Starting a business is challenging enough on its own merits. Finding proficient, efficient, and affordable legal assistance is one challenge that the BLG Business Venture Clinic has a solution to. The Clinic is always looking for ways to help support entrepreneurs, start-ups, and growth-businesses with their legal needs. We are excited to announce that we have recently welcomed a new partnership with Intrinsic Innovations – Alberta’s International Start-Up Incubator.
 
Who is Intrinsic Innovations?
Intrinsic Innovations is a not-for-profit international business incubator located in Calgary, Alberta. Intrinsic was Co-Founded in 2021, by Andrew Sanden and Alec Wang, both of whom are extremely accomplished and intelligent businessmen and leaders.[1] Intrinsic Innovations also offers a small venture capital fund titled “Intrinsic VC” which serves to financially aid their incubating businesses as they plant roots in Alberta.
 
Andrew Sanden, the CEO of Intrinsic, offers a wide range of expertise in the start-up space, as well as in the energy and defense communications sectors. Most notably, however, Andrew is passionate about economic immigration, and actively seeks to bring innovative ideas to Alberta.
 
Alec Wang, the former CEO and co-founder of Click Dishes and founder of Nomi, is an integral element of Intrinsic Innovation. His business experience, international presence, and desire to give back to the community is a major factor in the success Intrinsic Innovations has experienced thus far.
 
What does Intrinsic Innovations do?
Intrinsic Innovations offers the opportunity to help Canadian companies get their products into international markets and offers to help foreign companies expand or relocate to Canada.[2] The partnership with the BLG Business Venture Clinic will be uniquely focused on individuals with who wish to move to Canada and start an innovative business here.
 
Intrinsic Innovations seized an opportunity in the market to capitalize on the growing appetite for entrepreneurial talent in Alberta. Being a start-up themselves, Intrinsic had to provide a unique edge to their business model. Focusing on entrepreneurs abroad, with brilliant ideas, and a desire to immigrate is the edge Intrinsic offers. They have a keen focus on technology innovation, and one of their goals is to have Alberta recognized as leader in technology commercialization on the world-stage.[3]
 
Intrinsic has built a strong global network that gives founders access to experts, business connections and global services. Intrinsic Innovation’s programs take on a holistic approach that ensures founders are positioned to achieve success for their business and for their family’s settlement in Calgary. They provide a longer-term relationship-focused program that supports their clients for a period of 18-months to two years. The program is very personalized and prepares founders on business practices and culture, while also helping their families feel supported as they become comfortable in their new environment.
 
Intrinsic VC has worked with 12 companies to date (companies from Canada, China, Bangladesh, Iran, Eastern Europe and South America). Industries include robotics, AgTech, HealthTech, EduTech and FinTech.
 
Furthermore, Intrinsic has developed an online training program to help guide international start-up entrepreneurs in the innovation technology space as they start their businesses here. The training program provides an overview about important business practices and business culture in Canada.
 
Upon successful completion, founders will be equipped with the knowledge they need to establish a company in Canada, effectively navigate the Canadian business environment and successfully grow their business based on intrinsic knowledge on the specifics of business practices and business culture in Canada.

Why is the Partnership with the BVC Important?
The Business Venture Clinic is student-run free legal clinic whose success depends on the community. The relationships the Clinic fosters and maintains with its partners and clients provide workflow and allow the students the opportunity for hands-on experience. It is precisely these types of relationships that has helped the BLG Venture Clinic successfully operate for over a decade. The opportunity to work with Intrinsic Innovations opens a new door for not only this year’s students, but it also opens doors for new members of Calgary’s community. Practical experience as a law-student is invaluable, and what better way to gain it than by providing access to legal information for entrepreneurs!
 
Authored by Claire Standring 
UCalgary Law | JD Candidate 2024

[1] “Intrinsic Innovations”, online: <www.intrinsicinnovations.ca> [Intrinsic Website].
[2] See ibid.
[3] See ibid.

Written by Chiara Lasquety
JD Candidate 2023 | UCalgary Law
 
Taken together, the general rule articulated in sections 9(1), 67, and 18(1)(a) of the Income Tax Act (the “ITA”) is that reasonable expenses associated with operating a business may be deducted against the income generated by that business. Such costs include not only all the ordinary operations costs but also moneys paid in the discharge of liabilities normally incurred in the operations. These expenses include amounts spent on employee salaries, rent, research and development, furniture and equipment, etc.[1]
 
Note: The deduction of business losses under the ITA is optional, not mandatory.[2] Accordingly, subsection 111(1)(a) of the ITA permits a corporation (or individual businessperson) to carry losses forward for twenty (20) years or applied back three (3) years.[3]
 
Start-Up Expenses
An established, profitable company can immediately make use of the losses associated with the start-up costs of a new business.[4] A newly formed corporation undertaking a new business is able to deduct its start-up expenses, but because it has no income the corporation gains no immediate tax savings from the deduction.[5]
 
Other Permitted Deductions
Additionally, other permitted deductions under the ITA include, but are not limited to, the following:  

• Capital cost allowance on depreciable property is deductible under subsection 20(1)(a) – allows a taxpayer to deduct an amount to reflect “depreciation” of the property.
• Interest payments are deductible under subsection 20(1)(c)(i) if four conditions are met:
  1. amount must be paid or payable in the year;
  2. amount must be paid pursuant to a legal obligation to pay interest;
  3. borrowed money must be used for the purpose of earning income from a business or property; (emphasis added)
  4. amount must be reasonable.[6]
• Share transfers and other fees under subsection 20(1)(g).
• Moving expenses* are deductible under section 62 if such expenses fall under the definition of “eligible relocation” where the distance between the old residence and the new work location is not less than 40 km greater than the distance between the new residence and the new work location.[7]
  • Note: There needs to be a causal connection between the move and the “new” job.
  • *Not limited to businesses – employees may also use deduction.
• Home workspace expenses are deductible under subsection 18(12)(a) to the extent that the workspace is either
  1. the individual’s principal place of business; or
  2. used exclusively for business and meeting clients, customers or patients of the individual in respect of the business.
     • Note: Expenses may only be deducted to the extent of the taxpayer’s income from that business for the year – i.e., cannot create a loss,[8] but losses (i.e., any amounts not deductible by reason of s. 18(12)(b)) can be carried forward indefinitely.[9]

