FREQUENTLY ASKED QUESTIONS
What’s the difference between an Ontario company and a federal company?
You can think of it as two levels of government that do the same thing. The federal government incorporates companies through Corporations Canada and the Ontario government incorporates companies through the Ministry of Government Services.
There are a few differences to consider:
(1) name protection – you may get more name protection across Canada with a federal company. Keep in mind if you’re really concerned about your brand, you should look into a trademark (which can be done with a federal or provincial company).
(2) extra provincial registration – if you need to register as an extra provincial corporation in another province, it may be easier to effect the registration if you’re starting off with a federal company.
(3) portability – if you may be moving out of Ontario, we sometimes recommend a federal company because it’s more easily “transportable” – meaning that you just change the registered office address and file the extra provincial registration in the province where you’ll be moving.
That being said, 80% of our companies are Ontario companies, they’re quicker and easier to do.
Why is an Ontario company more expensive than a federal company?
The government filing fee for an Ontario company is $100 more than for a federal company. We pass this savings on to you. However, you shouldn’t let that cost difference govern your decision. Keep in mind that, unlike an Ontario corporation, there’s an additional annual filing for a federal corporation (called an annual return) which is separate and apart from your tax return and there is a $20 cost to file the return. This annual filing offsets the initial cost savings over time.
What is a Business Number and how do I get one?
Your Business Number (BN) is the root of all your tax accounts (i.e. HST, payroll, corporate tax, import/export). Your BN and corporate income tax number are assigned automatically by Canada Revenue Agency (CRA) when you incorporate. For federal corporations, your business number is now sent to you by Corporations Canada at the time of incorporation along with your other incorporations documents. For Ontario companies, you will receive a letter in the mail from CRA with your Business Number in approx. 7-10 days following the incorporation or you can obtain it sooner online or by calling CRA at 1-800-959-5525 and speaking to a live agent.
HST and Payroll Numbers. How and when to get them?
Like your Business Number, an HST # and Payroll # are also free to get. There is no need to pay anyone to obtain these accounts for you. All you have to do is call Canada Revenue Agency (CRA) at 1-800-959-5525 and speak to a live agent. You’ll be assigned the accounts you need on the spot, free of charge. We recommend that you get an HST # or Payroll # when you need them but not before. Remember once you get these numbers, you’ll have regular filing obligations.
HST. If you expect to generate more than $30,000 in sales, you’ll generally have to charge and remit HST. Keep in mind that from the HST you collect, you can deduct HST that you paid out on your purchases and are generally only required to remit the difference to CRA.
Payroll. If you are hiring employees, including paying yourself as an employee, you will need to obtain a payroll number and remit source deductions to CRA.
We recommend that you talk to an accountant about the tax numbers you’ll need in your circumstances. If you’d like us to introduce you to an accountant in your area, feel free to contact us.
What are the tax advantages of incorporating?
We usually talk to clients about two main tax advantages:
(1) the small business deduction – this effectively lowers your corporate tax rate to about 15.5% on the first $500,000 that your company makes each year. It’s available on your active business income only (not income from passive investments) and is available to Canadian Controlled Private Companies (referred to as CCPC’s). Keep in mind that this is a deferral only meaning that once you pull money out of your company it becomes your personal income and is taxed at the marginal tax rates on your T1 return. To the extent that you can leave the earnings in the company, the deferral “lives” and you can use the additional money to grow and invest in your business.
(2) the lifetime capital gains exemption – if you sell your shares down the road, you may be able to take approx. $800,000 off the table tax free. The exemption is available for qualifying small business corporation shares and there are a few criteria you’ll need to meet.
There may be other tax benefits and you can always consult an accountant. If you need a referral to an accountant in your area, just let us know.
What does limited liability mean?
At law, a corporation is considered a separate legal person and can enter into contracts, borrow money and own property. As the theory goes, if your corporation is a party to a contract, the corporation alone should be liable for a breach of that contract. Or, if your corporation borrows money, it alone should be responsible to repay the loan. So, the concept of limited liability means that you personally are separate from your company and are not generally responsible for its debts, obligations or liabilities.
