Hello blog readers! This post is about directors' residency requirements in Ontario.
I am a lawyer and have been doing this for more than ten years. I have had the privilege of working with entrepreneurs in a wide variety of industries. (It is actually one of the best parts of this job.)
Several years ago, when covid first hit, I was of course a bit shocked. As time goes on, I started thinking about how I can give something back to our community. One idea was to create a blog as a source of credible, reliable information. In particular, I hope that this first set of blog posts is helpful for guys (and girls) who may be first-time entrepreneurs. More recently, the law around director's residencer requirements changed, and so I wanted to write this short blog.
It’s all good, man. Let’s do this!
Provincial Incorporation Versus Federal Incorporation
In Ontario, business peopel are free to choose between incorporating federally or provincially.
A federal corporation will be governed by the Canada Business Corporations Act (CBCA). Meanwhile, a provincial corporation in Ontario will be governed by the Ontario Business Corporations Act (OBCA).
These two pieces of legislation are, overall, very similar. However, one significant differnece between the two acts bears noting. This is the removal of requirements in the OBCA around the residence of corporate directors.
The Starting Point
Corporations operating in Canada were historically subject to residency requirements for their directors.
Both federal and provincial corporate law enforced the requirement that a certain percentage of corporate directors were Canadian residents. Under the Canada Business Corporations Act (CBCA), at least 25% of a corporation's directors were, and still are, required to be "resident Canadians." This has the practical consequence that if there are less than four (4) directors, one of them must be a Canadian resident, and if there is only one (1) director, he or she must be a Canadian resident.
The Ontario Business Corporations Act (OBCA) mirrored these residency requirements. Before July 5, 2023, section 118(3) of the OBCA mandated that 25% of an Ontario corporation’s directors had to be "resident Canadians." For companies with four or fewer directors, at least one of them had to meet this residency criterion.
Considerations
The residency requirement rule was thought to be part of a policy aimed at ensuring Canadian control over corporate governance.
The rule presented both challenges and benefits for businesses. While it guaranteed Canadian influence within corporate boards, it also limited the ability of multinational corporations to freely appoint directors. Businesses seeking to expand into Ontario or Canada as a whole often had to ensure compliance with these rules, which sometimes meant finding Canadian directors even when suitable candidates were located outside the country.
Changes to Ontario Legislation
As of July 2023, the OBCA has been amended, which removed the director residency requirement.
With the elimination of section 118(3), Ontario corporations are no longer obligated to appoint directors who are resident Canadians. This change means that businesses operating in Ontario under the OBCA can now be entirely controlled by non-residents of Canada.
The removal of this requirement may be material for multinational or foreign-owned businesses. Ontario corporations now have more flexibility in determining who can serve on their boards, without needing to navigate residency-related restrictions. While the shift may ease operational burdens for corporations, it has also raised questions. Some may argue that removing the residency requirement will reduce Canadian influence over corporations operating within the country.
It is beyond the scope of this post to argue one way or another whether
Practical Takeaway
We have previously reviewed certain differences between provincial and federal corporations. In that post we came to the conclusion both types of corporations have advantages and that choice between the two should be made based on specific facts in each particular case.
The removal of residence requirements adds one more important consideration of which entrepreneurs should be aware.