Why we don’t Incorporate Federally

Prospective clients often ask to incorporate “federally” or that they want a “Canadian incorporated” company. In most cases we recommend a provincial incorporation instead – here’s why:

1. Federal Falsehoods

At the start, it’s critical to dispel federal incorporation falsehoods:

First, federal incorporation does not allow the company to operate Canada-wide. Like a provincially incorporated company, a federal company must register in each province in which it does business (see separate nexus test), which involves paying an extraprovincial registration fee to each province (except Ontario, which is free for federal companies). Similarly, provincial companies must pay an extraprovincial registration fee in each province.

Second, federal incorporation does not protect a company name across Canada. The federal government uses the “NUANS” name reservation system, which has been adopted by some but not all provinces (British Columbia, for example, does not use NUANS) such that a federal company name is only protected in NUANS provinces. If you’re looking to protect a company name Canada-wide, the correct approach is to file a trademark.

2.  Residency.  Federal corporations are required to have a board of directors containing 25% Canadian residents or, if four or fewer directors, 1 resident director.  Conversely, certain other provinces do not have director residency requirements, for example British Columbia, Alberta, Ontario and Nova Scotia. As most startups receive foreign (often U.S.) investment, federal residency requirements quickly become a problem.

3.  Extra Provincial Registration. Since federal corporations are effectively foreign in all provinces (except Ontario), a federal corporation must immediately pay an additional extraprovincial registration fee based on the first province in which it does business. For example, a federal corporation based in British Columbia must pay roughly $450 in extraprovincial registration fees immediately upon incorporation, which for a cash-strapped startup is an unnecessary expense.

For all the above reasons, consider incorporating in your home province rather than federally (with some exceptions). Before taking the step to incorporate, be sure to speak with your legal advisors to determine which jurisdiction fits your particular needs.

New Filing Requirements for Canadian Federal Corporations – Individuals with Significant Control (ISCs)

Starting January 22, 2024, all federal corporations created under the Canada Business Corporations Act (CBCA) are required to file information regarding individuals with significant control (ISCs) with Corporations Canada.

1.  Who is an ISC?

According to the CBCA, an ISC is an individual (see: human person) that:

• owns, controls or directs 25% or more of the shares of a corporation individually, jointly or in convert with one or more individuals;
• has control over the corporation without owning any shares; or
• meets a combination of any of the above two factors.

If a corporation’s shareholder is an entity (for example, a corporation, partnership, or trust), the individual(s) in control of such entity must be identified as ISCs.

Additionally, if multiple family members jointly own more than 25% of the shares of a corporation and one family member has sufficient influence over the other family members, such influential individual may be considered an ISC.

2.  What information will be filed?

The following information regarding ISCs must be filed with Corporations Canada:

Information that will be made public:

• full legal name;
• date on which the individual became an ISC;
• description of the ISC’s significant control; and
• mailing address.

Information that will not be made public:

• date of birth;
• country of citizenship;
• country of tax residency; and
• residential address.

If an ISC is less than 18 years of age, information will not be made publicly available until such individual turns 18 years old.

You may file an application to not make the information about an ISC public if:

• making the information publicly available presents or would present a serious threat to the safety of the individual;
• the ISC is declared incapable either by court or under provincial or territorial laws; or
• making the information publicly available would go against the Conflict of Interest Act or a similar legislation of a province or territory.

3.  Who is excluded from the ISC filing requirements?

Most federal corporations are required to comply with the new filing requirements, however, the following corporations are excluded:

• non-federal corporations (for example, a corporation incorporated under a province’s corporations act);
• a reporting issuer under provincial securities legislation or a wholly-owned subsidiary of a reporting issuer;
• a public corporation that trades its securities on a stock exchange designated by the Income Tax Act or a wholly-owned subsidiary of such a corporation; or
• a crown corporation or a wholly-owned subsidiary of a crown corporation.

4.  What does this mean for you?

If your corporation is federally incorporated and not exempt from the filing requirements, failure to maintain and file the ISC information may result in directors or officers facing penalties up to $1,000,000 or possible imprisonment, as well as potential fines to the corporation of up to $1,000,000 and involuntary dissolution.

Please reach out to the Voyer Law team to discuss your annual filing requirements and to maintain your corporation in good standing.

