ASSET DROP-DOWN: Canadian Branch to Subsidiary Company
Branch - Subsidiary - Incorporation - Partnership - Joint Venture - License - Franchise
For international commercial enterprises requiring Canadian legal services call 403-400-4092 or email Chris@NeufeldLegal.com
Transitioning a Canadian branch operation into a distinct corporate subsidiary is a strategic restructuring move often executed through an Asset Drop-Down. This process involves the parent foreign corporation transferring the assets and liabilities of its existing Canadian branch into a newly incorporated Canadian subsidiary. Yet, unlike a simple name change, this represents a fundamental shift from an extension of a foreign entity to a domestic taxpayer, requiring careful navigation of Canadian corporate and tax laws.
At its core, the drop-down is a contractual exchange. The foreign parent company "drops" its Canadian-based business (including inventory, equipment, real estate, and intellectual property) into the subsidiary company. In exchange, the parent typically receives shares of the subsidiary’s capital stock. This ensures that the parent retains indirect ownership and control over the Canadian operations while shielding itself from direct legal liabilities incurred by the branch.
A primary concern during this transition is the potential for triggering immediate capital gains or income tax on the appreciation of assets. To mitigate this, businesses frequently utilize Section 85 of the Income Tax Act (Canada). This provision allows for a "tax-deferred rollover," where the transferor (the foreign parent) and the transferee (the Canadian subsidiary) jointly elect to transfer assets at their tax cost rather than their fair market value. This effectively defers any tax liability until the subsidiary eventually sells the assets or the parent sells the subsidiary's shares [more on section 85 corporate rollover].
Beyond tax, the transition necessitates a comprehensive audit of existing obligations. The new subsidiary must obtain its own Business Number, GST/HST accounts, and payroll registrations from the Canada Revenue Agency. Furthermore, all existing contracts (ranging from office leases and supplier agreements to customer service level agreements) must be formally assigned or novated from the foreign parent to the new Canadian corporation, often requiring the consent of third parties.
Meanwhile, the human side of an asset drop-down is equally complex. In Canada, when a business is transferred as a going concern, the employment of branch staff is generally considered to continue with the new subsidiary. However, the foreign parent must ensure that the transition respects provincial employment standards legislation, particularly regarding "successor employer" rules. This ensures that employees’ years of service, benefits, and seniority are preserved, preventing claims of constructive dismissal during the corporate migration.
As such, when your international business seeks the professional services of an experienced Canadian business lawyer to facilitate its entry into Canada's commercial market, contact our law firm for a confidential initial consultation at 403-400-4092 [western Canada], 905-616-8864 [eastern Canada] or Chris@NeufeldLegal.com.