Business Venture Blog
This is where we post about business ventures, law, and business venture law.
Anything interesting, really.
Anything interesting, really.
Business Venture Blog
Basic Tax Implications for Canadian Entrepreneurs
With the calendar year coming to a close and the first quarter of next year on the horizon, tax season looms large for Canadian businesses, employees, and entrepreneurs alike. It is important to distinguish the tax implications between individuals earning income from employment and self-employed individuals in an enterprising venture. This post outlines the general principles of how the tax system in Canada operates, how tax is assessed, and explores the implications for entrepreneurs operating a business in Canada.
The Source Concept of Income and Residency
The central document that determines the rules and processes behind Canadian tax is the federal Income Tax Act. According to the Act, Canada taxes income earned based on the source concept of income. Section 3 of the Income Tax Act states that the income of a taxpayer for a taxation year is determined by… “the taxpayer’s income for the year from each office, employment, business, and property”. Although there is no specific mention of when markers to use when calculating a “year”, for tax purposes, taxpayers calculate it on the calendar year.
Taxation is also based on the taxpayer’s residence. Canadian residents are taxed on world-wide income from all sources which are the office, employment, business, and property categories mentioned above. Individual persons are determined to be Canadian based on their customary mode of life, the main indicators of which are an individual’s primary ties. These include maintaining a permanent place of residence in Canada and whether or not you have a spouse or dependent(s) in Canada as well. Generally, if a taxpayer permanently lives in Canada and has a family, there is no question as to the residency, and thus tax implications for that taxpayer. As entrepreneurs are generally advised to carry on their business through a corporate vehicle, there are different ways to determine residency for corporations. For corporations, the residency test looks to whether a corporation is incorporated in Canada either federally under the Canadian Business Corporations Act, or provincially with the Alberta Business Corporations Act. Additionally, for companies operating in multiple jurisdictions, Courts will look to the test from DeBeers, which asks where the “mind and management” of the corporation resides. In other words, one must determine where the Board of Directors of that particular company sits and makes decisions from.
For our purposes, individual residency is generally not an issue as most small businesses and growth companies start locally. For corporations, an entrepreneur may incorporate in other jurisdictions in which they operate in, so the mind and management test will play a large factor in determining residency, and thus the taxpayer’s tax implications.
Income for Businesses
The general formula to apply when calculating taxes is simple. First, the resident taxpayer determines the total of all amounts each of which is the taxpayer’s income from a source, which are listed but not limited to as office (elected officials), employment, business (entrepreneurs), or property (rental). Second, the taxpayer includes any taxable capital gains, which is income derived from the disposition (sale) of property like houses and shares. Next, deductions like moving and childcare expenses are removed from the total income. Finally, the taxpayer subtracts any office, employment, business, and property losses from their total income.
A business is a profession, calling, trade, manufacture of any kind whatsoever and an adventure or concern in the nature of trade, but it does not include income from an office or employment. Section 9(1) of the ITA lays out the initial starting point. A taxpayer’s income for a taxation year from a business is the taxpayer’s profit from that business or property. However, the Act does not define what “profit” means, but common law jurisprudence indicate that profit means net profit. Net profit is equal to the total revenue of a business less any expenses incurred earning that revenue, adjusted by specific rules contained in the Act. In the jurisprudence, there are a variety of cases that ask the question whether or not the impugned activity constitutes carrying on a business, or whether the activity is deemed to be a personal endeavours. However, as one of the main points the case law examines is whether or not the activity is being done for the intent to profit, and entrepreneurs go into business to make money, that is not a point that requires much discussion.
Subsection 9(1) also contains the primary rule for business deductions through the definition of a taxpayer’s income from a business as the “profit from the business… for that year”. As mentioned, profit from the business is defined to be net profit. This is determined according to accounting or commercial principles unless the principles are overridden by other provisions of the Act or case law. Therefore, the primary rule for deductions is net accounting profit calculations, less any reasonable expenses incurred in earning income from the business.
The concept of calculating profit and deducting expenses is a general rule that is subject to specific restrictions; section 18 of the Act specifically limits a deduction for certain expenses. These restrictions have further exceptions from section 20 which serve to overrise section 18 and specifically allows a deduction of capital cost allowance. Capital cost allowance is simply the depreciation of capital property over a certain period of time. Finally, section 67 imposes a generable “reasonableness standard” on the overall computation of profit and deductions and denies a deduction of expenses that are otherwise deductible to the extent that the amount of the expense is unreasonable. Section 18(1)(a) provides that an expense is deductible to the extent that it is incurred for the purpose of earning income from a business or property. Stated colloquially by Imperial Oil, did the loss in business arise in the normal course of operations?
The case law and Act also explicitly outlines expenses that are and are not deductible. Generally, personal or living expenses are not deductible under sections 9(1) and 18(1)(a). Additionally, expenses incurred when travelling to and from work, and expenses incurred from recreational facilities and club dues are not deductible either. Some deductions like moving and childcare expenses are allowed; though not explicitly calculated in computing business income, it slots into the overall deductions framework. The rules surrounding moving expenses dictate that the deduction is limited to the income earned after the move and require the taxpayer to meet four criteria: (1) the purpose for the move must have been for work; (2) residences were actually changed; (3) the new residence must be in Canada; and (4) the new residence must be at least 40 km closer to the new work location.
Finally, many entrepreneurs and employees are working from home in light of the COVID-19 pandemic. Section 18(12) of the Act allows for the deduction of income from a home workspace, subject to approval from the Canada Revenue Agency. The CRA examines whether the spave is the individual’s principal place of business, meaning over 50% of the work occurs there, or if the space is used exclusively for the purpose of earning income from business and used on a regular and continuous basis for meeting clients, customers or patients of the individual in respect of the business. According to the CRA, there are three types of workers who may qualify; these include employees, commissioned salespeople, and self-employed workers. Deductible expenses typically include utilities such as heating and electric home maintenance and supplies. Additionally, commissioned salespeople and self-employed workers can claim property taxes and home insurance. Entrepreneurs may also claim a portion of their mortgage and capital cost allowance.
How an entrepreneur approaches their tax season has major implications for the overall viability of their business. Losses incurred from operating a business can be applied retroactively to past and future income, which allows the taxpayer to focus whatever resources they have into their venture. Due to the unique possibilities of potential businesses, the general rule does not enumerate the specific deductions an entrepreneur has to keep in mind, instead applying a reasonableness standard for expenses incurred. In order to gain a deeper analysis into the various tax implications to start-ups and growth companies, consultation with a tax specialist and professional accountant is highly recommended.
 Income Tax Act, RSC 1985, c 1 [the Act].
 Ibid at s 3(a).
 Ibid at s 2(1).
 Thomson v MNR,  SCR 209.
 Denis Lee v MNR,  TCC.
