What is a Personal Services Corporation??

We would like to share an excellent article written by Susan Ward from About.com
 
Bluntly, a designation by the Canada Revenue Agency (CRA) that you don't want, because a personal services corporation (a.k.a. personal services business) is not allowed to claim any of the standard business expenses, including the Small Business Deduction..
 
Technically, a personal services corporation is:
 
"a business that a corporation carries on to provide services to another entity (such as a person or a partnership) that an officer or employee of that entity would usually perform" (T4012 – T2 Corporation Income Tax Guide, Chapter 4, Canada Revenue Agency).
 
The CRA Guide goes on to explain that the person providing those services on behalf of the corporation is called an incorporated employee.
 
Right away, your mental alarm bells should be dinging like mad, because as you know, this is the basic tax divide, employee versus business person. Business people (whether sole proprietorships or corporations) have many more potential tax deductions available to them than employees.
 
The Canada Revenue Agency generally considers four issues to determine whether a person is an employee or an independent contractor:

1. Control
2. Ownership of tools
3. Chance of profit/risk of loss
4. Integration

Are You a Contractor or an Employee? provides detailed explanations of each of these points.
 
But these may be moot in terms of determining whether or not a corporation is deemed to be a personal services business.
 
It appears that all that is required for a small corporation to be considered a personal services corporation is:
 
1) that the person performing the services (you) or any person related to you, is a specified shareholder of the corporation (a person who owns at least 10% of the issued shares of any class of capital stock in the corporation or a related corporation, directly or indirectly, at any time of the year);
 
2) that you would "reasonably be considered an officer or employee of the entity receiving the services" if not for the existence of the corporation.
 
You can see, just from reading this last pair of sentences, how difficult it could be for a person with a corporation that has a single shareholder who is doing business with one company to prove otherwise.
 
From the government's point of view, just calling an employee something else doesn't mean they’re not actually an employee – especially when they're doing exactly what an employee would do.
 
Corporations who are suddenly deemed to be personal services corporations not only lose their favorable tax advantage of being able to claim business expenses, but also become ineligible for the Small Business Tax Deduction, losing their favorable tax rate on the first $500,000 of active income.
 
For more information on the above, please contact HazloLaw Founder & Business Lawyer, Hugues Boisvert at  hboisvert@hazlolaw.com
 

"Shareholder Agreements" - The essentials

When a company is first created, its founding shareholders determine how a company will be owned and managed. This is when a "shareholders agreement" kicks in. The shareholders agreement may be amended when new shareholders enter the picture for various reasons, i.e. new shareholders may want to add new terms before they become part of the team. Not having such an agreement can lead to serious legal ramification, and future disputes arising amongst shareholders may create irreconcilable harm to the overall well-being of a company.

The incorporation of a company must be in compliance with the law that governs the corporations. Companies are incorporated in a particular jurisdiction (e.g. provincial or federal) and must adhere to the applicable legislation, e.g. the Canada Business Corporations Act, or the Ontario Corporations Act. This legislation lays out the ground rules for corporate governance, i.e. what you can and cannot do, who can be a director, can a company issue shares, how can you buy or sell shares, etc. When a company is formed, it files a Memorandum and Articles of Incorporation (depending on jurisdiction) which are public documents filed with the Registrar of Companies. A shareholders agreement, however, is confidential and its contents need not be filed or made public.

When a company is formed, its shareholders may decide on a set of ground rules over and above the basic legislation that will govern their behaviour. For example, how do you handle a shareholder who wants to sell his or her shares? Should it be possible to buy out a shareholder? How are disagreements resolved? Who can sit on the Board? Who has the decision-making authorities? Can a shareholder (the founder of a company) be fired? 

There is no need for a Shareholder Agreement if the company has only one owner. However, if there are more than one owner, it is very crucial to create a Shareholder Agreement. Each company should have its own tailored Shareholder Agreement depending on the mission & vision and business goals of the owners. When a company  becomes a "public" company, such an agreement is no longer needed, and the relevant law and securities regulations will become applicable.

