Thinking of Incorporating your Canadian Business in the USA?

Authored by Mercer Timmis 
JD Candidate 2023 | UCalgary Law 

WHEN IS IT TIME TO INCORPORATE IN THE U.S.A

Incorporating in the U.S.A. can be a strategic move for Canadian start-ups, as it can provide access to a larger market, more significant funding opportunities, and a more business-friendly environment. However, it is important to note that generally, incorporating in the United States is a bad idea unless you are conducting significant business in the U.S.[1]  Additionally, there is serious litigation for risk for the following reasons:

(i) the U.S. does not have loser pay rules (i.e., the other party pays expenses);
(ii) it is easier to organize class action lawsuits;
(iii) U.S. courts permit juries for civil trials; and
(iv) the U.S. has 5x more lawsuits in comparison to Canada.[2] 
 
CONSIDERATIONS FOR INCORPORATING IN THE U.S.A
 
Nonetheless, if you plan to incorporate in the U.S., there are a few key considerations.

First, companies should choose their jurisdiction wisely. Typically, you will want to create a U.S. subsidiary in a favourable jurisdiction. For instance, many companies select Delaware due to its long history of promoting business-friendly policies and its establishment of a legal framework that makes it relatively easy for companies to incorporate.[3]

Second, Canadian start-ups should also consider the regulatory environment in the U.S.A., including tax laws, employment laws, and intellectual property laws. When establishing a U.S. corporation, it is crucial to examine the operations of both the Canadian and U.S. companies to create a structure that reduces Canadian and U.S. tax liabilities, aligns cash flow with the business plan, and facilitates tax-efficient repatriation of profits back to Canada. It is also important to devise an effective transfer pricing strategy. However, it is important to note that this is costly for businesses because it requires the assistance of tax lawyers and accountants.

Third, incorporating in the U.S.A. can open up new funding opportunities, including access to venture capitalists, angel investors, and government grants.[4] As such, it may benefit you to incorporate in the U.S. if you expect your future investors to be American. Further, a company may want to consider if government grants are only available to companies incorporated in the United States.

Fourth, many Canadian start-ups are formed as Canadian-controlled private corporation (CCPC). If a CCPC carries on business in the U.S. through a permanent establishment, any income derived from that P.E. will not qualify for the small business deduction.[5] Further, if you provide services in the U.S. (even without a P.E.), the income from those services is not normally eligible for the small business deduction. As such, this income could be taxed at a higher corporate rate in Canada.
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Finally, before incorporating in the U.S.A., growth companies should evaluate whether there is a significant market opportunity for their product or service in the U.S.A. This can involve researching market size, competition, and customer demographics.


[1] Bryce C. Tinge, Start-up and Growth Companies in Canada: A Guide to Legal and Business Practices, 3rd ed (Canada: LexisNexis Canada Inc, 2018). 
[2] Ibid.
[3] March Kusner et al., “Should Canadian Entrepreneurs Incorporate in the United States”, (8 May 2020).
[4] Voyer Law, “Revisiting ‘Should I incorporate my Canadian startup in Delaware”, Voyer Law (March 20, 2021).
[5] André Perey et a., “Should Canadian entrepreneurs incorporate in the United States?”, Alberta Bar Association (22 January 2020).