Spotlight On: Incorporations in Canada
Whether you are launching your own business or incorporating a subsidiary for a multi-national company, here is a handy checklist of things to consider.
Incorporating a business in Canada has many benefits, including favourable tax treatment and limited liability for shareholders. There are a number of decisions that should be made to start off on the right foot.
Corporations Are People Too
Corporations in Canada
Canadian law recognizes a corporation as a person, legally distinct from its shareholders and management. Therefore, corporations can own property, enter into contracts, and conduct business like other legal persons.
Alternatives to incorporation, such as sole proprietorships and partnerships, are discussed further below.
Every corporation has shareholders. Shareholders own shares in the corporation and this entitles them to elect the directors. As an added benefit, shareholders are not usually liable for the acts of the corporation. Generally, every corporation has at least one class of common shares. Based on tax advice you may also want to have other classes of shares such as preferred shares or non-voting shares. If you have more than one shareholder, you will probably want a shareholder agreement, discussed further below.
Every corporation must have at least one director. Directors are the individuals ultimately responsible for overseeing the business and affairs of the corporation and are responsible for appointing officers. Directors owe a fiduciary duty to the corporation and have personal liability for the company’s responsibilities in certain situations.
There is no requirement to have officers, but most corporations do. Officers are appointed by the board and typically manage the day-to-day business and affairs of the company. This is a great opportunity to give yourself a snazzy title, like “President” or “Chief Innovation Officer”. Like directors, officers have fiduciary duties to the company, but unlike directors, officers are not generally personally liable for the company’s affairs.
Employees and Contractors
Employees and contractors of the company carry out the instructions of officers and other management.
Decisions to Make before Incorporating
Selecting a Business Name
In Canada you may select a name for your business, or you may wish to use the corporation number assigned to your business as your name. If your business is a numbered company, you may still conduct business under a registered business name. Registration of a business name will involve additional costs.
The following are some things to consider in selecting a name for your corporation:
- If your company’s name will be important to its operations, consider searching Google and any relevant social media platform to confirm the domain or account name’s availability. Also consider searching for the name on the Canadian Trademarks Database.
- Part of your business name must be one of the following: “Limited”, “Incorporated”, “Corporation” (or the corresponding French translations) or respective abbreviations of these: Ltd., Inc., or Corp.
- If your corporation will do business in Quebec it will require a French name or a combined English and French name. Otherwise, your corporation may have just an English name, just a French name, a name that is a combination of English or French, or a name in English and a name in French that are equivalent but that are used separately.
- Depending on the jurisdiction of incorporation, certain words are prohibited from being used in the names of business corporations, and in Ontario, for instance, the use of words such as “architect”, “engineer”, “association”, “institute”, “college” “co-operative”, and the name of an individual is restricted.
Selecting a Jurisdiction for Incorporation
Canada has fourteen different corporate statutes to choose from when deciding where to incorporate your business: there is the federal statute (the Canada Business Corporations Act (the “CBCA”)) and a corporate statute for every province and territory. For instance, Ontario’s provincial statute is the Business Corporations Act (Ontario) or the “OBCA”, and the British Columbia provincial statute is the Business Corporations Act (BC) or the “BCBCA”.
First, you may want to consider whether you would like your business to be federally or provincially incorporated. Here are a few advantages of each:
- Name Protection: The name of a federally incorporated business is given exclusive protection across Canada, and a federal corporation has the right to conduct business across Canada under its name. In contrast, names of provincial corporations are only provided exclusive protection against the names of other corporations formed or registered in that province.
- Information Required in Incorporation Application: There are differences in how much information is required to be filed according to jurisdiction upon incorporation. Quebec requires the most information including the names and residential addresses of the officers, directors and three largest shareholders. Under the CBCA and other provincial statutes, the names and addresses of the initial directors are required, but information about corporate officers and shareholders is not (except in British Columbia where the first shareholder’s name and address will be required).
