Corporation

A corporation is a distinct legal person created by statute. Once incorporated, it exists independently of its shareholders, directors, and officers. It can sue and be sued, own real property, enter into contracts, and carry on business — all in its own name.

This concept of separate legal personality was established in the landmark English case Salomon v Salomon & Co Ltd [1897] AC 22, and it remains the foundational principle of corporate law in Ontario today. The Ontario Business Corporations Act, RSO 1990, c B.16 (OBCA) and the Canada Business Corporations Act, RSC 1985, c C-44 (CBCA) both enshrine this principle.

The practical consequence is that a corporation's debts are its own. If an Ontario corporation cannot pay its creditors, those creditors generally cannot reach the personal assets of the shareholders — a doctrine known as the corporate veil.

To incorporate a provincial corporation in Ontario under the OBCA, the applicant must file Articles of Incorporation with the Ontario Ministry of Public and Business Service Delivery under Section 4 of the OBCA. The articles must include:

• The corporation's name (which must comply with naming rules under Section 10 of the OBCA and the Business Names Act)
• The municipality or geographic area in Ontario where the registered office will be located
• The classes and maximum number of shares the corporation is authorized to issue
• Restrictions on share transfers (if any)
• The number of directors (minimum and maximum)
• Any restrictions on business the corporation may carry on
• Any other provisions the incorporators wish to include

The government filing fee is $300 when filed online through Ontario Business Registry (OBR). After filing, the province issues a Certificate of Incorporation, and the corporation legally comes into existence on the date shown on that certificate (OBCA, s. 5).

In addition to Articles of Incorporation, a newly incorporated corporation should promptly adopt by-laws, hold an organizational meeting of directors, issue shares, and establish a minute book.

The separate legal personality of a corporation has several critical practical consequences in Ontario:

Perpetual existence: A corporation does not die when its shareholders or directors do. It continues until it is voluntarily dissolved or cancelled by the government for non-compliance.

Ownership of property: Real estate, intellectual property, equipment, and bank accounts are held in the corporation's name, not the shareholders' names. This simplifies transfers and estate planning.

Contractual capacity: The corporation, acting through its authorized officers and directors, can enter contracts that bind only itself — not the individual signatories personally (unless personal guarantees are given).

Litigation: The corporation sues and defends lawsuits in its own name. Shareholders are not parties to corporate litigation by virtue of their ownership alone.

Piercing the corporate veil: Ontario courts will disregard the separate personality of a corporation — "pierce the corporate veil" — in limited circumstances: fraud, using the corporation as a sham to evade legal obligations, or where a court finds the corporation is the alter ego of its controllers. This is an exceptional remedy and courts are reluctant to apply it.

Limited liability is the signature advantage of the corporate form. Under Section 92 of the OBCA, shareholders are not personally liable for the acts, defaults, or obligations of the corporation merely by reason of being shareholders. A shareholder's financial exposure is limited to the amount invested in shares.

In practice, however, this protection has exceptions that business owners should understand:

Personal guarantees: Lenders and landlords routinely require founders to personally guarantee corporate debts. When a guarantee is signed, the shareholder waives limited liability for that specific obligation.

Director liability: Directors (who may also be shareholders) face personal liability for unpaid wages and vacation pay under Section 131 of the OBCA, unremitted source deductions under the Income Tax Act, unremitted HST under the Excise Tax Act, and environmental damages. This is a critical distinction: shareholders are shielded, but directors are not for these statutory obligations.

Professional malpractice: Regulated professionals (lawyers, doctors, engineers) retain personal liability for their own negligence regardless of the corporate form.

A corporation can create a tax deferral where eligible business profits remain in the company after corporate tax instead of being paid immediately to the owner. It does not automatically turn all revenue into low-rate income or eliminate personal tax.

