Federal vs Provincial Corporation                        &                                                          Named vs Numbered Corporation

So you are ready to incorporate your business, ok. But before you move forward, you need to decide on following two critical questions:

1) Whether a federal or a provincial incorporation fits your needs?

You must evaluate the above choices and fully understand the implication of both before making your choice. A wrong selection may create unwanted problems and cost a lot later.  Let’s discuss both options in a little detail.

Federal vs Provincial Incorporation

In Canada, you can register your corporation under either federal or provincial laws.  Though both federal and provincial corporations can operate and do business Canada wide, both must meet different requirements before starting their business, which can make a lot of difference. Therefore, while deciding on jurisdiction of incorporation, one should ask questions like:

1. Where do you intend to do business – just locally or across country?
2. How important is the name protection?
3. Laws and requirements of each jurisdiction?
4. Costs?

Federal Corporation

Federal corporations are incorporated under the Canada Business Corporations Act (CBCA). Federal incorporation is considered a sign of distinction and receives global recognition as “Canadian company.”

A request for federal incorporation goes through a stricter name approval process (NUANs name search) since the registration authority will make sure that the proposed name of the corporation does not exist anywhere in the country. Once approved, the company name is protected across the country, including all provinces and territories. 

Therefore, if the name matters, and you think you will be doing business across Canada, it is recommended to opt for a federal corporation.

A Canadian (federal) corporation has the right to carry on business throughout Canada and can have its head office anywhere located in Canada.  However, it has to apply for extra-provincial registration in the province where it wants to operate.  This means extra cost (and time), as some provinces charge a fee for the registration, and you also need to get name clearance from the province, which at times become problematic.  

Cost is another element to consider, which varies from province to province, as you not only pay for federal incorporation but also for extra-provincial registration. Furthermore, a federal corporation is required to submit an annual information return; that means a recurring cost every year.

Lastly, a federal corporation must have at least 25% Canadian (resident) directors. This is not the requirement in some provinces.

Provincial Corporation

Provincial corporations are incorporated under provincial corporate statutes. In Ontario, a corporation is registered under the Ontario Business Corporations Act (OBCA).

There is no restriction on a provincial corporation to do business with anyone in any part of Canada (or even internationally), however, it must have registered office in head (registered) office and books of records within the province of incorporation. If a provincial corporation needs to open an office in another province, it must get an extra-provincial registration there and get name’s approval. However, when you go to another province, there is no guarantee that you will get approval for the name of your corporation, because there might be already a corporation, or a business registered and operating with the same (or similar) name.  

Therefore, if you think you need to operate from different provinces, it is recommended to choose for a federal corporation. But if you are operating a small grocery store and you don’t think you will be operating country wide, provincial incorporation is better option.

Another consideration is the cost of provincial incorporation, which varies from province to province. You need to check with the province you are planning to incorporate in. A provincial corporation is also required to submit an annual information return. In the case of Ontario, this return is part of the corporate income tax return, therefore, it does not cost anything extra.

Lastly, each province also has its own local director requirement. For example, Ontario, like a federal legislative requirement, has the requirement of minimum 25% local (resident) director. However, some provinces, like Quebec, do not have these requirements.

It is important to note that in terms of the tax treatment or benefit, federal and provincial corporations have no distinction and are treated equally.

Named company vs Numbered company

If the name of a corporation has no value for your company, and you are incorporating only for legal and tax benefit that corporation offers, you can select a numbered company instead of a name corporation. Number company is assigned a number as an identifier (a serial number) by registering authority.  Like 123456 Ontario Inc.

Legally, there is no difference between a named and numbered corporation. The main benefit of numbered company is the speed and cost saving. Since you don’t need any specific name, you don’t need to go through a name search and approval process (called NUANS). This results in saving of time and fee, however, these savings are not significant and are one time only.

On the other hand, if you are dealing with your clients, you don’t want them to remember you with a number. Or if you want to create your brand name, print visiting cards or make a website, you want a name there, not a number. In these cases, having a name company such as ABC Engineering Inc. makes more sense than 123456 Ontario Inc.

Operationally also, it is difficult to remember a number; people tend to get the number wrong.  For example, most people will write ABC Engineering Inc. correctly on a cheque, but chance of making an error is higher while writing a cheque for 896456 Ontario Inc. Overall, a numbered company saves time and cost initially but does not offer a lot of advantages. Specially, if you are dealing with clients, name company is most suitable instead of number.

Conclusion

It is critical to evaluate all factors that relate to your specific business, current and future requirement, provisions, terms and condition of each jurisdiction where you intend to register and operate, importance of a name, etc. It is highly advisable to seek a professional advice for above issues and other incorporation related questions like classes of shares, right and obligation of shareholders, power of directors, method of selection and number of directors. Timely and correct decision will ensure that your business operates smoothly, and you are able to achieve your objectives while complying with the legislation.

If you need any help with start-up of your business, incorporation, registration with CRA, establishing and maintaining your books of accounts, tax filing, and etc., please feel free to reach out to Source Accounting for an advice. Source Accounting Professional Corporation, CPA is a full-scale accounting firm in Mississauga, dedicated to small and medium size business. Our professional team is ready to guide and help you. Call for free initial consultation.

Disclaimer: The above contents are provided for the general guidance only, based on information believed to be accurate and complete, but we cannot guarantee its accuracy or completeness. It does not provide legal advice; nor can it or should it be relied upon. Please consult a qualified tax professional specific to your case.