Corporations
Introduction
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A corporation is its own legal entity, meaning that it is owned and operated by one or more
members, also known as shareholders. It is important to note that a corporation will have the
same rights and obligations under Canadian law as a person. It can acquire assets, obtain a loan,
enter into contracts, sue or be sued, and can even be found guilty of committing a crime.
Corporations can be for-profit, as typical businesses are, or not-for-profit, as charities are.
One of the main benefits of incorporating is that the corporation is recognized as its own
separate entity, distinct from its shareholders. The shareholders will not personally be liable for
the commercial liabilities and debt of the corporation, unless a personal guarantee is given.
Creation of a Corporation
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A corporation is created when it is incorporated by a group of shareholders who have ownership
of the corporation, represented by their common share distributions. Corporations can have
one shareholder or several. Shareholders, as owners of a percentage of the company, are only
responsible for the money they pay into the company and the percentage of shares they own.
If there are multiple shareholders, a shareholder agreement is recommended. This will outline
share distribution, when a shareholder wants to leave the company, when someone wants to
sell or buy shares, and what happens in the event of death or dissolution of the company. A
shareholder agreement sets out the rights and obligations of each shareholder in the event of
exit or dispute.
The law requires that all corporations maintain minute books. A minute book will contain
documents, such as, minutes of important meetings, the by-laws, the directors’, shareholders’
and officers’ registers, and a copy of the Articles of Incorporation. Minute books can also contain
other documents, such as copies of important loan documents and government filings.
Articles of Incorporation
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The Articles of Incorporation is the legal document that governs the structure of your
corporation.
They can be submitted to the Provincial, Territorial, or Federal Government of Canada which
establishes a business in Canada.
In most cases, a percentage of ownership is required to be either Canadian Citizens or
Permanent Residents. For example, with an Ontario and Federal incorporation, 25% of the
individuals listed as directors are required to be a Canadian Citizen or Permanent Residents.
The following information is required to file a Articles of Incorporation:
o A name of business – can be word name or numbered company
o Registered head office
o Number of directors
o Names and addresses for directors/shareholders for the Articles of Incorporation
o Directors citizenship status
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Share structure and provisions
Any restrictions for business activity and share structure transfer
Class of shares and maximum number of shares of each class
The rights, and restrictions of each class of shares
Share Structure and Shareholders
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Articles of Incorporation are required to set out the classes of shares and maximum amount of
shares that a corporation is authorized to issue.
Common shares are shares of ownership that afford their holders voting rights. They are issued
to the business owners as proof of the money they have paid into a company.
There are no limit to the class of shares that can be set out in the articles. If there are only one
class of shares, those shares must have:
o The right to vote;
o The right to receive money paid to them out of the company’s earnings after tax in
return for using their capital; and
o The right to receive the remaining property of the corporation after its dissolved
If there are more than one class of shares, each of the three rights have to be assigned to at
least one class of shares.
Generally, unless otherwise stated within the articles, each share in the corporation entitles the
shareholder to one vote. The larger the number of shares a shareholder has, the larger the
number of votes that person has.
A person can buy shares that haven’t been previously issued to anyone yet, or buy shares from
an existing shareholder and have the corporation register the transfer.
The shareholders' liability in a corporation is limited to the amount they paid for their shares;
shareholders are usually not liable for the corporation's debts.
Board of Directors
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Directors are responsible for supervising the activities of the corporation and making decisions
regarding those activities.
Generally, the directors are elected by the members to represent the shareholders and a
corporation must have at least one director. The number of directors is specified in your articles
of incorporation. Shareholders elect directors at the shareholders' meeting by a majority of
votes. An individual can be the sole shareholder, director and officer of a corporation.
At least 25% of the directors of a federally registered corporation must be Canadian residents. If
a corporation has fewer than 4 directors, at least of them must be a Canadian resident.
For provincially registered corporations, at least 25% of the directors of a corporation other than
a non-resident corporation shall be resident Canadians, but where a corporation has less than
four directors, at least one director shall be a resident Canadian.
A Lawyer’s Role
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A lawyer can help a company decide if incorporating a company and what corporate structure is
right for your specific needs.
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They will obtain the articles of incorporation, any by-laws that have been drafted, and any other
documents that are relevant to the company. These documents will give the lawyer a better
understanding of the rights and obligations of directors, and shareholders of the corporation
and how to move forward in addressing the company’s objectives.
A lawyer can draft a shareholders agreement, assist with the corporate structure of the
company including who to appoint as directors, and how shares and classes of shares should be
distributed. The short-term and long-term goals of the company will be considered and planned
out accordingly.
Risks will be identified and dealt with within the provisions of the shareholder’s agreement, and
articles of incorporation to avoid potential disputes, how a company is governed, who can make
decisions on the company’s behalf, and how to settle disputes when they arise.
They will also ensure that all deadlines are met in a timely manner, including those of filing
annual filings, and annual corporate governance requirements. Without this, the company
could face strict financial penalties or even shut down.
Federal Incorporation
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Any business and not-for-profit operating in Canada can incorporate federally. Benefits of
federally incorporating include the right to use your name across Canada, limited liability, lower
corporate tax rates and better access to capital and grants.
Corporations Canada is the branch of Industry Canada that administers the Canada Business
Corporations Act (CBCA) and the office where all filings, such as articles of incorporation, are
made. It has offices in Vancouver, British Columbia; Ottawa, Ontario; Montreal; and Toronto.
