Archive for the ‘Corporate Law’ Category

Ontario Corporate Land Registers are Coming December 10

Thursday, December 1st, 2016

Before I go to the main topic of today’s post, a little opportunity to rant.  There are two aspects to starting up your corporation: (a) incorporation and (b) organization.  Incorporation is simple.  You fill out the articles of incorporation, pay the applicable fee, have no issues with the Ministry and, congratulations, you have an existing corporation.  But this isn’t the entire picture.  Think of your corporation like the human body.  Incorporation is the equivalent of getting a skeleton.  But a skeleton without organs, muscles, tendons, skin, etc., is nothing more than a pile of bones that cannot do anything.  Organization is things like the issuance of shares, the election of directors, the appointment of officers, the passing of by-laws giving authority to the officers, the passing of various corporate resolutions, etc.  This is the equivalent of giving the skeleton organs and muscles and tendons and covering it all with skin and hair, etc.  The reason I mention this is because far too often I have clients who come in and I ask to see their corporate minute book and they look at my like I’ve just ask to see an aardvark – they have no idea what I’ve asked for or why I’ve asked for it.  And why is that?  Because they literally just paid a small amount for someone to incorporate them and they have never organized the company.

If you have organized your company and have a minute book, then you will be familiar with such things as the lists known as the shareholders register, the shareholders ledger, the directors register, the officers register, etc.  If these are not familiar to you, that likely means that you do not have a minute book – in which case there’s a problem – or you have a minute book but have not updated it since you incorporated – which is a different type of problem.

As of December 10, 2016, Ontario companies will have to keep a new type of register (that is, a new continually updated list).  This is a register of land ownership interests.  It would be best to keep this as part of the minute book.  The easiest situation will be if your company has no ownership interests – then the register should simply say “None” or “Nil”.  But what if your company does have an ownership interest in land?  In that situation, you will have to keep a register that sets out:

a) The municipal address of the land

b) The land registry where the property is registered and the “property identifier number” for the land;

c) The legal description of the land; and

d) The tax assessment roll number for the land.

Copies of any deeds, transfers or similar documents that include this information will also have to be kept with the register.  As such, you will have to keep available the information to show when your company acquired its ownership interest and when, if applicable, it sold its ownership interest.

You should also note that you will have to keep this information for each and every property that the company acquires an ownership interest in.

If your company does not own any land, then this is a very minor administrative matter that can be easily handled.  If your company does have any ownership interests in land, it is not a monumental administrative task (unless your company is a holding company with hundreds of properties that it owns), but you will want to ensure that your company is compliant with its new obligations as of December 10, 2016.

Not only something to think about, but something to look into and determine if you need to update your minute book.

CALC

 

Personal or Corporate Liability?

Tuesday, June 21st, 2011

Why does one incorporate?  In part it is to avoid personal liability for business debts or expenses.  Alright, but what happens if you don’t have your company incorporated yet?  Or what if you have several companies and you’re just not sure which one you intend to use for the particular transaction?  The common approach is to indicate that you are not signing in your personal capacity but on behalf of a company.  This is why you sometimes see agreements (usually of purchase and sale) that will identify the purchaser as “Joe Blow in Trust for a Company to be Incorporated” – and if a lawyer is involved, they will usually tack on at the end of that the additional words “And Not in His Personal Capacity”.

Why does this matter?  Because if you do not specify that you are signing on behalf of a company, then you could find yourself personally liable for the debt.  This happened to the unfortunate Mr. Borg in a decision last week from the Ontario Divisional Court.  In that case, Mr. Borg signed his name and put the letters “O/B” beside his name.  He claimed that this meant that he was signing “on behalf of” someone else (ie. a company).  That may well be what he intended, but the trial judge and then the Divisional Court hearing the appeal did not agree that that was sufficient.

Beyond this, one should remember that Section 21 of the Ontario Business Corporations Act provides that if someone enters into a contract on behalf of a corporation that has not yet been incorporated, then that person is personally liable under the contract (even if it says that it is for a corporation to be incorporated) UNLESS the corporation adopts the contract either by its actions or its conduct (that is, by formally adopting the contract or by acting as if it were a party to the contract).

