Expanding a U.S.-based business internationally is a significant step that requires a thoughtful approach and well-developed strategy. Before diving in, it is important to first learn as much as you can about the legal and business landscape of the market you intend to enter since foreign laws and business practices can vary considerably from those in the U.S. In this 3-part blog series, we will explore three popular expansion targets for U.S . companies - Canada, the UK and France – by reviewing some basic considerations associated with doing business in each one of these markets.
Part 1: Doing Business in Canada
Canada’s close proximity to the U.S. makes it a convenient and easily accessible market in which to expand your business operations. However, its legal structure is quite distinct from that of the U.S., and therefore, can present some initial challenges. One of the most unique features of the Canadian legal system is the fact each of its 10 Provinces and 3 territories has its own laws and regulations. Conducting business in Canada, therefore, requires knowledge of applicable local, provincial and federal legislation. The following overview is intended to help companies successfully navigate entry into the Canadian market.
Entering the Canadian market
Canada is primarily an English-speaking country (with the exception of the Province of Quebec, which is predominantly French-speaking, and the Province of New Brunswick, which is bilingual - French and English), making it easily accessible to foreign businesses from a cultural and linguistic perspective. As such, many U.S. companies will consider the differences in provincial laws when choosing an entry point for business in Canada. Another factor often weighed is the predominant industrial activity in each of its commercial hubs. For example, Canada’s main technology hubs are located in Vancouver, British Columbia; Toronto, Ontario; and Montreal and Quebec City, Quebec.
Companies in Canada can either incorporate at the federal level or at the provincial level. Provincial incorporations are best suited for U.S. companies that plan to have offices based primarily in one province (which does not exclude future growth potential). However, if a company is incorporated at the federal level, but operates primarily from one particular province, it will also need to incorporate provincially in such province. Incorporations in the province of Quebec involve the additional, unique rules of that particular province, including the obligation to ensure that the corporate name conforms to the requirements of the Charter of the French Language.
Finally, there is an annual obligation to file a corporate Annual Report with the appropriate corporate registry; failure to do so can cause the company to lose its incorporation.
Complying with Corporate Tax Obligations
Regardless of whether a company is a federal or provincial corporation, the directors of the company are required to be natural persons. With respect to the payment of income taxes, in order for the company to be classified as a Canadian corporation– and therefore pay the lower corporate tax rate – it must meet strict requirements regarding the number of directors and shareholders who themselves qualify as Canadian residents for income tax purposes (people that file Canadian income taxes). Currently, at least 25% of the Directors are required to be Canadian residents, and the majority of the issued shares need to be controlled by Canadian shareholders. If those requirements are not met, the corporation will be taxed at a higher level as a foreign entity.
Applying for Work Visas
Once a U.S. company has decided to establish a physical presence in Canada, the next step is to have its employees apply for work visas in order to demonstrate evidence of the right to live and work in the country. Federal law governs immigration requirements (which will vary based on status), and it is common for the Provinces to offer certain incentives designed to attract specific categories of immigrants.
For example, entrepreneur immigration rules generally requires the candidate to open or purchase, and then actively manage, a qualifying small business in Canada. Upon satisfying pre-determined conditions, “Entrepreneur Visa” holders can then become Canadian permanent residents and eventually citizens of the country. Other incentive programs include Canada’s Start-up Visa program, the British Columbia Entrepreneur program and the Quebec Entrepreneur program.
Building a Local Workforce
Once a company is established in Canada, it will be important to secure the right talent and workforce needed to operationalize your business development strategy. While many U.S. companies (technology startups, in particular) prefer to keep the R&D in their country of origin, you may rely on local employees to sell to the Canadian clientele. A local salesforce will understand Canadian sales and marketing expectations and will be able to execute a local sales strategy, even if the bulk of operations continue to be located in the company’s country of origin.
Employment of Canadian workers is regulated at the Provincial level. In fact, as soon as you hire your first employee, you will be required to undergo extensive registration procedures at both the Provincial and Federal level. In addition, Common Law of employment applies consistently throughout Canada, with the exception of Quebec where Civil Law applies. It is therefore important to work with an employment lawyer who practices in your target Province.
For instance, if you wish to include non-disclosure obligations, non-solicitation, or non-compete clauses in your letter of engagement with employees, make sure your legal advisor is able to advise you as to the validity of those clauses under local employment laws. Finally, it is essential for employers in Canada to implement a number of internal policies in the workplace in order to document their compliance with various Canadian employment laws and regulations, including an anti-harassment policy, code of conduct, policies related to the use of social media, the internet, and personal e-mail use at work, and policies related to conflicts of interest and company policies surrounding reimbursements of business expenses.
Registering your Intellectual Property
If your company has secured its rights to intellectual property (patents, copyrights, trademarks) in the U.S., those rights will not be recognized or enforced in Canada unless you file to protect them under Canadian IP law. If you intend to sell products or services within Canadian territory, it is particularly important that you can document your IP rights through registration. It is worth noting that in Canada, patent and trademark registrations are both granted based on a first-to-file system, which means you should obtain protection before introducing your products or services to the Canadian market.
Canadian IP law falls under federal jurisdiction; as a result, the legislative rules relating to IP ownership within the employment setting are also national in scope. For example, under Canada’s copyright rules, the author of the work is the first owner of the copyright, except when the work is authored by an employee under a “contract of service” in the course of employment (unless otherwise agreed in writing between the parties). However, in the case of independent contractors, unless there is an express provision in the independent contractor agreement to the contrary, the copyright will be owned by the independent contractor, not the company.
Contracting under Canadian law
When entering into contracts in Canada, it is important to recognize that Canadian contract law principles are derived from both Federal and Provincial case law and legislation. Likewise, the rules and legal concepts used for contract drafting and interpretation are different between anglophone Canada (based in common law and rooted in English law principles) and the Province of Quebec (civil law, code-based laws originating from the old French Napoleonic Civil Code). Quebec not only requires the use of the French language in all contracts, but also for receipts, warranties, order forms, brochures and catalogs.
Like any other business opportunity, exploring the possibility of a foreign expansion should involve some basic diligence about the target market, particularly its laws and business practices. Seeking the advice of an attorney who is qualified to practice in both the U.S. and the country of interest can also help when formulating a strategy for growth beyond U.S. borders. If you are interested in learning more about the Canadian market or foreign expansion in general, please contact Stephan Grynwajc for more information or assistance. Stephan can be reached at email@example.com or 347-543-3035.
Stephan Grynwajc is admitted to the practice of law in the U.S., Canada, U.K. and in France/the European Union. He has served as a senior in-house attorney for several blue-chip technology corporations (e.g., Intel and Symantec) in France, the U.K. and the U.S., and today, focuses his practice on advising U.S.-based clients on navigating the EU, UK and Canadian legal and regulatory landscape.