Federal vs Provincial Incorporation in Ontario: Taxation Differences

Ontario businesses can choose between incorporating at the provincial or federal level. There are differences between provincial and federal incorporation that could affect how your business operates within Canada.

Whether you own a small business that you are planning to incorporate, or you are starting a new business in Ontario, choosing the best method of incorporation can help you save money in the long term.

Business accountants at T2inc explain the important taxation differences between provincial and federal incorporation.

Points to consider before incorporating

Before incorporating your business, take a look at your long-term plans. Several factors come into play when deciding whether to incorporate provincially or federally:

• Whether you intend to conduct business in provinces other than Ontario
• The importance of your company name to successful operations
• The type of business accounting services you can rely on to manage annual returns and bookkeeping

Conducting business elsewhere in Canada

A business that is incorporated in Ontario has the right to operate within that province, but not elsewhere in Canada.

An Ontario corporation is also obliged to ensure that all information on the public record about the company remains accurate and up to date via the Ontario Business Registry.

Federally incorporated companies have the freedom to conduct business across Canada without any limitations on the province or territory where their head office is situated, where they keep their corporate records, or where they hold annual general meetings.

In both cases, business owners are responsible for filing both provincial and federal tax returns, and declaring all relevant activity within Ontario or elsewhere in the country. Note that unincorporated Ontario businesses (sole proprietorships and partnerships) are not liable for Ontario corporate tax.

Controlling your company name

When you register your company name, you are awarded name protection for the exact corporate name within the jurisdiction of incorporation.

If you register your company name in Ontario, it will protected only within Ontario. If, at a later date, you decide to expand operations to other provinces or territories, you could find yourself unable to operate using your registered name in cases where another company is already using that name in that jurisdiction.

If your name is registered federally, your company name will be protected throughout Canada for as along as you uphold your responsibilities as a federally registered business.

When you file your T2 taxes, you will use your incorporate business name, since an incorporated company is financially separate from its owner and any business profits will be taxed at corporate rather than personal rates.

Keep in mind that it is easier to have a name approved in Ontario than federally, although at both levels, there is always the risk that someone else will have chosen the exact or similar name to your company. It is worth doing your research before choosing a name, to learn what your options are and the difference between registered names and trademarks. Both federal and Ontario corporations must register their name with NUANS.

Accounting support for filing annual returns and maintaining financial records

Both federally and provincially incorporated businesses have taxation responsibilities. Many businesses choose to rely on the services of a professional business tax accountant to avoid errors and late submissions, as both federal and provincial taxation responsibilities can be complex.

To successfully file your corporate taxes in Ontario and Canada, remember these key points:

• Filing Annual Returns: The Ontario annual return was previously filed with the Canada Revenue Agency at the same time as the corporate tax return.  As of May 15, 2021, this situation has changed, and the Ontario annual return must now be completed and filed with the province of Ontario.
• Business number: To file your annual provincial corporate returns, you need an Ontario corporations tax account number, awarded by the Ontario Ministry of Public and Business Service Delivery. To file your annual federal returns, you need a federal business number, generated by the Canada Revenue Agency.
• Initial Notice: In addition to annual returns, Ontario corporations have to file an Initial Notice within 60 of incorporating, and must indicate any changes to company ownership and structure within 15 days of this change. Federal corporate records, on the other hand, must be updated immediately.

If you do not have the necessary accounting support to file your corporate taxes, you could find yourself losing time and compromising your company’s success. Consider your accounting needs before deciding where to incorporate, and remember to consult a lawyer regarding any legal issues that could also impact your decision.

Protect your profits with the right type of incorporation

Choosing to incorporate at the provincial or federal level can have long-term consequences for your business success. If you intend to operate outside of Ontario, you will need to pay relevant taxes, and operating across the country with the same name and structure can simplify your tax filing experience.

Tax regulations change frequently. Contact the experienced tax accountants at T2inc for help filing your provincial or federal corporate taxes.