The end result is that you should always be careful in signing a contract that is to be on behalf of a comp

Shelf Corporations

Friday, April 22nd, 2011

I was driving home yesterday and listened to a show on the French CBC called “Classe économique”.  They had an interesting report about some serious problems with Quebec’s electronic system for incorporating companies.  They said that there is currently a backlog of at least one month, and if you had something wrong in your application for registration that it could take upwards of a second month before your company was registered.  This is starting to create problems for business people in Quebec because until the company is registered, the business cannot really do anything – it cannot open a bank account, it cannot transact business (unless done by the person him/herself and then the contract is transferred to the company after it is incorporated and the business person crosses his/her fingers that nothing goes wrong in the meantime), etc.

How can business people get around this problem?  One relatively easy solution is a “shelf corporation”.  This, of course, begs the question of what exactly is a shelf corporation.  As its name implies, a shelf corporation is a corporation that “sits on the shelf”.  In other words, it is a company that is incorporated and then not used but saved for a later day.  Why are they created?  Numerous reasons.  Sometimes they are created just to have a company handy should one be needed right away.  Sometimes they are created with a view towards specific events – for example, about 10 years ago there was a strike at the Ontario government and while the strike was looming lawyers started to incorporate shelf corporations so that they could use those corporations for clients’ needs if the strike occurred and turned out to be long.  (Today, though, since it is now easier to incorporate federally, there probably wouldn’t be the same rush since the lawyers would just give their clients federal companies.)  I also had a shelf corporation where the client came from England, wanted to incorporate (which I did for him), then ran into difficulties and decided to abandon the incorporation and left me with a company that never did anything and for which the incorporation was effected but the company was never organized (that is, no shares were issued, no officers appointed, no resolutions passed or by-laws enacted).  I kept the company as a shelf company for use by a later client should the need arise.

Why would you want to use a shelf corporation?  As in the CBC report – when you need fast(er) access to a company.  This would be not only where there are problems with the incorporation process but also where you have a wonderful, but urgent, deal and want to use a separate company but don’t have time to incorporate.  Beyond this, though, there could be several reasons.  One is that you may need to be “grandfathered”.  Sometimes the rules will change.  And, again, sometimes the rule change will permit grandfathering.  For example, whatever applicable rule we’re dealing with will say that the new rule came into effect on January 1, 2011.  If you incorporate a company today then your company will be subject to the new rule.  However, if you use a shelf corporation that was incorporated before January 1, 2011, then that corporation may be subject to grandfathering – that is, the “old rule” still applies to that company.  For example, this could apply to the ever-changing tax rules or possibly for licensing rules.

Another potential benefit comes from the age of a corporation.  For example, putting on advertising “Bob’s Fishmart Ltd. – Incorporated 2011” doesn’t mean much.  But if you pick up a shelf corporation that is, say, 5 years old, then that advertising might have a little more punch.  Similarly, you may have some better credibility with others (bankers, potential customers, etc.) if they see that your company is older – or possibly some contracts (such as government procurement) may require only businesses with a minimum age can submit bids on the contract.  Of course, though, this isn’t the “be all and end all” because, for example, while the banker might be pleased to see that the company has been around for 5 years, this won’t be too big a deal when he/she asks to see the financial statements for the last 5 years and sees nothing but zeros since the company hasn’t done anything.

In any event, at least now you know about shelf corporations and depending on your circumstances, it might be beneficial for you to start your business with a shelf corporation instead of incorporating a new company.

Something to think about.

CALC

 

Ontario Law Comes to YouTube

Wednesday, September 29th, 2010

I am a member of the Ontario Bar Association.  The O.B.A. has a division known as the Advancement of Legal Education and Research Trust, or A.L.E.R.T.  As part of its operations, A.L.E.R.T. has recently created a new YouTube channel to provide legal information on topics of legal interest.  Within the past week, videos regarding Small Claims Court procedures (there is a total of 7 episodes) and pension and benefit law (there is a total of 6 episodes) have been added to the channel.  Further videos on other areas of the law will be added in the future.

These do not give comprehensive information, but they do give you basic information and this can be handy for those who have not had to deal with these areas of the law in the past.  There are both English and French language videos providing the same information.

