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Written by Christian Rossi
JD Candidate 2024 | UCalgary Law When people think of Artificial Intelligence (AI) taking human jobs, they often picture more data-entry-like roles, which can be done without a human touch. However, this presumption is being challenged by an AI named Mika, who has become the first AI CEO. Mika is a research project created by Hanson Robotics, a Hong Kong-based engineering and robotics company known for developing human-like robots.[1] Mika has been brought on by a Polish company named Dictador, which sells premium aged rum from Colombia.[2] Mika’s purported advantage lies in its ability to swiftly and accurately analyze vast amounts of data, enabling unbiased, data-driven decision-making.[3] The AI can also work 24/7 and is not subject to the same employment standards as a human CEO. The obvious downside of an AI CEO is its lack of emotional intelligence and inability to understand the more intricate wants and needs of humans.[4] Dictador, however, proposes a symbiotic relationship between Mika and a human team to balance and complement each other’s strengths.[5] Hanson Robotics is using Mika to humanize AI.[6] With AI being a relatively new phenomenon, there’s a justified societal concern about the risks of granting excessive power to AI. Placing an AI in a management position allows society to witness firsthand how AI operates and whether it is worth continuing this trend. For Dictador, it appears their primary purpose for making this move is to promote themselves as a forward-looking corporation. While Mika’s role details remain limited, it’s noted that the AI will be a board member and will be responsible for overseeing the Arthouse Spirits DAO project.[7] This DAO, or decentralized autonomous organization, is an exclusive community comprising high-net-worth individuals.[8] To join, one needs to possess a Dictador Non-Fungible Token (NFT). The funds raised from the NFT sales are then put into the DAO Treasury.[9] The DAO Treasury is backed by tangible assets, consisting of over US$50 million of the world’s oldest and rarest rums.[10] Members of the DAO get access to certain benefits such as discounted bottles, exclusive VIP events, masterclasses, having conversations with experts, artists, and blend masters, or they can redeem their tokens for a physical bottle from the Treasury.[11] Mika marks a step towards a new world. Jack Ma, the co-founder of Alibaba Group, predicted that by 2047, a robot CEO will make the cover of Time magazine. However, that prediction may have been too pessimistic.[12] Having an AI CEO raises many practical questions that Dictador will have to consider. For example, what happens to the compensation that would have gone to a CEO? Presumably, part of the compensation that would otherwise go to a CEO will go to the operating and maintenance of the AI system. Still, as the technology advances, the costs of these systems will decrease, leaving additional capital for the corporation. Corporations will need to decide how to best allocate this money—whether it should go to the shareholders or whether the costs, which would typically benefit employees, should still be directed to employees. There’s also the question of who’s responsible if something goes wrong. CEOs owe a fiduciary duty to the corporation. However, is it possible for a corporation to sue an AI CEO? If the AI is at fault, who should be held liable - will it be the corporation, the creator of the AI system, or the employees responsible for overseeing the AI system? Apart from these questions, there is, of course, the broader ethical question of whether society wants AI to take over executive roles in corporations and whether hiring an AI system over a human is fair. All these questions must be addressed before society becomes overly dependent on AI, but Mika will be the first step towards resolving these issues. It’s hard to imagine a world run by AI, but the future seems closer than ever. The story of Mika is one society hasn’t experienced yet, prompting the question: Is anyone’s job [1] Vanya Gautam, “Meet Mika: The World’s First AI Human-Like Robot Hired As CEO” (9 November 2023), online: <https://www.indiatimes.com/worth/news/meet-mika-world-first-ai-human-like-ceo-hired-620076.html> [Gautam]. [2] Jamie Nonis, “Meet Mika, the world’s first AI CEO running a global company” (11 July 2023), online: <https://www.thepeakmagazine.com.sg/interviews/mika-world-first-ai-ceo/>. [3] Ibid. [4] Ibid. [5] Ibid. [6] Gautam, supra note 1. [7] “Dictador announces the first AI human-like robot CEO in a global company” (7 September 2022), online: < https://dictador.com/the-first-robot-ceo-in-a-global-company/>. [8] Ibid. [9] Ibid. [10] Ibid. [11] Ibid. [12] Ibid.