Small business deduction: A Canadian-controlled private corporation may claim the federal and Ontario small business deductions on qualifying active business income up to its available business limit. Associated corporations share limits, and taxable capital, passive investment income, personal-services-business rules, and the character of the income can change the result. Consult the CRA's current corporation tax rates for the applicable tax year.

Paying the owner: Salary is generally deductible to the corporation and taxable as employment income. Dividends are paid from after-tax corporate income and receive their own personal tax treatment. A complete comparison includes corporate tax, personal tax, CPP and payroll consequences, the timing of withdrawals, and compliance costs.

Investment income: Passive income in a private corporation is taxed under different rules and can reduce access to the federal small-business limit. A corporation should not be described as a general low-tax investment account.

Sale of shares: An individual may be able to claim the lifetime capital gains exemption on a sale of qualifying small business corporation shares if the detailed ownership and asset-use tests are satisfied. The limit and rules can change, so purification and sale planning should begin well before a transaction.

Potential advantages:

• Limited liability: Shareholders are generally not liable for corporate obligations merely because they hold shares, subject to guarantees, personal conduct and statutory liabilities
• Tax deferral: Eligible profits retained in the corporation may postpone personal tax until withdrawal
• Transaction planning: A sale of qualifying shares may support a lifetime capital gains exemption claim by an eligible individual
• Continuity and ownership: The corporation survives ownership changes and can issue different share classes
• Financing and governance: Shares, options, board oversight and shareholder agreements can support investors and succession

Potential disadvantages:

• Cost and administration: In addition to Ontario's current $300 online incorporation fee, the corporation needs tax returns, annual corporate filings, accounting records and a minute book. Professional costs depend on scope.
• Separate losses: Corporate losses generally stay with the corporation rather than reducing a shareholder's other personal income.
• Duties and exposure: Directors and officers have statutory and fiduciary obligations; limited liability is not a shield for their own conduct or every statutory debt.
• Withdrawal planning: Salary, dividends, shareholder loans and benefits have different legal and tax consequences.
• Family payments: The tax on split income rules can apply to dividends and other amounts connected with a related business. Family share ownership is not an automatic income-splitting advantage.

Ontario businesses can incorporate either provincially under the OBCA or federally under the CBCA. Key differences include:

Corporate-name review: Corporations Canada reviews a proposed federal word name across Canada. That is stronger corporate-name protection than an Ontario incorporation alone, but it is not a registered trademark and does not eliminate provincial name or registration rules.

Registered office: A CBCA corporation must maintain its registered office in the province or territory stated in its articles. An OBCA corporation must maintain its registered office in Ontario.

Director residency: The OBCA has no Canadian-resident director quota. The CBCA generally requires at least 25% of the directors to be resident Canadians; where there are fewer than four directors, at least one must be a resident Canadian. Special rules can apply to prescribed businesses.

Annual filings: A CBCA corporation files an annual return with Corporations Canada. An OBCA corporation files an annual return through the Ontario Business Registry. These corporate returns are separate from income-tax returns.

Operating in multiple provinces: Federal incorporation does not replace provincial or territorial registration. Both federal and Ontario corporations must assess the registration rules in every jurisdiction where they carry on business. Ontario currently offers an integrated, no-fee registration path for federal corporations incorporated online.

Maria operates a software-consulting business in Toronto. To compare a sole proprietorship with incorporation, her accountant first projects business profit, deductible expenses and personal cash needs. Counsel separately assesses customer-contract risk, ownership, insurance and future hiring.

If Maria incorporates and receives a reasonable salary, the corporation generally deducts that salary before calculating its taxable income. The corporation pays tax on the remaining taxable profit; Maria pays personal tax on the salary. Any after-tax amount retained by the corporation can fund operations or investment, but later salary, dividends or benefits can create further personal tax.

The model must also test whether the corporation would be a personal services business, whether its income qualifies for the small business deduction, and how passive investment income would affect future business limits. The decision turns on those facts and current-year rates—not on applying one corporate percentage to gross revenue.