For many of us, we had until April 30th to file our taxes, by now you should have received your notice of assesment from CRA... did you receive a surprise letter??
Over the weekend I came accross this great article from Tim Cesnick.
You screwed up your taxes, now what?
Taxes can be intimidating for some people. Don’t let your tax return scare you. Think of this tax filing exercise as an open-book test. Did you ever write one of those? They gave you the book, for crying out loud. The answers are right in front of you. And to be truthful, filing your tax return is even better than an open-book test because there isn’t always one right answer, and you’re allowed to choose the answer that gives you the best mark – that is, the lowest tax bill – as long as you’re not lying when you complete the forms.
Finally, unlike any test I’ve ever written, you can go back and change your answers after the fact if you discover you made a mistake or forgot something. And if you disagree with the grade you receive, you can often have it changed by a simple phone call or formal objection.
Today I want to talk about what to do after you’ve filed your tax return and discover you’ve forgotten something, made a mistake or disagree with the assessment the taxman sends you.
Making changes
Picture this: You send in your tax return thinking that all is well and then discover after the fact that another T-slip arrives in the mail a few days later. Or perhaps you’re going through your files from last year’s tax return and discover some receipts that should have been kept in this year’s file – so they were missed when you prepared this year’s return (you did check last year’s file, didn’t you?).
Could it be that you didn’t forget anything, but simply made a mistake? Common mistakes include failing to transfer certain tax credits to a family member to save more tax (age, disability, pension, tuition, education, textbook, public transit and donation tax credits come to mind), forgetting some types of business expenses (did you claim capital cost allowance on your computer, desk or owned vehicles used in business?), forgetting safety deposit box fees, among other mistakes.
If you did forget something, or made a mistake, you can easily make a change by filing Form T1-ADJ (called an “adjustment request”). It’s a one-page form where you simply make note of the lines on your tax return you’d like to change, provide an explanation at the bottom, and send it in. No need to file a complete amended tax return. You’ll find a copy of Form T1-ADJ on the Canada Revenue Agency’s (CRA’s) website at cra.gc.ca.
Today I want to talk about what to do after you’ve filed your tax return and discover you’ve forgotten something, made a mistake or disagree with the assessment the taxman sends you.
Making changes
Picture this: You send in your tax return thinking that all is well and then discover after the fact that another T-slip arrives in the mail a few days later. Or perhaps you’re going through your files from last year’s tax return and discover some receipts that should have been kept in this year’s file – so they were missed when you prepared this year’s return (you did check last year’s file, didn’t you?).
Could it be that you didn’t forget anything, but simply made a mistake? Common mistakes include failing to transfer certain tax credits to a family member to save more tax (age, disability, pension, tuition, education, textbook, public transit and donation tax credits come to mind), forgetting some types of business expenses (did you claim capital cost allowance on your computer, desk or owned vehicles used in business?), forgetting safety deposit box fees, among other mistakes.
If you did forget something, or made a mistake, you can easily make a change by filing Form T1-ADJ (called an “adjustment request”). It’s a one-page form where you simply make note of the lines on your tax return you’d like to change, provide an explanation at the bottom, and send it in. No need to file a complete amended tax return. You’ll find a copy of Form T1-ADJ on the Canada Revenue Agency’s (CRA’s) website at cra.gc.ca.
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As usual, its wise to consult a professional before undertaking any appeal. For any questions, please do not hesitate to contact me at hugues.boisvert@andrewsrobichaud.com
Tuesday, May 25, 2010
Saturday, May 1, 2010
Buying/Selling a business? Are you familiar with the due diligence process?
As a business lawyer, I deal on a daily basis with entrepreneurs and business owners who wish to purchase or sell their businesses. Over the years, I acted for the buyer and for the seller in different types of deals. However, in any given transaction, the first step is the due diligence.
What Does Due Diligence - DD Mean?
1. An investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to a sale.
2. Generally, due diligence refers to the care a reasonable person should take before entering into an agreement or a transaction with another party.
Offers to purchase an asset are usually dependent on the results of due diligence analysis. This includes reviewing all financial records plus anything else deemed material to the sale. Sellers could also perform a due diligence analysis on the buyer. Items that may be considered are the buyer's ability to purchase, as well as other items that would affect the purchased entity or the seller after the sale has been completed.
Today I would like to share the legal due diligence checklist that I am using to prepare my report. If you intend to sell your business, you can be sure that the buyer will ask for these informations. Hence, be prepared!! If you are the buyer, please review carefully the checklist to ensure that you are asking the right documents. I've seen many deals aborded after the due diligence....as we say in the legal community Caveat Emptor is Latin for "Let the buyer beware".
LEGAL DUE DILIGENCE
CHECKLIST
1. CORPORATE RECORDS
a. Copy of the Certificate of Incorporation and By-Laws, as amended and/or restated, of the Company and each of its subsidiaries, if any, each as certified by appropriate authorities.
b. A list of all jurisdictions in which the Company and each of its subsidiaries, if any, is qualified to do business.
c. Certificates of authority, good standing certificates and tax status certificates for those states where the Company or any subsidiary, if any, is incorporated or qualified to do business.
d. Copies or descriptions of all outstanding agreements respecting or involving the capital stock or ownership of the Company, including stock option agreements.
e. List of names under which business is conducted.
f. List of all of the predecessors of the Company, including name, state or jurisdiction of incorporation, capitalization and states where such predecessors were qualified to do business and any fictitious names under which the predecessors conducted business.
g. Certificates of qualification or domestication and list of registered agents and their addresses.
h. Any acquisition and disposition documents regarding subsidiaries or divisions.
i. Minutes of all Board of Directors, committee and shareholders meetings and all consents to actions without meeting since inception.
j. Any management reports to the Board of Directors.
k. List of current officers and directors of the Company and subsidiaries.
2. CAPITALIZATION AND ISSUANCE OF SECURITIES
a. All stock records books of the Company, including stock transfer ledgers and receipts for certificates (including the reverse side of such certificates).
b. Schedule setting forth the precise holdings of the Company's securities holders, including a description of how the shares are held (jointly, in trust, etc.), copies of any stockholder, voting or other agreements among them and copies of all outstanding stock certificates for the Company.
c. List of outstanding and treasury shares, including, without limitation, common stock, preferred stock and any other securities.
d. All stock options, stock purchase and other employee benefit plans and forms of agreements.
e. List of outstanding stock options and warrants showing dates of issuance or grant, amounts issued or granted, exercise prices, exercise and expiration dates, dates and amounts of exercise and cancellation, and names of option holders.
f. Any voting trust agreements, buy/sell agreements, shareholder agreements or proxies affecting the right of any shareholder to freely sell or vote shares.
g. Any registration rights agreements.
h. Copies of all documents evidencing any phantom stock plans or similar arrangements by or in respect of the Company for any person.
i. Powers of attorney on any matter.
j. Convertible debt instruments.
k. Other contracts, arrangements, or public or private commitments relating to the stock to which any officer or director is a party or which involves more than 5% of the common stock.
l. A list of all issuances or sales of securities of any class by the Company or any officer, director or affiliate of the Company, including the title of such securities, the amount of such securities issued or sold, the date of such issuance or sale, and the unit price of such securities.
3. ASSETS AND PERSONAL PROPERTY
a. All leases or other written agreements or arrangements and a description of any unwritten agreements or arrangements relating to any personal property or asset owned or leased by the Company.
b. A list of automobiles and other vehicles owned or leased by the Company, together with a copy of the certificate of title related thereto.
c. List of all liens, encumbrances and other restrictions regarding the Company’s assets.
d. Description of computer systems and networks of the Company.
e. List and describe assets or properties in which an affiliate, any officer, director or employee or any holder of 5% or more of the common stock has any interest.