 
Prohibited Deductions
In computing the income of a taxpayer from a business or property no deduction shall be made in respect of:

• illegal payments – i.e., bribes (s. 67.5(1));
• fines and penalties (s. 67.6);
• outlays or expenses – except to the extent they were made or incurred for the purpose of gaining or producing income (s. 18(1)(a));
• payments on account of capital (“capital outlay or loss”) – i.e., while current expenditures are deductible under s. 9(1), capital expenditures are not (s. 18(1)(b));
• personal living expenses – other than travel expenses incurred while away in the course of carrying on the taxpayer’s business or certain moving expenses permitted under s. 62 (see above) (s. 18(1)(h));
• home office expenses if they do not meet the requirements of 18(12)(a) above (s. 18(12));
• use of recreational facilities and club dues (s. 18(1)(l));
• limitation re: personal services business expenses (s. 18(1)(p)); and
• certain automobile expenses (s. 18(1)(r)).

 
Additional Considerations re: Canadian Controlled Private Corporations (CCPCs)
A CCPC is simply a type of private corporation controlled by residents of Canada.[10] Many businesses aim to be designated as a CCPC because of its advantages when it comes to tax reliefs, including a lower tax rate.[11] A common strategy for small businesses is to use just enough of a year’s expenses to reduce a CCPC’s income to $500,000 in order to benefit from the special low tax rate – saving any remaining expenses for application against income in future years.[12]
 
Flow-Through Taxation for Unincorporated Businesses
For unincorporated structures, such as partnerships and limited partnerships, losses may flow-through from the partnership to their partners, who can then use those losses to reduce their personal taxes.[13]
 
Conclusion
As opposed to the limited deductions available to employees in reducing one’s taxable income, there are various deductions available for businesses to utilize under the ITA. For further information regarding any of the foregoing, or about tax considerations in structuring your enterprise generally, 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 38.
[2] Ibid.
[3] Income Tax Act, RSC 1985, c 1, s 111(1)(a) [ITA].
[4] Supra note 1.
[5] Ibid.
[6] ITA, s 20(1)(c)(i); Shell Canada Ltd. v Canada, [1993] 3 S.C.R. 622.
[7] ITA, s 248(1)(d).
[8] ITA, s 18(12)(b).
[9] ITA, s 18(12)(c).
[10] Diana Grey, “What are Canadian-controlled private corporations (CCPC)?” (January 2021), online: Wealthsimple <https://www.wealthsimple.com/en-ca/learn/canada-controlled-private-corporations#what_is_a_ccpc>.
[11] Ibid.
[12] Supra note 1.
[13] Ibid.

By Shazaib Rashid, JD Candidate 2024 | UCalgary Law

Introduction
Starting and growing a business requires a significant number of financial resources and is one of the most crucial aspects of achieving success is raising capital.[1] Insufficient funding can hinder a business from taking off, sustaining operations, or competing effectively in its industry. As such, understanding financing options is an essential skill for any entrepreneur who wants to succeed in today's competitive marketplace.
As a startup, you have several financing options to consider, including debt and equity financing. The decision between the two can be challenging, as both have their advantages and drawbacks. Generally depending on multiple types of sources of capital will afford more flexibility and reduce expose to risks in financial markets.[2]
In this blog, we will discuss the benefits and drawbacks of debt and equity, provide examples, and give considerations for when to use each one.
 
Debt Financing
Debt financing involves borrowing money from a lender and paying it back with interest over a specific period.[3] Examples of debt financing include business loans from banks, credit unions, or other financial institutions, merchant cash advances, personal loans, lines of credit.
 
Benefits of Debt Financing

• Lower Cost: Debt financing is generally less expensive than equity financing because lenders usually charge lower interest rates than investors expect in return for equity.[4]
• Control: With debt financing, the lender does not have a say in how the business is run. The lender only has the right to be repaid the principal and interest.[5]

Drawbacks of Debt Financing

• Risk: If the business is unable to pay back the loan, it may default, and the lender may seize the company’s assets.[6]
• Repayment: Debt financing requires regular repayment, which can put a strain on the company’s cash flow.[7]

 
Debt financing is an attractive option for startups that want to maintain ownership and control of their business. However, it is not ideal for long-term funding needs.
 
 
 
Equity Financing
Equity financing involves selling ownership to investors in exchange for funding.[8] Examples of equity financing include angel investments, venture capital investments, crowdfunding, initial public offerings.
 
Benefits of Equity Financing

• No Repayment: Unlike debt financing, there is no requirement to repay the investment, which can provide greater flexibility for the business.[9]
• Expertise: Investors often bring valuable expertise and connections to the company, which can help the business grow.[10]

Drawbacks of Equity Financing

• Control: With equity financing, investors typically have a say in how the business is run and may require seats on the board of directors.[11]
• Cost: Equity financing can be more expensive than debt financing because investors typically require a higher return on their investment.[12]

 
Equity financing can be an attractive option for startups because it does not require repayment of the investment. However, it can be costly for the business.
 