- Registered Office: The registered office of a federal corporation can be located in whichever province is specified in the corporation’s articles. Provincial corporate statutes, on the other hand, tend to require that a registered office be located in the province of incorporation.
- Register of Key Shareholders: Tracking and maintaining a register of key shareholders or individuals with “significant control” over the corporation is required for federal corporations and corporations formed in certain provinces, including British Columbia, and (likely soon) Nova Scotia. See SkyLaw’s blog post about tracking controlling shareholders and the below section “Disclosure of Large Shareholders” for more information.
- Land Ownership Transparency Register. As of November 30, 2020, “reporting bodies”, including all corporations in British Columbia with interests in land (including land ownership and land leased for ten or more years) will be required to file a transparency report with the Land Owner Transparency Registry by November 30, 2021 unless they fall under an exemption. Such reports will be required to disclose information about those individuals who have beneficial ownership or indirect control of 10% or more of the equity shares or voting rights or individuals who have a right or indirect control to elect, appoint or remove the majority of the directors of the corporation. OBCA corporations are also required to maintain a register of ownership interests in land in Ontario.
- Registration: Both federal and provincial corporations must register in each province in which they plan to do business. Federally incorporated businesses are required to extra-provincially register in any province where the corporation will conduct business, and provincial companies must extra-provincially register in any province where they conduct business outside of the one where they are incorporated. See below for more details about registration.
- Diversity Disclosure Requirements: Federal companies that are “distributing corporations” (generally, reporting issuers or public companies) are subject to diversity disclosure requirements which include required disclosure of their current board composition and targets and process for nominating diverse board members if any (for more information, see SkyLaw’s blog post about diversity disclosure requirements). Diversity disclosure is not required under any provincial corporate statutes for public or private companies, although public companies are required to meet diversity disclosure requirements under securities legislation.
- Certificated or Uncertificated Securities: You may also want to consider whether you prefer to have certificated or uncertificated securities for your business. Some provincial statutes such as the OBCA and the BCBCA explicitly allow for a corporation’s securities to be uncertificated. The CBCA has a slightly different approach in that it allows for a corporation to provide a security holder with a “non-transferable written acknowledgement” of their right to obtain a security certificate from the corporation. If you plan to issue shares to other investors, you may wish to have certificated securities as investors may expect to see share certificates.
- Prestige: Sometimes federally incorporated businesses are viewed as more prestigious by organizations outside of Canada.
Who Will the Directors Be?
You will need to identify the names and addresses of the first directors of your corporation as these will need to be included in your company’s articles of incorporation. Individuals will need to consent before they can act as corporate directors (and before you include them in your incorporation application).
Directors face personal liability in a number of different contexts which can vary with jurisdiction.
How many of your proposed directors are Canadian residents?
- One quarter of the directors of federal corporations and businesses incorporated in Alberta, Manitoba, Saskatchewan, Ontario, and Newfoundland must be Canadian residents. If there are fewer than four directors of such a company, at least one director must be a Canadian resident in these jurisdictions.
- All other provinces and territories have no such director residency requirement.
Who Will the Shareholders Be?
- Share Classes: We would typically incorporate a corporation with a single class of common shares. Speak with your accountant to determine if you will need any additional share classes. See also the list of questions to ask your tax advisor below.
- Issuing Shares: It is typical for new companies to issue shares for nominal consideration upon incorporation. As the company grows in value, the fair value of its shares will typically increase; the price per share is set by the board at the time of issuance. It is also important to ensure that any shares being issued by your business are issued for proper consideration.
Unanimous Shareholder Agreements (“USAs”)
Directors’ powers and liability may be transferred to shareholders or other persons under a USA. USAs can be useful tools to ensure that a shareholder retains complete control over a company – for example, in the case of a corporation that is a wholly owned subsidiary of another corporation.
These agreements may also provide for how decisions get made, how money flows in and out of the business, shareholder rights and share transfer restrictions, as well as exit provisions for shareholders.
