JOINT VENTURE FACT SHEET - Foreign Business Entry to Canada
Branch - Subsidiary - Incorporation - Partnership - Joint Venture - License - Franchise
For international commercial enterprises requiring Canadian legal services call 403-400-4092 / 905-616-8864 or email Chris@NeufeldLegal.com
What a joint venture is in Canada
Basic definition:
A joint venture is an arrangement where two or more parties agree to contribute goods, services, or capital to a shared commercial project or enterprise. It is typically used for a specific project, business line, asset, or period, rather than to run all of the parties’ businesses together.
Not a partnership (in the strict sense):
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Separate ownership: Each co‑venturer keeps legal ownership of its own property; there is no automatic joint tenancy or tenancy in common in joijnt venture assets.
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No general agency: Co‑venturers do not automatically act as agents for each other, unlike many partnerships.
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Project‑based profits and costs: Each co‑venturer receives a share of gross profits and shares only in expenses of the specific joint venture project; they are not “carrying on a business in common” in the same way as a partnership.
Forms a joint venture can take:
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Contractual Joint Venture: Purely governed by a joint venture or co‑ownership agreement; no separate legal entity.
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Partnership Joint Venture: Partners form a general or limited partnership to carry on the joint venture business.
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Incorporated Joint Venture: Parties form a jointly owned corporation (or group of corporations) with a shareholders’ agreement.
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Hybrid structures: Combinations of corporations, partnerships, and contractual arrangements for tax, liability, and regulatory reasons.
Why foreign companies use joint ventures in Canada
Key strategic reasons:
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Local market access: Joint venture with a Canadian partner leverages their market knowledge, customer relationships, and networks.
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Regulatory familiarity: Local partner understands provincial and federal rules, permitting, employment laws, and industry‑specific regulation.
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Risk and cost sharing: Capital costs, operating risks, and market uncertainty are shared.
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Speed to market: A joint venture can be faster than building a standalone subsidiary from scratch.
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Reputation and credibility: Association with a known Canadian company can help with customers, regulators, and financiers.
When a joint venture is especially useful for foreign investors:
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Highly regulated sectors: Energy, mining, infrastructure, telecom, transportation, and financial services.
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Indigenous partnerships: Resource and infrastructure projects on or near Indigenous lands often involve project‑specific joint ventures with Indigenous partners.
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Project‑based industries: Construction, real estate development, and large infrastructure where each project is ring‑fenced.
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Testing the market: Where the foreign investor wants to learn the Canadian market before committing to a full acquisition or large standalone operation.
Tax considerations for joint ventures
Is the joint venture taxed as an entity?
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Contractual Joint Venture (non‑entity): The joint venture itself is not generally treated as a separate taxpayer. Each co‑venturer reports its share of joint venture income, expenses, assets, and liabilities in its own tax returns, per the joint venture agreement.
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Partnership Joint Venture: A partnership is a “flow‑through” for income tax: the partnership files an information return, but the partners include their share of income/loss in their own returns. Character of income (business income, capital gains, etc.) usually flows through to partners.
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Incorporated Joint Venture: The joint venture corporation is a separate taxpayer subject to Canadian corporate income tax on its profits, and then may pay dividends to shareholders (potentially subject to withholding tax when paid to foreign shareholders).
Corporate income tax issues for foreign joint venture participants
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Permanent establishment risk: A foreign company active in Canada through a joint venture may be treated as having a “permanent establishment” in Canada, depending on the structure and activities. This can subject it to Canadian income tax on business profits attributable to Canadian operations and require Canadian tax filings.
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Withholding taxes: Payments from a Canadian joint venture entity to a foreign participant (interest, dividends, royalties, certain services) may be subject to Canadian withholding tax, potentially reduced by tax treaties. Proper characterization of payments (e.g., service fee vs. royalty) and treaty analysis is critical.
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Transfer pricing and intercompany dealings: If the foreign parent supplies services, loans, IP, or goods to the Canadian joint venture, transfer pricing rules require arm’s‑length pricing and documentation to avoid reassessments by the Canada Revenue Agency (CRA).
Indirect tax (GST/HST) treatment
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GST/HST basics: Canada imposes goods and services tax/harmonized sales tax (GST/HST) on most supplies of goods and services; registration and collection obligations depend on the activities and turnover in Canada.
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Joint Venture (GST/HST) Regulations: For certain prescribed joint venture activities (such as construction of real property, exploration or exploitation of mineral deposits, operation of pipelines, and other specified activities), co‑venturers can elect to have one “operator” account for GST/HST on behalf of all co‑venturers, simplifying compliance. The Joint Venture (GST/HST) Regulations specify which activities are eligible and how the election works (usually via a written election rather than a CRA form).
Practical steps for foreign businesses considering a joint venture in Canada
Clarify objectives and risk tolerance
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Define why you want a joint venture - Market entry, technology sharing, project risk‑sharing, regulatory access—or a combination - will drive the structure.
Select the joint venture vehicle carefully
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Match structure to goals - For project‑specific, finite ventures, a contractual joint venture or limited partnership often works well; for long‑term operating businesses with broader scope, an incorporated joint venture is common.
Conduct thorough due diligence on partners
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Check financial, legal, and reputational health - Review litigation history, regulatory track record, ownership, and alignment of culture and strategy.
Map regulatory, investment, and competition requirements early
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Avoid approval delays - Assess Investment Canada Act thresholds and potential national security review, and determine if competition/merger filings are required before signing or closing.
Plan tax and transfer pricing structure upfront
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Involve Canadian and home‑country tax advisers - Decide whether to use a partnership vs. corporation, how to finance the joint venture, and how to price intragroup services and intellectual property to minimize double taxation and CRA disputes.
Address governance and exit clearly in the contract
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Avoid deadlocks and “trapped capital” - Build realistic deadlock mechanisms and predictable exit formulas; this is especially critical when one party is foreign and may want a clean exit route.
Consider operational and cultural integration
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Align decision making and communication - Time zones, languages, and corporate cultures will affect how the joint venture functions day to day; formal processes can reduce friction.
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.