Canada: Weighing The Options: 5 Key Considerations When Deciding Between Federal & Provincial Incorporation

Last Updated: August 10 2016
Article by McInnes Cooper

A key legal decision in starting or growing your business is choosing the business structure that's right for you. If you incorporate, you'll need to decide whether to incorporate provincially, under the relevant province's incorporation legislation, or federally. There are differences between the two, and between individual provinces / territories, each with pros and cons.

Here are five key considerations to discuss with your legal team to help you make that decision.

  1. Investor-readiness. Investors might prefer federal incorporation because it gives them consistency and greater certainty. Provincial incorporation might not be a deal breaker, but an investor might insist that you later switch to federal incorporation – and that will cost you money and time.
      
  2. Target Market. Generally, a provincially incorporated company is entitled to carry on business in that province but, with a few exceptions (for example, New Brunswick and Nova Scotia have a reciprocal exemption), must register extra-provincially in the other provinces or territories in which it wishes to do business. A federally incorporated corporation can carry on business anywhere in Canada and though it must still register in each province or territory in which it does business, there may be less red tape to do so. Some people also believe that federal incorporation conveys a higher level of prestige, particularly if you plan to do business outside of Canada. 
     
  3. Share Structure. Provincial incorporation may offer more flexibility in structuring your shares. Nova Scotia, in particular, offers significant flexibility by permitting a company limited by shares or by guarantee or an unlimited company (aka an unlimited liability company, ULC or NSULC); Alberta and British Columbia also permit unlimited liability companies. Unlike a limited company, the liability of a ULC's members is unlimited. Federal incorporation allows unanimous shareholder agreements that can restrict the powers of the directors and reallocate liability from the directors to the shareholders; this is available under some provincial legislation – but not all.
     
  4. Directors. Federal incorporation and incorporation in most provinces and territories require that the directors be Canadian residents. New Brunswick, Nova Scotia, Prince Edward Island and British Columbia, however, have no residency requirements for the directors of their provincially incorporated companies, so all the directors may be non-residents of Canada.
     
  5. Registered Office, Reporting & Business Name. A federally incorporated company can have its registered office in any Canadian province or territory; a provincially incorporated company must typically have its registered office in the province or territory of incorporation. The annual reporting requirements for federally incorporated companies may be less stringent than those for provincially incorporated companies, although federally incorporated companies are also typically required to complete annual filings in provinces or territories in which they are carrying on business. However, it might be harder to obtain a business name for a federal corporation because the scope of the required name search and approvals is broader (though remember, either way, obtaining the name doesn't alone give the corporation the right to use the name as a trade-mark).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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