4. INTELLECTUAL PROPERTY
a. A list of states in which any research or development efforts have occurred for either software or hardware.
b. A list (including descriptive title, jurisdiction and serial or application number) and copies of all patents and applications pending, held or otherwise in process by or on behalf of the Company in Canada or any foreign country, together with all correspondence to or from the examining authorities or other agencies regarding such patents or applications.
c. Identify each product sold, now or in the past five years, by the Company and for each such product identify the dates during which such product was sold and all patents, patent applications or other intellectual property rights relating to such product.
d. Identify each product (including designs, standards or concepts) developed or under development, now or in the past five years, by the Company but not included in item 3(c), and for each such product identify the dates during which such product was developed or considered for development and all patents, patent applications or other intellectual property rights relating to such product.
e. A list (including descriptive title, jurisdiction and serial or registration number) and copies of all copyright registrations held by the Company or pending in the Canada or elsewhere together with a copy of the deposit materials for each such registration. A list of all copyrightable works of authorship (including software and documentation) material to the Company's actual or contemplated products but as to which there is no copyright registration or application pending, including user's manuals and technical and support documentation.
f. A list (including mark, description of goods or services, jurisdiction and serial or registration number) of all trademarks, registered or unregistered, used in connection with the business of the Company in Canada or elsewhere, together with copies of all state, federal or foreign registrations of such trademarks and assignments and recordation documents or other certifications pertaining to each (including associated affidavits of use or working).
g. A list of all technologies (whether or not patented or patentable) that are material to the business of the Company, together with a description of how each such
technology was developed or acquired, and copies of all documents evidencing any such acquisition.
h. Copies of all license agreements and sublicense agreements pursuant to which the Company licenses any technology or intellectual property rights to or from third parties.
i. Copies of all agreements pursuant to which the Company has assigned any technology or intellectual property rights to, or obtained any technology or intellectual property rights from, third parties.
j. Copies of all agreements pursuant to which the Company's products are distributed or marketed to third parties.
k. Copies of all agreements pursuant to which the Company's products (including software) are manufactured or assembled by, or pursuant to which the Company acquires such products or components from, third parties.
l. Copies of all research and development or joint development agreements to which the Company is a party or a beneficiary.
m. Copies of all other agreements relating to technology or intellectual property that are material to the business of the Company.
n. All documents, correspondence, memos, notes and other papers relating to the Company's written policies on intellectual property or maintenance of confidential, proprietary or trade secret information.
o. All documents, correspondence, memos, notes and other papers relating to the Company's written copies of all security agreements pursuant to which a lender or creditor has taken a security interest in, and copies of all niform Commercial Code filings, or other state and federal filings, that relate in any way to any encumbrance of, any of the Company's technology, intellectual property assets or "general intangibles."
p. All documents, correspondence, pleadings, memos, notes or other papers or information in tangible or machine readable form relating to any actual, pending, potential, or threatened intellectual property litigation or claim against the Company, or any other actual, pending, potential or threatened assertion, suggestion or inquiry by a third party that the Company is infringing its intellectual property rights, even if no threat has been made against the Company.
q. All documents, correspondence, memos, notes and other papers analyzing or assessing the validity or scope of any the Company copyright, patent, trademark or other intellectual property right.
r. List of all material designations and governmental licenses, authorizations, consents and approvals that the Company has obtained in connection with the manufacture, use, sale or export of any product identified in response to items 3(c) or 3(d), above.
s. Reports or letters concerning the Company, including letters from or to auditors, relating to any intellectual property right whether owned by the Company or a third party and whether asserted or unasserted.
t. Marketing literature, users' manuals, and technical and support documentation for each product identified in response to items 3(c) or 3(d).
u. New releases issued by the Company for each product identified in response to items 3(c) or 3(d).
v. All other documents and information which, in the Company's judgment, are significant with respect to any portion of its intellectual property rights or obligations or which should be considered and reviewed in analyzing the intellectual property rights and obligations of the Company.
5. REAL PROPERTY
a. A list of all locations where the Company conducts operations (the “Properties”).
b. Copies of all deeds, title abstracts, surveys, title policies, certificates of occupancy, other evidence of ownership and similar compliance certificates for all Properties owned by the Company.
c. Copies of all appraisals of all Properties owned by the Company done in the past three years.
d. Copies of all leases, subleases, option agreements, operating agreements, management agreements and real estate tax bills with respect to the Properties and notices of default, changes or amendments thereto.
e. Copies of mortgages, pledge agreements, guaranties, liens, easements, encumbrances and other secured agreements with respect to the Properties.
f. Evidence of zoning restrictions or variances relating to the Properties and a description of any proposed zoning changes or intention to exercise eminent domain for the Properties which are known to the Company.
g. A description of significant capital improvements being undertaken or contemplated for the Company and copies of any contracts.
6. CUSTOMERS AND SALES
a. All agreements, arrangements or documents used in connection with the business between the Company and any of its customers or licensees, including license
agreements, purchase orders, sales contracts, service contracts, distribution agreements, budget payment programs, fixed price contracts and other pricing arrangements, including, without limitation, contracts for the provision of content.
b. All written agreements and documents, and a description of all unwritten agreements and arrangements, between the Company and any third party relating to the marketing, advertising or sale of the Company’s products or services.
c. Copies of all warranties provided by the Company to its customers during the current fiscal year and each of the previous three fiscal years and a schedule of the total dollar amount of warranty claims made against the Company during the current fiscal year and each of the three previous fiscal years.
d. A description of all discounts, allowances and other special terms or promotions provided by the Company to its customers or prospective customers.
e. A description of all unfilled purchase or sale commitments.
7. OTHER MATERIAL CONTRACTS
a. All debt and financing agreements and documents, including loan agreements, notes, indentures, credit agreements, credit lines, letters of credit, deferred purchase agreements, guarantees, mortgages, pledges, security agreements, liens, encumbrances, and the like and a schedule of maturities of all such indebtedness. List of banks or other lenders (briefly describe nature of relationship - lines of credit, equipment lesser, etc.).
b. A list of all financing arrangements under which a default has occurred or is claimed to have occurred setting forth the nature of the default.
c. All material documents relating to any business acquisitions or dispositions by the Company during the past six years, including the acquisition of significant assets or stock of another company and any filings made with any governmental authorities relating to the same.
d. All partnership or joint venture agreements to which the Company is a party or which relate to its business.
e. All supply or service agreements to which the Company is a party or which relate to the business of the Company or by the terms of which the Company is obligated to purchase or provide products or services in the future.
f. Any indemnification agreements, guaranties or similar arrangements to which the Company is a party.
g. Copies of all non-competition agreements, consulting agreements, invention ownership agreements, restrictive covenants, secrecy, confidentiality and nondisclosure
agreements between the Company and any third party, including, without limitation, present and former stockholders, officers and directors and employees, potential purchasers of the Company’s business or any portion thereof, parties with which the Company has had acquisition discussions, parties with which the Company has concluded acquisitions and any of the Company’s customers or suppliers.
h. Copies of all contracts requiring third party consent to the proposed transaction.
i. Any other contracts or agreements to which the Company is a party made other than in the ordinary course of business in the past three years, including agreements with brokers, investment bankers or the like.
j. A list and description of all significant oral contracts and commitments of the Company.
k. A list of any contract or commitment to which the Company is a party and under which a default has occurred or is claimed to have occurred, setting forth the nature of the default and any other material information.
l. A list of all property and liability coverage maintained by the Company, including self insurance, which list should include the insurers, type of coverage, insured property or liability, deductibles, coverage limits, premiums, termination dates and the like.
m. A list of all claims made by the Company under any insurance policy during the past three years.
n. Any other debt arrangements, guarantees or indemnification with officers, directors or principal (5%) shareholders.
o. Any agreements, in principle or otherwise, with respect to mergers, acquisitions or sale of material assets, whether or not consummated.
8. EMPLOYEES AND COMPENSATION
a. A list of all employees, officers and directors of the Company setting forth the following information:
i. Name, date of hire, job title, office location and union membership.
ii. Current amount and manner of compensation (i.e., salary, hourly rate, etc.) and employment status (i.e., active, on layoff, disabled, etc.).
iii. Total compensation paid during each calendar year since the inception of the Company.
iv. Management organization chart.
b. Any written, and a description of any unwritten, bonus, incentive or commission plan or policy applicable to any employee of the Company. Description of the Company’s policy with respect to unused vacation and/or sick leave, and the provisions for the payment thereof, together with a schedule of all such accruals. Description of any severance or termination programs or plans of the Company for its employees or officers.
c. Any written, and a description of any unwritten, contracts or agreements with any current or former employee, director, officer, consultant, independent contractor, temporary, person or organization regarding employment, confidentiality, non-disclosure, work-for-hire, assignment of inventions, copyright, restrictions on use and Beta-test agreements. Indicate whether such agreements are standard or non-standard for the Company.
d. A list of all employees, officers, directors, temporaries, independent contractors, consultants, persons or organizations who have not executed any agreement identified in item 7(c).
e. All collective bargaining agreements covering any of the Company’s employees, the number of such employees covered by each such agreement and the anticipated expiration date thereof. Copies of any written notices or correspondence from any labor union or employee organization that is currently attempting, or that has attempted within the last three years, to organize or represent any of the Company’s employees. Description of renewal or renegotiation terms, if any, for any collective bargaining agreements.