What to include in a Shareholder Agreement?
(This is a non-exhaustive list)

• what is the structure of the company? 
• how equity is divided amongst the shareholders?
• how are the parties to the agreement?
• are there any vesting provisions? for example shares may be subject to cancellation if a shareholder/manager quits)
• are shareholders allowed to pledge their shares?
• who is on the Board? 
• who are the officers and managers?
• what constitutes a quorum for meetings?
• what are the restrictions on new equity issues?
• how are ownership buyouts to be resolved? 
• how are disputes to be resolved among shareholders? (* very important to review the dispute resolution clause(s)with your lawyer?)
• how are share sales done?
• what are a shareholders' obligations and commitment?
• what are shareholders' rights? 
• what happens in the event of death/incapacity?
• how is a share valuation determined 
• what are the operating guidelines or restrictions (budget approvals, spending limits banking, etc)
• what types of decisions require unanimous board and/or unanimous shareholder approval?
• compensation issues - remuneration of officers & directors, dividend policies
• are other agreements required as well, e.g. management contracts, confidentiality agreements, patent rights, etc?
• should there be any restrictions on shareholders with respect to competing interests?
• what could trigger the dissolution of the company?
• what is the liability exposure and is there any corporate indemnification?
• are there any financial obligations by shareholders (bank guarantees, shareholder loans, etc)?

Some Do's & Don'ts:

• don't confuse shareholder issues with management issues
• don't confuse return on capital with return on labour (i.e. cash investment vs founders' time commitment)
• don't get caught up in legalese - decide what you want, then have your lawyer put it in proper form
• do make sure everyone's objectives and visions are compatible 
• do separate the roles of shareholders, directors, and managers
• do talk to others who have gone through this process
• do ask yourself what the downside is - the most practical question is: what's the worst that can happen to you under the agreement?
• do get some tax advice. It is very important that some tax planning be done early to avoid a headache later when you've made millions. e.g. you want to make sure that you are not compensated by being given shares, you want to make sure you own shares early so that you can use the small business lifetime capital gains exemption, maybe a family trust or holding company should own your shares.

MOST IMPORTANTLY: DO HIRE A LAWYER! 

How to Re-Incorporate Your Business?

What is a continuance (import) of an incorporation and when does it come into effect?

•  A continuance (import) allows an incorporated business to effectively re-incorporate under another act. Because it is already incorporated, the legal process is called continuance. Instead of incorporating again, the incorporated business continues from one act into another so that it is governed by that other act as though it were incorporated under it. The process results in the corporation being exported out of one act and being imported into another.
•  The continuance comes into effect on the date shown on the Certificate of Continuance issued by Corporations Canada.

 Who can continue (import) under the Canada Business Corporations Act?

• An incorporated business must be incorporated under another act that is federal, provincial or territorial or is even from another country. That act must permit the continuance.

 What documents must be filed to continue (import) an incorporated business?

1. A completed and signed copy of Form 11: Articles of Continuance Opens in a new window;
2. a completed and signed copy of Form 2: Initial Registered Office and First Board of Directors Opens in a new window;
3. a NUANS Name Search Report External link, Opens in a new window for the proposed name of the corporation that is not more than 90 days old. If you have received prior approval of the name, attach a copy of the letter from Corporations Canada approving the name along with the copy of the NUANS Name Search Report. If the proposed name is a number name, a NUANS Name Search Report is not required; and
4. the filing fee, although there is no fee if the incorporated business is governed by another federal act.

The articles can be in English or French or in a bilingual format.

If the incorporated business is governed by an act that has been pre-approved by Corporations Canada also include:

• A letter of approval from the legislative authority that administers the act currently governing the incorporated business. This document is not required if the incorporated business is governed by another federal act.

