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If you plan to do business in Canada and the U.S., you may
already have (or are planning to set up) an entity in both
jurisdictions. When preparing for a cross-border financing round,
you will often have to decide whether the investment should be made
in your U.S. or Canadian entity. Most commonly, the investments are
made at the parent company level.
Which company should be the parent company, and which should be
Here are key considerations to weigh:
- Ideally, you will want to determine the appropriate
jurisdiction for your parent company when first setting up your
business. While you can change the parent company’s
jurisdiction at the time of a financing round, it is best to do so
before there is significant value in the company so that you can
avoid adverse tax consequences.
For example, if a Canadian company with Canadian shareholders
wishes to reorganize so that it has a US parent company, the
Canadian shareholders will be subject to tax for the increase in
value of their shares when they exchange the Canadian company
shares for those in the U.S. company. This tax will be applicable
regardless of whether such shareholders sell their shares.
- To receive reimbursable and enhanced Scientific Research and
Experimental Development (SR&ED) tax credits, a company needs
to be a Canadian-controlled private corporation (CCPC). The rate
for enhanced reimbursable SR&ED credits is 35% federally for
qualified expenditures and each province has additional
reimbursable tax credits for CCPCs. Although it may be possible to
implement corporate structures that allow a company to access
enhanced SR&ED credits with a U.S. parent company, this
structuring can be complex and costly.
- U.S. shareholders will not be able to access capital gains
exemptions under the Qualified Small Business Stock (QSBS) regime
if investing in a Canadian entity.
- Canadian shareholders will not be able to access the lifetime
capital gains exemptions for Qualified Small Business Corporations
(QSBC) if the shares are held in a U.S. corporation.
- Corporate law in Canada is very similar to Delaware corporate
law (the jurisdiction of choice for most U.S. corporations), with
recent changes in Ontario and Alberta corporate law bringing them
even more in line.
- Many cross-border tax-related issues, such as withholding taxes
and PFIC status, have been addressed by changes in laws in both
jurisdictions, allowing for less obstacles in doing business.
In addition to determining if investments should be made into
your U.S. or Canadian entity, there are several other cross-border
fundraising considerations to keep in mind.
Should the price be set in U.S. or Canadian dollars?
The price of shares and options can be set in either U.S. or
Canadian dollars, regardless of where your parent company is.
However, using multiple currencies can create accounting
Where should you hold your intellectual property?
We generally recommend that companies hold their intellectual
property (including U.S. patents) outside of the United States due
to higher U.S. corporate tax rates and the difficulty of moving IP
outside of the U.S. at a later date. For these reasons, Canada is
generally preferable to the United States as an IP holding
Canada may soon become even more attractive, as the Canadian
government is currently considering the implementation of an
“IP box” regime that would set lower tax rates for income
from IP than for other business income.
Are there differences in deal documents?
The Canadian Venture Capital & Private Equity Association
(CVCA) has publicly made available model venture capital documents
which are based on the U.S. National Venture Capital Association
(NVCA) model documents. Therefore, investment deal documentation
will be similar whether investing in a Canadian or U.S. entity.
Each company’s situation is unique, so there is no one size
fits all approach to these issues. The analysis of what best works
for each company can be complicated and it is important to obtain
advice from legal and accounting professionals who are experts in
dealing with cross-border issues affecting life science companies.
They can guide and assist you in arriving at the best solution for
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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