Services And Sales Agreement: What Is It? What Should You Find In It?

Corporations, services providers, and individuals often tend to appeal to business lawyers when it comes to write a services and sales agreement between two or more Parties. It is indeed the role of business lawyers to ensure that every Parties’ rights and obligations are construed in such contract.

An Agreement is a legal document, a contract, that defines roles and expectations that each Party must await from each other. It ensures the reliability of the proceedings, removes any ambiguity regarding legal issues, and guarantees that the Services and/or the Sales will occur under the right financial terms. All Parties are (and should be) involved when it comes to define an agreement that will protect their interests and facilitate the collaboration between them.

The services and sales agreement can contain multiple clauses for which we recommend you to see your lawyer. In order to give you an idea of what the document should contain, here is an indicative and non-exhaustive list of clauses:

1) The names and roles of the Parties involved in the agreement (clarifying the role of the Services Providers and the Customer);

2) The subject(s) of the agreement (Service(s) provided and/or the subject of the Sale);

3)  The date (effective date and termination date of the contract i.e. at the completion of the Services or at the completion of the Sale);

 4) The hourly rate, the amount of the transaction and the currency;

The responsibilities of each Party (role, obligations, and benefits the Parties should abide by and qualify for);

5) At least one member of each Party who will be in charge of revising the agreement in case of requests, demands, notices, communications issued at the conclusion of the contract;

6) The conditions of modification, delegation of tasks or waiver (in case of default, breach, omission, delay or any scenario that can make the agreement null and void);

7) The Governing Law whereby the contract, Services, Sales and proceedings must be performed (applicable jurisdiction agreed by all Parties);

 8) The signatures of all Parties and date of completion of the agreement.

For more information on the above, please call/email info@hazlolaw.com or at 1.613.747.2459.  

Lettres de crédit : pas facile de prouver la fraude !

La force d’une lettre de crédit comme mécanisme de paiement réside dans le fait que son bénéficiaire, le vendeur de biens, doit être payé du moment qu’il fournit à la banque émettrice les documents spécifiés par la lettre de crédit. La banque a une obligation absolue de payer, sans regard aux possibles disputes contractuelles entre l’acheteur et le vendeur. Les litiges dus au fait que les biens ne rencontrent pas les attentes ou les accords spécifiés ou toute autre demande, ne peuvent être utilisés par l’acheteur pour éviter de payer le vendeur. Ainsi, la lettre de crédit est un contrat séparé, autonome du contrat sur lequel elle est basée, par exemple, le contrat de vente. Une des rares exceptions à ce principe d’autonomie est la fraude commise par le bénéficiaire de la lettre de crédit.

Le droit anglais est souvent utilisé entre les parties d’une vente internationale de biens, particulièrement lorsqu’une des deux parties est domiciliée dans un pays membre du Commonwealth. La jurisprudence de la Cour anglaise est de ce fait d’une certaine importance pour ceux impliqués dans le commerce international. Le cas discuté dans ce blogue confirme que l’exception de fraude doit être interprétée de façon restrictive d’après le droit anglais.

Dans l’affaire Alternative Power Solutions c. Central Electricity Board et al., [2014] UKPC 31, le comité judiciaire du Conseil privé (le CJCP) a clarifié les principes juridiques qui doivent être appliqués lorsqu’une exception de fraude est invoquée afin d’empêcher le vendeur d’encaisser la lettre de crédit. Le jugement du CJCP confirme que l’exception de fraude ne pourra être utilisée qu’en des circonstances exceptionnelles.

En 2010, l’entreprise Alternative Power Solutions (« APS ») gagne un appel d’offres lancé par la Central Electricity Board (« CEB ») à l’île Maurice pour la fourniture de 660 000 ampoules de lumière fluorescente. Le contrat qui s’en suit prévoit que CEB a le droit d’inspecter la marchandise avant qu’elle ne soit envoyée. Les litiges entre les parties sont soumis à l’arbitrage. Une lettre de crédit irrévocable est émise par la Banque Standard qui en avise CEB. Seulement, il n’existe aucune obligation de présenter un certificat d’inspection ou de document similaire à la banque pour que la lettre de crédit soit payée. 

Des différences d’opinions s’élèvent entre les parties à l’égard de l’identité du manufacturier des ampoules de lumière, des modalités de l’inspection et du port d’envoi. CEB dépose une demande d’injonction pour empêcher la Banque Standard de payer la lettre de crédit. Pendant l’audience, le représentant d’APS indique qu’il n’y a aucune objection de procéder à une inspection en accord avec les termes du contrat et qu’aucune expédition n’aura lieu à moins qu’une inspection ne soit menée à la satisfaction de l’acheteur. La Banque Standard, quant à elle, indique qu’elle ne procédera à aucun paiement jusqu’à ce que la marchandise soit expédiée. Du coup, l’acheteur rétracte sa demande d’injonction mais les ampoules sont tout de même envoyées sans que l’inspection n’ait lieu. Il est loin d’être clair cependant que le représentant du vendeur qui avait promis le contraire devant la Cour était au courant de cela au moment de son affirmation.

Se fondant sur la conduite d’APS, CEB cherche à convaincre le tribunal qu’on devait en déduire qu’APS n’avait nullement l’intention d’expédier les ampoules qu’elle avait convenu de fournir et qu’elle avait donc agi frauduleusement afin de s’approprier le prix d’achat. Pour une seconde fois, CEB intente, et cette fois-ci obtient, une injonction provisoire interdisant la Banque Standard de payer la lettre de crédit. Quelques mois plus tard, la Cour fait de l’injonction provisoire une injonction interlocutoire, confirmant qu’APS n’a pas le droit de réclamer le paiement de la lettre de crédit. La Cour d’Appel de l’île Maurice confirme la décision du tribunal de première instance.

Le CJCP renverse le jugement de la Cour d’Appel et annule l’injonction. Le CJCP se dit en accord avec les juges des tribunaux inférieurs qu’une injonction doit seulement être accordée pour empêcher la banque de payer la lettre de crédit lorsque l’exception de fraude s’applique et que la banque est au courant de la fraude. Cependant, le test pour déterminer si l’exception s’applique n’était pas le bon. Le test appliqué par le juge de première instance était celui de savoir si CEB avait soulevé, à première vue, « une cause défendable qu’il pourrait y avoir une tentative de fraude » de la part d’APS, la question étant d’établir s’il y avait réellement eu fraude devant être définitivement décidée par la Cour ou, dans ce cas, par l’arbitre, par une procédure subséquente.

