Company Incorporation in Ontario

A corporation is legally distinct from its shareholders and directors. It is formed by filing articles of incorporation with the appropriate government authority, which then issues a certificate of incorporation. The business corporation acts in its own name, including when entering into contracts, and pays its own taxes.

Unlike not-for-profit corporations, business corporations are generally intended to operate a business and make a profit, or earn income from investments.

Profits are paid out to shareholders in the form of dividends. The power to declare dividends is exercised at the discretion of the directors. Therefore, unless there is a “unanimous shareholder agreement”, there is no obligation to force the directors to pay dividends.

Small businesses are very often operated through a business corporation. As a result, most business corporations have a limited number of directors and shareholders. One person may be both sole director and sole shareholder.

There are a number of advantages to running a business via a corporation, although these may not apply to everyone. Since the corporation is a separate legal entity, the liability of its shareholders and directors is limited in the event of a lawsuit. In addition, the corporate tax rate, which is substantially lower than that of individuals, may allow tax deferral by deciding when dividends are paid.

There are exceptions, however. Despite the general principle that shareholders' liability is limited to the amount paid on their shares, there are times when a shareholder will be personally liable. In such cases, the corporate veil may be lifted, and the shareholder may be held civilly liable. Similarly, if the shareholder has made himself personally liable in a contract (such as a loan agreement), then he will incur personal liability.

Regarding the tax rate, the lowest tax rate of 12.2% (in Ontario, in 2024) is not applicable for all types of income. This rate applies to active business income earned by Canadian-controlled private corporations (CCPCs) as defined in the Income Tax Act. On the other hand, for any active business income exceeding $500,000, a higher tax rate will apply (26.5% in Ontario, in 2024).

In the case of passive income (e.g. dividends or interest), the tax rate is higher and generally does not allow for tax deferral. It is advisable to consult a tax specialist if you have any questions about corporate taxation.

In Canada, it's possible to incorporate both provincially and federally. Over time, provincial and federal incorporation laws have been largely harmonized. As a result, Ontario and federal corporations are very similar in terms of their incorporating legislation, although there are some technical differences. The vast majority of companies (especially the smaller ones) incorporate provincially. However, it may make sense to incorporate federally if the intention is to move the registered office to another Canadian province in the future, which is not possible under Ontario incorporation.

Among the technical differences between the provincial (Ontario) and federal levels is the possibility for Ontario companies to have several identical classes of shares. It is not clear whether this is permitted for federal corporations; many believe that several identical classes are in fact one and the same class. Having several identical classes is useful for tax purposes, for example to avoid paid-up capital being diluted equally among all shares of the same class. Paid-up capital is the amount that shareholders can recover tax-free. In addition, having several identical classes means that dividends can be paid out on a discretionary basis between several classes.

Another difference is that Ontario law allows a written resolution in lieu of a shareholders' meeting not to be signed by all shareholders entitled to vote, if it is signed by shareholders holding a majority of the shares. At the federal level, for a written resolution to replace a meeting, it must be signed by all shareholders entitled to vote. Ontario's legislation provides greater flexibility in this regard.

In addition, in Ontario it is possible to have shares without a certificate, unlike federal companies. Uncertificated shares allow the shares not to be represented by a document in paper form. However, at the federal level, it is permitted for shares not to be represented by a certificate if a non-transferable written acknowledgment of their right to obtain such a security certificate is delivered to the holders.

A shareholder is a person who owns shares in a corporation. Thus, the shareholder has no direct rights in the company's assets, but the shares he or she holds in the company confer rights. Fundamental rights include the right to vote at shareholder meetings, to receive dividends and to receive the remaining assets in the event of the corporation's dissolution or liquidation.

Where the corporation's articles provide for a single class of shares, the holders of these shares have equal rights. Only when there is more than one class is it possible to treat shareholders unequally.

For example, holders of “preferred” shares generally have a limited right to dividends. This dividend will either be calculated as a percentage, or the amount of the dividend will be fixed in advance in the articles of incorporation. The same applies to the amount payable in the event of dissolution or liquidation of the corporation; holders of common shares are entitled to receive the remaining assets (without limit), while holders of preferred shares will receive an amount fixed in advance in the articles.

It is also possible to provide that certain shares have voting rights and others do not. Shares may have multiple voting rights (e.g. 2 or more votes per share).

It can also be provided that certain classes of shares are redeemable, at the option of the corporation and/or the holder of the shares, and/or when a specific event occurs (for example death or bankruptcy).