Limited liability is a general rule and there are definitely exceptions in the real world. For example, if your company borrows money from a bank, the financial institution usually requires that you personally guarantee repayment of the loan. Or, if your company wants to lease commercial space, the landlord may ask that you personally guarantee payment of the rent. There are ways to minimize personal guarantees, but it’s important to be aware that the limited liability protection of a corporation is not absolute.
You should also be aware that directors of a company have personal responsibility for certain debts and liabilities of the company. Specifically, if your company owes money for taxes or employee deductions to the government, you as a director can be held personally liable for these amounts.
How can I limit liability?
Below are three ways to help limit liability in your business.
(1) contractual disclaimers – consider having a customer agreement drafted for your business that includes certain disclaimers and limitation of liability clauses. Should you include a general disclaimer? Are you prepared to give certain assurances in relation to your product or service? Also, if there is a claim made by a customer, do you want to limit your maximum liability to a certain dollar amount?
(2) insurance – consider insurance for your business. There are different types of insurance you may want to look into depending on the nature of your business including auto, property, product, professional, errors and omissions and general liability coverage.
(3) incorporation – consider incorporating. You can limit liability by operating your business through a separate legal entity. There are some exceptions and limitations to the concept of limited liability, which we would be happy to discuss with you.
What should I use as my registered office address?
You’re not allowed to use a P.O. box as your registered office address. Most people who don’t have an established office use their home address as their registered office address to start. If you decide to use your home address, keep in mind that you don’t need to use this address as your business mailing address and you don’t need to promote this address to the public. You can also easily change your registered office address down the road.
What is the difference between Inc, Ltd and Corp?
From a legal perspective in Ontario, there is no difference. They all take you to the same place –– an incorporated company. You’re allowed to choose your legal ending which basically involves 6 choices (Inc. or incorporated), (Ltd. or Limited) or (Corp. or Corporation). FYI – Inc. seems to be the most popular nowadays.
Do I need to come and see you in person to incorporate?
No, in fact most of our incorporations are done over the phone and by email. We’ve created an efficient process where you speak to a lawyer about the incorporation and when the job is done, all of your corporate documents are sent to you by email. If you prefer to meet us in person, you can set up an appointment and come by the office.
How long does it take to incorporate?
For Ontario corporations, the entire process can be completed within 2-3 business hours. That’s because the incorporation documents are filed automatically. For federal corporations, the process takes a bit longer. The reason is that the application goes in front of an examiner who will review the application and in particular the NUANS name search to make sure there are no conflicting names out there. Assuming there are no issues with your chosen name, federal companies are usually completed in a day or two.
How do I open a corporate bank account?
You’ll need to make an appointment with a small business advisor at your branch. They usually don’t open corporate accounts at the teller. Your banker will need to see the articles and certificate of incorporation, which you can print off or forward by email in advance of the meeting. Anyone who will have signing authority should attend at the bank as they will have to sign the signature card and other documents.
You may want to talk to the bank about a corporate credit card for a couple of reasons: (1) you probably don’t want to write cheques out of the account every time you go to Staples to buy a highlighter; (2) you’ll minimize bank charges by reducing the number of outgoing transactions from your account: and (3) you’ll build up your companies credit rating over time by successfully paying off your credit card bill.
Do I need a corporate seal?
A corporate seal is not legally required. Both the Ontario Business Corporations Act and Canada Business Corporations Act make a corporate seal optional – the exact language used is “A corporation may, but need not, have a corporate seal”. I’ve never used a corporate seal in all my years of practice. It’s one of these “legal dinosaurs” that’s been carried over from days gone past. Bank’s used to require that certain documents be sealed, but not so much anymore. Given that it’s not required and hardly ever used, we don’t include a corporate seal as part of our standard incorporation package to help keep the cost down. Remember that you can always get a corporate seal if you need it down the road.
Do I need a physical minute book?
A physical minute book is not legally required. The Ontario Business Corporations Act states that corporate records “may be kept in a bound or looseleaf book or may be entered or recorded by any system of mechanical or electronic data processing or any other information storage device”. Note that the Canada Business Corporations Act includes a similar section for Federal Canadian corporations. In other words, keeping your corporate records in the form of PDF documents on your computer is sufficient. There may be reasons why you want a physical minute book as well and we can definitely provide one.
What is the difference between shareholders, directors and officers?
