What do foreign businesses actually need to know before setting up a subsidiary in Canada? Expanding into Canada is often treated as an operational decision. In practice, it is a structural one.
The choice between a branch and a subsidiary, and between federal and provincial incorporation, affects how liability is contained, how tax applies, and how banks, regulators, and counterparties see the business.
This article walks through those choices, the key steps to set up a Canadian subsidiary, and where structural problems tend to surface once operations are underway.
Key Takeaways
- Expanding into Canada is a structural decision from the very first step.
- A branch extends the foreign company's liability into Canada. A subsidiary contains liability within a separate Canadian corporation.
- A Canadian subsidiary can be incorporated federally under the CBCA, or provincially under legislation such as Ontario's OBCA.
- Federal corporations still require at least 25 percent resident Canadian directors. Ontario corporations do not.
- Setting up a subsidiary involves several steps beyond incorporation, including registrations, a bank account, and an Investment Canada Act notification.
- The parent company and the subsidiary need documented intercompany arrangements, not informal ones.
- Structural problems usually surface when a bank, regulator, or transaction forces a formal review.
Branch vs Subsidiary: The First Structural Decision
A branch is an extension of the foreign company itself. A subsidiary is a separate legal entity incorporated in Canada.
This choice determines whether liabilities stay with the parent company or are contained within the Canadian entity. A branch generally exposes the parent's assets to Canadian claims and creditors.
A properly structured subsidiary is its own legal person under Canadian law, which generally keeps those claims within the Canadian corporation.
The choice also affects tax treatment, regulatory exposure, and future flexibility. Switching from a branch to a subsidiary after contracts are signed and employees are hired often means renegotiating contracts, reassigning leases, and re-registering with regulators.
Our comparison of branch vs subsidiary in Canada covers the trade-offs, including how each structure is taxed.
How to Set Up a Subsidiary in Canada: Key Steps
Incorporation is only one part of setting up a Canadian subsidiary. These are the main steps most foreign businesses work through.
Step 1: Choose Federal or Provincial Incorporation
Decide whether to incorporate under the federal Canada Business Corporations Act or a provincial statute, such as Ontario's Business Corporations Act. The section below explains the main differences.
Step 2: Choose and Clear a Corporate Name
Choose a name and confirm it is available, or incorporate as a numbered company and register a business name later. Our article on naming a new corporation in Ontario explains the name rules and search process.
Step 3: Incorporate the Subsidiary
File the articles of incorporation with Corporations Canada for a federal corporation, or through the Ontario Business Registry for an Ontario corporation. The articles set out the share structure, the number of directors, and any restrictions.
Step 4: Register in Other Provinces Where You Operate
A corporation generally needs to register extra-provincially in each province where it carries on business, other than its home jurisdiction. A federal corporation operating in Ontario, for example, still needs to make filings in Ontario.
Step 5: Organize the Corporation
Pass by-laws, appoint directors and officers, and issue shares to the parent company. Set up a minute book with the corporate records, including the register of individuals with significant control that both federal and Ontario corporations must maintain.
Step 6: Register With the CRA
Obtain a business number and register for the accounts the subsidiary needs, such as payroll and GST/HST. Our article on hiring in Canada through a subsidiary explains what changes once the subsidiary has employees.
Step 7: Open a Canadian Bank Account
Banks will usually require the completed incorporation documents and full details of ownership and control. Our overview of banking and regulatory setup for a Canadian subsidiary explains what to prepare.
Step 8: File an Investment Canada Act Notification
A non-Canadian establishing a new Canadian business may need to file a notification under the Investment Canada Act, generally within 30 days after the investment is implemented.
Step 9: Put Intercompany Agreements in Place
Document the funding, services, and IP arrangements between the parent and the subsidiary. Our guide to intercompany agreements between a foreign parent and Canadian subsidiary explains what they should cover.
Federal vs Provincial Incorporation When Setting Up a Subsidiary in Canada
A Canadian subsidiary can be incorporated federally under the Canada Business Corporations Act (CBCA), or provincially under legislation such as Ontario's Business Corporations Act (OBCA).
The choice affects name protection, governance rules, and director residency. A federal corporation has the right to use its name across Canada. A provincial corporation's name protection is tied to its home province, although it can still register to carry on business elsewhere.
In most cases, the day-to-day differences are manageable. What matters most is that the choice fits where the business will actually operate and how it will be governed.
Director Residency Requirements for a Canadian Subsidiary
Director residency rules differ between jurisdictions, and they often decide the federal vs provincial question for foreign businesses.
Ontario removed its resident Canadian director requirement in July 2021, so an OBCA corporation can have a board made up entirely of non-residents. A CBCA corporation still generally requires at least 25 percent of its directors to be resident Canadians, or at least one if the board has fewer than four directors.
