Provincial vs Federal Corporation: What’s the difference?
We are often asked what the difference is between incorporating a provincial corporation under the Ontario Business Corporations Act (OCBA) and incorporating a federal corporation under the Canada Business Corporations Act (CBCA).
The answer is that these two pieces of legislation are almost identical with very few minor variances. This is because the Ontario Business Corporations Act (OBCA) which governs Ontario provincial corporations was modelled after the federal Canada Business Corporations Act (CBCA) in an effort to create uniformity across corporate law in Canada.
The few distinctions between the two can be reduced to geographical scope of operations, name availability, public visibility of major shareholders, residency of directors, cost, and turnaround time.
Geographical Scope: Is your Corporation a National or Provincial Enterprise?
An important factor for founders to consider when deciding whether to incorporate provincially or federally is whether their operation is a national or local enterprise. Under the Canada Business Corporations Act, a corporation may establish businesses, receive profits and market itself across Canada. A federal company then is a good option if the founders want to establish an international presence and garner familiarity, prestige, and recognition in foreign jurisdictions.
With that said, to the extent there are operations occurring within a certain province such as hiring employees or maintaining a brick-and-mortar physical location, the corporation will likely also require an extra provincial registration to do business in that particular province. In other words, a federal corporation may sell goods or services to individuals across Canada however any commercial activities that occur within a certain province over and above this basic premise will likely require additional registration in that province. When incorporating federally, an Ontario extra provincial licence is free to
register, however each additional province will garner additional fees.
Name Selection
The most important factor that we used to determine whether our client will incorporate a federal or provincial company is that of its preferred name selection. If our client wishes to secure a named company (such as ABC Flowers and Chocolates Inc.), we will likely not recommend they proceed with a federal company. That is because it is extremely difficult to secure a named company at the federal level since you are vying for exclusivity for that name with 38 million other Canadians. The federal corporate registry employs federal examiners who ‘police’ name registrations in Canada. If you
propose to incorporate a name that is already in use by another corporation or that is similar to an existing business name, the federal examiners will likely send you a Notice of Deficiency and reject the name. You must then overcome their assumptions of similarity or you may choose another name altogether. Oftentimes this process of rejection and re-name selection can go through several rounds with the federal examiners. Each round costs additional legal fees and takes much time and hassle.
It is far simpler and easier to incorporate a named provincial company since there are no examiners at the provincial level. Any name you choose will be granted provided the name is not exactly the same as an existing name (similar and confusingly similar names will be accepted). In order to incorporate a named company you must first run a NUANS name search report. The report will demonstrate whether there are existing or similar names already registered for the proposed name you wish to use. The onus will be on you to review the report to ensure you are not proposing to use a conflicting name. Still, you may proceed to incorporate the conflicting name and run the risk of the existing owner filing a claim against you for infringing use if your name is too similar to the existing name, and the two respective businesses operate in the same jurisdiction and in the same market or industry. In other words, when incorporating under the Ontario Business Corporations Act, the name selection is self-policing; the risk of infringement is entirely yours. Since there are no federal examiners to block the name and disrupt the incorporation filing, the process is much quicker than a federal incorporation.
Residential Locations of Directors and Shareholders
The location of the directors and shareholders, as well as their ability to travel, is an important consideration when deciding between incorporating under the Ontario Business Corporations Act or the Canadian Business Corporations Act.
In Ontario, all of the directors may be non-residents of Canada. However for federal companies, at least 25% of the directors must be permanent residents of Canada. This poses a significant hurdle if the company is intended to be entirely foreign owned and controlled. Where this is the case, then we will suggest our client opt for a provincial company which will not require any local directors.
As far as shareholders, there is no requirement or prohibition against foreign owned corporations, both federally and provincially. In other words, 100% of a provincial or federal corporation can be owned by a non-resident of Canada. This is permissible under both legislations. However, once a non-resident of Canada owns more than 51% of the shares of a Canadian or provincial corporation, then the corporation is no longer deemed to be “Canadian controlled“ and as a result, it loses a formidable tax deduction on its internal revenue. The tax rate for a Canadian controlled private corporation (CCPC) is 12.2% in combined federal and provincial corporate income tax. However, the tax rate for non-CCPC’s is 26.5% on its terminal revenue. Therefore, the corporation is tax incentivized to ensure that 51% or more of its shareholders are permanent residents of Canada.
Public Visibility of Shareholders
Effective January 22, 2024, federal corporations created under the Canada Business Corporations Act are required to file information on their individuals with significant control (ISC) with Corporations Canada.
In Canada, the Significant Control Persons (SCP) register is part of the federal government’s efforts to enhance corporate transparency and combat money laundering and other illicit activities. It requires certain corporations to maintain a register of individuals who have significant control over the corporation. The ISC register must include information such as the individual’s name, date of birth, address, and details of their significant control. This includes individuals who own or control a significant number of shares, have significant influence over decision-making, or otherwise exercise control over the corporation.
Departing from the long-standing principle that a private company’s shareholders are private and not public, under the new ISC register rules, the register of controlling persons is made public record. This means that anyone can search and pull the register which will reveal the names of the ultimate controlling persons or entities holding 25% or more of the issued capital of that corporation.
If it is your desire to keep ownership information private, then you must incorporate a provincial company.
This significant change in the law has garnered mixed response from the legal profession and across industry abroad. Some welcome the regulation as eliciting more transparency in corporate enterprise while others eschew the new rules as disclosing too much information to public record contrary to longstanding legal principles that previously protected private company information as private.
Turn-Around Time
Because the name selection under the Canada Business Corporations Act is decided by government examiners based on availability across Canada, turn-around time is usually longer than selecting a name provincially.
Incorporation can be completed same day for provincial companies and within 3 business days for federal companies.
Cost
While the legal fee for incorporating a federal or provincial company is the same, the government of each jurisdiction charges slightly different fees which law firms charge back to their clients as disbursements. The disbursement (government fee) to incorporate provincially is $300, while the fee for federal companies is $200. In addition, the fee to run a NUANS name search is about $50 or so.
Annual Filings
Both types of corporations now require separate annual corporate filings.
In Ontario, this annual filing was previously combined with the federal tax filing of the corporation’s T2 Income Tax Return. That is, once the accountant filed an Ontario company’s T2, the corporate return would be auto-filed as well. This changed in October of 2021. Now, an Ontario company must file a separate annual corporate return. Failure to file this annual return for successive years will result in the dissolution of the corporation by the provincial government.
The annual return for a provincial company is due within 6 months of the fiscal year end of the corporation.
Federal companies must also file an annual corporate return or will face dissolution for non-compliance. Federal companies must file this return within 2 months of the anniversary date of the incorporation.
Summary
While most features are quite the same, there are a few distinctions between the two types of corporations. Consideration should be given to each of the above factors to select the corporation that is right for you and your business. If you have questions regarding which type of corporation is right for you, please contact us for assistance.
-Shira Kalfa, BA, JD, Partner and Founder
Shira Kalfa is the founding partner of Kalfa Law Firm. Shira’s practice is focused in corporate-commercial and private M&A law including corporate reorganizations, corporate restructuring, mergers and acquisitions, commercial financing, secured lending and transactional law.
© Kalfa Law 2024
The above provides information of a general nature only. This does not constitute legal or accounting
advice. All transactions or circumstances vary, and specified legal advice is required to meet your
particular needs. If you have a legal question you should consult with a lawyer.
