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Peter’s Blog

Often the use of a Corporate Lawyer comes about as a result of challenges in business situations. Peter’s blog has been created to demonstrate the range of business situations that require the introduction of a corporate lawyer early in the process to prevent the often complex problems businesses find themselves in. Short succinct examples on asset protection, estate planning, succession planning and a variety of other matters will be addressed interspersed with some fun tongue and cheek responses to the media on issues of corporate law. Enjoy!

Land Purchase Options

It’s not infrequent that commercial tenants have options in their leases to purchase either contiguous property or even the subject matter property of the Lease.  The issue is: What can be set out in the option at the time of its creation that makes the option fully capable of being enforced?

There is a relatively simple process to eliminate this disadvantage to the “Tenant” who holds the “option to purchase”.  The document comprising the option can expressly state what the option amount should be by way of a ratio to a third party purchaser or alternatively a purchase price which is good for a period of time and thereafter subject to an index such as the consumers price index.

It is equally conceivable that the land owner who is subject to an option to purchase in favour of his tenant, may never have had the option registered on title and might very well sell the property to a third party who, of course, takes subject to the Lease on the property where there is actual notice that the Lease exists.

That is hardly secure for the Tenant of property which includes an option to purchase.  Valuation is always critical with respect to exercising an option to purchase.

The Take-away:  My suggestion is that the option expressed in the principal document (Lease or other business relationship) sets out precisely what the terms for exercising the option are and the terms for the purchase of the optioned lands, possibly using a factor or a multiple of the existing Lease and at the minimum some form of correlation to the method of calculating the value of the principal property that is under Lease using square footage.  Simply leaving the price and payment requirements to be determined later merely exposes the option to abuse.

We’ve had too many cases where the option grants to the Tenant the right to purchase but the land owner demands far more than realistic.  Options should specify fully what it is to mean and how much.

Estate Administration Tax – Early Payment and Recent Reforms


As you may know, the appetite of persons to be the Estate Trustee of an Estate has been significantly dissipated as the result of recent changes relating to obligations for the payment of Estate Administration Tax.  In an abbreviated form, the Estate Trustee/Executor named in the Will has a responsibility to report to the Minister of Finance, Ontario, within 90 days following the issuance of “Probate” by way of an Estate Administration Tax Return.  The Return must report exactly what is due by the Estate and the Beneficiaries for “Probate Fees” on the Estate.  The penalties to the Estate Trustee for failing to report or to under report are personal.  Both penal and financial. Yet the Estate Trustee, himself/herself, may never receive any compensation whatever for assuming the personal liability.

So here is the abbreviated version: Estate Administration Tax is payable at the moment of the Application for “Probate” either with or without a Will.  Regardless of the time it takes to obtain “Probate” (variously, on average, 6 weeks to 12 weeks), the Estate Trustee as Applicant for Probate has a personal responsibility to both the Beneficiaries as well as to the various levels of government.  Accurate reporting of the value of the Estate upon which the calculation is made for the payment of the Estate Administration Tax is critical.

But here is the reality: To overpay Estate Administration Tax at the time of application gives rise to an entitlement for an application for refund of the overpayment.  The problem is that the overpayment will take at least 6 months and maybe as much as a year to obtain back from the government.  They like to receive the money; they just don’t like to pay it out.

Accordingly, I strongly encourage the underpayment of the Estate Administration Tax at the time of the filing of the Application.  If it turns out that the assets of the Estate are higher than what was initially submitted at the time of the filing of the Application, simply pay the surplus that was not included earlier.  No requirement for Refund.  No 6-10 months waiting.  Remember there is still, within 90 days following the date of the issuance of the Certificate of Appointment of Estate Trustee the necessity to file the Estate Administration Tax Return with the Minister of Finance but even that can be done based upon the original valuation and “topped-up” later.

Here’s an example: Gentleman Matthew dies intestate (without a Will) in 2014 leaving wife and daughter but owning at the date of death shares in a privately held Corporation the value of which is largely not capable of being determined until either the remaining Shareholders buy out the Estate or the shares are sold to a third party or potentially the entire business is sold to a third party.

The widow makes Application for Probate by way of a Certificate of Appointment of Estate Trustee without Will which was granted but only upon payment of the Estate Administration Tax estimated by the widow at the top end of what could potentially be the value of Matthew’s 60% shares in his Company.

It turned out that the estimate was significantly higher than the actual value achieved years later upon the sale of the Estate’s shares.

A large refund was requested upon the overpayment of the Estate Administration Tax paid at the time of the Application (which was necessary in order to permit the widow to even deal with the Estate and all the other items within the Estate). 

The Application for refund was filed in March 2016 and eventually in September 2016, the Court finally got around to issuing a refund.  In the interval, the widow, who did not have any other source of income, has overpaid the Estate Administration Tax from resources that could well have been spent better in underwriting the surviving family members.

