Federal vs Provincial Incorporation in Canada

Nov 8, 2023

Canada has an option to incorporate either federally under the Canada Business Corporations Act or provincially under a provincial Business Corporations Act, and this system of concurrent jurisdictions creates lots of confusion among incorporators.

Geographical limitations on operations of a corporation – there is no difference between provincial or federal corporations and both types can operate anywhere in Canada and abroad.

There are also no differences in the tax rates that apply to federal or provincial corporations. The taxation system in Canada is based on a provincial level whereas corporate income tax consists of a federal and a provincial portions of income tax. Every corporation, federal and provincial, would declare the province of their residency and would apply the tax rate accordingly. Therefore for example Ontario Corporation and a federal corporation with its head office registered in Ontario would be paying identical tax rates based on the Ontario tax rates.

A federal corporation in Canada

A federal corporation will provide slightly better protection not the corporation’s name since it will prevent anyone else from being able to register same or confusingly similar name across Canada, while a provincial corporation will protect that name only within the same province.

Although the corporation’s name will be reserved for the federal corporation across Canada it will not prevent others from operating a business under the same name.

There is a mandatory requirement in some of the jurisdictions including federal to appoint at least 25% directors as Canadian citizens or Permanent Residents.

It is important to emphasize that this requirement applies only to the directors and not shares of a corporation, meaning that 100% of the shares could be owned by non-resident incorporators, while 25% of directors will be Canadian citizens.

For Canadians incorporating in Ontario, federal incorporation will probably be the best solution since it will be the cheapest and the most efficient way to register. For Canadians incorporating anywhere but in Ontario, the provincial incorporation would be a more cost-efficient and streamlined way to incorporate. Unless you plan to operate your business outside of Canada, and work with international government organizations and governmental institutions, then incorporating federally might bring you the benefit of all the documents being issued by the government of Canada – bearing the Canadian flag, issued by Corporations Canada, etc. therefore giving you the benefit of the Canadian business reputation around the world.

A non-resident or a foreign resident or a person who is in Canada with a work permit would prefer Ontario (or some other province) incorporation since this type of incorporation does not need to appoint a Canadian director, so no need to rely on someone else in the management of your business (if you plan to incorporate anywhere other that Ontario, BC or Alberta – check what are the requirements in that province or contact us to verify it).

This cancellation of the Canadian director’s requirement in Ontario, in my opinion, made Ontario incorporation as the most beneficial and advantageous type of incorporation for non-residents.

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