Provincial or federal incorporation? New considerations (2024)

Theincorporation of a corporation (company) can be done either under provincial or federal law. The differences between the Quebec Business Corporations Act and the Canada Business Corporations Act have been discussed in other articles on this blog. In general, it can be said that the Quebec incorporation regime offers more flexibility than the federal regime; however, federal corporations may have certain advantages for operating a pan-Canadian or international business, although a provincial corporation may well do business outside its jurisdiction of incorporation.

Corporate laws are constantly evolving. For example, we have recently seen some important changes, specifically concerning the declaration of ultimate beneficiaries (or individuals with significant federal control). These recent changes may influence the analytical framework for the choice between federal or provincial incorporation. In our view, these recent corporate transparency requirements favor provincial over federal incorporation, for the following reasons.

Duplication of corporate transparency obligations

Unlike the other provinces and the federal government, Quebec law requires companies to declare their ultimate beneficiaries, regardless of their legal form or incorporation. Thus, with a few exceptions provided for in the law, all companies registered in the Quebec Enterprise Register must declare their ultimate beneficiaries, even if the company is incorporated federally or in another province. The other provinces and the federal government only provide for a "register of individuals with significant control" for companies incorporated under their jurisdiction.

In practice, this means that a federal corporation must not only meet its obligations to maintain a register of individuals with significant control (which, since 2024, must be partly published online), but must also declare its ultimate beneficiaries to the Quebec Enterprise Registrar.

This represents a significant duplication of compliance costs, especially for corporations with complex structures (e.g. where a trust is a shareholder), especially since the definition of "ultimate beneficiary" is in many respects radically different from the definition of "major controlling individual". An individual could be an ultimate beneficiary for Quebec legal publicity purposes, but not an "important controlling individual" for federal purposes.

Business address

Since March 31, 2023, it has been possible for Quebec's enterprise registrar to declare business addresses, thereby concealing the real addresses of individuals. However, the federal corporate registry requires that the real addresses of directors and individuals with significant control be declared. Thus, for federal corporations, although they can declare business addresses in Quebec, the actual addresses must still be made public in the federal register, which nullifies the advantage conferred by the Act respecting the legal publicity of enterprises, which allows the actual addresses of individuals to be concealed.

Fines

Penalties for non-compliance with reporting obligations for individuals with significant control are extremely severe at the federal level. The maximum fine is $1 million , with a maximum prison sentence of five years.

In contrast, the Quebec legislator has not provided for penalties specific to obligations relating to ultimate beneficiaries. Any false or misleading declaration may result in a fine of up to $10,000.