Incorporating Federally or Provincially: Choosing a Jurisdiction

Incorporating a business means legally separating that business from its owner. A sole proprietorship or partnership is not separated from its owners, either legally or for tax purposes, because any income earned by the business remains personal income. It also means the owners are personally liable for everything the business does, including its debts and any litigation brought against it, exposing personal assets to financial risk.

Incorporation changes that position. The business becomes governed by the corporate legislation of the jurisdiction in which it is incorporated, and the liability of shareholders is limited. If the corporation fails, shareholders generally lose only the equity they invested in their shares. The principal disadvantage is that income is taxed at two levels: first on the income of the corporate entity, and again at the shareholder level on any dividends received.

Once the decision to incorporate is made, the question becomes where. In Canada a business may incorporate provincially, in a single province or territory, or federally.

Provincial incorporation is, for many smaller business owners, the more efficient option. Documents are filed at one level only, provincial fees tend to be lower than federal fees, and the documentation required is less onerous. Provincial incorporation protects the business name within that province, but only within that province. Another business elsewhere in Canada may be incorporated under the same name entirely lawfully. Where a provincially incorporated business later wishes to carry on business in another province, it does not incorporate again in that jurisdiction; it registers extra-provincially with the relevant authority, which is a lighter and less expensive process than a second incorporation.

Federal incorporation, governed by Corporations Canada, permits a business to carry on business in all provinces and territories and confers name protection across the country. For many owners, national name protection is the actual motivation, and it is a reasonable one. A business with protection in only one province may find, on expanding, that it must operate under a different name elsewhere, or that another business in another jurisdiction is already trading under an identical or very similar name. The trade-offs are a higher initial cost and more annual paperwork. Federal incorporation also does not replace provincial registration: an Ontario business that incorporates federally must still register in Ontario, so the federal route adds a layer rather than substituting for one.

Two further differences are worth weighing, and both have arisen relatively recently.

The first concerns director residency. Section 118(3) of the Ontario Business Corporations Act formerly required that twenty-five per cent of an Ontario corporation's directors be resident Canadians, or that at least one director be a resident Canadian where there were fewer than four. That requirement was repealed effective 5 July 2021. The Canada Business Corporations Act retains a twenty-five per cent resident director requirement. For founders whose directors are not Canadian residents — a common situation for international investors establishing a Canadian entity — provincial incorporation may be the only practicable route.

The second concerns corporate transparency. Since 22 January 2024, federal corporations have been required to file information from their register of individuals with significant control with Corporations Canada, and a portion of that information is made publicly accessible. Ontario corporations have been required to maintain an equivalent register since 1 January 2023, but it is kept internally at the registered office and is not available to the public; access is limited to government, law enforcement and certain regulatory authorities for investigative and enforcement purposes. Where the privacy of ownership information is a consideration, this is a meaningful distinction between the two regimes.

There is no universally correct answer, but there is usually a clearly correct answer for a particular business. The questions worth working through before deciding are whether you intend to expand into other Canadian provinces, what your growth objectives are over the medium term, whether you need your business name protected nationally or only locally, and what administrative resources you have available for ongoing filings. Resolving these at the point of incorporation is considerably cheaper than continuing a corporation into another jurisdiction later.