If the incorporated business is not governed by another federal act or by an act that has been pre-approved by Corporations Canada, the following documents must also be filed:

• A letter of approval from the legislative authority that administers the act currently governing the incorporated business.
• A copy of the sections of the act under which the incorporated business currently exists showing that the continuance is permitted.
• A signed legal opinion by counsel qualified to practice in the jurisdiction where the incorporated business is incorporated, stating that: the non-federal law permits continuances to the CBCA, once the incorporate business is continued under the CBCA, the non-federal law will cease to apply to it, and in cases where the other legislative authority does not make it a practice to issue a formal authorization for continuance, the incorporated business meets all the requirements for export.

If you have any questions regarding the continuance of your business, please contact Hugues Boisvert for further information: hboisvert@hazlolaw.com, or 613-747-2459 ext. 304. 

What do I need a business lawyer for?

One of the most common misconceptions many people have about hiring a lawyer is that lawyers are mostly useful after problems have arisen - to settle disputes or to go to court. However, it is equally important (if not more important) to hire a lawyer before you are about to incorporate a business, draft your Will, form a company with your business partners, sign a contract with another party etc.... - having a lawyer before problems float onto the surface not only saves hundreds of dollars on legal fees compared to having to resolve the problems afterwards, it also gives you the peace of mind when matters can be simply left in the hands of a legal professional to handle on your behalf. After all, to prevent a problem from occurring is far less stressful and far more economic than to deal with a problem. 

So what is 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). 

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

Do I need a business lawyer?

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

For any questions on the above, please contact Hugues Boisvert at hboisvert@hazlolaw.com, or call the office at 613-747-2459, ext. 304.

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

Legal issues for small business 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 proprietorships, 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.

Entrepreneurs: The different business structures available in Canada....

Now that you have decided on starting your own business, you will have to determine what business structure or form of organization suits your needs.

The structure of your business will depend on whether you want to run your business yourself or with a partner or associates. There are four types of business structures: sole proprietorship, partnerships, corporations and cooperatives.


Sole proprietorship

With this type of business organization, you would be fully responsible for all debts and obligations related to your business and all profits would be yours alone to keep. As a sole owner of the business, a creditor can make a claim against your personal or business assets to pay off any debt.

Advantages:

•Easy and inexpensive to form a sole proprietorship (you will only need to register your business name provincially, except in Newfoundland and Labrador)
•Relatively low cost to start your business
•Lowest amount of regulatory burden
•Direct control of decision making
•Minimal working capital required to start-up
•Tax advantages if your business is not doing well, for example, deducting your losses from your personal income, lower tax bracket when profits are low, and so on
•All profits will go to you directly

Disadvantages:

•Unlimited liability (if you have business debts, personal assets would be used to pay off the debt)
•Income would be taxable at your personal rate and, if your business is profitable, this may put you in a higher tax bracket
•Lack of continuity for your business, if you need to be absent
•Difficulty raising capital on your own

Partnerships

A partnership would be a good business structure if you want to carry on a business with a partner and you do not wish to incorporate your business. With a partnership, you would combine your financial resources with your partner into the business. You can establish the terms of your business with your partner and protect yourself in case of a disagreement or dissolution by drawing up a specific business agreement. As a partner, you would share in the profits of your business according to the terms of your agreement.

You may also be interested in a limited liability partnership in the business. This means that you would not take part in the control or management of the business, but would be liable for debts to a specified extent only.

