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10 Considerations when Starting a Digital Business

4/15/2023

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Written by Connor Heuver 
JD Candidate | UCalgary Law

Starting a digital business in Canada requires careful planning and consideration of various factors. Some important considerations to keep in mind include:

  1. Business Registration and Permits: You need to register your business with the government and obtain necessary permits and licenses to operate legally.
  2. Taxation: You need to understand Canadian tax laws and regulations, and ensure you comply with all requirements. You may also need to register for a GST/HST account and collect and remit taxes accordingly.
  3. Funding: You need to assess the financial requirements of your business and explore funding options, such as loans, grants, or venture capital.
  4. Market Research: Conduct thorough market research to identify your target market, assess the competition, and understand the demand for your product or service.
  5. Intellectual Property Protection: Consider securing patents, trademarks, and copyrights to protect your intellectual property.
  6. Cybersecurity and Privacy: Ensure that you have proper security measures in place to protect your business and customer data from cyber threats.
  7. Digital Marketing: Create a digital marketing strategy to promote your business, build brand awareness, and attract customers.
  8. E-commerce Regulations: Understand e-commerce regulations, such as consumer protection laws and privacy laws, and ensure that your business complies with them.
  9. Infrastructure: Ensure that you have the necessary technology, software, and hardware to operate your business effectively.
  10. Human Resources: Consider hiring employees, contractors, or freelancers to help you run your business and ensure that you comply with Canadian labor laws and regulations.
These are just a few of the many factors to consider when starting a digital business in Canada. It's important to seek professional advice and guidance from legal, financial, and business experts to ensure that your business is set up for success.

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Contract Law Considerations for Entrepreneurs in Canada

4/15/2023

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Written by Connor Heuver 
​JD Candidate 2023 | UCalgary Law

Contract law is important for entrepreneurs in Canada because it provides a framework for creating legally binding agreements and protecting their interests. Understanding and following contract law can help entrepreneurs avoid disputes and ensure that their agreements are enforceable in court.

In Canada, contract law is governed by both common law and statutory law. Common law is the body of law developed by the courts, while statutory law is the law created by the legislature.

One key principle of contract law in Canada is the requirement for a "meeting of the minds," or mutual assent, between the parties. This means that both parties must understand and agree to the terms of the contract. Additionally, contracts must typically be supported by consideration, or something of value exchanged by the parties.

Another important principle of contract law in Canada is the concept of "good faith" which is implied in all contracts. This means that both parties must act in a fair and honest manner and not use the contract to take advantage of the other party.
Canadian law also recognizes the principle of "frustration of contract" which allows parties to be released from their obligations under a contract if an unforeseen event renders the contract impossible to perform.

Entrepreneurs should also be aware of the various types of contracts and their legal implications. For example, express contracts are agreements in which the terms are explicitly stated, while implied contracts are agreements in which the terms are inferred from the parties' actions.

In case of disputes arising from contracts, it is generally resolved through the court system, although mediation and arbitration are also used as alternative dispute resolution methods.

In summary, contract law is essential for entrepreneurs in Canada because it provides a framework for creating legally binding agreements, protecting their interests and ensuring that agreements with customers, suppliers, employees, and other parties are enforceable in court. Entrepreneurs should be familiar with the principles of contract law in Canada and seek legal advice when drafting and entering into contracts.
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Selling Shares of Your Successful Business and Accessing the Lifetime Capital Gains Exemption

4/13/2023

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Authored by Jack Kuzyk
JD Candidate 2023 | UCalgary Law


As entrepreneurs in Canada, it is important to understand how to arrange your affairs to minimize the amount of tax payable by utilizing the tax tools provided in the Income Tax Act (“ITA”).[1] Successful business owners may wish to sell their shares in a private corporation, but what are the tax implications upon the sale of the appreciated shares? This blog post will provide a brief overview of the lifetime capital gains exemption (“LCGE”) and how entrepreneurs can use this generous tax planning tool to decrease their tax payable.
 
What Is The Lifetime Capital Gains Exemption?
As one of the most important tax policies for entrepreneurs and small business shareholders, the LCGE is a tax incentive that can, within limits, apply at the tax payer’s option to exempt all or part of the taxable capital gains realized when disposing of qualified small business corporation shares (“QSBCS).[2] Essentially, it acts as an economic incentive to help raise investments in small businesses, as entrepreneurs and prospective investors can potentially pay less tax when they eventually sell their shares. Upon such disposition,[3] the LCGE may be used against the tax payer’s taxable capital gain, eliminating some or all of the taxable capital gain. While calculating taxable capital gain is beyond the scope of this blog, it is important to note that taxable capital is 50% of the capital gain realized when disposing of shares.[4]
 
How Much Is the Lifetime Capital Gains Exemption?
The LDGE amount changes annually and is indexed to inflation. For dispositions in 2022 of QSBCS, the LCGE limit has increased to $913,630.[5] In comparison to 2021, this increase of $21,412 provides tax payers with a greater opportunity to save when disposing QSBCS that have accrued in value.
 