f. Description of any actual or threatened strike, work stoppage, disturbance, unresolved grievance, labor dispute or arbitration proceeding relating to the Company within the past three years and a description of the current status of all unfair labor practices, complaints or grievances involving the Company within the past three years.
g. A list of all people who have power of attorney to act on behalf of the Company and copies of all such powers of attorney.
h. A description of all benefits provided or committed by the Company to any present or former employees, including without limitation health/medical/ dental insurance, life insurance, disability insurance, pension or retirement plans, employee welfare plans, bonus plans, welfare benefit plans, stock option or ownership plans, profit sharing plans, vacation pay, sick pay, severance pay or other benefits upon termination of employment, holiday pay and tuition assistance.
i. Copies of all retirement and/or pension plans covering any employee of the Company, as amended and/or restated, as well as copies of the most recent valuation
of each such plan or other actuarial statement of plan benefits and assets.
j. Copies of any personnel policy, manual or handbook distributed by the Company to any of its employees at any time during the current fiscal year or the previous three fiscal years.
k. A list of all employees whose employment has been terminated – voluntarily or involuntarily – since January 1, 2000, setting forth job description and location for each such employee and their reasons for leaving.
l. History of workmen’s compensation claims.
m. Outstanding loans to employees or directors individually in excess of $25,000.
9. GOVERNMENT AND REGULATORY ISSUES
a. Any orders, notices, decrees, reports, enforcement actions, settlement agreements, correspondence or other documents
i. relating to the violation, or alleged violation, by the Company of any applicable law, rule or regulation of any federal, provincial or local government, or agency thereof, including without limitation laws, rules and regulations relating to the environment, occupational safety and health, employment discrimination, employee benefits, government procurement and antitrust and trade regulation or otherwise affecting the Company, the operation of its business, or any of the assets or properties owned or used by it in connection with its business.
b. Any reports, studies or assessments performed by or for the Company and relating to compliance by the Company with any such law, rule or regulation.
c. Copies of all licenses, permits, certificates and authorizations (including tax registrations) held by the Company in connection with the operation of its business or the use or ownership of any of its assets of properties as well as any filing made with respect to the same.
d. Results of all audits by any regulatory authorities since inception of the Company.
10. LITIGATION AND OTHER DISPUTES
a. A description of all pending and threatened litigation, arbitrations, claims, administrative proceedings, consent decrees, injunctions, governmental investigations or inquiries, regulatory or other proceedings (“Litigation”) relating to or otherwise affecting the Company, the operation of its business, or any of the assets or properties owned or used by it.
b. A description of any Litigation which was settled, or with respect to which a final judgment, decree or order was entered, within the last three years, including a description of such settlement, judgment, decree or order.
c. A description of any material dispute with any customer or supplier of the Company, which arose during the current fiscal year or any of the previous three fiscal years, and copies of all written reports, correspondence and other documents relating thereto.
11. ENVIRONMENTAL
a. Copies of all currently effective licenses, permits, certificates and orders, or applications, issued by any governmental authority or regulatory body applicable or relating to the Company or its properties, assets or business.
b. A list and summary description of all current material environmental issues, including governmental inquiries and threatened or actual Litigation, together with proposed resolutions, if any, with respect to the Company or its properties, assets or business.
c. Copies of all documents evidencing compliance by the Company with all regulatory requirements.
d. A list and summary description of any problems incurred in the field of air, ground or water pollution or safety regulations in connection with the operation of any Property.
e. A list and summary description of closed environmental disputes and their resolutions with respect to the Company or its properties, assets or business.
f. Copies of all information relating to hazardous substances (both as identified by the governmental authority and those deemed to be such by management) used, emitted, transported, disposed of or stored by the Company.
g. Copies of recent environmental audits or other environmental studies with respect to the Company.
h. A list of all real property owned, leased or used by the Company or in connection with its business at any time.
i. Descriptions of all past and present operations at each property owned, leased or used by the Company, including to the extent available operations by any former owner or operator of each such property, including, but not limited to, manufacturing and assembly processes, agricultural activities, raw materials, waste streams, emission inventories, water supply and solid and hazardous wastes.
j. A list of names and telephone numbers of the individuals at each property owned, leased or used by the Company most knowledgeable about environmental matters.
12. FINANCIAL MATTERS
a. All audited and un-audited annual financial statements of the Company for the last five (5) fiscal years, together with all footnotes, schedules, etc. and the most recent interim financial statements.
i. Name of accountants and length of relationship with accountants; indicate whether the accountants own any interest in or hold any position with the Company.
b. Income tax returns of the Company for the last five (5) fiscal years and sales tax returns of the Company for the last five (5) fiscal years and the fiscal year to date.
c. Detailed aged accounts receivable schedule at the most recent practicable date.
i. List of customer credit limits and payment terms.
ii. Detailed aged accounts payable schedule at the most recent practicable date.
d. Detail of all customer accounts written-off since January 1, 2000 and a list of all recoveries of customer accounts received in the same period.
e. List of all accounts in litigation.
f. Description of credit and collection policies and procedures, including samples of credit application forms, order entry forms, customer invoices and statements.
g. Brief description of any change in accounting policies or procedures during the past five years.
h. Copies of all correspondence during the past five years with independent auditors regarding accounting, control systems, methods of accounting, or compliance with contract requirements, including cost accounting standards and regulations.
i. Business plan and other documents describing the current and/or expected business including all material marketing studies, consulting studies or reports.
What Does Due Diligence - DD Mean?
1. An investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to a sale.
2. Generally, due diligence refers to the care a reasonable person should take before entering into an agreement or a transaction with another party.
Offers to purchase an asset are usually dependent on the results of due diligence analysis. This includes reviewing all financial records plus anything else deemed material to the sale. Sellers could also perform a due diligence analysis on the buyer. Items that may be considered are the buyer's ability to purchase, as well as other items that would affect the purchased entity or the seller after the sale has been completed.
Today I would like to share the legal due diligence checklist that I am using to prepare my report. If you intend to sell your business, you can be sure that the buyer will ask for these informations. Hence, be prepared!! If you are the buyer, please review carefully the checklist to ensure that you are asking the right documents. I've seen many deals aborded after the due diligence....as we say in the legal community Caveat Emptor is Latin for "Let the buyer beware".
LEGAL DUE DILIGENCE
CHECKLIST
1. CORPORATE RECORDS
a. Copy of the Certificate of Incorporation and By-Laws, as amended and/or restated, of the Company and each of its subsidiaries, if any, each as certified by appropriate authorities.
b. A list of all jurisdictions in which the Company and each of its subsidiaries, if any, is qualified to do business.
c. Certificates of authority, good standing certificates and tax status certificates for those states where the Company or any subsidiary, if any, is incorporated or qualified to do business.
d. Copies or descriptions of all outstanding agreements respecting or involving the capital stock or ownership of the Company, including stock option agreements.
e. List of names under which business is conducted.
f. List of all of the predecessors of the Company, including name, state or jurisdiction of incorporation, capitalization and states where such predecessors were qualified to do business and any fictitious names under which the predecessors conducted business.
g. Certificates of qualification or domestication and list of registered agents and their addresses.
h. Any acquisition and disposition documents regarding subsidiaries or divisions.
i. Minutes of all Board of Directors, committee and shareholders meetings and all consents to actions without meeting since inception.
j. Any management reports to the Board of Directors.
k. List of current officers and directors of the Company and subsidiaries.
2. CAPITALIZATION AND ISSUANCE OF SECURITIES
a. All stock records books of the Company, including stock transfer ledgers and receipts for certificates (including the reverse side of such certificates).
b. Schedule setting forth the precise holdings of the Company's securities holders, including a description of how the shares are held (jointly, in trust, etc.), copies of any stockholder, voting or other agreements among them and copies of all outstanding stock certificates for the Company.
c. List of outstanding and treasury shares, including, without limitation, common stock, preferred stock and any other securities.
d. All stock options, stock purchase and other employee benefit plans and forms of agreements.
e. List of outstanding stock options and warrants showing dates of issuance or grant, amounts issued or granted, exercise prices, exercise and expiration dates, dates and amounts of exercise and cancellation, and names of option holders.
f. Any voting trust agreements, buy/sell agreements, shareholder agreements or proxies affecting the right of any shareholder to freely sell or vote shares.
g. Any registration rights agreements.
h. Copies of all documents evidencing any phantom stock plans or similar arrangements by or in respect of the Company for any person.
i. Powers of attorney on any matter.
j. Convertible debt instruments.
k. Other contracts, arrangements, or public or private commitments relating to the stock to which any officer or director is a party or which involves more than 5% of the common stock.
l. A list of all issuances or sales of securities of any class by the Company or any officer, director or affiliate of the Company, including the title of such securities, the amount of such securities issued or sold, the date of such issuance or sale, and the unit price of such securities.
