SR&ED and US Sister Corporations

March 30, 2017 SRED

Canadian Corporations who incorporate in
Delaware will benefit from tax and corporate savings.

If you’re a Canadian start-up in the information technology sector, you might be able to benefit from some tax and corporate advantages of being both a Canadian corporation and a U.S.-based corporation. A cross-border structure, known as the “Delaware Straddle” encourages Canadian corporations (“CanCo”) to incorporate in the state of Delaware (“DelawareCo”). This allows corporations to benefit from tax and corporate savings by operating through both companies.

Why should Canadian corporations do this? This strategy is useful if your company wishes to:

Attract U.S. angel investors, venture capitalists and institutional investors who wish to invest in early-stage or start-up technology businesses
Enroll in U.S.-based tech incubators and tax-driven funding programs
Enhance cross-border travel for employees, key personnel, and executives who have access to work visas

The other benefit is if a Canadian corporation is acquired by a U.S. company, tax complexities on both sides of the border may be reduced. By creating these sister companies, the shareholders are able to use Canada’s lifetime capital gains exemption in the sale of shares of a Canadian Controlled Private Corporation (CCPC).

The Top Eight Reasons Why You Should Incorporate in Delaware

There are quite a few reasons why Delaware is such an attractive state to incorporate in, but here are the top eight:

The Delaware Court of Chancery is highly-respected and focuses on corporate issues. Because of this, the Court has much expertise and a great deal of case law for resolving complex corporate disputes.
Jurisprudence is well established in Delaware. The state’s judges are said to be sophisticated and well-versed in adjudicating corporate law cases.
Delaware corporate statutes allow companies to be flexible in how a corporation is organized including the rights and duties of board members and shareholders.
Most American corporate attorneys know the Delaware Corporate Code, which makes Delaware more cost-efficient and effective than other states.
Most American angel investors, venture capitalists and private equity firms tend to invest more in Delaware corporations that are incorporated as a Subchapter “C” corporation than in any other state or another kind of corporate entity.
Many investment bankers want a U.S. company to be incorporated in Delaware before going public.
By investing in Delaware, you send a message to investors and venture capitalists that you are a “national company” serious about receiving investments.
There is a great layer of privacy in Delaware. The state does not need officer or director names to be disclosed on formation documents.

One Final Caveat

The one thing corporations who share the Delaware territory must keep in mind, though, that when they apply for Canadian government grants, such as the SR&ED tax program, the Canadian company needs to own the intellectual property (IP) of what they are developing including any research and development associated with the IP. If you have de facto control of the Canadian corporation while working in the US, you may encounter further issues (incl. not being eligible for the enhanced tax credit rate); be sure to consult a lawyer familiar with SR&ED and cross-border issues prior to pursuing this option.