Brooks Barristers and Solicitors
Incorporation in Canada:
Description and Establishment of a Canadian Corporation
A Canadian corporation is a legal entity separate in law from its owners (i.e. the shareholders), and is created under provincial or federal statute.
It is possible for an individual to be both an employee and a shareholder of a corporation.
A corporation with share capital is the most frequently used method of carrying on business in Canada.
A Canadian corporation is created by registration of Articles of Incorporation under provincial or federal statute.
Once incorporated, a corporation can own property, carry on business, possess rights and incur liabilities. A Canadian corporation carries on business under its own name and has a perpetual existence. That is, a corporation is dissolved only when a special majority of the shareholders resolve that it should be dissolved. If a Canadian corporation carries on business under a name other than its corporate name (i.e. ABC Inc.), it must register such name under the Business Names Act (Ontario) or such other corresponding legislation in other Provinces.
Shareholders of a Canadian corporation obtain shares in the corporation by providing the corporation with money, prior services or property in exchange for their shares.
A corporation's shareholders do not own the business or the property belonging to the corporation, and the rights and liabilities of the corporation are not the rights and liabilities of its shareholders.
Shareholders in Canada are responsible for appointing directors who manage and supervise the management of the business and affairs of the corporation.
In order to be a director of a corporation, an individual must be at least eighteen years of age, of sound mind and not bankrupt.
The majority of directors of an Ontario corporation must also be resident Canadians.
Corporate Liability in Canada
One of the most beneficial aspects of a Canadian corporation is the limited liability of its shareholders. Shareholders have limited liability because their liability in connection with the property or business owned by the corporation is limited to the value of the assets they have transferred to the corporation in exchange for their shares.
A shareholder's liability to creditors of a corporation, in most instances, is therefore limited to the amount of his/her investment in the shares of the corporation.
There are times however, when a shareholder in Canada is required to personally guarantee a corporation's debts or when he/she would be liable for the acts of a corporation (when the courts "lifts the corporate veil" contending the individual is the "alter ego" of the corporation).
There are also significant potential personal liabilities associated with being a director of a corporation which individuals should be aware of, including without limitation: unpaid employee wages (to a maximum of six (6) months), unremitted GST, PST and corporate income tax.
Corporate Financing in Canada
A Canadian corporation is the most flexible structure from a financing perspective.
Various types of debt and equity products are available including unsecured debt, secured debt, mezzanine or sub-debt, equity based on preferred shares and equity tied to common shares.
In addition, Canadian corporations may make "offerings" to the public for capital. However, any offering of securities to the public also requires compliance with securities laws and regulations.
Corporate Taxation in Canada
A Canadian corporation's income is determined and taxed separately from that of its shareholders. A corporation's after-tax income can be paid to its shareholders by the declaration of a dividend authorized by the directors. The dividend is income in the hands of shareholders and therefore taxable in Canada as such at the personal level.
Canadian corporations can gain advantages from a tax perspective in several ways. First, Canadian corporations are eligible for several types of tax credits and business deductions. Second, a corporation in Canada can reduce taxes payable by paying income out to the owners as salary rather than dividends. The corporation can deduct the salaries from its income in determining its income subject to tax. Lastly, there is a tax deferral created by leaving funds in the corporation.
Brooks Barristers & Solicitors
is a boutique business law firm located in Toronto, Ontario specializing in serving the needs of entrepreneurs, privately-owned Canadian businesses and their principals.