Federal or Ontario Incorporation: Which is right for your business?

By Camdin Kingsbury and Jide Babalola

When starting or restructuring a business, one of the first decisions you will face is whether to incorporate or continue federally under the Canada Business Corporations Act (“CBCA”) or provincially, in Ontario, under the Ontario Business Corporations Act (“OBCA”). Both jurisdictions of incorporation create a separate legal entity and provide limited liability protection. However, they differ in compliance requirements, name protection, territorial scope, and other aspects. Having a comprehensive understanding of these distinctions is essential to choosing the incorporation structure that best suits your business goals.

Key Considerations

When deciding between federal and Ontario incorporation, business owners should consider:

• Scope of Operations: Does the business intend to operate solely in Ontario, or across multiple provinces or territories?
• Name Protection: How important is nationwide protection to the business name?
• Cost and Compliance: What level of ongoing administrative and filing requirements is manageable for the business?

As a note, regardless of the jurisdiction of incorporation, all corporations must maintain proper corporate records, including bylaws, annual resolutions, and ledgers/registers.

Federal Incorporation

Federally incorporated corporations can carry on business anywhere in Canada and may establish their head office in any province or territory they so choose. Once incorporated federally, you are required to file an annual return with Corporations Canada. Federal corporations carrying on business in Ontario must also register extra-provincially in the province and file annual returns with the Ontario Ministry of Public and Business Service Delivery. In addition, under the CBCA, federal corporations must maintain an Individual with Significant (“ISC”) Register, which lists individuals who own or control 25% or more of the corporation's shares. Federal Incorporations ISC Registers are made publicly available. Therefore, federal incorporation offers the added benefit of enabling nationwide operations but also entails greater compliance obligations and costs.

One considerable advantage of federal incorporation is enhanced name protection. Business names are subject to a stricter name approval process because they are reviewed at the national level and must be distinct across Canada. Once approved, the business name is protected nationwide. This is appealing to businesses seeking to expand beyond a single province/territory.

Federal incorporation comes with a director residency requirement. Under section 105(3) of the CBCA, at least 25% of the directors of a corporation must be resident Canadians, unless the corporation has fewer than four directors, in which case at least one director must be a resident Canadian. This is an important consideration for foreign business owners or internationally controlled businesses wishing to expand into Canada.

Ontario Incorporation

Incorporating in Ontario under the OBCA is well-suited to businesses that wish to operate only within Ontario. Ontario corporations are required only to file annual returns with the Ontario Ministry of Public and Business Service Delivery, resulting in fewer ongoing administrative compliance requirements and costs. Family-owned and small-to-medium-sized businesses often favour this simplicity. Ontario Corporations are also required to maintain an ISC register under the OBCA; however, the ISC Register is only kept in the corporation's minute book and is not made publicly available.

Business names registered in Ontario are protected only within Ontario. If a business later wishes to expand into another province or territory, it must register extra-provincially and confirm that its business name is available in the new province/territory. If the business name is unavailable, the corporation must operate under a different name in that jurisdiction. 

Unlike the CBCA, the OBCA does not impose a director residency requirement, making Ontario incorporation attractive to foreign business owners and internationally controlled corporations wishing to establish a Canadian presence.

Concluding Thoughts

Overall, there is no universal “right” choice between federal and Ontario incorporation. The appropriate option depends on your business’s operations, growth plans, ownership structure and tolerance for ongoing compliance requirements. The advantages and disadvantages of each should be carefully weighed before ultimately making the decision.

The knowledgeable lawyers at Sorbara Law can assist in determining the best incorporation route for your business to ensure you achieve your goals now and into the future.