How To Qualify? What Are Qualified Small Business Corporation Shares?
While acting as an economic incentive to help raise the level of investment in small businesses, not everyone meets the criteria to qualify for the LCGE. To access the LCGE, the tax payer must meet be a Canadian resident at the time of the disposition. Moreover, it is imperative that the shares qualify as QSBCS. In order to constitute QSBCS, must meet several conditions under subsection 110.6(1) of the Income Tax Act:[6]
  1. The corporation is a Canadian Controlled Corporation;[7]
  2. At the time of sale, the corporation must use more than 90% of its assets (computed on a fair market value basis) principally in an active business operations carried on primarily in Canada by the corporation or a related corporation, or be shares or debt of an connected corporation that meets the 90% test;
  3. The shareholder(s) must have owned the shares for a 24-month period preceding the sale, subject to some exceptions; and
  4. Additionally, during a 24-month period preceding the sale, at least 50% of the fair market value of the corporation's assets must be used principally in an active business operations carried on primarily in Canada by the corporation or a related corporation, or be shares or debt of a connected corporation that meets the 90% test described above.

If all of these criteria are satisfied, the Canadian resident taxpayer may claim the LCGE on their tax return and maximize their after-tax income.
 
Conclusion:
In Summary, the LCGE is a valuable tool for entrepreneurs to reduce their tax liabilities when selling QSBCS. By understanding the criteria for accessing the LCGE and using it strategically, entrepreneurs can potentially save up to the full amount of the LCGE. For more information regarding eligibility under the LCGE, or maximizing tax savings while staying compliant with Canadian tax laws, please contact the BLG Business Venture Clinic.
 


[1] Income Tax Act, RSC 1985, c 1, s 110.6(2.1) [ITA].
[2] Bryce C. Tingle, Start-up and Growth Companies in Canada: A Guide to Legal and Business Practice, 3rd ed (Toronto: LexisNexis Canada Inc., 2018) at 82-84.
[3] ITA, supra note 1, s 248 “disposition”.
[4] ITA, supra note 1, s 38(a).
[5] Canada Revenue Agency. “T4037 Capital Gains 2021.” Government of Canada, 18 January 2021, https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4037/capital-gains.html.
[6] ITA, supra note 1, s 110.6
[7] ITA, supra note 1, s 125(7).
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Facing Insolvency: Do Directors Owe a Fiduciary Duty to Creditors During a Bankruptcy? If Not, How Can Creditors Protect Themselves?

4/13/2023

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Written by Jack Kuzyk
JD Candidate 2023 | UCalgary Law

Bankruptcy is a difficult process that can be overwhelming for both individuals and businesses. Provisions in the federal Bankruptcy and Insolvency Act (“BIA”) and the provincial Personal Property Security Acts make it difficult for creditors to seize and retain their assets for materially less than their fair market value.[1] Upon bankruptcy, the BIA provides a distribution scheme to determine creditor priority when administering the bankrupt’s estate (i.e., the debtor company assets).[2] The estate, however, generally holds an insufficient amount of assets for creditors to fully recover. Further, a stay of proceedings is automatically imposed on all claims against the bankrupt and their property.[3] As a means to maintain control over the distribution of the assets and property of the bankrupt, the stay operates to prohibit creditors from commencing any further legal action against the debtor.[4] From a creditor perspective, this mechanism severely limits repayment by inhibiting enforcement of debt collection.
 
In Canada, however, directors of a corporation are subject to potential personal liability – e.g., unpaid taxes, environmental damage and unpaid employment wages. Director liability provides a legal tool for creditors to increase their reimbursements. Under the Canadian Business Corporations Act (“CBCA”), director duties include both the duty of loyalty, and duty of care.[5] There is, however, growing recognition that directors of an insolvent corporation owe a duty of care to the corporation’s creditors. Although this duty does not rise to the level of a fiduciary duty,[6] the directors, in discharging their fiduciary duty of loyalty and determining the best interests of the corporation,[7] may need to consider the interests of shareholders, employees, suppliers, creditors, consumers, governments and other stakeholders.[8] The interests of these different constituencies may conflict (e.g., debtholders versus equity holders where the corporation is in the vicinity of bankruptcy[9]) and the directors, in fulfilling their fiduciary obligation to act in the best interest of the corporation, are required to balance these competing interests. With very little guidance on how to perform this balancing act, this blog post will provide a brief discussion on whether directors are required to shift their primary focus to the creditors once the corporation approaches the possibility of insolvency.  
 
