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WELCOME. The webinar will begin at 12:02 p.m. (EDT). Tax and Legal Aspects of Business Transition (Series: Part II ) Guest Speakers :. Me Stavros Rilling Associate DS Welch Bussières Quebec City, QC. Me Simon Chouinard Partner DS Welch Bussières Quebec City, QC.

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slide1

WELCOME

The webinar will begin at 12:02 p.m. (EDT)

Tax and Legal Aspects of Business Transition

(Series: Part II)

Guest Speakers:

Me Stavros Rilling

Associate

DS Welch Bussières

Quebec City, QC

Me Simon Chouinard

Partner

DS Welch Bussières

Quebec City, QC

slide2

CEDEC Small Business Support Network

RESPONSIVE AND PROACTIVE

CEDEC Small Business Support Network is the only Quebec-wide network positioned to help English-speaking entrepreneurs network, acquire new skills, and build successful businesses.

The CEDEC Small Business Support Network supports communities across Quebec by providing personalized business-development services in English. We follow through with every client to make sure they have the tools to succeed.

Our members are SMEs from across the province of Quebec and encompass a variety of business sectors and industries. Membership enables entrepreneurs to connect, learn and benefit from the skills, knowledge and expertise of business people throughout the province - people who understand what it takes to get a business off the ground and thriving.

Building Stronger

Businesses Together

presentation outline
Presentation Outline
  • Part I: Tax Aspects of Business Transition
    • First things first : What is your Business Form ?
    • What do you sell ? Assets or Shares?
    • Tax implications of selling assets
    • Tax implications of selling shares
    • Capital Gains Exemption – Qualified Small Business Corporation Shares
    • Tax planning
  • Part II: Legal Aspects of Business Transition
    • Legal implications of selling / shares assets
    • Legal documents
    • Due diligence
slide4

Part I

Tax Aspects of Business Transition

(Me. Simon Chouinard)

business forms
Business Forms
  • First things first: What is your business form?
      • Corporation
        • Shares
      • Sole Proprietorship
        • Assets (bank account, receivables inventory, equipment and other depreciable assets, land and other non depreciable assets, goodwill)
      • Partnership
        • Units
what are you selling
What Are You Selling?
  • Assets or shares - general considerations:
    • Assets
        • Buyer not liable for the owner’s actions (pre-sale)
        • Depreciable properties provide tax reductions (capital cost allowance)
        • Allocation of purchase / selling price
        • Interest deductibility
        • Transfer duty on immoveable property
        • GST / QST
what are you selling1
What Are You Selling?
  • Assets or shares - general considerations:
    • Shares
        • Selling (and buying) the past of the company
        • Tax attributes of the company (paid-up capital, capital dividend account, general rate income pool, refundable dividend tax on hand, availability of capital losses and business investment losses)
        • Adjusted cost basis of the shares
        • Availability of the exemption on Qualified Small Business Corporation
selling a ssets t ax implications
Selling Assets: Tax Implications
  • Assets (seller is an individual)
      • Taxation for the owner of the assets: graduated tax rate of the individual
        • Inventory: business income
        • Receivables: business income
        • Equipment: recapture of the capital cost allowance (business income) + capital gain (or business loss if sold under the UCC)
        • Land: capital gain
        • Goodwill: business income (50 % rate inclusion)
selling assets tax implications
Selling Assets : Tax Implications
  • Assets (seller is a company)
      • Taxation for the company:
        • Business income: 19% (or 26,9% for profit > 500 K)
        • Taxable capital gain: 46,57% (26,67% is refundable upon payment of dividend)
        • Selling of eligible capital property (goodwill) : 19% (or 26,9%) on 50% of the profit made on the sale
      • Increasing of the Capital Dividend Account: tax free dividend to the shareholders
      • Taxable dividend for the shareholder on any other distribution of the company’s surplus
selling s hares t ax implications
Selling Shares: Tax Implications
  • Shares
      • Taxation for the owner
        • Shares : capital gain (50% of the capital gain is taxable)

