Monday, September 30, 2013

What do you need to know before setting up your business? The types of Canadian business entities and their key features

In Canada, we typically have 4 major types of business entities:
  1. Sole Proprietorship
  2. Partnership 
  3. Business Corporation 
  4. Joint Venture 

In this Blog, we are going to provide you with some key features for each of the business entity. Before you set up your business, it is best to know what the implications are for the particular type(s) of business entity you are about to set up. These features include: 1) the formation of the business entity, 2) the structure of the entity, 3) Limited Liability, 4) Ownership of Assets, 5) Income, 6)Income Tax, and 7) Income Splitting. 

For more information regarding setting up your own business, please contact Hugues Boisvert at HazloLaw Corporation - Business Lawyers for Business Owners  


Sole Proprietorship

Formation
  • Simple - no legislation 
  • No organizational arrangements (bylaws, etc.) are required 
  • One owner who is responsible for all business decisions 
  • Modest start-up expenses
  • All profits accrue to the proprietor 
  • Size and complexity can be changed as finances dictate 
  • Involvement of family members is relatively unrestricted 
Structure 
  • No flexibility 
Separate Existence 
  • Business has no separate legal personality; business and proprietor are considered one and the same
Limited Liability
  • No limited liability 
  • Owner fully liable for all debts and obligations
Ownership of Assets 
  • Assets owned by proprietor
Income
  • Determined by proprietor, proprietor can determine extent of discretionary expenses, such as CCA and ECE
Income Tax
  • Taxed at individuals marginal tax rates
  • Disadvantage exists where business income is put back into business because of potential to be taxed at marginal rates greater than 19%
  • Losses may be deducted against other income 
Income Splitting
  • Pay reasonable salaries to family members 

Partnership

Formation 
  • Relationship between 2 or more individuals or companies carrying on business with a view to make a profit 
  • General partnership - codified by Partnership Act - agreement between partners can override provisions
  • Limited partnership  - must register under Limited Partnership Act (Ontario) 
Structure 
  • Great flexibility in internal management strcture 
Separate Existence 
  • Does not have a separate legal personality 
Limited Liability
  • Does not have a separate legal personality 
  • Unlimited liability of each partner, jointly or jointly and severally, for all debts and other obligations
  • Partners share equally in losses 
  • Partners are equally liable for all debts incurred by partnership while she is a partner
  • Partners may become limited, which reduces her liability to the extent of her contribution to the firm
  • Limited partner loses her protection if she "takes part in the control of the business" i.e. Takes part in the management of the partnership  
Ownership of Assets
  • Assets can be owned either by the partnership or by the individual partners
Income
  • Determined at the partnership level 
  • Partners share profit/losses
Income Tax
  • Partners are taxed on income whether or not it is distributed 
  • Partners cannot individually decide discretionary expenses - ie CCA determined at partnership level 
  • Disadvantage exists where business income is put back into business because of potential to be taxed at marginal rates greater than 19%
  • losses may be deducted against other income 
Income Splitting 
  • Can income split by having spouses partners and receive allocation of business income, but must be cautious as ss. 103(1) and 103(1.1) require allocations to be reasonable 
  • Kiddie Tax in section 120.4 also applies to partnership income 


Business Corporation 

Formation 
  • Incorporate via Business Corporations Act (Ontario) or Canada Business Corporation Act 
  • One or more person may incorporate
  • Incorporation and filing fees are generally higher than those paid by partnerships 
  • Legal fees may also be higher
  • Annual returns must be filed in many provinces 
  • A corporation wishing to do business in more than one province either has to incorporate federally or obtain an extra provincial license to carry on business in the host province 
Structure 
  • Can put in a place parent-subsidiary relationships to accomplish business goals
Separate Existence
  • Has its own legal personality - true even of one person corporations
  • Has perpetual succession, not affected by changes in, or deaths or retirements of, its members 
Limited Liability 
  • Shareholders are not liable for debts or other obligations of the corporation
Ownership of Assets
  • Assets can be owned either by the corporation or the shareholders (most often owned by corporation) 
Income
  • Corporation (rather than shareholders) determines discretionary expenses
  • Shareholders may share after tax profit via dividends 
Income Tax
  • CCPC earning income from active business carried on primarily in Canada may be eligible for Small Business Deduction (low rate of tax on the first $400,000 of income earned)
  • Note - the SBD represents a deferral of income tax as he/she will pay tax when the after-tax profits are distributed 
Income Splitting 
  • Pay reasonable salaries to non-shareholder family members 
  • Bonus income to shareholder/employees
  • Allocation of income via dividends not subject to reasonableness
  • Attribution issues on share ownership 
  • Kiddie Tax on dividend distributions to children 


