Since the introduction of the new federal not-for-profit legislation, we have assisted several not-for-profits who have struggled to track down the key documents needed for continuance under the new not-for-profit legislation. Key documents such as the Letters Patent or Supplementary Letters Patent and a current copy of the by-laws must be located before the conversion can take place. If you are a federally registered charity, it is also important to have copies of important documents from CRA available for review.
As for corporate records such as minutes, resolutions and registers, it is not unusual for an organization to have missing or incomplete records. Unfortunately, when dealing with incomplete or missing corporate records there are no quick solutions or statutory provisions to rely on.
The first step is to obtain and examine the records that actually exist which are often found in an official binder or folder, often referred to as the “minute book”. Even if there is not an official “minute book” there is likely a folder somewhere that has all the important corporate documents to date including your charter documents. You may also need to contact former officers or directors of the corporation and also the lawyers who may have previously acted for the corporation.
Once all searches are exhausted it is time for the corporation and their lawyer to reconstruct the material corporate events as best they can. Your lawyer will work with you to determine what material documents are missing and may create an omnibus resolution to bring the records up to date. For example there may not be any record of the officers or directors of the corporation so it will need to be traced as carefully as possible and set out in a resolution.
Effective record keeping of corporate documents is not only a wise and essential part of your corporation, it is required under the new legislation. Your corporate secretary, whether it the lawyer you have retained, or a member of your organization should maintain detailed minutes and review the documents yearly to make sure everything is kept up to date.
Federally incorporated not-for-profits have until October 2014 to complete their conversion to the new legislation. If you are provincially incorporated then your time is coming. The Province of Ontario is expected to enact similar legislation later this year.
Businesses who find themselves embroiled in a commercial dispute have the opportunity to resolve it through mediation. Unfortunately, mediation can often fail to produce a settlement not because of a lack of will, but because of a lack of planning and understanding of the process. The goal of mediation should be to settle on agreed terms. It should not be used as an opportunity to size up the other side case ahead of a trial. If you are heading into mediation there are a several important things to keep in mind before the day of the mediation:
#1 – Choose your mediator carefully. Mediators come in all shapes and sizes and can take very different approaches to their role. For example, do you want someone who will provide their opinion or someone who will facilitate the process and let you reach a deal? Some mediators have experience in specific business sectors and types of disputes. Be proactive and select your mediator with the opposing side before one is appointed for you.
#2 – Be sure to meet with your lawyers ahead of the mediation. This will help ensure you are on the same page in terms of approach, the value of the matter and know what each of you is going to say.
#3 – Do not develop a bottom line before the mediation. Parties intent on using the mediation process to resolve the dispute must be open to receiving new information and remain flexible based on the discussion that takes place during the session. Once you hear the other side’s view of the dispute your perceptions of them and the case can alter.
#4 – Evaluate what alternatives are available (eg. arbitration or trial), including how long it will take, the cost, possible outcomes and the risk. This can be used to compare to the proposal on the table at mediation. Businesses should also consider the cost to their business caused by the distraction of the on-going dispute.
#5 – Be sure you, or your representative at the mediation, have the authority to agree a settlement. And make sure the opposing side is also sending a representative with the same authority. It is significantly easier for someone to say ‘no’ over the phone when they haven’t been part of the discussions, heard the other side and sat face-to-face with them. If both parties truly want to use the mediation process to resolve the dispute, both need to send someone with the authority to agree a settlement.
In the coming weeks we’ll be writing about the actions you can and should be taking once the mediation has commenced.
Lisa Langevin Stephen Kelly
In a recent blog post I outlined the benefits of dual wills for business owners as a means of providing a tax efficient manner of transferring the value of a business interest to his or her beneficiaries. However, this is only of value if there is something to be transferred to the beneficiaries, in other words, ensuring that a business owner’s estate will receive money for his or her share in the business is equally as important. This can be achieved with careful planning through a shareholders agreement. The first step in the process is to have a buy/sell provision in the shareholders’ agreement specifying that, in the event of the death of a shareholder, the remaining shareholders will purchase the deceased’s shares (with the added benefit that the remaining shareholders do not risk co-owning the business with an undesired third party).
Though the buy-out on death is in place, there is no guarantee that the remaining shareholders will have the required funds to purchase the deceased’s shares. To avoid this problem, the shareholders agreement is drafted in such a way that allows the business to purchase life insurance on its shareholders. In brief, the life insurance proceeds are then used to fund the buy-out of the deceased shareholder. Careful attention needs to be made when implementing this type of planning, and working closely with an insurance broker and legal counsel will ensure these planning steps are done properly.
During a recent webinar on the ‘DOs and DON’Ts of Staff Recruitment’ we polled participants to see how many regularly Googled their job applicants to learn more about them. Our informal poll revealed that 75% of businesses are conducting these searches. And it easy to understand why. The internet provides the opportunity to learn so much about a candidate before they even set foot in the door. This has fundamentally changed how employers go about learning about candidates, as they are able to learn a great deal about an employee’s personal characteristics long before they walk in the door for an interview. Traditionally, the recruitment process was akin to what Human Rights lawyer Donna Seale calls an upside-down funnel : the employer learns more about the employee as the process moves forward. Internet searches turns the funnel right-side up. Employers engaged in online searches of job candidates need to be aware of the risk of violating the human rights code or invading a candidates right to privacy.
Ontario’s Human Rights Code states that:
Every person has a right to equal treatment with respect to employment without discrimination because of race, ancestry, place of origin, colour, ethnic origin, citizenship, creed, sex, sexual orientation, age, record of offences, marital status, family status or disability.
These protections extend to every faced of the employment relationship, including job hiring. If a job applicant can prove that one of the protected grounds such as race or gender had even the slightest impact on the decision not to hire then the employer can be found liable and required to pay damages for the lost position.
It is important for companies to remember that once they learn something about a candidate through online searches, they cannot ‘un-learn’ it. To protect themselves from a potential claim, companies that conduct online searches of candidates should follow these five guidelines:
- Create a written policy and follow it. Very often policies exist but are not known or followed by everyone in the organization.
- Be consistent. Apply the same internet search processes for all applicants.
- Keep records. Information collected should be recorded for all applicants and be maintained. Being able to demonstrate what information was obtained and the processes followed will be valuable information should a claim arise.
- The searcher should not be the decision maker. Wherever possible, a different person from the decision maker should conduct the search for information that is relevant to the candidate’s ability to perform the job.
- Provide disclosure and obtain consent. Finally, candidates should be informed through ads, recruitment web pages and face-to-face meetings that internet searches are a part of the recruitment process.
To hear more on this topic, click here to watch my webinar presentation.
For many business owners the decision to sell their business is not an easy one. But once the decision to sell has been made, many owners become frustrated with the length of time needed and the detail required to complete the transaction. Recently released analysis of 9,000 transactionsby an American accounting firm provides some insight into the length of time typically required to complete a private business sale. The report indicates that the average
An indexed archive of information on the company will limit the real potential for business interruption during the due diligence period.
business sold in 6.8 months. Not surprisingly, larger businesses took longer to sell than smaller firms. A significant reason why the process can be so lengthy is simple. Potential buyers of a company want to undertake extensive due diligence to properly assess what exactly it is they are buying.
By properly preparing the necessary documentation about the business well in advance of a potential sale, business owners can expedite the pace of the transaction, reduce frustration with the process, leave more time to focus on the continued operations of the business and increase the ultimate sale price.
While the potential purchaser will want to understand every detail of the target business, past, present and future, there are areas which may attract more attention than others, including:
- Employment contracts of key personnel, non-compete/non-solicitation/confidentiality clauses, waiver of intellectual property and moral rights
- Assignability of licenses and other contracts including supplier, customer and joint-venture contracts
I’ll be exploring these topics in greater detail over the next few weeks.
An entrepreneur, whether considering an exit strategy or not, should always be proactive so as to avoid having to be reactive should a possible sale arise. A regular review of the corporate and business records and a preparedness for the due diligence process should form part of every firm’s strategic planning. Sellers really need to put themselves in the shoes of the purchaser and anticipate the purchaser’s concerns or needs. In the buyer’s eyes, the more organized the target appears, the greater the comfort. The ability to provide a purchaser with an indexed archive of information on the company and the business and its contractual relationships will limit the real potential for business interruption during the due diligence period.