If you are interested, you can find the A.L.E.R.T. channel on YouTube at:

http://www.youtube.com/user/alertoba

CALC

How to Break Off Your Business Relationship

Monday, March 8th, 2010

I read an article that appeared in last week’s Your Business magazine in the Globe and Mail.  It is entitled “There Must be 50 Reasons to Leave Your Partner”.  Although the reference is to “partner”, it is not solely to a partnership in the purely legal sense, but, rather, a partnership in the generic sense – that is, whether the “partners” actually have a formal partnership, are in a joint venture or are shareholders in a corporation or some other arrangement.

The article talks about what happens when the two or more partners decide to go their separate ways and what to do about their business.

I have to admit, though, that there’s something about the lawyer they’ve quoted.  I agree with absolutely everything he said.  I hear he’s pretty good looking too … at least in his own mind ;-)

CALC

“Offshore Companies”

Friday, January 1st, 2010

I was reading a promotional discussion that talked about the advantages for business owners to operate their businesses through “offshore companies”.  First and foremost a little clarification.  By “offshore”, we’re really talking about foreign companies or, more specifically, non-Canadian or American companies – hence, outside of Canada’s shores or “offshore”.  The particular discussion I was reading related to setting up companies in the United Arab Emirates but many of these companies relate to Caribbean or European companies – usually in small countries or principalities (for those who want to set up businesses in, say, Lichtenstein).

The thing I smiled the most about when it came to this particular discussion was the title that suggested that it was better to be safe than sorry and the connotation was that you were safer with an offshore company and sorry if you stayed with your plain-old Canadian company.  The discussion also touted the benefits that, in this example, the UAE companies didn’t have to pay Canadian taxes but only UAE taxes, you didn’t have to be a resident of the UAE, the company could have non-UAE bank accounts, etc.  These types of claims are made for the other offshore companies as well.

The first problem with offshore companies is that they involve a huge leap of faith.  Since you are not in the UAE (or Bermuda or Lichtenstein, etc.), there is always the possibility that someone unscrupulous could take over control of your company.  Will it happen every time?  No.  But then again, you have better control of the situation with a Canadian company than with an offshore company.

The second problem is that before you ever get involved in any of these companies you should get specialized taxation advice.  And, even then, you are probably best off to get two tax opinions.  Why is that?  Because it is not uncommon for the promoter to send you to a tax specialist who may not be completely independent.  Unfortunately, some of my clients have learned this the hard way.  This is not to say that the tax expert is somehow “in cahoots” with the promoter, but it is possible that the tax expert may not give enough emphasis to the downside risks that a truly independent expert may put on the situation.

A third problem, which is related to the second problem, is that these promoters may only be focusing on part of the issue.  For example, in this particular discussion, the person was promoting the fact that there was a tax treaty with the UAE that prevented double-taxation.  Fair enough, but this may not be the entire picture.  For example, if the UAE doesn’t tax on dividends at all, then it’s not an issue of double-taxation.  Rather, you still might have to pay Canadian tax with the result that you are still paying the same tax you would have had to pay if you had gone with a Canadian company.  Or, let’s suppose that the UAE tax rate is 30% while the Canadian rate is 35%.  You may not have to pay 65%, but you may still be required to pay 30% to UAE and 5% to Canada – again, no real net savings – and at the cost of the loss of some control over your company.

A fourth issue is to remind you that even if you have an “offshore company”, if you are intending to do business in Ontario, you will still have to register your company as an “extra-provincial corporation”.  The result is that you now have to not only submit whatever corporate forms or returns are required by the offshore country but also whatever Ontario requires.  Is this extra work offset by the potential savings of being offshore?  Maybe.  Maybe not.  But you should take this factor also into consideration.

Finally, a warning of how things could go very wrong.  One of my old clients invested in offshore corporations and sent money to what proved to be fraudsters.  They made off with $20 Million.  The problem was that my client’s money was tied up in U.S. stocks that had been earned through stock options.  The shares were in the client’s name and could not be moved to someone else without incurring huge tax consequences.  However, the client wanted to keep these shares for the benefit of the client’s heirs – which resulted in a further problem because the U.S. had huge estate taxes that would give money to the U.S. government which was unfair since the client and the client’s relatives all lived in Canada and had never worked in the U.S., all work done for the stock options was done in Canada and the only tie to the U.S. was the fact that the shares were traded on the NYSE.  So, the client implemented a tax structure that would minimize the impact through the use of offshore companies that was legitimate, but because control could be taken by the “foreigners”, that did occur and the client lost $20 Million.  After following the monies from the Caribbean to New York, to Europe and then back down through several Caribbean countries, we eventually found $12 Million and then had a huge fight over that money that cost the client tons of money in legal fees for lawyers in many countries.  In the process, the client’s house was sold, the client suffered financial and emotional strains and whatever benefits might have been gained were completely wiped away and then some.  Moreover, the client still had money to be able to fund the lawyers and the financial experts to follow the money and eventually get part of it back.  You may not be able to afford such a process.