When establishing a partnership, you should have a partnership agreement drawn up with the assistance of a lawyer, to ensure that:

•You are protecting your interests
•That you have clearly established the terms of the partnership with regards to issues like profit sharing, dissolving the partnership, and more
•That you meet the legal requirements for a limited partnership (if applicable)

Advantages:

•Easy to start-up a partnership
•Start-up costs would be shared equally with you and your partner
•Equal share in the management, profits and assets
•Tax advantage, if income from the partnership is low or loses money (you and your partner include your share of the partnership in your individual tax return)

Disadvantages:

•Similar to sole proprietorship, as there is no legal difference between you and your business
•Unlimited liability (if you have business debts, personal assets would be used to pay off the debt)
•Hard to find a suitable partner
•Possible development of conflict between you and your partner
•You are held financially responsible for business decisions made by your partner (for example, contracts that are broken)

Corporations


Another business structure is to incorporate your business. This can be done at the federal or provincial level. When you incorporate your business, it is considered to be a legal entity that is separate from the owners and shareholders. As a shareholder of a corporation, you will not be personally liable for the debts, obligations or acts of the corporation.

Advantages:

•Limited liability
•Ownership is transferable
•Continuous existence
•Separate legal entity
•Easier to raise capital
•Possible tax advantage as taxes may be lower for an incorporated business

Disadvantages:

•A corporation is closely regulated
•More expensive to incorporate than a partnership or sole proprietorship
•Extensive corporate records required, including shareholder and director meetings, and documentation filed annually with the government
•Possible conflict between shareholders and directors
•Possible problem with residency of directors, if they are in another province or the majority are not Canadian

Business owners: 7 Reasons to Incorporate Your Business! *

Business owners: You should incorporate If Any of These Apply to You.

One of the first questions new business owners need to answer is how to legally structure their business, a question often phrased as, "Should I incorporate my business or not?" Below are seven reasons to incorporate your business. Whether you're starting a new business or running an established enterprise, you'll probably want to incorporate if any of these situations apply.


1. You need to incorporate if you’re trying to get financing.

"Certainly, you will need to probably incorporate if you want to look for financing, because that demonstrates to a lender that you are committed to going for the long haul," says Ted Mallett, vice-president of research and chief economist at the Canadian Federation of Independent Business (Ann Perry, Banking on a home-based business, TheStar.com).

Whether or not it's true, lenders generally have the perception that businesses that bother to incorporate are more serious and stable than those that don't.


2. You need to incorporate to be eligible for particular federal programs.

For instance, if you don't incorporate, your business is not eligible for the Small Business Internship Program, a program where the Government of Canada will reimburse 75 percent of the eligible wages and related expenses such as statutory employee benefits, up to a total of $10,000 when you employ a post-secondary student to work on an information and communication technologies (ICT) project.

The Ontario Book Publishing Tax Credit (OBPTC), which provides a maximum tax credit of $10,000 per title, is another example of a program only open to Canadian-controlled private corporations.

3. You need to incorporate if your business involves potential liability that could seriously damage your personal finances.

Roger Haineault suggests considering what the worst that could happen is when trying to answer the question, "Should I incorporate my business?"(Pros and cons to incorporating, New Brunswick Business Journal).Suppose you're a painter, he says. The worst that can happen if a customer is dissatisfied with the job you do is that you might have to repaint some rooms.

But the worst can be much worse if the painter has hired a worker who falls off a roof. As a sole proprietor, the painter could be wiped out financially, whereas the most a corporation can lose is the value of its assets.

What's the worst that could happen in your business? Your projected liability could make the cost to incorporate your business a bargain.

4. You need to incorporate if you're trying to work for other businesses.

Some businesses, especially larger corporations, will only hire contractors that are incorporated. So if you don't incorporate, you have no chance of working for them.

5. You need to incorporate if you want to take advantage of the Lifetime Capital Gains Exemption when you sell your business.

If you sell shares of a qualifying corporation for a profit, the first $750,000 of your gain on a lifetime basis can be received on a tax-free basis.

What's the catch? Well first of all, a business owner qualifies for the exemption only if the company is a Canadian-controlled private corporation with generally 90 per cent of its assets involved in active business. Second, the shares must have been owned by the owner for at least 24 months before the sale of the business and more than 50 per cent of the corporation's assets must have been used in an active business carried on primarily in Canada throughout the 24-month period immediately before the sale.