 Canada Business Corporations Act, 1985 RSC, c C-44; Business Corporations Act, 2000 RSA, c B-9.
 De Beers Consolidated Mines, Ltd v Howe,  UKHL 626.
 The Act, supra note 1 at s 3(d).
 Ibid, at s 248(1).
 Ibid, at s 9(1).
 Daley v MNR, ; Arcorp Investments Ltd v Canada, 2000 CanLII 16535 (FC).
 The Act, supra note 10.
 The Act, supra note 1 at s 18.
 The Act, supra note 1 at s 20.
 The Act, supra note 1 at s 67.
 Imperial Oil v MNR, 1947 CanLII 293 (FC).
 The Act, supra note 1 at s 18(1)(l); Henry v MNR,  SCR 155.
 The Act, supra note 1 at s 248(1).
 The Act, supra note 1 at s 18(12).
 Canada Revenue Agency, Business-use-home Expenses (February 2019), online: <https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/sole-proprietorships-partnerships/report-business-income-expenses/completing-form-t2125/business-use-home-expenses.html>.
 The Motley Fool, CRA Update: Work-From-Home COVID-19 Tax Break (July 2020), online: <https://www.fool.ca/2020/07/24/cra-update-work-from-home-covid-19-tax-break>.
Picture this: you’re an up-and-coming entrepreneur and starting an orange juice business. The problem is, you don’t have any oranges! So, being savvy, you go and find an orange supplier. You manage to find one and they are willing to sell you their last load of 500 oranges. The catch is, another party has approached the supplier and also wants to purchase the 500 oranges. The supplier has left it to both of you to decide who gets the oranges. 
So, what do you do? It might seem you only have two options. Either one of you gets all 500 oranges or you find a way to divide the load. Either way, someone is walking away from the supplier without all 500 oranges. So, naturally you and the other party go back and forth arguing over prices and are fighting for every orange.
ENTER: Interest-Based Negotiation
What if you both could get all 500 oranges? You, being that savvy entrepreneur, decide to ASK the other party what they need the oranges for. It turns out, they are making a serum out of orange rinds. You acknowledge that you only need the juice. And voila – you decide to split the price of the load and you’ll each get the part of the orange you need! Everybody wins.
In this simple example, it was easy to find a solution beneficial to both parties if the right question was asked. This is the basis of Interest-based negotiation (otherwise known as principled negotiations, integrative bargaining or interest-based bargaining) - asking questions, uncovering the interests of the other party and collaborating to find a solution that works for everyone.
Now let’s back up – what is negotiation?
Negotiation has many definitions, one definition is: “Negotiation is a basic means of getting what you want from others. It is back-and-forth communication designed to reach an agreement when you and the other side have some interests that are shared and others that are opposed”. – Fisher and Ury, authors of Getting to Yes
In negotiations, people tend to think in ways that ultimately hurt their chances for the best deal, such as:
1.Negotiations are a zero-sum world and that the other party is an adversary.
2.Either you win or you lose.
3.You both only have your positions.
This thinking tends to limit negotiations, as then typically information is not shared among parties and often the best solutions are left aside. People stand firm with their positions and budging on them is felt as losing.
Interest-based negotiation removes the thinking of “positions” and replaces it with “interests”. Instead of demands, terms and ultimatums, you have underlying motivations, needs and concerns and THE WHY! 
The basic method of Interest based negotiations, outlined in international best seller Getting to Yes is as follows:
People: Separate the people from the problem
Every negotiator has two kinds of interests – in the substance and in the relationship. They are interested in solving the substantive issues while also maintaining a good working relationship with the other party. Sometimes, strong emotions from the relationship of the parties can be wrapped up in the substantive issues in a negotiation and cause complications. It is essential that you disentangle the relationship from the substance and try to reach a better understanding of each party’s concerns. Base the relationship on mutually understood perceptions, clear two-way communication and a forward looking, purposive outlook.
Interests: Focus on interests, not position
Your position is something you have decided upon while your interests are what caused you to decide.  Shared interests lie latent in every negotiation, even if they are not immediately obvious. Looking to interests instead of positions will allow you to develop creative solutions that can meet both party’s needs.
Options: Invent options for mutual gain
Having both a lot at stake and only thinking there is one possible solution inhibits creativity. Do not settle on the first agreement made. Instead, brainstorm a wide range of options before choosing the best one. If getting to the ultimate agreement proves out of reach – try agreeing on smaller, “weaker” options like a provisional agreement or only agreeing on what you disagree about. At least then some issues are discussed, and you have something to build on in the future.
Criteria: Use objective criteria/standards.
Rely on a fair, independent standard to settle differences. Whether it is market value, replacement cost, an expert opinion or a particular law. People using objective criteria tend to use their time more efficiency to talk about possible solutions and outcomes.
Best Alternative to a Negotiated Agreement (“BATNA”)
Your BATNA is the best-case scenario if you don’t reach an agreement. The better your BATNA, the more you can ask for in your current negotiation. Understanding your own BATNA, but also the BATNA of the other party is crucial.
For example, you are at a car dealership. You are negotiating the price of a new car. Your current car works fine – you are just looking for a good deal. However, the salesperson has targets he must meet by the end of the day and is desperate for a sale. In this example, your BATNA is stronger than the other party’s, and thus you are able to push for a better price. If the deal doesn’t happen, you still will have a car to drive. It is important to remember that asking questions, doing research and putting yourself in the position of the other party is the only way for you to uncover their BATNA.
Knowing your own BATNA and also the BATNA of the other party not only allows you to negotiate more effectively but forces you to consider their interests, motivations and the WHY!
The interest-based negotiation method permits you to reach a consensus on a joint decision efficiently. Using this approach will not only benefit your own negotiations but can guide your thought process to overcome differences in many areas of life. Remember to ask questions, uncover the interests of the other party and develop creative solutions for mutual benefit.
 David Wright, Law 508 – Negotiation (Faculty of Law, University of Calgary, 2019)
 Roger Fischer & William Ury, Getting To Yes: Negotiating Agreement Without Giving In, 3rd ed (New-York: Penguin Books, 2011).
 Wright, supra note 2.
 Fischer, supra note 2 at xxvii.
 Wright, supra note 1.
 Fischer, supra note 2.
 Ibid at 23.
 Wright, supra note 1.
 Fischer, supra note 2 at 43.
 Ibid at 74.
 Ibid at 71.
 Katie Shonk, “Principled Negotiation: Focus on Interests to Create Value” (13 July 2020), online (blog): Program on Negotiation Harvard Law School < https://www.pon.harvard.edu/daily/negotiation-skills-daily/principled-negotiation-focus-interests-create-value/>.