Après avoir examiné un certain nombre de précédents, le CJCP détermine que les tests pour décider de la disponibilité de l’exception de fraude au stade de l’injonction interlocutoire et au procès ne sont pas les mêmes. Au stade interlocutoire des procédures, autrement dit avant que l’injonction ne devienne finale, le test correct, selon le CJCP, est de savoir s’il est « sérieusement défendable que sur la foi de la preuve disponible, la seule inférence réaliste possible est que le bénéficiaire de la lettre de crédit ne puisse pas avoir honnêtement cru en la validité de sa demande [pour le paiement] ». Une injonction interlocutoire ne peut seulement être accordée que si ce test est réussi. Le CJCP se dit d’avis que l’expression « sérieusement défendable » est censée imposer un test significativement plus strict que celui de la « bonne cause défendable », sans parler de celui de la « sérieuse question à débattre ».

Dans le cas présent, il n’avait pas été soumis, devant les tribunaux de première instance, que les documents présentés à la Banque Standard étaient des contrefaçons ou qu’ils contenaient, à la connaissance d’APS, des informations clairement frauduleuses. Étant donné que les conclusions concernant les allégations de fraude faites par CEB ne sauraient être établies qu’une fois soit faite une analyse minutieuse de la véritable position contractuelle entre le vendeur et l’acheteur, de telles conclusions ne pouvaient légitimer l’émission d’une injonction interlocutoire contre la Banque Standard. Aussi, le fait que cette dernière était au courant du litige contractuel entre le vendeur et l’acheteur, et même impliquée dans la procédure judiciaire, n’avait aucune incidence sur son obligation d’honorer les termes de la lettre de crédit.

Bien que cette affaire soit un bel exercice de sémantique par la magistrature anglaise, elle offre une leçon à tirer. À savoir, si comme acheteur de biens à être payés par le biais d’une lettre de crédit vous avez des exigences spécifiques que vous considérez comme des conditions préalables au paiement et que celles-ci peuvent être objectivement documentées, il faut alors les inclure parmi les documents qui devront être présentés à la banque pour déclencher le paiement. Ne comptez pas sur la Cour pour vous prendre au mot que le vendeur n’adhère pas aux termes de l’accord. 

Pour plus d'informations sur ce qui précède, veuillez contacter par courriel ou téléphone Martin Aquilina, maquilina@hazlolaw.com ou au 1.613.747.2459 ext 308. 

Letters of credit: Another one does NOT bite the dust

The strength of the letter of credit as a payment mechanism lies in the fact that its beneficiary, the seller of goods, is entitled to be paid as long as it provides to the bank the documents specified by the letter of credit. The bank has an absolute obligation to pay, irrespective of any contractual disputes between the buyer and the seller. Issues as to whether the goods actually meet the agreed upon specifications or any other claim of non-performance cannot be used by the purchaser to avoid paying the seller. It is thus said that the letter of credit is a separate contract, autonomous from the contract on which it is based, e.g. the contract of sale. One of the very few exceptions to this principle of autonomy is a fraud committed by the beneficiary of the letter of credit.

English law is often used between the parties to an international sale of goods, particularly where one or both parties are domiciled in a member country of the Commonwealth. The jurisprudence of English courts is therefore of some importance to those involved in international commerce. The recent case discussed in this blog entry confirms that the fraud exception is to be interpreted narrowly under English law.

In the case of Alternative Power Solutions vs. Central Electricity Board et al., [2014] UKPC 31, the Judicial Committee of the Privy Council (the “JCPC”) clarified the legal principles that are to be applied where the fraud exception is invoked in order to prevent the seller from drawing on the letter of credit. The JCPC’s judgement confirms that the fraud exception will only be available in very exceptional circumstances.

In 2010, Alternative Power Solutions (“APS”) won a tender process launched by the Central Electricity Board of Mauritius (“CEB”) for the supply of 660,000 compact fluorescent light bulbs. The ensuing contract provided that CEB had the right to inspect the merchandise prior to shipment. Disputes between the parties were to be arbitrated. An irrevocable letter of credit was issued by the Standard Bank and notified to CEB. Importantly, there was no requirement for any certificate of inspection or similar document to be presented to the bank in order for the letter of credit to be paid.

Differences of opinion arose between the parties in respect of the identity of the manufacturer of the light bulbs, the modalities of the inspection and the port of shipment. CEB applied for an injunction to restrain Standard Bank from paying under the letter of credit. At the hearing, APS’ representative indicated that it had no objection to an inspection being carried out in accordance with the terms of the contract and that no shipment would take place unless the inspection was carried out to the satisfaction of the buyer. Standard Bank indicated that it would not make payment until shipment was effected. The purchaser therefore withdrew its application; however the bulbs were shipped without the inspection having taken place. It was far from clear that the representative of the seller who made the representation before the court was aware of this at the time he made the representation.

CEB sought to draw an inference from APS’ conduct that it had no intention to provide the light bulbs it had agreed to provide and was acting fraudulently in order to defraud it of the purchase price. For a second time, CEB filed for, and this time obtained an interim (provisional) injunction prohibiting Standard Bank from making any payment under the letter of credit. A few months later, the court made the interim injunction interlocutory, confirming that APS had no right to draw on the letter of credit. The Court of Appeal of Mauritius confirmed the lower court’s decision.

The JCPC reversed the Court of Appeal’s judgement, quashing the injunction. The JCPC agreed with the lower courts’ judges that an injunction should only be granted to restrain a bank from paying under a letter of credit where the fraud exception applies and the bank is aware of the fraud. However, the test to determine whether the exception applies was incorrect. The test applied by the judge at first instance was whether CEB had raised “a serious prima facie arguable case that there might be an attempt to defraud” by APS. He held that the issue of fraud must ultimately be decided by the court or, in this case, the arbitrator.

