Incorporation of the joint stock company: federal or provincial law?

On February 3, 2019, Posted by , In Business Cases,En, By ,,,, ,

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Many of our clients willing to create a company do not know which legislative regime is right for their business, nor how to choose it, between the federal regime under the Canada Business Corporations Act or the provincial regime under the Business Corporations Act(Quebec)? Any entrepreneur will often come to ask himself this question. If you are one of them, this article will help you better understand which law suits your business best. .

Incorporation fee

The formalities regarding the creation of the company are relatively similar in both laws and can be quickly done online.

Incorporation fees are expenses related to the creation of the company. In Quebec, they must be distinguished from the registration fees associated with the registration of the corporation with the Registraire des entreprises du Québec (REQ). A company incorporated under the Quebec law is automatically registered and will not pay those fees, whereas a federal company looking to do business in Quebec will.

The head office

Quebec law requires the head office to be at all times located in Quebec, while the Canadian law allows it to be established anywhere in Canada.

Contrary to popular belief, whether the company is governed by Quebec or federal law, it will be able to conduct its business all across Canada and the entire world. A corporation incorporated under the Quebec law will not be limited to Quebec territory regarding its activities. The legal restrictions abovementioned only concern the address of the registered office but not the rest of the establishments of the company.

Company Name

Under both laws, it is possible to choose a numbered company (for example, 1234-5678 Québec Inc. or 12345678 Canada Inc.

Otherwise, a name in letters is subject to specific regulations under both the federal and provincial regime. The restrictions are relatively similar except as regards the language used for the name.

At the federal level, the name may be in one of Canada’s two official languages ​​(English or French) or both. It is mandatory to file a name search report called the “NUANS Report”, which ensure the availability of the name in Canada and must be dated less than 90 days. This service is offered by the Government of Canada subject to fees.

At the provincial level, the Charter of the French Language imposes different restrictions and corporation must respect the following obligations regarding the choice of their names:

  • the name has to be in French or if it is an invented word, one must be able to express its French origin; or if not applicable
  • a French descriptive word must be added to the English or foreign word or name, such as “Compagnie” or “Restaurant”; or
  • the name is a registered trademark in Canada (not necessarily in French).

Note that when a federal corporation wishes to do business in Quebec, its name must comply with above-mentioned linguistic restrictions. The same applies with respect to any other names under which the corporation conducts its activities in Quebec.

Therefore, it is recommended to take these regulations into consideration while incorporating your company and in your choice of regime of incorporation.

Share Capital

Federal law requires that all shares to be paid in full before being issued. At the provincial level, it is permitted to issue shares without being fully paid and to provide for payment calls to claim the money owed by the shareholders to the company.

On the other hand, the provincial system operates the issuance of at least one action during the organization of the company, which is not the case at the federal level.

Board of Directors

The federal system requires that at least 25% of the board of directors be Canadian residents. The term “Canadian residents” is defined by law as a Canadian citizen or a permanent resident ordinarily residing in Canada. At the provincial level, these criteria of nationality and residence are not prerequisites for being appointed as a director.

Shareholding

Shareholding is not subject to restrictions regarding the shareholder’s nationality. However, this factor may be detrimental to obtaining Canadian-controlled private corporation status. For more information on this matter, please find on this blog another articleto this effect.

Under the Quebec law, a specific regime for the sole shareholder is provided, in the event that all the powers of the board of directors have been removed in his favor. The decision-making procedure was simplified and adapted to the situation of the sole shareholder. Thus, all actions taken by him on behalf of the company deemed to be authorized, he may choose not to appoint a director or even an auditor, he is not required to comply with the provisions of the Act regarding shareholder meetings, meaning all decisions may be approved by written resolution, and finally the company can be dissolved solely by a written declaration signed by the sole shareholder. Under the federal law, no shortcut was intended for the sole shareholder and the latter must comply with all the formalities required by law.

Moreover, federal corporations with more than 50 shareholders are required to file a proxy circular prepared by management to solicit proxies from shareholders prior to a shareholder meeting. This circular provides shareholders with information about the governance of the corporation and the issues to be voted on. It must be communicated to each director, shareholder and, if applicable, the auditor.

Be aware that the two laws may be interchanged, from the provincial to the federal and vice versa, subject to compliance with the formalities provided for in each of the Acts and the payment of the costs related to such an operation. Nevertheless, although this article presents the main differences between Quebec law and federal law, it does not constitute an exhaustive list of all the elements that may come into play in the essential choice of the articles of incorporation. The assistance of a lawyer is always advised to guide through the process of incorporating your corporation, do not hesitate to contact Sabrina Leung,  Charlotte Tainturier or one of CMKZ’s lawyers specialized in corporate law.

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