3. ASSETS AND PERSONAL PROPERTY
a. All leases or other written agreements or arrangements and a description of any unwritten agreements or arrangements relating to any personal property or asset owned or leased by the Company.
b. A list of automobiles and other vehicles owned or leased by the Company, together with a copy of the certificate of title related thereto.
c. List of all liens, encumbrances and other restrictions regarding the Company’s assets.
d. Description of computer systems and networks of the Company.
e. List and describe assets or properties in which an affiliate, any officer, director or employee or any holder of 5% or more of the common stock has any interest.
4. INTELLECTUAL PROPERTY
a. A list of states in which any research or development efforts have occurred for either software or hardware.
b. A list (including descriptive title, jurisdiction and serial or application number) and copies of all patents and applications pending, held or otherwise in process by or on behalf of the Company in Canada or any foreign country, together with all correspondence to or from the examining authorities or other agencies regarding such patents or applications.
c. Identify each product sold, now or in the past five years, by the Company and for each such product identify the dates during which such product was sold and all patents, patent applications or other intellectual property rights relating to such product.
d. Identify each product (including designs, standards or concepts) developed or under development, now or in the past five years, by the Company but not included in item 3(c), and for each such product identify the dates during which such product was developed or considered for development and all patents, patent applications or other intellectual property rights relating to such product.
e. A list (including descriptive title, jurisdiction and serial or registration number) and copies of all copyright registrations held by the Company or pending in the Canada or elsewhere together with a copy of the deposit materials for each such registration. A list of all copyrightable works of authorship (including software and documentation) material to the Company's actual or contemplated products but as to which there is no copyright registration or application pending, including user's manuals and technical and support documentation.
f. A list (including mark, description of goods or services, jurisdiction and serial or registration number) of all trademarks, registered or unregistered, used in connection with the business of the Company in Canada or elsewhere, together with copies of all state, federal or foreign registrations of such trademarks and assignments and recordation documents or other certifications pertaining to each (including associated affidavits of use or working).
g. A list of all technologies (whether or not patented or patentable) that are material to the business of the Company, together with a description of how each such
technology was developed or acquired, and copies of all documents evidencing any such acquisition.
h. Copies of all license agreements and sublicense agreements pursuant to which the Company licenses any technology or intellectual property rights to or from third parties.
i. Copies of all agreements pursuant to which the Company has assigned any technology or intellectual property rights to, or obtained any technology or intellectual property rights from, third parties.
j. Copies of all agreements pursuant to which the Company's products are distributed or marketed to third parties.
k. Copies of all agreements pursuant to which the Company's products (including software) are manufactured or assembled by, or pursuant to which the Company acquires such products or components from, third parties.
l. Copies of all research and development or joint development agreements to which the Company is a party or a beneficiary.
m. Copies of all other agreements relating to technology or intellectual property that are material to the business of the Company.
n. All documents, correspondence, memos, notes and other papers relating to the Company's written policies on intellectual property or maintenance of confidential, proprietary or trade secret information.
o. All documents, correspondence, memos, notes and other papers relating to the Company's written copies of all security agreements pursuant to which a lender or creditor has taken a security interest in, and copies of all niform Commercial Code filings, or other state and federal filings, that relate in any way to any encumbrance of, any of the Company's technology, intellectual property assets or "general intangibles."
p. All documents, correspondence, pleadings, memos, notes or other papers or information in tangible or machine readable form relating to any actual, pending, potential, or threatened intellectual property litigation or claim against the Company, or any other actual, pending, potential or threatened assertion, suggestion or inquiry by a third party that the Company is infringing its intellectual property rights, even if no threat has been made against the Company.
q. All documents, correspondence, memos, notes and other papers analyzing or assessing the validity or scope of any the Company copyright, patent, trademark or other intellectual property right.
r. List of all material designations and governmental licenses, authorizations, consents and approvals that the Company has obtained in connection with the manufacture, use, sale or export of any product identified in response to items 3(c) or 3(d), above.
s. Reports or letters concerning the Company, including letters from or to auditors, relating to any intellectual property right whether owned by the Company or a third party and whether asserted or unasserted.
t. Marketing literature, users' manuals, and technical and support documentation for each product identified in response to items 3(c) or 3(d).
u. New releases issued by the Company for each product identified in response to items 3(c) or 3(d).
v. All other documents and information which, in the Company's judgment, are significant with respect to any portion of its intellectual property rights or obligations or which should be considered and reviewed in analyzing the intellectual property rights and obligations of the Company.
5. REAL PROPERTY
a. A list of all locations where the Company conducts operations (the “Properties”).
b. Copies of all deeds, title abstracts, surveys, title policies, certificates of occupancy, other evidence of ownership and similar compliance certificates for all Properties owned by the Company.
c. Copies of all appraisals of all Properties owned by the Company done in the past three years.
d. Copies of all leases, subleases, option agreements, operating agreements, management agreements and real estate tax bills with respect to the Properties and notices of default, changes or amendments thereto.
e. Copies of mortgages, pledge agreements, guaranties, liens, easements, encumbrances and other secured agreements with respect to the Properties.
f. Evidence of zoning restrictions or variances relating to the Properties and a description of any proposed zoning changes or intention to exercise eminent domain for the Properties which are known to the Company.
g. A description of significant capital improvements being undertaken or contemplated for the Company and copies of any contracts.
6. CUSTOMERS AND SALES
a. All agreements, arrangements or documents used in connection with the business between the Company and any of its customers or licensees, including license
agreements, purchase orders, sales contracts, service contracts, distribution agreements, budget payment programs, fixed price contracts and other pricing arrangements, including, without limitation, contracts for the provision of content.
b. All written agreements and documents, and a description of all unwritten agreements and arrangements, between the Company and any third party relating to the marketing, advertising or sale of the Company’s products or services.
c. Copies of all warranties provided by the Company to its customers during the current fiscal year and each of the previous three fiscal years and a schedule of the total dollar amount of warranty claims made against the Company during the current fiscal year and each of the three previous fiscal years.
d. A description of all discounts, allowances and other special terms or promotions provided by the Company to its customers or prospective customers.
e. A description of all unfilled purchase or sale commitments.
7. OTHER MATERIAL CONTRACTS
a. All debt and financing agreements and documents, including loan agreements, notes, indentures, credit agreements, credit lines, letters of credit, deferred purchase agreements, guarantees, mortgages, pledges, security agreements, liens, encumbrances, and the like and a schedule of maturities of all such indebtedness. List of banks or other lenders (briefly describe nature of relationship - lines of credit, equipment lesser, etc.).
b. A list of all financing arrangements under which a default has occurred or is claimed to have occurred setting forth the nature of the default.
c. All material documents relating to any business acquisitions or dispositions by the Company during the past six years, including the acquisition of significant assets or stock of another company and any filings made with any governmental authorities relating to the same.
d. All partnership or joint venture agreements to which the Company is a party or which relate to its business.
e. All supply or service agreements to which the Company is a party or which relate to the business of the Company or by the terms of which the Company is obligated to purchase or provide products or services in the future.
f. Any indemnification agreements, guaranties or similar arrangements to which the Company is a party.
g. Copies of all non-competition agreements, consulting agreements, invention ownership agreements, restrictive covenants, secrecy, confidentiality and nondisclosure
agreements between the Company and any third party, including, without limitation, present and former stockholders, officers and directors and employees, potential purchasers of the Company’s business or any portion thereof, parties with which the Company has had acquisition discussions, parties with which the Company has concluded acquisitions and any of the Company’s customers or suppliers.
h. Copies of all contracts requiring third party consent to the proposed transaction.
i. Any other contracts or agreements to which the Company is a party made other than in the ordinary course of business in the past three years, including agreements with brokers, investment bankers or the like.
j. A list and description of all significant oral contracts and commitments of the Company.
k. A list of any contract or commitment to which the Company is a party and under which a default has occurred or is claimed to have occurred, setting forth the nature of the default and any other material information.
l. A list of all property and liability coverage maintained by the Company, including self insurance, which list should include the insurers, type of coverage, insured property or liability, deductibles, coverage limits, premiums, termination dates and the like.
m. A list of all claims made by the Company under any insurance policy during the past three years.
n. Any other debt arrangements, guarantees or indemnification with officers, directors or principal (5%) shareholders.
o. Any agreements, in principle or otherwise, with respect to mergers, acquisitions or sale of material assets, whether or not consummated.