Business owners who have retained profits in (see recent blog post on ‘Securing Retained Profits Through Restructuring’) can often distribute those profits to family members with lower incomes in a tax efficient manner through a family trust. This can be achieved by creating a family trust and making it a shareholder of the corporation where the retained profits are held. As a shareholder of the corporation, the family trust could take a distribution of the retained profits by way of a declaration of a dividend to the family trust. Once in the hands of the trust the funds can flow to the beneficiaries of the trust in a tax efficient manner. All income received by trust recipients is still subject to income tax at whatever rate is being paid by each individual beneficiary. Consequently, a family trust is ideally used in scenarios where income splitting allows the family members with lower level of income and lower tax rates to receive the funds. For example, university students not earning any annual income could be eligible for over $30,000 in tax free revenue from a family trust. Anyone can be a beneficiary of a family trust and, when drafted carefully, the trust can also accommodate future generations.
The use of “dual wills” is an estate planning tool available to business owners in order to transfer the value of their shares to their beneficiaries in a tax efficient manner. Having dual wills means that business owners have one will that deals with all assets of their estate except for their shares in a privately held company, and they have a second will dealing exclusively with the shares in such company. The will dealing with all assets except for the shares in the company is subject to an estate administration tax of up to 1.5% of the total value of the assets dealt with in that will. However, the will dealing with the shares in the private company is not subject to the estate administration tax. In other words, estate administration tax will not paid on the value of the shares. Given the significant value of certain businesses the tax savings that can be realized here far outweigh the minimal planning cost of drafting dual wills.
The Workplace Safety and Insurance Board (WSIB) recently announced that mandatory coverage for “independent operators, sole proprietors, some partners in a partnership and some executive officers who work in the construction industry” will come into effect on January 1st, 2013. (See link for more info on the announcement.) Exempt from the new requirements are home renovators who are “contracted directly with the person occupying the residence and work exclusively in home renovation”.
However, home renovators need to be concerned about what qualifies as a home residence. The legislation states that a private residence also includes ancillary structures on the same property that are “used exclusively for non-commercial purposes”. It will not come as a surprise to anyone that more and more homeowners have a business based out of their house. If that business uses an attached office or a backyard studio it would not fall under the definition of private residence and WSIB registration would be required. The consequences for a home renovator caught working on a job without the requisite insurance coverage could be fines by the WSIB, as well as assessment of all of the premiums that should have been paid from January 2013.
Further guidance from the WSIB prior to January 1, 2013 would be beneficial for all home renovators and home owners themselves, many of whom will have to pay higher fees to their renovators due to their increased insurance premiums.
The question of what constitutes a general partnership versus a cost sharing arrangement has important tax consequences for professional corporations and is an issue increasingly being reviewed by CRA. The main tax advantage for professionals using a cost sharing arrangement is the ability for each professional to take advantage of the $500,000 small business deduction. On the other hand, should the professionals be viewed by CRA as being in a partnership, they collectively could only apply for the small business deduction once. This can have a dramatic influence on the tax rate paid by each professional.
Unfortunately there is no easy to apply rules to determine if the professional corporation would be considered a partnership. The essential question is this – is the relationship between professionals carried on in common. For example:
- Is there a collective sharing of profits and loss?
- Is there a central management or decision making process that all professionals follow?
- Do the professionals jointly own equipment that is used to carry out the practice?
Despite whatever may be written in the business agreement between the parties, if CRA views the relationship as a partnership there could be significant back taxes, interest and penalties incurred by each of the professionals.
If the business arrangement is likely to be deemed a partnership by CRA there are steps that can be put in place to help reduce the tax overall tax burden. For example, each professional could form his or her own professional corporation and those corporations could enter into an arm’s length agreement with a partnership of the same professionals in the same way it might enter into an arm’s length agreement with a landlord and other suppliers. Profits from the partnership could then be distributed to each professional’s own corporation, provided that the amount paid represents the fair market value of the services provided. However, no solution is foolproof and there are always steps that must be taken to satisfy CRA that the partnership and the corporations serve a legitimate purpose.