Joint Venture 

Formation 
  • Simple - no legislation - agreement between parties 
  • Individuals, corporations, or partnership may form a short term partnership (joint venture)
Structure 
  • Great flexibility in structure 
Separate Existence
  • Does not have a separate legal personality 
  • Lasts for a specified duration
Limited Liability 
  • Liability may be limited depending on nature of parties involved in joint venture and agreement between parties 
Ownership of Assets
  • Ownership of assets by two or more co-owners by two or more co-owners ordinarily involves the holding by each owner of his own separate interest in the property which he can deal with as he chooses, subject to any agreement he may have
  • entered into with his co-owners 
Income
  • No determination of profit at JV level
  • No sharing of profit (sharing of gross revenue expenses) 
Income Tax
  • ITA ignores the existence of JV
  • CCA taken by each Venturer - not restricted as in Partnership
  • Concept of Specified Partnership income does not exist 
  • Statutory at-risk rules do not apply to JV
  • Statutorily, there is no separate tax year, but CRA allows JV to have separate taxation year from participants
  • New participants must acquire an ownership interest in JV property 
  • Annual information returns not required 
  • Elections that affect computation of income do not need to be jointly elected amongst joint ventures 
Income Splitting
  • Splitting opportunities affect by business status of JV


Friday, September 27, 2013

Have you ever considered a dual-will to save thousands of dollars on Estate Administration Taxes?

A dual-will is an effective tool in estate-planning in the province of Ontario. When the owner of the will has significant personal property or owns shares in a private company, it is highly effective to have your lawyer draft a dual-will on your behalf. 

A dual-will contains a Primary Will and a Secondary Will. Generally speaking, a Primary Will deals with assets which involves probate. Probate is a legal process by which an Ontario Court certifies a duly proven Will to be valid. This process requires the Estate Administration Taxes payable on the assets in the estate in order to grant a certificate of appointment of the estate trustees for the purpose of honouring the wishes in the will and commencing the administration of the estate. The Estate Administration Taxes are also known as the probate fees. The probate fees are generally calculated on the fair market value of all assets owned where the first $50,000 is taxed at 0.5% and the excess at 1.5%. In other words, for the first $50,000, there is a $5 tax charge on every $1,000, and $15 on every $1,000 for the remainder assets. It is considered as one of  the highest estate administration tax rates in North America. 

A Secondary Will can contain assets which may legally avoid probate and avoid  probate fees. 

If you are considering hiring an estate lawyer to draft a Will, it is a good idea to consider drafting a dual-will. For more information on dual-wills, please contact Hugues Boisvert at HazloLaw - Business Lawyers for Business Owners

Friday, September 20, 2013

What is “Venture Capital”?

       Venture Capital refers to the funds provided by investors (also known as the venture capitalists) to start-up companies and small businesses with the potential for long-term growth. Venture Capital provides the financial resources to start-ups which may not have the access to capital markets otherwise. Most venture capital comes from a group of wealthy investors, investment banks and other financial institutions that pool such investments or partnerships. Venture Capital helps solve the problems for entrepreneurs who have difficulties raising funds by issuing debt. What entrepreneurs need to keep in mind is that venture capitalists usually have a say in company decisions on top of holding a portion of the company’s equity.
      
           The loans Venture Capital makes to start-up companies are often high in rates with the possibility of an annual return rate up to 50 percent. However, unlike banks and other lenders, venture capitalists can take equity position, which means that you can give a portion of your or other owner’s interest in the company to the venture capitalists instead of paying out cash in the form of interest and principal instalments
   
Companies that venture capitalists are most interested in are those who have:

     1. Rapid, steady sales growth;
     2. A new technology or dominant position in an emerging market;
     3. A sound management team;
     4. The potential for being acquired by a larger company or getting publicly listed in the stock market.
    