Considerations for Choosing Debt or Equity Financing
When deciding between debt and equity financing, there are several considerations to keep in mind as these can significantly influence your decision when choosing between debt and equity financing. Some critical considerations are risk tolerance, funding needs, and growth potential.
 
Risk Tolerance

• If you have a low-risk tolerance and want to maintain control over the business, debt financing may be a better option for you.
•  If you have a high-risk tolerance and are looking for significant funding and expertise, equity financing may be more suitable.

Long-Term Funding

• If you have short-term funding needs, debt financing may be more suitable as it offers a fixed repayment schedule over a specific period.
• If you require significant funding for long-term growth, equity financing may be a better option.

Growth Potential

• Equity financing is typically better suited for high-growth startups as it provides access to significant funding and expertise from investors.
• Debt financing may not be the best option for startups with high growth potential as it offers limited funding and may have stricter repayment terms.

 
In conclusion, raising capital is an essential aspect of starting and growing a business. With careful consideration and planning, you can make an informed decision that aligns with your goals and helps your business thrive.


[1] Bryce Tingle, Start-Up and Growth Companies in Canada, 3rd ed (Canada: LexisNexis, 2018) at 69.
[2] Ibid
[3] Ibid., at 70 – 73.
[4] Ibid
[5] Ibid
[6] Ibid
[7] Ibid
[8] Ibid., at 73 - 76
[9] Ibid
[10] Ibid
[11] Ibid
[12] Ibid
​

Written by Sarah Dallyn
JD Candidate 2024 | UCalgary Law
 
There is a lot of paperwork involved in getting a new business off the ground and it can be overwhelming to keep all the different documents straight. One set of documents that are essential to the formation and organization of any new corporation are the constating documents. This blog provides a brief overview of what constating documents are and why these documents are important to your start-up.
 
What are constating documents?
Constating documents, also referred to as organizational documents, are the documents that establish a corporation and set out how the internal affairs of the business are governed.[1] Under the Canada Business Corporations Act (CBCA), a corporation’s constating documents consist of articles of incorporation, bylaws, and unanimous shareholder agreement.[2]
 
Articles of Incorporation:
Every corporation incorporating under the CBCA or the Alberta Business Corporations Act (ABCA) is required to file an articles of incorporation document with the regulator appointed to administer the act.[3] The articles of incorporation are the charter or constitution that set out basic elements of the corporation and provides the framework for its formation.[4] Under the CBCA[5] and the ABCA[6], articles of incorporation must include the following information:

• the name of the corporation
• the classes and any maximum number of shares that the corporation is authorized to issue
• if the right to transfer shares of the corporation is to be restricted, a statement that the right to transfer shares is restricted
• the number of directors or, the minimum and maximum number of directors of the corporation
• any restrictions on the businesses that the corporation may carry on

 
The CBCA also requires the province in Canada where the registered office of the corporations is to be situated.[7] In addition to the required information above, articles of incorporation may also include additional provisions depending on the specific needs of the business. It is important to carefully consider your business and tailor the articles of incorporation to your business’s specific structure to help avoid shareholder disputes or taxation issues in the future.[8]
 
Bylaws:
Bylaws are the specific rules and procedures for the internal governance of the corporation.[9] In other words, the bylaws are like the internal operating manual for your business.[10] The bylaws often cover the procedures for board and shareholder meetings, the composition and election of the board of directors, and corporate record-keeping. These rules must be consistent with the articles of incorporation. [11] However, unlike the articles of incorporation, bylaws are not required by law under the CBCA or the ABCA. If a corporation chooses not to pass its own bylaws, the CBCA or the ABCA will act as the default for certain affairs of the corporation.[12] Although not legally required, bylaws are important to establish the effective governance of the corporation and may be required in the future by third parties such as potential investors or banks lending money to the corporation.[13]
 
Unanimous Shareholder Agreement:
A unanimous shareholder agreement is defined in the CBCA as a written agreement among all the shareholders of a corporation that restricts the powers of the directors to manage, or supervise the management of, the affairs of the corporation.[14] The purpose of a unanimous shareholder agreement is to transfer authority over some or all management decisions from the directors to the shareholders of the corporation.[15] It is important to note that under the ABCA, the removal of power from the directors is not required and instead represents one of several things that may be included in a unanimous shareholder agreement.[16] Furthermore, as is the case with bylaws, a unanimous shareholder agreement is not a legal requirement under the CBCA or the ABCA.[17]
 
In addition to binding current shareholders, all subsequent shareholders are also bound to the terms of the unanimous shareholder agreement. This can be problematic for growth companies as they add new shareholders as it becomes more difficult to efficiently make decisions among all shareholders.[18] Furthermore, the CBCA and ABCA provides no clear-cut procedures for governing shareholder decisions made under a unanimous shareholder agreement. Another issue is that the powers exercised by shareholders under a unanimous shareholder agreement attract the same kind of fiduciary duties that attach to the activities of directors.[19] New shareholders may not want to become bound to the fiduciary duties of the corporation, especially if they already have fiduciary duties to their own shareholders.[20] As these potential issues illustrate, it is very important to think through your business and growth plans to determine whether or not a unanimous shareholder agreement is appropriate for your specific business. If a unanimous shareholder agreement is not entered into, there are other types of shareholder agreements that do not fall within the meaning of CBCA or ABCA’s definition of unanimous shareholder agreement that can be drafted to set forth the various rights and obligations of the corporation’s shareholders.
 
If you have questions regarding the various constating documents discussed above or require assistance with the drafting of your start-up’s constating documents, please reach out to the BLG Business Venture Clinic.
 