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Written by Amreet Toor
JD Candidate 2025 | UCalgary Law In the excitement of creating a start-up business, it is easy to overlook important steps such as creating a founders’ agreement. While an agreement may not be necessary for all businesses, there are potential scenarios where it may be very detrimental to the long-term success of a business if a proper agreement is not created from the outset. A founders’ agreement, also known as a co-founder agreement, establishes the framework for the relationship between the founders and addresses various aspects of the business, providing clarity, protection, and a shared understanding. This may not seem very important in the beginning when the founders involved have a clear picture of their roles and responsibilities. Still, as the business grows and evolves, expectations and responsibilities may begin to change from what was originally discussed. To address and prevent these potential issues, most founders’ agreements will contain provisions regarding equity distribution, vesting terms and schedules, roles and responsibilities, decision-making procedures, compensation, intellectual property rights, non-competition and non-solicitation, confidentiality, exit strategies, and dispute resolution[1]. Equity distribution provisions clarify the allocations of equity or shares in the company that the founders will be entitled to based on their contributions to the new business. These contributions can be financial, time or in kind. Vesting terms and schedules outline the conditions under which founders become entitled to their allocated equity. This prevents founders from leaving the business with a significant ownership stake earlier than planned or failing to uphold their commitments to the business. A well-planned vesting schedule protects the other founders while encouraging long-term commitment to the business. Zipcar[2] is an excellent example of a company that would have greatly benefitted from a well-planned vesting schedule. Provisions that outline founders’ roles prevent future misunderstandings and conflicts. These provisions are not guaranteed to cover all possibilities and may need to be amended over time as the business grows. Compensation may be tied to these roles and may also need to be adjusted as the business grows, but creating these provisions ahead of time prevents litigation that could arise based solely on verbal agreements. Decision-making provisions outline the decision-making process and specify how major decisions will be made, including what constitutes a quorum to pass decisions. In conjunction with this provision is the dispute resolution process, which works to smoothly handle any disputes that arise and can help to avoid lengthy and costly litigation between founders and the corporation. Intellectual property is one of the most important provisions in a founders’ agreement. It is crucial to designate whether intellectual property is the property of a founder or the corporation. If the intellectual property does not rest with the corporation, a founder may exit the business and effectively shut it down by taking the intellectual property rights with them. They may also choose to hold the business hostage by controlling the intellectual property[3]. Intellectual property is not limited to copyright or patents but can also include trade secrets. Waiting to create a contract that outlines intellectual property rights can result in serious harm, such as a founder stealing the idea and creating a competing venture, as alleged by the Winklevoss twins.[4] This is why confidentiality agreements are also crucial to the long-term success of a business. Confidentiality agreements prevent founders from sharing crucial information about the business outside of a select group of people. In combination with non-compete and non-solicitation provisions, confidentiality agreements protect the corporation’s interests from founders who choose to exit the business. Finally, there is the exit strategy provision. It is an eventuality that founders will need to exit the business to be able to sell the equity they have been allocated, and to reap the rewards of their hard work. A properly planned exit strategy will consider procedures for selling the business, transferring ownership, or handling other exit scenarios. It will vary greatly depending on the organization, but it is important to set out early to avoid conflict and possible litigation. Considering this information, a founders’ agreement can be a powerful tool to protect the interests of both the founders and the corporation. It allows for easier conflict resolution, aligns the interests of all founders, and provides clarity. [1] Raz. “The Importance of Founder Agreements: Key Considerations for Startup Founders.” Falcon Law PC, 4 May 2023, falconlawyers.ca/the-importance-of-founder-agreements-key-considerations-for-startup-founders/. Accessed 29 Oct. 2023. [2] Hellmann, Thomas, and Veikko Thiele. “Contracting among Founders.” Journal of Law, Economics, & Organization, vol. 31, no. 3, 2015, pp. 630. JSTOR, http://www.jstor.org/stable/43774415. Accessed 29 Oct. 2023. [3] Fauri, Khaled El. “What Should a Founders Agreement Include and Why Do You Need One?” Fauri Law, 10 Oct. 2022, www.faurilaw.ca/blog/what-should-a-founders-agreement-include-and-why-do-you-need-one/. Accessed 29 Oct. 2023. [4] Hellmann, Thomas, and Veikko Thiele. “Contracting among Founders.” Journal of Law, Economics, & Organization, vol. 31, no. 3, 2015, pp. 630. JSTOR, http://www.jstor.org/stable/43774415. Accessed 29 Oct. 2023. Written by Michael Cheung
