British Columbia Unlimited Liability Companies

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Kevin Zimka

On March 29, 2007, Bill 14, which contained changes to the Business Corporations Act (British Columbia) (the BCA) passed Third Reading in the British Columbia Legislature. The most significant of these changes was the amendment to the BCA to permit a company to be incorporated in British Columbia as an unlimited liability company (ULC). The Lieutenant Governor in Council of British Columbia must still pass a regulation enacting the amendments to the BCA containing the ULC provisions.

British Columbia becomes the third Canadian jurisdiction, joining Nova Scotia and Alberta, to allow for the establishment of ULCs.

Benefits of a ULC

ULCs are of primary benefit to certain U.S. corporations with operations in Canada. ULCs are designed to fall within the “check-the-box” rules under the U.S. Internal Revenue Code (the Code) which permits certain entities to choose to be classified as partnerships or to be disregarded for purposes of the Code. This allows for the flow-through of income and losses of the ULC to its shareholders and allows a U.S. corporate group to achieve the same result as if a group tax return was permitted. This can result in deductions of the ULC, including interest expense, being treated as having been incurred by the shareholders of the ULC for U.S. federal income tax purposes. While the Code does not specifically mention that a ULC incorporated pursuant to the BCA (a BCULC) will receive “check-the-box” treatment, it does provide that any company or corporation “all of whose owners have unlimited liability pursuant to federal or provincial law” will fall within this provision. A BCULC would appear to fit this criteria. For Canadian tax purposes, a ULC is taxed the same as any other Canadian corporation.

Differences Between The ULC Jurisdictions

A BCULC has several advantages over ULCs formed under the laws of Alberta and Nova Scotia (an ABULC and an NSULC, respectively).

Under the Business Corporations Act (Alberta), the liability of each shareholder of an ABULC for any liability, act or default thereof is unlimited in extent and is joint and several in nature during the ABULC’s existence and operation. By contrast, the liability of shareholder of a BCULC arises only if the BCULC is unable to pay its debts and liabilities on dissolution or liquidation. Further, an ABULC is required to have 25% of its directors resident in Canada. The BCA has no such requirements for a BCULC, thus making it easier for non-residents to establish and operate a BCULC.

An NSULC is similar to a BCULC with respect to the liability of shareholders and lack of requirement for resident directors. However, a BCULC has the benefit of being governed by a more modern corporate statute and being subject to more modest yearly fees than an NSULC. The incorporation fee for a BCULC and an NSULC are the same, being CAD 1,000. The annual renewal fee for an NSULC is CAD 2,750, while it appears the annual renewal fee for limited companies incorporated under the BCA, which is nominal, will also apply to a BCULC. The fee for the amalgamation, continuation or alteration of a BCULC is CAD 1,000.

A Summary of the BCULC Legislation

The Notice of Articles of a BCULC must contain a statement that the shareholders of the BCULC are jointly and severally liable to satisfy the debts and liabilities of the BCULC on dissolution or liquidation. Further, the share certificates of a BCULC must contain a similar statement and the company name must contain the words “unlimited liability company” or the abbreviation “ULC”. The phrase “unlimited liability company” and the abbreviation “ULC” may only be used in British Columbia by a BCULC, an ABULC, an NSULC, or a “foreign corporation of which the shareholders ... are liable for the debts and liabilities of the corporation” or a prescribed person. Regulations with respect to prescribed persons have not yet been released. A BCULC must not use the words “Limited”, “Limitée”, “Incorporated”, “Incorporée”, or “Corporation” or the abbreviations “Ltd.” “Ltée” or “Inc.” or “Corp.” in its name.

As stated, the shareholders and former shareholders of a BCULC are jointly and severally liable for the payment of the BCULC’s debts and liabilities on dissolution or liquidation. If a company becomes a BCULC by altering its Notice of Articles, the shareholders of the BCULC are liable for the debts thereof whether these debts arose before or after the company became a BCULC. If a BCULC becomes a limited company, continues or amalgamates, unlimited liability continues for shareholders of the BCULC at the time of conversion, continuance or amalgamation. With respect to a former shareholder, liability only arises if the existing shareholders are unable to satisfy the debts and liabilities of the BCULC, and, even in that case, a former shareholder is not liable:

(i) for any debt or liability that arose after the former shareholder ceased to be shareholder;

(ii) on a liquidation of the BCULC, if the former shareholder ceased to be a shareholder one year or more before the commencement of the liquidation; or

(iii) on or after dissolution of the BCULC, effected without liquidation, if the former shareholder ceased to be a shareholder one year or more before the date of dissolution.

A limited company may become a BCULC by altering its Notice of Articles to provide for unlimited liability for shareholders on dissolution and by changing its name to add the words “unlimited liability company” or “ULC”. Such alteration must be approved by unanimous resolution of the shareholders, whether or not their shares carry the right to vote. The shareholders must also return their share certificates to the company for endorsement with the statement with respect to unlimited liability, as set out above.

A BCULC may become a limited company by altering its Notice of Articles to remove the statement of unlimited liability of shareholders and amending its name to remove any reference to the words “unlimited liability company” or “ULC”. It generally requires a special resolution passed by 2/3 of the votes at a shareholders meeting or consented to in writing by all the shareholders to alter a company’s Notice of Articles.

Two or more limited companies may also amalgamate to form a BCULC. Again, a unanimous resolution of the shareholders of each amalgamating company is required and the Notice of Articles of the amalgamated company and name must comply with the BCA, as set out above. The shareholders of the newly amalgamated BCULC are liable for the debts and liabilities of the amalgamated BCULC on dissolution regardless of whether those debts and liabilities were debts and liabilities that arose before or after the amalgamation.

ABULCs, NSULCs, and foreign corporations “within a prescribed class of foreign corporations” may continue into British Columbia under the BCA provided such corporations meet prescribed conditions and the requirements under the BCA with respect to the Notice of Articles, name and liability of shareholders. Regulations setting out a prescribed class of foreign corporations have not yet been released.

For further information, please contact any one of the members of Blakes Tax or Business Groups listed below: