Federal Incorporation or Provincial Incorporation – Which is Better?

In this article, Toronto Business Lawyer, Antonio DiMinno, of DiMinno Rizzi Lawyers, provides a complete guide to choosing between provincial or federal incorporation.

Are you a sole proprietor looking to take your business to the next level? Incorporating your business can provide many benefits, including limited liability, tax advantages, and the ability to raise money and enhance brand recognition.

However, when it comes to incorporating a business, the decision between provincial and federal incorporation can be a difficult one.

Choosing the right type of incorporation is crucial for the success of your business. It’s important to weigh the pros and cons of federal and provincial incorporation and make an informed decision.

By the end of this article, you will have a clear understanding of which option is best for your business. Let’s dive into the details of federal vs provincial incorporation.

What Does It Mean to Incorporate A Business?

Why Do Sole Proprietors Choose to Incorporate Their Business?

There are a few key reasons sole proprietors choose to incorporate their business. They are:

Protection From Personal Liability

The most important advantage of a corporation is protection from personal liability

Protection from personal liability means your personal assets, like your personal home and cars, are safe if your business encounters financial or legal issues. Let’s look at a real example to understand this:

Imagine you run a bakery as a sole proprietor. Without protection, if a customer gets sick from your pastries and sues your business, your personal savings, car, or even your home could be at risk to cover the lawsuit’s costs. This is because, in the eyes of the law, you and your bakery are the same entity.

Now, suppose you incorporate your bakery. If a similar lawsuit arises, your personal assets remain separate and protected. The legal responsibility falls on the business itself, not you personally. Even if the business faces financial trouble or debt, your personal assets are shielded.

Incorporation offers a safety net for your personal finances, ensuring they won’t be in jeopardy due to your business’s liabilities or legal troubles.

Tax Advantages of Incorporation

After limited liability, the next largest benefit of incorporating your business are the tax advantages.

Corporations get taxed at a much lower rate than sole proprietors, with an approximate income tax rate of 12% on income up to $500,000. This means that any money that is not taken from the corporation as a salary can be reinvested into the business . In addition, there is a lifetime capital gains exemption which allows you to shelter over $ 883,384 from capital gains tax when you sell the company. There are numerous other tax benefits to incorporating, like income splitting, insurance strategies, and tax grants.

Raising Money

Expanding a business costs money. Eventually, you may need loans, grants, or investors. Sole proprietors face challenges getting funds because some lenders avoid unincorporated businesses, and investors prefer businesses they can buy shares in.

Prestige

When your business is incorporated, you tell the world that your business is professional, legitimate, and that you have all your ducks in a row. This is crucial whether you’re looking to sign on your first big client, attract investors, or exit and sell the business to a third-party buyer.

Click here to learn more about the advantages of incorporation.

Incorporation may also have some disadvantages depending on your circumstances.

What is a Provincial Corporation?

When you incorporate provincially, it means your business operates with limited national reach in the one province or territory where you officially registered your company. If you plan to expand to other places in Canada, it’s possible, but there’s some extra administrative work involved.

When you go for provincial incorporation, your company follows the provincial legislation and corporate laws of your province/territory. Each province and territory in Canada has its own set of rules and regulations for how companies can be incorporated and operate. So, you’ll need to follow the rulebook of the province where you decide to incorporate your business.

So, for example, an Ontario corporation is governed by the Ontario Business Corporations Act, not the Canada Business Corporations Act. The provincial Acts closely follows the Canadian Act, but there are differences and variations that you should be aware of for your province. Our lawyers can help you understand them when the time comes.  

For an Ontario business owner and other business owners who only plan to operate within a specific province and don’t need to do business all across Canada, it’s usually quicker and cheaper to incorporate provincially rather than incorporate federally. When you choose provincial incorporation, you only have to deal with the provincial government’s paperwork to maintain compliance. Provincial incorporation fees are often lower than federal ones, and the paperwork requirements are generally less burdensome.

What is Federal Incorporation

In Canada, when you choose to incorporate federally, a national organization called “Corporations Canada” oversees it, and it offers generally wider protections.

Federal incorporation lets you do business all across the country in every province and territory. You’ll still need to get a business license for each place, but it’s usually easier than doing it with a provincial corporation in a different province.

Even though it’s a federal company, you’ll need to pick a “home” place, which means you’ll have a bit more paperwork and time involved when starting and keeping up a federal corporation.

But for many business owners, the extra cost is worthwhile because of the benefits, which we explain below.

Choosing Between Federal or Provincial Incorporation

Once you have made the wise decision to incorporate your business, the next step is choosing between federal or provincial incorporation. Making the best decision here depends on several factors:

What Is Your Target Market?

Generally, a provincially incorporated company can operate in its home province, but requires an “extra-provincial registration” to do business in other provinces/territories. Federally incorporated companies can do business nationwide. A federal company must still register in each province, but this is much easier as there is less bureaucracy and the process is more streamlined.

If you plan to expand to other provinces or outside of Canada, you should incorporate federally. In our experience, federal corporations are better understood outside Canada and carry a greater level of prestige nationwide and in the US. It is the favored choice for businesses with international suppliers, customers, investors, and partners, emphasizing a broader scope of operations and enhanced business name protection.

