Problems with Stripe Atlas Incorporation for Canadians
We frequently work with Canadian startups operating a U.S. (usually Delaware) company incorporated on their behalf by Stripe Atlas. On the surface, Stripe’s assistance with incorporating this U.S. company seems convenient and an easy way to meet the U.S. entity requirements to use the Stripe payment processing platform. However, a number of material issues are generated by Stripe when it incorporates a U.S. company on behalf of a Canadian startup.
Problem #1
It’s critical to understand that a U.S. company cannot operate out of Canada without registering as doing business in Canada (thus exposing the company to unnecessarily complicated Canadian/US dual taxation), which Stripe does not address in its standard documentation.
The common solution to this is to treat the U.S. company as a parent to (or as a subsidiary of) a new Canadian company and isolate each company’s tax obligations in their respective countries.
Problem #2
Your U.S. company formed by Stripe needs to transact with your Canadian company on an arm’s length basis, taking into account tax transfer pricing rules. If you don’t engage in tax planning around the flow of cash and assets between the two companies, expect expensive tax problems in the future
These tax issues can typically be addressed through cross-border tax planning as documented in an Intercompany Agreement in which we address the flow of cash and assets between the two companies. For example, in the agreement we can address which company books sales in which countries and how the cash from these sales moves between the companies.
While Stripe Atlas touts the ease and speed with which a U.S. company can be incorporated, it neglects the massive cross-border legal and accounting issues that forming a U.S. company abroad generates. If these issues are understood before incorporating, Stripe Atlas can be a valuable tool but, if not understood and planned for, expect it to generate more problems than it solves for.
Employees Disguised as Contractors
As your company grows, you may be looking to expand your team and add to your workforce. When hiring additional employees or engaging independent contractors you need to be well-aware that an independent contractor may actually be considered an employee, regardless of how you label the person.
Employees are entitled to rights pursuant to the applicable Employment Standards Acts (based on the province the employee resides) such as: (1) vacation pay; (2) overtime pay; (3) statutory holidays; (4) notice period or payment in lieu of such notice period upon termination; (5) severance pay; and (6) employment insurance benefits.
Independent contractors are not entitled to such benefits. However, if a government authority determines that an independent contractor is actually an employee based on the factual relationship between the parties, the independent contractor will be entitled to all of the above rights and there may be penalties that come with such determination.
There is no one test to determine whether a worker is an employee or an independent contractor, but here are some factors to consider when engaging an independent contractor:
Level of Control: Does the worker set his/her own hours of work? Does the worker determine how the services are to be completed?
Equipment: Is the worker required to provide his/her own tools and equipment for work?
Sole Income: Is the employer the sole source of income for the worker? Is the worker prohibited from taking other jobs?
Subcontractors: Is the worker allowed to engage subcontractors for the services?
Opportunity for Profit: Is the worker taking on a chance for profit and a risk of loss?
Compensation: Is the worker providing monthly invoices to the company?
The above factors may all be considered when determining whether a worker is an employee or an independent contractor. If a worker who you presumed to be an independent contractor is determined to an employee, you may face fines and penalties including and related to unpaid vacation and overtime pay, severance pay, employment payroll taxes and employment insurance deductions and remittance. All of which are costly, so way the least!
In summary, you will need to assess the relationship between the company and each of its potential workers before determining whether to commit to an employee or contractor relationship, something that your legal team is best suited to assist with to avoid costly penalties down the road.
Changes to California’s Privacy Law – Consumer Privacy Rights Act
On November 3, 2020, California voters approved the California Privacy Rights Act (CPRA), which replaces the California Consumer Privacy Act of 2018 (CCPA).
The CPRA expands consumers’ rights regarding protection of personal information. Companies collecting personal data should review the changes to ensure compliance. Indeed, we anticipate that enforcement of these laws will drastically increase when the CPRA comes into effect
For many companies, the CPRA may not directly apply, but companies may be contractually obligated to comply with the law if they conduct business with large tech firms. As as a result, it will be prudent for many companies to comply in order to ensure they can continue to service their clients.