The take-away:  I strongly recommend that the Estate Administration Tax be understated upon its payment. That takes nothing away from the obligations of the Estate Trustee to provide a payment of the Estate Administration Tax as finally determined based upon the value of the assets as eventually determined.

Foreign Investments

Welsh Law Asset Protection and Creditor ProofingWhile largely remote to most Canadian clients without investments/houses/properties in sunny climate environments, for those that have taken that initiative, please read on.

Recently, a Canadian resident/citizen bought his dream home in Barbados. After investing heavily in both the purchase as well as improvements and the retention of locals for various services, it came time to move on in his retirement plans which, in this case, did not mean living happily ever after in Barbados. No reflection; just new plans.

That, of course, involved the sale of his property. That’s when the rub started.

First, as it turned out, his original purchase was not properly recorded. In fact it wasn’t recorded at all despite the retention of a Barbados lawyer to do so. The lawyer neglected to register and the client neglected to require full reports on his purchase, relying, as he did, on his Barbados lawyer.

Then, upon his efforts to sell, his source of ownership (previous deeds, title documents, etc) did not even exist. That required a “Rectification Deed” and a change to the title which was, at considerable cost, eventually obtained to place him in the position that he should have been in at the time of acquisition.

But then here’s the message: Currency control.

While purchased (and later sold) in US Dollars, the extraction of the client’s US Dollars was held up by the Barbados authorities.

Whether currency conversion shortages or mere obstreperousness, there was a reluctance to provide US Dollars and preference to provide the client with the equivalent in Barbados dollars which of course have lower currency recognition than do US Dollars.

Eventually, our client did receive his US Dollars but only after another Barbados law firm went to bat for him.
Only as the result of extensive (and expensive) legal maneuvers did the client receive what he should have received.

THE TAKE-AWAY:

Remember always 3 points must be considered when investing in a foreign jurisdiction: Getting in; Getting along (with local authorities) and Getting out. And getting out means not only getting out personally, but also with your investment.

Be sure you address all of these and never overlook the one relating to getting out.

Estate Administration Tax: The Final “Cash Grab” by the Government of Ontario

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As we all know, Estate Planning, to minimize taxes, has long been the “mantra” of professional advisors. Sadly, current reports suggest no more than 50% of Canadians even have Wills. Without harping on that, read on for this tragedy.

Bob and Mabel, married over 50 years, with 3 grown children, dutifully prepared their Wills in 1994. The Wills were reciprocal and dealt essentially with identical items.

JUST ONE TRAGIC CASE

Bob died in 2016. Mabel wished to sell their family home to downsize. To her astonishment (and despite all of the right things about joint accounts, designated beneficiaries on investments outside the Estate and with full expectation that whatever was “his” would be “hers” and vice versa) the family home was registered as Tenants in Common.

What does that mean? It means that Bob owned 50% and Mabel owned 50%. Upon Bob’s death, Bob’s Estate owned 50%. Mabel did not own Bob’s 50%.

However, the house was registered Tenants in Common also referenced, to their ignorance (obliquely) in their reciprocal Wills in 1994. If the house were registered as Joint Tenants, on Bob’s death, Mabel would own the house with no costs.

To Mabel’s astonishment (and significant cash cost) the family home could not be sold without “probate” on Bob’s Will. She needed to mortgage the family home to raise money to buy a downsized house, but could not without probate on Bob’s 50% interest in the family home.

The Wills provided the survivor would leave the family home to the surviving spouse to live in as long as he/she wished, and to decide on when or if to sell but then 50% only of the interest (in this case, of Bob) would go to Mabel and the remaining 50% would go to Bob’s 3 children. That meant Bob’s 50% ownership in the house is split into two: effectively 25% to Mabel and 25% to be held by the children. Mabel did not control Bob’s 50% or even inherit it fully.

Mabel must get probate on Bob’s Estate. Cost: Estate Administration Tax at 1.5% of Bob’s 50% interest in the house. That probate fee is totally thrown away had it been that Bob and Mabel had taken the title as Joint Tenants. The probate fees Mabel has to pay on Bob’s share of the house together with her legal costs to file the Application in order to get probate were necessary in order to deal with the sale of the house. Mabel’s costs thrown away in this case: $20,650 plus costs; all taken away by the government without any benefit to the wife or the kids.

THE TAKE-AWAY

1. If you expect “what’s his is mine”, check to be sure; may not be so;

2. A 1994 Will is woefully overdue for review and update;

3. Estate Administration Tax is nothing less than a cash grab on whatever has been saved by the deceased and ought to be avoided at all costs and every time. That means to avoid probate fees.

This tragedy could have totally been avoided had Bob and Mabel reconsidered the contents of their Wills in the last 25 years or for that matter reaffirmed exactly what their intentions were to be sure that their testamentary wishes were matched by what they had actually prepared in 1994.

Benefits of Unanimous Shareholders Agreements

Peter Welsh Law Partnership and Shareholder Agreements

While fledgling startups frequently are short of disposable funds to be expended upon legal documents designed to record the expectations and the participation of the principals, serious consideration should be given to some sort of a Unanimous Shareholders Agreement, almost regardless of how extensive.

