The last few years have seen a considerable rise in foreign private equity and portfolio investment companies—especially those coming from the United States—entering Canada. Canadian private equity (PE) deals with U.S. involvement rose from $13.5 billion in 2016 to $33.8 billion in 2021. Similarly, U.S. investors of all PE deals in Canada rose from 42% in 2016 to 56% in 2021.
There are many reasons foreign PE companies find Canada attractive. Our physical proximity to the U.S., the value of the Canadian dollar, our industry-specific tax incentives and credits, and our political stability are just some of reasons foreign PE companies want to make an entry.
However, what really sets Canada apart from the rest of the world is just how easy it is to do business here. We’re a business-friendly market with low barriers to entry and limited red tape, in relative terms, when compared to places like the U.S., South America, Asia, and Europe.
But here’s the thing: While the red tape in Canada isn’t as complex as in other parts of the world, it can be difficult to navigate the regulatory environment and business operations when you don’t have Canadian expertise on your team.
Building a solid foundation for Canadian success
Canada is known for its business-friendly nature, thanks to its comparatively straightforward tax and regulatory environment. However, despite the apparent ease of doing business, many firms with extensive international experience may underestimate the nuances of navigating the Canadian market on their own.
Partnering with local knowledge helps foreign private equity and portfolio investment companies establish a solid foundation for their Canadian operations in a way that safeguards the companies from issues in the long term.
If a company follows Canadian rules, regulations, and expectations early on, it is unlikely to be flagged by the Canadian Revenue Agency (CRA), the revenue service of the federal government that collects taxes and administers laws and policy concerning business. However, if a red flag is ever raised by the CRA, it can be very difficult to get out from under their scrutiny in the future—which can make conducting business in Canada challenging.
Potential challenges foreign PE companies should be on the lookout for
In addition to being flagged by the CRA, some of the biggest challenges foreign PE companies face when entering Canada include:
Canadian banks are highly conservative. For foreign PE companies, this means it can be difficult to raise capital locally. Even setting up a Canadian bank account can come with some challenges you may not expect. Requirements such as needing to be physically present to open a new business account or requiring valid Canadian identification can be significant roadblocks for PE firms.
Canadian banks operate under a distinct regulatory framework. To successfully secure financing and establish banking operations, partnering with local professionals is essential. Their in-depth knowledge of the market can streamline the process and mitigate risks.
Although Canada boasts a highly diverse and skilled talent pool, attracting the right talent can present challenges for foreign PE firms. A high national employment rate coupled with a relatively low population density can lead to localized labour shortages in specific industries and fields. To navigate these complexities, understanding local hiring practices and offering competitive compensation packages is key to attracting the skilled Canadian talent needed for successful operations.
Expanding into Canada requires a nuanced understanding of the role of professional bodies and unions. Organizations such as the Canadian Medical Association or the Association of Professional Engineers and Geoscientists of Alberta wield significant influence in their respective industries. This is often a surprise for many foreign PE companies. Negotiating contracts with unionized employees and understanding the implications for deal structure and timelines are critical considerations. Specialized HR and legal expertise are necessary to navigate these complexities.
Canada’s tax system presents unique challenges. Indirect taxes, such as those that apply to imported equipment, can significantly impact bottom lines. Additionally, many PE companies that have operations in multiple provinces find it difficult to navigate Canada’s dual federal and provincial tax system. Issues related to double taxation, transfer pricing, and expat employee taxes are another source of frustration. A comprehensive understanding of these tax implications is essential for effective financial planning and compliance.
Management restructuring and financial restructuring are common actions aimed at streamlining operations for PE companies, improving performance, and driving growth. You may need to dedicate resources, such as local experts, accounting systems, and ERP technologies, to monitor and report on performance.
Are you willing to take the risk?
For foreign private equity and portfolio investment companies that aren’t able to manage these challenges effectively, there are a number of risks that can negatively affect the business—and the investment.
Loss of revenue, loss of capital, loss of reputation
Misalignment with Canadian consumer preferences, economic conditions, and the regulatory landscape can lead to operational challenges and lost revenue—as we’ve seen with high-profile expansion failures like retail giant Target.A failed Canadian venture carries significant risks. Beyond financial losses, reputational damage can extend to both consumers and investors. Underperforming portfolio companies directly impact a firm's overall returns, while a tarnished reputation can erode investor confidence and hinder future fundraising efforts. The Canadian market demands a strategic approach that considers its unique characteristics to mitigate these risks and achieve long-term success.
Lack of trust from the local market
Without local guidance, foreign PE firms that enter Canada risk making mistakes that result in locals losing trust in their business. For example, many foreign PE firms are surprised to learn that Canada and the U.S. are some of the only countries in the world that pay employees bi-weekly. Most other countries pay salary monthly. Offering a contract to a Canadian employee with a monthly payout goes against what local talent expects.Fines and penalties
Non-compliance with Canadian laws and standards may lead to financial setbacks in the form of fines and penalties, further hurting operations and the advancement into Canada. For example, the CRA has fines and penalties associated with late filings and late payments, and the two most common types of these fines are in relation to sales tax filings and payroll. Financial penalties can lead to operational issues, reputational damage, and reduced productivity. By fully understanding the Canadian regulatory landscape with local guidance, however, foreign PE companies can focus their resources on expanding their entry into Canada.Start your entry into Canada on the right foot
From the outside in, entering the business-friendly Canadian market as a foreign private equity or portfolio investment firm may seem straightforward compared to other countries. However, without a local partner, the challenges can keep piling up—which can result in raised red flags with the CRA.
BDO’s Business Services & Outsourcing team works with private equity firms to support a successful entry into the Canadian market. Here’s how:
A conversation is where it all begins
If your foreign private equity or portfolio investment firm is considering entering Canada, let’s have a conversation. We’ll discuss what opportunities exist for your firm, the most common challenges you could be up against, and what your next steps should be.
After all, while Canadian red tape may seem straightforward to navigate from the outside, not having local expertise in your corner may lead to issues that can cost you your investment.
Ready to invest in Canada?
Learn more about how BDO can support your journey and connect with a BDO professional for personalized guidance.