Sales Tax Obligations and Opportunities for Small Canadian Businesses
Author: Vanessa Fisher
If you are a new company with plans to operate in Canada it is important to be aware of your sales tax obligations before you begin selling any goods or services within the country. This blog outlies the goods and services tax (“GST”) / harmonized sales tax (“HST”) regimes and walks through signing up for a GST/HST account online. Lastly, this blog explains how to collect and remit GST/HST to the Canada Revenue Agency (“CRA”) and provides guidance on the Input Tax Credit (“ITC”) system available to small Canadian businesses.
GST is a 5% tax applied to most items and services sold in all provinces and territories within Canada. Certain provinces (Ontario, New Brunswick, Newfoundland and Labrador, Nova Scotia and PEI) have combined their provincial sales tax with GST, utilizing a unique HST rate that is collected in the same way as GST. When a business sells goods or services in Canada, they are required to add the applicable GST/HST rate to their selling price. The GST/HST is then collected by the seller at the point-of-sale and held until remitted to the CRA.
Businesses in Canada are not obligated to begin collecting and remitting GST/HST on their goods and services sold within the country until they are no longer considered a “small supplier” by the CRA. A business is no longer a small supplier once their revenue before expenses (that is, the company’s sales, not their profit) exceeds $30,000 in a single calendar quarter (three consecutive months), or over the last four consecutive quarters. While collecting and remitting GST/HST is mandatory on sales that occur after this $30,000 threshold is passed, a small business can also elect to voluntarily register for a GST/HST account prior to this point and become eligible for Input Tax Credits (“ITCs”), a point I will return to.
How to Register for a GST/HST Account
In order to sing up for a GST/HST account, one must first apply for a Business Number (“BN”). A BN is a unique number assigned to your corporation that simplifies all your dealings with the CRA and is also necessary for filing corporate income tax, setting up payroll accounts, importing/exporting accounts, and GST/HST accounts. The registration for a BN also automatically creates an account for filing corporate income taxes.
The CRA’s business registration page allows you to register your corporation with a BN at no cost. From there, you can create and add a GST/HST account (and any other accounts needed) on the same webpage. This process will also create a CRA e-portal for your business that allows you to update your corporate information, do your tax filings, and process payments to the CRA online.
How to Collect and Remit GST/HST
The GST/HST you charge your customers at the point of sale will depend on the GST/HST rate of the location where your customer is purchasing and receiving their order. The CRA calls this the place-of-supply. For example, if your company is in Alberta and you sell an item of clothing for $10.00 to a customer residing in Toronto, you would need to apply the Ontario HST rate of 13% to the purchase price (for a total of $11.30), not the Alberta GST rate of 5%. In this scenario, Alberta is the place where the selling corporation resides, not the place-of-supply. However, if the customer physically comes to Alberta to purchase the clothing from a store in Alberta, the Alberta GST rate of 5% would apply to the purchase.
The CRA provides a useful Provincial Rates Table and GST/HST Calculator to calculate what to charge on your sales to each province.
It is also important to note that Alberta, Nunavut, the Northwest Territories, and the Yukon have no provincial sales tax, and other provinces (as mentioned above) utilize an integrated HST, which means that only GST/HST is collected from sales in these provinces. British Columbia, Manitoba and Saskatchewan have a separate provincial sales tax (PST/RST/QST) and rules for collecting and remitting provincial sales tax are unique to the provinces. Provincial sales tax will not be considered in this blog, but obligations related to provincial sales tax should be investigated if your company ever plans to sell its products to customers in these provinces.
Once you begin collecting and charging GST/HST (and any relevant provincial sales tax), you must also tell your customers that the sales tax is either included in pricing or will be added separately, and this information should be clearly indicated on your invoice with the rate being charged and your registration number.
Your business is also considered to hold GST/HST collected “in trust for the Crown” until you remit it to the CRA. This constitutes a kind of trust fund that comes into existence automatically when you collect sales tax from your customers. Failure to remit amounts collected to the CRA has serious consequences, so it is important to keep detailed records of your sales that supports the information you will send to the CRA when you file your GST/HST return at the end of each reporting period. 
Input Tax Credits and Zero-Rated Supplies
As mentioned, Canadian businesses are not obligated to begin collecting and remitting GST/HST until their sales exceed $30,000 in a single calendar quarter, or over the last four consecutive quarters. That said, for certain small businesses it might be worth voluntarily registering for your GST/HST account early, even if it is not required. One reason is to get a head-start on good record-keeping, as you will have to begin collecting and remitting GST/HST as soon as you register for your account. Volunteer registration also allows your business to make use of ITCs.
ITCs are basically a mechanism to offset your GST paid on expenses for the business against the GST collected from sales of the business. For example, if the GST/HST you pay on expenses incurred for your business was $1,000 for the reporting period, and the GST/HST collected from customers for your goods/services sold was $3,000, you can claim an ITC of $1,000 and therefore be required to remit back $2,000 to the CRA.
ITCs can be especially useful if you are registered for the GST/HST account and produce or sell zero-rated supplies. Certain goods and supplies are considered zero-rated by the CRA and therefore not subject to GST/HST charges on sales. At the same time, a business selling zero-rated goods is still eligible to claim ITCs on the GST/HST paid or payable on purchases and operating expenses related to the commercial activities of its business. In other words, a refund is available on GST/HST paid on certain expenses for the business despite not being required to collect or remit GST/HST to the CRA on sales. It is also advised to obtain professional advice from a lawyer and/or accountant to find out exactly what you can and can’t include as expenses in the business as this can be a complicated area to navigate.
There is a wealth of information on the CRA website under the General Information for GST/HST Registrants  and GST/HST for Businesses  that provide further guidance on completing your GST/HST return and much more.
 “Canada’s Harmonized Sales Tax Explained”, online: Investopedia <https://www.investopedia.com/terms/h/harmonized-sales-tax.asp>
 “Definitions for GST/HST (Small Supplier)”, online: Government of Canada <https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/gst-hst-businesses/definitions-gst-hst.html#smallsupplier>
 CRA Business Registration page: https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/registering-your-business/bro-register.html
 “GST/HST rates and place-of-supply rules”, online: Government of Canada <https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/gst-hst-businesses/charge-collect-place-supply.html>
 GST/HST Calculator: https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/gst-hst-businesses/charge-collect-which-rate/calculator.html
 “Charging Provincial Sales Tax on Online Sales” <https://www.thebalancesmb.com/charging-provincial-sales-taxes-on-online-sales-2948448>
 “Charge and Collect the Tax - What to do with Collected GST/HST”, online: Government of Canada < https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/gst-hst-businesses/charge-collect-what-collected.html>
 “Zero-Rated Goods”, online: Government of Canada <https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/4-3/basic-groceries.html>
(also, in speaking with a CRA agent, I was told that coffee is only a zero-rated good as long as it is in bean or grind form and sold in packaged bags. If you brew the coffee and sell it, it becomes taxable for GST/HST purposes).
