3. What are the implications of incorporating federally and provincially?

Incorporation in General

A corporation is constituted under a statute (see: Canada Business Corporations Act. R.S., 1985, c. C-44, and the Companies Act R.S.Q. C-38) and exists as a distinct legal entity from its shareholder or shareholders. Because it is a distinct legal entity, and is not susceptible of being an “Indian” according to the Indian Act, certain benefits may actually be lost through incorporation.

The goal of a corporation is to operate a business for profit and to distribute the profits among the shareholders.

The following are some of the characteristics of a corporation:

  • A corporation exists on an ongoing basis, until such time as it is wound up.
  • A corporation can be set up under the authority of either a federal or a provincial statute. If you intend to operate your business solely in Québec, it might be advisable to incorporate under a provincial statute. However, the corporate name of a federally incorporated entity is protected throughout Canada.
  • A corporation has exclusive ownership of all property (whether money or personal property) transferred to it by its shareholders in exchange for shares of the corporation.
  • A shareholder’s liability for the corporation’s debts is limited to his or her investment, unless the shareholder provided personal guarantees for a loan to be invested in the corporation’s business.

Liability of Directors

If the corporation fails to remit an amount payable to the Ministère, the corporation and the directors serving at the time of the omission are jointly liable for the amount in question, as well as any penalties and interest.   However, directors are not liable if they acted with reasonable care, dispatch and skill under the circumstances, or if it was impossible for them to be aware of the omission.

(Source: http://www.revenu.gouv.qc.ca/eng/entreprise/demarrage/types/societe.asp)

Advantages and Disadvantages of Federal and Provincial Incorporation

The next decision is whether to incorporate your company federally or provincially. If you incorporate federally (a “Corporation”), your business will be empowered to conduct business throughout Canada. Although your “corporation” will still be subject to provincial regulations, and will have to pay a license or registration fee in some provinces, no province will be able to prevent your company from conducting business under its corporate name. A provincially incorporated company, (a “Company”) on the other hand, may not be able to operate under the same name in another province, if another corporation with a similar name already exists in that province.

One disadvantage of federally incorporating your company is the required disclosure of financial records. A private corporation’s financial statements must be made public if a federal corporation has gross revenues for a fiscal period in excess of $10 million, or has total assets in excess of $5 million as of the last day of any fiscal period. These gross revenues and total asset figures include those of affiliated companies and the parent company (Canadian Business Guide).

Also, to federally incorporate, the composition of your company’s board of directors must meet the requirements of the Canada Business Corporation Act. Under this Act, a majority of the directors of a federally incorporated company must be resident Canadians, unless “a holding corporation earns in Canada directly or through its subsidiaries less than five per cent of the gross revenues of the holding corporation and all of its subsidiary bodies corporate together, then not more than one-third of the directors of the holding corporation need be resident Canadians” (“…Incorporation Kit, Industry Canada).

Finally, corporations provide more security for minority shareholders than do companies. So when a client is in a minority shareholding position, we suggest incorporating at the federal level.

Industry Canada’s Small Business Guide to Federal Incorporation provides detailed information on how to federally incorporate your company. Federal incorporation costs $500.

If you incorporate your company provincially, you’ll have to register and license your company through the appropriate provincial Registrar in each province and territory you wish to do business in, outside of the original incorporation jurisdiction. So if you incorporate your business in Ontario, and then want to operate in New Brunswick as well, you’ll have to register your business with the New Brunswick Registrar as well, and pay the appropriate additional fees. Incorporation fees vary from province to province, but generally, provincial incorporation costs about half as much as federal incorporation.

Posted in: Small Business Services