It is common for the shareholders of a corporation to seek a more active role in its internal affairs. To that end, both Quebec law 1 and Canadian federal law 2 allow shareholders to limit or completely withdraw the powers of the board of directors (hereinafter the “Board”) in order to exercise those powers themselves. This choice is also offered to a sole shareholder wishing to simplify the administration of his corporation and take all the decisions.3 However, when the shareholders or the sole shareholder are non-residents of Canada, this choice is not without legal and tax considerations.
Firstly, Canadian law requires that at least 25% of Board members be Canadian residents and that the sole director be a resident of Canada.4 This obligation, while usually imposed only on the Board, must be considered by the shareholders or the sole shareholder exercising all the powers of the Board, as they must now respect it. Only Quebec law is devoid of restrictions on this issue. Therefore, the shareholders of a corporation governed by Quebec law, exercising all the powers of the Board, can be non-residents of Canada.
Moreover, if the shareholders or the sole shareholder withdraw the powers of the Board, they become responsible for the rights and responsibilities previously granted to the Board.5 For example, directors are responsible for unpaid wages for 6 month preceding insolvency. They are also responsible for remitting payroll deductions at source and sales taxes to governmental authorities. If the shareholders exercise the powers of the Board, they are responsible for these payments, if applicable. However, it is important to note that an important decision of the Quebec Court of Appeals established that it is necessary to determine the individuals who exercise true control and decision-making in order to make a conclusion on liability.6 In practice, should such individuals exercise significant control or management duties within the corporation, it would be wise to consider purchasing Directors and Officers Liability Insurance (“D&O”) for them, even if they are not official directors per se.
From a tax perspective, the shareholders’ choice to withdraw and exercise the powers of the Board can be disadvantageous. Indeed, although the law provides that a corporation incorporated in Canada after April 26, 1965 is presumed to reside there, the tax residence of a corporation is usually at its real center of control. Thus, a corporation administered by shareholders who are non-residents of Canada may not qualify as a resident corporation, Canadian corporation or Canadian-controlled private corporation within the definition of Canadian tax laws. Consequently, this corporation may not be able to benefit from certain tax reductions, tax deductions or rules for corporate reorganization that are beneficial.
In this context, it is essential to anticipate the legal and tax implications of the withdrawal of the powers of the Board by shareholders who are not Canadian residents. We recommend that you obtain legal advice in order to make this choice in the most profitable way for you and your business.
1 Business Corporations Act, RLRQ, c. S-31.1 (BCA)
2 Canada Business Corporations Act, LRC, c. C-44 (CBCA)
3 213 and 216 BCA; 146 CBCA
4 105 (3) CBCA
5 214 BCA
6 Allard v. Myhill, 2012 QCCA 2024