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Federal vs. Provincial Incorporation: What’s the difference?

Successful businesses never stay still. They always evolve and develop, growing and changing as trends and customers demand. In fact, as a business owner, your company can undergo a number of changes.

In fact, once your business hits a certain size or level of complexity, a change in business structure may be necessary. For instance, shifting from a sole proprietorship to a corporation can be a healthy financial move. There are many advantages and benefits for choosing to run your business as a corporation. If it is the next move for you, you may be thinking about how to incorporate your business in Canada.

However, when you look into incorporating your business, you may have read that can do this on either the federal or provincial level. What does this mean?  Which is right for you as a business entity in Canada?

Federal Incorporation

As a federal corporation, you operate under the Canada Business Corporations Act (CBCA). Although it may seem more tedious to set up, federally incorporating your company has its advantages.  

When you do so, you will first notice that you go through a stricter name selection through a NUANs name search and Federal examiner. However, this ensures that your corporate company name is protected across the country, its provinces, and territories. In other words, you can make profits and advertise your business across Canada and benefit from an increase in recognition outside your local jurisdiction. Yet if at any point your corporation uses any other name, you have to register it under the business Names Act, as well.  

You are automatically assigned a Business Number by the Canada Revenue Agency, rather than having to apply for it separately, and you can run your business on a national level without restrictions on your location, company records or  where the meeting of your business’ directors are held.

The CBCA also provides more flexibility in quorum requirements, which is ideal if your founders are located in different cities. Quorum can include shareholders and directors being present via digitally or via conference call. However, Federal corporations still need to follow Canadian residence requirements with 25% of your directors living in Canada or, in the case of having less than 4 directors on the board, at least one director must be living in the country.  

There are some things to note when incorporating federally.  For instance, you will find that incorporating federally can be more expensive. Federal incorporation naturally requires more paperwork and fees to complete and pay for. This is usually due to operating in different provinces, which means extra-provincial registration, application processing times, and fees. Having your business based in Ontario is an exception, however. You are not charged extra-provincial registration fees if you federally incorporate within the province.

The initial fee for incorporating federally is $200  in person and $250 by mail, which does not include the fees you have to pay to do business in other provinces. In addition, federal corporations are required to file a Corporation Tax Return and a Corporate Information Return on top of that, as well.  The Corporate Information Return, itself, carries a fee– $20 for online filing and $40 in person. Thus, the more you expand across Canada, the more fees you will be responsible for.

Provincial Incorporation

When provincially incorporating your business, one of the main differences is that your corporate name is protected only within the province you are registered. The requirements for naming your company are less strict than when you federally incorporate your company, and it is a good option if you intend to remain a local business and do not have any other business, suppliers or customers in another province.

In Ontario, provincially incorporated businesses operate under the Ontario Business Corporations Act (OBCA). Unlike a federal corporation, you operate under your province’s corporate statute and file corporate information with that province’s official government.

You can conduct business with other companies, but your office is required to be located in the province in which you are registered for legal documentation purposes and establishing your contact information. With regards to meeting quorum requirements for provincially incorporated companies, quorum exists where the holders of a majority of the voting shares are present or represented by proxy.

If, at one point, you decide to do business in another province, you need to go through an extra-provincial registration process. Not only that, but you will need to have your name re-approved in the other provinces you wish to do business in. This can lead to issues if another company has a similar business name. If so, you have to have to do business under a different (assumed) name.  If your corporation uses a name other than its corporate name, it has to be registered under the Business Names Act. A five year registration from the Ontario government will cost you $60-80. Note that each province has its own definition of what doing business means, so consulting a lawyer on what business you want to conduct in other provinces is essential.

As a provincially incorporated company, you are also required to file a combined Corporation Tax and Annual Return every year with the provincial government, usually within 60 days of the date on which you incorporated your company.

Additionally, it costs lower to provincially incorporate your business overall than federally, which makes it a more appealing and cost effective option. Thus, if you decide to incorporate your company provincially, it costs $360, which is higher, but you do not have to worry about extra-provincial registration fees.

If you decide to expand, you can always change your Provincial corporation to a Federal corporation and vice versa. To do so, you need to apply to both federal and provincial governments to get approval, which will be a costly and time consuming process.

Incorporating a company is a big step for any business and should be done with due diligence. If you need help with the process, you should consult a lawyer on what may be the best strategic option for you.