Crossing borders with your business

For most Canadian business owners, crossing borders is a sign of success. With Canada’s GDP value representing just 2.5 percent of the global economy, the rest of the world represents a huge opportunity for expansion.

But having a great product and/or service isn’t enough in today’s increasingly competitive global market. To expand across the border into the United States, the world’s largest economy, or to other markets worldwide, business owners need the right tools and resources to keep their operations running smoothly.

That means also taking into consideration the various legal, tax and foreign exchange implications. Business owners should also consider the tax and estate planning implications of holding personal assets in another country, such as real estate and investments, and how rules may vary from back home in Canada.

The sooner business owners make decisions and act on setting up shop in other countries, the better prepared they will be when business, hopefully, ramps up.

Joe Teves, director of global banking services in the commercial banking division at Royal Bank of Canada, recommends business owners first determine how they want to operate in other countries, either by setting up a subsidiary or a branch office.

“These two are very different for legal and tax purposes and business owners should get professional advice — in particular from experts in that country — on the risks and benefits of each structure,” Teves says. In some countries, such as China, there’s no really effective choice but to open a subsidiary.

Setting up foreign bank accounts

Businesses should consider acting early to set up banking services in a foreign country. Teves says some business owners are caught off guard by how long it can take to set up a bank account in another country, due to increasingly strict banking regulations around the world.

“When we tell clients it can take three to six months, they’re dismayed,” Teves says.

Banks are also doing more due diligence with new customers amid heightened concerns around fraud, money laundering and other financial crimes.

“With different individuals, in certain countries some banks may go as far as wanting to understand the nature of their wealth,” says Teves.

Too often, he says business owners leave decisions about banking until later in the expansion process, when it should be one of the first steps.

“My warning here is to decide as soon as possible whether you’ll need banking in the country you need to be in, so that you can start working on that right away,” Teves says.

Currency considerations

Business owners going to the U.S. or abroad also need to consider currency strategies when buying or selling goods or operating cross-border or in international locations.

In most cases, Teves says customers prefer to pay in their own currency, which should be an incentive on its own for companies to set up bank accounts abroad.

“The moment you ask buyers to remit payments across borders, you are effectively increasing their costs and yours as well. To receive a payment from outside one’s country is always more expensive than handling it domestically,” he says.

Having a banking relationship in that foreign market can also add credibility to the business, signalling that it intends to be around for the long term.

“Sometimes business owners will decide to establish banking outside of the Canada, even if they don’t have to, if nothing else than to add more caché and as evidence of their commitment to the buyer,” Teves says.

Foreign exchange rates are also a consideration. “Because of currency fluctuations, profit margins may be affected if the Canadian dollar devalues when compared to other currencies,” Teves says.

“Once you start to have a mismatch of income and expense streams in terms of currency, you should manage the exposure associated with currency fluctuations,” he says. “That’s above and beyond other issues such as currency controls, which may make moving currency in and out of a country challenging.”

Eric LeBlanc, vice-president, knowledge-based industries for Ontario at the Royal Bank of Canada, says many business owners rely on financial professionals to help with various currency strategies for both costs and revenues outside of Canada.

“They can help, whether it’s with a formal hedging strategy or just the ability to not deal with the exchange rates,” by setting up and utilizing accounts in the other country, LeBlanc says.

Financing considerations

There comes a time when every successful company needs to finance future growth, either through a loan or raising capital. In most cases, the financing needs to be done in the home country, even if the business has active and successful subsidiaries in other countries. Lenders in foreign markets are unlikely to offer financing to foreign companies either because they’re not as established there, or because they may not have sufficient capital or collateral.

“Typically how it works is you borrow from home and then use that money to finance your growth abroad,” says Teves.

There are exceptions, of course, but this is rare. Teves says some foreign banks might be willing to finance subsidiaries if they see a solid business plan, are well-established in their home country, and the home bank (or another bank) can provide a guarantee to the foreign bank.

Estate planning considerations

As more Canadians do business in other countries, they may also choose to acquire assets there. That includes their corporate subsidiaries as well as personal investments.

“As businesses become more global, more people cross borders and their assets cross borders,” says Luis Javier Lopez, regional vice-president business segments, private banking at RBC Wealth Management.

Lopez says business owners have to manage those assets, for tax and estate planning purposes, based on the rules established in the country where they’re based.

“When assets and people cross borders, you’re dealing with different laws,” says Lopez.

For example, Canadian business owners, who also accumulate assets in the U.S., can be exposed to estate taxes in that country, or the inheritance tax in the UK; neither of which Canada has. Lopez says there are also certain countries where beneficiaries are restricted by law in wills. For instance, in some countries, women aren’t allowed to receive an inheritance.

Lopez says clients, including those who are coming from other countries to do business in Canada, are often unaware of the need to have a will and a Power of Attorney in each country where they have assets.

“Many of our foreign clients are completely surprised when we say, ‘this is a significant risk if you don’t have the appropriate documentation in place,'” Lopez says.

Benefitting from cross-border business

Business owners may get the most of out of doing business outside of Canada by tapping into resources offered by banks as well as programs offered by governments.

“Business owners can often overlook the various complexities in other jurisdictions and do better if they seek the professional advice of those who have been through it,” Leblanc says. “Moving money across borders may sound simple, but there are many rules and requirements that need to be met.”

LeBlanc recommends business owners spend the time choosing the right financial partner to help with cross-border and overseas expansion. That includes financial institutions with divisions or banking partners in those other countries. By relying on professionals with the skills and network around cross-border business, owners can focus on what they do best — running their companies.