[1] Ahlstrom Wright, Definition: Constating Documents (April 18, 2018), online: https://ahlstromwright.ca/definitions-constating-documents/

[2] Practical Law, Glossary: Constating Documents, online: https://ca.practicallaw.thomsonreuters.com/Document/I188aaba9f92311e498db8b09b4f043e0/View/FullText.html?listSource=Foldering&originationContext=MyResearchHistoryRecents&transitionType=MyResearchHistoryItem&contextData=%28oc.Default%29&VR=3.0&RS=WLCA1.0

[3] Practical Law, Glossary: Articles of Incorporation, online: https://ca.practicallaw.thomsonreuters.com/Glossary/CAPracticalLaw?docGuid=I75b15b03f95911e498db8b09b4f043e0&transitionType=DocumentItem&contextData=(oc.Default)&ppcid=66e3e985f4a0458c8fc2c0c02dbb4792

[4] Upcounsel, Bylaws vs. Articles of Incorporation, online: https://www.upcounsel.com/bylaws-vs-articles-of-incorporation

[5] CBCA R.S.C., 1985, c. C-44, s 6(1)

[6] ABCA RSA 2000, c B-9, s 6(1)

[7] CBCA, supra note 5

[8] Kahane Law Office, Understanding The Articles That Form Your Corporation, online: https://kahanelaw.com/articles-of-incorporation-corporate-lawyers-calgary/

[9] Supra note 4

[10] Lena Eisenstein, Articles of Incorporation and Bylaws: Same or Different? (September 29, 2021), online: https://www.boardeffect.com/blog/difference-between-articles-of-incorporation-and-bylaws/

[11] Ahlstrom Wright, What is A Corporate Bylaw And Why Do Corporations Need Them? (April 20, 2018), online: https://ahlstromwright.ca/what-is-a-corporate-bylaw-and-why-do-corporations-need-them/#:~:text=There%20is%20no%20legal%20requirement,although%20it%20is%20not%20recommended.

[12] Ibid

[13] Ibid

[14] Bryce Tingle, Start-up and Growth Companies in Canada: A Guide to Legal and Business Practice, p. 100-101

[15] Ibid at p. 101

[16] Ibid

[17] In 1998, the Supreme Court of Canada recognized unanimous shareholder agreements as being one of the three constating documents for a corporation under the Canada Business Corporations Act in Duha Printers (Western) Ltd. v. R. [1998] 1 S.C.R. 795

[18] Ibid at p. 102

[19] Ibid at p. 104

[20] Ibid at p. 104

Authored by Shazaib Rashid, UCalgary Law, JD Candidate 2024

Patents play an important role in both promotion innovation and economic growth. In Canada, patent law is governed by the Patent Act[1], a complex series of rules and regulations which came into force in 1869. A Patent is a type of intellectual property, that provides the owner the sole and exclusive right to making, using, or selling their innovation. In Canada, the first applicant to file a patent application for an invention will be entitled to obtain patent protection for that invention. This protection lasts up to 20 years starting from the date of filing.[2] Additionally, a patent application must be filed or registered in each country where patent protection is desired.
 
The Patent Act defines an invention as “any new and useful art, process, machine, manufacture or composition of matter or any new and useful improvement in any art, process, machine, manufacture or composition of matter.”[3] Although the definition is broad and would cover a broad variety of different item, there are specific criteria that must be met to receive a patent. To be patentable in Canada an invention must meet three main criteria: new, novel and non-obviousness.[4] First the invention must new, to be considered novel the invention cannot have been disclosed in such a manner as to have become publicly. However, this does not mean that you need to re-invent the wheel you can patent a combination of old inventions as long results in the production of a novel invention. Second the invention must also be useful, to be useful the invention for the purpose which it was designed. An invention has utility if: (a) it gives a benefit to the public; (b) it is useful in achieving a particular purpose; (c) it makes a process better or cheaper; (d) it is advantageous under certain circumstances; and (e) it works.[5] Lastly the innovation must non-obviousness or inventive ingenuity, this requirement was added originally through case law[6] and now by statute.  The invention cannot be obvious to a hypothetical individual, someone who possesses the relevant technical experience and knowledge.
 
The typical process to obtain a patent is as follows: Applicants prepare and file the application; If you are considering a patent the typical process to obtain a patent is as follows: Applicants prepare and file the application; Applicants must then request if the invention is new by searching prior art; The examiner looks for possible defects or issues in the application and may send a report to the applicant if there are any; The applicant files a correction or response to that report. If there are still defects, the examiner can issue another report.[6] If you are considering it is also recommended that one consider hiring a patent agent and/or IP lawyer to help them.
 

[1] Patent Act, RSC 1985, c P-4

[2] Ibid, s. 44

[3] Ibid.

[4] Donald M. Cameron “Canadian Patent Law Primer” (2012) at pg. 7, online (pdf): < patweb00.pdf (jurisdiction.com)>

[5] Ibid at pg. 9

[6] Government of Canada, “Filing a patent application: the devil is in the details” (02 February, 2022). Online: Canadian Intellectual Property Office <https://ised-isde.canada.ca/site/canadian-intellectual-property-office/en/corporate-information/blog/filing-patent-application-devil-details>

Authored by Phil Vandekerkhove, UCalgary Law | JD Candidate 2023

You’re a new business looking to outsource the manufacturing of your product to another business. You have just finished negotiating the basic elements of the agreement. The supplier pulls out a memorandum of understanding (MOU), letter of intent (LOI), or term sheet for you to sign. As with any agreement, you should know what legal obligations are being created before signing.
 
What are MOUs, LOIs, and Term Sheets?
These agreements come in different forms but share the same substance. In this post, they will be referred to as term sheets. Term sheets are a useful and flexible stepping stone in coming to business agreements. They are often executed once key terms of a transaction are agreed upon. Using the above example, a term sheet may set out the price, quantity and timing expectations for a manufacturing agreement. Such a term sheet will usually be signed before drafting the final manufacturing agreement.
 