 “Input Tax Credits (ITCs)”, online: Government of Canada <https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/payroll/benefits-allowances/remitting-gst-hst-on-employee-benefits/input-tax-credits-itcs.html
What is a liability waiver?
A liability waiver is an exclusionary clause that is drafted to protect a party from liability by excluding liability altogether or limiting liability. Also known as “limitation of liability” clause or “waiver”. If taking part in the activities involved in your business could lead to any risk of injury for the patrons of your business, as a business owner, you will want your customers to sign a liability waiver. This blog post is intended to give a brief overview of liability waivers and to give business owners some tips on how to approach this issue.
Standard Form Contracts
Standard form contracts are massed produced documents that often include the liability waiver and can be the document that you get every customer to sign. There are many advantages to a standard form contract. The standard form means that you will not have to negotiate specific terms with every customer that comes to your business, this leads to reduced costs and increased certainty in the terms. These are very commonplace in startup companies and should be used correctly to ensure that the liability waiver is enforceable.
As Professor Girgis has written, the standard form contracts present the customer with a “take it or leave it” agreement, and the lack of negotiation between the patron and the company brings into question whether the clause should be enforceable.
How to ensure your waiver is enforceable
First, it is well established law that reasonable notice needs to be given to patrons. Practically, this refers to when you bring the liability waiver to the attention of the patron and how you go about bringing this to their attention. The more onerous the clause, the more notice you should give to the patron. If the document waives you of liability even when you, the company, is negligent, you will need to bring a considerable amount of early notice to the patron. In a British Columbia decision involving a bike park the company’s waiver was enforced and protected the company from any liability. The notice given in this case involved the waiver itself, but also signs around the park written in bold saying “STOP – READ THIS” to bring extra attention to the waiver of liability. Within the document, the bike park used yellow boxes, bold print and larger letters in places to draw attention to the important details. Further, the language used in the document was clear and blunt, and left no doubt that the typical adult could understand the waiver.
In another British Columbia case, however, signage did not help a ski resort from escaping liability. An important distinction to be made here is that there was not a signature required for the waiver of liability. When a liability waiver does not require express signature or a document that the patron’s attention can be drawn to, businesses are required to meet a higher bar for reasonable notice. In other words, there is no magic formula to ensuring that your waiver will be enforceable and certainly protect you from any liability.
In order to have an effective waiver of liability you need to use plain language and to bring sufficient notice to your patrons. The language used should be understandable to any person and should avoid unnecessary legal jargon. Further, it should be a company policy to affirm with the customer that they have had enough time to read the contract.
If an exclusionary clause ends up being challenged in court for its enforceability, the outcome is ultimately unpredictable. However, a prudent business owner will follow the two basic tips set out in this post: use clear language, and ensure the customer has the time to read the contract.
 Jassmine Girgis, “Incorporating Waivers of Liability into Contracts” (May 11, 2020), online: ABlawg, http://ablawg.ca/wp-content/uploads/2020/05/Blog_JG_Apps.pdf
 See Thornton v Shoe Lane Parking Limited,  EWCA Civ 2,
 Jamieson v. Whistler Mountain Resort Limited Partnership and Gravity Logic Inc., 2017 BCSC 1001,
 Apps v Grouse Mountain Resorts Ltd., 2020 BCCA 78 (CanLII)
Where are all the BIPOC Entrepreneurs in Canada?
Entrepreneur. What image comes to mind when you think of that word? Perhaps a Zuckerberg-esque, T-shirt wearing tech genius in his mid-twenties. Maybe a duo of university drop-outs utilizing their computer programming skills to fulfill their dream of making computers small enough for people to have in their homes and offices. The image you envision when you think of an entrepreneur likely doesn't borrow traits from Madam C.J. Walker, whose hair-care business led to her becoming the first American woman millionaire. You most likely don't picture Michael Jordan, who used his success as a basketball player to build a best-selling footwear brand.
Steve Jobs. Elon Musk. Jeff Bezos. Why is it that the figure of the white male has become the pinnacle image associated with entrepreneurship? In 2013, economist Ross Levine and London School of Economic professor Yona Rubinstein released a working paper that explored the demographics, personality traits and earnings of entrepreneurs. They found that entrepreneurs are "disproportionately white, male, and highly educated". Big surprise.
While entrepreneurial activity is on the rise, Black, Indigenous and People of Color ("BIPOC") entrepreneurs remain underrepresented within the startup sphere. This underrepresentation of BIPOC entrepreneurs extends beyond the borders of any one country in particular. In Canada, although 1.2 million Canadians identify as Black, a 2015 survey conducted by Black in Canada found that there are only 2,000 Black-owned businesses of "significant scale" within our borders. Strikingly, I was unable to find any published statistics regarding the prevalence of Indigenous-owned businesses in Canada. It is obvious that there is a systemic issue that results in the underrepresentation of BIPOC entrepreneurs within the start-up sphere in Canada. The question remains, however, as to why such under-representation exists?
Well for one, you need money to start a successful business. One of the most significant challenges that BIPOC entrepreneurs face is securing capital to back their endeavors. Many early-stage growth companies and start-ups receive their financial backing in the form of venture capital. Due to the reliance many growth companies have on venture capital, venture capitalists act as gatekeepers for the success of start-ups. Although diverse founding teams, defined as a group with at least one founder with a non-white perceived ethnicity, have earned a 3.26x median realized multiple on IPOs and acquisitions, 30% more than the 2.5x realized multiple for all white founding teams, there is still a severe funding gap between BIPOC and white entrepreneurs. For example, venture capital funding for Black American women entrepreneurs accounted for 0.2 percent of all venture funding in the US in 2018. Again, I was unable to find comparative statistics regarding the financing of Indigenous Canadians.
Despite the clear financial evidence indicating that investing in companies founded by BIPOC entrepreneurs is a good move, the funding gap between white and BIPOC-led companies is prevalent. This can be attributed to unconscious bias. Venture capital investment decisions are likely to be subconsciously influenced by familiarity bias, or the preference of an individual to remain confined to what is familiar to them. If an entrepreneur reminds a venture capitalist of Zuckerberg, Musk, or Bezos, familiarity bias creeps in to increase their perceived trustworthiness and the view that the company is more likely to be a sound investment.
The geographic remoteness of many Indigenous populations further exacerbates the problems BIPOC entrepreneurs face when trying to obtain capital to finance their businesses. Statistics Canada indicates that around 60% of indigenous peoples live in rural areas. The vast majority of rural Indigenous communities do not have a bank within their boundaries. Collectively, the four major banks in Canada have less than 50 aboriginal branches, banking outlets, or banking centres located on-reserve. Section 89 of the Indian Act prohibits the use of reserve land as collateral, and banks are reluctant to provide loans if assets cannot be seized in the case of a default. As you can see, there are a number of factors that contribute to the racial funding gap for entrepreneurs.
