Hey Guys! Today’s post is gonna compare provincial incorporation versus federal incorporation for entrepreneurs in the GTA.
I am a lawyer and have been doing this for more than ten years. I have had the privilege of working with entrepreneurs in a wide variety of industries. (It is actually one of the best parts of this job.)
Last year, when we first got locked down, I was of course a bit shocked. As time goes on, I started thinking about how I can give something back. One idea was to create this blog as a source of credible, reliable information. In particular, I am hoping that this first set of blog posts are helpful for guys (and girls) who may be first-time entrepreneurs.
It’s all good, man. Let’s do this!
Provincial Incorporation Versus Federal Incorporation
In Canada, our federal and provincial governments have concurrent jurisdiction over business corporations. To make a long story short, the result is that entrepreneurs in Toronto are free to choose between incorporating federally or provincially.
A federal corporation will be governed by the Canada Business Corporations Act (CBCA). Meanwhile, a provincial corporation in Ontario will be governed by the Ontario Business Corporations Act (OBCA).
These two pieces of legislation are, to be frank, very similar. (In fact, the OBCA was modeled after the CBCA in order to promote corporate law coherence.) As a result, the differences between provincial and federal incorporation are relatively minor.
Today’s post is going to break down some of key considerations, especially:
- Geography of operations,
- Location of shareholders and directors
- name availability, and
- Administrative cost and timing
Consideration 1: Where is the Business going to Operate
To get started, it makes sense to consider whether the business is going to operate only in Ontario, or in a wider swath of our vast country.
A corporation established under the federal Canada Business Corporations Act is automatically entitled to operate in all ten Canadian provinces. But, a corporation established under a provincial corporate law statute, such as Ontario' s Ontario Business Corporations Act, does not automatically enjoy this privilege.
As a result, an Ontario corporation will need to register in any other province in which it intends to operate.
Likewise, a non-Ontario provincial corporation should file certain additional paperwork before operating in Ontario. Specifically, we have the Extra-provincial Corporations Act in Ontario. It requires that a licence is required to do business in Ontario if a corporation was incorporated elsewhere. These are given out as a matter of course.
A federal corporation may establish its business operations and market itself across Canada. For this reason, some business people prefer federal incorporation when they intend to establish a physical presence across Canada.
Consideration 2: Where are the Shareholders (and Directors) Going to be Located?
The founding shareholders will also want to think about where the corporation's shareholders will be physically located.
One reason is that both statutes require annual shareholder meetings as well as annual directors meetings.
There is an important difference between the two Acts, however, that we can examine by way of shareholders meetings.
You will want to think about whether it is going to be feasible for, for instance, the shareholders to be "present" in a single location for the annual shareholders meeting. Even if gathering for an in-person meeting is not practical, the corporation still has an obligation to hold an annual shareholders' meeting. In this respect, questions arise such as can the shareholders meeting be held online?
Ontario Corporations are generally thought to be able to hold an online shareholders meeting so long as the communication mechanism being used provides a means for the shareholders to vote. This is a general statement and will depend on a variety of specific factors.
However, under the CBCA the requirements for holding online meetings are more restrictive. Under the CBCA, an online shareholder meeting can only be held if the corporation's bylaws expressly permit it and the relevant communication mechanism used permits all participants to communicate adequately with each other during the meeting.
Without going into extraneous hypotheticals, the simple take-away is that incorporation under the federal statute may make virtual shareholders meetings more difficult.
Consideration 3: Name Availability and Protection
The corporate name may be one of the reasons why an entrepreneur wants to incorporate in the first place. First, doing business as a corporation carries a certain amount of prestige. Second, the corporate name is protected in the jurisdiction in which it is registered.
Provincial incorporation means that the corporate name is protected only within that province. Federal incorporation results in wider name protection. Once the corporate name is approved by Industry Canada, it is protected throughout Canada and all of its provinces and territories.
The flip side of greater name protection for federal corporations, is that the federal government imposes a stricter and more time consuming process for name selection. In order to incorporate a named corporation under the federal statutue, the incorporator must purchase something called a 'NUANS report'. This is a proprietary search on a database that is maintained of registered corporate names throughout Canada.
Not only does the founder of a federal corporation need to obtain the NUANS report, the report has to be inspected and approved by Industry Canada. (Talk about government red tape!)
In Ontario, the process is slightly lighter on bureaucracy. The onus is placed on the incorporator to ascertain that the corporate name complies with the statutory requirements and is distinct.
On balance, this consideration usually leans towards choosing to incorporate provincially.
Consideration 4: Administrative Cost and Timing
So far, we have covered one consideration where federal incorporation has a clear advantage and two other considerations where the comparison is usually favorable to provincial incorporation. Let's look at a fourth consideration: what is going to take to get incorporated in terms of both time and cost.
The previous section talked about the federal government's bureaucracy heavy approach to corporate names. This is one of the factors that results in federal incorporation often being more time consuming.
While provincial incorporation is usually going to be faster than federal incorporation,, federal incorporation is going to have a smaller financial cost. Incorporating a business with Industry Canada under the Canadian Business Corporations Act costs $200 when done online. The alternative is going to Service Ontario's online portal and paying $350.
Federal vs Provincial Incorporation: The Winner?
Guys, as you can see, there is no knock-out winner in this battle.
Federal incorporation and provincial incorporation are both very similar when it comes to the laws that regulate them. However, if your corporation intends on operating its business across Canada then federal incorporation gets the nod because of its automatic entitlement to operate in all ten provinces and three territories.
Overall, it is good to keep things simple unless you have specific reasons for incorporating federally then the standard practice would be setting up an Ontario corporation under the provincial act.
In any case, there are variety of factors to consider and it is best practice to discuss any specific issues with a lawyer.