Canadian Federal Incorporation Guide

DISCLAIMER: The information on this webpage is not (and is not intended to be) legal advice. This is legal information only. Reviewing information about the law may help you understand whether you need legal assistance. Whether and how this information applies to your circumstances requires the assistance of legal counsel who can apply the information to your needs. Do not rely on this webpage to make decisions. You may contact Wires Law, and we would be pleased to determine whether our firm can assist you. No solicitor-client relationship is established until we confirm we can act for you in a legal services agreement. Read our Terms of Use for more information.

This page provides a brief review of pertinent information relevant to a new Canadian federally incorporated company. If you have any questions regarding incorporation or the contents of this page please contact Wires Law.

The information on this page does not set out the entire workings of a corporation, provide all the next steps following incorporation, review all provisions of the Canadian Business Corporations Act (“CBCA”) or other relevant legislation or regulations, nor does it address the full extent of the duties of directors and officers of the company. This page is intended for informational purposes to help you better understand the operation of a corporation.  For a more in depth publication please see the Federal Government’s guide to Corporations (“Guide”) at https://www.ic.gc.ca/eic/site/cd-dgc.nsf/eng/h_cs04839.html.


About Newly Incorporated Federal Companies 

Separate Legal Entity

One of the benefits of a corporation is that it can, in some instances, protect against individual liability of the owners. However, it is essential that directors treat the corporation as a separate legal entity. Among other things, the corporation must have separate bank accounts, separate credit cards, issue separate invoices, enter contracts and be paid separately, in its own name. Where an individual’s assets (or a related company’s assets), records and business practices are comingled with a corporation’s, a court may find that they are one in the same for the purpose of establishing liability in the event of a lawsuit.

Directors

The CBCA contains provisions on the duties and powers of directors. It can be accessed online at http://canlii.org/en/ca/laws/stat/rsc-1985-c-c-44/latest/rsc-1985-c-c-44.html.

The CBCA also prescribes a standard of care for directors (s. 122) and sets out some (but not all) of their liabilities (ss. 118, 119). Note that in addition to these statutory provisions directors and officers also have duties and responsibilities establish by courts at common law.  Common areas where directors face personal liability include, but are certainly not limited to:

  • Failure of the company to pay employee wages;
  • Environmental damage caused by the corporation;
  • Unpaid corporate taxes or failing to withhold income tax from employees;
  • Occupational health and safety legislation;
  • Product safety legislation; and
  • Criminal acts or fraud by the company .

Directors Duties and Responsibilities

The directors of a corporation are required to manage or supervise the management of the corporation. This power of management can only be restricted, in whole or in part, by a unanimous shareholder agreement (“USA”). There are two main types of obligations imposed upon directors in connection with their management of a corporation’s business and affairs:

  • A fiduciary duty to act honestly, in good faith, and with a view to the best interests of the corporation (and its shareholders); and
  • A duty to exercise the care, diligence, and skill of a reasonably prudent person in comparable circumstances.

A Meeting of the Directors

For smaller companies, directors typically organize the company by resolutions in writing. In most cases, particularly where there are more than one director or shareholder, directors pass resolutions to:

  • enact by-laws;
  • allot and authorize the issuance of shares;
  • appoint officers; and
  • adopt any pre-incorporation contracts.

A meeting of directors for a federal company will not be properly constituted unless 25% of those present are resident Canadians. For more details on corporate governance, ensure you review the provisions of the CBCA and speak with a lawyer.

A Meeting of the Shareholders

Once the initial directors’ meeting has been held, a meeting of the shareholders is called in accordance with the CBCA and by-laws to, among other things:

  • confirm the by-laws passed earlier by the directors;
  • appoint the auditor (if required)
  • appoint the directors for the remaining fiscal year.

All corporations are required to appoint an auditor. However, where all shareholders consent, the audit requirement imposed by the CBCA can be removed each year. This is often done by startups to avoid the expense of an audit.

By-laws

The articles of incorporation for your new company provide that the directors may create by-laws which govern the company. Although not required by legislation, a corporation’s by-laws regulate its business and affairs including the procedures for meetings of directors and shareholders, director remuneration and indemnification.

Resolutions

Other business of a corporation is carried out by way of resolution passed as required by the directors and shareholders of the company.  In some instances, including amendment of the articles, mergers or the sale of all or substantially all of the assets of a corporation, a “special resolution” is required. A special resolution is a resolution passed by a majority of not less than two-thirds of the votes cast by the shareholders who voted in respect of that resolution. There are also resolutions that require unanimous written approval of shareholders, including those not otherwise entitled to vote (e.g., dispensing with auditors).

