Alberta Budget Measures Will Establish Unlimited Liability Companies and Limitations on Income Fund Liability
If the measures become law as scheduled, Alberta will become the second Canadian province to allow for increasingly popular ULCs - and may be among the first to limit investors' liability in income or royalty funds.
Provisions proposing to create unlimited liability companies and to limit investors' personal liability in income funds were among the highlights for business in the 2004 Budget tabled by the Government of Alberta on Wednesday, March 24, 2004.
Under the first proposal, the Minister of Finance, the Honourable Pat Nelson, indicated that the province will introduce legislation in the next fiscal year to allow for the incorporation of unlimited liability companies.
Favourable Tax Treatment for ULCs
Unlimited liability companies are companies that are corporate in nature but without the usual limitation of shareholder liability, which is the foundation of most corporations. The reason they are used is that they can, if properly structured, be subject to favourable tax treatment under the tax laws of the United States by being treated as a "flow-through" entity for U.S. tax purposes. To avoid the obvious disadvantage of unlimited liability to the shareholders, ULCs are generally used as holding and financing vehicles with the main business operations being held in a regular limited liability corporation.
ULCs have become increasingly popular vehicles for U.S. companies doing business in Canada as they allow for a full flow-through of the tax attributes of the ULC to the U.S. parent shareholder. Hence, financing costs and other losses can be flowed back to the U.S. parent for U.S. tax purposes, as if the ULC were simply a branch operation.
Up until now, the Province of Nova Scotia was the only corporate jurisdiction in Canada that allowed for the incorporation of ULCs. This will change with last Wednesday's announcement that Alberta will also provide for the incorporation of ULCs.
Allaying Investor Concerns Re Income Funds
Under the second proposal, because concerns have been expressed that investors in an income or royalty fund (which are generally structured as commercial trusts that qualify as "mutual fund trusts" for income tax purposes), may not have the same limitation of personal liability as is provided to shareholders of regular limited liability corporations, the Alberta government will introduce legislation to explicitly confirm the limitation of liability.
The former Conservative government of Ontario had also introduced measures to limit liability in publicly traded income funds and trusts in its March 2003 budget but these changes were not enacted before the Conservatives were defeated in the October election. In Québec, civil law already addresses this issue. Other provinces have indicated they plan to introduce similar legislation limiting investor liability in the near future.
The Alberta government has not given a time frame for the enactment of these two proposals other than to say that both will be introduced during the next fiscal year set to end on March 31, 2005.