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UNLIMITED LIABILITY CORPORATIONS

Most people are familiar with or have at least heard of limited liability corporations.  The idea is that the shareholders are not personally liable for the actions or debts of the corporation.  Until recently these corporations would be the only corporations you would see in Alberta.  They are recognized by the use of a legal component in the name.  The name must end in one of the words; Limited, Corporation or Incorporation or the abbreviation Ltd., Corp., or Inc.

Alberta has recently amended the Business Corporations Act to allow the creation of unlimited liability corporations.  The concept behind the unlimited liability corporation is that the shareholders are jointly and severally liable for all the obligations of the corporation.

Unlimited liability corporations will not be attractive for Albertans because they can operate through limited corporations without any disadvantage.  Unlimited liability corporations will be very attractive to foreign entities, which want to do business in Canada.  Businesses from the United States wanting to operate in Canada will have an increased tax advantage when operating through the unlimited liability corporation as compared to operating through a limited corporation.

Although it is expected that the Canada / Alberta taxation of the two types of corporations will be the same, there is a tax advantage in the US.  Apparently the unlimited liability corporation is disregarded as an entity under US tax laws.  The result is that a US shareholder of a Canadian unlimited liability corporation is deemed to have received income earned by the corporation personally.  For an Albertan this sounds a little scary, for the US shareholder it can be a tax advantage when it comes to US taxation.

When a limited liability corporation receives income it is taxed in Canada, then when the shareholder takes any funds into the US those funds are income or dividends and taxed in the US.  There cannot be any losses claimed in the US by the shareholder unless the Canadian corporation collapses and then the shareholder could claim a loss of the original investment.

With an unlimited liability corporation there will still be Canadian tax, but all income and expenses are deemed to be the shareholder's for US tax purposes.  This would allow the US shareholder to claim expenses of start up and create a loss in the US for tax purposes.  The shareholder would also have credit with the US tax authority for the amount of Canadian tax paid on income.

The creation of unlimited liability corporations in Alberta should not affect the tax revenues from income earned by foreign controlled corporations but may give the foreign shareholders incentive to come to Alberta to do business by allowing them to retain some of the funds they would have otherwise paid as tax in the US.  The availability of unlimited liability corporations in Alberta may generate an increase in US companies coming to do business in Alberta.

By Glen Cunningham
October 12, 2005