Example:

Selling price: $500,000

Cost of the shares: $1,000

Capital gain: $499,990

Taxable capital gain: $249,950

Tax (rate = 49,97%): $124,900

capital gains exemption
Capital Gains Exemption
  • Qualified Small Business Corporation
      • Three (3) Tests:
        • the corporation must be a SBC (90% qualified-assets test)
        • The shares must not have been held by anyone other than the individual or related persons throughout the 24-month period preceding the disposition
        • Throughout the 24-month period, more than 50% of the FMV of the assets of the corporation must have been used in an active business that is carried on primarily in Canada by the corporation or a related corporation
capital gains exemption1
Capital Gains Exemption
  • Qualified Small Business Corporation – Ex. # 1
capital gains exemption2
Capital Gains Exemption
  • Qualified Small Business Corporation – Ex. # 2
capital gains exemption3
Capital Gains Exemption
  • Qualified Small Business Corporation – Ex. # 3
capital gains exemption4
Capital Gains Exemption
  • Qualified Small Business Corporation
      • $800,000 (+ indexation from 2015)
      • What if the shares do not qualify?
        • Wait for the 24-month period to expire
        • Purification (take you non-qualifying assets in another company – tax free basis … or not)
      • The $800,000 limit can be reduced by :
        • Capital loss incurred in the past
        • Business Investment Losses claimed in the past
planning
Planning
  • Rollover of all your business assets in a company (in exchange for shares) and selling your shares (no need to wait for the 24-month period to expire)
  • Reducing the selling price by paying a tax free dividend to a holding company (taking advantage of the safe income on hand)
  • Capital gain deferral for eligible small business shares
  • Capital gain reserve
  • Multiplying the capital gain exemption (have a family trust hold the shares)
slide17

Part II

Legal Aspects of Business Transition

(Me. Stavros Rilling)

quick review
Quick Review
  • Academics
  • Business background
  • Game Plan:
    • Legal implications of selling / shares assets
    • Legal documents
    • Due diligence
    • Questions
selling a business
Selling a Business
  • Are you selling assets or shares?
    • Shares: a share is a unit of ownership of a corporation. Can be an ordinary share, preferred share, can also be called a unit, interest, participation…
    • Assets: an asset is a resource owned by a corporation with the intent of generating future benefit. An asset is presented on a corporation’s balance sheet, thus excluding a key employee, for example…
shares vs assets
Shares vs. Assets
  • Which is best?
    • From a purely legal standpoint, tax issues aside…
    • The corporation’s obligations must be considered… These obligations will be an issue for the buyer if shares are sold or they will be an issue for the seller if assets are sold.
the acquisition p rocess
The Acquisition Process
  • Some preliminary documents may be signed by the parties at the very beginning of the process:
    • Non-Disclosure Agreement
    • Exclusivity Agreement
    • Letter of Intent
    • Non-Binding Letter of Intent
non disclosure agreement
Non-Disclosure Agreement
  • A non-disclosure agreement may be requested by the seller or the buyer…
    • The seller may not wish for his clients or competitors to know about the sale.
    • The buyer may not wish for other potential buyers to try to steal his deal.
    • The seller is handing out very sensitive information about his business: financials, commercial secrets, etc.

Example: The Receiving Party understands that the Disclosing Party has disclosed or may disclose information relating to the sale of the Business, which to the extent previously, presently, or subsequently disclosed to the Receiving Party is hereinafter referred to as "Proprietary Information" of the Disclosing Party. The Proprietary Information may not be disclosed to any third party by the Receiving Party without the written consent of the Disclosing Party.

exclusivity agreement
Exclusivity Agreement
  • An exclusivity agreement is generally requested by the buyer, in order to insure that the seller is not looking for another potential buyer.

