Incorporate in Ontario and Canada
Everything You Need to Know
Figuring out how to incorporate and understanding all the ins and outs can be difficult. We’ve created this page to try and deal with all the key issues in one place.
If you can’t find the answers here, feel free to contact us anytime. We typically respond to all phone calls and emails within one business hour or less.
Everyone starting a business should consider this question: Should I incorporate at all?
You basically have a few options when starting a business:
- Sole Proprietor
If you go into business by yourself, you can operate as a sole proprietor. You register a business name, get a Business Number, and an HST Number if needed, and you’re off to the races. This is a simple structure and the least expensive option. However, with a sole proprietorship, you are personally responsible for the debts and liabilities of the business. You will also pay income tax on your earnings at your personal marginal tax rate in the same year you made the money. So, the potential liability and tax burden is typically higher.
- General Partnership
If you go into business with others, you can operate as a general partnership. The same considerations apply as above. You will also generally be personally responsible for the debts and liabilities of the partnership whether you created them or not. This means that if your partner borrows money, buys equipment on credit or rents office space, you are personally on the hook as well.
Whether you go into business by yourself or with others, you can incorporate a company. A corporation is a separate legal person at law with all the rights and privileges of a natural person. It can own property, enter into contracts and carry on business.
The decision whether to incorporate is important. To begin, it’s good to know two of the key benefits of incorporating: Tax Advantages and Limited Liability.
- The small business deduction
The small business deduction effectively lowers your corporate tax rate to about 12.5% in Ontario on the first $500,000 you make each year. There are certain eligibility requirements for the small business deduction. First, it’s available on your active business income only (not income from passive investments) and second, it is only available to Canadian Controlled Private Corporations (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 at a lower tax rate.
- The lifetime capital gains exemption
If you sell shares of your business down the road, you may be able to take approximately $866,000 off the table tax free. In other words, you will not have a to pay capital gains tax on the proceeds of the sale up to your lifetime exemption limit of approx. $866,000. As with the small business deduction, there are certain eligibility requirements. Generally speaking, the exemption is available on sale of shares by an individual who has held the shares for at least 24 months. You can read about some of the other eligibility requirements here. Note that if you don’t use the entire exemption amount in one transaction, the balance can be carried forward.
A corporation is considered a separate legal person and can enter into contracts, borrow money and own property. As the theory of limited liability 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 are separate from your company and are not generally responsible for its debts, obligations or liabilities.
Keep in mind that 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, they usually require 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 be aware that the limited liability protection of a corporation is not absolute. You should also know that directors of a company have personal responsibility in certain circumstances. 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.
Along with these two key benefits, there are several other advantages that we have addressed in our blog article, “Top Ten Reasons to Incorporate in Ontario”, including:
- Perpetual Existence
- Advantages when Raising Capital
- Easier to Include Multiple Owners
- Tax Advantages when transferring Ownership
- Avoiding Transitional Expenses Later
In deciding whether to incorporate now or later you will have to weigh the costs and benefits.
In terms of the costs, there is an initial set up fee to incorporate and organize your company. You’ll also be required to file a corporate tax return and deal with other annual compliance requirements.
One strategy is to wait to incorporate until you’re earning enough to take full advantage of the tax benefits. Keep in mind however that moving from a sole proprietorship or partnership to a corporate structure down the road, once your business is profitable, will likely involve costs over and above setting up the new company. Assets may need to be transferred and liabilities assumed. This type of reorganization will require your accountant’s input and the assistance of a lawyer. You’ll likely avoid transitional costs if you incorporate now while your business is just starting up.
Although you may not be able to take full advantage of the tax benefits to start, limited liability protection starts right away and given the other advantages, it may be better to incorporate now rather than wait.
In Canada, there are two levels of government that oversee, manage and regulate incorporations. The federal government incorporates companies through Corporations Canada and, at the provincial level, each province offers incorporations. In Ontario, the Ontario government incorporates companies through the Ministry of Government Services. Basically, there are two levels of government doing the same thing and providing essentially the same product.
However, there are a few differences to consider:
- 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 may want to consider a trademark.