Are term sheets legally binding?
You may want to know the specifics of an agreement before committing to a price. Many believe that signing a term sheet specifying prices could create a legal obligation to ensure the final agreement integrates those prices. But this is not usually the case.
 
            Non-binding Provision
Standard term sheets contain a non-binding or “subject to definitive agreement” provision.[1] This provision makes clear that the agreement is not intended to create legal obligations.[2] It is unlikely for a court to find a legally binding intention in an agreement with a non-binding provision. Including a non-binding provision carries the lowest risk that the agreement could become legally binding.
 
            Agreements to Agree
Without a non-binding provision, a term sheet is more likely to be enforced by the court. In such a case, the court will turn to the legal principle of agreements to agree. An agreement to agree, or agreements subject to contract is an agreement that leaves out essential terms, expecting the parties to agree on those terms in the future. Using our example, the supplier and buyer may agree on a price and quantity of product and agree to negotiate delivery timelines in the future. If the parties cannot conclude on a delivery timeline, and a dispute arises, the court is unlikely to find this “agreement to agree” enforceable due to uncertainty.[3] Where a contract lacks an essential term, it becomes too uncertain to enforce. Term sheets are often too short to set out all essential elements of an agreement. This legal doctrine adds protection to term sheets, usually making them unenforceable. [4]
 
Why execute a term sheet if they are unenforceable?
There are four main reasons why term sheets are useful business tools:[5]

1. Moral commitment
   Although not legally binding, term sheets can create moral commitments. In our manufacturing example, a manufacturer is less likely to raise the price of their product at the end of negotiations if they have previously signed a term sheet recognizing their original price.
   
   
2. Guidance for Lawyers
   Once key terms have been agreed to, lawyers can use a term sheet as a skeleton around which they can start drafting the final agreement. Early drafting can reduce delays and identify important terms as negotiations continue.
   
   
3. Creating Timetables for Continued Negotiations
   Depending on the transaction, companies may wish to create timelines for due diligence or other inspections. Such inspections often occur before executing the final agreement. With our manufacturing example, the buyer may want to schedule an inspection of product quality during negotiations.
   
   
4. Preliminary binding Legal Clauses
   Although term sheets are generally unenforceable, certain obligations may still be created to benefit ongoing negotiations. If legally binding terms are included, parties should ensure a non-binding provision reflects this intention.[6] Legally binding obligations may include:[7]

• Confidentiality and Non-Disclosure: Parties disclosing confidential information during negotiations will want to bind the other party through a confidentiality provision. In our example, the buyer may be disclosing confidential product ingredients. 

 

• Exclusivity: Exclusivity provisions ensure the parties do not negotiate with a third-party while current negotiations are ongoing. Exclusivity provisions reduce the risk of losing a deal to a third-party offer.

 

• Expenses: Parties often divide expenses incurred during negotiations such as legal, financial and accounting service fees. Parties may each pay their own incurred fees, or devise a fee-splitting arrangement.

 
Conclusion
Be not afraid when a term sheet is put before you. Read the terms to ensure they represent the key provisions agreed on in principle. Ask yourself if it may become binding. A non-binding provision should always be included. Finally, consider the binding terms under the circumstances. For example, if you are receiving other offers, consider whether an exclusivity commitment is the right choice for you.
 
If you would like more information about an MOU, LOI or term sheet, please feel free to reach out to the BLG Business Venture Clinic.


[1] Standard Document: Memorandum of Understanding, Practical Law

[2] Practice Notes: Term Sheets, Practical Law

[3] Bawitko Investments Ltd. v. Kernels Popcorn Ltd., 1991 CarsewellOnt 836, [1991] O.J. No. 495 at para 21.

[4] Practice Notes: Term Sheets, Practical Law

[5] Practice Notes: Term Sheets, Practical Law

[6] Standard Document: Memorandum of Understanding, Practical Law

[7] Practice Notes: Term Sheets, Practical Law

Written by Reed Boothby
JD Candidate 2023 | UCalgary Law

 
On May 31, 2022, amendments to the Alberta Business Corporations Act (“ABCA”)[1] came into force. In line with Alberta’s Recovery Plan, the intention underlying the amendments is to attract investment and make Alberta a more appealing jurisdiction for incorporation. Three key benefits as a result of these amendments include: (1) streamlined administrative processes; (2) enhanced director and officer protections; and (3) corporate opportunity waivers.
 

1. Streamlined Administrative Processes:
   
   (a)  Shareholder Approval Requirements for Non-Reporting Issuers:
    
   There are a variety of matters specified in the ABCA that require shareholder approval by way of ordinary or special resolution. Shareholders may approve resolutions by: (1) voting at a shareholder meeting;[2] or (2) signing a written resolution.[3]
    
   Voting during a shareholder meeting was unchanged by the amendments. During a shareholder meeting, ordinary resolutions are still passed by a simple majority vote,[4] and special resolutions passed by a majority vote of not less than two-thirds of the votes cast.[5]
    
   The amendments did change the requirements to pass a written resolution, however. Prior to the amendments, written resolutions required the signature of every shareholder. If a single shareholder was unwilling or unable to sign a written resolution, the corporation was forced to call a shareholder meeting on at least 21 days’ notice (changes to notice periods are discussed below). This led to delays and an increased administrative burden on the corporation.
    
   Pursuant to the amendments, a non-reporting issuer (i.e., a private company)[6] may now pass a written resolution with the signatures of only two-thirds of the shareholders,[7] reducing the ability of any one shareholder to delay business activity.
    
   (b)  Reduced Notice Period for Shareholder Meetings for Non-Reporting Issuers:
    
   The minimum notice a non-reporting issuer is required to provide prior to a shareholder meeting has been reduced from 21 days to 7 days.[8] This change increases flexibility and enables the corporation to more quickly address issues as they arise.
    