The JCPC, after canvassing a number of previous court cases, determined that the tests to decide on the availability of the fraud exception at trial and at the injunction stage are not quite the same. At the interlocutory stage of the proceedings, i.e. before the injunction becomes final, the correct test, according to the JCPC, is whether it is “seriously arguable that on the material available [to the court], the only realistic inference is that the beneficiary of the letter of credit could not have honestly believed in the validity of its demands [for payment]”. An interlocutory injunction can only be granted if this test is met. The JCPC then clarified that “the expression “seriously arguable” is intended to be a significantly more stringent case then “good arguable case”, let alone “serious issue to be tried.”

Here, it was not suggested before the lower courts that any of the documents presented to Standard Bank were forgeries or that any of them contained, to the knowledge of APS, any material express misrepresentation. Given that conclusions regarding CEB’S allegation of fraud depended upon a thorough analysis of the true contractual position between the seller and buyer, such conclusions could not form a proper basis for the grant of an injunction against Standard Bank. Also, that the latter was aware of a contractual dispute between the seller and buyer and indeed, even made party to the court proceedings, had no bearing on its obligation to honour the terms of the letter of credit.

While this case is a fine specimen of semiological hair splitting by the English judiciary, it offers a lesson to be learned. Namely, if as a purchaser of goods paid through a letter of credit you have specific requirements that you consider to be a pre-condition to payment and these can be objectively documented on paper, then include them in the documents that must be presented to the bank to trigger payment. Do not count on the courts to take your word that the seller is not adhering to the terms of the deal.

For more information on the above, please call/email Martin Aquilina at maquilina@hazlolaw.com or at 1.613.747.2459 x 308

Canadian case of Kaynes vs. BP - Does Ontario has jurisdiction in a securities class action related to trades of a foreign security

Earlier this year (see blog post of March 15, 2014), we commented on the Canadian case of Kaynes vs. BP PLC, 2013 ONSC 5802, in which a judge of the Superior Court of Ontario ruled that the Province of Ontario had jurisdiction in a securities class action related to trades of a foreign security of a foreign issuer on a foreign exchange.  The decision was appealed to Ontario’s highest appellate court, which confirmed that Ontario had jurisdiction sempliciter. [1]  The Court of Appeal however recently overturned the judgement a quo on the basis of forum non conveniens.

The facts

Briefly, Kaynes, a resident of the Province of Ontario, is requesting the court’s permission to bring a class action for secondary market misrepresentation under s. 138.3(1) of the Ontario’s Securities Act (the “Act”) on the basis that BP made various misrepresentations in its investor documents before and after the notorious Deepwater Horizon oil spill in the Gulf of Mexico in April 2010.  Kaynes seeks to represent all Canadian purchasers of shares of BP in a class action, regardless of where they purchased their shares. In parallel, a proposed class action is also pending certification in the United States, based on the same allegations.

Kaynes purchased American Depository Shares (ADS) in the U.S., which traded on the Toronto Stock Exchange (the “TSX”) until August 2008, at which time BP voluntarily de-listed them.  In conjunction with its delisting, BP undertook with the Ontario Securities Commission (the “OSC”) to continue sending to its Canadian securityholders all disclosure material that it was required to send to its U.S. investors (its ADSs were still listed on the NYSE).

Although BP has several indirect Canadian subsidiaries that conduct exploration and development of energy properties in Canada, BP itself is a company incorporated in the U.K. headquartered in London. It has no property, no offices and no employees in Canada.

BP concedes that Ontario has jurisdiction to entertain the claims of those members of the proposed class who purchased their shares on the TSX, but contends that there is no “real and substantial connection” - the applicable test under Ontario’s rules of private international law as well as under the Act - between Ontario and the claims of Canadian residents who, like the plaintiff, purchased their shares on foreign exchanges

BP’s appeal

On appeal, BP argued that the motion judge erred when she determined that she had jurisdiction based on a statutory tort having been committed in Ontario.  Section 138.3(1) of the Act provides for a cause of action where an issuer “releases a document that contains a misrepresentation”.  BP argued that since it never has had a presence in Ontario, the document allegedly containing a misrepresentation could only have been issued outside of Ontario, thus locating the commission of the tort outside the jurisdiction.

The Court of Appeal upheld the motion judge’s finding of jurisdiction sempliciter, ruling that when BP released the documents containing the alleged misrepresentations, it knew by virtue of the undertaking it had given to the OSC that even if the initial point of release was outside Ontario, the document was certain to find its way to Ontario and to its Ontario shareholders. The Court rejected the “place of acting” test, which it described as being “rigid and unduly mechanical”, for determining the place of commission of a tort for purposes of determining jurisdiction.  In so doing, it referred to Moran v. Pyle National (Canada) Ltd.[2], a product liability tort case that involved a defective light bulb manufactured in Ontario causing injury in Saskatchewan, a jurisdiction where the defendant did not sell or manufacture its products or otherwise carry on business. In holding that the tort was committed in Saskatchewan, Dickson J. wrote:

“[W]here a foreign defendant carelessly manufactures a product in a foreign jurisdiction which enters into the normal channels of trade and he knows or ought to know both that as a result of his carelessness a consumer may well be injured and it is reasonably foreseeable that the product would be used or consumed where the plaintiff used or consumed it, then the forum in which the plaintiff suffered damage is entitled to exercise judicial jurisdiction over that foreign defendant….By tendering his products in the market place directly or through normal distributive channels, a manufacturer ought to assume the burden of defending those products wherever they cause harm as long as the forum into which the manufacturer is taken is one that he reasonably ought to have had in his contemplation when he so tendered his goods.”

Given BP’s undertaking to the OSC, it could not possibly argue that the place of effect of its misrepresentation, i.e. Ontario, was beyond its contemplation.

The Court of Appeal also made a provision-specific determination, indicating that for purposes of s. 138(1), a document’s point of release is to be understood as the place where the document was either released or presented.

BP’s forum non conveniens argument

It is well-established under Ontario law that if a plaintiff succeeds in demonstrating that an Ontario court has jurisdiction, the court retains the discretion to decline to exercise it under the doctrine of forum non conveniens. Quoting the Supreme Court of Canada’s decision in Van Breda[3], to succeed in a plea of forum non-conveniens, “[t]he defendant must identify another forum that has an appropriate connection under the conflicts rules and that should be allowed to dispose of the action” and “must demonstrate why the proposed alternative forum should be preferred and considered to be more appropriate.”

