Unlimited Liability Corporation

Unlimited Liability Corporation

Unlimited liability corporations exist in three of Canada's ten provinces – Alberta (AULCs for Alberta Unlimited Liability Corporation), Nova Scotia (NSULCs for Nova Scotia Unlimited Liability Company), and British Columbia.

ULCs have commonly been used by US companies investing in Canada on a greenfield basis or through corporate acquisitions of Canadian entities or assets, especially if those Canadian assets or operations are expected to generate business losses.

This is the case because following the January 1, 1997 introduction of the entity classification rules in the US Internal Revenue Code which provided specific exceptions in certain cases such that “ith regard to Canada . . . any . . . company or corporation all of whose owners have unlimited liability pursuant to federal or provincial law” will not be treated as a corporation (Reg. Section 301.7701-2(b)(8)(ii)(A)), US parent companies have generally been able to consolidate the activities of a Canadian ULC (heretofore only a Nova Scotia ULC) for US income tax purposes. In essence, the ULC can act as a “flow-through” or “disregarded” entity for US tax purposes as the US tax rules “look through” the ULC to its shareholder(s). In contrast, the ULC is treated as a corporation, and is subject to tax at the corporate level, for Canadian tax purposes.

Changes to the Canada-US tax treaty, which were effective January 1, 2010, restrict the availability of treaty benefits to ULCs in certain circumstances.