Federal and Provincial Incorporation Name Protection

One of the most significant distinctions between federal and provincial corporations lies in business name protection. Opting for federal incorporation grants your business a heightened level of name protection and broader business operations rights. When you federally incorporate your business, it secures the privilege to conduct business nationwide under the same name, even if a similar name is already in use by another company, such as a provincial corporation, in a different province or territory.

During the federal incorporation process, Corporations Canada rigorously examines your proposed business name, requiring it to be distinct and significantly different from existing corporations. Proposed names are often rejected if they lack distinctiveness or if they bear confusing resemblances to established companies. In contrast, provincial incorporation in Ontario accepts proposed business names as long as there are no exact matches already in existence.

Industry Regulations

Depending on your industry and the specific regulatory landscape it falls under, opting for provincial incorporation might prove advantageous. Certain sectors are subject to provincial-level regulations, making provincial incorporation a more suitable choice.

For example, in Ontario, Professional Corporations are typically incorporated exclusively under the Ontario Business Corporations Act (OBCA). Professional Corporations are legal entities that offer professional services and operate under the oversight of professional governing bodies like the Law Society of Ontario, the Royal College of Dental Surgeons of Ontario, or the College of Physicians and Surgeons of Ontario. The eligibility for Professional Corporation status is limited to specific professions, which encompass:

• Engineers
• Dentists
• Social and Social Service Workers
• Lawyers
• Accountants
• Physicians
• Architects
• Veterinarians
• And various other regulated professions.

Residency of Directors

Federal incorporation typically demands at least 25% of a corporation’s directors to be Canadian residents or citizens. However, most provinces (including all Atlantic provinces) don’t have residency requirements for provincially incorporated companies, allowing all directors to be non-residents. This offers flexibility in director selection, regardless of their global location.

Location of Registered Office

Canadian companies incorporated federally can set up their registered head office anywhere in Canada, but moving the head office between provinces or territories needs shareholder approval. Provincially incorporated companies must generally keep their registered office within the province or territory where they’re incorporated.

Share Structuring

Provincial incorporation can provide more share structuring flexibility. Nova Scotia, for instance, allows various company types, including those with unlimited liability. Alberta, British Columbia, and Prince Edward Island also permit unlimited liability firms (ULCs). Unlike limited companies, ULC members have unlimited liability. Federal incorporation permits unanimous shareholder agreements to limit director powers and shift liability to shareholders, but not all provinces offer this option.

Extra Provincial Registration

Even with nationwide name protection through federal incorporation, it’s necessary to secure extra-provincial licenses in every province where you operate. This requirement applies to both provincial and federal corporations operating in multiple provinces or territories.

Corporations must complete the registration process in the provinces where they intend to conduct business. When incorporating federally online, you have the option to simultaneously register it in Ontario, Nova Scotia, Saskatchewan, and Newfoundland and Labrador. This simplifies the procedure for Ontarians incorporating at the federal level. The federal-provincial service, known as the Joint Online Registration System, aims to streamline the process for federal corporations by automatically populating the necessary provincial forms with the information provided during incorporation.

Should you wish to conduct business in a province other than the one where your corporation is primarily registered—using an Ontario Corporation as an example, operating in British Columbia (BC)—you’ll also need to seek extra-provincial registration in that specific province. In the context of BC, your corporation is deemed to be conducting business in the province if it meets any of the following criteria:

1. Actively soliciting business in British Columbia.
2. Having its name or any trade name associated with it listed in a BC telephone directory or featured in any advertisement displaying a BC address.
3. Maintaining a resident agent, representative, warehouse, office, or place of business in British Columbia.
4. Being licensed, registered, or required to be licensed or registered under any BC Act permitting business operations.
5. Owning property in British Columbia.

Costs and Time to Start and Maintain a Corporation

Generally, both a provincial and federal incorporation requires legal fees to create and maintain the corporation. However, a federal corporation requires more annual paperwork, and the filing fees are slightly higher at incorporation.

Thus, in our experience, federal corporations require slightly higher administration costs. A provincial incorporation is usually also quicker to complete. This is the trade-off of having some of the advantages of a federal corporation. So, if you are simply looking to do business in Ontario only, and are running a lean budget, a Ontario corporation may be best for you.

Using a Lawyer to Incorporate Vs. An Online Retailer

Unfortunately, there is a lot of conflicting and false information on the internet concerning the federal and provincial incorporation procedure and what it should cost.

In particular, there are “incorporation retailers” or online incorporation platforms out there that advertise quick and easy ways to undertake incorporation for a few hundred dollars or less. They are able to offer low prices because they don’t actually have lawyers overseeing the incorporation. Rather, they produce template documents using virtual assistants and clerks from overseas who don’t even understand what they are drafting.

Business owners should avoid these companies.  Here’s why

Disclaimer: All number figures are approximate only and may be subject to change. Like all material on this website, this is not financial, legal, or tax advice. Contact a professional for your specific situation. 

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