If a business corporation best serves your needs, you have a number of jurisdictions from which to choose. If your business will have employees reporting for work in Ontario, the choice may be between a business corporation incorporated under the Business Corporations Act ((OBCAA) or one incorporated under its federal counterpart, the Canada Business Corporations Act ((CBCAA).

There are another nine or 10 business corporations acts to choose from in Canada, and given that (a) Ontario does not require any corporation incorporated in any Canadian jurisdiction to hold an extra-provincial licence to conduct business in Ontario and (b) neither British Columbia nor Nova Scotia has a requirement that any directors be resident in Canada, the other alternatives should not be ignored. However, the choice often comes down to either the OBCA or the CBCA

On balance, it would appear that the federal choice (the CBCA) will win out, especially where the business corporation is, in effect, an incorporated partnership between one majority shareholder and one minority shareholder.

The Deadlock Threat

For corporations with a single majority shareholder, perhaps the most significant aspect of the OBCAAoverlooked during the recent OBCA amendments that came into effect on January 1, 20077 is the definition of a quorumm for the purposes of shareholder meetings. While both the CBCA and OBCA state that a quorum exists where the holders of a majority of the voting shares are present or represented by proxy, the CBCA adds that a quorum is present irrespective of the number of persons actually present at the meeting.. While this may appear to be a minor distinction, it has great significance.

Under the common law, it is impossible to meet with oneself. In the context of shareholder meetings, this means that at least two voting shareholders must be present at all shareholder meetings, and a shareholder cannot issue proxies, in effect splitting the shareholder in two. While the CBCA explicitly overrides this rule, the OBCA does not. As a result, it is possible for the minority shareholder of a two-shareholder corporation to create a deadlock regarding shareholder matters. A deadlock would be possible even where the minority shareholder holds, say, only one per cent of the issued shares.

Under the OBCA, matters that must be dealt with by shareholders (and not the directors alone) include:

  • the approval of the sale of all or substantially all of the assets of the corporation;
  • certain changes in the registered office of the corporation;
  • additions or reductions in the stated capital of any class of shares;
  • payment of a dividend by a corporation with wasting (e.g., mining or oil and gas) assets;
  • approval of a contract with the corporation in which the personal interests of an officer or director are in conflict;
  • removal of a director or the auditor;
  • waiver of the otherwise mandatory audit requirement;
  • changing the number of directors;
  • filling a vacancy in the board where no quorum remains in office;
  • any amendment to the articles of the corporation
  • approval of any amalgamation with another corporation;
  • continuance of the corporation to a new jurisdiction;
  • a re-organization;
  • the liquidation of the corporation; and the winding-up or dissolution of the corporation.

Corporations incorporated under the CBCA must ensure that the general by-law of the corporation, if it includes language relating to the quorum for shareholder meetings, tracks the (somewhat unusual) language of the CBCA quoted above to avoid the shareholder meeting deadlock pitfall.

Other Considerations

While the danger posed by the definition of quorum under the OBCA is reason enough to favour CBCA incorporation for corporations with two shareholders holding a different number of shares, many other reasons also exist.

First, in a federal Newly Updated Automated Names Search ((NUANSS))which is a precondition to incorporation under the CBCAAthe database searched is much broader than that searched in an Ontario NUANS. A federal NUANS will compare the proposed name with corporate names across the country, as well as registered trade marks. If the federal report approves a name, it is more or less certain the name will be available for extra-provincial registration in any province provided the registration is completed shortly after the federal NUANS is conducted. In contrast, a corporation incorporated under the OBCA that conducts business in another province (other than Quebec) must apply for extra-provincial registration in such province, and it may then find that a similarly named corporation already exists in the other jurisdiction

Second, a federal corporation may, as of right, conduct business in any province in Canada. Each province can require that all corporations not incorporated in the provinceeincluding federal corporationssconducting business in the province to register as an extra-provincial corporation, although no province can refuse to issue a licence to a CBCA corporation. However, the province does have a right to impose conditions on the licence, including the condition that the CBCA corporation conduct business under a name other than its incorporated name, where the incorporated name conflicts with one already in use in the province

Third, a lawyer in any province will be able to give an opinion regarding the due incorporation and power and authority of a CBCA corporation. In contrast, subject to the National Mobility Agreement under which lawyers called in one province may give opinions regarding specific laws in provinces in which they have not been called (not yet widely relied upon), only a lawyer called to the bar in the province in which the corporation is incorporated may give a like opinion for a provincially incorporated corporation

Fourth, it appears that domain name registration procedures may favour federally incorporated corporations in the sense that the registration of a proposed domain name that directly conflicts with the name of an existing CBCA corporation will be refused. Similar treatment does not appear to be afforded to OBCA or other provincially incorporated corporations. Finally, while incorporation under the CBCA and OBCA can both be achieved by filing electronically, incorporation under the CBCA is less expensive. Currently the fee to incorporate under the CBCA is $200 for electronic filing and $250 for paper filing by mail, fax, or in person, whereas incorporation under the OBCA is $300 plus a fee for the registered service provider for electronic filing and $360 for a paper filing in person or by mail.

Conclusion

Despite the recent amendments to the OBCA, which brought the OBCA more in line with many of the provisions of the CBCA, there are still important reasons to prefer incorporation under the CBCA.