JD Candidate 2024 | UCalgary Law For motivated teenagers, the prospect of venturing into entrepreneurship can be both alluring and daunting. Starting a business at a young age is a journey filled with excitement and promise, but it demands careful planning, unwavering dedication, and a profound sense of purpose. In this guide shared by the BLG Business Venture Clinic, we will elucidate key strategies to assist teenagers in realizing their entrepreneurial aspirations and charting a course towards success. Look Into the MarketAt the heart of any thriving business lies the fundamental task of recognizing unmet needs in the market. This forms the bedrock upon which to develop innovative products or services that address these real-world problems. By addressing these issues, your entrepreneurial endeavour gains a sense of purpose and relevance. This positions your business favourably in the eyes of potential customers and investors, a pivotal step towards building a flourishing enterprise. Passion-Driven Ventures Teenagers can significantly enhance their chances of success by pursuing businesses that align with their genuine passions. Passion serves as a catalyst for acquiring deep knowledge, nurturing creativity, and cultivating the resilience necessary for thriving as an entrepreneur. When you love what you do, obstacles become opportunities rather than impediments, propelling you forward on your entrepreneurial journey. Leverage Free ResourcesIn the age of digital abundance, numerous free or cost-effective resources tailored for young entrepreneurs await exploration. Online courses, startup incubators, and government programs are among the treasures designed to support and nurture your business growth. Take advantage of these resources, as they can provide valuable insights, skills, and connections that are indispensable for your pursuit of entrepreneurial success. Seek MentorshipEntrepreneurship is not a solitary endeavour. Seek out mentorship programs to elevate your business acumen. Experienced mentors, with their wealth of knowledge and insights, offer guidance that transcends textbooks and formal education. Their network can open doors and provide critical perspectives essential for navigating the complexities of entrepreneurship. Online PresenceEstablishing a strong online presence is non-negotiable in today's digital landscape. The foundation of this presence lies in a professional website and active engagement with your audience through social media. Your online presence serves as a virtual storefront, a medium through which you can build trust, expand your reach, and cultivate meaningful connections with your target audience. Credibility and visibility are pivotal. Secure FundingSecuring adequate funding is a crucial step on the path to business success. Explore various avenues, including crowdfunding, grants, or seeking investments from family and friends. Regardless of the source, a meticulously crafted business plan is your most potent tool in attracting potential investors. It showcases your vision, strategy, and the tangible returns they can expect from supporting your venture. Budget Management Sound financial management is the foundation of a prosperous enterprise. Develop a comprehensive budget plan to oversee and allocate resources judiciously. A well-structured budget ensures informed decision-making, preventing the pitfalls of overspending and promoting financial stability. This fiscal acumen is not only essential for the short term but also a critical factor for the long-term viability of your business. Effective Marketing In a competitive marketplace, effective marketing is your guiding light. Establish a strong brand identity, commencing with a compelling logo that leaves a lasting impression. Building brand awareness and distinguishing your business from the competition necessitates strategic marketing campaigns and creative messaging. In today's dynamic landscape, online logo makers and digital marketing strategies can be invaluable assets in this endeavour. The entrepreneurial journey embarked upon during one's teenage years is a formidable yet rewarding odyssey. It hinges on your ability to identify market needs, pursue your passions, leverage available resources, seek mentorship, establish a commanding online presence, secure essential funding, prudently manage your budget, and execute effective marketing strategies. Remember, success in entrepreneurship is not tethered to age but rather to your unwavering determination, innovative spirit, and steadfast commitment to your goals. As a teen entrepreneur, you possess the potential to make a lasting impact on the business world. Embrace this voyage, letting your passion steer you forward. Written by Justin Chia
