Many retailers are establishing subsidiary operations in Canada because the economic situation there is better than in most countries, and retail spending remains relatively robust. But there are legal issues that must be addressed in connection with Canadian market entry, and they are not confined to the obvious ones of store leasing and employment. Sound planning for customs, tax and transfer pricing is key to a smooth and successful cross-border business launch.
The typical choice of business vehicle for Canadian retailers is a Canadian incorporated subsidiary, or Canco, an entity that can be established either under the federal laws of Canada or the laws of its provinces or territories. In some jurisdictions, there is a minimum Canadian resident director requirement.
In certain situations, U.S. tax advantages may be gained by establishing the Canadian subsidiary as an unlimited liability company, a corporation for Canadian tax purposes that is fiscally transparent for U.S. tax purposes.
Establishing a Canadian subsidiary retail operation supplied with products purchased or sourced through a foreign parent gives rises to Canadian tax and customs transfer pricing issues. Many multi-nationals fail to co-ordinate the tax/finance and customs/logistics functions, which may have different reporting lines within the organization. As a result they miss the opportunity for a unified approach to tax and customs transfer pricing that improves compliance and reduces exposure. Retailers are advised to adopt an approach to transfer pricing that meets both tax and customs transfer pricing requirements.