Creditors of a Corporation under the BIA:
As a preliminary matter, section of 2 of the BIA defines “creditor” as a person having a “claim provable as a claim”.[10] Sections 121 to 123 of the BIA define what constitutes “claims provable”, including certain debts and liabilities incurred by the bankrupt corporation.[11] To be granted creditor status, including the right to participate in the distribution scheme prescribed under the BIA, onus is on the creditor to prove its status under the BIA. Moreover, creditors are separated into different constituencies reflecting various levels of priority under the bankruptcy regime. For purposes of this blog, the ensuing discussion assumes all creditors are unsecured and collecting inside the bankruptcy process. Notably, however, there are instances where creditors may strategically force a corporation into bankruptcy as their status inside bankruptcy results in them receiving a greater return than they would otherwise receive outside of bankruptcy.[12] From both debtor and creditor perspective, it is imperative to understand creditor status and priority ranking.
 
Peoples: Fiduciary Duty Not Owed To Creditors
Pursuant to the Supreme Court of Canada (the “Court”) in Peoples Department Stores Inc. (Trustee of) v Wise,[13] the directors of a corporation, even when facing insolvency, do not owe a fiduciary duty to the creditors of a company.[14] In Peoples, the trustee in bankruptcy, representing the creditors of the bankrupt company (here, Peoples), commenced an action against the directors of Peoples, alleging that its directors breached their fiduciary obligations to its creditors. The claim against the directors was not pursued under the oppression remedy nor a derivative action. In examining the nature of a director’s duties under Canadian law in the context of an insolvency proceeding, the Court in Peoples held that “the various shifts in interest that naturally occur as a corporation’s fortunes rise and fall do not, however, affect the content of the fiduciary duty under s. 122(1)(a) [CCBA – i.e., duty of loyalty]… At all times, directors and officers owe their fiduciary obligation to the corporation. The interests of the corporation are not to be confused with the interests of the creditors or those of any other stakeholders… In using their skills for the benefit of the corporation when it is in troubled waters financially, the directors must be careful to attempt to act in its best interest by creating a “better” corporation, and not to favour the interests of any one group of stakeholders.”[15] In other words, while broadly describing the duty of care, the Court, while limiting the duty of loyalty to the corporation itself, specifically excluded creditors from the scope of a director’s fiduciary duties and found director fiduciary duties do not change when a corporation is in the nebulous “vicinity of insolvency”.[16] Notably, the Court reasoned that creditors have the broad oppression remedy available to protect their interests against prejudicial conduct of director(s) under s.241 of the CBCA. Thus, the Court found no need to extend the fiduciary duty of loyalty imposed on directors to include creditors.[17]
 
Further, the Court in Peoples,[18] and later re-affirmed in BCE Inc v 1976 Debentureholders,[19] severely restricted director liability by affirming the business judgment rule. Effectively, the courts will not intervene in the substantive decisions of directors and impose director liability where directors’ decisions satisfy their procedural requirements under the duty of care.  
 
If Not, How Can Creditors Contractually Protect Themselves?
Therefore, if not owed a fiduciary duty, unpaid creditors, or the trustee in bankruptcy, may use the oppression remedy to obtain judgment against the directors of a corporation under the Canadian Business Corporation Act.[20]  However, as an equitable remedy, receiving standing as a “complainant” to pursue an oppression action is based on the circumstances of each case.[21] For instance, the oppression remedy may not be used by a creditor solely as a tool for debt collection. The policy rationale for its limited use is that creditors are not contractually obligated to enter into agreements with the corporation. Moreover, freedom of contract enables creditors to price the risk of the corporation’s failure into the price (e.g., higher interest on a loan or higher cost for supply of services), use a debt instrument,[22] or impose conditions that withstand bankruptcy and provide the creditor with priority protection. For example, the creditor may require a charge against property of the debtor as security for the debt due to the creditor. Consequently, the creditor has a secured interest that ranks above unsecured creditors in the distribution scheme.[23] Moreover, it may not be affected by the stay of proceeding.[24]
 
Conclusion:
While the pendulum does not swing entirely to the creditors, directors of a corporation experiencing financial difficulties should, and should be seen to, maintain a high degree of diligence and care regarding the dealings of the corporation. While there is no bright-line test in this regard, the interests of creditors is a factor. In particular, when the threat of insolvency looms over the company’s future. The foregoing only touches the surface of this issue. For further information, please contact the BLG Business Venture Clinic.