According to the Court of Appeal, the motion judge erred in law by failing to take into account the principle of comity[4] in assessing the effect of Ontario’s jurisdiction over claims arising from foreign traded securities. In particular, in the US: a) there is a  well-established regime governing class actions for secondary market misrepresentation, b) there is a pending class action […] based upon very similar allegations, covering substantially the same period, and embracing the claims of all BP shareholders, including the plaintiff, who purchased their shares on a US exchange; c) the law relating to jurisdiction over such claims is based on the principle that securities litigation should take place in the forum where the securities transaction took place (this is also the case with the U.K.); d) by statute, actions for secondary market misrepresentation under US securities law may only be brought by those who purchased their shares on a US exchange;  e) the Securities and Exchange Act of 1934 stipulates that “the US district courts have “exclusive jurisdiction of violations of this title or the rules and regulations thereunder” including claims for secondary market misrepresentation”; f) US law precludes US courts from entertaining private actions involving securities transactions outside the US; and g) perhaps most importantly, the plaintiff’s claim rests to a significant degree on foreign law, as the impugned document in fact consisted in the material required to be sent or provided to US resident security holders “under applicable US federal securities laws or exchange requirements”.

To further convince the Court that Ontario was not the most appropriate forum, BP submitted that 83,945 ADSs were traded on the TSX, compared with 9 billion on the NYSE and 8.7 billion on the LSE.  The Court agreed “that permitting the plaintiff to use BP’s negligible relative trading on the TSX […] as a toehold for bringing foreign exchange purchasers under the jurisdiction of an Ontario court would be both opportunistic and a classic example of the “tail wagging the dog””.[5]

In our previous blog, we pondered as to “what logic would allow a court to cast aside the substantive application of the very law that gave it jurisdiction in the first place”. We now have an answer:  forum non conveniens.  As a result of the Ontario Court of Appeal’s decision, class action plaintiffs will now likely think twice before using Ontario courts as a forum for secondary market misrepresentation claims against foreign issuers for trades of securities acquired on foreign exchanges.

For more information on the above,  please call/email Martin Aquilina at maquilina@hazlolaw.com  or at 1.613.747.2459 x 308

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[1] Kaynes v. BP, PLC, 2014 ONCA 580.

[2] Moran v. Pyle National (Canada) Ltd., [1975] 1 S.C.R. 393.

[3] Club Resorts Ltd. v. Van Breda, 2012 SCC 17.
[4] Comity can be defined as: “the recognition which one nation allows within its territory to the legislative, executive or judicial acts of another nation, having due regard both to international duty and convenience, and to the rights of its own citizens or of other persons who are under the protection of its laws.” (the Court of Appeal, quoting Morguard Investments Ltd. v. De Savoye, [1990] 3 S.C.R. 1077 at p. 1096 S.C.R., in which La Forest J. adopted the definition of comity set out in the 1895 American case of Hilton v. Guyot, 159 U.S. 113).

[5] For our foreign readers who may not be familiar with this idiomatic impression, it refers to a minor or secondary part of something controlling the whole.

What is the role of a Business Lawyer??

A "business lawyer" or a "corporate lawyer" generally refers to a lawyer who primarily works for corporations and represents business entities of all types. These include sole proprietorships, corporations, associations, joint venture and partnerships. Typically business lawyers also represent individuals who act in a business capacity (owners-managers, entrepreneurs, directors, officers, controlling shareholders, etc.). Further, business lawyers also represent other individuals in their dealings with business entities (e.g. contractors, subcontractors, consultants, minority shareholders, employees). Generally, when I use the term "business lawyer" I think of all of the above.

What types of clients do we represent?

On a daily basis, we represent start ups, family businesses, owners/managers and mid size companies at the regional, provincial, national and international level in a wide range of industries and we advise clients on their legal issue and their day-to-day business issues, including but not limited to: contracts, corporate structure, mergers & acquisitions, corporate reorganizations (family trust, holding company etc.), estate planning and any other corporate matters. Further, our primary focus is on the creation of various tax-effective structures for the preservation, accumulation and transfer of wealth for entrepreneurs.

Do I need a business lawyer?

If you are a business owner and you are concerned with the legal protection of your business and your personal assets, the answer is YES.

A business lawyer can advise you of the applicable laws and help you comply with them.

A business lawyer can help steer you away from future disputes and lawsuits.

A business lawyer can help protect your tangible and intangible assets.

A business lawyer can help you negotiate more favourable business transactions.

Having a business lawyer can also project positively on your business. Further, an established relationship with a business lawyer can be invaluable when you need to turn to someone who knows your business for quick legal guidance.

Over the years, we have realized that many small businesses have genuine concerns about lawyers running up large tabs for unwanted, unnecessary or questionable work. Hence, we are extremely sensitive to that concern and actively work with you to control legal costs. We believe it is in both our interests to discuss the scope of work and the costs involved before we provide any legal services.

You should seek a business lawyer if you or your company are . . .

- Starting a new business; (partnership, sole proprietorship or corporation)

- Issuing shares, stocks, options, warrants or convertible notes;

- Hiring your first employees (i.e. employment agreement);

- Negotiating a new lease;

- Acquiring another business;

- Reorganizing your affairs to save taxes (i.e. family trust, holding company, etc.)

- Transferring your business to you children and/or employee (Section 86 – Estate Freeze)

- Selling your company;

- Succession planning; (estate planning, estate freeze, primary and secondary will, etc.)

- Planning to create and develop new ideas, products and services;

- Seeking to resolve internal disputes. (i.e. shareholders agreement);

- Any other business/legal issues

For more information on the above, call/email our Founder & CEO + Business Lawyer, Hugues Boisvert at hboisvert@hazlolaw.com or +1.613.747.2459 x 304

Why you MUST have an Holding Company (a.k.a. HoldCo)

Today, I would like to share an excellent article written by Tim Cesnick, clearly explaining the advantages of Holding Companies.  At HazloLaw, we advise clients on a daily basis about the necessity of putting in place this type of structure and we also suggest to add a Family Trust to your current structure.  Read our related blog on Family Trust.

