Written by Ivana Palacios
UCalgary Law | JD Candidate 2024

There are many duties to which the directors and officers of a company are subject. It is unlikely that the average businessperson is aware of all of them. While this may be of initial concern for a new director or officer, there is good news. There are factors working in favour of directors and officers in Canada. Significantly, one of them is the defense of the Business Judgement Rule.[1] 

The Duty of Care is one of the fiduciary duties that are owe by directors and officers, the Business Judgement Rule (BJR) provides a defense when this Duty is called into question. In 2004, in what has become known as the People’s case[2], the Supreme Court of Canada officially adopted the BJR. This meant that the courts should give deference to business decisions due to the risk of hindsight bias when considering a decision made in the past. The BJR has three key elements:

1. Reasonable business decisions based on circumstance,
2. The court will focus on form of decision not the substance,
3. Perfection is not required.[3]
   
   

In practice this means that courts will not consider alternative decisions that are often developed in hindsight. The Directors or Officers only need to show that their decision was reasonable in the given circumstances. This has been shown to include both substantive and procedural elements.[4] The court will pay attention to whether there is evidence that the board understood the issue and will look at evidence that they analyzed the issue. The courts will consider whether data the board considered and whether the amount of time was appropriate. Additionally they will consider whether retaining independent advisors required if it was done they will consider whether the board engaged with the advisors or passively followed their advice. Ultimately, the court will determine whether the process met the standard of reasonability and from there generally the decision will be justifiable. 

The standard by which a board, director, or officer’s decision will be examined is whether it was made prudently and on a reasonably informed basis.[5] The BJR helps directors and officers’ defended decisions made when they are call in to question in hindsight. There are many duties that directors and officers owe and this is only one of the factors working in favour of Directors and Officers in Canada.
 
 
[1] Bryce Tingle, Start-Up and Growth Companies in Canada, 3rd ed (Canada: LexisNexis, 2018) at 192.
[2] Peoples Department Stores Inc. (Trustee of) v Wise, [2004] SCR 461, 2004 SCC  68.
[3] Ibid., at para 67.
[4] Supra note 1 at 193.
[5] Supra note 4.

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
​