Regrettably, not all ventures fully succeed or surpass the wishes of their creators and in the event of a dispute or collapse, the costs, whether through litigation or third party intervention, to resolve disputes, often exceed even the economics at stake.

“Shot Gun” clauses offer a tried and true method for dealing with potential battles of interest.

This is a dual-message. First: all business relationships among parties should have a “divorce mechanism”. The second is that “shot gun” clauses offer an expeditious and expedient method to achieve that divorce without the necessity and costs of litigation.

In essence, “shot gun” clauses allow one party to say: “I want either to buy you or to sell to you: same terms; you choose”.

It’s cutting the pie: the other side chooses which “one-half”.

THE SHOT-GUN NOTICE

But here’s the caution: almost all “shot gun” clauses dictate that the shot gun Notice determines the terms of the shot gun. (NOT the Unanimous Shareholders Agreement in which is found the provision for the shot gun clause).

Extreme care must be taken to set out precisely what are the terms triggered on a shot gun clause. It is not infrequent that the underwriters of the business (the startup entrepreneurs) have guaranteed bank loans or possibly leases of premises or third party contracts. The shot gun Notice should expressly state what is to be done with those third party obligations; most usually, that, whoever is the eventual Vendor of shares, is absolved of all of those third party obligations.

The shot gun Notice is the document in which those terms are set out and they must be set out explicitly because that is what the other party is to receive and must match in order to reverse the shot gun.

A clear example: a business operates for a brief period of time and generates significant Canada Revenue Agency unremitted withholdings or HST obligations together with an operating line of credit and a government guaranteed small business loan. One or the other of the shareholders wishes to get out of the venture but wishes to be absolved of all third party obligations. The shot gun Notice must set out exactly what is to be done with those third party obligations. If they are not expressly set out, there is no obligation of a party to eliminate those third party obligations and the departing shareholder may find himself in the position of being a continuing guarantor of the indebtedness due by his former Corporation and former shareholder/partner.

The message and takeaway is:

1. The shot gun Notice must be triggered with absolute certainty of what is required including full specificity of all terms.

2. Frequently, the party ending up purchasing must renegotiate with third parties all third party obligations in order to secure the release of the vending partner. That takes time and third party cooperation and frequently substituted security to satisfy the third party lender.

Winding Down A Business

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There are 2 prominent initiatives driving consideration of winding down a corporation:

1. First, retirement/capitalization on investment; sale to third party; or
2. While still operating, a desire to reduce complexity and possibly to merge holding companies with operating companies to result in fewer tax filings and simplification of administration.

These types of initiatives frequently arise from family maturation, change in business plans or maybe even declining business.

But regardless, many enterprises have complex structures of “tiered” corporations frequently determined by estate planning or for the purpose of segregating potential liability. The relevance of these related corporations should be seriously considered before the desire to simplify prevails over better business structure planning.

It’s natural to think of simply “shutting down”. Simple as that may seem, that will not stop government filing requirements, costs to complete tax returns and continual notices from various levels of government, sometimes rather costly as the result of the failure to file.

So we’ve counseled clients to consider amalgamations between and among holding companies and operating entities to result in just one corporation and therefore just one set of filings. Continuing a corporate existence to take advantage of corporate tax rates/income splitting and banking relationships should be considered. It is not infrequent that corporate structures have been established in a multitude of jurisdictions necessitating the bringing of a corporation from one jurisdiction (say, for example, the federal jurisdiction) into the jurisdiction of another company (say, an Ontario company).

One must also assess the effect of an amalgamation relating to liabilities. Remember that whatever were the assets and liabilities of each pre-amalgamation corporation automatically become the assets and liabilities of the post-amalgamated corporation.

There are admittedly certain savings and tax benefits, but at the same time before simply proceeding, serious consideration should also be given to the liability component of the effect of amalgamation.
We’d be pleased to assist you in your consideration.

Franchise Leases

pen-signature-21182892Most franchise operations involve either the franchisor holding a lease and subletting to a franchisee (for obvious control purposes) or the franchisee itself directly leasing space with direct liability to a Landlord.
Either way, the franchisor always seeks control over the location in the event the franchisor seeks to enforce its rights following a franchisee default.

So, for franchisees, here are your issues:

1. Who controls the location?
2. Can you operate any other business on the site in the event the franchise agreement is revoked or discontinued or the franchisor ceases to operate?
3. If the franchisor controls the lease, who controls the renewals if any?
4. What about personal liabilities either of the franchisor in its capacity as both the holder of the intellectual property of the franchise as well as the holder of the real estate?
5. Who owns the improvements located in the premises? (machinery, equipment)

It’s not easy to differentiate the relationships, but if you are a pending franchisee, don’t lose sight of the fact that the lease is as important and sometimes even more important than the franchise agreement.

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