HOLDING COMPANY 
This summer when you're standing around the barbecue with your business-owner neighbours, impress them with your knowledge of tax planning.

I can tell you from experience that you'll bore them to tears with the conversation, but they'll thank you later when the tax savings start rolling in. Specifically, share with them that holding companies can help them to defer tax. Here are the highlights.

THE RULES

If you happen to own a corporation that carries on an active business, give some thought to setting up your affairs to allow for a deferral of tax.

How? By establishing a holding company to own the shares of your active business corporation (ABC).

You see, if you own the shares of your ABC directly, then any payment of dividends from that corporation to you will be taxable in your hands personally in the year you receive those dividends.

If, on the other hand, you have a personal holding company that owns your shares in your ABC, you can pay a dividend to your holding company that will, in most cases, be tax free to your holding company.

It's subsection 112(1) of our tax law that allows, in most cases, your holding company to claim a deduction for taxable dividends received from your ABC. And, as long as your holding company and ABC are "connected" under our tax law (which will be the case in the vast majority of situations), you'll avoid another tax called the Part Four tax.

By passing some of those earnings from your ABC to your holding company, you'll defer tax, which is essentially the difference between the tax paid by your ABC on its profits, and the amount of tax you would have paid had the profits been paid out immediately to you as a bonus.

The tax deferred is approximately 30 per cent of the taxable income in most provinces for someone in the highest tax bracket.

THE STRATEGIES

What strategies should you be thinking about?

Multiple shareholders: If you're one of multiple shareholders in your ABC, setting up a personal holding company for each shareholder can provide flexibility to each of you.

Think of each holding company as a tap to control the payment of dividends to each of you personally.

Your ABC can pay dividends to each of the holding companies on a tax-free basis, and then each holding company can pay dividends to its shareholders based on his or her personal cash requirements.

Splitting income: Your holding company can be owned by more than one person in the family.

Your spouse, for example, could own some shares. This will allow you to sprinkle dividends to your spouse or others in the family so that the tax burden on those dividends can be shared.

It's not always advisable to issue shares in the holding company directly to your children (and if they're minors, this isn't possible), and so a family trust can be utilized, which brings me to the next strategy.

Establish a trust: I really like this structure. The shares of your ABC can be held by a family trust.

The beneficiaries of the trust will include you, your spouse, your children (regardless of their age), and your holding company.

Now, any dividends paid by your ABC to the trust can be distributed out to your holding company as a beneficiary of the trust, and you'll achieve the same tax-free payment to the holding company as you would achieve if the holding company owned the shares in the ABC directly, provided the two companies are "connected."

The advantages, however, include: The ability to sprinkle dividends to family members or the holding company as beneficiaries of the trust, at your discretion; the ability to multiply the lifetime capital gains exemption on a sale of the shares of your ABC (assuming the shares qualify for the exemption); creditor protection over the property of the trust, including the shares of the ABC, among other benefits.

Protection from creditors: Any excess profits of your ABC can be paid to your holding company as dividends, and can be lent back to your operating business on a secured basis, if the cash is needed for the business. This will protect those excess profits from other creditors of the business.

Retirement nest egg: The accumulation of assets inside your holding company can become the type of retirement nest egg or "pension" that you will need to look after yourself during retirement

For more information on the above, call/email our Founder & CEO + Business Lawyer, Hugues Boisvert at hboisvert@hazlolaw.com or +1.613.747.2459 x 304

Understanding the multiple sources of Financing for your Business

Acquiring a business often requires multiple sources of financing. This can be a complex undertaking, especially in cases when more than $500,000 is needed. In most cases, there are four types of lenders and investors willing to finance an acquisition.

Lenders interested in fixed assets

Acquiring a business often involves the purchase of buildings or equipment. Your tax advisor might suggest you take out a separate bank loan for this part of the project, either from your bank or jointly with other financial institutions.

The Canada Small Business Financing Program makes it easier for small businesses to obtain financing from banks up to a maximum value of $500,000, of which $350,000 can be used to finance the purchase or improvement of equipment and the purchase of leasehold improvements.

Lenders interested in the whole package

BDC often supports expansion projects with term financing. Unlike conventional bank loans, this formula allows flexible repayment terms. Another advantage is that a BDC loan will not be called without a valid reason.

Companies that have a competitive advantage in a fast-growing industry should consider subordinate financing. Under this formula, financial institutions lend higher amounts than they would under other circumstances and accept subordinate security in return. But such arrangements will always require a higher return for the lender, who may also ask for royalties on future sales or stock options.

Equity investors

Depending on your situation and the amount you need to raise, you can seek out venture capital from investment banks, institutional investors and mutual or labour-sponsored funds. Your new financier will become a major financial partner, taking an ownership stake in your company and the right to name some members of your board in exchange for a significant injection of capital. Industry Canada's web site has more information on this subject.

Venture capital firms invest across all sectors of the economy but target only businesses with excellent growth potential. Sometimes technology-oriented venture capital companies also consider outright acquisitions. For example, they will look favorably on buying a leading-edge business with products almost ready to put to market that would complement a more mature company's product line.

Strategic investors

These investors focus on certain types of businesses and are often faster than others to grasp developments within a particular industry. These are often groups of professionals from the same industry who keep close tabs on their market and are therefore quicker to recognize risks and opportunities. Major corporations also sometimes acquire equity in companies whose growth they believe it is in their interest to support. The goal can be to exploit a promising niche in their industry, for example, or to improve their firms' technological know-how. Regardless of the type of financing you have in mind, management consulting companies and accounting firms specializing in acquisitions can provide invaluable outside advice. Their contacts with investors and financial institutions often help them quickly identify people who are interested playing a role in an acquisition. Getting specialists involved at the outset also greatly simplifies tax reporting.

For more information on the above, call/email our Founder & CEO + Business Lawyer, Hugues Boisvert at hboisvert@hazlolaw.com or +1.613.747.2459 x 304

When buying a business, is the new owner liable for any outstanding liabilities??

QUESTION:

When buying a business, is the new owner liable for any outstanding liabilities such as debt and lawsuits from the previous owner?