For a foreign parent without a Canadian director available, this difference is often decisive. Our article on director residency requirements in Canada covers how the rules work across jurisdictions.
Beyond compliance, the more important question is who actually governs the Canadian entity in practice, and how decisions made outside Canada are documented in its corporate records.
Why Structure Should Come Before Operations
Many businesses begin operating in Canada before the legal structure is settled.
Contracts are signed early. Employees or contractors are engaged quickly to start generating revenue. Sometimes the parent company starts doing business in Canada directly before the subsidiary even exists.
At that point, the structure has to catch up with what is already happening. The longer operations continue under the wrong structure, the more costly it becomes to correct, because contracts, employees, and registrations may all need to be moved over.
The Parent Company's Role: Intercompany Agreements and Compliance
A subsidiary is a separate legal entity, but in practice it rarely operates independently. The parent company usually controls strategy, funding, and key decisions from outside Canada.
That creates obligations that need to be managed at the Canadian level. Funding and service arrangements between the parent and the subsidiary should be documented in intercompany agreements, not left informal. Corporate records must be kept up to date in Canada.
Compliance is also ongoing, not a one-time task at incorporation. Our overview of ongoing compliance for a Canadian subsidiary explains the annual filings, records, and other obligations.
When Subsidiary Structure Issues Surface
Most structural problems do not appear immediately after incorporation. They surface later, when something forces a formal review.
A bank asks for full documentation of ownership and control before opening an account. A regulator considers whether the business is carrying on a regulated activity. A financing round or acquisition requires clarity on structure and control before it can close.
At each of these moments, informal early decisions are tested against formal requirements, often under time pressure with a deal or account waiting on the outcome.
Investment Canada Act Notification
One requirement that is often missed is the Investment Canada Act notification. Where a non-Canadian establishes a new Canadian business, a notification is generally required within 30 days after the investment is implemented. Missing it can create an issue that surfaces later in a financing or transaction review.
When to Involve a Lawyer
The best time to involve a lawyer is before signing contracts, hiring, or opening a bank account in Canada, while the structure and jurisdiction can still be chosen cleanly.
It is also worth getting advice if your business is already operating in Canada through a branch or informally, if you are choosing between federal and provincial incorporation, or if a bank, investor, or buyer is asking questions about your Canadian structure.
The Bottom Line on Setting Up a Subsidiary in Canada
Setting up a subsidiary in Canada is a structural decision, not just an operational one. The choice of branch or subsidiary, federal or provincial incorporation, and how the parent and subsidiary relate to each other will shape liability, tax, and governance for years.
Those decisions are much easier to get right at the start than to correct once contracts, employees, and registrations are in place. The structure should reflect how the business will actually operate in Canada, not just how it looks on paper.
If your business is expanding into Canada, our team at Levine Law can help. We can choose the right structure and jurisdiction, incorporate your Canadian subsidiary, and set up the intercompany and compliance framework before operations begin.
Frequently Asked Questions
What is the difference between a branch and a subsidiary in Canada?
A branch is an extension of the foreign company, so the parent's assets are generally exposed to Canadian claims and creditors. A subsidiary is a separate Canadian corporation, which generally keeps liability within the Canadian entity. The choice also affects tax and regulatory treatment. Our comparison of branch vs subsidiary in Canada explains the trade-offs, including how each structure is taxed.
Should a foreign business incorporate federally or provincially in Canada?
It depends on where the business will operate and how it will be governed. A federal corporation can use its name across Canada, but still generally needs at least 25 percent resident Canadian directors. An Ontario corporation has no resident director requirement, but its name protection is tied to Ontario. Either way, the corporation will generally need to register in other provinces where it carries on business.
Does a Canadian subsidiary need Canadian resident directors?
It depends on where it is incorporated. Ontario removed its resident Canadian director requirement in July 2021, so an Ontario corporation can have an entirely non-resident board. A corporation under the Canada Business Corporations Act still generally requires at least 25 percent resident Canadian directors, or at least one if it has fewer than four directors.
Does setting up a Canadian subsidiary require an Investment Canada Act filing?
Often, yes. Where a non-Canadian establishes a new Canadian business, a notification under the Investment Canada Act is generally required within 30 days after the investment is implemented. Some investments may also be subject to further review, so it is worth confirming the requirements before or immediately after the subsidiary starts operating.
When should a foreign business start planning its Canadian subsidiary?
Before signing contracts, hiring anyone, or opening a bank account in Canada. Once operations begin, changing the structure often means moving contracts, employees, and registrations to a new entity, which is costly and slow. Planning early also makes it easier to put intercompany agreements and ongoing compliance in place from the start.