Does this mean that all offshore companies are scams and should be avoided?  No.  But they can be fraught with danger and it’s something you should not go into lightly.

Something to think about.

CALC

Security for Your Loans

Sunday, November 1st, 2009

The Supreme Court of Canada released reasons in three appeals dealing with the same issues yesterday.  The decision is found here.  In each of the cases there were businesses that were required to collect either or both provincial sales tax and the federal GST.  These businesses did collect the taxes but then went bankrupt.  Financial institutions that were owed loans and had registered security against the assets of the businesses claimed that they had priority over the assets.  The governments argued that the taxes required the businesses to collect the taxes as agents for the government and that, as a result, the money so collected was actually the government’s money and did not form a part of the businesses assets that were subject to the financial institutions’ security. 

If the governments were right, then they would get the money first and the financial institutions would fight over what was left.  However, the financial institutions argued that money was not specifically “earmarked” for the governments.  The money collected was mixed with other non-GST or PST monies and, ultimately, the businesses paid the governments money but not the actual monies received and, moreover, the businesses paid net amounts after taking various credits (such as input tax credits) into account so that if $100 in GST was collected it did not necessarily follow that the businesses had to pay $100 when the tax instalment was remitted.  As a result, the financial institutions argued that the governments could not say that it was “their money” and that, as a result, the governments were ordinary, unsecured creditors and that therefore the financial institutions, as secured creditors, had priority to the monies over the governments.  The Supreme Court of Canada has agreed with financial institutions with the result that the financial institutions won.

Now, at first blush you’re probably thinking “So what?”  If your busines goes bankrupt you won’t really be caring whether the bank or the government gets to pick at the bones first.  However, these cases do provide an opportunity to remind you that it may be worthwhile to grant security for any amounts you spend to start up your business.  For example, when I first started up my law practice, I had a loan given to me by a relative.  Even though I expected (and did) pay back the start up monies quite quickly, I ensured that my relative had a security agreement in place (and registered) to protect my relative’s interest.  If problems ever arose then I knew that my relative would have a chance of getting repaid before any other creditors. 

Let’s suppose that your business is operated by a corporation.  You may have personally advanced start up capital to your company which then usually takes the form of shareholder loans.  The rule that business gurus mention all the time is “pay yourself first”.  The reality, though, is that this is rarely followed with the result that the entrepreneur puts a lot of money into his/her business and is usually the last one to be paid.  If that’s the case, AND if you don’t have security, then the reality is that you will likely receive little to nothing from the business should it fail.  However, if your business grants to you a security interest in its assets, then you may have a chance of getting paid something if the business should ultimately fail.  And, based on these cases, you’ll have a better chance of getting paid than the government – at least until they change the bankruptcy or tax laws to change the result of these cases ;-)

Giving yourself security for monies you put into the business … something to think about.

CALC

Quebec Companies – New Legislation

Tuesday, October 27th, 2009

It has been a long time since I studied law in Quebec and I make no efforts anymore to even try to keep up with the changes in Quebec law – nor do I advise on Quebec law anymore.  However, it is not uncommon for my clients to have Quebec subsidiary companies or affiliates or to otherwise be involved with Quebec companies from time to time (for example, being asked to be a director).  So, for the benefit of those persons, I am passing on a link to a web site for one of the larger firms in Quebec that highlights new changes that are being proposed for Quebec’s companies legislation that may be of interest.

You can find the summary here.

CALC

Shareholders Agreements – Get Independent Advice

Monday, July 27th, 2009

I was reading the latest issue of the Business Law Reports and it has a decision from late last year of the Ontario Divisional Court regarding shareholder agreements.  There is nothing particularly earth-shattering about the decision, but it does serve as a good reminder that if you wish to have a shareholder agreement upheld then you should have each party to the agreement obtain independent legal and financial advice.

