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The Impact of the Elimination of Canadian Residency Requirements for Ontario Directors

The laws concerning director residency have created obstacles for corporations and investors who did not have Canadian directors. The elimination of Canadian residency requirements for Ontario Directors is explained by Toronto Business and Technology Lawyer Sukhi Hansra

The Ontario Better for People, Smarter for Business Act 2020 (Bill 213) received Royal Assent in December 2020 to amend the Ontario Business Corporations Act (OBCA), including the elimination of the current Canadian residency requirements for directors of Ontario corporations.

Tentatively planned to go into effect on July 1, 2021, when proclaimed, the new amendments eradicate the current requirement whereby 25% of company directors in Ontario corporations need to be resident Canadians. In short, you no longer need to be located in Ontario to open a corporation in Ontario.

This will affect both private and publicly held Ontario corporations and is a positive move for companies and foreign investors based outside of Canada, as well immigrant entrepreneurs who want to incorporate into the Province of Ontario.

Let’s review some frequently asked questions about the change in Canadian residency requirements for directors.

2023 Update: Since originally writing this blog post originally, we’ve helped countless individuals and business owners located all across the world with strategizing the best ways to open a new company in Canada. From setting up a company in Ontario to ensuring you’ve got the most tax efficient setup possible – there’s a ton of great strategies that we can help implement if you’re located internationally and want to open a company in Ontario. If you want to learn more, you can contact us by clicking here or calling us at (416) 580-0345.

Why does altering Canadian residency requirements for directors matter?

The laws around director residency have previously created obstacles for corporations and investors who did not have Canadian directors. These corporations would often forego the opportunity to conduct business in Ontario and set up shop in another jurisdiction, or elect resident Canadians as directors who may only have been chosen to fulfill the residency requirement.

Some foreign corporations would even go as far as employing a Canadian director but institute a unanimous shareholders’ agreement (USA) to ensure power remained with the shareholders and not the director, essentially diminishing the director’s role.

How did the Canadian residency requirement for directors come about?

In the 1970s there were concerns about too much direct foreign investment in Canada. The stringent Canadian residency requirements for directors were developed out of the notion that corporations would be more responsive to Canada’s national interests if there was a Canadian presence on corporate boards.

In addition, it was commonly held that resident Canadian directors faced more significant risks and would have a greater interest and responsibility in seeing that a corporation followed the law. As globalization took hold, these rationales relaxed and are now not as pervasive as they were before.

Today, corporate directors have a duty to act in the corporation’s best interests, whether or not they align with Canada’s best interest. Furthermore, residency requirements do not promote the enforcement of laws as director liability can still be removed by a Unanimous Shareholders Agreement.

What will change with Canadian residency requirements for directors?

Among other changes the amendment will bring, these are the two changes applicable to director residency requirements:

  1. Businesses incorporated in Ontario under the Business Corporations Act will no longer be required to have at least 25% of their board of directors be Canadian residents; and
  2. Businesses incorporated under the Companies Act will no longer be required to have at least 50% of the board of directors be Canadian residents.

What does the elimination of Canadian residency requirements for directors hope to achieve?

The Ontario Better for People, Smarter for Business Act 2020 hopes to speed up government approvals, ease administrative burdens, improve government transparency and remove outdated requirements that stunted economic growth and job creation.

This makes Ontario more attractive to foreign investors and entrepreneurs as it reduces the cost, complication, and bureaucratic delay that comes with finding the right Canadian director. Existing Ontario corporations may revise their board composition, while others may open new offices in the province.

What is an agent for service?

An agent for service acts as a corporation’s “contact” in Ontario and will be served any claims against the corporation relating to business conducted in the province. They are required by law to inform the corporation of any such claims.

Agents for service essentially act as local contacts for government agencies. Corporations often use professionally registered agencies to maintain their crucial documents sent from government departments or other agencies separate from their daily corporate correspondence.

What is the new agent for service requirement for companies in Ontario?

When the new amendments come into play, all companies, including non-profits, will be required to appoint an agent for service who must:

  1. Be 18 or older and resident of Ontario; and
  2. Have an accessible address to the public during normal business hours.
 

Existing companies have been granted a one-year grace period to find an agent for service. Failure to do so will result in the company’s dissolution – meaning that they will close down your company. Current companies will need to send their notice of appointments to the Registrar.

What should you do if you no longer want a Canadian director on your board?

With the elimination of the Canadian residency requirements for directors, you may no longer wish to have a resident Canadian director on your board. To remove them, you will need to conduct a legal review of your corporation’s by-laws to determine whether any by-law amendments are required to reflect the removal of the Canadian director. No changes can legally be made to a corporation’s board before going through these legal proceedings.

Once you have reviewed the by-laws and determined the requirements for removing directors, you will need to either hold a meeting of shareholders to vote the director out or have your lawyer prepare a Shareholders Resolution whereby all of the shareholders can agree in writing to vote the director off the company’s board.

Lastly, you can have your lawyer file a Notice of Change with the Ministry of Consumer Services in Ontario to update your corporate records with the government. 

Warning: You Should Have a Good Tax Strategy

Before you suddenly jump ship and start a company in Ontario, one key aspect that you should be aware of is the CCPC requirement. The biggest problem when it comes to internationally owned Canadian businesses is that if you cannot meet the definition of a Canadian Controlled Private Corporation (CCPC), you are looking at more than double the standard corporate tax rate for business in Canada (about 12% vs. 30%). To be a CCPC, more than 50% of your company’s shareholdings must be with Resident Canadians.

Sometimes, this is not possible right off the bat. Other times, we can form strategies to plan for how to achieve CCPC status later down the road. Regardless of what you choose, it’s important that you work with a professional that understands this area so that you don’t end losing about 20% of your profit margin to corporate tax payments. That’s a huge hit for any business!

Summary

Eliminating the Canadian residency requirement for Ontario businesses is a big change for foreign investors and immigrant entrepreneurs – and opens the door for more businesses to open in Toronto and create jobs for Canadians. However, before you make the move, it’s important to put in place a solid strategy – from the business side, legal side and tax side – so that you can be setup for success from the start.

Learn More:

Toronto Business Lawyer

Do you want to launch a business in Ontario? Hansra Law provides strategic business and legal advice on how you can set your company up for international expansion with great success. By working with our experienced business lawyers, our clients can focus on starting and growing their business on the right foot instead of losing a ton of money on easily avoidable things.

To schedule a FREE phone call to discuss how we can help launch and grow your business, contact Sukhi Hansra at (416) 580-0345

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