shares for a maximum of 30 days so as to facilitate corporate reorganizations. In Nova Scotia, any purchase or other acquisition by an NSULC of its own shares, other than redeemable shares, must have the requisite level of shareholder approval. Therefore, Alberta has the advantage.
As can be seen from this analysis, both the NSULC and the AULC have advantages and disadvantages. The residency director requirement is a distinct disadvantage to an AULC for any US business that does not have a Canadian representative who can meet the resident Canadian test. The scope of shareholder liability with an AULC has been much commented on. However, the impact of any difference in scope will be reduced or neutralized if a US C corporation, which is a special purpose vehicle for this purpose, is used as the shareholder of the ULC. Therefore, lower costs, along with ease of continuance and amalgamation, will encourage many US investors to use AULCs.
For further information on this topic please contact Elinore J Richardson at Borden Ladner Gervais LLP by telephone (+1 416 367 6000) or by fax (+1 416 367 6749) or by email (firstname.lastname@example.org).
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Elinore J Richardson