choosing the right business structure€¦ · 12:50 p.m. – 1:05 p.m. incorporations, governance...

chair

Sundeep Sandhu Blaney McMurtry LLP

October 4, 2018

CHOOSING THE Right Business Structure

*CLE18-0100500-A-PUB*

Law Society I Barreau of Ontario de !'Ontario

(3mruContinuing I I Professional Development

DISCLAIMER: This work appears as part of the Law Society of Ontario’s initiatives in Continuing Professional Development (CPD). It provides information and various opinions to help legal professionals maintain and enhance their competence. It does not, however, represent or embody any official position of, or statement by, the Society, except where specifically indicated; nor does it attempt to set forth definitive practice standards or to provide legal advice. Precedents and other material contained herein should be used prudently, as nothing in the work relieves readers of their responsibility to assess the material in light of their own professional experience. No warranty is made with regards to this work. The Society can accept no responsibility for any errors or omissions, and expressly disclaims any such responsibility.

© 2018 All Rights Reserved

This compilation of collective works is copyrighted by the Law Society of Ontario. The individual documents remain the property of the original authors or their assignees.

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Library and Archives Canada Cataloguing in Publication

Choosing the Right Business Structure

ISBN 978-1-77345-269-2 (PDF)


(3mruContinuing I I Professional Development

1

October 4, 2018

Chair: Sundeep Sandhu, Blaney McMurtry LLP

October 4, 2018 12:00 p.m. – 1:30 p.m.

Total CPD Hours = 1h 30m Substantive

WEBCAST ONLY

Law Society of Ontario

CLE18-0100500

Agenda

12:00 p.m. – 12:05 p.m. Welcome and Opening Remarks

Sundeep Sandhu, Blaney McMurtry LLP

12:05 p.m. – 12:20 p.m. General Overview of Alternative Business Structures:

What are the Choices?

Anna Balinsky, Miller Thomson LLP

12:20 p.m. – 12:35 p.m. Sole Proprietorships: Advantages and Disadvantages

Jesslyn Maurier, Bennett Jones LLP

CHOOSING THE

Right Business Structure

2

12:35 p.m. – 12:50 p.m. Finding the Right Partnership to Fit the Deal: General

Partnerships, LLPs, and Limited Partnerships Victor Liu, Goodmans LLP

12:50 p.m. – 1:05 p.m. Incorporations, Governance and Share Structures: Why

Incorporate? Cynthia Sargeant, Norton Rose Fulbright Canada LLP The Latest Developments on Benefit Corporations

Dennis Tobin, Blaney McMurtry LLP

1:05 p.m. – 1:20 p.m. Tax Implications of Business and Deal Structures

Vitaly Timokhov, TaxChambers LLP

1:20 p.m. – 1:30 p.m. Question and Answer Session 1:30 p.m. Program Ends

October 4, 2018

SKU CLE18-0100500

Table of Contents TAB 1 Sole Proprietorships: Advantages and Disadvantages.................... 1 - 1 to 1 - 3

Jesslyn Maurier, Bennett Jones LLP

TAB 2 Finding the Right Partnership to Fit the Deal: General Partnerships, LLPs, and Limited Partnerships ................... 2 - 1 to 2 - 3

Victor Liu, Goodmans LLP

TAB 3 Incorporations, Governance and Share Structures: Why Incorporate? ........................................................................ 3 - 1 to 3 - 4

Cynthia Sargeant, Norton Rose Fulbright Canada LLP

TAB 4 The Latest Developments on Benefit Corporations ........................ 4 - 1 to 4 - 2

Dennis Tobin, Blaney McMurtry LLP

TAB 5 Tax Implications of Business And Deal Structures………………..5 - 1 to 5 - 6 Vitaly Timokhov, TaxChambers LLP


TAB 1


Sole Proprietorships: Advantages and Disadvantages

Jesslyn Maurier Bennett Jones LLP

October 4, 2018


------••·

(3fTiruContinuing I I Professional Development

1

Sole Proprietorships: Advantages and Disadvantages

Law Society of Ontario Webcast October 4, 2018

Presented by: Jesslyn Maurier, Bennett Jones LLP

The following table provides a brief overview of the key advantages and disadvantages of

conducting business as a sole proprietorship.

