Creation of a subsidiary

Expertises connexes

The creation of a subsidiary provides various advantages. Indeed, it can bring tax advantages, marketing advantages, legal advantages, etc. Since the law is not explicit on the subject, Bernier Fournier offers you its services to guide you in understanding the subsidiary and to ensure that your objectives are met.

What is a subsidiary?

In general, we can define a subsidiary as a corporation that is controlled by another corporation called the “parent corporation”. Under the Business Corporations Act¹ (hereinafter, “BCA”), a subsidiary is “a legal person controlled by another legal person or by legal persons controlled by that other legal person”². The Canada Business Corporations Act³ (hereinafter the “CBCA”) has also adopted a definition of subsidiary that also addresses the concept of control and defines the term for the purposes of the regime it establishes. It is thus understood that the notion of subsidiary revolves around the notion of control, i.e. the fact that one corporation must control a second.

Although the notion of control seems obvious and simple, the different regimes allowing the incorporation of corporations in Canada define it differently. For example, under the BCA, to control is “a legal person means to hold shares to which sufficient votes are attached to elect a majority of the legal person’s directors”⁴. The CBCA, on the other hand, takes a different route by requiring, among other things, that the parent corporation hold “securities of the body corporate to which are attached more than fifty per cent of the votes that may be cast to elect directors of the body corporate are held, other than by way of security only, by or for the benefit of that person or by or for the benefit of those bodies corporate”⁵. As a result, each regime does not allow for control of a corporation in the same manner. Thus, the creation of a subsidiary will depend on the parent company’s incorporating statute and how the parent company exercises control over the “daughter company”.

Despite these distinctions between the regimes and regardless of the regime under which the corporation is incorporated, control of another corporation is therefore essential to the creation of a subsidiary.

How is it possible to acquire control of a subsidiary?

To do so, the parent corporation can proceed in two ways. The first is for the parent corporation to acquire voting shares for the election of directors of the subsidiary from one or more shareholders. The parent corporation will have to ensure that it holds enough voting shares to meet the essential conditions of the concept of control in its incorporating act. Otherwise, it will not be considered to have control of another corporation, which is fundamental to owning a subsidiary.

The second way is to form a new corporation, after which the parent company will subscribe to the shares allowing it to have control within the meaning of its incorporating act.

Depending on the objectives of the parent company, it is sometimes more interesting to create a new corporation that will be owned, managed and financed by the parent company from the beginning. In this way, the subsidiary will reflect the parent company and meet the desired objectives.

The creation of a subsidiary involves several important steps as well as several formalities that should not be neglected, no matter how it is created. This is why Bernier Fournier’s team is at your disposal to advise you adequately on the different ways to proceed and on the legal systems to choose. Our team has the expertise and competence necessary to create a subsidiary and is able to answer your questions, draft all the necessary documents for the creation of the subsidiary, and look after the interests of your company and your future subsidiary.

¹ Business Corporations Act, RLRQ, c. S-31.1.
² Id., section 2.
³ Canada Business Corporations Act, LRC, c. C-44.
⁴ Business Corporations Act, supra note 1. section 2.
⁵ Canada Business Corporations Act, supra note 3, s. 2, para. 3, subpara. a).