 There are three different types of venture capital:
  
 1. Private venture capital partnerships are perhaps the largest source of risk capital and generally look for businesses that have the capability to generate a 30 percent return on investment each year. They like to actively participate in the planning and management of the businesses they finance and have very large capital bases--up to $500 million--to invest at all stages.
     
      2. Industrial venture capital pools usually focus on funding firms that have a high likelihood of success, like high-tech firms or companies using state-of-the-art technology in a unique manner.
     
      3. Investment banking firms traditionally provide expansion capital by selling a company's stock to public and private equity investors. Some also have formed their own venture capital divisions to provide risk capital for expansion and early-stage financing.
The way to contact venture capitalists is through an introduction from another business owner, banker, lawyer, or other professional who knows you and the venture capitalist well enough to approach them with the proposition.

What do I need to know in order to set up a company in the U.S.?

    There are a few important questions you may want to ask yourself before you set up a business in the United States. 

1.     What will the company do? 
  • There are some activities that require a license (such as medicine, dentistry or architecture) or special permission (banking, insurance, aviation) before it can be formed.
2. Who will own the company? 
  • These will be the shareholders of a corporation or members of a Limited Liability Company ( also known as "LLC").
3. Who will manage the company? 
  • These will be the directors and officers of a corporation or managers of an LLC. 
4.  What will the company’s name be? 
  • It must follow the rules of the state where the company is formed, and have a corporate indicator.
5. What type of entity will it be? 
  • Generally, it will be a corporation, an LLC, or a sole proprietorship. 
6. What state will it be incorporated in?
  •  This will be either in the state where it is doing business, or in another state like Delaware where there are special legal benefits. 
7. What state will it do business in? 
  • If this (or these) state(s) are not where the company is incorporated, it must register to do business there as a foreign corporation. 
8. Who will act as registered agent? 
  • Almost every state requires its companies to maintain a legal address and agent within its borders to accept legal process and to which the state government can send annual reports, annual tax forms or other compliance matters.

To learn more about how to set up a company/business in the U.S., please come to our special seminar called "Setting up your U.S. Business" to be held in mid-October, 2013 by Renate Harrison, a US & Canadian Business Lawyer of HazloLaw. For more information about the seminar, please call HazloLaw at 613-747-2459 x 306. 

Ms. Renate Harrison: 
A graduate of the prestigious Harvard Law School, Renate Harrison is a U.S. and Canadian business lawyer at our Ottawa office and she practices in the areas of Business Law and Corporate Finance. Renate advises Canadian companies on the formation and operation of U.S. subsidiaries and on strategic alliances, joint ventures, mergers and acquisitions, divestitures and asset sales. In that capacity, she regularly acts for start-ups, private equity and venture capital firms, issuers and underwriters in placing  debt and equity securities in Canada and in the United States. Renate is a member of the Ontario bar and she is also admitted to practice law in Massachusetts and Tennessee in the United States. To learn more about Renate Harrison, please visit http://www.hazlolaw.com/people/renate-harrison 

Monday, September 16, 2013

New Permanent Residents: Tax-related issues and obligations you should know about before and after you immigrate to Canada

In Marcil Lavallee LLP's most recent Tax Letter, they did a fantastic job summarizing the tax-related considerations and obligations for new immigrants (Permanent Residents) living in Canada and before moving to Canada. 

Tax on worldwide income
The most important thing to know is that, once a person becomes resident in Canada, they are taxable on their worldwide income from all sources, including foreign income. This will include, for example:
• Pensions from the home country;
• Interest being earned in bank accounts in the home country;
• Gains from selling property in the home country.

You should also know that Canada now has tax treaties or “tax information exchange agreements” with over 100 countries. More such agreements are being signed all the time, specifically for the purposes of exchanging information; and new mechanisms for computerized exchange of information are going to be introduced in at least some situations.