Incorporating your company federally is a 4 step process:
o Name the corporation – this could be either a word name, or numbered company.
o Create articles of incorporation – for these, you will first need to determine share
structure, your corporation’s number of directors, restrictions that may be set for your
business or activities, and any other related provisions. You can select either basic
corporation, which is for those incorporating under a numbered company, or custom
incorporation, for those who wish to name their company.
o Establish the initial registered office address and first board of directors – every
incorporated business must have a registered office and a board of directors. The
registered office is where you keep your corporate records and where official
documents will be served on the corporation. Each member of the board will be
identified, including their full name, address, and if they are a resident of Canada.
o Submit and pay the fee of $200 if it is completed online, and $250 if done via email or
mail
To add to or modify the articles of incorporation for a federally incorporated company, you must
file a Form 4 – Articles of Amendment with Corporations Canada. If the change involves a name
change, a name search must be completed. If you are changing the address of the company,
you must file a Form 3 – Change of Registered Office Address, and if you are making any changes
to the directors, you must file a Form 6 – Changes Regarding Directors.
Provincial Incorporation
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Incorporating provincially means your business will be able to operate only in that jurisdiction
and you will have name protection only in that jurisdiction.
To incorporate a business corporation in Ontario, you must file Articles of Incorporation and
supporting documents with the Ministry of Government and Consumers Services. This can be
filed electronically via the internet through a Service Provider approved by the Ministry, overthe-counter in person, or through mail. The online process can be completed and approved in 1
day, or other means will take about 10 days to be processed and completed.
The following documentation is required:
o The Articles of Incorporation Form – obtained by the Ministry of Government and
Consumers Services online, completed in duplicate with original signatures on both
documents. You can select either basic corporation, which is for those incorporating
under a numbered company, or custom incorporation, for those who wish to name their
company.
o Ontario-based NUANS search for the proposed name (not necessary if incorporating
under a numbered company) – this is a computerized search that compares a proposed
name and trade-marks with a database of already existing company names and trademarks and produces a list of similar names – this is completed any time someone
registers a business in Ontario, regardless of incorporating
o A fee of $360.00, payable to the Minister of Finance
o Covering Letter – giving contact name, return address, and telephone number, and may
also include a future date for incorporation
Name search – the NUANS search report must be completed more than 90 days prior to the
submission of the articles. This can be done online for a fee. It is the responsibility of the
shareholders to ensure that the name for the business complies with the Business Corporations
Act. The words “limited”, “incorporated”, or “corporation” or abbreviations must be a part of
the name of every corporation. The same of the business must be unique and not identical to
another business name, unless the business operated outside of Ontario jurisdiction, or unless
the other business ceased business activities in at least 10 years, the corporation was dissolved,
or changed names.
For a provincially incorporated company, you must file the appropriate amendment forms for
the province. For example, you must file an Articles of Amendment Form 3 Corporations Act
with Service Ontario for any changes or amendments to the Articles of Incorporation.
Federal vs. Provincial Incorporations in Canada
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The differences between the two methods are:
o Protection of company name rights
o Ability to conduct business in all provinces
o The overall costs to initiate and renew incorporation
Federal incorporation gives your business increased protection and wider rights to carry on
business throughout Canada. You will be able to do business across Canada, regardless if some
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other company is already using a similar name. This is not the case with provincial
incorporation, you will only be entitled to operate your business in that jurisdiction.
Federal incorporations require more work maintain annual corporate filings required by all the
provinces and although the initial fee is lower, may require additional funds to register your
company throughout the provinces and for the cost of the additional annual required
paperwork.
Corporate Tax Implications
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Incorporating your business may lead to lower taxes depending on your circumstances and
where your business operates. Once the business generates more income than you need for
living expenses, incorporating can save you money. Corporations can also choose a fiscal period
other than a calendar year for calculating and paying taxes.
Additional costs and paperwork can be a disadvantage. The paperwork involved with
corporations is more intricate and requires yearly filing with multiple entities. It does require
ongoing paperwork to continue to operate. Annual financial statements and tax returns will
need to be prepared, in addition to annual minutes and resolutions.
Owning a corporation will force you to file two tax returns, a corporate T2 and a personal T1. It
has been advised that you should obtain a good accountant when setting up your corporation as
one is needed to ensure that all regulations are followed. Too many inexperienced accountants
have been used by many which results in frozen bank accounts, and even funds seized if filings
are not completed correctly and on time. Ensure that all bank accounts are separated from the
individual shareholders.
Corporations carrying on business in Canada can claim the small business deduction. An
individual can claim the federal small business deduction on business income up to $500,000
and defer tax on any income left in the corporation.
The effective rate of general federal tax is 15%. For corporations claiming the small business
deduction, the small business tax rate is at 9%. Provincial income taxes have 2 rates – a lower
rate that applies to the eligible income for the federal small business deduction, and a higher
rate that applies to all other income. In Ontario, the lower corporate income tax rate on the first
$500,000 of active business income has been reduced to 3.2%.
If you draw a salary from the corporation, the usual deductions for employees will be made
from your paycheques and remitted to the CRA. These deductions are for employment
insurance and income tax. In addition to this, corporations may be required to collect and remit
HST and payroll tax. From the corporation’s standpoint, the employment income can be
deducted as an expense from business income before taxes are applied.
If you own shares in a private corporation, you can receive dividends. If you receive dividends,
you will not be able to use the RRSP deduction to reduce taxable income. However, because of
the dividend deduction, you will pay less personal income tax than if you were paid a salary.