Bruce Ball, a recognized authority on capital gains, succession and retirement planning explains how to take steps now to make sure your company can benefit from the Lifetime Capital Gains Tax Exemption in the future, such as crystallizing your exemption (The Importance of the Capital Gains Exemption for Owner–Managers (Canadian Federation of Independent Business).

6. You need to incorporate to take advantage of the Small Business Deduction.

For Canadian-controlled private corporations claiming the small business deduction, the net tax rate as of January 1, 2008 is 11%, while the net tax rate for other types of corporations as of January 1, 2008 is 19.5%. (Note that, once again, this tax advantage is only available to Canadian-Controlled Private Corporations. See Types of Corporations in Canada.)

7. You need to incorporate if you're making enough money that you need to manage your income.

For instance, in a discussion about whether or not to incorporate in the About Small Business Canada forum, one user wrote:

"The beauty of having that separate legal entity means you can also throttle how much you pay yourself in any given year. You can hold it in the company or not depending on other things going on in your life. Think of it as a giant surrogate RRSP. As a sole proprietor, if you have a banner year, you're going to pay serious tax right away that year."
If you incorporate your business, you can control how much revenue you take and therefore, how much personal income tax you pay.

Other Reasons to Incorporate Your Business

I've given you seven reasons to incorporate your business here but there are more. One that springs to mind is public perception. Generally I think the public views incorporated businesses more favourably. There's a certain amount of prestige attached to an "Inc." or a "Ltd." After a company's name.

But should you incorporate your business? My best advice is to consider the reasons to incorporate I've presented above, and if you're still unsure about whether or not you should incorporate your own business, talk to your accountant or lawyer about it.


*** This excellent article was written by Suzan Ward and published on the website www.about.com ***

Business owners: 5 resolutions for the New Year!

You are a successful business owner...but are you satisfied with your results?

I didn’t think so. Let me help you make your business even more successful in 2011. Here is how I can help:

1. Setting up a proper share structure

Save on taxes! I’ll say it again, save taxes! Having the right structure allows flexibility in terms of tax planning. While you are only required, in law, to have one class of shares (common), it is always best to provide additional classes of shares so that you will have the needed flexibility. You might want an opportunity to income split between family members and save substantial taxes; to attract new investors and possibly to make use of a family trust. The right share structure will help you save on your tax bill in 2011.

2. Enter a shareholders’ agreement

Because happy endings only happen in Hollywood! Every entrepreneur should understand the importance of a written contract to resolve conflicts. A shareholders’ agreement defines the way in which the company should be governed and managed so as to avoid messy and expensive disputes in the future.

3. Set up a holding company

To protect the assets you need to operate your business. You need operating cash flow, a place of business and equipment to make a profit right? So why would you subject them to attacks from creditors? The best way to protect the assets of an incorporated business is through the use of a holding company (Holdco). And you can also save on taxes because when the operating company has excess cash in the operating company each year, it can pay the excess capital to the Holdco as a tax-free dividend.

4. Use discretionary family trusts to maximize income-splitting

Save taxes (again) thanks to your spouse and children. If you have children and/or are married, you should consider owning their shares through a discretionary Family trust because you can further reduce your income tax bill. 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 and very low tax rate of 16% instead (c) Multiply the allowable tax free gains (capital gains exemption) should you sell your company: Hence, the $750,000 capital gains exemption may be multiplied by the number of family members who are beneficiaries of the trust, without direct share ownership.

5. Prepare primary and secondary wills

Did you know that you’ll be taxed even when you pass on? Yes, thanks to probate fees! You can save significant probate fees if you have a secondary will? Probate fees are the fees charged by provincial governments to probate your Will when settling your estate. As a result, Ontario’s probate fees for a modest estate of $500,000 now amount to $7,000. In order to avoid probate fees on their corporate holdings (i.e. shares in private companies) and by using the “double will” technique, every shareholder should have a primary and secondary will drafted and executed.