Establishment of a Corporation in Canada
You have decided to start or establish a business in Canada. One of the issues you have to solve is the creation of a corporation. The first question to solve is what is a corporation?
Note: It is important to understand that Canadian law is similar to the law of the United States, but that both are very much different from the system used in most Latin American countries (with the exception of Belize) and Spain. Because of this, the English names of the different types of business organizations will be used, to avoid confusion.
Different types of business organizations
In Canada, there are several ways in which people can organize themselves. Each form of organization has its advantages and disadvantages. The simplest way is known as sole proprietorship, which is basically running a business by yourself without entering into some type of incorporation or agreement with someone else. This way of running a business is not going to be discussed here. It is recommended to seek legal advice on how to protect your assets and conduct business.
Another form of organization is when two or more people run a business together. This type of organization is known as a partnership. When making agreements with other people it is very important that you define well what you want to do. This is because a court can declare a partnership as existing based on the conduct displayed by its members. For the same reason, it is recommended to seek legal advice when planning a business with several people. The partnership does not provide protection for the assets of the members. In other words, the creditors of the partnership can seize the assets of either member to settle debts.
It is important to understand that neither sole proprietorship nor partnerships create a new person. In other words, the activities carried out by both the sole proprietorship and the members of the partnership are understood to be carried out by them. However, it is understood that the members of a partnership are representatives of the other members, so the actions of one member may have repercussions on the others.
Instead, the next form of organization if you create a new person, the corporation. In other words, when you decide to “incorporate” a company you are giving rise to the birth of a new person, the corporation. The corporation is considered a different person from the members that compose it. Because of this, the corporation can acquire assets in its name (which will not be owned by the members), sign contracts, and acquire obligations (for example, acquire debt when obtaining a loan). In principle, the obligations acquired by the corporation will not be borne by the members.
By considering itself a person other than the members, the corporation limits their liability. In other words, the members’ assets (in principle) will be protected from the corporation’s creditors. These creditors will not be able to request to seize the assets of the members when the corporation cannot pay its debts. Also, the acts carried out by the representatives of the corporation in the name of the same do not bind the members personally.
“Incorporation”
Before entering the incorporation process, you must decide which jurisdiction is the one to choose. What does this mean of jurisdiction? Canada is a federal state, this means that there is a division of powers between the government of the country (the federal government), and the governments of the provinces (what is known as states in other countries). Unlike some Latin American countries, such as Mexico, where you can only choose federal jurisdiction, in Canada it is possible to incorporate a company under the laws of a province or under federal laws.
The jurisdiction that is decided will influence the laws and requirements that will apply to the corporation. Corporations created at the federal level (under the Canada Business Corporations Act) can conduct business throughout Canada under their name (subject to some registration requirements in the provinces). On the other hand, a corporation incorporated under the laws of a province, in principle, can only carry out commercial acts within that province and its name will only be protected within that province. This does not mean that a corporation incorporated under provincial laws cannot conduct business outside of that province, as it is possible to obtain a registration in another province (the extra-provincial registration).
Extra-provincial registration includes registering the name of the corporation in the other province (unless the corporation is federal, in which case it is not necessary to register the name). Performing the extra-provincial registration also allows you to install your offices in the new province or to acquire assets in said province.
Name of the Corporation
Unlike other places, the name given to the corporation is very important at the time of incorporation. As mentioned before, a corporation incorporated under federal law can use your name throughout Canada. However, the federal incorporation requirements are the strictest when it comes to naming. It is recommended to seek advice for the creation of the company name and thus reduce the possibility that the incorporation will be rejected.
Another possibility is to incorporate the company under the number assigned by the jurisdiction in which the procedure is carried out. In this way, the corporation will have a name consisting of a number, for example 123456 Manitoba Inc. Of course, it is possible to change this name later. It is also possible to leave that name and advertise as “doing business as (doing businesses as or d.b.a.),” example 123456 Manitoba Inc. d.b.a. Importing Company of Canada.
A search is necessary to ensure that the name selected is not the same or confusingly similar to the name used by another corporation doing business in Canada. When entering the documents with the government, whether federal or provincial, it is necessary to present a copy of the search carried out in one of the authorized search systems. There is a general system for Canada, NUANS, and one for Quebec, CIDREQ. Depending on the jurisdiction in which it is to be incorporated is the system that must be used. Due to the complexity and the high possibility that the incorporation will be rejected due to a name that cannot be used, it is recommended to seek advice before entering the documents.
It is important to note that, by law, corporations must announce their commercial nature. That is, they must let the public know that they are dealing with a corporation (and not a partnership or LL.P.). That is why words like “Limited,” “Limitée,” “Incorporated,” “Incorporated,” or “Corporation” should be added to the end of the name. It is also accepted to put abbreviations in place of the complete words, “Ltd.,” “Ltée,” “Inc.,” or “Corp.” It is also possible to have to use “Société par actions de régime fédéral” or “S.A.R.F.” for corporations incorporated under federal law.
Articles of Incorporation
The articles of incorporation are the legal statutes with which the corporation is to be created. In other jurisdictions they are known as “articles of incorporation.” In these articles, the members of the corporation will have to decide certain questions, which include the place where the registered office of the company will be located, restrictions on the transfer of shares (shares of the corporation), number of directors, others restrictions that members want to include.
Shares
Shares are what are known in other jurisdictions as “shares.” The shares are titles that grant certain rights to their owners. These rights include voting in assemblies and receiving dividends when profits are shared. Different classes of shares can be established with different prerogatives and rights. At the time of incorporation it is necessary to present the value of the shares to be given; that is, those people who are going to be shareholders (shareholders) must have delivered the cash, properties, or provided the services for which the shares are going to be given.
Other requirements
In addition to incorporation, you need to meet other requirements to start a business. Among these procedures is obtaining a federal registration number, which is used for various administrative procedures. Records will also have to be made with the provincial authorities.
Residency requirements for directors
Depending on the jurisdiction that is selected, the corporation will have to comply with requirements regarding the residence of the directors. In other words, a certain number of directors will have to be Canadian citizens or permanent residents of Canada.
In this table you can see the requirements.
Jurisdiction | Directors’ residence requirement |
Federal (Canada) | At least 2% of the directors of a corporation must be residents. If there are less than four directors on the board of directors, at least one of them must be a resident. These requirements also apply when there is a council meeting. |
Alberta | At least 25% of directors must be residents |
British Columbia | There are no requirements |
Prince-Edward Island | There are no requirements |
Ontario | At least 25% of the directors of a corporation must be residents. This does not apply to foreign corporations. When a corporation has fewer than four directors, one of them must be a resident. |
Manitoba | At least 25% of the directors must be residents. If the board of directors has three or fewer directors, one of them must be a resident. |
New Brunswick | There are no requirements |
Nova Scotia | There are no requirements |
Nunavut | There are no requirements |
Quebec | There are no requirements |
Saskatchewan | At least 25% of the directors of a corporation must be residents. If there are less than four directors, one of them must be a resident. |
Newfoundland-and-Labrador | At least 25% of the directors must be residents. It does not apply to legal entities that do not receive income in Canada. |
Northwest Territories | There are no requirements |
Yukon | There are no requirements |
We recommend obtaining legal advice to resolve any problem that may arise regarding compliance with this and other requirements.
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