[1] Bryce C. Tingle, Start-up and Growth Companies in Canada: A Guide to Legal and Business Practice, 3rd ed (Toronto: LexisNexis Canada Inc., 2018) at 79 [Tingle]. See also, Bankruptcy and Insolvency Act, RSC 1985, c B-3, s 247 [BIA] and Personal Property Security Act, RSA 2000, c P-7, ss 60,62.
[2] Supra note 1, s 136.
[3] BIA, supra note 1, s 69.
[4] BIA, supra note 1, s 69.3(1)
[5] Canadian Business Corporations Act, RSC 1985, c C-33, ss 121(1)(a) and (b), respectively [CBCA].
[6] Peoples Department Stores Inc (Trustee of) v Wise, [2004] SCJ 64, [2004] SCR 68 [Peoples].
[7] CBCA, supra note 5, s 122(1).
[8] CBCA, supra note 5, s.122(1.1); Peoples, supra note 6, at para 42.
[9] Tingle, supra note 1 at 79.
[10] Supra note 1.
[11] Supra note 1.
[12] Stephanie Ben-Ishai & Thomas G.W. Telfer, Bankruptcy and Insolvency Law in Canada: Cases, Materials, and Problems, (Toronto: Irvin Law, 2019) at 321.
[13] Supra note 6.
[14] Peoples, supra note 6 at para 1.
[15]Supra note 6 at paras 43-47.
[16] Peoples, supra note 6 at para 46.
[17] Peoples, supra note 6 at paras 48-53.
[18] Peoples, supra note 6, at para 67.
[19] [2008] SCJ No 37, [2008] 3 SCR 560 at para 112 [BCE].
[20]Olympia and York (2001), 28 CBR (4th) 294; CBCA, supra note 5, s 2(d).
[21] First Edmonton Place Ltd v 31588 Alberta Ltd (1989), 45 BLR 110 (Alta CA); Sidaplex-Plastic v Elta Group Inc (1998), 111 OAC 106 (CA). 
[22] Tingle, supra note 1 at p 79.
[23] BIA, supra note 1, ss 136 and 2 “secured creditor”.
[24] BIA, supra note 1, s 69.3(2).
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Alberta's Tech Ecosystem: A Snapshot of Progress, Challenges, and Opportunities

4/12/2023

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Authored by Parker Easter 
JD Candidate 2023 | UCalgary Law 
Co-founder, ReNu Hygienics

In January of 2022, Calgary-based tech-oriented community builder, Zachary Novak, released a comprehensive letter on the state of Alberta’s technology ecosystem entitled “The Alberta Tech Ecosystem: The Good, the Improving and the Tough Realities.”[1] Subsequent to reviewing his thorough account, I felt significantly more informed on our province’s tech balance sheet. This article provides a snapshot of his snapshot: the high-points broken down into our province’s tech strengths, challenges, and opportunities.
 
Strengths:
  1. Capital: Venture capital funding in Alberta has increased significantly, with $480 million raised in the first 9 months of 2021.[2] Large exits from companies such as Benevity, Shareworks, and Enervus demonstrate the potential for success in the Alberta tech ecosystem. Additionally, seed stage capital is becoming more abundant in the ecosystem; the space is benefiting from investors like Harvest Ventures, Thin Air Labs and a growing community of angel investors such as Startup TNT and Women at the Cap Table.
  2. Talent: Educational institutions are increasingly focusing on retraining and reskilling programs to develop the necessary tech talent. The Alberta government has also introduced an "express" pathway for international talent to migrate to tech, aiming to fill experience gaps in the local talent pool.
  3. Founders: The Alberta tech ecosystem is experiencing a surge in pre-seed and seed-stage founders. Startup activity is accelerating as digital technology and innovation increases in local familiarity.
  4. Community Initiatives: Grassroots initiatives like Chic Geek, Product Calgary, and Rainforest movement support the talent, founders, and capital pillars in Alberta's tech ecosystem.

Challenges:
  1. Later-stage funding: The growth in Alberta's tech ecosystem has been stalling due to a lack of scale-up capital (Series A, B, C) directly sourced from Alberta-based firms. Home-grown venture capital presence is limited compared to other regions in Canada.
  2. Fiscal Policy: The cancellation of the Alberta Investor Tax Credit has negatively impacted start-up investments, making Alberta less competitive compared to neighboring provinces (30% in BC, 45% in Saskatchewan). Additionally, outdated accredited investor rules create barriers for novice investors to support local start-ups, despite having access to risky investments like penny and “meme” stocks, an issue prevalent across North America.
  3. Talent gaps: There is a notable lack of experienced talent in sales, marketing, and customer success roles, which are critical for tech startups. Additionally, the mindset of newly displaced oil and gas workers needs to shift from a "solution" focus to a "problem" focus, which is more suited to tech startups.
  4. Founder challenges: Alberta's tech founders face issues with over-engineering solutions, lack of early focus on distribution, and significant distractions from chasing grants and programming as a sign of validation. A cultural shift towards rapid iteration and embracing experimentation is needed for success.
  5. Capital realities: Despite the growth in available capital (as described above), Alberta is far behind other Canadian provinces in venture funding. In comparison to British Columbia, Alberta's population is about 88% of BCs, but it has raised only 20% of the venture funding. Additionally, the average deal size for Alberta was only $8M whereas BC and Saskatchewan each realized an average of $29M and $15M, respectively – once again pointing to a lack of later stage financings.
 