Advantages Disadvantages

Control Decision-making is streamlined. A

sole proprietor has direct and

exclusive control over business

management and decision-making.

Exclusive control may be a

disadvantage if managing a

particular business requires a

diverse set of skills, expertise and

perspectives.

Liability No advantages. No separate legal personality for

the business. As a result, the sole

proprietor has unlimited personal

liability: the sole proprietor is

personally responsible for all

obligations and liabilities relating to

the business, and all of his or her

assets are exposed and may be

required to satisfy those business

obligations and liabilities.

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Financing And

Start-Up Costs

Possibly lower ancillary costs of

starting the business (such as legal

fees associated with drafting

organizational documents and

complying with other legal

formalities), as compared to other

business vehicles.

It may be difficult to raise capital.

Available working capital is limited

to the assets of the sole proprietor

and to the credit that the sole

proprietor is able to obtain.

Administrative

And Regulatory

Requirements

Few regulatory requirements to

create or maintain a sole

proprietorship.

No disadvantages.

Financial

Returns

The sole proprietor owns all of the

assets and is entitled to all profits

of the business. Profits may be re-

invested into the business or used

for personal purposes, at the sole

proprietor’s discretion.

The sole proprietor is personally

responsible for all obligations,

losses and liabilities, as discussed

above under "Liability".

Taxation Income and losses are directly

taxed in the hands of the sole

proprietor, at the sole proprietor's

personal tax rate (an advantage

when profits are relatively low).

Losses of the business may be

applied against other sources of

income to lower the sole

proprietor’s overall tax burden.

In profitable years, the business

income will be taxed at the sole

proprietor's personal tax rate,

which may be a higher rate than

would apply if the business were

incorporated.

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Transferability

And Estate

Planning

Dissolution of the business upon

the death of the sole proprietor

may simplify estate planning

considerations.

The business will dissolve upon the

death of the sole proprietor,

potentially resulting in a loss of

value.

The business (business assets) may

be sold or transferred through

inheritance. Upon the death of the

sole proprietor, the estate executor

has a duty to maximize the value of

estate assets (which may involve

selling the business as going

concern), but the nature of the sole

proprietorship may make the sale

of the business challenging.

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TAB 2

Finding the Right Partnership to Fit the Deal: General Partnerships, LLPs, and Limited Partnerships

Victor Liu Goodmans LLP

October 4, 2018



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Finding the Right Partnership to Fit the Deal: General Partnerships, LLPs, and Limited Partnerships

Victor Liu, Goodmans LLP

Overview

A partnership is the relationship among natural persons, corporations or other partnerships carrying

on business in common with a view to profit. Subject to the underlying provincial statute, the

rights and obligations of the partners among themselves are typically set out in a written

partnership agreement. In the absence of any agreement to the contrary, the rights and obligations

of partners will be those stipulated by the underlying provincial statute. Provincial statutes also

sets out presumptive rules governing the rights and obligations of the partnership and partners to

third parties.

To be a partnership, the partners must be carrying on a business, with a view to making a profit

and must have agreed to be carrying on business in common. Unlike a corporation, a partnership

is not a separate legal entity. As a result, and this will be discussed later in the program, income

and losses of partnerships, although determined at the partnership level, are taxed in the partners’

hands. This tax treatment is often the primary reason for using a partnership rather than a

corporation, for example, since each partner may offset its share of the partnership’s business tax

losses against income from such partner’s other sources.

Though not a separately legal entity, any property that the partners contribute to the partnership or

purchase in the course of the business belongs to the partnership as “partnership property”.

Partners are only entitled to the sale and division of the proceeds of partnership property on

dissolution of the partnership and after all of the partnership’s liabilities have been discharged and

settled. Where a partner holds partnership property (such as legal title to land or other asset), the

partner is deemed to hold the property in trust for the partnership because the partnership property

must be used exclusively for the partnership.

