Written by Ali Abdulla
JD Candidate 2024 | UCalgary Law When incorporating under the Alberta Business Corporations Act [ABCA],[1] a Notice of Corporate Address[2] must be sent to the Registrar along with the Articles of Incorporation.[3] The Notice of Corporate Address Form contains language that may be confusing, as it refers to (1) the address of the registered office, (2) the records address, and (3) the address for service by mail. For clarity, we explain each of these terms below:
All of the above addresses must be in Alberta. Note that if the directors of the corporation change the address of the registered office, records office, or address for service of the corporation, they must notify the Registrar within 15 days of such change.[10] To end, we briefly note that a corporation under the ABCA must also appoint an agent for service through a Notice of Agent for Service.[11] An agent for service is a resident Albertan who can accept notices and documents on behalf of a corporation, and is often a lawyer at a law firm.[12] [1] Business Corporations Act, RSA 2000, c B-9 [ABCA]. [2] Notice of Address Form accessible online at <https://www.alberta.ca/business-organization-forms>. [3] ABCA, s 20(2). [4] ABCA, s 20(1); see also Notice of Address Form at 2. [5] ABCA, s 20(6). [6] ABCA, s 20(2)(b); see also Notice of Address Form at 2. [7] ABCA, s 21(1). [8] ABCA, s 20(7). [9] ABCA, s 20(2)(c); see also Notice of Address Form at 2. [10] ABCA, s 20(5). [11] ABCA, s 20.1(1). [12] Government of Alberta, "Incorporate an Alberta corporation" (2023), online: <https://www.alberta.ca/incorporate-alberta-corporation>.
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Written by Alec Colwell
JD Candidate | UCalgary Law While corporate residency may not be a primary concern for many businesses, it may be prudent for individuals involved in start-ups that have become profitable to consider the prospect of double taxation. This issue could be more relevant for smaller corporations where “central management and control” may be vested in just one founder or a significantly smaller board of directors. In such cases, if a few key individuals opt to relocate and conduct their business activities in a jurisdiction outside the one they have incorporated, they may encounter unexpected tax consequences. Under subsection 2(1) of the Canadian Income Tax Act (the “Act”),[1] income tax must be paid on the taxable income of every person that is resident in Canada. The Act provides that a corporation is a person and a taxpayer.[2] A corporation is deemed to be a resident if it was incorporated in Canada after April 26, 1965, or incorporated in Canada before April 27, 1965, and was resident or carried on business in Canada after April 26, 1965.[3] What this all means is that when you incorporate a business in Canada, that business will be resident in Canada, and its profits will be taxable. This is expected and seems quite reasonable to most. However, the deeming provisions of the Act are not the only way that a corporation can be found to be a resident of Canada. Under common law, a corporation is resident where its “central management and control” is located.[4] Generally, “central management and control” is where the members of the board of directors meet and hold their meetings.[5] In practical terms, this would mean that if the majority of a non-Canadian business’ board of directors were to relocate to Canada and conduct their business in Canada, the business could be considered to be a resident of both its originating jurisdiction under that jurisdiction’s laws and a resident of Canada under the common law. This could lead to the unexpected issue of being subject to tax in a jurisdiction different than the one in which a business is incorporated and operating, or, even worse, becoming the victim of double taxation. In an effort to relieve the issue of double taxation, Canada has negotiated tax treaties with many countries. Within these tax treaties are tie-breaker rules that determine which contracting state should be the state that receives the tax payments for the year. While this mechanism will offer relief in many situations where a corporation would otherwise be subject to double taxation, it is not a perfect solution. For example, the Canada-U.S. Tax Treaty, in general terms, stipulates that the tiebreaker will be the jurisdiction of incorporation.[6] This is a relatively simple rule and, in clear cases, will result in the corporation being taxed in only one jurisdiction. However, the treaty also provides, in the case that neither jurisdiction is the jurisdiction of incorporation, “the competent authorities of the Contracting States shall endeavour to settle the question of residency by mutual agreement and determine the mode of application of this Convention to the company.”[7] This situation is less than ideal as it could lead to an unexpected tax outcome. Additionally, the wording in the convention, that the parties shall endeavour to mutually agree, rather than that they must come to a mutual agreement is troubling. It leaves open the possibility that, in the absence of such mutual agreement, the contracting states may both tax the taxpayer and offer no relief from double taxation. Furthermore, not all tax treaties have a clear first tie-breaker rule as in the Canada-US tax treaty. For example, the Canadian-Mexico tax treaty tie-breaker rules state that “[w]here by reason of the provisions of paragraph 1 a person other than an individual is a resident of both Contracting States, the competent authorities of the Contracting States shall by mutual agreement endeavour to settle the question and to determine the mode of application of the Convention to such person. In the absence of such agreement, such person shall not be entitled to claim any relief or exemption from tax provided by the Convention.”[8] Here, the convention explicitly states that a mutual agreement does not need to be reached and, in that event, the taxpayer will have no relief from double taxation. One final issue to consider is that, while Canada currently has tax treaties with many countries, there are still a significant amount of countries with which a treaty is not in place. Some examples of countries that Canada does not have a tax treaty with include Andorra, Fiji, and Monaco.[9] In light of potential unanticipated residency issues, entrepreneurs and small business owners should be aware of the corporate residency laws and tax treaty regulations of any jurisdiction in which they are planning to manage the affairs of their Canadian-incorporated business. [1] Income Tax Ac, RSC 1985, c 1 (5th Supp) [ITA]. [2] Ibid at ss 248(1). [3] Ibid at para 250(4)(c). [4] De Beers Consolidated Mines Limited v Howe [1906] AC 455 (HL). [5] Fundy Settlement v Canada, 2012 SCC 14 at para 9. [6] The Convention Between Canada and the United States of America with Respect to Taxes on Income and on Capital, signed at Washington, DC on September 26, 1980, as amended by the protocols signed on June 14, 1983, March 28, 1984, March 17, 1995, July 29, 1997, and September 21, 2007, at Article IV (3)(a) of the Canada-US tax treaty. [7] Ibid at Article IV (3)(b) [8] Convention Between the Government of Canada and the Government of the United Mexican States, signed at Mexico City, Mexico, on September 12, 2006, at Article 4 (3) of the Canada-Mexico tax treaty. [9] Department of Finance Canada, Tax treaties, (last modified 29 August 2019), online: <https://www.canada.ca/en/department-finance/programs/tax-policy/tax-treaties.html> 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:
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. Selling Shares of Your Successful Business and Accessing the Lifetime Capital Gains Exemption4/13/2023 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]
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). 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). 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:
Opportunities:
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. 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 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. Canadian Small Business Acquisitions and the $2 Trillion in Baby Boomer Business to be Sold By 20304/11/2023 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.
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.
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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