In Masciathe parties had a shareholders agreement that dealt with the terms in which the parties could go their separate ways.  Dr. Mascia complained that the terms were an unfair penalty and the application judge agreed and relieved Dr. Mascia of the strictness of the terms.  The Divisional Court disagreed.  The burden of proof that the terms were an unfair penalty lay with Dr. Mascia and there was an initial presumption that shareholder agreements were fair.  As stated by the court:

        Generally, courts will not interfere with an agreement made by sophisticated parties acting at arms’ length and, in particular, will not set aside a shareholders agreement “that has been entered into in good faith by experienced persons who have had independent legal advice”: Kabutey v. New-Form Manufacturing Co., [1999] O.J. No. 3635, at para. 12 (S.C.J.). Where parties have agreed upon a formula for determining the price at which departing shareholders will be bought out of a company, the expectation is that they will live with that formula.

      When he entered into the shareholders agreement, Dr. Mascia had the benefit of both independent legal advice as well as independent financial advice. He negotiated the terms on which he was prepared to invest in Dixie. …

In these circumstances, then, the court upheld the terms of the agreement.  The upshot is that if you wish to enforce the terms of a shareholders agreement and to defend against any attack that claims that the agreement is unfair, one of the easiest ways to do so is to ensure that the other parties get independent legal and financial advice.  This is a prudent way to proceed in any event, but Mascia shows how important this prudent approach can be when a fight later occurs among the parties.

CALC

Everybody’s Incorporating

Sunday, May 24th, 2009

An interesting occurrence has been happening lately.  I have received at least one phone call or e-mail per day for the last few weeks for people seeking to incorporate new companies.  Given the current economic climate, this would appear to be counter-intuitive – when times are bad, people want to keep their jobs, not go out and start new businesses.  The answer to this apparent quandary is if we suppose that a person was “downsized”, “rightsized”, “capsized”, whatever, and is given a severance package of, say, six months.  After three or four months of searching for a new job, the person discovers that there aren’t any other jobs out there and if he/she wants to make money to keep going in a few months, they’d better create their own job.  Hence all the calls and e-mails now.

The primary question I am being asked lately is: how much is this going to cost me? The answer is that the general cost is: (a) legal fees of $900; plus (b) GST of $45; plus (c) filing fee for articles of incorporation – between $300 and $360 – depending on whether you do an Ontario or a federal incorporation; plus (d) approximate cost for a minute book of $200 (including one set of share certificates); plus (e) the cost of obtaining a NUANS search of $30 – which is not required if you go with a numbered name (for example, 1234567 Canada Inc.).  Total cost: $1,545 including all taxes (assuming the highest incorporation fee and a NUANS search).  Also, this assumes a relatively straightforward incorporation.  If you start getting into multiple classes of shares with different share attributes, etc., etc., the cost for the legal fees goes up – the more complicated, the more expensive.  Now, the first thing you’re going to do is to have your jaw drop and think “Holy Smokes! (or something like that) I can go down to the paralegal who is advertising incorporation for only $400.”  Let’s make sure, though, that you are comparing apples to apples and not apples to oranges. 

The first thing that you see is that the advertisement says “$400 for incorporation” and usually has an asterisk that if you look down at the bottom of the add will then say “plus applicable filing fees and taxes”.  So, you’re looking at $400, plus the $300 to $360 for the filing fee, plus the GST.  This means that, right away, $400 is really $400 plus $20 for GST plus $360 (again, assuming the highest cost for the filing fee), or $780. 

The second thing is to realize that you are paying for an incorporation – nothing more, nothing less.  The end result is that you will get a copy of the Articles of Incorporation and that’s it.  There will be no by-laws, no resolutions to create shares and issue them to shareholders, no election of directors, no appointment of officers, no appointment of accountants or auditors, no setting up bank accounts – all of which is known as “organizing” the company.  If the company is not organized, this can have huge impacts (and huge costs) down the road if the company ever gets audited by the tax man, or you wish to sell the company or do estate planning, etc.  Ultimately, the $1,545 you pay today is less than the amount you’ll have to pay later to fix things up retroactively – assuming that this can even be done in the circumstances.

CALC