Expect the Canada Revenue Agency to find out about pension income, bank interest, sales of real property and other sources of income in the home country. Taxpayers who do not report their income can be subject to severe penalties and even prison.

Reporting foreign assets and trusts
All Canadian residents must state, on their annual income tax return, whether they have foreign investments (cost exceeding $100,000), or, in some cases, whether they are beneficiaries of foreign trusts or own shares (directly or indirectly) in foreign corporations. Starting next year, the information required for foreign assets and investments will be very detailed.

New immigrants need to take particular note of this requirement, and disclose assets or investments they have left behind in the home country.

Steps before immigrating to Canada
There are a number of tax planning steps that the prospective immigrant should consider before
moving to Canada.

• Arrange to receive all payments for pre- immigration employment outside Canada before immigrating. If employment income is received after immigration, Canada will tax it.

• For immigrants with substantial assets, consider setting up an “immigration trust”.
 If structured properly, this can allow the immigrant to keep funds offshore and not pay any Canadian tax on the income for five years.

• Note that capital property (e.g., real estate)  is generally deemed disposed of and  reacquired at fair market value on  immigration. This will boost the cost base of the property up to its current value, for purposes of future capital gain or loss calculations. The immigrant may want to obtain a formal evaluation of such properties to document the value for later.

• Any Canadian professionals who are advising the immigrant (e.g., lawyers or accountants) should render an account for  time spent to date before the immigrant  moves to Canada. The account will not  bear GST or HST.

Tax issues after becoming resident
If you are a new immigrant, you should consider the following:
• As noted above, you will pay tax on your worldwide income from all sources. Make sure to identify and report these to the CRA, even if you have left the income offshore. Note that some forms of income (e.g., pension income) may be given special relief by the tax treaty between Canada and your home country.

• Obtain a Social Insurance Number upon arriving in Canada. This number will be used as your Canada Revenue Agency account number.

• If you are carrying on business, consider whether you need to register for GST/HST, and to collect and remit GST or HST on your revenues.

• Have you become resident in Canada for tax purposes? Aside from the ordinary meaning of “resident”, if Canada has a tax treaty with the home country, check how the “tie-breaker” rule applies if you might still be resident in both countries.

 For example, if you still have a home in both countries and travel back and forth, the answer may not be obvious.

• If you control a foreign corporation, you generally have to report its passive income as “foreign accrual property income” (FAPI), and pay Canadian tax on it each year. The FAPI rules are very complex and you will need professional advice.

• If you receive income that is subject to foreign tax (e.g., foreign withholding tax  on interest or pension income), you can normally claim a “foreign tax credit” for  this tax on your Canadian return, up to a  limit of your Canadian tax on the same  income. The rules can become complex, but in general you end up paying the higher of the two countries’ tax rates in total.

• If you are a US citizen, you must continue to file US tax returns even though you are no longer resident there. To reduce the impact of double taxation, you will want to claim the US “foreign earned income exclusion” against your employment or self-employment income in Canada, as well as US foreign tax credits and any relief provided by the Canada-US tax treaty.

 Professional advice from a specialist in both Canadian and US tax law is usually recommended. Note also that the US and Canadian tax systems differ in many ways, and your calculation of income for the two systems may be very different.

• Consider setting up a TFSA (Tax-Free Savings Account) and contributing funds to it so that you can earn a certain amount of investment income tax-free. (If you are a US citizen, this is normally not advisable.)

• After your first year of earning employment or business income, set up a registered  retirement savings plan (RRSP) and  contribute the maximum possible to it  (unless you are planning to emigrate from  Canada within a few years, in which case  there could be negative consequences).

• If you have children under 6, apply to the CRA for the Universal Child Care Benefit. If you have children under 18 and your family is relatively low-income, apply for the Canada Child Tax Benefit. If your family is low-income, apply for the GST/HST Credit. (See cra.gc.ca for more information.)

• Payments under pre-existing spousal support obligations may be deductible for Canadian tax purposes. If the payments qualify, keep good records and make the claim on your Canadian tax return. 

• A person who dies while owning property in the US, or a US citizen who dies, is subject to US estate taxes. A credit to reduce or eliminate this tax is provided by the Canada-US tax treaty.