Opportunities:
  1. Address the scaling challenge: Alberta needs to attract and develop senior talent to scale technology enterprises in the province. This includes attracting international talent and promoting programs like the Alberta Product Leadership Program. One suggestion made was to make Alberta a more “attractive place to live, so talent is willing to relocate here.”
  2. Improve investment conditions: Founders in Alberta need larger investment rounds and higher valuations to spend less time raising money and more time with customers. Local investors need to take more risks, move quickly, and streamline due diligence processes.
  3. Embrace risk and creativity: Alberta's tech ecosystem needs to adopt a mindset that embraces failure and doesn't penalize founders for taking risks. Celebrating big swings, even if they strike out, will help create a culture of innovation and ambition.
 
Read Zachary Novak’s complete and comprehensive analysis of the Alberta tech ecosystem here: https://fmlstudios.substack.com/p/the-alberta-tech-ecosystem-the-good?r=2eqc9&utm_campaign=post&utm_medium=web.



[1] Zachary Novak, The Alberta Tech Ecosystem: The Good, the Improving and the Tough Realities, FML Studios, online: https://fmlstudios.substack.com/p/the-alberta-tech-ecosystem-the-good?r=2eqc9&utm_campaign=post&utm_medium=web.
[2] This figure rose to an approximate $571M raised by the end of 2021.
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Intellectual Property: All about Trade Secrets

4/12/2023

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Written by Kevin Seo 
​JD Candidate 2024 | UCalgary Law

A trade secret is a type of intellectual property which derives its value from its secrecy. This can come in the form of secret technology, secret processes, secret formulas, and other confidential information not disclosed to the public.[1] Considering the immense value that can be generated from trade secrets, corporations should consider a number of key factors to safeguard proprietary information. This article will discuss the basic ins-and-outs of trade secret law in Canada.

Unlike other forms of intellectual property such as patents and copyrights, there is no Canadian legislation related to trade secrets or a formal process for trade secret registration. Instead, trade secrets are largely based on common law precedent and are protected by the courts through tort claims, breaches of contract, or breaches of confidence.[2] The one caveat is that trade secrets may be caught under the Security of Information Act, which deals with the fraudulent theft of trade secrets owned by foreign entities. [3]

For information to be considered a trade secret, the information must be confidential, and the owner of that information must have taken reasonable steps to maintain its secrecy.[4] In terms of confidentiality, this would be established if the information was only known to a select group of people and was not disclosed to the wider public.[5] Some measures which may be considered reasonable steps to maintain secrecy may include physically locking up tangible information, keeping an inventory of all intellectual property, and requiring employees to sign non-disclosure agreements prior to and following the course of employment.[6] There is also a requirement that the trade secrets must have sufficient economic value, which provides a competitive advantage or have an industrial or commercial application.[7]

One distinctive feature of trades secrets is that there is no expiry date for protection, and can survive in perpetuity, as long as the information remains a secret. This characteristic is useful, as inventors may use trade secrets as a cost-effective measure to protect their innovations with no time limitations. Furthermore, trade secret can be used to protect information which would not be protected by other forms of Intellectual property, such as consumer data, market research, and recipes.


[1] Canadian Intellectual Property Office. “Government of Canada”, (19 March 2021), online: Government of Canada, Innovation, Science and Economic Development Canada, Office of the Deputy Minister, Canadian Intellectual Property Office <https://ised-isde.canada.ca/site/canadian-intellectual-property-office/en/what-intellectual-property/what-trade-secret>
[2] “Trade secrets in Canada”, online: Heer Law <https://www.heerlaw.com/basics-trade-secrets>
[3] Security of Information Act (R.S.C., 1985, c. O-5)
[4] “Protecting your trade secrets”, online: Osler, Hoskin & Harcourt LLP <https://www.osler.com/en/resources/business-in-canada/browse-topics/intellectual-property/protecting-your-trade-secrets>
[5] Ibid.
[6] Ibid.
[7] Ibid
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Intellectual Property: All about Industrial Designs

4/12/2023

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Written by Kevin Seo 
JD Candidate 2023 | UCalgary Law 

Industrial designs, which are also sometimes referred to as design patents, are a type of intellectual property which predominantly focuses on a product’s visual features.[1] While industrial designs are less commonly known compared to patents, copyrights or trademarks, registering industrial designs can be a great source of value for start-ups and newly formed companies. This article will discuss the basic ins-and-outs respecting the law as it applies to industrial designs.