Example: During the period up to and including the Closing Date, the Parties shall ensure that their respective directors, officers, employees, agents do not, directly or indirectly, enter into any contract for, or take any action to solicit, initiate, entertain, discuss or consider any other offers, enquiries or proposals in any way relating to the sale of the Shares.

letter of intent
Letter of Intent
  • A letter of intent is generally signed between the parties at the beginning of the process and may include a non-disclosure agreement and exclusivity agreement.
  • By the letter of intent, the parties put in writing the principal terms of the transaction, pending the completion of certain steps, such as satisfactory due diligence, adequate financing terms…
binding or non binding
Binding or Non-Binding
  • A letter of intent can be binding or non-binding.
    • Binding: a party cannot back out of a transaction.
    • Non-Binding: a party can back out of a transaction.
  • A seller wants a binding letter of intent / a buyer wants a non-binding letter of intent.
  • Middle ground?
due diligence
Due Diligence
  • Due diligence is the process by which the buyer examines the potential object of an acquisition.
    • The letter of intent will provide for the parameters of the due diligence. Such as…
    • The object of the process will be determined by the type of sale: assets or shares.
    • The due diligence process is usually divided into 2 main categories…
due diligence assets
Due Diligence - Assets
  • When assets are purchased, what are we looking for?
    • Any third party right relating to a purchased asset, such as mortgages, rights of passage…
    • Tools? Land Registry, Register of Personal and Movable Real Rights, etc.
    • In the case of some specific assets, other elements will be verified…
  • What happens when you miss something?
due diligence shares
Due Diligence – Shares
  • When assets are purchased, the same due diligence elements that were examined in the previous slide will be verified.
    • However, much more must be done…
    • Exactly how much more?
what happens next
What Happens Next?
  • A formal purchase agreement will be negotiated and signed, which will contain:
    • Object of the agreement
    • Price
    • Method of payment
    • Declarations and warranties
    • Declaration under Regulation 45-106

(in the case of shares)

    • Etc.
who does w hat
Who Does What?
  • Most of the work is usually done by the buyer (and his lawyers), that is…
  • Does that mean the seller does not have to do anything?
  • Who pays the advisors?
what can go wrong
What can go wrong?
  • So very much…
  • A party backing out, failing to secure adequate financing, finding something during the due diligence process, an uncooperative party, failing to obtain third party authorization (governmental or private).
  • What can be done if a party backs out?
what can go wrong1
What can go wrong?
  • What else must you look out for, as sellers?
    • Other shareholders who do not want to sell
    • Employees
    • Restrictive dispositions regarding the seller (non-competition, non-solicitation, confidentiality)
    • Sale price not paid in full upon closing – guarantees!!
    • Personal guarantees
    • Working for the new owner – employment agreements
    • Etc.
slide34

ACKNOWLEDGEMENT

Thank you for a wonderful learning experience!

If you have any further questions, please contact:

Me Simon Chouinard

Partner

DS Welch Bussières

Québec (Québec)

Tel : 418.780.4321 schouinard@dswelchbussieres.com

www.dsavocats.com

Me Stavros Rilling

Associate

DS Welch Bussières

Québec (Québec)

Tel: 418.780.4321

srilling@dswelchbussieres.com

www.dsavocats.com

slide35

BECOMING A MEMBER

  • Currently membership is free and key benefits include:
  • Expanded connections and resources
  • Increased visibility
  • Enhanced business support
  • Knowledge sharing
  • www.cedec.ca/sbsn
  • sbsn@cedec.ca

CEDEC Small Business Support Network is an initiative of the Community Economic Development and Employability Corporation (CEDEC)

CEDEC is funded by the Enabling Fund for Official Language Minority Communities and by the Government of Canada.

slide36

UPCOMING WEBINAR

  • Stress and Time Management:
  • How to Reduce, Prevent, and Cope with Stress
  • Tuesday, May 13, 2014 (EDT)
  • 12:00 - 1:00 p.m.
  • Guest Speaker:

Ariel Sherker

Certified Hypnotherapist

Founder and President

The Montreal Hypnosis Centre