The Difference Between Federal and Provincial Incorporations

With over 100,000 companies incorporating in Quebec every year, and over 400,000 in Canada, it’s important to understand the difference between what it means to own a federally incorporated company VS provincial incorporation. We’re here to help.

Because of the way Canada is set up and its Constitution, businesspeople can choose to incorporate either federally (under the Canada Business Corporations Act) or provincially (for example, under the Quebec Business Corporations Act).

The cost of incorporation is lower under the provincial system, to start.

How come?

Companies with federal incorporation that want to conduct business in Quebec must always register with the Quebec Enterprise Register.

These companies must register in all provinces and territories where they intend to do business. In Quebec, these companies must therefore pay $343 CAD to register with the Registraire des Entreprises du Québec, whereas companies incorporated under the Quebec regime are automatically registered there and therefore don’t have to pay any fees in addition to the incorporation fees.

Therefore, federally incorporated businesses will have two sets of paperwork to complete: one for Corporations Canada and one for the Registraire des entreprises. Another difference between companies incorporated provincially in Quebec and those subject to the federal regime is where they can establish their head office. The Quebec Business Corporations Act imposes to establish any head office in the Quebec province. Whereas, the Canada Business Corporations Act allows corporations to establish their head office anywhere in Canada.

A federally incorporated company's name, which should not be confused with its trademark, is additionally protected on a national level. For instance, a business with federal incorporation runs the gym "Global Fitness". This gym is based in Quebec, but it hopes to establish a name for itself in the gym scene in Ontario. This gym will be able to operate under the same name in Ontario as it is federally incorporated.

So, if you are already planning for your future company to do import-export business, incorporating your business federally could be a good idea. Does this mean that provincially incorporated companies cannot do business anywhere other than on the land of Quebec? Absolutely not. However, provincially incorporated companies will have to deal with the following two problems.

First, because they will have to abide by other provinces' regulations, it might be harder for these businesses to establish themselves outside of Quebec. Second, names of businesses formed in Quebec will not enjoy universal Canadian protection and may be used by businesses in other territories and provinces.

There are two significant issues with a company name that must be addressed. First, whether a federal corporation or a provincial corporation, the name of a business operating in Quebec must

adhere to the Quebec Charter of the French Language's requirements. According to this charter, all corporations operating in Quebec must have a French name.

Of course, they may also have a name in another language, but the use of this other name must comply with certain rules. For example, if it is exposed, its French version must occupy a prominent place.

Secondly, unlike provincially incorporated businesses, federally incorporated businesses must submit a NUANS report to Corporations Canada. This document attests that no other business is utilizing the name that it intends to use. The Canada Business Corporations Act requires that shares be fully paid before being issued, whereas the Quebec Business Corporations Act permits entrepreneurs to issue shares even if they are not yet fully paid. The Quebec regime also permits corporations to avoid issuing share certificates, which is not possible under the Canada Business Corporations Act.

The newly incorporated company's board of directors has the authority to decide not to issue certificates. As you are probably already aware, the majority of corporations have a board of directors that is in charge of making decisions about the management and course of the company.

The origin of the members of the board of directors is also legally different depending on the incorporating status. Quebec law doesn’t place any restrictions on the origin of the members of the board of directors, whereas federal law requires that 25% of them reside in Canada and are Canadian citizens or have permanent resident status.

Finally, while there is no legal basis for this, some believe that a federally incorporated company carries a certain amount of prestige. According to Corporations Canada, "federal incorporation is seen as a sign of distinction." Indeed, federal corporations are perceived as Canadian companies around the world, which can increase the trust placed in them by foreign clients and investors. However, there is no law prohibiting provincial corporations from doing business with the rest of the world.

If you intend to do business throughout Canada, or even internationally, in the near future, it is preferable to incorporate federally in order to have greater flexibility, particularly in the choice of the head office, greater protection of your company's name throughout Canada, and to gain some prestige.

If, on the other hand, you intend to do business in Quebec in the medium or long term, it is certainly more suitable to incorporate provincially in order to profit from lower prices and the highly practical option of issuing uncertified shares, even if they have not been fully paid.

The choice therefore depends on your projects and your aspirations. Book a call with us to see which is the best option for you!