Details, Details: the Importance of the Minute Book

It is important for business owners, directors, officers and managers of a company to maintain accurate corporate records in their corporate minute book.

Minute books are meant to serve as the official source of all corporate records. They should contain such documents as the articles of incorporation/amendment/ amalgamation, corporate bylaws, and minutes of shareholders’ and directors’ meetings. Ensuring the minute book is up-to-date helps to ensure that all vital corporate documents are in one place. This way, such documents can be easily found, retrieved and consulted when and if needed.

The minute book should properly identify the shareholders of the company, and document all share issuances and transfers. The minute book must also properly identify the decision makers of the corporation (i.e. directors and officers), when such decision makers were elected/appointed and when they ceased their functions. The corporate records should properly demonstrate that the directors and officers were granted their authority to act. The minute book share ledgers and shareholder, director and officer registers should be updated each time there is a change. These registers will often be used to quickly identify who the directors, officers and shareholders are, or were, on any given date.

A minute book that is accurate will also show the official standing of the corporation. Such information will be vital to facilitating many corporate transactions, such as a potential sale of a company. For example, shareholders are required to approve the sale of a business. If share transfers and/or issuances were never documented, or improperly documented, it may be difficult to quickly and accurately identify the current shareholders in order to obtain their consent to the sale. If your company’s minute book is out-of-date, a generally straight-forward transaction may become lengthier and much more expensive.

There may also be times when third parties will need to examine your minute book. For example, in the case of an audit by the Canada Revenue Agency (“CRA”), the minute book can help to establish effective dates for tax purposes, and can serve as a record of bonuses and dividends the corporation has paid out. The CRA may disallow dividends if the appropriate resolutions are not prepared, signed and included in the minute book. The Workplace Safety and Insurance Board may also examine the book to assess compliance under the Workplace Safety and Insurance Act.

Having an out-of-date minute book can have both practical and legal implications. Practically speaking, and in addition to those implications already discussed, if a company is being sold, the buyer will likely require a legal opinion relating to various corporate matters. Such opinions will not be able to be drafted until all corporate documents have been properly executed and the minute book has been updated accordingly. Having an up-to-date minute book can help avoid any such delays related to the legal opinion. An out-of-date minute book and improperly kept corporate records may also cause delays in obtaining financing.

Moreover, if the minute book is missing documents demonstrating that certain directors and officers have been properly elected or appointed, their authority to make decisions may be subject to challenge.

From a legal perspective, a corporation that fails to comply with requirements to maintain certain corporate records may be found guilty of an offence and liable to a fine.

If your corporate minute book is not up-to-date, there are methods of rectifying such deficiencies in the corporate records. A corporate lawyer will be able to perform a proper review of your minute book to identify any deficiencies and will be able to prepare the necessary documentation to resolve any problems. Ensuring your minute book is properly updated now may help prevent any future delays and expenses associated with updating your corporate records.

Jennifer Brigandi, Associate

 

This article is provided as an information resource and is not intended to replace advice from a quaified legal professional and should not be relied upon to make decisions. In all cases, contact your legal professional for advice on any matter referenced in this document before making decisions.

 

Do I need a shareholders’ agreement for my new business?

Here is a typical scenario:  2 or more colleagues join together to start up a business.  They incorporate and organize a company.  Then they ask themselves whether they should enter into a shareholders’ agreement.

A shareholders’ agreement is an agreement among the shareholders of a corporation setting out their agreement on how the company will operate. Typically, it deals with issues such as: (1) who will be the directors and officers of the company; (2) how the start-up costs and ongoing costs will be funded; (3) what are the restrictions on the transfer of shares; (4) what happens if new shares are being issued; (5) how are disputes resolved; (6) what happens on the death, bankruptcy, divorce or incompetence of any of the shareholders; and (7) how are major decisions approved.

A major benefit of a shareholders’ agreement includes the ability to clearly set out how the company will be run.

Firstly, when people start up a business they are usually cordial and optimistic.  Later on, if the business is not doing so well and animosity sets in, it’s hard at that point for the parties to agree on issues such as those set out above.  For example, how much should each shareholder contribute to the $100,000 needed to carry the company through the year?   This issue is easier to deal with when the company is starting as opposed to when the company is going through a tough time and no one wants to put in more money.