At its core, industrial designs protect a product’s unique appearance irrespective of what it is made of, how it is made or how it works.[2] Industrial designs can be distinguished from patents as industrial designs are not concerned with whether an entirely novel good or process was created. The functional aspects of a specific product are not considered, only the visual aspects such as shapes, configurations, or patterns. [3]

Specifically, registering industrial designs afford the corporation the exclusive right to exclude others from making, selling, or importing similarly manufactured goods.[4] Industrial designs can be registered alongside copyrights and patents for more comprehensive protection of intellectual property rights. For example, a creator of a video game may be able to register the game’s storyline as copyright, while also registering the specific aesthetic quality of the computer graphics as industrial designs.

For an individual to apply to register an industrial design, they must be the proprietor of the industrial design or an agent acting on the proprietor’s behalf.[5] The proprietor is often the creator of the industrial design. The one exception is if the creator was hired for the specific purpose of the industrial design, at which point the employer would be considered the proprietor.[6]

When registering an industrial design, the first step is to file an industrial design application. The application generally includes information such a description of the industrial design, reasons for why the registration is sought, and the identity of the application’s filer.[7] The application is then reviewed by the Canadian Intellectual Property Office, otherwise referred to as the CIPO. The CIPO will determine whether the design is sufficiently novel and will either provide a notification of approval or an examiner’s report outlining objections to the application.[8] If an examiner’s report is received, the applicant has 3 months to either amend the application or provide arguments as to why the application should be accepted.[9] If the examiner determines that the application fulfills all the requirements, the industrial design will proceed to be registered. It may take up to 12 months to receive an examiner’s first report after initially filing, and a Canadian industrial design registration will last for ten years from the registration date or fifteen years from the filing date, whichever is longer. [10]


[1] Tingle, Bryce C. Start-up and Growth Companies in Canada: A guide to legal and business practice, ed (Toronto: LexisNexis, 2018).
[2] Canadian Intellectual Property Office. “Government of Canada”, (10 January 2023), online: Government of Canada, Innovation, Science and Economic Development Canada, Office of the Deputy Minister, Canadian Intellectual Property Office <https://ised-isde.canada.ca/site/canadian-intellectual-property-office/en/industrial-designs/industrial-designs-guide> .
[3] Ibid.
[4] “Industrial Design FAQ”, online: Heer Law <https://www.heerlaw.com/industrial-design-faq> .
[5] Ibid.
[6] Ibid.
[7] Ibid.
[8] Ibid.
[9] Ibid.
[10] Ibid.
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Canadian Small Business Acquisitions and the $2 Trillion in Baby Boomer Business to be Sold By 2030

4/11/2023

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Written by Parker Easter
JD Candidate 2023 | UCalgary Law
Co-Founder | ReNu Hygienics 
​

Most are familiar, many are excited, and a few are disgruntled; the great generational wealth asset transition (somewhere between $30-70 trillion!)[1] is among us and is well discussed. However, the conversations surrounding the $2 trillion worth of Canadian baby boomer business soon to enter the robust small and medium business mergers and acquisitions (“SBA”)[2] are far and few between.
 
Considering some studies report that as much as 62% of Canadian business owners plan to use the proceeds of their business exits to fund their retirement,[3] ensuring the demand-side of the market is equipped and able is critical to the macro-economic health of the country. Unfortunately, this requirement is met by overleveraged, unsecured, and unaccredited prospective buyers – Canadian youth. How overleveraged, unsecured, and unaccredited are our youth? Well, it is difficult to say but one Industry Canada report summed the problem up well:
 
“Very few studies containing empirical data are available in the literature describing youth SME financing, although significant anecdotal evidence of barriers to attaining financing can be found. Youth owned SMEs must overcome all of the same obstacles that any venture must overcome in their quest for capital. However, some of the obstacles are even more pronounced in this group as they do not have extensive career track records or significant personal assets to use as collateral. Compounding this is a strong likelihood of no personal credit history and often a large student loan debt.”[4]
 
Sufficient to say that while our youth will make up an uncertain, but surely sizeable, amount of the acquisitions needed to match the nearing supply, their barrier to bank loans generates concern. As such, this article sets out to provide insight to prospective buyers by vetting the main sources of SBA financing available to Canadians – even our youth.

​
The Landscape

Debt, equity, and seller financing are the three key forms of SBA financing. The best capital structure varies widely and will be unique to each buyer.[5]

Debt Financing for SBA

Debt Financing occurs when a person or entity borrows money for the purposes of an SBA in exchange for the promise that it will pay back the entire value borrowed (the “principle”) plus an additional interest fee. In addition to repayment terms, Debt Financing is invariably accompanied by a “down payment” and often with financial performance rules (covenants). Within Debt Financing, there are several vehicles to consider, however, for simplicity, discussed below includes just (1) Bank Financing, and (2) Government Financing.