8. EMPLOYEES AND COMPENSATION
a. A list of all employees, officers and directors of the Company setting forth the following information:
i. Name, date of hire, job title, office location and union membership.
ii. Current amount and manner of compensation (i.e., salary, hourly rate, etc.) and employment status (i.e., active, on layoff, disabled, etc.).
iii. Total compensation paid during each calendar year since the inception of the Company.
iv. Management organization chart.
b. Any written, and a description of any unwritten, bonus, incentive or commission plan or policy applicable to any employee of the Company. Description of the Company’s policy with respect to unused vacation and/or sick leave, and the provisions for the payment thereof, together with a schedule of all such accruals. Description of any severance or termination programs or plans of the Company for its employees or officers.
c. Any written, and a description of any unwritten, contracts or agreements with any current or former employee, director, officer, consultant, independent contractor, temporary, person or organization regarding employment, confidentiality, non-disclosure, work-for-hire, assignment of inventions, copyright, restrictions on use and Beta-test agreements. Indicate whether such agreements are standard or non-standard for the Company.
d. A list of all employees, officers, directors, temporaries, independent contractors, consultants, persons or organizations who have not executed any agreement identified in item 7(c).
e. All collective bargaining agreements covering any of the Company’s employees, the number of such employees covered by each such agreement and the anticipated expiration date thereof. Copies of any written notices or correspondence from any labor union or employee organization that is currently attempting, or that has attempted within the last three years, to organize or represent any of the Company’s employees. Description of renewal or renegotiation terms, if any, for any collective bargaining agreements.
f. Description of any actual or threatened strike, work stoppage, disturbance, unresolved grievance, labor dispute or arbitration proceeding relating to the Company within the past three years and a description of the current status of all unfair labor practices, complaints or grievances involving the Company within the past three years.
g. A list of all people who have power of attorney to act on behalf of the Company and copies of all such powers of attorney.
h. A description of all benefits provided or committed by the Company to any present or former employees, including without limitation health/medical/ dental insurance, life insurance, disability insurance, pension or retirement plans, employee welfare plans, bonus plans, welfare benefit plans, stock option or ownership plans, profit sharing plans, vacation pay, sick pay, severance pay or other benefits upon termination of employment, holiday pay and tuition assistance.
i. Copies of all retirement and/or pension plans covering any employee of the Company, as amended and/or restated, as well as copies of the most recent valuation
of each such plan or other actuarial statement of plan benefits and assets.
j. Copies of any personnel policy, manual or handbook distributed by the Company to any of its employees at any time during the current fiscal year or the previous three fiscal years.
k. A list of all employees whose employment has been terminated – voluntarily or involuntarily – since January 1, 2000, setting forth job description and location for each such employee and their reasons for leaving.
l. History of workmen’s compensation claims.
m. Outstanding loans to employees or directors individually in excess of $25,000.
9. GOVERNMENT AND REGULATORY ISSUES
a. Any orders, notices, decrees, reports, enforcement actions, settlement agreements, correspondence or other documents
i. relating to the violation, or alleged violation, by the Company of any applicable law, rule or regulation of any federal, provincial or local government, or agency thereof, including without limitation laws, rules and regulations relating to the environment, occupational safety and health, employment discrimination, employee benefits, government procurement and antitrust and trade regulation or otherwise affecting the Company, the operation of its business, or any of the assets or properties owned or used by it in connection with its business.
b. Any reports, studies or assessments performed by or for the Company and relating to compliance by the Company with any such law, rule or regulation.
c. Copies of all licenses, permits, certificates and authorizations (including tax registrations) held by the Company in connection with the operation of its business or the use or ownership of any of its assets of properties as well as any filing made with respect to the same.
d. Results of all audits by any regulatory authorities since inception of the Company.
10. LITIGATION AND OTHER DISPUTES
a. A description of all pending and threatened litigation, arbitrations, claims, administrative proceedings, consent decrees, injunctions, governmental investigations or inquiries, regulatory or other proceedings (“Litigation”) relating to or otherwise affecting the Company, the operation of its business, or any of the assets or properties owned or used by it.
b. A description of any Litigation which was settled, or with respect to which a final judgment, decree or order was entered, within the last three years, including a description of such settlement, judgment, decree or order.
c. A description of any material dispute with any customer or supplier of the Company, which arose during the current fiscal year or any of the previous three fiscal years, and copies of all written reports, correspondence and other documents relating thereto.
11. ENVIRONMENTAL
a. Copies of all currently effective licenses, permits, certificates and orders, or applications, issued by any governmental authority or regulatory body applicable or relating to the Company or its properties, assets or business.
b. A list and summary description of all current material environmental issues, including governmental inquiries and threatened or actual Litigation, together with proposed resolutions, if any, with respect to the Company or its properties, assets or business.
c. Copies of all documents evidencing compliance by the Company with all regulatory requirements.
d. A list and summary description of any problems incurred in the field of air, ground or water pollution or safety regulations in connection with the operation of any Property.
e. A list and summary description of closed environmental disputes and their resolutions with respect to the Company or its properties, assets or business.
f. Copies of all information relating to hazardous substances (both as identified by the governmental authority and those deemed to be such by management) used, emitted, transported, disposed of or stored by the Company.
g. Copies of recent environmental audits or other environmental studies with respect to the Company.
h. A list of all real property owned, leased or used by the Company or in connection with its business at any time.
i. Descriptions of all past and present operations at each property owned, leased or used by the Company, including to the extent available operations by any former owner or operator of each such property, including, but not limited to, manufacturing and assembly processes, agricultural activities, raw materials, waste streams, emission inventories, water supply and solid and hazardous wastes.
j. A list of names and telephone numbers of the individuals at each property owned, leased or used by the Company most knowledgeable about environmental matters.
12. FINANCIAL MATTERS
a. All audited and un-audited annual financial statements of the Company for the last five (5) fiscal years, together with all footnotes, schedules, etc. and the most recent interim financial statements.
i. Name of accountants and length of relationship with accountants; indicate whether the accountants own any interest in or hold any position with the Company.
b. Income tax returns of the Company for the last five (5) fiscal years and sales tax returns of the Company for the last five (5) fiscal years and the fiscal year to date.
c. Detailed aged accounts receivable schedule at the most recent practicable date.
i. List of customer credit limits and payment terms.
ii. Detailed aged accounts payable schedule at the most recent practicable date.
d. Detail of all customer accounts written-off since January 1, 2000 and a list of all recoveries of customer accounts received in the same period.
e. List of all accounts in litigation.
f. Description of credit and collection policies and procedures, including samples of credit application forms, order entry forms, customer invoices and statements.
g. Brief description of any change in accounting policies or procedures during the past five years.
h. Copies of all correspondence during the past five years with independent auditors regarding accounting, control systems, methods of accounting, or compliance with contract requirements, including cost accounting standards and regulations.
i. Business plan and other documents describing the current and/or expected business including all material marketing studies, consulting studies or reports.
A Primer in Tax Jargon...
Below is an excellent article written by Rollie Vaive, C.A. based in Ottawa, Ontario - its a must read:
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Given enough time and a dose of patience, a good tax practitioner should be able to explain virtually any concept to you in plain English, and distill the issue down to a level where it can be understood. Tax is complex, but once all of the nuts and bolts provisions of the Income Tax Act are analyzed, most people should be able to understand the issues before them so that they can make an informed decision about their affairs.
When explaining tax ideas and concepts, even the best tax practitioners sometimes slip up and resort to using obscure tax terminology. If you’ve ever been in the same room with two tax practitioners, you’ll know what I mean. The conversation is littered with acronyms and buzzwords that will leave you scratching your head.
We thought that it would be a good idea to explain some of these acronyms and buzzwords so that you can slide them into the conversation next time you’re talking to a tax advisor.
ABIL: Pronounced "Able". This is an acronym for Allowable Business Investment Loss, which is a definition contained in the Income Tax Act. An ABIL is a capital loss that is incurred on very specific types of assets, namely shares or debt of a small business corporation. Whereas a normal capital loss is of limited use because it can only be deducted against capital gains, an ABIL can be used to offset any type of income. If you invest in shares of a small business corporation, and you incur a loss on that investment (either because you sold it for less than you paid for it, or the company went out of business), you can use that loss to offset employment income, business income, or any other type of income. Like all capital gains and losses, an ABIL is subject to a 1/2 inclusion rate when determining how much of a deduction can be claimed against your other sources of income. If you invest $1,000 in a small business corporation, and the corporation goes bankrupt, your ABIL is 1/2 x $1,000, or $500.