Major changes include:
- Enforcement
The CPRA creates the California Privacy Protection Agency, a government body tasked to make the regulations and enforce the CPRA. It is predicted that the CPRA will increase the level of enforcement because it is partially funded by the fines.
- No more warnings
The new law eliminates the 30-day cure period provided by the CCPA. The CCPA provided notices to businesses not complying with the law and allowed them to fix the violations within 30 days without having to pay fines. The notice and cure period no longer exist with the CPRA.
- Sensitive Personal Information
The CPRA creates a new subcategory of personal information, which includes information such as biometric information and contents of e-mails and texts. Collection of sensitive personal information compels additional disclosure, opt-out and use requirements.
- Expansion of Consumer Rights
Consumers now have the right to opt-out of businesses sharing and selling their personal information. Under the CCPA, consumers only had the right to opt-out of the sale of their personal information. Consumer also have the right to request businesses to delete their personal information and businesses must notify third parties to delete the personal information as well.
The CPRA will become effective on January 1, 2023 with a look back period of 12-months so businesses will need to comply by January 1, 2022.
The CPRA will likely be the foundation for privacy legislation in other states and on a federal level. Similar laws will pass in the near future in many states including Washing and New York and on a federal level in both the US and Canada.
In this constantly changing regulatory environment, it will be critical to review your data collection practices and Privacy Policy to ensure that your company remains compliant and to avoid enforcement actions.
Canada’s Start-up Visa Program
To attract foreign entrepreneurs to work in Canada, Canada has implemented the Start-up Visa Program. The program gives qualified business owners and their families an expedited track to permanent residency if they can meet the requirements.
To be eligible for the Start-up Visa Program, you must (1) have a qualified business, (2) obtain a letter of support from a designated organization, (3) meet the language requirements, and (4) have enough money to settle in Canada.
1. To have a qualified business, you must show that you own more than ten percent of the voting rights attached to all company shares. Additionally, applicants and the supporting designated organization must jointly own at least fifty percent of the voting rights shares. Upon receiving permanent residency, you must incorporate your business in Canada, an essential part of your business must take place in Canada, and you must provide active management of your business from within Canada.
2. Applicants must also obtain a letter of financial support from a designated organization. These can be venture capital funds, angel investor groups, and business incubators that are pre-approved by the Canadian Government. You can find a list of these organizations here (https://www.canada.ca/en/immigration-refugees-citizenship/services/immigrate-canada/start-visa/designated-organizations.html). The letter of support:
- describes the business structure;
- identifies the applicant and their role in the business;
- describes the nature of the business;
- confirms the applicant has control over the company’s intellectual property;
- specifies the amount of the investment; and
- that the organization performed a due diligent assessment of the applicant.
Lastly, the designated organization will send a commitment certificate directly to Citizenship and Immmigration Canada (CIC) that outlines its financial support. The CIC will use both the letter of support and the commitment certificate to assess your application.
3. To be eligible to apply, you must also take a language test from an approved agency. To be considered for the program, you be able to show minimum proficiency in speaking, reading, writing, and listening in either English, French, or both languages. Upon receiving a score above Canadian Language Benchmark 5, an applicant should submit the results along with their application.
4. Finally, applicants will not receive financial support from the Canadian Government, so they must provide proof of sufficient funds. You must show that you have enough money to support yourself as well as any dependents you plan on bringing to Canada with you. There are minimum requirements but the Canadian Government recommends that any applicant brings as much money as possible with them.
If an applicant meets the eligibility requirements and submits and pays for a successful application, the process should take approximately twelve to sixteen months to complete. However, interested applicants can also apply for a temporary work permit while their start-up visa application is pending so they can start building their business in Canada. There are more specific requirements for such a work permit, but an applicant must have already received a letter of support from a designated organization. Finally, temporary work permits can typically be complete in a few weeks but times can vary depending on the country and other circumstances (Covid-19).
If you can meet the criteria, the Start-up Visa Program can be an excellent opportunity to move your business into Canada while concurrently obtaining permanent residency.