- Extra provincial registration
If you are a Canadian business and you need to register as an extra provincial corporation, it may be easier to effect the registration if you’re starting off with a federal company. Why? Most provinces don’t require that you get another NUANS report when filing an extra-provincial registration for a federally incorporated company.
If there’s a chance you’ll be moving to another province, 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.
Ontario corporations are more expensive initially, but Federal corporations may be more expensive in the long term.
- Filing Fee
The government filing fee for an Ontario corporation is $100 more than for a federal company. And, you’ll have to file a Form 1 initial return with the Ministry for which there is an extra charge.
- Federal Annual Returns
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 currently a $20 cost to file the return each year. Accordingly, the initial cost savings of a federal corporation will be offset by the additional ongoing annual return filing over time.
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 incorporations are usually completed in a day or two.
A corporate name generally has three parts:
- Distinctive Element
This is the unique part of your name (i.e. “Ordower”);
- Descriptive Element
This part of the name describes the nature of your business (i.e. Law). Not all company names have a descriptive element, but it can help distinguish your company if similar names are out there.
- Legal Element
This refers to one of the permitted legal endings. You’re allowed to choose your legal ending which basically involves 6 choices (Inc. or Incorporated), (Ltd. or Limited) or (Corp. or Corporation). From a legal perspective in Ontario, there is no difference. They all take you to the same place – an incorporated company. FYI – Inc. seems to be the popular choice among entrepreneurs!
You can see this breakdown in the sample below:
You can also read about choosing a name on our blog: Business Startup – The First year: Why Choosing a Name is Important and How to Do It.
A business name or trade name allows you to carry on business under that name in the specific province you registered, but doesn’t really offer you any name protection. Whereas a trademark actually offers you name protection – meaning that you may be able to prevent others from using that name.
- Business Name
Business Name/Trade Name is also known as an “operating as” name or “doing business as” name. If you’re a sole proprietor and don’t want to operate under your personal name, you can register a business name, which effectively creates your sole proprietorship. And, if you’re incorporated, and you want to operate under a name other than your corporate name, your company can register a separate business name, which creates a “doing business as” name. In the corporate context, this is especially common for numbered companies (i.e. 1234567 Ontario Inc. dba Jim’s Garage).
A trademark is a combination of letters, words or designs that can be registered with Industry Canada. The entire trademark process can take approx. 2 years to complete. Keep in mind that a Canadian trademark registration only offers you protection in Canada. Check out our blog article on registering trademarks.
This is a common question. Basically,
Shareholders own the company (receive dividends or build equity if things go well). When you go to sell your business, the equity shareholders will be entitled to the proceeds of sale of the business based on their proportionate holdings. 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).
Directors are responsible for managing (or supervising the management) of the business and affairs of the corporation. They essentially make the big decisions such as whether to raise capital, issue shares or declare dividends. Keep in mind that a shareholders agreement can remove certain powers from the directors and put it in the hands of the shareholders.
Officers are appointed by the directors to run the day to day business. The officers are the people on the street carrying out the marching orders.
Shares are the ownership units of a corporation. If only one person owns shares, that person owns 100% of the corporation. If two people each own 100 shares of a corporation, then those two people each own 50% of the corporation and so on.
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 carry the right 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.
In completing your articles of incorporation, you will be required to set out the classes of shares that your corporation is authorized to issue.
You can include multiple classes of Common shares and multiple classes of Special or Preferred shares. In determining how many classes you should authorize in your articles, 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, for things like income splitting, if available, and tax reorganizations. 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.
Keep in mind that where a corporation has only one class of shares, those shares have all the basic rights including the right to vote at meetings, to receive dividends and to receive the remaining property of the corporation upon dissolution.
You’ll include the following in your articles of incorporation: corporate name, registered office address, number of directors (fixed or range), business restriction (if any), share classes and their rights, privileges, restrictions and conditions, restrictions on transfer of shares and other provisions (if applicable).
Check out our blog post for more information on what’s included in your Articles of Incorporation.
Shareholder agreements usually deal with the following: decision making of the board and shareholders, funding obligations, sale events for death, disability, insolvency, default and others, share transfer restrictions, rights of first refusal, divorce provisions such as a shotgun clause, defining roles and responsibilities, restricting competitive activities and maintaining confidentiality and others.