Oh yeah, and there's racism. Although sometimes not overtly obvious, systemic, anti-BIPOC racism resulting from biases is ingrained in the business sphere. It is easy to quantify the barriers that BIPOC entrepreneurs face in the financial realm. However, in addition to the barriers in obtaining capital to back their ventures, BIPOC entrepreneurs face a multitude of social barriers that are difficult to quantify. Building a strong network of business personnel tends to lend an image of legitimacy to an entrepreneur. If you surround yourself with successful people, you are more likely to be perceived as successful. However, the systemic anti-BIPOC racism that exists in offices and executives suites restricts BIPOC access to high level positions within companies. For example, a Ryerson University study on diversity of companies in Vancouver, Montreal, Calgary, and Toronto was released in June and indicated that Black people held only 13 out of 1,639 board positions at the companies involved in the study. If your access to executive positions within a Company is restricted, it is difficult to build a network of high-level, well-respected business personnel. Additionally, as a direct result of inequitable government support and funding to indigenous communities, only 48% of on-reserve indigenous peoples graduate high school. In a society where the corporate world relies so heavily on educational background, social access to corporate networking for Indigenous business-owners is heavily restricted and largely absent.
Systemic racism, combined with statistics that show that BIPOC entrepreneurs are less likely to receive financial support at the venture capital level, have made the start-up world as inaccessible as ever. In the aftermath of George Floyd's murder at the hands of Minneapolis Police Officers, difficult conversations about systemic racism in the entrepreneurial world are no longer avoidable. Instead of merely taking performative measures such as posting a black square or writing about support for the Black Lives Matter movement on their social media, entire industries must be challenged to review how their actions contribute to the underrepresentation of BIPOC entrepreneurs in the start-up sphere. Rather than echoing Doug Ford's sentiment that "we don't have the systemic, deep [racist] roots that the [US] has had for years”, Canadians need to recognize that Canada is not immune to the systemic racism that plagues society and stifles BIPOC entrepreneurship in the US.
Innovation is a key facet of entrepreneurship. To function successfully, innovation demands inclusivity. Taking time to inform yourself of the barriers that BIPOC entrepreneurs face is a good first step. After reading this post, I encourage you to research BIPOC entrepreneurs who have been successful in spite of the multitude of barriers they face in obtaining their success. I have provided a list of BIPOC entrepreneurs below. Hopefully, in going through this list, the image that you perceive when you hear the word "entrepreneur" will be changed.
Navigating the Non-Profit Scene in Alberta
The Charity and not-for-profit sector is a vital and growing part of the Canadian economy. In 2017, economic activity in the non-profit sector totalled $169.2 billion, representing 8.5% of Canada's GDP. Despite the large impact non-profit corporations have on the Canadian economy, the organizational legislation for non-profit corporations has been largely unaltered in Alberta since the 1920's. This has led to a fragmented and potentially confusing landscape for keen social entrepreneurs looking to make their mark in the not-for-profit scene.
This article will attempt to demystify the process of incorporating a non-profit in Alberta by outlining the different options a new organization has to incorporate.
Different Ways of Creating a Non-Profit Organization in Alberta
Depending on the purpose of the organization, an applicant may choose from any of the following pieces of legislation to incorporate a non-profit in Alberta:
(i)Companies Act, RSA 2000, c C-21;
(ii)Societies Act, RSA 2000, c S-14;
(iii)Canada Not-for-Profit Corporations Act, SC 2009, c 23;
(iv)Business Corporations Act, RSA 200, c B-9; or
(v)Cooperatives Act, SA 2001, c C-28.1.
There is no single, universal best way to incorporate a non-profit. The path a start-up non-profit takes will depend on its unique objectives and needs.
The sheer amount of options that an applicant has can lead to confusion. In order to offer some clarity, the features, advantages, and disadvantages of incorporation under the Companies Act, Societies Act, and the Canada Not-for-Profit Corporations Act (the three most common ways of incorporating a non-profit) will be further outlined.
(i)Incorporation under the Companies Act
Non-profits corporations created under the Companies Act are formed to promote art, science, religion, charity or other similar endeavors or for promoting recreation for their members.
A non-profit corporation can operate in almost any way; however, it must operate on a cost-recovery basis and cannot distribute profits to its shareholders or members.
There are two types of non-profits that exist, (a) private, and (b) public.
a.Private non-profit corporation
This structure places limits on the number of shareholders / members, the number of shares or membership transfers, and puts restrictions on inviting members of the public to subscribe for shares in the company.
b.Public non-profit corporation
Under this structure there are no restrictions with respect to the number of shareholders / members. However, there are continuous reporting obligations. These organizations typically obtain most of their financial support through donations received from the public.
The main disadvantage of the Companies Act is that it is more complex than the Societies Act. A company must decide if it will act as a private or public company. If it does operate as a public company it faces more extensive financial reporting requirements.
(ii)Incorporation under the Societies Act
A society is an incorporated group of five or more people who share a common recreational, cultural, scientific, or charitable interest. According to the Government of Alberta it is the most used method of incorporating a non-profit, likely due to the fact that it is the simplest and cheapest way to incorporate.
The major advantages of a society are that:
i)a member of a society may not be held responsible for the debts of the society;
ii)the society can enter into contracts as an entity; and
iii)a society is able to apply for government grants.
The major disadvantage of a society is that it is not allowed to engage in any type of ongoing business operations. An organization must consider if part of its model will include engaging in a trade or business, such as a second-hand store. A society also cannot distribute property among its members during its lifetime.
(iii)Incorporation under the Canada Not-for-Profit Corporations Act
A start-up may determine that it wishes to incorporate federally rather than provincially. If it wishes to do so, it can incorporate under the Canada Not-for-Profit Corporations Act ("NFP"). This is typically only advised for companies which wish to operate nationally and require name protection across Canada. Even if a company intends to operate in more than one province, it can still incorporate as a non-profit in Alberta and then register in the other provinces it intends to do business in. This is often the simpler and quicker option rather than incorporating federally.
Similar to the Companies Act, the NFP distinguishes between two types of not-for-profit corporations: (a) Non-soliciting corporations, and (b) soliciting corporations. A company will be designated as a soliciting corporation if it receives revenues from public sources in excess of $10,000. Non-soliciting corporations is the residual category which every other corporation falls under in the Act.
 David G Roberts, "Charitable and Non-Profit Corporations in Alberta - an update on legal and tax issues" (1989) 27:3 Alberta L Rev 476 at 477.
 Companies Act, RSA 2000, c C-21, s 200(1)
 Ross Swanson, "Incorporating a Not-For-Profit Organization" Duncan Craig LLP (17 January 2018), online (blog): < https://dcllp.com/blog/2018/01/17/incorporating-a-not-for-profit-organization/>.