   (c)  Electronic Signatures and Delivery by Electronic Means:
   
   A variety of changes were made to the ABCA to facilitate the use of electronic signatures and allow for delivery of documents by electronic means. For instance, security certificates may now be issued in electronic form, rather than paper.[9] Similarly, financial statements may now be signed by directors using electronic signatures, rather than requiring a wet-ink signature.[10] Furthermore, unless the corporation's bylaws or articles of incorporation indicate otherwise, any documents that must be sent to shareholders, directors or other stakeholders of the corporation may be sent by electronic means.[11]
    
   (d)  Revival of a Corporation:
    
   Corporations may be dissolved or wound-up for a variety of reasons. Prior to the amendments, the ABCA permitted the revival of a corporation within five years of its dissolution. Now, a corporation may be revived for up to 10 years after dissolution.[12] This provides interested parties with more flexibility to resume activity under a previously dissolved corporate entity.
   
   
   
2. Enhanced Director and Officer Protections:
   
   (a)  Expanded circumstances of “good faith” defense for Directors:
    
   The ABCA provides a defense wherein a director will not be liable for a breach of their duty of care if the director can demonstrate they relied in good faith on an opinion provided by a list of persons whose profession or expertise lends credibility to a statement made by that person.[13] Prior to the amendments, this list included only lawyers, accountants, engineers and appraisers. The amendments expanded the scope of this list to include employees of the corporation, meaning directors and officers may now benefit from the good faith defense by showing reliance on the opinions of employees who have credibility due to their profession or expertise.
   
   (b)  Enhanced Director and Officer Indemnification:
    
   The ABCA amendments expand the scope of director and officer indemnification. Pursuant to the amendments, directors and officers may now be indemnified with respect to:
    
        (i)    “investigative “ proceedings in addition to civil, criminal, and administrative proceedings;
        (ii)    investigations, actions and proceedings in which the director or officer is not named as a formal party but rather, is
                involved by reason of being (currently or formerly) a director or officer of the corporation.
    
   Prior to the amendments, a corporation was generally limited to indemnifying a director or officer for costs related to civil, criminal, or administrative actions or proceedings to which the director or officer was named as a formal party.
    
   Furthermore, the amendments now provide a corporation with the option to purchase directors’ and officers’ insurance benefiting directors and officers even where they have failed to act honestly and in good faith with a view to the best interest of the corporation.[14] Previously, liability caused by a director or officer failing to act honestly and in good faith with a view to the best interest of the corporation was excluded from insurance coverage.
   
   
   
3. Corporate Opportunity Waivers:
   
   As part of their fiduciary duty, directors and officers are generally prevented from personally exploiting business opportunities offered to the corporation. The amendments to the ABCA now give a corporation the option of including a “corporate opportunity waiver” (the first of its kind in Canada) within its articles of incorporation or unanimous shareholders agreement. Under a corporate opportunity waiver, the corporation waives any “interest or expectancy” of the corporation to participate in a business opportunity that has been offered to it.[15] This enables directors and officers to personally participate in a particular business opportunity they may otherwise have been prevented from participating in by virtue of their fiduciary duty.
   
   The waiver is beneficial for any directors or officers involved with multiple corporations. In particular, institutional investors, such as private equity or venture capital firms, commonly invest in multiple companies and consequently have representatives that sit on multiple boards of directors. The corporate opportunity waiver provides added certainty to these directors and officers that their actions will not violate the fiduciary duties they would otherwise owe to each individual corporation.

 
Conclusion:

The recent amendments to the ABCA make Alberta a more attractive jurisdiction in which to incorporate and operate a business by: (1) streamlining administrative processes; (2) enhancing director and officer protections; and (3) introducing a corporate opportunity waiver.

Note that a corporation's constating documents may require amendments to implement some of the changes outlined in this post. For assistance with amending constating documents, or for further information about the ABCA generally, please contact the BLG Business Venture Clinic.


[1] Business Corporations Act (Alberta), RSA 2000, c B-9. [ABCA]

[2] ABCA, s. 139.

[3] ABCA, s. 141.

[4] ABCA, s. 1(w).

[5] ABCA, s. 1 (ii).

[6] “non-reporting issuer” means a private corporation that is not required to file continuous disclosure documents pursuant to National Instrument 51-102 – Continuous Disclosure Obligations (NI 51-102).

[7] ABCA, s. 141(2.1).

[8] ABCA, s.134(1.1).

[9] ABCA, s. 48(7.1)

[10] ABCA, s. 158(1).

[11] ABCA, s. 255(5).

[12] ABCA, s. 208(1).

[13] ABCA, s. 123(3)(b).

[14] ABCA, s.124.

[15] ABCA, s. 16.1.

By Martika Ince | JD Candidate 2024, UCalgary Law
 
A social enterprise, or a benefit corporation, is one that pursues primarily social or environmental goals through an entrepreneurial structure. As social entrepreneurship gains popularity in Canada, it is crucial for entrepreneurs to be aware of and understand their options in structuring their business. This provides a brief overview of three different legal structures for those who are starting to think about how to organize their social enterprise.  
 