Check out our blog post for more information on shareholders agreements.
For Ontario and Federal corporations, there is a resident Canadian director 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.
Some provinces, like British Columbia, don’t have a resident Canadian director requirement.
When incorporating, you should understand what’s required and what is just an add-on. Two common questions we get asked are: Do I need a corporate seal? And, do I need a physical minute book?
- 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. In our view, it’s one of these “legal dinosaurs” that’s been carried over from days gone past. 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.
- Minute Book
A physical minute book is also not legally required. It is simply used to keep all the records of the corporation that you are required to keep, including for example, minutes of meetings and resolutions, registers of directors and officers, shareholders ledgers, etc. The Ontario Business Corporations Act states:
“Where this Act requires a record to be kept by a corporation, it 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.”
So, it appears that keeping your corporate records on your computer is legally sufficient.
The Ontario Business Corporations Act requires Ontario corporations to prepare and maintain, at its registered office or at such other place in Ontario designated by the directors:
- the articles and the by-laws and a copy of any unanimous shareholder agreement;
- minutes of meetings and resolutions of directors and shareholders;
- a register of directors with names and residential addresses;
- a share/security register setting out the ownership of shares and other securities;
- a register of ownership interests in land; and
- adequate accounting records.
There are similar provisions in the Canada Business Corporations Act.
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:
- 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.
- 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.
- 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.
When incorporating a new company, you will get a business number and may obtain an HST and/or payroll number. It’s important to understand when and why you should get these numbers:
- Business Number
Your Business Number is the root of all your tax accounts (i.e. HST, payroll, corporate tax, import/export). Your Business Number 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 incorporation 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.
- GST/HST Number
Like your Business Number, an HST Number and Payroll Number 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 Number or Payroll Number when you need them but not before. Remember once you get these numbers, you’ll have regular filing obligations.
- When is HST Mandatory?
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.
- When should I get a Payroll Number?
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. When your company starts making revenue, one of the things you’ll want to think about is how you are paying yourself. Generally speaking, you can pay yourself a dividend or you can pay yourself a salary. There are different considerations for each option.
Once you have incorporated, here are a few additional topics to consider:
- Signing the documents
Sign your minute book documents in hard copy (by printing them out) or electronically.
Open a corporate bank account. You’ll need to make an appointment with a small business advisor at your branch and bring your articles and certificate of incorporation. Anyone who will have signing authority should attend at the bank as they will have to sign the signature card and other documents. In addition, 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.
Now may be the time to meet up with a few accountants and find someone you’re comfortable dealing with. This is an important business relationship that will grow over time and having an accountant by your side will help you take advantage of certain tax benefits that may be available. During our initial call we will discuss working with an accountant and put you in touch with some trusted accountants we have worked with before.
Considering insurance can be another way to manage your business risks. There are different types of insurance you may want to look into depending on the nature of your business. Ordower Law can always assist with finding the right insurance agent for you.
- Annual Compliance
Below is a list of the key annual corporate compliance requirements that you will need to manage for your corporation. Note that these are in addition to the requirement of your company to file its tax return (see also Table 1):
- Annual Meeting / Annual Resolutions
Each year the directors and shareholders are required to have a meeting (or sign resolutions in lieu of that meeting) to approve the financial statements of the company, approve the issuance of dividends/bonuses etc., if any, appoint accountants and confirm and ratify other matters.
- Additional Requirement for Federally Incorporated Companies
Federally incorporated companies are also required to file an annual return every year with Corporations Canada. If you have signed up for email notifications with Corporations Canada (which you can do through their online filing centre), you will be notified by email when it is due. This return is NOT related to taxes and is in addition to your corporate tax return. You can also search your federal corporation by following this link. It will indicate when your annual report is due each year.
- Note that failure to file this return for two years in a row will result in the dissolution of your company.
Who to File With
|Corporate Tax Return||
Keep in Minute Book
Certain regulated professions permit their members to operate through a professional corporation. These professions include lawyers, accountants, doctors, dentists and a number of other regulated health professionals. The articles of incorporation for professional corporations have certain restrictions relating to the business that the corporation can carry on. In addition, generally speaking, only members of the profession can be shareholders of a professional corporation.