ACB: This is an acronym for Adjusted Cost Base, which is a definition contained in the Income Tax Act. In short, ACB is the "tax cost" of a non-depreciable asset for income tax purposes. A non-depreciable asset is any asset whose physical state is not subject to wear and tear. Examples of non-depreciable assets would include shares of companies, bonds, mutual fund units, interests in a partnership, and land to name just a few.
ACB is important, since it will determine how much of a capital gain or a loss that you realize on the disposition of an asset. When determining the tax consequences of a disposition, we calculate the proceeds of disposition and compare it to the ACB of the asset which was disposed of.
Determining the ACB of an asset can be very simple or very difficult. The starting point is usually the amount that you pay for an asset. If you were unfortunate enough to buy 100 Nortel shares when they were trading at $100, each Nortel share that you hold has an ACB of $100. If you acquire additional Nortel shares on the open market, the ACB is averaged over all of the Nortel shares that you hold. If you buy another 100 Nortel shares at $3 each, you now hold 200 shares for which you’ve paid a total of $10,300. Your new ACB would be $51.50 per share.
CCA: This is an acronym for Capital Cost Allowance. CCA is defined in the Income Tax Act, and is essentially the depreciation deduction that you can claim in a particular year to reduce your income for tax purposes. It is the technical term for tax depreciation.
The Regulations to the Income Tax Act contain detailed rules on how to claim CCA. The Regulations break assets into different categories, called CCA classes, and state the maximum rate that you can depreciate the asset each year. A fax machine or a photocopier, for example, are placed in Class 8 and can be depreciated at up to 20% per year subject to a number of complex rules which are beyond the scope of this forum. Computers are considered Class 10 assets and are depreciated at a rate of 30% per year subject to the same complexities . CCA is optional, and you can choose not to claim depreciation in a particular year. While most often we do claim maximum CCA (because we want to reduce our income and taxes to the maximum extent possible), there are many instances where we may decide not to claim the maximum CCA. We have the flexibility to make this decision each year.
CCPC: This is an acronym for Canadian Controlled Private Corporation. This term is defined in the Income Tax Act, and is one of the few tax terms which can be relatively well understood by the plain English meaning of the expression.
A CCPC is a corporation which is private (i.e. it does not have shares or debt that are listed on a stock exchange, and is not controlled by a public corporation). The corporation must also be controlled by Canadian resident shareholders. For this purpose, control is generally meant to mean possession of a majority of the votes to elect the Board of Directors. Other concepts do come into the concept of control, so it is clearly not as simple as it seems.
Whether or not a company is considered a CCPC is extremely important. CCPC's and shareholders who own shares of a CCPC are given a multitude of beneficial tax "breaks". CCPC's pay a low rate of tax on active business income and qualify for enriched R&D tax credits to name just two. Shareholders who own shares of a CCPC may be in a position to realize the $500,000 enhanced capital gains deduction on the sale of their shares, or may qualify for ABIL treatment if they lose money on their investment.
CDA: This is an acronym for Capital Dividend Account, which is defined in the Income Tax Act. The CDA is a concept which applies only to corporations. It is an account balance which can be used to pay tax-free dividends to a shareholder.
When an individual realizes a capital gain, only 1/2 of the capital gain is included in income, and the other 1/2 of the capital gain is never subject to tax. Similarly, when an individual realizes a capital loss, only 1/2 of the loss can be used by the individual to offset capital gains. When a corporation realizes a capital gain or loss, the same concept applies, and only 1/2 of the capital gain or loss is included in the corporation's taxable income or is eligible to be used to offset capital gains. That 1/2 portion of the capital gain which is not included in the corporation's income is added to the corporation's Capital Dividend Account. The 1/2 portion of the capital loss is deducted from the corporation's Capital Dividend Account. The corporation's Capital Dividend Account is therefore the sum of all of the non-taxable portions of capital gains that the corporation has realized, and is reduced by all of the non-included capital losses that the company has realized. The 1/2 inclusion rate applied to capital transactions has changed over the years. Depending on the year that the transaction would have occurred, the inclusion rate may have been 2/3rds (i.e. 1/3 of the capital gain or loss is included in the calculation of the CDA), or 3/4ths (i.e. 1/4 of the capital gain or loss is included in the calculation of the CDA). The Capital Dividend Account is also increased if the corporation has received life insurance proceeds, or if it has received a capital dividend from another corporation.
The Capital Dividend Account is not shown on a company's balance sheet, and it will not appear anywhere on the company's tax returns. It is a balance which must be calculated by looking to the company's past tax returns. Once the CDA is calculated, and assuming the balance is positive, a dividend can be paid to a shareholder and declared to be paid from the CDA. This dividend would be received tax-free by a Canadian resident shareholder. The payment of a capital dividend must be done in a specific manner, and requires an election form to be filed with the Canada Customs and Revenue Agency.
CNIL: Pronounced "Senile". This is an acronym for Cumulative Net Investment Loss, which is defined in the Income Tax Act. CNIL is a concept which applies only to individuals.
When an individual realizes a capital gain on shares of a qualified small business corporation, that gain may qualify for the $500,000 enhanced capital gains deduction. There are a number of tests which must be met before this can happen. Not only do the shares that are sold have to meet the very strict definition of qualified small business corporation, the individual must not have a CNIL balance.
The CNIL balance is the sum of an individual's investment expenses claimed from 1988 onward and is reduced by the sum of an individual's investment income from 1988 onward. Investment expenses include deductions claimed for interest expenses and investment counsel fees, rental losses, and limited partnership losses. Investment income includes interest income, dividend income, limited partnership income and net rental income.
The CNIL balance is important because an individual who has a CNIL balance will see their ability to use the $500,000 enhanced capital gains deduction reduced by the amount of their CNIL balance, even if they realize a capital gain which would otherwise qualify for the enhanced capital gains deduction.
Because the CNIL is a cumulative balance, it is possible that an individual may have a CNIL balance in one year, only to find it eliminated in a subsequent year if they generate investment income in that subsequent year.
Crystallization: This is a tax expression which is not defined in the Income Tax Act. A crystallization refers to a series of tax transactions which result in an individual triggering a gain or a loss on an asset.
In its most common form, crystallization refers to a series of transactions which are designed to utilize an individual's enhanced capital gains deduction. When an individual sells shares of a qualified small business corporation, the capital gain may qualify for the $750,000 capital gains deduction. The end result of this could be a significant reduction, or altogether elimination of tax on the sale of the shares. It is a very, very powerful tax incentive. However, there are many tests that need to be met in order for the gain to qualify for the enhanced capital gains deduction. An individual may hold shares of a corporation which have increased in value, and for which the gain may qualify for the enhanced capital gains deduction if they were to be sold today. However, the individual may not be in a position to sell those shares today, and there may be some real concerns that the gain will not qualify for the enhanced capital gains deduction when they are sold at a later date. In this case, it may be a good idea to "crystallize the capital gains deduction". The individual would undertake a series of steps which would trigger a gain on the shares in question, without actually giving up ownership of the shares. The gain which is triggered would be reported on the individual's personal tax return, and would be offset by the enhanced capital gains deduction. The series of transactions would increase the tax cost of the shares in question by the crystallized amount. When the shares are actually sold at a later date, the gain will not qualify for the enhanced capital gains deduction, but the amount of tax paid at that later date will be substantially reduced or eliminated because the tax cost of the shares would have already been increased as a result of the crystallization.
A crystallization may also refer to transactions which are designed to trigger capital losses on shares. If you have sold shares at a gain in the current year, and you continue to hold other shares which have decreased in value, you may want to sell those loss shares to trigger capital losses which will reduce or offset the gains. This would be an example of "crystallizing losses".
PUC: Pronounced "Puck". This is an acronym for Paid Up Capital. PUC is more of a legal concept, and although it is defined in the Income Tax Act, it is not well defined.