A partnership can be dissolved upon the expiration of its term (if fixed by partnership agreement),

at the termination of the undertaking for which it was entered into, by a partner giving notice to

the other partners of an intention to dissolve, or by the death or insolvency of a partner. A

partnership will also be immediately dissolved by the occurrence of any event that makes it

unlawful for the business of the partnership to be carried on or for the partners to carry on the

business in partnership. Finally, a partnership can be dissolved by order of a court upon application

by a partner, based on various circumstances including mental incompetency, incapacity to

perform, conduct prejudicial to the partnership, persistent breach of partnership agreement, no

reasonable expectation of profit for the partnership, and on equitable grounds.

Absent a partnership agreement, the provincial statutes will set out default rules governing various

aspects of a partnership. Typically, the provincial statute will require unanimous approval to vary

the default rules, which can be effected by all partners signing onto a partnership agreement. For

example, Ontario’s Partnership Act assumes that all partners are to be treated equally. It also

requires admission of a new partner to be by unanimous approval of all partners, and similarly,

changing the business of the partnership requires unanimous approval. A majority of partnership

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cannot expel an existing partner and the death or withdrawal of a partner may trigger dissolution.

These, along with governance and decision-making, are important matters to be considered and

addressed by the partners in a partnership agreement.

Generally, three types of partnerships: (1) general partnerships; (2) limited partnerships and

(3) limited liability partnerships.

General Partnerships

In a general partnership, each partner has unlimited liability for the partnership’s liabilities and

each partner is jointly liable with the other partners for all debts and obligations incurred by the

partnership (though typically limited to those partnership debts and obligations while a partner has

become and before it ceases to be a partner). All partners may take an active role in operating a

general partnership and each partner may also bind other partners unless there are restrictions in

the partnership agreement of which third parties have actual notice.

The main disadvantages of general partnerships is the unlimited joint liability and the possibility

of partners being bound by other partners.

Limited Partnerships

A limited partnership is made up of one or more general partners, each of whom has the same

rights and obligations as a partner in a general partnerships, and one or more limited partners,

whose powers and liabilities are limited, the latter generally limited to the contributed capital (in

cash or property) of the limited partner. The limited liability of limited partners is the primary

advantage of limited partnerships over general partnerships.

For a limited partnership, the general partner(s) manage the partnership and the limited partner(s)

cannot take part in the control or management of the partnership without jeopardizing the limited

partner(s)’ limited liability. If limited partners take part in the activities of the limited partnership,

they may be deemed to be general partners and lose the limited liability protection of being a

limited partner. The provincial statute do provide some protection for the limited partnership by

restricting the general partner from doing certain acts without the written consent of all the limited

partners (which act of consent does not, in and of itself, constitute taking part in the activities of

the limited partnership). These acts include any act in contravention of the partnership agreement

or that makes it impossible to carry on the business of the partnership, consent to a judgment,

possessing partnership property, and admitting a new general partner.

A limited partnership provides both limited liability and the ability to flow tax losses through to

passive investors. This form of business structure is often used to finance businesses that may

have tax losses in the early years that are more valuable to investors than to the enterprise itself.

As tax considerations is often a main consideration for limited partnerships, the different provincial

statutes also impact the jurisdiction chosen for the limited partnership. In Ontario, a limited

partnership can be established by filing a declaration (signed by all the general partners), which

declaration must be renewed every five years. The declaration requires relatively basic

information to provided, including name of partnership, address of business, general nature of the

business and basic information regarding the general partner(s) but not of the limited partners. By

contrast, in Alberta, a limited partnership can be established by filing a certificate, which requires

additional information regarding the limited partners, including contributed capital and committed

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capital. However, unlike Ontario and other provinces, Alberta limited partnerships do not need to

have a registered office in the province, and from a tax perspective, that is often an important

factor.

Limited Liability Partnerships

A limited liability partnership is a sub-set of a limited partnership, created by statute. A limited

liability partnership is restricted to carrying on business for the purpose of practising a profession

that is expressly permitted to be permitted through a limited liability partnership, such as lawyers,

doctors, accountants, architects and professional engineers.

