This article was originally published in Blakes Bulletin on Cross-Border Tax - May 2005
Article by Doug Richardson and Wanda Rumball, ©2005, Blake, Cassels & Graydon LLP
Amendments to the Business Corporations Act (Alberta) (the ABCA) providing for the incorporation of unlimited liability corporations are now law. Those amendments also include several other provisions of particular interest to tax practitioners such as changes to the corporate incest rule and the share dividend provisions.
The introduction of the Alberta unlimited liability corporation (the ABULC) has been anticipated by practitioners for some time. Previously, the only Canadian jurisdiction permitting the creation of a company with unlimited shareholder liability has been Nova Scotia. Unlimited liability companies (NSULCs) incorporated under the Nova Scotia Companies Act (NSCA) have been increasingly utilized since the promulgation of the ‘check-the-box’ rules under the U.S. Internal Revenue Code (the Code) to create hybrid entities for U.S. tax planning purposes – corporate entities that are respected as corporations for Canadian income tax purposes and that are treated as partnerships or are disregarded for the purposes of the Code.
The treasury regulation under the Code which identifies the entities that must be corporations for the purpose of the Code expressly excludes NSULCs and "any other company or corporation all of whose owners have unlimited liability pursuant to federal or provincial law". That language is expected to operate to extend ‘check-the-box’ treatment under the Code to ABULCs.
Not only is it expected that ABULCs will have immediate popularity for those seeking to incorporate new hybrid entities, but also that many NSULCs may convert themselves to ABULCs by continuing under the ABCA. While the relatively low tax rates enjoyed in the province of Alberta (note also that there are no provincial capital or sales taxes of general application), the strong business community and levels of commerce in Alberta and the high administrative and incorporation fees charged under the NSCA are expected to fuel the demand for ABULCs, many consider that ABULCs may be preferred over NSULCs because of the differences between the governing statutes.
The ABCA generally is considered to be a more modern statute and modelled more closely to the U.S. style of business corporation statute. The NSCA is modelled after the historical U.K. Companies Act and corporate actions such as share capital reductions and amalgamations still require court approval under the NSCA, often increasing the time, cost and risk of some transactions. Practitioners should note that the shareholder liability provisions for ABULCs are different from those that apply to NSULCs. NSULC shareholders have unlimited liability to the creditors on the wind-up of an NSULC if the assets are insufficient to pay its debts and liabilities on dissolution. ABULC shareholders are to be jointly and severally liable with the ABULC for its liabilities, acts or defaults to an unlimited extent.
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