JD Candidate 2025 | UCalgary Law The emergence of artificial intelligence (AI) across many sectors of society has been a source of excitement and concern, depending on who you ask. From a business standpoint, AI is thought to jumpstart the rise of start-ups developing innovative and creative ideas centring around this exciting technology and, in turn, generating upside in profits. So far, this prospect has not quite materialized to the extent anticipated. The multi-billion-dollar investments in AI are largely confined to a small bubble of start-ups in Silicon Valley.[1] However, prominent Venture capitalists seem more than willing to invest in AI start-ups, meaning a boom in AI start-up investment in the near future is certainly not out of the question.[2] There are several potential barriers to a boom in AI start-up investments, but I will limit this discussion to 2 key sources: 1) greedy tech giants and 2) high costs of entry. One of the more misguided propositions in the start-up space is that competition triggers innovation, leading to profits. This is partly true, but most profits generated by competition and technological innovation, such as AI, go directly to the multi-national, multi-billion-dollar companies with the resources to exploit this technology for profit. Tech giants, such as Google, Apple, Microsoft and Amazon, have gotten significantly richer with advancements in AI and the subsequent hype amongst investors.[3] Efforts by growth companies to crack into the AI space and rake in some of these profits only boost profits for these tech giants who use innovation to create barriers to entry for start-ups. This is not limited to AI but is instead a product of the corporate system. Established companies view new innovations as opportunities to generate profit, which leaves little room for start-ups to join the party. A closely related explanation is the high costs for start-ups in accessing and developing AI technology and the uncertainty amongst investors regarding the viability of AI start-ups. The high costs of developing and maintaining AI are significant barriers to growth for start-ups, especially when investments are flowing through at a consistent rate. Add to this the myriad of legal fees, including the costs associated with incorporation, filing a patent application, financing agreements and employment. Lawyers play an important role in ensuring AI start-ups' immediate and long-term success. Critically, lawyers must help AI start-ups choose and implement a legal structure that reflects present needs and can adapt to future circumstances.[4] Lawyers will also be key in ensuring that a start-up complies with the relevant legislation, as the last thing that a start-up needs is unnecessary litigation and its costs. Another key area that a lawyer can be of use, especially in the context of AI, is ensuring that the start-ups’ intellectual property is adequately protected. Lawyers will help start-ups choose the type of IP most suitable for their invention or idea. In most cases involving technological innovations, a lawyer will assist start-ups in preparing and filing patent applications, which grant inventors exclusive rights to their inventions.[5] In addition to protecting IP, lawyers will help AI start-ups raise capital by ensuring that the minute book and other relevant documents are prepared to comply with the law. Lastly, and maybe most importantly, lawyers will advise AI start-ups on the appropriate exit transaction/strategy. Most tech and AI start-ups with sufficient funding tend to be acquired, as opposed to going public through an IPO, but a lawyer will be in the best position to determine which option is most viable for the company, given the circumstances.[6] Suffice it to say, the AI start-up landscape remains uncertain, though promising in some respects. One thing that is certain, however, is that lawyers will play an integral role in helping AI start-ups navigate this landscape and hopefully thrive amidst the challenges. [1] “Silicon Valley Startups lean into AI boom” (9 September 2023), online: Axios <https://www.axios.com/2023/09/09/startups-ai-venture-capital> . [2] “The big risk behind the AI investment boom” (23 October 2023), online: Axios https://www.axios.com/2023/10/23/venture-capital-ai-risk-investment. [3] “AI gave tech giants a $2.4 trillion boost to their market caps in 2023”(17 October 2023), online: CNBC <https://www.cnbc.com/2023/10/17/amid-ai-buzz-big-us-tech-giants-add-2point5-trillion-in-market-cap.html>. [4] Bryce C Tingle, Start-up and Growth Companies in Canada: A guide to Legal and Business Practice, 3rd ed (Toronto: LexisNexis, 2018) at 4. [5] “Tips for Startups – Intellectual Property and its Value to Your Company” (August 2016), Online: McMillan LLP <https://mcmillan.ca/insights/tips-for-startups-intellectual-property-and-its-value-to-your-company/>. [6] Ibid at 16. 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>. 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). |
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