It is important to note that professionals can’t shield their professional liability to clients or patients by incorporating. They incorporate to take advantage of corporate tax benefits, including the small business deduction which effectively lowers corporate income tax rates on active business income.
After incorporating a professional corporation, professionals will have to prepare and file the application materials with their respective College or other governing body to obtain a certificate of authorization to practice their profession in Ontario through the professional corporation. The materials that are submitted as part of the application typically consist of an application form, a copy of the certificate of incorporation, a declaration signed by a company director, a corporate profile report obtained from the Ministry of Government and Consumer Services and payment of an application fee directly to the College or other governing body (which is an additional cost). These fees are usually non-refundable and average out at around $400 depending on your specific profession.
If your company wants to “carry on business” in a particular province, it must be registered in that province. Whether a person is carrying on business is a question of fact that requires consideration of relevant facts. Note that generally speaking, you will not be carrying on business in another province if you are located in Ontario, but ship an individual or business products from Ontario or provide individuals or businesses services from Ontario.
- Ontario Corporation
If your Ontario company wants to carry on business in any other province, it must file an extra-provincial registration. If, for example, you open an Ontario company, but are going to be hiring employees or setting up offices in British Columbia, the Ontario company will need to file an extra-provincial registration in British Columbia.
- Federal Corporation
Federal corporations are also required to file an extra-provincial registration in each province that they intend to carry on business in. It is a common myth that incorporating federally gives you the right to “carry on business” in every province. When you incorporate federally make sure that you file an extra-provincial registration in the province that you will be carrying on business in at the time of incorporation. We file your Ontario extra-provincial registration automatically when we process your federal incorporation.
- Foreign Corporations
Foreign companies are also able to obtain a license to “carry on business” in each province. Foreign companies will have to fulfill additional requirements, including providing a current Certificate of Status from their foreign jurisdiction, appointing an agent for service and including a NUANS reservation.
There are a couple of considerations to this question which are detailed in our article about “Why Incorporate with a Lawyer (and not Incorporate by Yourself)”.
Below is a summary of the main points:
Incorporating with a Lawyer:
- PROS: Advice, Accuracy and Customization
Although not terribly complex, incorporating is still a legal process that requires you to understand how to incorporate as well as the NUANS name search process, the articles of incorporation and back end paperwork (which deals with the procedural rules (known as by-laws), election of directors, appointment of officers and the issuance of shares to name a few). That’s a lot to consider. If you try to incorporate yourself, you run the risk of getting some things wrong. Plus, you’ll spend your time and energy away from what you really need to do, which is building your business. A law firm can provide legal and practical advice and a customized solution for your particular circumstance.
- CONS: Cost and Timing
Traditional law firms generally charge $1200-$1500 + tax for a corporation and organizational documents and the process may take a couple of weeks or so. (Note that our pricing and turnaround time is in line with most of the online services. See the section on “why incorporate with Ordower Law” below).
Do-it-yourself Online Incorporation Services*
- PROS: Cost and Timing
An online incorporation service provider will generally charge $600 – $900 + tax for a corporation and organizational paperwork. These services can usually have everything done within a day or two.
- CONS: No Legal Advice + One Size Fits All Approach + Hidden Fees
A online incorporation service will not provide legal advice. In fact, they are careful to note that they do not provide legal services on their websites. In terms of process, you are generally left on your own to fill in forms at a time when advice and guidance from a lawyer is important. Also, most of the online services provide standard paperwork and limited options in terms of customizing your articles and share provisions and they may not complete all necessary filings for you, including the Form 1 – Initial Return. Finally, be careful about hidden fees that pop up along the way when you’re processing your incorporation online – for example, many services will charge for HST numbers when you can easily obtain an HST number and other tax accounts for free directly from CRA.
Ordower Law provides the value of an experienced corporate law firm for the price of a do-it-yourself on-line service, in a nutshell: the best of both worlds
- The personalized service and advice of a full-service law firm,
- The price and turnaround time of the do-it-yourself/self-help services,
- The efficiency of working with a law firm that uses the latest technologies, and
- Legal advice and resources for your business as it grows.