The main difference of a limited liability partnership is that it does not have a general partner, and

each partner has the ability to take part in the management of the partnership, but at the same time,

liability of the partner is limited and partners are not jointly liability with all other partners for the

liabilities of the partnership. Unlike a limited partnership which can have corporations act as

general partner (thereby providing a liability shield), a limited liability partnership cannot have a

corporation as a partner.

The limitation on liability depends on the governing provincial statute. In Ontario, a limited

liability partner is not liable for the liabilities of the partnership arising from the negligent acts or

omissions that another partner or an employee, agent or representative of the partnership commits

in the course of the business of the limited liability partnership. Importantly, a limited liability

partner remains liable for his or her own negligence or the negligence of a person under the limited

liability partner’s direct supervision or control. Similarly, the limited liability partnership itself

remains at risk for all liabilities of the partnership, including those arising from the negligence of

any of its partners, employees, agents or representatives. Finally, other than for negligence claims

and ordinary trade debts of the partnership, a limited liability partner’s interest in the limited

liability partnership remains available to satisfy claims against the partnership.

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TAB 3

The Motivation for Incorporation

Cynthia Sargeant Norton Rose Fulbright Canada LLP

October 4, 2018



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1

THE MOTIVATION FOR INCORPORATION

Cynthia Sargeant, Of Counsel, Norton Rose Fulbright Canada LLP

Overview – why incorporate?

In general, there are three basic benefits that result from incorporating:

(a) Limiting liability

(b) Flexibility in governance structures

(c) Flexibility in share structures

Limiting Liability

Unlike sole proprietorships, corporations have limited liability, meaning that shareholders are generally not liable for the business debts and obligations of a corporation. A classic case demonstrating this point in Salomon v. A. Salomon and Co Ltd., [1897] AC 22.

Salomon v. A. Salomon and Co Ltd., [1897] AC 22

Facts:

Aron Salomon was a boot maker. He initially ran his business as a sole proprietorship, butlater incorporated the business, with himself and six family members owning all shares.

When the business went into liquidation, the unsecured creditors argued that the businesswas fraudulently incorporated and that Salomon should be held personally responsible forits debts.

Decision:

The House of Lords affirmed that shareholders are generally not liable for the debts of acorporation, holding that incorporation gives a business “a legal existence with . . . rightsand liabilities of its own, whatever may have been the ideas or schemes of those whobrought it into existence.”

Key Takeaway:

Incorporating a company is a means of protecting the owners from liabilities arising againstthe company.

One Step Further – Holding Companies

Holding companies are setup as the sole shareholder of one or more operating companies. The operating companies carry one the business, while transferring all profits to the holding company by declaring regular dividends.

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Once the profits are held by the holding company, they are protected from liabilities incurred by the operating company because, as a shareholder, the holding company is not liable for debts or obligations of the operating company.

Governance Structures

The Board of Directors

Shareholders are the owners of the corporation, but they typically aren’t involved in corporate decision making. Rather, shareholders elect a Board of Directors that is tasked with making decisions in the best interests of the corporation.

The Canada Business Corporations Act (CBCA) imposes two over-arching duties on directors:

(i) the duty to act honestly and in good faith with a view to the best interests of the corporation,and

(ii) the duty to exercise the care, diligence and skill that a reasonably prudent person wouldexercise in comparable circumstances.

Flexibility in Governance

Canadian corporate statutes permit flexibility in terms of:

The number of directors a corporation has

The length of directors’ terms of service

The qualifications of directors

Whether directors are permitted or required to hold shares in the company

The decision making authority of directors

Directors in Name Only – Unanimous Shareholder Agreements

Every corporation must have at least one director. However, if it is desired to limit the authority of directors, this can be achieved through the use of a unanimous shareholder agreement (USA).

A USA is a written agreement among all shareholders of a corporation which restricts the powers of the Board of Directors and reassigns the restricted powers to the shareholders, effectively creating an “incorporated partnership” (Duha Printers (Western) Ltd. v. R., 1998 CarswellNat 750).

Various provisions in corporate law statutes are made subject to USAs, most notably the requirement that directors manage, or supervise the management of, the business and affairs of the corporation.

With USA, shareholders also attract former director liability.

