This article concerns the repeal of section 118(3) of the Ontario Business Corporations Act, (the “Act”) by the Better for People, Smarter for Business Act, 2020 (“Bill 213”). The repeals and amendments of Bill 213 have taken effect since July 5, 2021. There are 11 paragraphs in Schedule 1 of the Bill. The repeal of section 118(3), the focus of this article, is on the fifth paragraph of the Schedule.
Section 118(3) of the Act governs the necessary number of directors of a corporation required to be a resident Canadian. The section provided that “[a]t least 25 per cent of the directors of a corporation other than a non-resident corporation shall be resident Canadians, but where a corporation has less than four directors, at least one director shall be a resident Canadian.” Section 1(1) of the Act (now also repealed) provided that a ‘resident Canadian’ means “an individual who is, (a) a Canadian citizen ordinarily resident in Canada, (b) a Canadian citizen not ordinarily resident in Canada who is a member of a prescribed class of persons, or (c) a permanent resident within the meaning of the Immigration and Refugee Protection Act (Canada) and ordinarily resident in Canada.”
Following the repeal, the absence of the Canadian residency requirement will allow corporations to maximize their ability to appoint foreign or non-Canadians to their board. The repeal of the residency requirements will also prevent businesses from being disincentivized from incorporating inside Ontario. In addition, the repeal will empower corporations in Ontario to appoint more qualified directors to their board which may allow further efforts of increasing board diversity.
Previously, there were two alternatives for a business to incorporate within Canada. First, a business can be incorporate in a Canadian province where there is no Canadian residency requirement. Second, a business can seek out a resident Canadian to act as a director. Section 118(3) is an obstacle for foreign investors and businesses. As such, there are instances where foreign corporations would employ a Canadian director but they would diminish the director’s role by ensuring power remained within the shareholders under a ‘Unanimous Shareholders’ Agreement’ (“USA”).
Comparatively, prior to the Bill 213, the only provinces without a Canadian residency requirement were British Columbia (for more than two decades) and Alberta (recently removed its residency requirement as of March 29, 2021). Moving forward, after July 5, 2021, the residency requirements will remain only for federally incorporated companies under the Canada Business Corporations Act, R.S.C. 1985, c. C-44 and in the provinces of Manitoba, Newfoundland and Labrador, and Saskatchewan.
The elimination of the Canadian residency requirement under the Act will, undoubtedly, attract foreign investors and businesses seeking to incorporate in Ontario. In the contemporary context, the repeal will hopefully incentivize foreign investors and businesses which, in turn, would help Ontario on its road to recovery from the devastation of the COVID-19 pandemic.
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