Shareholders own the company (receive dividends or build equity if things go well), the shareholders elect the directors to manage the business and affairs of the company (the people who sit around the board room table discussing the bigger picture), and the directors in turn appoint officers to run the day to day business (the people on the street carrying out the marching orders). In smaller privately held companies (the one that you’ll first incorporate), the same person can wear all 3 hats. So, when you’re first starting up, you could be the sole director, officer and shareholder.
What are the different kinds of shares?
There are two basic types of shares:
Common shares – these are the equity shares. As your business grows in value, these shares grow in value. They are usually entitled to receive dividends in any amount and the remaining assets and property of the corporation on liquidation or dissolution. They can also be voting or non-voting.
Special or Preferred shares – these are usually fixed value type shares meaning that they are only entitled to receive a fixed amount of money when they are “redeemed” or sold back to the company. They sometimes have the rights to receive dividends in any amount and sometimes dividends are capped at a certain rate (i.e. 8% per year). Other provisions you see with special shares include redemption and retraction rights, price adjustment clauses and convertible features. They can also be voting or non-voting. They are sometimes used for tax-based transactions or issued to investors.
There are really two schools of thought. Some lawyers/accountants like to include a whole bunch of different classes of shares in anticipation of using these shares down the road. Other lawyers/accountants like to include what is needed to get going and then create different classes of shares down the road if and when needed by amending the articles. It’s really just a matter of choice and is something that we’d be happy to discuss with you.
How should I choose my Fiscal Year End?
Unlike individuals, corporations can choose their year-end for tax purposes (known as a fiscal year). For individuals, your tax year-end is December 31st and your T1 return is due April 30th – there’s no choice. For corporations, here are a couple of thoughts:
(1) wait the longest time before filing your first return – if you want to wait the longest time possible before having to file your first income tax return, you could choose the end of the month before the month you incorporated (i.e. if you incorporated on April 15, you could choose March 31st as your fiscal year end). This means you’d have almost a full year before you hit your first fiscal year end.
(2) choose a calendar year end – you may want to look at your financial picture from a calendar year perspective and this would also help you coordinate the filing of your personal return and corporate.
(3) talk to your accountant first – you don’t have to make the decision right away and your accountant may have preferred times during the year when they can better handle your work.
Do the directors have to be Canadian?
For Ontario and Federal corporations, there is a resident Canadian director requirement. Some provinces, like BC don’t have this requirement. The Ontario Business Corporations Act states that “At least 25% of the directors … shall be resident Canadians, but where a corporation has less than 4 directors, at least 1 needs to be resident Canadian.” There is a similar provision in the Canada Business Corporations Act for federal companies. So, if one person is on the board, that person needs to be resident Canadian and, if two people are on the board, at least one of two needs to be resident Canadian. We understand “resident Canadian” to mean that the person is a Canadian citizen or has PR status and ordinarily lives in Canada. If you do not have this status, you can still incorporate an Ontario or federal company so long as you can find a resident Canadian to sit on the board of directors with you (like a close friend or relative). If that person agrees to act, you may have to obtain directors insurance or provide an indemnity to them (i.e. agree to cover their costs, expenses or losses) if they encounter liability through no fault of their own while acting as a director of your company.
What are the elements of a corporate name?
A corporate name generally has three parts:
Distinctive Element. This is the unique part of your name that identifies your particular company (i.e. “Ordower”);
Descriptive Element. This part of the name is meant to describe the nature of your business (i.e. Law). Not all companies include a descriptive element in their name, but doing so may also help you distinguish your name from other similar names that are out there.
Legal Element. This refers to one of the permitted legal endings (i.e. Ltd., Corp., Inc., Limited, Corporation, Incorporated, or in our case, Professional Corporation).
What happens to my shares when I die?
When you pass away, your shares will form part of your estate and will be dealt with in accordance with your will or, if you don’t have a will, in accordance with the rules of intestacy (which just means dying without a will). We recommend that our clients have wills – even if they’re basic and simple to start. The general set up for a married couple is for both spouses to have wills that “mirror” each other. Keep in mind that you can always change your will over the course of your lifetime and many people do.
If you’re in business with a partner and happen to have a shareholders agreement, some of these agreements provide for a sale of shares on death – in order to deal with issues of control and tax planning. If this happens, your estate would receive the proceeds from the sale rather than the shares themselves.
If you have any questions or would like to discuss putting a will together, please contact us.