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3

Share Structures

General Requirements

The share structure of a corporation is set out in its articles of incorporation, which may provide for one or more classes of shares. Pursuant to section 24(3) of the CBCA, if there is only one class of shares, they must provide shareholders with the right to:

(i) vote at any meeting of shareholders of the corporation,

(ii) receive any dividend declared by the corporation, and

(iii) receive the remaining property of the corporation on dissolution.

If there is more than one class of shares, each of these three rights must attach to at least one class of shares.

Super Voting Shares

The ability to have multiple classes of shares, each having different rights, permits flexibility in structuring a corporation. A common practice is for founders of a company to establish a class of super voting shares. The corporation can then issue shares that entitle the holder to one vote per share, while the founders can retain super voting shares that entitle them to multiple votes per share. In this way, corporations can raise capital by issuing shares without jeopardizing the founders’ voting control.

The use of super voting shares can result in a situation where those holding the shares have voting control but own only a small portion of the total equity in the corporation. This was the situation in the case of Magna International Inc., Re, 2010.

Magna International Inc., Re, 2010

Facts:

Magna International is an automotive supplier which previously had a dual-class sharestructure:

Class A shares were publicly traded and entitled holders to one vote per share

Class B shares were held only by Frank Stronach, the founder of the company,and entitled him to 300 votes per share

Due to this share structure, Frank Stronach owned roughly 66% of the voting rights, butless than 1% of the equity attached to all outstanding shares. As a result, Frank couldcontrol how the company spent its money without concern that large purchases wouldsignificantly reduce the value of his shareholding.

Frank became interested in diversifying the company and began purchasing assets thataligned with his interests (but had nothing to do with auto parts), including race tracks,soccer clubs, and a theme park in Austria.

These sudden changes in the company’s direction worried investors and resulted in areduced share price – a discount that came to be known as the “Frank factor.”

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To eliminate the “Frank factor,” Magna offered to buy the controlling shares from Frank atan 1800% premium.

Staff of the Ontario Securities Commission alleged that the transaction was both abusiveof shareholders and contrary to the public interest.

Decision:

The transaction is not abusive of shareholders or contrary to the public interest:

The Class A shares had no coat-tail provision, and the Class B shares had nosunset provision (i.e., expiration), so Frank was entitled to sell his shares atwhatever price he could negotiate.

The Class A shareholders could not reasonably have expected to share in anycontrol premium offered for the Class B shares.

The Class A shareholders were given the opportunity to vote on the transaction.

Interesting Points:

The Ontario Securities Commission specifically stated that they would have found thetransaction to be abusive if it did not require a vote of minority shareholders.

A transaction is not abusive just because some shareholders are outraged at the price tobe paid.

Unfairness is not a sufficient ground for the Ontario Securities Commission to intervene onthe basis of the public interest.

Can the situation in Magna occur again?

Done right, a dual-class share structure can enable a founder to maintain control of a company while raising capital through the issuance of subordinate voting shares.

However, it is unlikely that the sizeable control premium paid to Frank Stronach will be seen again in Canadian deals because the TSX now requires all subordinate voting shares to contain coat-tail provisions.

____________________________________________________________________________________

Disclaimer

Norton Rose Fulbright US LLP, Norton Rose Fulbright LLP, Norton Rose Fulbright Australia, Norton Rose Fulbright Canada LLP, and Norton Rose Fulbright South Africa Inc are separate legal entities and all of them are members of Norton Rose Fulbright Verein, a Swiss verein. Norton Rose Fulbright Verein helps coordinate the activities of the members but does not itself provide legal services to clients.

References to ‘Norton Rose Fulbright’, ‘the law firm’ and ‘legal practice’ are to one or more of the Norton Rose Fulbright members or to one of their respective affiliates (together ‘Norton Rose Fulbright entity/entities’). No individual who is a member, partner, shareholder, director, employee or consultant of, in or to any Norton Rose Fulbright entity (whether or not such individual is described as a ‘partner’) accepts or assumes responsibility, or has any liability, to any person in respect of this communication. Any reference to a partner or director is to a member, employee or consultant with equivalent standing and qualifications of the relevant Norton Rose Fulbright entity.