  1. Bank Financing

    Bank financing is the most traditional form of debt financing and involves borrowing money from a bank or other financial institutions. Banks provide a range of financing options, including lines of credit, term loans, and mortgages, among others. However, qualifying for bank financing can be challenging for small business owners, particularly those without a strong credit history or collateral – cue the youth. Where available to these high-risk borrowers, banks will often require a higher rate of interest or greater down payment, implying a greater chance of default, and often require the borrower to adhere to certain covenants.[6]

    To increase their chances of securing bank financing, small business owners should prepare a detailed business plan and financial statements that demonstrate their ability to repay the loan. This applies even in SBAs; while the past performance of the target will be a strong indicator of risk of default, the banks will want to see the buyer’s vision and the level of prudency they are bringing to the endeavor. They may also consider seeking the assistance of an accountant or private M&A lawyer who can help them navigate the financing process.

  2. Government Financing

    Government financing is a form of debt financing that is backed by the government. The Canadian government offers several programs that provide loans, grants, and other types of financing to small businesses, including those involved in SBA transactions. These programs are designed to help Canadian businesses grow and create jobs, and they often have lower interest rates and more flexible repayment terms than traditional bank loans.

    One popular government financing program is the Canada Small Business Financing Program (CSBFP), which provides loans of up to $1 million to help small businesses acquire assets, such as equipment or real estate. The program is administered by the Small Business Financing Directorate of Industry Canada and is available to businesses that have gross annual revenues of $10 million or less.[7] While the CSBFP does not permit borrowers to use the funds to acquire shares (in a target acquisition – the ethos of this article, per say), an entrepreneur can leverage this program post-acquisition to catapult the new company in pursuit of their vision.

Bridging the Gap: Equity and Seller Financing for SBA

But where will one come up with the 20-30%[8] down payment often required to obtain the debt finance capital for a SBA? If one doesn’t have the capital themselves, they can look to (1) Equity Financing, or (2) Seller Financing to obtain the necessary finance.

  1. Equity Financing

    While the owner and operator of a small business is often its first equity investor using their own savings, equity financing can also be leveraged for additional outside capital. Simply, it involves trading a portion of the target business for investment capital. In SBA transactions, equity financing can come from several sources including friends and family, angel investors, and even professional private equity or venture capital firms.
     
    When it comes to equity capital for SBAs, the dominant concern surrounds negotiating investor terms. These vary widely based on the deal, the investor, and the relationship between the investor and acquiror. In addition to the most obvious term up for negotiation, equity stake, investors may also be bothered to negotiate board representation, liquidation preference, anti-dilution protection, governance provisions, and even information rights.

  2. Seller Financing for SBA

    Seller financing is a form of financing where the seller personally finances a portion of the purchase price. While there is no limit to the amount of seller financing you can ask a seller for (in fact, some less “salable” businesses may be 100% seller financed), it is often used to bridge the gap between traditional source financing obtained and the purchase price.[9]

    There are several potential advantages to this approach for the buyer: potentially a lower interest rate, more flexibility on the payback schedule, and, arguably most important, a seller with a vested interest in a successful transition and the continued success of the business. On the seller side, the seller may even reap tax benefits by exiting in this fashion.[10]
 
Conclusion

In conclusion, SBA financing can be a complex and challenging process, particularly for Canadian youth who face unique barriers to accessing financing. However, by understanding the landscape of available financing options, small business owners can increase their chances of securing financing and completing successful SBA transactions. Whether through government financing, bank financing, equity financing, seller financing, or a combination of each, there are many ways for small business owners to access the capital they need to grow and thrive.


