Choosing Between Federal and Provincial Incorporation

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Ali Ahmari Moghaddam /
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Choosing Between Federal and Provincial Incorporation

Once you have made the decision to incorporate your business, the next important decision to be made is to decide whether to proceed with the incorporation pursuant to the Canada Business Corporations Act (CBCA), which sets the rules and regulations governing federal corporations, or to incorporate pursuant to the corresponding Provincial legislative frameworks. Each province has their own legislative framework governing corporations within a given province, for example in Ontario, the Ontario Business Corporations Act (OBCA) was enacted to model after the federal statute. In simple terms, the federal and provincial statutes provide the rules and regulations that corporations must follow with respect to matters including but not limited to incorporation requirements, corporate governance and interactions with shareholders.

Choosing the appropriate statute to incorporate under is not a simple task, and there are some important factors, as well as advantages and disadvantages, that should be considered when contemplating this decision including your business name, nature of your operations, future plans for your corporation and the start up costs involved.

Federal incorporation of your business will provide your corporation with the ability to operate and conduct business throughout all of Canada under the same business name. This can be a good option for those who want to move freely and conduct their business within all of Canada, as it will not limit the organization’s operations and will allow for expansion across the entire country in the future. Incorporation under the Federal Statute can also provide greater credibility when trying to compete in an international market. A federal incorporation will also allow for flexibility in the event of changes to the location of the registered head office of the corporation.

The above benefit does not apply to incorporations under provincial legislation, especially if your business is strictly local and operates solely within a given province. Should you incorporate under a provincial statue, your corporation will only be allowed to operate the business in same provincial jurisdiction which the incorporation took place.

Furthermore, a provincial corporation will not have name protection outside of that province of which it was incorporated. Corporations receive naming rights within the specific jurisdiction of incorporation, whether it is in a province or in Canada federally. This may be particularly important in situations of planned expansion and nation-wide commerce.

Under the provisions of CBCA, at least 25% of directors of a federal corporation must be resident Canadians. However, in 2020 Ontario eliminated director residency requirements under the OBCA, meaning that Ontario Corporations are no longer required to satisfy director residency requirements. Bill 213 was introduced in October 2020 to simplify the process for incorporation in Ontario, specifically with respect to foreign ownership within companies.

In addition to the removal of the requirement for Canadian resident directors discussed above, Ontario also has removed the requirement for written resolutions to require 100% approval. With the current changes, written resolutions can be implemented with the same level of approval without the need for a shareholder’s meeting. This will bring forward more efficiency for corporations and will allow for business to be conducted more conveniently with respect to resolutions.

Something to note about federal incorporation, is the higher cost for incorporating as it involves more paperwork and fees. In Ontario there are no extra-provincial registration fees if you have already incorporated federally, and are now extra-provincially registering.

Steps to Incorporate Federally

Below is a simplified process for federal incorporation under the CBCA in Canada.

1. You must name your corporation, or operate under a corporate number. If you decide to chose a name, you must complete a NUANS search report and name reservation. Should the proposed corporate name be acceptable and available, this reservation holds the proposed business name for 90 days, until the incorporation process is completed.

2. Create your articles of incorporation which establish the structure of your corporation. This step will require decisions to be made relating to the classes and any maximum number of shares that the corporation is authorized to issue, restrictions on share transfers, minimum and maximum number of directors, as well as any restrictions on the business the corporation may carry on.

3. Complete and file the necessary Form 2 providing information with respect to the initial registered office address and the first board of directors.

4. Organize the corporate minute book, including preparation of by-laws, resolutions as well as issuance of share certificates as applicable.

Steps to Incorporate Provincially in Ontario

Below is a simplified process for provincial registration of a corporation under the OBCA in Ontario.

1. You must select a name for your corporation, or operate under a corporate number. If you decide to choose a name, you must complete an Ontario biased NUANS search report and name reservation. Should the proposed corporate name be acceptable and available, this reservation holds the proposed business name for 90 days, until the incorporation process is completed.

2. Create your articles of incorporation which establish the structure of your corporation. This step will require decisions to be made relating to the registered office address of the corporation, minimum and maximum number of directors, naming the first directors of the corporation, restrictions (if any) on business the corporation may carry on or on powers the corporation may exercise, the classes and any maximum number of shares that the corporation is authorized to issue, the rights, privileges, restrictions and conditions (if any) attaching to each class of shares and directors' authority with respect to any class of shares which may be issued in series, as well as restrictions on share transfers.

3. Complete and file the necessary Form 1 – Initial Return, providing information with respect to officers of the corporation.

4. Organize the corporate minute book, including preparation of by-laws, resolutions as well as issuance of share certificates as applicable.

What is Required after Incorporation?

Under the CBCA and OBCA, there are several legal requirements to maintain active and valid incorporation status. Both within the province of Ontario and federally, there must be a validly maintained minute book and share record, company updates, as well as annual returns and annual resolutions. There are various important components within your minute book such as your bylaws, resolutions, ledgers, registers, and many other significant internal corporate documents that you are required to maintain by law and that may differ depending on whether your corporation was incorporated federally or provincially. Directors of a corporation are responsible for ensuring your corporation is maintaining a valid minute book.

Incorporation is a significant part of creating a business, and must be done with careful planning and consideration.