ANSWER:

Acquisitions are very common today: one business - usually a corporation - takes over or buys out another business and takes its place in the market. An acquisition is when one business, usually called the "successor," buys either another company's stock or assets.

Asset Purchase

Generally, in an asset purchase, the buyer-company is not liable for the seller-company's debts and liabilities. However, there are exceptions, such as: when the buyer agrees to assume the debts or liabilities; that is, as the buyer, you could assume some or all of the seller's debts in exchange for a lower sales price.

The asset acquisition does not require the approval of the buyer's stockholders, but the seller's stockholders do have to approve the sale of all or most of the assets. Stockholders who oppose the sale usually have the right to the "appraisal value" of their stock, which is determined by an independent third party.

Stock Purchase

If you acquire a business through a stock purchase, that is, buying all or substantially all of the company's stock from its shareholders, your company "steps into the shoes" of the other company, and business continues as usual. The buyer takes on all of the seller's debts and obligations, whether they're known or unknown at the time of the sale.

A known liability might be a bank loan that is recorded in the company's books and records. An unknown liability might be money owed to employees or contractors that has not been properly recorded and has been overlooked by both the seller and the buyer. But, the most dangerous unknown liability often arises from the seller's pre-sale activities.

For example, if the seller had been making and selling paint for 15 years before the buyer acquired it through a stock purchase, the buyer can be liable for the injuries sustained by a painter who claims that the seller's paint contained toxic chemicals, even if the painter's injuries did not show up several years after the stock purchase.

A stock purchase requires stockholder approval, and stockholders have the right to oppose the sale and to have the value of their stock appraised by an independent party.

In both cases, it is highly recommended to contact a lawyer in order to define your best purchase option.   For more information on the above, call/email our Founder & CEO + Business Lawyer, Hugues Boisvert at hboisvert@hazlolaw.com or +1.613.747.2459 x 304

Business Owners: Why you MUST have a business lawyer on your side.

Legal issues for business owners and entrepreneurs.

 As a business owner, you may think that you don't need the additional cost of hiring a lawyer. That may be a big mistake. Read this document to understand why consulting a lawyer is essential for any small business start-up. Lawyers are trained to interpret the law and those who specialize in business law can be worth their weight in gold. It is less expensive to retain a lawyer up front and have your legal work done properly than trying to hire a lawyer later on to fix problems that may have arisen from lack of legal knowledge. Sometimes procedures and forms for businesses look simple, but legal transactions are often more complex than they seem.

When do you need a lawyer? There are a number of situations where you should strongly consider consulting a lawyer.

Business Structure

One of the first things you will need to do is to decide on the business structure that best suits your needs. Your options can range from sole proprietorship, partnerships, limited or incorporated companies to co-operatives. A lawyer can help you choose the correct form of business structure, based on factors such as the number of people involved, the type of business, tax issues, liability concerns and financial requirements of the firm. Your lawyer can also help you draw up the necessary legal documents that set out the terms of any partnership or other shared ownership, ensure that all parties will be treated fairly and that there is a mechanism for handling any disputes or disagreements. Forms of business organization Find out which type of business structure is right for your business. Buying an existing business If you wish to buy an existing business, you may have to decide whether to buy only the assets of the business or, in the case of an incorporated company, the shares of that company. With any business purchase, you should have a buy and sell agreement, signed by both parties, that spells out the demands and obligations of each, as well as the terms of the agreement (for example, non-competition provision). Buying a business What you need to know before purchasing an existing business. Leasing Requirements Most small businesses will start by taking out a lease for their business premises. However, leases can be one of your largest expenses. Make sure that your lease will be suitable to your business needs, in case you wish to break your lease or expand your business.

A lawyer can give you advice on any pitfalls or costs that may be incurred, before you sign on the dotted line. Choosing and setting up a location Trying to decide where to locate your business and how to arrange it once you get there? Review the following resources and consider your options.

Contracts

When you are drawing up legal contracts, you should get the advice of a lawyer.  Some examples of contracts that you should get a lawyer's help with include:

•Licensing agreements

•Franchise agreements

•Employment contracts

•Subcontractor agreements

•Partnership, incorporation or shareholder agreements

•Lease agreements

•Mortgage, purchase agreements

This is not a comprehensive list. Above all, make sure you contact a lawyer before you sign any contract. Equity Financing If you plan to seek equity financing for your business, it is important to contact a lawyer to help you draw up the terms of the shareholder agreement and/or to review the legal documents provided by a potential investor. Your lawyer can also help you assess the impact of any new shareholder agreement on other obligations and existing contracts with employees, suppliers or financial institutions. Steps to Growth Capital Learn how to develop the plan, the materials and the confidence to go after the equity financing for your business opportunity. Other issues requiring legal advice

There may be other issues where you need to seek the advice of a lawyer in order to determine the best course of action.

 This can include:

 •Environmental complaints or concerns

•Employee problems or conflicts 

•Disagreements between business partners

•Closing your business

 •Protection of intellectual property

 Any time you are unsure of the legality of something or the legality of your business practices are questioned, you should be sure to get the advice of a lawyer. How should you choose a lawyer? If you have used a lawyer before for a real estate transaction or other personal issue, he/she may be able to refer you to a lawyer who specializes in small business start-ups or to a business lawyer. Ask your business associates, friends and family for references of law firms they have used and received satisfactory services from in the past. Make sure you have a comfort level with your lawyer, as you will be working closely for the life cycle of your business. Don't hire the first lawyer you speak to.

You will have to do some searching for the best expertise you need for your business. Make a list of potential lawyers you wish to meet. Many lawyers will meet you free of charge for the first time to establish expectations on both sides, as long as you don't try to get free legal advice while you are there. You will probably want to have a general business lawyer to handle your day-to-day affairs, but look for someone connected to specialists in specific areas of law who can refer you, as necessary, to someone with more expertise in areas like intellectual property, equity financing, and so on. Make sure you understand your lawyer's billing practices. If you think it may be a little while before revenue comes in to your business, you will have to make arrangements ahead of time with your lawyer, so you are both on the same page.