Record Keeping and Organization 

The CBCA requires that certain corporate records must be kept, including a copy of the articles, by-laws, unanimous shareholder agreement, minutes of meetings and resolutions of shareholders, a register of directors, a securities register, adequate accounting records, minutes of meetings and resolutions of the directors and a register of share transfers.

Share Capital

Where a corporation has only one class of shares, the rights of the holders are equal in all respects and include the right to vote at any meeting of shareholders of the corporation and to receive the remaining property of the corporation on dissolution.  The CBCA provides, as a basic right, the right to receive dividends when declared.  As there may be favourable tax treatment from collecting your income in the form of dividends, you should seek advice from your accountant or tax advisor.

A corporation’s articles may provide for more than one class of shares, with the rights, privileges, restrictions, and conditions attaching to the shares clearly identified. The number of shares of each class which a corporation may issue will be unlimited unless a maximum number is specified in the articles. In some cases, corporations elect to cap the number of shares in a certain class and create different rounds or series of investment.


Next Steps: So You Have Incorporated, Now What? 

Once your business has been incorporated there are a few essential steps to take including:

Extra-Provincial Registration

Federal corporations must register their business in at least one province where they will be carrying on business. If you are carrying on business in Ontario, Wires Law can register your corporation in Ontario and obtain an Ontario Corporation Number (“OCN”) as part of the incorporation process. There are government filing fees to register a federal corporation in other provinces and territories. If you are carrying on business in a province or territory other than Ontario, you will likely need to register in that province as well. Seek legal advice on same.

Creating a CRA Business Number and HST Account

Once you have successfully incorporated and received your articles of incorporation, your corporate information gets automatically sent to the Canada Revenue Agency (CRA). The Federal government then creates, and sends to you by mail, your new business number business number (BN) for the corporation. The business number issued by CRA is separate from your Federal corporation number and your Ontario Corporation Number (OCN).

When this information is received by you at your corporation’s address, you can open the following account(s) (among others and only if applicable) with the CRA:

  • HST Account
  • Payroll Deductions Account
  • Corporate Income Tax Account
  • Import / Export Account

If Revenue Canada does not contact you, you should follow up with them.

HST Account

Harmonized Sales Tax (HST) is tax that most businesses are required to collect and remit. There is no charge to create this account. With some exceptions, all businesses are subject to HST. You can contact the Canada Revenue Agency for details: (1800) 959-5525.

Payroll Deductions Account

If your tax advisors have determined that your business is an employer, trustee or payer you will need to open a payroll account so you can remit deductions.

Corporate Income Tax Account

Corporate income tax needs to be paid to the CRA every year, and in many cases on an instalment basis throughout the year. Refer to Corporate Income Tax Guide published by CRA and consult with your accountant and tax advisors for more information.

If your corporation is registered in Ontario, Ontario corporate taxes are administered by the CRA.  If you have any questions or concerns about your Ontario corporate tax account, contact the Ontario Ministry of Revenue directly. Your accountant and tax advisor can also assist you. If you hire employees, other registrations you must consider include:

You should consult with your accountant on any other necessary registrations, withholdings or taxes.

Director Consents

Each director will need to sign a consent form acknowledging and consenting to act as a director of the corporation.

Hold First Meetings 

The first meeting of directors and shareholders is required to be held to, among other things, adopt the company’s by-laws and issue shares.

Open a Corporate Bank Account & Retain an Accountant

It is highly recommended that you retain a professional management accountant for the corporation to deal with, among other things, accounting, dividend and tax issues.

One common issue founders face is the tax implications of transferring existing assets (including intellectual property) to the corporation. If you have existing assets held for business purposes, tax advice should be sought before assigning or transferring any property to the corporation.

Other Steps

Although there are many others that may apply to your corporation,oOther steps you may wish to take include:

  • Entering a shareholders’ agreement;
  • Registering your trademark or other intellectual property;
  • Assigning intellectual property created by the founders to the new corporation;
  • Purchasing insurance, including for example, general liability insurance for the business and/or indemnification insurance for directors and officers of the company in the event the company is sued;
  • Entering written agreements with your employees or contractors; and
  • Having a lawyer draft or review any contracts you enter with customers or third parties.

Caution Regarding Personal Services Corporation

If you incorporate a business but could reasonably be regarded as an employee or officer of the business you intend on providing services to (but for the existence of your corporation), you risk being characterized as a ‘personal services business’ (PSB). Upon incorporation, you should speak with your accountant and tax advisor to ensure your corporation is not a PSB.

As a PSB, your corporation will not be able to claim the small business deduction or be taxed at the small business rate. Your corporation also will not qualify for the general corporate rate reduction and may not be able to write off business expenses against income.