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Ontario Repeals Director Residency Requirement

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The Government of Ontario has now made a long-hoped for change to the Ontario Business Corporations Act (“OBCA”) removing the director residency requirement effective July 5, 2021.

This means that corporations incorporated or continued into Ontario no longer need to have any Canadian resident directors and will help put Ontario on a level playing field with provinces like British Columbia which have been without a director residency requirement for nearly two decades!

Former Rules

Under former subsection 118(3) of the OBCA, an Ontario corporation was required to have at least 25% of the directors to be resident Canadians. For corporations with less than four directors at least one
Canadian resident director was required.

This meant that foreign businesses looking to establish a subsidiary in Ontario would have to find at least one Canadian resident director before they could incorporate.

Many other Canadian provinces and territories including British Columbia, Quebec, Nova Scotia and New Brunswick did not have such barriers to incorporation. Accordingly, Canadian subsidiaries would often incorporate in British Columbia – even if they did business exclusively in Ontario – in order to avoid the requirement of a Canadian director.

This created an additional and unnecessary compliance burdento file certain returns/notices with the province of Ontario in addition to complying with its corporation filing requirements in British Columbia.

New Rules

Pursuant to Bill 213, which received Royal Assent December 8, 2020, the OBCA was amended effective July 5, 2021 to repeal subsection 118(3). This effectively eliminated any Canadian residency requirements for directors.

This means that foreign companies looking to establish a Canadian subsidiary now have one less reason to look outside of Ontario for a jurisdiction of incorporation.

Going forward, foreign corporations can now incorporate in Ontario and appoint whoever they like as directors – even the same directors as the US parent itself.

Commentary

Given Ontario’s size, population and proximity to US, it goes without saying that it has historically been a desirable jurisdiction for foreign businesses – but for the Director Residency requirement which might be considered a “deal-breaker” for other foreign parent companies.

This much-anticipated change now puts Ontario on a level playing field with other provinces. From an economic perspective, this welcomed amendment means more businesses will likely be incorporated and/or continued into Ontario going forward.

Existing corporations can also capitalize on these amendments if they decide to apply to “continue” the corporation from its present jurisdiction into Ontario and formally become an Ontario corporation.

In order to apply for continuance in Ontario, section 3 of the Ontario Reg. 289/00 under the OBCA, requires corporations to submit approval in the form of a letter of satisfaction, certificate of discontinuance or other document issued by the appropriate officer of the incorporating jurisdiction that indicates that the corporation is authorized under the laws of that jurisdiction, with its application for Articles of Continuance under section 180 of the OBCA.

Non-resident businesses looking to incorporate or continue into Ontario, should seek expert advice to avoid any compliance challenges while availing themselves of this amendment!

Do you require assistance in this area? If so, please click here.

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