The purpose of this communication is to provide general information of a legal nature. It does not contain a full analysis of the law nor does it constitute an opinion of any Norton Rose Fulbright entity on the points of law discussed. You must take specific legal advice on any particular matter which concerns you. If you require any advice or further information, please speak to your usual contact at Norton Rose Fulbright.

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TAB 4

Benefit Corporations and B Corp Certification

Dennis Tobin Blaney McMurtry LLP

October 4, 2018



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Benefit Corporations and B Corp Certification

Dennis Tobin

September 20181

Business law is developing in a new direction in Canada. That direction is firmly based

on profitability and material prosperity. However, that prosperity is increasingly being

linked to a more sustainable, environmentally responsible and widely shared model of

carrying on business.

The B Corp movement is a leading force across Canada and is quickly changing the

world of business. We have prepared two articles and a podcast that provide imperative

information on B Corp Certification and what you need to know.

Part I - B Corp Certification in Canada: Amending the Articles of Incorporation

Reviews B Lab’s suggested amendments from a legal perspective and may be of

interest to lawyers who are advising companies seeking B Corp certification.

Part II - B Corp Certification in Canada: What else should I be asking my lawyer?

This is likely to be of more interest to CEO’s considering seeking B Corp status and

investors investing in a certified company.

Blaneys Podcast: Panel discussion on B Corp certification in Canada

1 Access the articles and podcast on this subject at https://www.blaney.com/articles/b-corp-certification-

in-canada?ipl=1

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https://www.blaney.com/articles/b-corp-certification-in-canada-part-i-amending-the-articles-of-incorporation?ipl=1

https://www.blaney.com/articles/b-corp-certification-in-canada-part-ii-what-else-should-i-be-asking-my-lawyer?ipl=1

https://soundcloud.com/blaneyspodcast/blaneys-podcast-panel-discussion-on-b-corp-certification-in-canada

https://www.blaney.com/articles/b-corp-certification-in-canada?ipl=1

https://www.blaney.com/articles/b-corp-certification-in-canada?ipl=1

This panel podcast may be of interest to lawyers who are advising companies seeking B

Corp certification, CEO’s seeking B Corp status or investors considering investing in a

certified company.

The panel members include:

Joyce Sou, Director at B Lab Canada - the organization responsible for providing

the B Corp certification.

Tim Masson, Chief Steward and CEO, Ian Martin Group - a progressive

recruitment and project-staffing firm and certified B Corp.

Dennis Tobin, Partner, Blaney McMurtry LLP: legal counsel experienced with B

Corp and benefit corporation issues.

Moderated by Blaneys Podcast host, Lou Brzezinski.

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https://www.marsdd.com/bio/joyce-sou/

https://ianmartin.com/author/tim-masson/

https://www.blaney.com/lawyers/dennis-tobin

TAB 5

Tax Implications of Business And Deal Structures

Vitaly Timokhov TaxChambers LLP

October 4, 2018



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TAX IMPLICATIONS OF BUSINESS AND DEAL STRUCTURES Presentation by: Vitaly Timokhov, J.D., LL.M.

References & Acronyms

Income Tax Act, RSC 1985, c 1 (5th Supp) (the “ITA”)

Excise Tax Act, RSC 1985, c E-15 (the “ETA”)

Canadian-controlled private corporation (CCPC)

Lifetime capital gains exemption (LCGE)

Qualified small business corporation shares (QSBCS)

Qualified farm or fishing property (QFFP)

Adjusted cost base (ACB)

Eligible capital property (ECP)

Refundable dividend tax on hand (RDTOH)

Paid-up capital (PUC)

Taxable Canadian property (TCP)

Tax on split income (TOSI)

Small business deduction (SBD)

Business Structures (Basics)

4 basic business vehicles

- An individual

- Corporation, including hybrids

- Partnership

- Trust (Personal or Commercial)

- Variety: Joint Venture – not a separate vehicle but rather a combination of the above

Business Structures (Cash Flows)

Partnerships – not a taxpayer

- non-taxable

- flow-through treatment to partners

- Income/gains/losses taxed/reported by partners

Trusts – an individual and a taxpayer in its own right

- Unallocated income is taxed to the trust

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I CHAMBERS LLP t.'R'AWYERS &ADVISORS

. . f @taxchambers.ca . -285-6527 [ Email: in ° H 3B7 h . 416-847-7300 I Fax. 1-866 su·1te 300 Toronto, ON MS p one. . ·ty Avenue '

155 Un1vers1 ' . 1 85

5-847-7300 taxchambers.ca I Toll Free. .