The articles of incorporation include the name of the corporation, which may have two versions: one English and one French. They also specify the number of directors of the corporation, which may be a fixed number, or a minimum and maximum number, allowing shareholders to set the number between these limits. The description of the different classes of shares (if there is more than one) is also set out in the articles. It may also contain provisions restricting the transfer of shares or other securities.

The articles may be amended from time to time, with the consent of the shareholders (except in certain cases where the consent of the directors is sufficient). The authorization of the shareholders to amend the articles is done by special resolution. A special resolution is a resolution adopted by at least two-thirds of the votes. An amendment of the articles will be required, in particular, to create or eliminate classes of shares, or to convert shares of a class into shares of another class.

Amendment of the Articles requires that Articles of Amendment be filed with the appropriate governmental authority. The law requires that the articles of amendment must be kept with the other books and records of the corporation.

For small companies, it is very important that the articles contain restrictions on the transfer of shares and other securities. Securities legislation provides that the transfer of securities must be restricted by the articles or by an agreement in order for the corporation to qualify as a private issuer. Failing to qualify as a private issuer, any corporation must produce a prospectus when it distributes its securities, which is very costly and complex. In general, it is sufficient that the transfer of securities be subject to the consent of the board of directors. This means that a shareholder will only be able to transfer their shares if the directors approve the transfer.

Having several classes of shares with different rights provides greater flexibility. For example, sometimes the founder of a company wishes to issue shares to a new investor without conferring the right to vote at shareholder meetings. This also makes it possible to issue "preferred" shares.

Holders of “preferred” shares generally have a limited right to dividends. This dividend will either be calculated as a percentage, or the amount of the dividend will be fixed in advance in the articles of association. The same applies to the amount payable in the event of dissolution or liquidation of the corporation; holders of common shares are entitled to receive the remaining assets (without limit), while holders of preferred shares will receive an amount fixed in advance in the articles.

It is also possible to provide that certain shares have voting rights and others do not. Shares may have multiple voting rights (e.g. 2 or more votes per share).

It can also be provided that certain classes of shares are redeemable, at the option of the corporation and/or the holder of the shares, and/or when a specific event occurs (for example death or bankruptcy).

A director is a member of the Board of Directors. Individually, he or she has no powers unless the Board specifically grants them. Directors make decisions by voting at Board meetings. Decisions are generally taken by majority vote, subject to any unanimous shareholder agreement. Officers are persons appointed by the Board of Directors to specific positions: President, Vice-President, Treasurer, Secretary. They may have detailed functions, and implement decisions taken by the Board of Directors.

As with shareholders, directors can make decisions by written resolution signed by all directors entitled to vote. Most of the time, for smaller companies, directors make decisions by written resolution instead of holding actual meetings.

The number of directors that a corporation must have is provided for in the articles, or the articles provide for a minimum number and a maximum number of directors. The shareholders will in this case have the power to set the number within these limits; sometimes the power to set the number of directors is delegated to the directors themselves.

A resolution of the board of directors is required to authorize the issuance of shares. This resolution must specify to whom the shares will be issued, the number and class of shares that will be issued to him, as well as the consideration that the subscriber must pay in exchange. Ontario and federal law require shares to be fully paid for before being issued (unlike other jurisdictions, including Quebec and Nova Scotia). Following authorization for the issue of shares, a share certificate is delivered to the subscriber and the transaction is recorded in the corporate records.

Shares can be issued in exchange for money, property or services rendered. When shares are issued in consideration for property or services rendered, the directors must set a monetary value for these property or services. They will be personally liable if the fair value is less than the amount they should have received in money.

It is therefore prohibited, with certain specific exceptions, to issue shares in exchange for a promise to pay or a note. If such a situation occurs, the shares would be considered to be issued without having been paid for and the issue may be canceled.

In Ontario and federally, shares have no par value. The par value is a minimum amount for which shares can be issued. Since the par value does not generally represent the true value of shares, this concept has been abolished in most Canadian provinces and at the federal level. However, it is still possible to have shares with par value in certain provinces: Quebec, British Columbia and Nova Scotia. In practice, even in these provinces we rarely see shares at par value.

As for the transfer of shares, this must first be authorized by the directors (depending on the provisions of the articles). To validly transfer shares, the certificate representing the shares must be endorsed and delivered to the purchaser. If the shares are uncertificated (Ontario only), the transferee must give transfer instructions to the corporation.