A number of corporate statutes specifically provide for USAs, including the CBCA and the OBCA. The corporate statutes of British Columbia, Quebec and Nova Scotia do not explicitly contemplate USAs. However, the BCBCA allows for the corporation’s articles to transfer the powers of directors to the shareholders or other persons.
Number of Shareholders
How many shareholders will your business have? If you are planning to have 50 or more shareholders, keep in mind that a CBCA corporation may have to prepare and deliver to shareholders an information circular in advance of its annual general meetings, which is no small task. Under the OBCA, this requirement only applies to public companies. For more information about information circulars and proxy solicitation, see SkyLaw’s proxy blog post.
Notice periods ahead of shareholder meetings can vary as well: for private corporations, the OBCA requires at least 10 days’ notice, whereas the CBCA requires at least 21 days’ notice.
Disclosure of Large Shareholders
Under the BCBCA, private companies are required to maintain a transparency register. This register must include information about all “significant individuals”, including the name, date of birth, address, and whether or not he/she is a Canadian citizen or resident in Canada. “Significant individuals” include: anyone with 25% or more of the issued shares of the company (whether these are held directly or indirectly and whether the individual is a registered or beneficial owner thereof); individuals with shares that represent 25% of the voting rights at the corporation’s general meetings (directly or indirectly); and an individual with the right or ability, if exercised, to elect, appoint, or remove the majority of the company’s directors (directly or indirectly).
It is expected that ultimately most, if not all, Canadian provinces will establish similar requirements and many other provinces have already initiated legislative processes to amend their statutes accordingly.
Under the Alberta corporate statute, every corporation in its annual report must provide information about its five largest shareholders. Publicly-available corporate profile reports about Alberta companies disclose both the company’s shareholders and shares of other companies owned by that corporation.
Under securities regulation, certain public company shareholders including holders of 10% of any class of securities generally must report their holdings, both through filings on the System for Electronic Disclosure by Insiders (SEDI) and by filing more detailed reports on the System for Electronic Document Analysis and Retrieval (SEDAR).
Other Oft-Overlooked Considerations
Advance planning is required to incorporate on time. You cannot back-date an incorporation. Check with your accountant to confirm the date you want the incorporation to be completed. Some jurisdictions take longer than others, particularly if you need to get the corporation’s name pre-approved.
Registering to Do Business
Whichever jurisdiction you incorporate in, if you wish to do business in other provinces, there may be costs to register your business with each province. For instance, if yours is a federal corporation, you will need to extra-provincially register your business in every province in which business will be conducted. If your business is incorporated in Ontario but you have employees and offices in British Columbia, you will be required to extra-provincially register in British Columbia. Each province has its own thresholds for requiring extra-provincial registration (i.e. having a physical office or employees located in a province may constitute “doing business”).
Fiscal Year End
If you incorporate a business, you will be able to choose when you would like your financial year end to be. However, there may be tax consequences associated with this selection and it is very important that you seek tax advice relating to your business’ financial year end.
Registering for GST/HST, etc.
Wherever you incorporate in Canada, the Canada Revenue Agency will know about it. The first piece of mail that will be sent to the corporation’s registered office will likely be a notification with the corporation’s CRA business number. You may want to apply to register for GST/HST depending on the advice of your accountant.
In general, if a corporation does not carry on business for a number of years, it may be dissolved by the ministry-appointed Director. The time periods for dissolution vary across jurisdictions. For example, a CBCA corporation may be dissolved after three years of not carrying on business, whereas a BCBCA corporation may be dissolved after two years. The OBCA does not have a specific time period for dissolution; instead, the Director under the OBCA may cancel a certificate of incorporation where “sufficient cause” is shown.
Get Tax Advice
Before deciding whether and where to incorporate, be sure to speak with an accountant or tax lawyer for advice on tax matters. Tax may be the single most important factor when you are deciding whether and where to incorporate.