- Allocated Income is taxed to beneficiaries

- Commercial v. Private

Corporations – income is taxed to corporations

Reporting taxpayer

Lower tax rates (corp. v. individual 53.53%)

Accumulation of income + Reinvestment

- CCPC (13.5/26.5% + 50.2 for investment/taxable capital gains)

- Private Corporations (M&P – 25%, Other Income: 26.5%)

- Non-Resident Corporations (as above)

- Public Corporations – same as Private

Corporation: Cash Flows

Transactional Taxation is determined by two factors: type and cash flows

Type: Buy, or Sell

Cash Flows

- Loans and payments for the use of money (interest)

- Payments for Goods or Services (incl. management fees and non-services/non-

compete) or use of property (rent/royalties)

- Distribution of Profits/dividends to shareholders

- Hint: it’s tax free to get in and taxable to take out

The Equilibrium of Buy and Sell

Generally, for tax purposes

- Vendors: prefer to sell shares

- Purchasers: prefer to buy assets

Tax and non-tax factors to consider when selling a business

- Tax factors: Capital Gains Exemptions

- Capital/business losses

- GST/HST

- Non-tax factors: liability (purchaser), employees, reduced complexity vis-à-vis share sale

Sale: Share v. Assets

Share sale preferred

- Capital losses available or shares have high ACB

- No tax advantage to selling shares if neither capital losses nor high ACB shares

available

- Step-Up of Capital Assets to FMV

- To get rid of “corporate skeletons” which may include tax liabilities (tax due diligence is

more complex)

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Phone: 416-847-7300 I Toll Free: 1-855-847-7300 I Fax: 1-866-285-6527 I Email: [email protected]

155 University Avenue, Suite 300, Toronto, ON M5H 3B7

taxchambers.ca

Asset sale preferred

- Purchaser: wants to maximize tax pools by allocating purchase price to depreciable

capital assets with high depreciation rates (tax shield)

- Simple(r) tax due diligence

Share Sale

- Generally, capital gain

- 50% is taxable

- If individual seller – the effective tax rate is about 27%

- If CCPC – 25%

- Non-CCPC – about 14%

- If corporate sale, then small double-taxation on extraction to an individual shareholder

Asset sale

- Capital Assets and Inventory

- Capital Assets: depreciable and non-depreciable

- Allocation of Purchase Price to various assets

- Valuation for Related Party Transactions

- Recapture (return of over-depreciated amounts) – business income

Share Sale: Capital Gains Exemption

Capital Gains Exemption

Sale of Qualified Small Business Corporation Shares (QSBC Shares)

Generally, a sale of a CCPC Shares that carries on an active business and has

minimum passive assets

$848,252 ($424,126 taxable portion) per shareholder

(But – Alternative Minimum Tax)

Pre-Sale for the Purchaser

A special purpose acquisition vehicle is recommended where practical

If asset purchase, to hold the assets

If share purchase, reduce the risks by a post-acquisition wind-up of the acquired corp.