 For more information, call and/or email our Founder & Ceo and Business Lawyer, Hugues Boisvert at hboisvert@hazlolaw.com or +1.613.747.2459 x 304

Business Owners: Are you a candidate for a Corporate Reorganization and, in the process, eligible to save thousand of dollars in taxes?

As a business lawyer, I work with entrepreneurs and business owners on a daily basis. For the vast majority of them, their most valuable asset is their corporation. For obvious reasons, their number one priority is on income earning activities, such as generating sales. Attention to such activities is, of course, a practical necessity and a hallmark of success. However, the utilization of a proper corporate structure to reduce tax exposure is, unfortunately, often overlooked. Remember, as the old saying goes, “It is not what you make, but what you keep.” Business owners must realize that a proper structure can save a substantial amount of taxes, which will greatly benefit themselves, their family and their business. Further, the costs of implementing these types of structures are usually easily justified by the annual tax savings. The purpose of this article is to explain to you the benefits of a corporate reorganization and to help you determine if you are a good candidate for implementing such structure.

What is a Corporate Reorganization?

A Corporate Reorganization is a legal way to reorganize and restructure your company so that you can reap the rewards of the existing tax regulations - often resulting in annual tax savings in amounts upwards of tens of thousands of dollars. Why do I need a Corporate Reorganization? As a business lawyer, I sometime see situations where businesses are set up with a certain structure to take advantage of particular circumstances that were relevant at the time they were set up. But as we all know, situations change over time. It is common that the conditions which resulted in a particular corporate structure no longer reflect what is best for the corporation or its owners, resulting in a somewhat cumbersome and inefficient structure, particularly from a tax point of view. Every day, I work with companies, who are in this situation and help them to reorganize and restructure their affairs, which, in turn, allows them to save a substantial amount of money.

There are many situations where a corporate reorganization is recommended, such as, corporate tax planning, creditor proofing or in order to reach other organizational goals. Sometimes this process will even involve the transfer of assets on a tax-deferred basis from one entity to another, or from one corporation to another. Every person and corporation is different. Accordingly, when analyzing whether or not a corporate reorganization is appropriate, it is important to investigate all relevant options thoroughly. Given the complexities and technicalities of such an undertaking, it is highly recommend one obtains qualified profession help. This ensures the business owner obtains proper advice and implements the best possible plan to meet the their objectives.

 Based on my experience, there are many reasons companies may need to be reorganized. Some of the common reasons, which may apply to you, are as follows:

 (1) To implement a proper share structure; Having the right structure allows flexibility in terms of tax planning. While you are only required, by law, to have one class of shares (common), it is always best to provide for the possibility of additional classes of shares. This allows a corporation the flexibility to modify its ownership structure, should the need arise. For example, in order to save on taxes, you might want to take advantage of income splitting available to eligible family members. Or you might need to issue a new class of shares in order to attract new investors. Or you might want to make use of a family trust, discussed further below.

 (2) To establish and implement a Family Trust; If you have children and/or are married, serious consideration should be given to owning the shares of your business through a discretionary Family Trust. The benefits of a family trust include: (a) Income splitting: A well-structured family trust allows for the splitting of income earned by the trust among the various beneficiaries; (b) Funding of children’s education at a potential tax rate of 15.5% instead of 48% (a savings of up to $34,500 per $100,000 of profit); and, (c) Multiply uses of the one-time capital gains exemption, should you sell your company, allowing the $750,000 capital gains exemption to be multiplied by the number of family members who are beneficiaries of the trust, without direct share ownership.

 (3) To create holding companies for tax and creditor-proofing reasons; Generally, a “holding company” is a corporation which is placed between a business, the “operating company”, and the individual shareholder. One of the foremost principles of Canadian taxation is that dividends are allowed to flow on a tax-free basis from one corporation to another. Accordingly, after-tax profits accumulated in the operating company can be distributed to the holding company as tax-free dividends. Funds transferred to the holding company in this manner are better protected from claims made by any of the operating company’s creditors. No one ever expects to face such a claim; however, the reality is that, for a variety of different reasons, creditor claims are made on a daily basis. As a result of these claims, many unprepared business owners have seen a lifetime of accumulated profits vanish, often due to a single claim. It is for this reason that use of a holding company is especially attractive to companies where the risk of lawsuits or litigation is significant. Additionally, if necessary, funds held in a holding company can be lent back to the operating company on a secured basis in order to retain protection from creditors.

 (4) To carry out and implement a succession plan through an estate freeze (by using Section 86 of the Income Tax Act). For business owners, tax minimization is central to any plan. One popular tool is an estate freeze. An estate freeze is part of a corporate reorganization that allows business owners to freeze the value of the company at today's value. As a result, future increases in the value of the company can be transferred to the benefit of children, key employees or a trust. Such a freeze allows business owners to minimize capital gains tax due under the deemed disposition rules upon their death and provides a deferral mechanism of taxes. A freeze in combination with the creation of a discretionary trust can provide a flexible framework that can lead to further tax minimization.

If you think you are a candidate for a corporate reorganization or would like to know more, please feel free to contact me. I can advise on whether a corporate reorganization is required and the benefits of such reorganization, as well as manage its implementation and execution. As you can imagine, a corporate reorganization has many tax and legal implications for companies and their owners, so anyone considering it should seek professional help.

 For more information on the above, call and/or email our Founder & CEO and Business Lawyer, Hugues Boisvert at hboisvert@hazlolaw.com or +1.613.747.2459 x 304

Business Plan Template to help you grow your business

At HazloLaw - Business Lawyers we always like to help our clients to grow their business.

Our friends at BDC – (Business Development Bank of Canada) offers a great tool that allows you to set out a roadmap of your business and plan accordingly. The main purpose of this business plan template is to allow you to prepare a professional plan, and take your business to the next level toward growth and success.

As an entrepreneur, it is recommended to familiarize yourself with the BDC website simply because they have over 65 years of experience working with entrepreneurs and great resources that put you on the right path for success. It’s free!