PUC is essentially the amount that was paid into a corporation as consideration for shares of the company. PUC is calculated on an averaged basis, and is calculated separately for each class of shares issued by a corporation. In it's simplest form, if I subscribe for 100 common shares of a company and pay $100 to the company for those shares, I will hold shares whose PUC is $1 per share. PUC is only calculated based on what is paid to the company for those shares. Continuing my example, if I sell 50 of those 100 common shares for $1,000 to someone else, the shares will still have a PUC of $1 per share since there would not have been any new money paid into the corporation as a result of my sale. If a new investor later subscribes for 100 additional common shares, and pays $5,000 into the company for those shares, the PUC of my shares will be affected. The company would have had issued a total of 200 shares for total consideration of $5,100. My 50 common shares would now have PUC of $25.50 per share.
PUC is important because it represents an amount that can be returned to a shareholder without incurring any tax. A company can pass a resolution and make a payment to a shareholder which represents a return of their PUC. When this happens, the shareholder will generally not pay any tax on the return of PUC. Similarly, when a company redeems its own shares (i.e. buys them back from a shareholder), the shareholder will only be taxable on the portion of the redemption proceeds that exceed the PUC of the shares which are redeemed.
RDTOH: An all-time favourite expression. It is an acronym for Refundable Dividend Tax On Hand, which is defined in the Income Tax Act. RDTOH is an expression that relates to corporations.
A corporation generally pays a low rate of tax on active business income. Investment income, on the other hand, is subject to a considerably higher rate of tax. Depending on the province in which the corporation operates and the year end of the corporation, this tax rate may be in the 50% range. When the company is a CCPC, it pays a high rate of tax on its investment income, but a portion of it is added to the RDTOH account. The refundable portion of tax is 26 2/3% , although the actual calculation is a bit more complex than that. Consider the example of an Ontario resident corporation which generates $1,000 of interest income. The corporation will pay a combined Federal and provincial tax rate of approximately 48%, but $266.67 will be added to the corporation's RDTOH balance. If the corporation pays a taxable dividend to its shareholders, the company will be refunded $1 out of its RDTOH balance for every $3 of dividends that it pays. This may actually provide the company with a Federal tax refund.
Consider the following example. A company has accumulated an RDTOH balance of $2,313 over its' existence. During the current year, the company pays a taxable dividend of $12,000. Because the company has an RDTOH balance, it is entitled to a dividend refund. The dividend refund is calculated on a 1:3 ratio. The $12,000 dividend paid by the company could result in a dividend refund of $4,000, but the dividend refund cannot be higher than the RDTOH balance itself. In this case, the $12,000 dividend would result in a dividend refund of $2,313 to the company. The dividend refund is only generated by taxable dividends. If the $12,000 dividend was paid by the company as a non-taxable dividend out of the CDA balance, it would not recover a dividend refund from its RDTOH balance.
Rollover: Rollover is a tax expression, and is not defined in the Income Tax Act. A rollover is any transaction which takes place on a tax-deferred basis.
Here are a few examples.
When an individual dies, all of their assets are disposed of at their fair market value for tax purposes, leading to a potentially significant tax liability. If the deceased's assets pass to their spouse on death, there is no fair market value deemed disposition. Instead, the assets pass to the surviving spouse at their tax cost, and no tax consequences result at death. The tax consequences are deferred and will only occur when the surviving spouse dies. This would be an example of a spousal rollover at death.
There are certain provisions of the Income Tax Act which allow assets to be transferred at their tax cost. Let's say that you personally own shares of a public company that you bought for $100, but which were now trading at $250. Section 85 of the Income Tax Act would allow you to transfer these shares to a Canadian corporation at their tax cost, allowing the shares to be disposed of without triggering a capital gain in your hands. The corporation would inherit your $100 ACB, and it would be the corporation which would realize the capital gain if the shares are sold for $250. This is an example of what we call a Section 85 rollover. Section 85 rollovers are relatively common, and are a powerful tool for reorganizing corporations and corporate structures without immediately triggering any tax.
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Given enough time and a dose of patience, a good tax practitioner should be able to explain virtually any concept to you in plain English, and distill the issue down to a level where it can be understood. Tax is complex, but once all of the nuts and bolts provisions of the Income Tax Act are analyzed, most people should be able to understand the issues before them so that they can make an informed decision about their affairs.
When explaining tax ideas and concepts, even the best tax practitioners sometimes slip up and resort to using obscure tax terminology. If you’ve ever been in the same room with two tax practitioners, you’ll know what I mean. The conversation is littered with acronyms and buzzwords that will leave you scratching your head.
We thought that it would be a good idea to explain some of these acronyms and buzzwords so that you can slide them into the conversation next time you’re talking to a tax advisor.
ABIL: Pronounced "Able". This is an acronym for Allowable Business Investment Loss, which is a definition contained in the Income Tax Act. An ABIL is a capital loss that is incurred on very specific types of assets, namely shares or debt of a small business corporation. Whereas a normal capital loss is of limited use because it can only be deducted against capital gains, an ABIL can be used to offset any type of income. If you invest in shares of a small business corporation, and you incur a loss on that investment (either because you sold it for less than you paid for it, or the company went out of business), you can use that loss to offset employment income, business income, or any other type of income. Like all capital gains and losses, an ABIL is subject to a 1/2 inclusion rate when determining how much of a deduction can be claimed against your other sources of income. If you invest $1,000 in a small business corporation, and the corporation goes bankrupt, your ABIL is 1/2 x $1,000, or $500.
ACB: This is an acronym for Adjusted Cost Base, which is a definition contained in the Income Tax Act. In short, ACB is the "tax cost" of a non-depreciable asset for income tax purposes. A non-depreciable asset is any asset whose physical state is not subject to wear and tear. Examples of non-depreciable assets would include shares of companies, bonds, mutual fund units, interests in a partnership, and land to name just a few.
ACB is important, since it will determine how much of a capital gain or a loss that you realize on the disposition of an asset. When determining the tax consequences of a disposition, we calculate the proceeds of disposition and compare it to the ACB of the asset which was disposed of.
Determining the ACB of an asset can be very simple or very difficult. The starting point is usually the amount that you pay for an asset. If you were unfortunate enough to buy 100 Nortel shares when they were trading at $100, each Nortel share that you hold has an ACB of $100. If you acquire additional Nortel shares on the open market, the ACB is averaged over all of the Nortel shares that you hold. If you buy another 100 Nortel shares at $3 each, you now hold 200 shares for which you’ve paid a total of $10,300. Your new ACB would be $51.50 per share.
CCA: This is an acronym for Capital Cost Allowance. CCA is defined in the Income Tax Act, and is essentially the depreciation deduction that you can claim in a particular year to reduce your income for tax purposes. It is the technical term for tax depreciation.
The Regulations to the Income Tax Act contain detailed rules on how to claim CCA. The Regulations break assets into different categories, called CCA classes, and state the maximum rate that you can depreciate the asset each year. A fax machine or a photocopier, for example, are placed in Class 8 and can be depreciated at up to 20% per year subject to a number of complex rules which are beyond the scope of this forum. Computers are considered Class 10 assets and are depreciated at a rate of 30% per year subject to the same complexities . CCA is optional, and you can choose not to claim depreciation in a particular year. While most often we do claim maximum CCA (because we want to reduce our income and taxes to the maximum extent possible), there are many instances where we may decide not to claim the maximum CCA. We have the flexibility to make this decision each year.
CCPC: This is an acronym for Canadian Controlled Private Corporation. This term is defined in the Income Tax Act, and is one of the few tax terms which can be relatively well understood by the plain English meaning of the expression.
A CCPC is a corporation which is private (i.e. it does not have shares or debt that are listed on a stock exchange, and is not controlled by a public corporation). The corporation must also be controlled by Canadian resident shareholders. For this purpose, control is generally meant to mean possession of a majority of the votes to elect the Board of Directors. Other concepts do come into the concept of control, so it is clearly not as simple as it seems.
Whether or not a company is considered a CCPC is extremely important. CCPC's and shareholders who own shares of a CCPC are given a multitude of beneficial tax "breaks". CCPC's pay a low rate of tax on active business income and qualify for enriched R&D tax credits to name just two. Shareholders who own shares of a CCPC may be in a position to realize the $500,000 enhanced capital gains deduction on the sale of their shares, or may qualify for ABIL treatment if they lose money on their investment.
CDA: This is an acronym for Capital Dividend Account, which is defined in the Income Tax Act. The CDA is a concept which applies only to corporations. It is an account balance which can be used to pay tax-free dividends to a shareholder.