Registered Charity
 
Registered charities are organizations that have a charitable purpose and devote their resources for charitable activities. The Income Tax Act (ITA) provides that organizations can become a registered charity after applying and being approved by the Canada Revenue Agency (CRA).[1] The charitable purpose must fall into one or more of the following categories:
·       The relief of poverty;
·       The advancement of education;
·       The advancement of religion; or
·       Other purposes that benefit the community.[2]
 
Registered charities benefit from a general tax exemption under the ITA.[3] As a charity, you are also able to issue charitable donation tax receipts so that donors can claim tax credits or deductions for charitable gifts.[4]
 
Registered charities can generate revenue in two ways:

1. Charging fees for the charitable service provided, such as a community centre charging for their programming, and
   
2. Carrying on ‘related business’ activities, such as renting out community centre space to third parties.[5]

 
However, carrying on an unrelated business activity is grounds for revocation of charitable registration. This is an important consideration in deciding whether registered charity status is right for your social enterprise, as this rule can severely limit the organization’s activities.[6] Moreover, you may face difficulty in securing private investment as a charity. Venture capitalists and other investors are often less motivated to invest funds to support a social benefit activity that may generate a lower return than pure for-profit entities.   
 
Non-Profit Organization
 
Another structure often used for a social enterprise is a non-profit organization, which has a social benefit purpose and does not operate for profit. You can choose to operate as a non-profit after incorporating into a corporate structure. Non-profits are typically organized as a non-share capital entity to alleviate the concern that owners and shareholders are accumulating wealth.[7] As such, third parties cannot invest in the same way they would with a share capital corporation.
 
Non-profits are exempt from paying income tax, but they must fulfil certain requirements to do so.[8] A non-profit organization can generate revenue if the business is connected to its social mission. The CRA may revoke a non-profit’s tax-exempt status if it is found to carry out trade or business exclusively with a view to profit.[9]
 
The following may indicate that a non-profit is operating for profit:
·       Trade or business operating in a normal commercial manner;
·       Goods or services are not restricted to members and their guests;
·       Operated on a profit rather than cost-recovery basis; or
·       Operated in competition with taxable entities carrying on the same trade or business.[10]
 
In some cases, generating profit to be directed to a social benefit purpose can be considered a for-profit activity by the CRA, rendering the organization ineligible for the tax exemption.[11] As such, non-profit organizations are limited in the ways that they can make money.
 
Business Corporation
 
Corporations are arguably the most flexible vehicle for carrying on social enterprise. A business corporation or for-profit corporation is a legal entity that exists separately from its owners – it is treated as a natural person. Corporations can be incorporated under the Canada Business Corporations Act (CBCA) federally or under the provincial equivalents. In order to indicate your corporation is a social enterprise, you should include your social mission in your articles of incorporation or in a resolution passed by the executive board or shareholders.[12]
 
The benefits of choosing a business corporation for your social enterprise are many. You can conduct any business activities, collaborate with anyone you wish, and use the proceeds with more freedom. Business corporations also have a flexible capital structure, which can attract private investment with no formal limit on returns. If desired, share conditions can be used to establish a set percentage of earnings that will be directed to the social mission, and formal restrictions can be placed on shareholder returns.[13]
 
There are also disadvantages to consider in choosing the appropriate legal structure for your business. As corporations are not a qualified donee under the ITA, they cannot attract funding from the charitable sector. They also do not benefit from a tax-exempt status under the ITA. However, corporations can deduct a percentage of their annual income on account of charitable donations. Another disadvantage is that corporations can be perceived by the public as using the cover of a social purpose to create wealth and benefit themselves.[14] It is important to be transparent about how your social enterprise contributes to a social or environmental goal.
 
Conclusion
 
Many legal structures exist for a business, but registered charities, non-profit organizations, and business corporations are the most commonly used for a social enterprise, each with their respective benefits and disadvantages. If you have questions or require additional information about different legal structures for your social enterprise, please reach out to the BLG Business Venture Clinic.
 

​

[1] Innovation, Science and Economic Development Canada, “Start, build, and grow a social enterprise: Build your social enterprise” (26 November 2021), online: Government of Canada,  <https://ised-isde.canada.ca/site/choosing-business-name/en/start-build-and-grow-social-enterprise-build-your-social-enterprise#s2> [ISED].

[2] Ibid.

[3] Income Tax Act, RSC 1985, c 1 (5th Supp) [ITA] at s 149(1)(f).

[4] Susan Manwaring & Andrew Valentine, “Social Enterprise in Canada”, The 2012 Lexpert (Thomson Reuters Canada Ltd, 2012) [Manwaring].

[5] Ibid.

[6] Ibid.

[7] Manwaring, supra note 4.

[8] ITA, supra note 3 at s 149(1)(l).

[9] ISED, supra note 1.

[10] Ibid.

[11] Manwaring, supra note 4.

[12] ISED, supra note 1.

[13] Manwaring, supra note 4.

[14] Ibid.

Written by Charlotte Kelso
JD Candidate 2024 
UCalgary Law

Ordinary Partnerships

A partnership is a relationship between two or more people (i.e., partners) carrying on a business together with the aim of making a profit, excluding corporations.[1] A firm of any size in any industry can be classified as a partnership if it meets this definition.[2] There are three types of partnerships: ordinary partnerships, limited partnerships, and limited liability partnerships. This article focuses on ordinary partnerships, which I will refer to simply as "partnerships". In Alberta, the Partnership Act governs partnerships, with similar legislation in place across Canada.

The key risk associated with partnerships is that a partner may be personally liable for any debt or obligation that the firm is liable for.[3] For example, if the firm is in default of a bank loan, the bank can recover the debt from the partners' personal funds and assets if needed. Liability is shared amongst partners. This means that an individual partner is financially responsible for the actions and decisions of the other partners during the course of business. Given the liability risks, it is important to know if you are in a partnership.

