Advantages of Quebec companies over federal companies

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Provincial or federal incorporation?

When incorporating a corporation, the first thing to decide is whether to incorporate under the Quebec Business Corporations Act or the Canada Business Corporations Act. Depending on the situation of each business, it may be preferable to incorporate under one corporate statute rather than another. However, it is undeniable that corporations governed by Quebec law have several advantages over federal corporations. It should be noted that the Quebec law is recent, having been adopted in 2009, compared to the federal law which dates back to 1975. Here is an overview of some of the advantages.

1. Issue of shares that are not fully paid

Under Quebec law, it is indeed possible to issue shares without them being fully or partially paid up. This is a continuation of the old Companies Act, in contrast to the federal law which requires that the shares be fully paid up at the time of issue. This constraint of the federal law is an anomaly in the world of corporate law. In fact, most corporate laws in the world allow for the issuance of unpaid shares and provide mechanisms for the call for payment and forfeiture of shares. This flexibility is particularly convenient when organizing a corporation, as it allows the founding shareholders to become shareholders without having to ensure that a payment has actually been made.

2. Classes of shares with identical rights and restrictions

The Quebec legislation allows, as does the Ontario legislation which has just been amended to this effect, the creation of classes of shares with identical rights and restrictions. The federal Act does not expressly allow this possibility.

There are several benefits to having identical classes of shares. On the one hand, it allows for discretionary dividend classes of shares, with directors having full discretion over the allocation of the dividend on these classes. On the other hand, identical classes allow for the segregation of the paid-up capital on these shares for tax purposes. When the company is federally incorporated, in order to achieve these objectives it is required to provide in the articles of association for minor distinctions between the classes of shares, in order to avoid them being considered as one class, despite a different designation.

3. Issue of uncertificated shares

Provincial corporations may issue shares that are not represented by a share certificate. The mere registration of the share issue in the securities register effects the issue, without the obligation to issue and deliver a registered certificate to the subscriber. The transfer of shares is then made not by delivery of the endorsed share certificate, but by a notice to the company instructing it to register a transfer. Uncertificated shares reduce the cost and complexity of share transactions and are convenient for closing share transactions remotely.

Federal law does not expressly allow for the possibility of having certificate shares. It is possible, however, for a shareholder to have, at his or her option, a "written and non-transferable acknowledgement" to have a share certificate delivered to him or her. This is not, however, in itself an uncertificated share plan, and the law does not provide for the issue or transfer of uncertificated shares.

4. Nominal value shares

Federal companies cannot issue shares with a nominal value. A par value share is a share whose issue value is set out in advance in the articles of incorporation. This type of share, although rarely used, is still possible under Quebec law. It facilitates various tax transactions, including the issuance of "high-low" shares with a low par value and a high redemption value.

5. directors non-residents

Federally incorporated companies must have one quarter of the directors of the company who are Canadian residents. If the company has less than 4 directors, at least 1 must be a Canadian resident. These requirements do not exist at the provincial level. The board ofdirector can be composed entirely of non-residents.

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