Canadian and US companies: notable differences

Over the decades, Canadian corporate law has developed in such a way that there are now several notable differences between corporations incorporated in the United States and those incorporated in Canada. As will be discussed below, these differences can be extremely important when a Canadian-incorporated company opens a place of business in the United States to operate a business. We provide an overview of three important differences between the Canadian and U.S. corporate environments.

1. Authorised number of shares

An important feature of Canadian corporate law (including in Quebec) is that the share capital authorized in the articles of incorporation is by default unlimited. This means that a corporation is not limited in the number of shares it is authorized to issue, unless the articles provide otherwise. This allows for great flexibility in the share capital, e.g. if a reorganisation requires shares to be subdivided into several million shares, this is quite possible, without having to increase the number of shares allowed in the articles.

In the United States, the number of authorised shares is generally limited. The articles of incorporation will provide, for example, that a maximum of 5,000 common shares and 10,000 preferred shares may be issued. It is often not in the interest of a U.S. corporation to have too many shares (if it doesn't need to), because generally the annual government fees are a function of the number of shares authorized, and these fees can amount to several thousand dollars at the highest level. Indeed, a Canadian corporation with unlimited share capital that moves to the United States could be subject to these very high annual fees unless it limits its share capital by amendment to its articles.

2. Nominal value

Another major difference is the use of par values. The par value is a price determined in the articles of incorporation, so that a share cannot be issued for less than that amount. If the articles provide for a par value of $1, for example, such a share must be issued for at least $1. In addition, any additional amount will be considered a premium (contributed surplus), and will appear as such in the financial statements.

A corporation incorporated under the Canadian business corporation regime cannot have shares with par value, as the legislator chose to abolish this notion, which was deemed inappropriate in the modern corporate reality, when the Canada Business Corporations Act was adopted in 1975. The Quebec business corporation regime is flexible in this regard, and allows some or all of the authorized shares to be with par value if this is expressly provided for in the articles. However, this is a very rare practice.

In the United States, although it is generally permissible (depending on the state) to have no par value, the practice is to have shares with par value. However, it is not uncommon to see an extremely low par value, for example $0.001. The concept ofpar value andpremium is still commonly used in the US.

3. Variety of share classes

In many cases, US corporations will have only two classes of shares: common and preferred. As in Canada, common shares participate in the dividends declared and the remainder in the event of liquidation, while preferred shares are only entitled to receive a pre-determined return (variable or not).

In Canada, corporate law has been significantly influenced by the evolution of domestic tax law, which has led tax and legal experts to be creative in creating all sorts of classes of shares, as needed. It is not uncommon in Canada for a small corporation to have in its authorized share capital about ten classes of shares, to allow for different tax planning.