 Societies Act, RSA 2000, c S-14, s 3(1).
 Alberta, Culture and Tourism, Incorporation and Other Options - Supplemental Handout Package (Alberta: Culture and Tourism, 2015) at 5, online: <http://boardleadershipcalgary.ca/wp-content/uploads/2015/04/Handouts-BL-Calgary-Incorporation.pdf>.
 Supra Note 6.
 Ibid, s 4(1).
 Ibid at 10.
 Canada Not-for-Profit Corporations Act, SC 2009, c 23, s. 5(1).
 Wayne D Gray, "A Practitioners Guide to the New Canada Not-for-Profit Corporations Act", (2010) 89 Can B Rev 141 at 145.
One of the keys to a successful start-up venture is hiring the right employees. An important part of the hiring process involves drafting an employment agreement. A good employment agreement provides a written account of the agreement between the employee and the Start-up and affords the parties a clearer understanding of their duties, responsibilities, and obligations to each other in their employment relationship. Here are some key issues to consider when drafting a strong employment agreement:
Consideration is Important:
An employment agreement is a contract, and all contracts require consideration. An employment agreement entered into as a condition of the individual being offered employment is enforceable, whereas an employment agreement enter into once the employee has commenced work must be supported by fresh consideration. As such, it is very important that an employment agreement and any ancillary contracts be given to an employee candidate as part of the offer of employment, failing to do so may leave the employment agreement unenforceable.
Keep it Simple:
Life at an early-stage start-up can be turbulent, employees will likely encounter changes in the nature and character of their work as time goes on. In light of this, the description of the job duties found in your start-up’s employment agreement should be kept simple and general as possible as courts have been willing to rule that unanticipated changes in employment responsibilities can constitute constructive dismissal. Having the employment agreement expressly provide for the employer’s power to change the employee’s position, duties, and responsibilities from time to time can provide additional protection to the start-up.
The employment agreement should set out monthly or annual salary and should reference any stock option grants if they exist. It is important that any mention of additional compensation, such as a bonus, should be clearly stated to lie in the dole discretion of the board of directors – bonus’s may be earned but there may not be enough money to reliably pay it.
Unfortunately, not all employees will work out and the employment relationship will have to be terminated. Employers have an implied contractual obligation to give employees proper notice of termination of the employment relationship unless there is “just cause” for immediate dismissal. Since “just cause” presents a very high legal bar to pass, it is advised that the employment agreement prepare for a “without cause” situation.
There are two legal regimes for determining proper notice – the relevant provincial Employment Standards Act and the common law. The relevant provincial Employment Standards Act will provide notice minimums that must be adhered to and cannot be contracted out of, whereas the common law provides for what is known as “reasonable notice”. Reasonable notice will typically exceed the minimum prescribed by statute and are determined by factors such as the character and length of service, and the employees age and prospects for future employment. If the employer and employee have previously agreed on the length of notice to be given, i.e. a written employment agreement with express notice terms, then those terms will generally govern provided they comply with statutory minimum notice requirements.
Generally, an employer can elect whether to provide “working notice” or whether to end the working relationship immediately by providing the employee with a lump sum equivalent to the notice period that is, a payment "in lieu" of notice.
In light of the above, a termination clause in an employment agreement should:
A non-compete clause is a clause under which an employee agrees not to enter into or start a similar profession or trade in competition against the employer. These clauses are notoriously hard to enforce due to courts often viewing them as an unreasonable restraint of trade.
Practically, you may have an easier time enforcing these clauses if:
This kind of provisions bar the ex-employee from contacting the stat-up’s current employees, investors, customers, business partners or suppliers in connection with a rival business. These are more reliable than non-compete provisions but can still be struck down if too broad.
Practical solutions include:
 Bryce C. Tingle, Start-up and Growth Companies in Canada: A Guide to Legal and Business Practices, 3rd ed (Canada: LexisNexis Canada Inc, 2018) at 127 [Tingle].
 See Holland v. Hostopia.com Inc 2015 ONCA 762.
 See Ferdinandusz v. Global Driver Services Inc,  O.J. No. 4225.
 Tingle, supra note 1.
 Ibid at 142.
 Peter M Neumann and Jeffrey Sack, eText on Wrongful Dismissal and Employment Law (2020), Lancaster House, 2012 CanLIIDocs 1 [Neumann].
 Tingle, supra note 1 at 128.
 Neumann, supra note 6.
 Tingle, supra note 1 at 129-30.
 See Elsley Estate v JG Collins Insurance Agencies Ltd.,  S.C.J. No. 47.
 Tingle, supra note 1 at 131-34.
 Ibid at 135-36.
Signed, Sealed and Delivered
What is a Contract?
A legal contract is an agreement between two parties that involves an exchange of rights and obligations enforceable in court. The law recognizes the autonomy of individuals to create a sort of private law between themselves to regulate their own conduct in the free market. Originally, this meant upholding “freedom of contract” and the intent of the parties, regardless of imbalances in bargaining powers or external notions of fairness. The powers that be quickly realized that humans are not quite robots, and as such, this strict interpretive approach did not endure. In modern times, contracts are interpreted using several doctrines and depending on the facts of a particular case, different weights will be given to a particular doctrine. It can sometimes be a challenge to predict the outcome of this more holistic approach to interpretation, which is why “legalese” is often employed in the drafting of contracts. These are not mere magic incantations, but instead an attempt by competent solicitors to establish greater certainty in the agreement while also respecting the limitations imposed by law and public policy.
Elements of a Contract
In a nutshell, a contract roughly consists of five core elements: Offer, Acceptance, Consideration, Legality, and Capacity. An offer is one person’s communication to another of a willingness to enter into a legally binding agreement under specific terms. Acceptance is a final, unqualified expression of assent to terms of an offer. Consideration refers to the fact that promises under contract need to be “bought” or “bargained for” by an act or promise of the other party, ensuring an exchange of value. Alternatively, a contract signed under seal may not require consideration. Legality means that a contract made for an illegal purpose or otherwise forbidden by statute will be void even if it conforms to the other elements. Finally, capacity refers to the legal and mental ability to execute a contract, such as not being a minor.
Some Key Doctrines
Reasonable Person: A time tested tool for “objective” interpretation. The standard of a reasonable person is often used in different areas of law to analyse a dispute through some level of objectivity. A reasonable person is a mythical creature of the law who is not too prudent but also not reckless, is more careful than most people (and hence more careful than the average person), and consciously makes decisions accounting for the consequences of their actions. It is used to determine the objective intent of contracting parties and other objective factors in a dispute.
Privity: The general rule from English common law is that a person who is not a party to a contract cannot have obligations or liabilities imposed on them. This part is rather uncontroversial. However, the general rule also provides that a person who is not a party to a contract cannot acquire enforceable rights under said contract. In an employment context, this second part has led to some harsh consequences, and as a result, an exception was made allowing employees to benefit from an immunity or limitation of liability granted to an employer if certain conditions are satisfied.