When an individual realizes a capital gain, only 1/2 of the capital gain is included in income, and the other 1/2 of the capital gain is never subject to tax. Similarly, when an individual realizes a capital loss, only 1/2 of the loss can be used by the individual to offset capital gains. When a corporation realizes a capital gain or loss, the same concept applies, and only 1/2 of the capital gain or loss is included in the corporation's taxable income or is eligible to be used to offset capital gains. That 1/2 portion of the capital gain which is not included in the corporation's income is added to the corporation's Capital Dividend Account. The 1/2 portion of the capital loss is deducted from the corporation's Capital Dividend Account. The corporation's Capital Dividend Account is therefore the sum of all of the non-taxable portions of capital gains that the corporation has realized, and is reduced by all of the non-included capital losses that the company has realized. The 1/2 inclusion rate applied to capital transactions has changed over the years. Depending on the year that the transaction would have occurred, the inclusion rate may have been 2/3rds (i.e. 1/3 of the capital gain or loss is included in the calculation of the CDA), or 3/4ths (i.e. 1/4 of the capital gain or loss is included in the calculation of the CDA). The Capital Dividend Account is also increased if the corporation has received life insurance proceeds, or if it has received a capital dividend from another corporation.
The Capital Dividend Account is not shown on a company's balance sheet, and it will not appear anywhere on the company's tax returns. It is a balance which must be calculated by looking to the company's past tax returns. Once the CDA is calculated, and assuming the balance is positive, a dividend can be paid to a shareholder and declared to be paid from the CDA. This dividend would be received tax-free by a Canadian resident shareholder. The payment of a capital dividend must be done in a specific manner, and requires an election form to be filed with the Canada Customs and Revenue Agency.
CNIL: Pronounced "Senile". This is an acronym for Cumulative Net Investment Loss, which is defined in the Income Tax Act. CNIL is a concept which applies only to individuals.
When an individual realizes a capital gain on shares of a qualified small business corporation, that gain may qualify for the $500,000 enhanced capital gains deduction. There are a number of tests which must be met before this can happen. Not only do the shares that are sold have to meet the very strict definition of qualified small business corporation, the individual must not have a CNIL balance.
The CNIL balance is the sum of an individual's investment expenses claimed from 1988 onward and is reduced by the sum of an individual's investment income from 1988 onward. Investment expenses include deductions claimed for interest expenses and investment counsel fees, rental losses, and limited partnership losses. Investment income includes interest income, dividend income, limited partnership income and net rental income.
The CNIL balance is important because an individual who has a CNIL balance will see their ability to use the $500,000 enhanced capital gains deduction reduced by the amount of their CNIL balance, even if they realize a capital gain which would otherwise qualify for the enhanced capital gains deduction.
Because the CNIL is a cumulative balance, it is possible that an individual may have a CNIL balance in one year, only to find it eliminated in a subsequent year if they generate investment income in that subsequent year.
Crystallization: This is a tax expression which is not defined in the Income Tax Act. A crystallization refers to a series of tax transactions which result in an individual triggering a gain or a loss on an asset.
In its most common form, crystallization refers to a series of transactions which are designed to utilize an individual's enhanced capital gains deduction. When an individual sells shares of a qualified small business corporation, the capital gain may qualify for the $750,000 capital gains deduction. The end result of this could be a significant reduction, or altogether elimination of tax on the sale of the shares. It is a very, very powerful tax incentive. However, there are many tests that need to be met in order for the gain to qualify for the enhanced capital gains deduction. An individual may hold shares of a corporation which have increased in value, and for which the gain may qualify for the enhanced capital gains deduction if they were to be sold today. However, the individual may not be in a position to sell those shares today, and there may be some real concerns that the gain will not qualify for the enhanced capital gains deduction when they are sold at a later date. In this case, it may be a good idea to "crystallize the capital gains deduction". The individual would undertake a series of steps which would trigger a gain on the shares in question, without actually giving up ownership of the shares. The gain which is triggered would be reported on the individual's personal tax return, and would be offset by the enhanced capital gains deduction. The series of transactions would increase the tax cost of the shares in question by the crystallized amount. When the shares are actually sold at a later date, the gain will not qualify for the enhanced capital gains deduction, but the amount of tax paid at that later date will be substantially reduced or eliminated because the tax cost of the shares would have already been increased as a result of the crystallization.
A crystallization may also refer to transactions which are designed to trigger capital losses on shares. If you have sold shares at a gain in the current year, and you continue to hold other shares which have decreased in value, you may want to sell those loss shares to trigger capital losses which will reduce or offset the gains. This would be an example of "crystallizing losses".
PUC: Pronounced "Puck". This is an acronym for Paid Up Capital. PUC is more of a legal concept, and although it is defined in the Income Tax Act, it is not well defined.
PUC is essentially the amount that was paid into a corporation as consideration for shares of the company. PUC is calculated on an averaged basis, and is calculated separately for each class of shares issued by a corporation. In it's simplest form, if I subscribe for 100 common shares of a company and pay $100 to the company for those shares, I will hold shares whose PUC is $1 per share. PUC is only calculated based on what is paid to the company for those shares. Continuing my example, if I sell 50 of those 100 common shares for $1,000 to someone else, the shares will still have a PUC of $1 per share since there would not have been any new money paid into the corporation as a result of my sale. If a new investor later subscribes for 100 additional common shares, and pays $5,000 into the company for those shares, the PUC of my shares will be affected. The company would have had issued a total of 200 shares for total consideration of $5,100. My 50 common shares would now have PUC of $25.50 per share.
PUC is important because it represents an amount that can be returned to a shareholder without incurring any tax. A company can pass a resolution and make a payment to a shareholder which represents a return of their PUC. When this happens, the shareholder will generally not pay any tax on the return of PUC. Similarly, when a company redeems its own shares (i.e. buys them back from a shareholder), the shareholder will only be taxable on the portion of the redemption proceeds that exceed the PUC of the shares which are redeemed.
RDTOH: An all-time favourite expression. It is an acronym for Refundable Dividend Tax On Hand, which is defined in the Income Tax Act. RDTOH is an expression that relates to corporations.
A corporation generally pays a low rate of tax on active business income. Investment income, on the other hand, is subject to a considerably higher rate of tax. Depending on the province in which the corporation operates and the year end of the corporation, this tax rate may be in the 50% range. When the company is a CCPC, it pays a high rate of tax on its investment income, but a portion of it is added to the RDTOH account. The refundable portion of tax is 26 2/3% , although the actual calculation is a bit more complex than that. Consider the example of an Ontario resident corporation which generates $1,000 of interest income. The corporation will pay a combined Federal and provincial tax rate of approximately 48%, but $266.67 will be added to the corporation's RDTOH balance. If the corporation pays a taxable dividend to its shareholders, the company will be refunded $1 out of its RDTOH balance for every $3 of dividends that it pays. This may actually provide the company with a Federal tax refund.
Consider the following example. A company has accumulated an RDTOH balance of $2,313 over its' existence. During the current year, the company pays a taxable dividend of $12,000. Because the company has an RDTOH balance, it is entitled to a dividend refund. The dividend refund is calculated on a 1:3 ratio. The $12,000 dividend paid by the company could result in a dividend refund of $4,000, but the dividend refund cannot be higher than the RDTOH balance itself. In this case, the $12,000 dividend would result in a dividend refund of $2,313 to the company. The dividend refund is only generated by taxable dividends. If the $12,000 dividend was paid by the company as a non-taxable dividend out of the CDA balance, it would not recover a dividend refund from its RDTOH balance.
Rollover: Rollover is a tax expression, and is not defined in the Income Tax Act. A rollover is any transaction which takes place on a tax-deferred basis.
Here are a few examples.
When an individual dies, all of their assets are disposed of at their fair market value for tax purposes, leading to a potentially significant tax liability. If the deceased's assets pass to their spouse on death, there is no fair market value deemed disposition. Instead, the assets pass to the surviving spouse at their tax cost, and no tax consequences result at death. The tax consequences are deferred and will only occur when the surviving spouse dies. This would be an example of a spousal rollover at death.
There are certain provisions of the Income Tax Act which allow assets to be transferred at their tax cost. Let's say that you personally own shares of a public company that you bought for $100, but which were now trading at $250. Section 85 of the Income Tax Act would allow you to transfer these shares to a Canadian corporation at their tax cost, allowing the shares to be disposed of without triggering a capital gain in your hands. The corporation would inherit your $100 ACB, and it would be the corporation which would realize the capital gain if the shares are sold for $250. This is an example of what we call a Section 85 rollover. Section 85 rollovers are relatively common, and are a powerful tool for reorganizing corporations and corporate structures without immediately triggering any tax.
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