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In Ontario, an entrepreneur may govern and register its corporation under the provincial or the federal law; the former is the Ontario Business Corporations Act (hereinafter “OBCA”), and the latter is the Canada Business Corporations Act (hereinafter “CBCA”).
The following article outlines the advantages of incorporating federally and provincially in Ontario, and sheds light onto some of the considerations you may keep in mind when choosing your law of incorporation.
Incorporating your company under the Canada Business Corporations Act
The CBCA offers 3 general advantages.
- Enhanced name protection
Choosing your corporate name represents an important step of your incorporation, especially if you want to expand your business into multiple provinces or territories in Canada. When you register your business under the Federal Act, you must clear both federal and provincial name databases because the business name must be distinct from any other registered name in Canada. This process is achieved through a NUANS report that must be filed with your incorporation form.
Therefore, a corporation governed by the CBCA has less chances to see its registration with provincial or territorial authorities refused on the basis that its business name shares similarities or creates confusion with that of an already established corporation. Note that certain particularities may apply. For example, in Quebec, all business names must have a French name in accordance with the Charter of the French Language. Similar conditions may be applicable in other Canadian provinces or territories.
Remember that your corporate name is not your legal trademark; both being distinct.
- Greater mobility
Furthermore, the Canada Business Corporations Act (CBCA) offers a greater choice of locations than the Ontario Business Corporations Act (OBCA) with respect to the registered office, shareholders’ meetings, records keeping, and quorum.
CBCA : In any province in Canada as specified in the articles of incorporation.
OBCA : Anywhere in the province of Ontario.
CBCA : At the place within Canada provided in the by-laws or, in the absence of such place, at the place within Canada that the directors determine.
OBCA : Subject to its articles and any unanimous shareholder agreement, anywhere in or outside the province of Ontario as determined by the directors or, in the absence of such place, at the place where the registered office of the corporation is.
CBCA : At the registered office, anywhere in Canada as designated by the directors, or outside of Canada provided that certain conditions are met.
OBCA : At the registered office, or anywhere in Ontario as designated by the directors.
CBCA : Quorum exists even where shareholders or directors are present electronically or over conference call.
OBCA : Quorum exists where the holders of a majority of the voting shares are present or represented by proxy.
- Sign of distinction
Lastly, incorporating under the CBCA is a form of distinction for clients outside of Canada. If you are looking to start a business with international ambitions, a federal incorporation will offer you a global brand of recognition whereas a provincial incorporation will not offer a similar added value.
*Note that, despite the advantages that the Canadian Act offers to corporations that register under its law, federal corporations may, in addition, have to comply with specific provincial laws. Please consult our legal professionals to obtain further information on the subject.*
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Incorporating your company under the Ontario Business Corporations Act
The OBCA offers 3 general advantages:
- Proximity with your operations
If you maintain most of your operations in Ontario, registering your corporation under the OBCA may fit best for your needs. Note that the OBCA does not prevent you from conducting business in another province or territory in Canada, provided certain conditions are met.
Barring exception, if you want to establish offices outside the province of Ontario, you have 2 options:
(A) Filing a continuing of the corporation:
This procedure allows your corporation to change its jurisdiction of incorporation, moving from the Ontario law to the Quebec law for example. To do so, you need to file a request to the Ministry of Government and Consumer Services (hereinafter “Ministry”) to leave the province of Ontario, and to file your request with the governmental entity of the province or territory where you are moving. In Quebec, it will be with the Registraire des Entreprises. You can read more about how to incorporate in Quebec, here.
(B) Filing an extra-provincial licence
This procedure allows your corporation to carry its business in another province or territory in Canada without changing its law of incorporation. However, you must comply with certain legal conditions provided by the province or territory in which you want to expand in. Typical requirements under this process includes the establishment of a physical address, the use of a virtual office holding an address in the province, or the hiring of a business agent from that province.
- Minimizing paperwork and future costs
On the short-term, registering your corporation under the Ontario law costs more than registering it under the Canadian law, however, on the long term, it minimizes future paperwork and costs.
In fact, the Federal Act requires an annual return which incurs additional fees every year. The annual return is a form that notifies the Director of Corporations Canada that your corporation remains active. If you forget to file the annual return for 3 consecutive years, the Director may issue a certificate of dissolution and dissolve your corporation. A corporation registered under the OBCA does not need to fill out an annual return.
Nonetheless, note that the OBCA requires corporations to file a copy of the certificate of continuance with the Ministry within 60 days after the incorporation’s anniversary date to remain active.
- Greater name flexibility
In the event that you do not intend to expand your business outside of Ontario, you may not require a name protection across Canada. Consequently, you will not have to clear the federal and provincial name databases, making the choice of your corporate name less restrained.
Similarities between the provincial and federal incorporation
Despite the differences between the Canada and the Ontario statutes, both share certain similarities with regard to the residency of the directors, and the financial tests applicable to distributions and return of capital.
- Residency of directors: at least 25% of directors (or if less than 4 directors, at least 1 of them) must be Canadian residents. Certain exceptions may apply.
- Financial tests: before declaring and paying dividends, either in cash or in species, a corporation must meet the tests below.
- Liquidity or cash-flow test (solvency test) – The corporation is (or would be) able to pay its liabilities as they become due. In other words, a corporation cannot declare or pay dividends if such would render it uncapable of repaying its liabilities on time.
- Net Assets Test (balance sheet test) – the liabilities of the corporation and the stated capital of all classes do not exceed the net realizable value of the assets. In other words, a corporation may declare or pay dividends only if the net value of the assets exceeds the aggregated value of its liabilities and stated capital of all classes.
In conclusion, remember that:
- Choosing the law that will govern your corporation is not an easy task; there are key factors that have to be taken into consideration such as your business name, operations, and launching costs.
- You are not alone; Lex Start is here to help you incorporate your business without compromising your budget by offering affordable and customized legal services.
We hope that you are now more comfortable going forward with the incorporation of your business. For more information in regard to your jurisdiction of incorporation or about the incorporation process, contact us.