Questions to Ask Your Tax Advisor
The following are some questions to ask your tax advisor before you incorporate your business:
- Does it make financial sense to incorporate now?
- Which share capital structure is best for you?
- Should you hold your shares in your own name, through a holding corporation or through a family trust?
- How should money flow in and out of the corporation? For instance, should the corporation’s start-up capital come from the sale of equity, or the issuance of debt (such as shareholder loans)? Should money flow out of the company through employment income or dividends?
- Will the business be a “Canadian-controlled private corporation” and what is required to maintain that status? There may be certain tax deductions available for small businesses in Ontario for Canadian-controlled private corporations.
- Which government incentive programs might be available for your business?
- What are the different corporate tax and goods and sales tax rates across Canadian jurisdictions?
- If yours is a US business wishing to do business in Canada, what are the tax benefits and consequences of various types of business organizations? For example, there may be tax advantages for US companies incorporating a ULC in Canada.
Alternatives to Incorporation
Incorporation is just one of several ways to organize a business in Canada. Instead of a corporation, individuals may choose to organize their business as:
- A sole proprietorship: whereby you operate your business on your own under a trade name. Keep in mind that you will be personally responsible for all liabilities under this structure.
- A general partnership: whereby you will work with at least one other person and each of you will have unlimited liability.
- A limited partnership: whereby the limited partner’s liability will be restricted to the investment he/she contributed to the partnership.
- A limited liability partnership: commonly used to structure law and accounting firms, although it is available for other types of businesses as well, depending on the jurisdiction. Partners of an LLP are generally protected from liability for the negligence of the other partners.
- A ULC: which will be treated as a corporation in most contexts, except that a ULC’s shareholders face unlimited liability for a ULC’s debts. ULCs may be established under the laws of Nova Scotia, Alberta, or British Columbia.
Foreign Entities Doing Business in Canada
A foreign entity wishing to conduct business in Canada may choose from the above structures, or choose from the below options:
- Incorporating a subsidiary corporation. It will be important to keep in mind the director residency requirements of some provincial statutes and the CBCA, as discussed above. Subsidiaries are separate entities from their parent companies and so the parent company will not in every case be liable for the actions of its subsidiary. This is not true if the subsidiary is a ULC.
- Setting up a Canadian branch of the business without incorporating a Canadian subsidiary. One thing to keep in mind for branches is that you will have to register in all provinces in which you wish to do business; however, the cost for registration is usually minimal.
- Unlike in the US, forming a Canadian limited liability company (or an “LLC”), is not an available option; however, US LLCs may register to do business in certain Canadian jurisdictions.
Other statutes to be aware of for foreign entities considering forming or acquiring a Canadian business include:
- The Investment Canada Act, which applies when a non-Canadian owned business establishes or purchases a business in Canada. Recently, in light of the COVID-19 pandemic, the Minister of Innovation Science and Industry issued a Ministerial Order on July 31, 2020, pursuant to the Time Limits and Other Periods Act (COVID-19) which, among other things, extended the time available for the Canadian government to conduct national security reviews under the Investment Canada Act. These changes may give rise to longer periods of post-closing uncertainty for foreign investors wishing to establish a business in Canada.
- The Competition Act permits the Competition Bureau to review transactions prior to or for one year after completion. If a company is amalgamating with or acquiring another business and the transaction meets certain thresholds, you may be required to report the transaction to the Competition Bureau.
Get Employment Law Advice
Finally, before deciding to incorporate, make sure you are not precluded from starting another business by your employment agreement. For instance, employment agreements may contain a non-competition clause which prohibits the employee from initiating a competing business. It may be useful to seek advice in this regard from an employment lawyer.
You may also want to decide if your business will require employees or independent contractors. If so, an employment lawyer in the appropriate jurisdiction can also help you draft employment agreements or independent contractor agreements for those you wish to hire.