Problems with Stripe Atlas Incorporation for Canadians

We frequently work with Canadian startups operating a U.S. (usually Delaware) company incorporated on their behalf by Stripe Atlas.  On the surface, Stripe’s assistance with incorporating this U.S. company seems convenient and an easy way to meet the U.S. entity requirements to use the Stripe payment processing platform.  However, a number of material issues are generated by Stripe when it incorporates a U.S. company on behalf of a Canadian startup.

Problem #1

It’s critical to understand that a U.S. company cannot operate out of Canada without registering as doing business in Canada (thus exposing the company to unnecessarily complicated Canadian/US dual taxation), which Stripe does not address in its standard documentation.

The common solution to this is to treat the U.S. company as a parent to (or as a subsidiary of) a new Canadian company and isolate each company’s tax obligations in their respective countries.

Problem #2

Your U.S. company formed by Stripe needs to transact with your Canadian company on an arm’s length basis, taking into account tax transfer pricing rules.  If you don’t engage in tax planning around the flow of cash and assets between the two companies, expect expensive tax problems in the future

These tax issues can typically be addressed through cross-border tax planning as documented in an Intercompany Agreement in which we address the flow of cash and assets between the two companies.  For example, in the agreement we can address which company books sales in which countries and how the cash from these sales moves between the companies.

While Stripe Atlas touts the ease and speed with which a U.S. company can be incorporated, it neglects the massive cross-border legal and accounting issues that forming a U.S. company abroad generates.  If these issues are understood before incorporating, Stripe Atlas can be a valuable tool but, if not understood and planned for, expect it to generate more problems than it solves for.

California Consumer Privacy Act comes into Force Jan. 1, 2020

The California Consumer Privacy Act (the “CCPA”) is a new law intended to enhance privacy rights and consumer protections for California residents, which comes into force on January 1, 2020. 

In the lead-up to the CCPA coming into force, this blog post covers three common questions we receive: (1) do I need to comply? (2) when do I need to comply? and (3) what happens if I do not comply?

1.         Do I need to comply? Probably, but not directly.  Most companies that operate from Canada or in states other than California, will not directly have to comply with the CCPA as the territorial scope of the law is fairly limited, especially when compared with the EU’s General Data Protection Regulations (the “GDPR”).  To fall under the territorial scope of the CCPA, you have to be a for-profit business doing business in the State of Californiaand have one of three factors apply: 

(a) gross revenue of over $25,000,000 USD; 

(b) handle the personal information of more than 50,000 consumers, households or devices (it is unclear in the Act, at this stage, whether this is a California or world-wide number); or 

(c) derive more than 50% of annual revenue from the selling of consumers’ personal information.  

While the CCPA may not apply directly to many companies, as we saw with the GDPR rollout in 2018, the CCPA will likely indirectly apply as major tech companies like Google and Apple will have to comply with this law and as such, they will likely require, as part of their own compliance requirements, that companies they do business with that collect personal information also comply.  The extent of this indirect compliance is currently unclear and may only apply to certain provisions of the CCPA.

2.         When do I need to comply?  The effective date of the CCPA (the date at which the CCPA becomes law), is January 1, 2020, and while enforcement by the California Attorney General’s office may not begin until supporting regulations are finalized (deadline for regulations is June 1, 2020), we recommend that companies that need to comply directly begin compliance work immediately and aim to be fully compliant by January 1.  Companies that only need to comply indirectly may have some time to wait and see how the CCPA will affect contracts and terms with CCPA compliant companies but it won’t hurt to be compliant by early 2020. 

3.         What happens if I do not comply?  Beware of the cost!  There are several penalty clauses in the CCPA, including $2,500 for each non-intentional violation and $7,500 for each intentional violation.  If you have over 50,000 users, these penalties can easily amount to over $125,000,000.  For companies that will have to comply indirectly through contracts or user agreements, beware of indemnification clauses and other liability amendments that may push these penalties onto your company.

For many companies, the CCPA may not directly apply. However, it’s important to monitor CCPA factors, relative to your company’s business, to ensure that you do not miss compliance should a factor be met in the future – this is especially important in rapidly growing startups where it’s easy for a compliance obligation to be missed. Even if the CCPA factors are not met, there may be an obligation to comply as large tech companies will likely be complying and force compliance on everyone else they do business with.