Honest Performance: All contracts have an implied duty of honest performance. This means that parties should not act in bad faith when performing under the contract. It does not necessarily mean acting in good faith. Respect for freedom of contract and the pursuit of economic self-interest must be weighed against the merits of judicial intervention. It is not the role of the judge to scrutinize the motives of contracting parties and enforce ad-hoc morality. Therefore, honest performance must be anchored to something objective for the court to assess. This doctrine is especially relevant in employee termination, and insurance contracts.
Take Ursula’s contract with Ariel in the Disney rendition of The Little Mermaid. As you can imagine, there are several issues with its enforceability, but only a few need to be highlighted to make the invalid in its entirety.
Capacity: Ariel was a minor at the time, meaning that terms are unlikely to be enforced on her
Legality: One cannot make a contract that could lead to eternal servitude of an individual
Honest Performance: Clear attempts to undermine the performance of a counterparty to achieve a certain result under the contract would fall foul of the duty of honest performance
Conclusion: This contract is not enforceable in Canada. The fact that it was enforceable in Atlantica raises serious doubts about Sebastian’s confident remark that life is indeed “better down where it’s wetter… under the sea”. Don’t be like Ursula, draft proper contracts for your business venture.
Author: João Victor Lima is member of the BLG Venture Clinic and is a second-year law student at the Faculty of Law, University of Calgary.
 CED (online), Contracts I.1, Contracts | I — Basis of Contract | 1 — Contract Defined, §1
 Strench v. Strench (2002), 2002 CarswellBC 695 (B.C.S.C.)
 CED (online), Contracts II.3, Contracts | II — Formation of Contract | 3 — Acceptance, §50
 CED (online), Contracts III.1, Contracts | III — Consideration for Contract | 1 — General, §102
 CED (online), Contracts III.1, Contracts | III — Consideration for Contract | 1 — General, §103
 CED (online), Contracts VIII.1, Contracts | VIII — Substantive Illegality in Contract Law | 1 — Illegality, §434
 CED (online), Contracts IV.2.(a).(iii), Contracts | IV — Parties to a Contract | 2 — Capacity to Contract | (a) — Natural Persons | (iii) — Infants (Minors) — Provinces Other than British Columbia
 Vaughan v Menlove (1837) 132 ER 490 (CP)
 London Drugs Ltd v Kuehne & Nagel International Ltd  3 SCR 299
 Bhasin v Hrynew 2014 SCC 71
 Clements, R., & Musker, J. (Directors). (1989). The Little mermaid [Motion picture]. United States: Buena Vista Pictures Distribution, Inc.
Standard Boilerplate Provisions
Boilerplate provisions are clauses that are included in most commercial agreements. They include governing law, severability and how time-sensitive the agreement may be. Boilerplate provisions are viewed as ancillary elements of a contract and are often the least controversial and negotiated. While parties rarely give these provisions a second look, they are fundamental in interpreting the agreement, as well as the rights and obligations of each party.
The following post aims to shed light on five common boilerplate clauses and the importance of tailoring each provision to the needs of the parties or agreement. 
Choosing a jurisdiction will depend on the parties to the agreement. It is often dictated by the location of the head office or where the business operates. A governing law provision is an inadequate substitute for a jurisdiction clause and won’t dictate where disputes may be heard. The specific language of the clause can have a great impact on its interpretation. In Naccarato v Brio Beverages Inc., the court found that the word “submit” does not constitute mandatory language but was considered permissive. If parties negate including a jurisdiction clause, the courts may infer the appropriate jurisdiction so long as it has a real and substantial connection to the parties or agreement.
Specifying an exclusive jurisdiction that meets the needs of the parties is important as it can avoid unexpected legal costs in another province or country.
The entire agreement clause aims to limit the obligations of each party to only what is included in the written agreement. This means that any discussions throughout negotiations or representations made prior to signing the agreement are excluded.
The entire agreement provision codifies “the parole evidence rule, which provides that a contract may not be contradicted by evidence of oral and written statements made by the parties before the signing of the contract.” The provision is not meant to apply proactively, only retroactively, allowing the parties to amend the agreement as needed. If a proactive application is desired, the specific wording must provide for it.
The entire agreement provision has the power to limit the obligations of the parties to what is written and included in the agreement.
A notice provision is not intended to be negotiated or favour one side or the other. It will provide the outline of how the parties must communicate throughout the term of the contract. A party can provide notice for a variety of reasons, for example: renewals, assignments, amendments, or termination. The goal is to minimize the potential for disputes to ensure each party is aware of changes in the obligations of the parties.
The notice clause should clarify in what manner notice should be communicated (ie. fax, e-mail, mail… etc.), who should receive the notice, where it should be sent, accepted methods of delivery and when notice is deemed received and effective.
There are two different types of notice provisions, mandatory and permissive notice provisions. Mandatory notice provisions outline the type or types of delivery the parties must comply with. Whereas permissive notice provisions allow for delivery in ways not explicitly named in the clause. If a provision is found to be permissive, courts will take a practical approach in finding whether notice is valid, and whether the method of delivery chosen provided unfair advantages to the sender.
It is important to tailor the notice provision to the parties and the agreement to ensure ease of delivery and acceptance.
The assignment clause will stipulate whether or not a party to the contract can transfer the rights and obligations under the contract to another party. A common provision might look like:
“This agreement shall not be assigned by either party without the consent of the other party.”
Such a provision raises a number of concerns. Namely, it doesn’t purport to identify whether the obligations, rights or both are assigned under the agreement. Further, the clause fails to specify what standard the non-assigning party must use to approve the assignment.
Canadian courts have addressed these concerns and found that typically, unless explicitly stated, benefits under the agreement can be assigned but the obligations must receive consent from the non-assigning party.
The standard by which the non-assigning party must be held is the reasonability standard. The non-assigning party may only refuse the assignment of both the benefits and obligations if it would be reasonable to do so. What is reasonable will depend on the specific factual circumstances, and the parties to the agreement and the potential assignee.
It is important to be explicit when drafting contractual provisions. The wording of the provisions should be carefully chosen and reflect the intentions of the parties.
A force majeure clause aims to protect the parties to an agreement if some unforeseeable event outside the parties control prevents them from fulfilling their obligations. The clause excuses the parties from their respective obligations without causing a breach. Generally, a force majeure clause will “acts of God, war, riots, natural or other disasters.” The circumstances of force majeure fall outside what is considered normal business risk.
Typically, the provisions will be considered narrowly with consideration to the wording of the provision. The party seeking to evoke the provisions must prove the force majeure event.
