Ontario Corporate Law Update: Director Residency Requirements Removed

Ontario no longer requires corporations to have a resident Canadian director under amendments passed in Ontario Bill 213. Bill 213 also includes legislation to relax a private corporation to pass written ordinary resolutions. Both changes in the Ontario Business Corporations Act (OBCA), came into force on July 5, 2021.

Director residency requirements

After the amendment corporations incorporating (or continuing) in Ontario no longer need to have resident Canadian acting as a director. Previously, the OBCA required at least 25% of the directors of an Ontario corporation to be resident Canadians, or at least one Canadian resident director, for corporations with less than four directors.

It brings the Ontario corporate law in line with the majority of Canadian provinces including British Columbia, Alberta, Quebec, Nova Scotia, and New Brunswick, that do not impose this requirement of a resident director. Before that, a foreign entity looking to establish a company in Ontario must either find a resident director or incorporate in another province that does not impose the local director requirement and then do an extra-provincial registration in Ontario to do business in the province. It meant additional filing and cost. 

The removal of the director residency requirement marks a significant change to the OBCA and makes Ontario a competitive alternative for the incorporation of non-Canadian businesses in Canada.

Even with these changes, the forms to be filed with the Ministry of Government and Consumer Services still require a declaration of a director’s residency status. But it is expected to be phased out soon as these forms are updated.

Under the Income Tax Act, a corporation incorporated in Canada (federally or provincially) will be deemed a resident in Canada. A corporation not incorporated in Canada will be considered to be resident in Canada if its central management and control are exercised in Canada. Where a corporation’s central management and control is exercised is a question of fact, but typically it is where the board of directors meets and makes decisions, provided the board takes action.

Also, note the difference between “other corporation” and Canadian Controlled Private Corporation (CCPC). A CCPC enjoys a lower tax rate (currently 12.2% in Ontario on the active business income up to $500,000 as compared to 26.5%). One of the key requirements of the CCPC is that it is “not controlled by non-residents”. So if the majority of shareholding is held by non-residents the corporation will not qualify for many benefits the CCPC does.

Written shareholder resolutions

Under new amendments, private corporations are also able to pass “ordinary resolutions” by way of a written resolution signed by shareholders holding at least a majority of the shares entitled to vote on the matter. Before this, written shareholder resolutions could only be passed in lieu of a shareholder meeting if the resolution is signed by all shareholders entitled to vote on the matter.

However, this change only applies to “ordinary resolutions” (i.e. resolutions that require a simple majority to pass) not to “special resolutions”, which require two-thirds of the votes to pass. Additionally, if a corporation’s articles or shareholders’ agreement requires more than a simple majority of votes to approve an ordinary resolution, then that higher threshold will be applied. 

Under the amendment, a corporation must give written notice of an ordinary resolution to all shareholders entitled to vote on such resolution who did not sign the resolution within 10 business days after the resolution is passed. This notice must include the text of the resolution, a description of the resolution, and the reasons for the resolution.

This can be helpful for a corporation with a large number of shareholders that are not active in the business, and it is difficult to obtain a signed resolution from all shareholders. 

It may also be prudent of an existing corporation to review its by-laws, and any other corporate governance documents to make sure that any references to residency requirements of its board of directors or higher voting thresholds be modified, if needed, to take advantage of these amendments. Otherwise, those requirements of the corporation’s articles, by-laws, and/or shareholder agreement will continue to prevail.

If you have any questions or want more information on how this may affect your corporation, please contact the Source Accounting Team, Mississauga.

If you have any questions or any other tax and accounting issues, please feel free to reach out to Source Accounting Professional Corporation (CPA). Source Accounting is a full-service accounting firm in Mississauga, dedicated to individuals, and small and medium-sized businesses, providing tax preparation, corporate tax filing, accounting, bookkeeping services, payroll solutions, etc. We are the accountant for small businesses and are rated as the top accountancy firm in Toronto, Mississauga, and Brampton by our clients.

Disclaimer: The above contents are provided for 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 contact/consult a qualified tax professional specific to your case.