[1] Joseph Coughlin, Millennials Are Banking On The Great Wealth Transfer, 4 Words Why You Shouldn’t Cash That Check Yet, Forbes (November 16, 2021), online: https://www.forbes.com/sites/josephcoughlin/2021/11/16/millennials-are-banking-on-the-great-wealth-transfer-4-words-why-you-shouldnt-cash-that-check-yet/?sh=47f9318b2dde. Note: it is unclear how much wealth is expected to be transferred throughout Canada specifically – articles on this topic often site both American and Canadian pundits but fail to clarify the scope.
[2] Succession Tsunami: Preparing for a decade of small business transitions in Canada, Canadian Federation of Independent Business (January 2023), online: https://www.cfib-fcei.ca/en/research-economic-analysis/succession-tsunami-preparing-for-a-decade-of-small-business-transitions.
[3] Are Your Clients Prepared To Sell Their Business? The Canadian Press (November 28, 2018), online: https://www.advisor.ca/tax/estate-planning/are-your-clients-prepared-to-sell-their-businesses/.
[4] Dr. Ted Heidrick, Financing SMEs in Canada, Government of Canada, online: https://www.ic.gc.ca/eic/site/061.nsf/vwapj/financingsmesincanadaphase1_e.pdf/$file/financingsmesincanadaphase1_e.pdf.
[5] Tom Venner, Introduction to Capital Structuring, Taureau Group, online: https://www.taureaugroup.com/resource-center/news-articles/capital-structuring-for-the-sale-of-your-business.
[6] James Chen, How Debt Financing Works, Examples, Costs, Pros & Cons (May 28, 2022), Investopedia.
[7] Canada Small Business Financing Program, Government of Canada, online: < https://ised-isde.canada.ca/site/canada-small-business-financing-program/en>.
[8] What is the minimum down payment to buy a business? , BDC, online: < https://www.bdc.ca/en/articles-tools/start-buy-business/buy-business/what-minimum-down-payment-to-buy-business>.
[9] Michael David, How to finance a business acquisition, Swoop Funding (December 21, 2022), online: https://swoopfunding.com/ca/blog/how-to-finance-a-business-acquisition/
[10] By exiting the company on a payment schedule instead of in a lump sum, the seller may assume a lower, or at least a spread-out, tax liability.
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5 Key Rules about Starting a Business from the Founder of PayPal

4/11/2023

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Authored by Claire Standring 
JD Candidate 2024 | UCalgary Law 


The serial entrepreneur, co-founder and billionaire investor Peter Thiel wrote a book in 2014 called "Zero to One". This book has earned the nickname of the Silicon Valley start-up bible, and whether it lives up to its name is… well up for you to decide after reading it.
 
Regardless, this book provides valuable insights on entrepreneurship and business, based on his experience as a successful investor and entrepreneur. One of the main themes of the book is the importance of creating something new and valuable, rather than competing in an existing market. According to Thiel, there are seven key rules for starting a successful business:
 
The first rule is to create a unique and valuable product or service. Thiel believes that true innovation comes from creating something entirely new, rather than trying to improve upon what already exists. To achieve this, entrepreneurs need to have a clear understanding of their customers' needs and preferences, and be willing to take risks in developing new products or services.
 
The second rule is to focus on a specific niche market and dominate it before expanding to other markets. Thiel argues that trying to please everyone will result in mediocrity, and that it's better to start small and build a loyal customer base before expanding. By focusing on a specific niche, entrepreneurs can better understand their customers' needs and provide tailored solutions that meet those needs.
 
The third rule is to build a strong team of like-minded individuals who share your vision and values. Thiel emphasizes the importance of hiring people who are not only talented but also aligned with the company's mission and culture. This is crucial for building a cohesive and effective team that can work together to achieve the company's goals.
 
The fourth rule is to take calculated risks and be willing to pursue unconventional paths to success. Thiel argues that successful entrepreneurs need to be comfortable with uncertainty and be willing to take risks that others are not willing to take. This requires a willingness to challenge conventional wisdom and think creatively about how to solve problems and achieve goals.
 
The fifth rule is to embrace the role of technology in shaping the future of business, and invest in research and development to stay ahead of the curve. Thiel believes that technology is the key driver of progress and innovation, and that entrepreneurs need to be aware of emerging technologies and trends in order to stay competitive. This requires a willingness to invest in R&D and explore new ideas and technologies.
 
In addition to these rules, "Zero to One" also emphasizes the importance of building a strong company culture that aligns with your values, as well as the need to constantly adapt and evolve in response to changing market conditions. By following these principles, Thiel argues that entrepreneurs can build successful businesses that have a lasting impact on the world.


Citation: Peter Thiel & Blake Masters, Zero to one: notes on startups, or how to build the future, (New York: Crown Business, 2014).

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Use of Corporate Name Inter-provincially

4/11/2023

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Written by Ivana Palacios
UCalgary Law | JD Candidate 2024


Deciding on whether to incorporate federally or provincially is often a question that new businesses grapple with. Depending on where you plan on conducting business there may be one additional consideration you have not though about. Will you be able to use the same name throughout Canada?

Federal incorporation allows a business to use its corporate name across Canada.[1] Provincial incorporation in Alberta only cross references names of companies incorporated in Alberta, extra-provincially in Alberta, and federally.[2] Federal name searches are therefore more rigorous than provincial name searches. A provincially incorporated corporation will therefore need to conduct a name search in each additional province in which it wishes to carry on business. There is a risk that its corporate name will be rejected in another province, requiring the use of an alternative name. 

If you plan on conducting business throughout Canada and wish to ensure you are operating under the same name everywhere, you may want to consider this advantage when deciding whether to incorporate federally or provincially.


[1] Corporations Canada, “Is incorporation right for you?” (2020), online: Government of Canada https://www.ic.gc.ca/eic/site/cd-dgc.nsf/eng/cs06641.html .
[2] ABCA, s 12(1).
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