If a contract includes a force majeure clause, the party seeking protection must take steps to prevent the event from happening, which can vary depending on the circumstances. The party is also required to attempt to avoid the event and mitigate the potential impact. It is common for a party to provide notice to the other party to an agreement to its inability to fulfill its obligations.
If the contract fails to provide for force majeure, the common law provides some protection under the Doctrine of Frustration. Frustration in contract law occurs when a situation arises rendering it impossible to complete the obligations under the contract. The frustrating event must not have been foreseeable at the time the contract was entered into, nor the fault of either party.
Boilerplate provisions can have powerful influence over the interpretation and application of the agreement. It is important to tailor the provisions to consider the parties interests and needs and to ensure the ability to fulfill its obligations as outlined in the contract.
 Boilerplate Clauses, Practical Law Standard Clauses, (2016), online : Thomson Reuters <https://blog.richmond.edu/lawe759/files/2016/08/Boilerplate-Clauses.doc.pdf>.
 Mary Paterson, Simon Hodgett & Seth Whitmore, How to draft exclusive vs. non-exclusive jurisdiction clauses, (May, 2019) online: Osler <https://www.osler.com/en/resources/regulations/2019/how-to-draft-exclusive-vs-non-exclusive-jurisdiction-clauses>.
 Christmas v Fort McKay First Nation, 2014 ONSC 373.
 Naccarato v. Brio Beverages Inc.,  AJ No 47 (QB).
 Club Resorts Ltd. v. Van Breda, 2012 SCC 17.
 Soboczynski v. Beauchamp, 2015 ONCA 282 at para 46.
 Shelanu Inc. vs. Print Three Franchising Corp. (2003) , 64 O.R. (3d) 533 (C.A.) at paras 51 and 52.
 Supra note 7.
 J Gerard Legagneur, Why your contract’s “notices” provision is vitally important, online: < https://www.nolo.com/legal-encyclopedia/why-your-contract-s-notices-provision-is-vitally-important.html>
 Ross v T Eaton Co., (1992) 96 DLR (4th) 631 (Ont CA).
 TL Stark, Negotiating and Drafting Contract Boilerplate, (New York: AML Publishing, 2003) at page 37.
 Rodaro v Royal Bank, (2002), 59 OR (3d) 74 CA.
 McCallum, Hill & Co. v Imperial Bank, (1914), 7 Sask LR 33 (SC).
 Peter Wiazowski & Trevor Zeyl, Contract performance in a coronavirus world: Force majeure clauses and the doctrine of frustration, (March 2020), online: Norton Rose Fulbright LLP < https://www.nortonrosefulbright.com/en-ca/knowledge/publications/844d7cf4/contract-performance-in-a-coronavirus-world-force-majeure-clauses-and-the-doctrine-of-frustration>.
 ES Block, K Brabander, M Lam, MS Bridges & K Smyth, The impact of Covid-19 on contractual obligations: force majeure and frustration, (March 2020), online: McCarthy’s LLP < https://www.mccarthy.ca/en/insights/articles/impact-covid-19-contractual-obligations-force-majeure-and-frustration>.
What are Anti-dilution Provisions?
For early-stage companies, convertible instruments offer several advantages over conventional debt or common equity. However, because start-up companies change their capital structure so often, investors with convertible instruments are particularly vulnerable to changes in the value of their investment.
Anti-dilution provisions are a commonly required protection for investors in early-stage companies. The purpose of anti-dilution provisions is to ensure that a convertible instrument retains its economic value to an investor in the event the company changes its capital structure.
If the company splits its shares, for example, an investor holding a convertible preferred share should be able to convert his shares and receive the same proportion of the company as he would have before the split happened. That is an example of a corporate structural anti-dilution provision, the other type of provision is the price-protection anti-dilution provision.
Corporate structural anti-dilution provisions
Corporate structural anti-dilution provisions ensure that the investor receives the same number of common shares at the same conversion price as he would have if a change to the corporation had not occurred. Common triggers include dividends, division or consolidation of common shares, amalgamation, arrangements, reorganization or recapitalization.
Price protection anti-dilution provisions
Price protection anti-dilution provisions are designed to adjust the conversion price of the investor’s instrument to align with any new issuances of the companies securities. Generally speaking, these are triggered only when new securities are issued at a price below the investor’s conversion price (“down-round financing”).  Common triggers include the issuance of common shares, issuance of options and other convertible securities, or changes in terms of options and other convertible securities. 
Adjustments to the conversion price are usually calculated in one of three ways:
Generally, a full-ratchet method offers the strongest protection to the investor allowing him to receive the lowest conversion price available and a proportionately higher number of shares. To see how that works consider the example below.
A company has 50,000 common shares outstanding, and an additional 10,000 common shares issuable on conversion of preferred equity. An early investor has a right to convert his preferred shares into 5,000 common shares at a conversion price of $1.25 per common share. The company subsequently issues 50,000 common shares in a private placement at a price of $1.10 per common share. The investor's preferred shares contain anti-dilution provisions that are triggered by the issuance of new common shares.
As the above table indicates, the impact of the price-protection mechanism matters a lot. Agreeing to anti-dilution provisions without considering the overall dilutive effect of such provisions could have serious consequences for holders of common shares (including managers or key employees).
Investors with bargaining power over a company will be able to extract stronger anti-dilution protections. Given the sizeable effect these provisions have on the company’s ability to attract future investors and potential dilution to common shareholders without these protections, companies should seek to limit or scale back the strength of anti-dilution provisions.
How can a company limit the severity of anti-dilution provisions?
Companies should be aware of the consequences of overly-strong anti-dilution protection given to early investors. When negotiating convertible instruments there are several ways a company can limit the severity of anti-dilution provisions.
 Bryce C. Tingle, Start-up and Growth Companies in Canada: A Guide to Legal and Business Practices, 3rd ed (Canada: LexisNexis Canada Inc, 2018) at p 85 [Tingle].
 Thomson Reuters: Practical Law Canada Corporate & Securities, Preferred Share Provisions: Conversion Privileges and Anti-Dilution Protection, s 3.6 “Adjustment to Conversion Price and Number of Conversion Shares” (Retrieved on October 7, 2020) [Thomson Reuters].
 Thomson Reuters, notes to ss 3.6(e) and (f).
 An investor might demand adjustment to their conversion price even if the price of new securities is higher than their conversion price, but lower than fair market value. Companies should do what they can to negotiate out of this trigger as it limits flexibility in future financing rounds (see Thomson Reuters, notes to s 3.6(a)).
 Thomson Reuters, notes to s 3.6(a) and (d).
 Tingle at p 359.
 Tingle at p 359; see also Thomson Reuters, notes to s 3.6.
 Thomson Reuters, notes to s 3.6(g).
 Thomson Reuters, notes to s 3.6.
Blog posts are by students at the Business Venture Clinic. Student bios appear under each post.