Please consult http://www.bdc.ca/EN/advice_centre/tools/business_plan/Pages/default.aspx?ref=hp-by-txt

For more information on the above, call and/or email our Founder & CEO and Business Lawyer, Hugues Boisvert at hboisvert@hazlolaw.com or +1.613.747.2459 x 304

Interesting Read with Respect to Canada's Immigration Policy

There has been quite a bit of controversy with respect to a number of recent changes to Canada’s immigration policy. An interesting and most likely unanticipated consequence of these changes has taken the form of a lawsuit by affluent foreigners, mostly from China, against the Federal Government after the cancellation of the Immigrant Investor Program (IIP). 

The IIP offered “would-be” immigrants permanent residency to those with a net worth exceeding $1.6 million as long as they invested $800,000 into the Canadian government. Seems like a good trade? Well, it did to the 66,000 applicants whose applications were backlogged prior to the Program’s cancellation. 1,500 of them are now asking to either have their applications processed or they will seek compensation in the amount of $5 million per applicant – resulting in over $18 billion in claims. Without disputing the benefits of immigration for Canada, a lawsuit like this one has, at first blush, little merit. From a private law perspective, the obvious argument is that the former availability of the IPP can hardly be considered an “offer” that, if accepted by a foreign applicant, forms a contract between the applicant and the Canadian government. 

From a public law perspective, Canadian courts have been traditionally loathe to find the existence of a duty of care between a government and a private party that could form the basis of a claim in tort. Finally, and perhaps most importantly, the conferral of citizenship, which is what permanent residency usually leads to, is an act of sovereign power. The acceptance of the plaintiffs’ claim by the Canadian judiciary would be tantamount to the imposition upon the other branches of government of a legal obligation not to change immigration policies where such change would be detrimental to a potential immigrant. 

This would be not only be taking the government’s duty to provide procedural fairness too far, it also ignores the sovereign nature of citizenship attribution under public international law. 

 For further details on this matter, please refer to the link below:

http://www.huffingtonpost.ca/2014/06/06/immigrant-investor-program-lawsuit-canada_n_5455932.html?utm_hp_ref=email_share

15 Things Successful Entrepreneurs Do Every Day:

The most effective entrepreneurs view themselves as assets. They continually invest in themselves and in their future through continuing education and self-improvement. If you want to become a better entrepreneur and successfully grow your business, dedicate time and energy to improve your daily habits. Here are 15 things many business influencers make time for in their busy schedules. 

1. Eat breakfast. To work at your peak performance, your body needs fuel. Rather than just grab a cup of coffee on your way to the office, take a few minutes to eat a meal or drink a protein smoothie — even if it’s on the go. 

  2. Plan your day. First thing in the morning, look at your calendar and prioritize your schedule. If you work best during a specific time of the day, block out those hours for quiet work time. I do my best work in the mornings, so I try to schedule at least 90 minutes to work on my writing before daily distractions begin. While you’re at it, schedule short breaks throughout the day to eat a healthy snack and keep your energy up.    

3. Don’t check email right away. It’s tough not to hop on your smart phone first thing in the morning and see who’s emailed you. Often checking email is a distraction from what you want to focus on early in the day. Try to wait until 9 a.m. or 10 a.m. to check email, after you’ve completed at least one of your critical to-do items. If you’re working on an important project, try not to check your email more than three times a day. 

4. Remember your purpose. Take a few moments at the start of each workday to remind yourself of your company’s goals. Think about your core customer and which areas of your business are most profitable. We oftentimes get caught up in the minutia of daily tasks we lose sight of what brings us happiness and profitability. 

5. Single-task. We live in a world that praises multi-tasking. Unfortunately, when you have too much going on at once you may become distracted by interruptions and unimportant glitches. To be productive and effective, prioritize, delegate whenever possible and focus. 

6. Visualize. It may feel silly, but close your eyes and envision your success. Imagine what you will feel like when you reach your goals. Visualization is a powerful tool and can help you keep your aspirations at the front of your mind. It might also help to post a picture of what you’d like to accomplish. For example, if you’re interested in taking a trip to Paris, post of photo of the Eiffel Tower on your desk. 

7. Say no. Entrepreneurs especially feel pressure to accept every opportunity that comes their way. However, not every opportunity will benefit you or your business. Time is our most valuable commodity. Be selective about what you agree to do. 

8. Value your time. Unlike money, time is a non-renewable resource. There’s simply no way to make more of it. Guard your time and spend it doing the most important things for yourself and your company. Avoid distractions whenever possible. Whether you facilitate or attend a meeting, online or in person, get clear about the start and end time. Whenever someone requests a meeting or consultation with you, try asking for the questions in advance so you can do your research ahead of time. This will keep you on time and on task.

9. Delegate. In the early days of my business, I thought I could save money and do everything myself. Then I realized the small, mundane tasks were taking me away from those things that generated the most income for my business. I was on the fast track to burnout. When you become overwhelmed with work or can’t figure out a solution, hire someone to help. 

10. Listen. Be present when you speak with a colleague or employee. Take the time to fully understand what the other person is saying. Leaders who listen effectively avoid miscommunications and are less likely to have to ask for clarification later. 

11. Show gratitude. Make it a daily habit to sit down and be thankful for all the opportunities you have been given and all the things you’ve accomplished so far. Simply reminding yourself of your past successes will keep you focused, present and productive. 

12. Stand up and move around. Did you know sitting is the new smoking? This car-commuting, desk-bound lifestyle can be harmful to your health. Studies show it raises the risk of disability, diabetes, heart disease, certain types of cancer and obesity. No matter when you can make time for it during the day, take a few minutes to stand up and take activity breaks every hour or so. It’s good for your body and mind. 

13. Breathe deeply. Many people take shallow breaths. Every hour or so, stand up from your desk, stretch and take 10 deep breaths. The quick break and boost of oxygen will reinvigorate you for your next task. 

 14. Take a lunch break. Get up from your desk and eat lunch elsewhere. If you can’t spare even a moment away from work during the day, make lunch your networking hour. Schedule lunch meetings throughout the week with key clients, professional acquaintances or friends. 

15. Clear your desk. At the end of each day, clear the clutter from your desk. Put away your pens, stack loose paper and straighten other items. A clear desk will give you a clean slate for the next day and prevent you from feeling bogged down by yesterday’s work. 

For more information on the above, please contact HazloLaw Founder & Business Lawyer, Hugues Boisvert at +1.613-747-2459 x 304 or at hboisvert@hazlolaw.com