What happens when an entrepreneur wants to expand their established business based out of the United States in another country like Canada?
The first rule of the road is to understand everything you can about what it means to run and do business in a foreign country. Canada may share a few similarities with the United States, such as its system of government, but non-Canadian businesses must first understand what needs to be done now to properly prepare for international expansion.
If you’re planning to expand your small business from the U.S. to Canada, keep the following key areas in mind.
1. Research the Canadian market.
Why, exactly, do you want to do business in Canada? Whether you chose to expand to Canada or another country, like Japan or France, the answer should not be “because I want to travel to cool places!”
You should be able to easily pinpoint what the Canadian market can offer your business. Conduct market research in the following areas.
- Target demographics per province and territory. Unlike the United States which is broken down into 50 states, Canada is made up of three territories and 10 provinces. The three territories are the Northwest Territories, Nunavut and Yukon. The 10 provinces include Ontario, Quebec, British Columbia, and Nova Scotia, among others. The geography may be different, but much like the United States, your target audience will likely be scattered around instead of readily available in one territory and/or province. Study to find out which existing businesses do well in these areas. What would customers pay for your offerings? How do your offerings solve their problems — and further, are the problems and needs of your international customers different from domestic ones?
- Examine competing businesses. Look at how they price their services and offerings. What does their customer base look like? What competitive advantage does your business have over them?
- Local and corporate laws. What are the expectations and regulations of the territory and/or province you want to do business in? Read about Canadian corporate law and the standards businesses in Canada are held to, instead of presuming running a business is the same there as it would be in America. You may also consider consulting with an attorney or legal professional that specializes in these matters.
2. Explore Canada’s economic outlook and financial advantages.
As of 2019, Canada’s economy is anticipated to grow by 2% according to the Business Development Bank of Canada (BDC). This is good news for Canadian and non-Canadian businesses alike. However, non-Canadian businesses should not solely rely on a solid economic forecast for their expansion. U.S. based businesses must explore other opportunities Canada can offer their companies.
- Cost of operations. Studies from J.P. Morgan in 2017 reported that the comprehensive cost of Canadian business operations is 14.6% less than operations in the United States. Conduct research to see if that percentage holds true today. Consider all cost facets, which may include, but are not limited to, facilities, taxes, labor, transportation and utilities.
- Tax incentives. What kinds of tax credits are available for your business in Canada? Business owners would need to consult the Canada Revenue Agency to best determine tax laws and incentive programs. Incentives may vary depending on the territory and province.
- Currency. The Bank of Canada offers entrepreneurs use of a currency converter. Currently, $1.00 in Canadian dollars equals 74 cents in U.S. currency. It’s crucial to keep in mind the existing currency of the Canadian dollar, and its exchange rate, when planning to expand a business from the U.S. to Canada.
3. What should you know about incorporating in Canada?
This section is particularly applicable to U.S. companies that have not yet incorporated their businesses. There are certain aspects to incorporating a business that are the same in the U.S. and Canada. Companies may incorporate as limited liability companies and corporations in both countries.
There are two more outside aspects to address for businesses that incorporate in Canada. Do you plan to incorporate at a federal or provincial level and do you plan to have the business act as a subsidiary or branch? Let’s dig a little deeper into what each of these terms mean and their key differences.
Federal or Provincial?
Businesses that wish to expand to and incorporate in Canada have the option to incorporate at a federal or provincial level. Those that incorporate at a provincial level may only conduct business in that specific province. For example, a business that incorporated in a province like Alberta would not be able to do business in an outside province like Quebec. This is because each province comes with specific rules for how businesses may be conducted and operated within its borders.
You can also incorporate your business at a federal level. This means companies may conduct business in any province. Incorporating federally presents businesses with a great opportunity to reach the widest possible audience and market. Regardless of whether the business decides to incorporate at a federal or provincial level, there are still a few areas that must be taken into consideration.
- Board of directors. Those that incorporate on a federal level are required to have 25% of their board of directors be composed of Canadian residents. If the business is small and has, for example, four members on its board of directors, then one must be a Canadian resident. The rules tend to differ on a provincial level, as each province has different requirements for its board of directors.
- Trademarks. It is still advised, whether the business is incorporated federally or provincially, that the business registers trademarks to protect its intellectual property, if it has done so already.
- Shareholder rights. These may differ depending on federal and provincial corporation laws in areas, such as squeeze-out transactions and proxy solicitation.
- Investment of time and energy. A business that incorporates at a federal level in Canada will have to complete more paperwork and invest more time into the process than a business at a provincial level.
Subsidiary or Branch?
The only businesses that may skip over reading this part are the ones that conduct business in Canada and do not have an outside presence established in another country.
If a U.S. business establishes a business presence in Canada, that is considered to be an extension to your existing business. Entrepreneurs must decide if the business is a subsidiary or branch.
- Subsidiary. This is a separate entity that limits liability to the subsidiary corporation. Subsidiaries must have a Canadian incorporation. They are considered to be separate entities. As such, the subsidiary’s finances are separate from the parent corporation which is unable to absorb the subsidiary’s losses.
- Branch. Branches are part of the parent corporation. They are not separate, and their liability extends to the parent corporation. Branches do not need a Canadian incorporation, but they must register their business within its designated province and obtain specific documents (like licenses and permits) to operate the business.
4. Need help? Consult the U.S. Department of Commerce.
From understanding currency to determining incorporation laws, this article only touches the surface of what U.S. based businesses need to know about expanding to Canada. It’s perfectly natural to have even more questions that have not been answered here!
Entrepreneurs are advised to seek help from the U.S. Department of Commerce. They have the resources necessary and available answers for businesses looking to expand outside of the United States — and do so without making any major mishaps in the journey forward.
For additional guidance along this journey, be sure to work with a SCORE mentor.