Identifying a Partnership

To be a partnership, a business relationship between parties must meet the definition of a partnership. There are three “essential ingredients” of a partnership.[4] First, the parties must carry on a business. Carrying on a business includes the early and preparatory stages of a venture.[5] The duration of the business venture does not need to pass any certain threshold.[6] Second, the business must be carried on “in common” by the parties. In other words, they must be carrying out the same business in tandem. Finally, the business must be carried on with the aim of making a profit. Aiming to make a profit does not require that the firm actually make a profit.[7]

Whether the “ingredients” are present is determined by looking at the circumstances and facts of the relationship. Materials like business licences in the partners’ names, correspondence between the parties, and tax returns showing shared profits can point to a partnership. The parties may have an agreement in writing that they have formed a partnership. While this can be indicative of a partnership, it is not necessarily decisive.[8] A lack of evidence that the parties intended to divide profits or carry on a business together suggests that there is no partnership.[9] Where there is no written agreement, words and actions that are consistent with a partnership may establish a partnership.[10] In sum, a partnership is identified based on the circumstances of each business relationship.

Converting the Partnership to a Corporation
​
Partnerships often represent a phase in the legal structure of a business which parties may eventually wish to transition out of, especially given the liability risks of a partnership. The Income Tax Act provides an avenue for a partnership to convert to a corporation in conjunction with the wind-up process. First the partners set up a corporation for the purposes of the transition. Then the partnership transfers property to the corporation in exchange for shares. The shares are transferred from the partnership to the individual partners. Then the partnership wind-ups up. The former partners continue on their business venture under the corporation as shareholders. [11] [12] 
 


[1] Partnership Act, RSA 2000, c P-3, at s. 1(g).

[2] Ibid at s. 1(c).

[3] Ibid at s. 11(2) and 15.

[4] Spire Freezers Ltd v Canada, 2001 SCC 11.

[5] Miah v Khan, [2000] 1 WLR 2163.

[6] Supra note 2.

[7] Supra note 2.

[8] Sproule v McConnell (1925), [1925] 1 DLR 982, 19 Sask LR 319.

[9] Big Bend Construction Ltd v Donald, 1958 CarswellAlta 33, 25 WWR (ns) 281.

[10] Sabbaugh v Rawdah, 1978 CarswellAlta 409, 16 AR 326.

[11] Income Tax Act, RSC 1985, c 1, s. 85(2).

[12] Tingle, B. C.  Start-Up and growth companies in Canada - a guide to legal and business practice (3rd ed.). LexisNexis Canada Inc, p. 36.

Written by Mercer Timmis*

What are Liquidation Preferences?
A liquidation preference is a contractual right that may be negotiated by a venture capital firm while providing financing to a business. A liquidation preference entitles preferred shareholders to receive a certain amount of money on the company's liquidation before anything is paid out to the holder of the other classes of shares.[1] Liquidation preferences may be triggered by events such as bankruptcy, winding up the business, an extraordinary sale of all or substantially all of the company's assets, or a change of control of a company.
Usually, preferred shareholders get an amount equal to their original purchase price plus any accrued and unpaid dividends (the" liquidation price"). However, venture capital investors ask for additional features, such as a multiple liquidation preference. A multiple liquidation preference gives the investor the right to receive between 1 to 3 times the liquidation price.[2]
 
Current Relevance
From 2020 to 2021, venture firms saw a record level of inflowing capital that pushed company valuations higher. This business-friendly market meant that investors settled on a 1 times liquidation preference which ensured they would be paid back their initial investment before founders and employees.[3]
Conversely, 2022 presents a different market where venture capital investment dropped to a six-quarter low amidst increasing interest rates, high levels of inflation, and a declining stock market. This weakened funding environment creates a lower risk appetite for investors where investors ask for more onerous terms. As such, investors are asking for a 2 to 3 times liquidation preference, meaning they would be paid back double or triple their money before other stakeholders.[4] 
 
The Dilemma
Generally, a company's valuation tends to increase for each financing round. However, the current economic climate brings unfavourable company valuations and leads businesses to agree to more onerous terms to prevent a 'down round.' A down round occurs when a company raises money at a lower valuation than its previous round. The consequences of a down round are two-fold. First, raising funds at a lower valuation has a dilutive effect on existing shareholders. Second, it is a red flag that reduces investor confidence and employee morale.[5] As such, liquidation preferences are prevalent in the current market because investors will agree to funding valuations equal to or higher than a company's previous round in return for 2 or 3 times multiple. These terms are attractive because, despite the underlying difficulties of the business, the investor is receiving 2 to 3 times their investment.
 
Options for the Business
If a company faces onerous liquidation preferences, the following compromises are available: First, suggest that the liquidation preferences operate only against management and founders' shareholding rather than against the equity of other investors (i.e., any friends or family). Second, place a cap on the return to the preferred shares so that in the event the company sees modest success, the preferred shareholders will do better by converting to common equity rather than relying on the liquidation preference. 
Finally, when negotiating the terms of liquidation preferences, they should not provide for a "change of control" mechanism that results in the deemed liquidation in the event of an equity investment involving more than 50% of outstanding shares. Instead, the threshold should be much higher.[6]

Footnotes:
[1] Bryce C. Tinge, Start-up and Growth Companies in Canada: A Guide to Legal and Business Practices, 3rd ed (Canada: LexisNexis Canada Inc, 2018). 
[2] Ibid.
[3] The Information, “Startups Avoid Valuation Cuts with ‘Up Rounds in Name Only’ (11, October, 2022) online: The information < https://www.theinformation.com/articles/startups-avoid-valuation-cuts-with-up-rounds-in-nameonly?utm_source=substack&utm_medium=email>.
[4] Bloomberg, “VCs Need the Good Tweets” (13, October, 2022) online: Bloomberg, Matt Levine < https://www.bloomberg.com/opinion/articles/2022-10-13/vcs-need-the-good-tweets>.
[5]Supra, note 1.
[6] Ibid.


*Mercer Timmis
J.D. Candidate 2023
University of Calgary, Faculty of Law