How to Incorporate in Canada (Part 1)

We’ve talked extensively about how to incorporate a business in the United States, but we have yet to explore the corporate laws of our neighbor to the north – Canada. Since MyCorporation offers incorporation packages for Canada, we thought it would be a good idea to dedicate two Business Basics posts to exploring Canada, with one on corporate law and the other detailing how to actually start a corporation in Canada. So, without further ado, here is a quick look into corporate law in Canada.

The Basics of Canadian Corporate Law

Canada doesn’t differ too much from the United States when it comes to corporate law. Corporations in Canada are seen as separate legal entities, just like they are in the United States, and the law separates the assets and debts of the executives and directors from those of the corporation. However, there are two major differences between the USA and Canada. The first is that, unlike in the United States, Canadian corporations are not as heavily regulated. American corporations are held to mandatory governance rules, while Canadian corporations adhere to a ‘comply-or-explain’ system, much like the United Kingdom or Australia. In this system, Canadian corporations may explain their reasons for non-compliance with company laws in their annual report. Though restrictions have tightened over the past ten years and there are certain regulations corporations must comply with, businesses are still largely able to define their own growth and development strategies, provided they explain these strategies to shareholders. The second difference is Canada’s provincial and federal corporate recognitions. In the United States, every state has to recognize the corporations of all other states, but there is no such requirement for Canadian provinces. Due to this, corporations have to choose whether to incorporate provincially or federally.

Provincial vs Federal Corporations

Each Canadian province has its own statutes governing corporations operating within their borders, and if you do choose to form a corporation in a particular province, you can only do business in that province. But if you form a corporation at the federal level, you can do business in any province. Federal incorporation also offers some protection from your business’s name being used by another corporation in another province, though for full protection you should file a trademark. However, federal incorporation also costs more, takes longer to complete, and can be a bit more involved than provincial incorporation.

Governance

It is important to note that 25% of a federal corporation’s board of directors must be Canadian citizens, which could make things a little difficult for American companies looking to expand north. Provincial corporations, on the other hand, differ in their residency requirements. British Columbia, for example, doesn’t require that any corporate directors be Canadian citizens, while Ontario has the same 25% requirement as the federal government. It is important then to consider where, exactly, you’d like to incorporate, and to research the particular laws of that province to make sure you are in a position to stay compliant.

As you can see, there are some differences between American and Canadian corporate law, but with a little knowledge and work it is fairly easy to accommodate them. And, as next week’s post will show, the actual steps to incorporation in both countries are fairly similar – make sure to check back then!