A simple guide to International contracts for Canadian startups

Starting a business in Canada is tough. Landing your first international client feels like a huge win. But that excitement can vanish fast if the contract you sign creates more problems than it solves.

Let’s start with a real-world story about a client of ours. It’s a perfect example of what can go wrong.

The Three-Country ‘Mix-Up‘ of a StartUp

An Ontario tech startup, let’s call them “TechCo,” was thrilled to sign a deal with a big German client.

Here was the setup:

• The Canadian Company: TechCo from Ontario signed the contract.
• The Client: A company in Germany.
• The Team Doing the Work: A separate company in India, which happened to have the same founders as TechCo.

To keep things “simple,” the contract said the German client should pay the Indian company directly.

But the contract was missing some very important details. It didn’t say which country’s courts would handle disputes, and it was silent on taxes.

When a disagreement popped up, TechCo was in a world of trouble:

1. Where Do We Settle This? TechCo wanted to use the familiar courts in Ontario. The German client wanted to use a German court. Just figuring out where to have the legal fight was going to be a long and expensive process.
2. The Money Went to the Wrong Company. According to the paperwork, the Canadian company that signed the deal never got paid. The money went to the separate company in India. This was a nightmare for their finances and made it hard for TechCo to argue that the client hadn’t held up their end of the deal.
3. Big Trouble with the Tax Man. The Canada Revenue Agency (CRA) has strict rules for deals between companies that share owners. The CRA could see this deal as a scheme to move money out of Canada to avoid paying Canadian taxes. This could lead to a big, unexpected tax bill from the government, plus hefty fines.

This story shows why getting the contract right is so important. Here’s what you need to watch out for.

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1. Decide Who Has “Home Field Advantage” (Jurisdiction)

Every cross-border contract needs two crucial clauses right at the start: Governing Law and Jurisdiction.

• Governing Law: This just means deciding which country’s rules will be used to understand the contract. As a Canadian company, you should always try to choose the laws of your province (e.g., Ontario). You know the rules here.
• Jurisdiction: This decides which country’s courts will handle a dispute. You want this to be your local courthouse, not one in a country thousands of kilometres away. Going to court in another country is incredibly expensive and stressful.

Why it matters: If you don’t set these rules in the contract, you could spend a fortune just figuring out where to even start a legal fight.

2. Protect Your Big Ideas (Intellectual Property)

For most startups, your ideas and inventions are your most valuable assets. Your contract must protect them.

• Your Protection Doesn’t Cross Borders Automatically: A Canadian trademark or patent doesn’t protect you in the United States or Japan. You need to register your intellectual property (IP) in the countries where you do business.
• Define Ownership Clearly: If you’re working with a partner to create something new, the contract must state, in plain English, who owns it. Is it you? Is it them? Is it shared? Put it in writing.

Why it matters: Without clear IP protection, a foreign partner or competitor could legally copy your idea and sell it in their market, and you wouldn’t be able to do a thing about it.

3. Be Careful with People’s Information (Data Privacy)

If you handle any personal information from customers or clients, you have to follow privacy laws. This gets tricky with international deals.

• Canada’s Rules Follow the Data: Canada’s privacy law (called PIPEDA) says you are responsible for protecting Canadians’ personal information, even if you send it to another company in another country for processing. Your contract must force your international partner to protect that data with the same level of care required in Canada.
• Watch Out for Foreign Laws: Other places have very strict data rules, like Europe’s GDPR. Breaking these rules can lead to massive fines.

Why it matters: A data breach on an international project can get you in trouble with the law in more than one country, costing you a lot of money and ruining your reputation.

4. Have a Plan for Disagreements (Dispute Resolution)

Even with a great contract, you might still have disagreements. Instead of going straight to a long and expensive court battle, plan for a better way.

• Try Talking First: Consider adding mediation (where a neutral person helps you both find a solution) or arbitration (where a neutral person makes a final decision) to your contract. These are usually cheaper, faster, and more private than court.

Why it matters: A simple dispute resolution plan can save your business relationship and prevent a disagreement from turning into a costly legal war.

5. Get the Money Details Right (Payments and Taxes)

Fuzzy details about money can sink your company. This area is full of traps, especially when dealing with the Canada Revenue Agency (CRA). Here’s how to protect yourself:

1. The Payment Must Come to You. Your contract is with your Canadian company, so the payment must be made to your Canadian company’s bank account. As our story showed, directing payments to a separate company, even one you own in another country, is a massive red flag. For the CRA, it can look like you’re trying to hide income. For your business, it means you technically haven’t been paid, which makes it very hard to enforce the contract.
2. Plan for “Withholding Taxes”. Many foreign countries have a rule that when a local company pays a Canadian company for services, they must “withhold” a portion of that payment (often 10-25%) and send it directly to their own government’s tax department. This is a pre-payment of taxes in that country. Your contract must clearly state whether your price includes this tax or if the client needs to pay it on top. If you don’t, you could receive less money than you expected. You can often claim this back as a foreign tax credit in Canada, but only if it’s documented correctly.
3. Clarify GST/HST Rules. Generally, services you provide to a client who is outside of Canada are “zero-rated.” This is good news: it means you don’t have to charge them GST/HST. However, you can still claim back the GST/HST you paid on your own business expenses related to that work (these are called Input Tax Credits). The rules can be complex, so your contract and invoices should clearly state that your services are for a non-resident, confirming why no GST/HST was charged.
4. Beware of Rules for “Related Companies”. The CRA has very strict “transfer pricing” rules. This applies when you have deals with related foreign companies (like TechCo and its sister company in India). These rules demand that the price you charge a related company must be the same fair market price you would charge a complete stranger. If the CRA believes you are using a related foreign company to artificially shift profits out of Canada (and away from Canadian taxes), they can hit you with severe penalties and reassess your income.

The Bottom Line

Doing business internationally is a fantastic way for a Canadian startup to grow. But it comes with risks. A clear, simple, and smart contract is your best line of defense.

Before you sign any international deal, it’s wise to get advice from a legal expert who understands these challenges. At Ahlawat Law PC, we help Canadian startups like yours navigate the world of cross-border business safely.

Don’t risk your hard work. Let’s talk before you sign.