Post-Acquisition Asset Protection through leveraging

A MUST for a non-resident purchaser

Pre-Sale Reorganizations

Remove all unneeded assets from the seller

- Tax-free transfers known as a butterfly

Clean tax attributes

Move assets to a clean/brand new corporation to accommodate the seller

- May be difficult to move encumbered personal property or real estate

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taxchambers.ca

Example: Crystalizing the CGE

CCPC-status loss when share sale

If non-resident purchaser, CCPC status jeopardized. Deemed year-end on loss of CCPC

status. Pre-closing agreements should be non-binding

LCGE eligibility

Must be QSBCS (1. small business corporation test, 2. holding period test, 3. must be

CCPC and 50% of FMV of assets must be used in active business in Canada)

Elephant in the Room: GST/HST

Every supply of goods or services is a taxable supply subject to HST, unless exempt by ETA

- Zero-rated Supply

- Exempt Supply

- Deemed to be Nil

Share Sale: Supply of Financial Services

Holding Company HST

Asset Sale: exempt providing that the sale of all or substantially all assets of the business

Goodwill

Reporting + Remittances

Trust + Personal Liability

Tax & Financing

Debt financing

- Interest deductibility, provided the borrowed funds used for the purpose of earning

income from a business or property

- Generally, no non-resident withholding tax on interest (non-arm’s length borrowing)

- Interest fully taxable to Canadians

- Inter-corporate debt

- Asset Protection and Leveraging

- Internal and External Financing

Equity financing

- Dividends not tax deductible, return of money, treatment to issuer, residency concerns

- Taxation of Recipient (individual v. Canadian corporation)

- Related party equity financing

Tax & Debt Financing (Deductibility)

S. 20(1)(c) of the ITA. Permits deduction of interest expense when conditions met:

- …amount paid/payable in the year…

- …pursuant to a legal obligation to pay interest…

- …reasonable amount… whichever is lesser…

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- Borrowed funds must be used for the purpose of earning income from a business or

property

Non-Residents (Cross-border Payments)

Part XIII of the ITA

- S.212(1)(b) withholding tax. 25% of the gross amount of payment

Some tax treaties: reduce to 10%

Canada-US Tax Treaty: reduce to 0% (for non-arm’s length parties)

Debt Financing: Canadian Lenders & Inclusion Rules

Corporate lenders

Must include interest accrued to it/interest that became receivable/received as “ordinary

income”

Tax & Equity Financing (Non-Residents)

Non-resident shareholders & share sales

Not subject to tax unless shares are TCP

TCP status if 50% of share value of private company derived from Canadian real

properties in the last 60 months

If shares listed, non-resident must own (with non-arm’s length persons) more than 25%

of a class, or else TCP

Tax & Equity Financing (Canadian Residents)

Canadian shareholders & share sales

Returns of capital not subject to tax, ‘grinds’ down ACB of shares

If ACB of shares become negative = capital gain triggered

½ inclusion on capital gains, QSBCS/QFFP exemptions

Intercorporate dividends from Canadian corporations not taxable under Part I of the ITA

Limitations: s.55(2) of the ITA, capital gains stripping & Part IV tax

Important Developments in Tax Law

1. ECP Regime Repeal

2. TOSI Expansion

3. S.55 Amendments

4. RDTOH Bifurcation

5. Passive Income Grind to SBD

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ECP Regime Repeal

Eligible capital property regime was repealed

- Replaced with CCA Class 14.1

Loss of deferral advantage:

- Dispositions of ECP no longer taxed as business income/gains now a capital gain (or

recapture)

Diminishes ability to defer tax by retaining corporate income

Capital dividends could be distributed in the current year

Vendors may be able to claim a reserve (was not possible under ECP regime)

- Crystallization/dropdown transactions no longer viable

CCPCs selling business are most impacted (i.e., goodwill)

TOSI Expansion (Related Business)

The tax on split income has been expanded

Inactive spouse now potentially subject to TOSI on amounts from a related business

- Purification may be a solution

S.55 of the ITA Amendments

S.55(3)(a) has been amended (narrowed)

- Now only for dividends arising on share redemptions, acquisitions, or cancellations

Tiered corporations with regular distributions are impacted

- “Roll & redeem” strategy & rollover approaches may be a solution

RDTOH Bifurcation

The refundable dividend tax on hand has been bifurcated/transitional rules do not aggregate

RDTOH/GRIP

Groups with RDTOH and GRIP in separate corporations are impacted

Passive Income “Grind” to SBD

Now, the small business deduction is reduced by $5 for every $1 of investment income

above $50,000

No SBD if passive income is over $150,000

Corporate groups earning both active business income and passive returns are impacted

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