Provincial or federal incorporation? Framework for analysis

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In Canada, a corporation may beincorporated under either provincial (in this case, Quebec law) or federal legislation. There are differences between these two incorporation regimes, although there are not really any fundamental differences. Ultimately, a provincial corporation is not necessarily limited to the territory of the province in which it is incorporated to carry on its activities; and conversely, a federal corporation may well operate locally without having a pan-Canadian or international focus. The following is an analytical framework to assist in deciding whether a federal or Quebec corporation is more appropriate.

Territory in which the activities are or will potentially be carried out

It is true that a corporation incorporated under the Québec system may operate elsewhere in Canada, provided it is registered in the provinces where it does business, just as a corporation not incorporated in Québec but carrying on business there must register with the Québec Enterprise Register.

However, it is important to note that a Quebec corporation must have its head office permanently in Quebec. Consequently, if the company has more "pan-Canadian" than local objectives, and it is possible that one day it will leave Quebec or wish to move its head office elsewhere in Canada, it is probably preferable to opt for the federal system instead of the provincial system.

The federally incorporated company can easily move its headquarters from one province to another, simply by amending its articles. This particular amendment to the Articles of Incorporation does not require the payment of any government fees.

International business

Canada is better known internationally than its various provinces. Being incorporated in Canada rather than under a provincial system can inspire confidence in various business partners when doing business internationally. In addition, the certificate of incorporation and articles of incorporation of a federal corporation are in bilingual form, whereas the incorporation documents issued to Quebec corporations are in French only. In this case, it may be necessary to have them translated when a foreign partner requests verification, or when applying for a government permit in another country whose language is not French.

Financing by issuing shares to third parties

An important feature of companies incorporated under the Quebec regime is that shares do not need to be fully paid up before being issued. This provides interesting flexibility, particularly when third-party investors are included in the shareholding. It is possible, for example, to provide in the subscription contract that the payment of the consideration for the shares will be made in instalments; the subscriber will have the full rights of a shareholder despite the fact that the shares are unpaid. The law then provides a mechanism for confiscation of the shares in the event that the subscriber fails to pay for the shares as provided for in the payment terms, or following a call for payment in the event that no payment terms have been contractually agreed.

Thus, if the corporation intends to seek external financing by issuing shares, it may be preferable to opt for the Quebec regime in order to have as much flexibility as possible. Note that this feature is not shared with most other provincial incorporation regimes; most are modelled on the federal model and do not allow for the issuance of a share until it is fully paid.

Company name in English

A federal corporation may have a name in French, English, or a version in each of the country's official languages. In contrast, it is mandatory for Quebec corporations to have a corporate name in French. It is true that it is possible to add a version in a "language other than French", but this version must be an exact translation of the French name. Thus, if the founders of the company strongly desire a name in English only, the federal regime may be preferable. It is important to note, however, that it will still be mandatory to declare a French name when registering the business in Quebec.

Share capital developed

Tax specialists will sometimes prefer Quebec corporations, because Quebec law allows greater flexibility in share capital, for example:

  • Possibility to have par value shares, which are useful for high-low shares (low paid-up capital, high redemption value);
  • Classes with identical rights and restrictions, which is useful for isolating paid-up capital between classes, or in the case of discretionary shares.

directors non-residents

The federal system requires that at least one quarter of directors be Canadian residents, or at least 1 director if the company has less than 4 directors. This requirement does not exist in the provincial system. A non-resident could be the sole director of a company incorporated in Quebec.

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