Business Formation & Start-Up

Pros

Incorporation under the Canada Business Corporations Act, R.S.C. 1985, c. C-44 (CBCA) provides the following advantages:

•   A CBCA corporation can carry on business as of right across Canada. This includes the right to enter and carry-on business in any Canadian province or territory under its corporate name (section 15(2), CBCA).
•   CBCA incorporation provides a common legal platform known throughout Canada (with the greatest recognition internationally).
•   The CBCA includes a highly flexible statutory arrangement provision (section 192, CBCA).
•   The CBCA no longer contains financial assistance restrictions (whether related-party or share purchase).

About 50% of the largest 200 non-financial corporations in Canada are incorporated under the CBCA.

Cons

Incorporation under the CBCA has the following disadvantages:

•   At least 25% of the directors must be resident Canadians (section 105(3), CBCA). A higher proportion applies in some industries (section 105(3.1), CBCA).
•   A CBCA corporation does not qualify for flow-through treatment under the US Internal Revenue Code.
•   The CBCA prohibits a:
•   Subsidiary from acquiring shares in its parent corporation.
•   Parent corporation from allowing its subsidiary to hold shares in the parent.
•   Unless it obtains an exemption from the Director under section 151(1) of the CBCA, a CBCA corporation must solicit proxies if it has more than 50 registered shareholders even if it is not a reporting issuer.

Pros

Incorporation under the Ontario Business Corporations Act, R.S.O. 1990, c. B.16 (OBCA) provides the following advantages:

•   It is generally easier to clear a corporate name under the OBCA than under the Canada Business Corporations Act, R.S.C. 1985, c. C-44 (CBCA).
•   OBCA incorporation avoids the additional cost of filing an annual return under the CBCA (although the annual return may be filed electronically under the CBCA for only $20 a year).
•   A CBCA corporation must solicit proxies where it has more than 50 registered shareholders (while an OBCA non-offering corporation is not required to solicit proxies regardless of the number of registered shareholders).
•   Professional corporations for lawyers, paralegals, public accountants, medical doctors, dentists, veterinarians and social workers practicing in Ontario are only available under the OBCA.
•   The OBCA no longer contains financial assistance restrictions (whether related-party or share purchase).

Cons

Incorporation under the OBCA has the following disadvantages:

•   Incorporation under the OBCA offers little name protection within, and no name protection outside, Ontario.
•   The incorporation fee for articles of incorporation filed electronically under the OBCA is $300 (compared with $200 to file electronically under the CBCA).
•   Like a CBCA corporation, an OBCA corporation does not qualify for flow-through treatment under the US Internal Revenue Code. Only Alberta, British Columbia and Nova Scotia have types of unlimited liability corporations that qualify.
•   At least 25% of the members of the board of directors must be resident Canadian as defined in the OBCA (section 118(3), OBCA), which is also the minimum requirement under the CBCA but not under the laws of the territories and several sister provinces including British Columbia, New Brunswick, Nova Scotia and Québec).
•   Except in rare circumstances, the OBCA prohibits:
  •   a subsidiary from acquiring shares in its parent corporation; or
  •   a parent corporation from allowing a subsidiary to hold its shares.

Corporations cannot generally impose restrictions on the issue of shares of any class or series, unless the restrictions are authorized by its articles. However, a unanimous shareholder agreement may impose controls on the issue of shares

Shares of series of the same class must participate ratably in respect of the payment of arrears of cumulative dividends, declared non-cumulative dividends and return of capital on dissolution or liquidation, if these claims are not paid in full (section 25(2) and (3), Business Corporations Act, R.S.O. 1990, c. B.16). Any other restrictions on a class or series of shares must be set out in the articles or a unanimous shareholder agreement.