Secondly, you want to deal with issues before it’s too late.  What happens if Shareholder A dies suddenly? Without a shareholders’ agreement, the shares go to his beneficiary under his Will who is usually the spouse.   Shareholder B knew Shareholder A and could work with him. Now the spouse steps into the role of a shareholder and with it a say on how the company is to be run.  A shareholders’ agreement may say that upon death the other shareholders or the company will buy back the deceased shareholder’s share at their fair market value.  The spouse is treated fairly because he or she receives the fair value of the shares but the company or other shareholders don’t have to deal with the spouse and all of the uncertainty that may bring.

Thirdly, you may want to modify what the law would “default” to in the circumstances.  For example, under the Ontario Business Corporations Act most fundamental decisions (i.e. major decisions) require 66.7% of shareholder approval.  But what if you want a greater approval for some major decisions?

If you are starting up a corporation with a number of other people, consider the above issues and consult a lawyer to see if it makes sense in your case to get a shareholders’ agreement drawn up.

If you have any questions about shareholders’ agreements or concerning other legal aspects of setting up a business, please do not hesitate to contact me directly at 613.288.3226 or by e-mail at meng@tslawyers.ca.

Michael Eng, Associate

 

This article is provided as an information resource and is not intended to replace advice from a quaified legal professional and should not be relied upon to make decisions. In all cases, contact your legal professional for advice on any matter referenced in this document before making decisions.

Taxation of Damages – What a Difference It Can Make

At the conclusion of a long litigation matter, two questions sure to arise are how much was awarded and whether or not that award is taxable. Everyone agrees that a tax-free award is most desirable to the plaintiff.  However, whether or not a particular award of damages is to be received on a tax-free basis depends upon the characteristics of the action, the pleadings, the methodology used by the trial judge and the actual calculation of the damages.

Lawyers and their clients would be well advised to consider the tax implications of the damages sought from the outset.  In some instances, the nature of the action clearly determines whether the damages will be taxable by rule of law.  However, in other cases, there may be the possibility of framing the cause of action for tax purposes; whether the damages are deemed income and, if so, are they capital gains or income.

Damages Related to Personal Injury or Death

The characterization of damages awarded in the context of an injured individual is key to determining whether the award may be received on a tax-free basis.

Damages awarded in respect to a personal injury or death are to be received by the injured party, or by the dependant of a deceased party, on a tax-free basis as long as the damages are special damages, general damages or pre-judgment damages.

Special damages in the context of personal injury relate to compensation such as out-of-pocket expenses (for medical and/or hospital expenses) and accrued or future loss of earning. However, an amount which can reasonably be considered to be income from employment rather than an award of damages will not be excluded from income.

General damages in the context of personal injury relate to compensation for pain and suffering, loss of amenities of life, loss of earning capacity, the shortened expectation of life and the loss of financial support caused by the death of the supporting individual (a parent for example).

Furthermore, damages that are awarded to be paid over a period of time by periodic installments are also to be received on a tax-free basis by the injured party; notwithstanding that it appears to be an annuity.  The CRA confirmed in its IT-Bulletin 365 that damages for personal injury or death that are ordered to be paid in periodic payments are not, despite such periodic payments, considered to be an annuity contract and the periodic payments themselves are not considered to be annuity payments.  However, an annuity contract purchased by a taxpayer or a taxpayer’s representative with proceeds of a lump sum award received for damages for personal injury or death will be considered an annuity contract and will likely be taxable, with some limited exceptions.

Business Related Damages

Determining the characterization of damages awarded on business matters and the resulting tax treatment can be difficult. The general principle is that damages in lieu of receipts that would have been taxable as income remain taxable.  However, determining whether those damages are deemed income or non-taxable receipts depends on the nature of the legal right at issue.  One must carefully review the facts and determine the purpose of the remedy; i.e., for what do the damages compensate?

If the damages awarded are for loss of income, then the general principle is that they will be considered business income and therefore taxable.  However, if the damages awarded relate to the loss of an income-producing asset, it will be considered to be a capital receipt and non-taxable.  As one can imagine, the difference between loss of income and the loss of an income producing asset can be nuanced and there exists no bright-line test to differentiate the two; it is always a question of fact.

Essentially, if the damages received are for the failure to receive a sum of money that would have been income had it been received, the damages are likely deemed income receipt and taxable.  Also, if the damages awarded are essentially a surrogatum for future profits surrendered, the damages will likely be treated as revenue receipts, not a capital receipt, and be taxable.

Employment Related Damages

In most instances, employment related damages are awarded as compensation for a loss of employment and are specifically dealt within the Income Tax Act as “retiring allowances.”  Under the Income Tax Act, retiring allowances are fully taxable as income.

As a result, damages for wrongful dismissal, damages for compensation for lost earnings or damages on account of a contractually agreed settlement (such as a signing bonus) will all be taxable in the hand of the recipient.

