On July 9, 2015, an expert panel convened by the Ontario Ministry of Government and Consumer Services (MGCS) released their final report (the Expert Report) containing many broad recommendations on how to modernize Ontario’s increasingly outdated business legislation. The Expert Report dealt with laws relating to corporations, partnerships, secured lending and other commercial activities. Taken together, these recommendations will bring Ontario into line with the leading corporate law jurisdictions in Canada (and beyond) and likely make the province a much more attractive business destination.
The release of the Expert Report is the first big step in the overhaul of Ontario’s business laws, which was first announced in the 2015-2016 Ontario Budget. This bulletin considers some of the more significant recommendations from the Expert Report and what their adoption could mean for businesses already operating in Ontario or those considering how (and where) to enter into the Canadian market.
1. Eliminating Residency Requirements for Directors
In Ontario, corporations are required, pursuant to Ontario Business Corporations Act (OBCA), to have at least 25% of resident Canadian directors, and if there are fewer than four directors, at least one director must be a resident Canadian. While most other provinces also require a resident director, as does the federal government for incorporations under the Canada Business Corporations Act, a handful of provinces have rejected this requirement, including British Columbia, Nova Scotia and New Brunswick. If Ontario drops this requirement it may become a more preferred jurisdiction for foreign companies looking to incorporate a subsidiary in Canada as well as potentially change the board composition of some Ontario corporations.
2. Expanding Availability of Limited Liability Partnerships
Limited Liability Partnerships (LLPs) are an attractive business vehicle for individuals wishing to operate their business as a partnership as they permit individual partners to only be liable for their own acts and omissions and, unlike limited partnerships, there is no requirement for a general partner to run the business and be liable for all debts and obligations of the partnership. However, Ontario only permits lawyers, chartered accountants and certified general accountants to form LLPs. The Expert Report’s recommendation to expand the availability of LLPs to other professions could therefore result in significant changes to how partnerships are organized in Ontario. While the recommendation doesn’t suggest which professions should be eligible for LLP status, one can imagine engineers, architects, planners, designers and medical professionals, among others, will all be interested in this form of partnership. British Columbia, which didn’t permit LLPs until 2004, has the most liberal LLP regime in Canada as the province allows any kind of business to be carried on through an LLP.
For those partnerships that will remain unable or unwilling to convert to an LLP, the Expert Report recommends narrowing the scope of liability for limited partners even when they take an active role in the limited partnership’s business. This would align Ontario more closely with Manitoba, which is a “jurisdiction of choice” according to the Expert Report, for limited partnerships in Canada precisely for this reason.
3. Permitting Unlimited Liability Corporations
Unlimited Liability Corporations (ULCs) are a special type of corporation often used with cross-border investors as they are treated under the Canada-US Tax Treaty as a corporation for Canadian tax purposes and as a flow-through or disregarded entity for US tax purposes. This helps avoid double taxation and, crucially, ULCs permit losses of the ULC to flow through to the shareholders to offset against their income, as well as other tax planning benefits. Currently, only the provinces of Alberta, BC and Nova Scotia allow ULCs to be incorporated. The Expert Report’s recommendation that Ontario permit ULCs could lead to a number of Ontario corporations converting to this structure, especially if they have foreign shareholders, and the incorporation of new ULCs going forward.
4. Keeping Corporate Law Current in Ontario
Perhaps the most important recommendation for the future of corporate law in Ontario from the Expert Report is to establish a formal process to continuously review and update the province’s corporate and commercial statutes. These statutes are rarely revised and, as can be seen from the above examples, have left Ontario’s business law regime behind some other provinces in Canada. Moreover, it has also left the legislation well behind the evolving corporate case law in Canada, such as the Supreme Court of Canada’s recent adoption of the duty of honesty in contracts. The province also needs to catch up on other corporate governance innovations, such as the Ontario Securities Commission’s recent ‘comply or explain’ procedure for gender diversity on boards and term limits for directors and the Toronto Stock Exchange’s recent adoption of majority voting for directors of its listed companies.
This has created a patch-work governance regime and a lack of clarity for Ontario businesses. This problem will only be remedied to the extent that the OBCA and other corporate and commercial statutes in Ontario can become and remain more current and reflect modern governance trends.
Public Comments on Expert Report Now Open
As mentioned above, the release of the Expert Report is just the first step in the overhaul of Ontario’s corporate and commercial laws. The next step will be MGCS releasing a ‘reform agenda’ this Fall, based on the Expert Report and public feedback. Legislation to implement any reforms will be introduced at some point thereafter. In the meantime, interested parties may provide public comments on the Expert Report until October 16, 2015 on the MGCS website.