Damages awarded by the Workers’ Compensation Board for illness, injury or death ought to be included as income but the recipient is entitled to a deduction which essentially offsets the inclusion by excluding the damages award.

Also, damages awarded in context of a human rights violation, personal injuries (e.g. defamation or harassment) or tortuous conduct by an employer are usually viewed as general damages unrelated to the loss of employment and are therefore non-taxable.  Once again, the determination is a factual one.

Conclusion

The taxation of damages awarded will inevitably affect the ultimate cost of recovery or indemnity.  In some instances, the Income Tax Act will clearly dictate whether the damages are taxable.  In other cases, a proper determination can only be made sometime after the commencement of the litigation process.  Ultimately, the only certainty is that some damages are taxable while others are not, that the analysis is a factual one and that the framing of the cause of action and the pleadings may formulate the determination.

If you have any questions concerning the taxation of damages, please do not hesitate to contact me directly at 613.288.3220

Sebastien Desmarais
Associate
Tierney Stauffer LLP
sdesmarais@tslawyers.ca

This article is provided as an information resource and is not intended to replace advice from a quaified legal professional and should not be relied upon to make decisions. In all cases, contact your legal professional for advice on any matter referenced in this document before making decisions.

Promotional Contests – YOU COULD WIN! …but know the rules.

Promotional contests are often used by companies to bring attention to their business, products and services. However, when proposing to conduct a contest, it is important to understand the applicable legal rules and regulations to ensure that your contest does not contravene the law. This article will focus on the provisions of the Competition Act (the “Act”) that apply to contests.

Contests, themselves, are not prohibited under the Act; instead, Section 74.06(a) of the Act prohibits any promotional contest where fair and adequate disclosure of the contest information and rules is not made. At a minimum, the following information must be provided:

1. The number and approximate value of the prizes. Generally, this means providing entrants with the regular market value of the prize. Where such a value is difficult to determine (i.e., the value of a prize that involves a trip from the winner’s home to New York may depend on where the winner is located), the range of possible values of the prize(s) should be disclosed.

 

1. The area(s) to which the prizes relate. If a contest is being run on a national basis, but three prizes are allocated for winners from Quebec, while only one prize is allocated to a winner from the Western Provinces, and one prize is allocated to a winner from Ontario, then such regional allocation of the prizes must be disclosed.

 

1. Series of Prizes. For example, if one winner is selected, and the prize is to receive $50 a month for 4 months, care must be taken to ensure that, after the first month, entrants are not made to believe that three $50 prizes remain to be won, when, in fact, they have already been awarded (just not distributed). 

 

1. Early Bird Prizes. When awarding specific prizes to the first entrants of a contest, make sure to disclose the start date of the entire contest (i.e. the date by which people must enter in order to win an early bird prize).

 

1. 5.       The skilling testing question requirement (if applicable);

 

1. Any important information relating to the chances/odds of winning.  For example, if the odds depend on the number of people who enter the contest, this fact should be disclosed. Similarly, if contest winning tokens are placed inside specially marked products, the number of winning tokens available to be found should be disclosed; and

 

1. The contest closing date.

 

The responsibility to provide all of this information rests on the person/entity conducting the contest. A consumer should not have to be inconvenienced in any way in order to obtain the basic information relating to the contest. Also, in a contest involving a particular product, a consumer should not have to buy the product to read the contest rules associated with it. Instead, a short list of the contest rules (at a minimum, numbers 1, 2, 5, 6, and 7 from above) should be disclosed on the outside of each product package.

In addition to the above, the Act requires contest promoters to select participants, and distribute prizes, randomly or on the basis of skill. Also, the distribution of prizes cannot be unduly delayed.

Failure to comply with any of the above may result in a court ordering the entity or individual to cease engaging in the conduct, to publish a corrective notice and/or to pay an administrative monetary penalty.

In addition to complying with the Act, contests must be lawful as they relate to other federal and provincial laws. The Criminal Code, and the possible requirement of a gaming license, should also be considered whenever a person (or business) wishes to conduct a contest.

Jennifer Brigandi is an Associate in the Business Law Group of Tierney Stauffer LLP. If you require further details, or require a lawyer to review or draft your promotional contest rules, please contact Jennifer at (613) 288-3221 or jbrigandi@tslawyers.ca.

This article is provided as an information resource and is not intended to replace advice from a quaified legal professional and should not be relied upon to make decisions. In all cases, contact your legal professional for advice on any matter referenced in this document before making decisions.