The Goods and Services Tax (GST) is a multi-level value-added tax which was introduced in Canada on January 1, 1991. Canada belongs to 120 countries that impose a consumption tax or “value added tax” on goods and services. GST in Canada replaced a hidden 13.5% Manufacturers’ Sales Tax (MST), while its introduction was controversial the government stated that GST was implemented because the MST hurt the manufacturing sector’s ability to export.

 

The history of the GST began in 1989, when the Progressive Conservative government of Prime Minister Brian Mulroney proposed to create a national sales tax of 9%. At that time, all the provinces in Canada except for Alberta had its own provincial sales tax.

The main purpose of the GST was to replace the 13.5% Manufacturers’ Sales Tax and Federal Telecommunications Tax of 11%. The federal government was expecting that the removal of the tax will aid Canadian manufacturers in their international competitiveness.

The tax became a controversy right from the beginning. While it was definitely helpful for the manufacturers and was promoted as revenue-neutral in relation to the MST, the opposition stated that the tax would make life more costly for Canadians. After a short stand, Mulroney used a little-known constitutional provision to increase the number of senators by eight temporarily, thus giving the Progressive Conservatives a majority in the upper chamber. The Opposition launched a filibuster and further delayed the legislation. The tax was lowered to 7% and Government defended the tax as a replacement for a tax unseen by consumers because it was placed on manufacturers. Eventually it came into force on January 1, 1991. In 2006 the Conservative Party of Canada reduced the tax by 1% (to 6%) on July 1, 2006 as part of an election promise. On January 1, 2008 they lowered it to 5%, bringing it to its current state.

 

The GST law is covered by the Excise Tax Act and all the Canadian Revenue Agency (Canada Customs and Revenue Agency before 2003). As of January 2009, the tax is 5% and applies to most goods and services, except for: used residential housing; most health, medical and dental services; day care; music lessons; and certain goods and services provided by non-profit organizations, governments, and other public service bodies. There are also a number of Zero Rated goods and services like: basic groceries, prescription drugs, exports, and any property or service that is for the use of the Governor General. New Brunswick, Nova Scotia and Newfoundland and Labrador, have a combined tax of 13% which is composed of 8% provincial portion and the 5% GST. The aboriginal people in Canada are exempt from payment. Like in many countries with the GST, visitors for up to 60 days can apply to have their tax refunded. When they are leaving the country they can fill out a form at a Canadian airport or some duty free stores at border crossings. After that the visitor sent in original receipts with a stamp by Canadian Customs. Cheques are mailed to the visitor within a few weeks.

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When in business, developing goodwill is one of the most difficult (and necessary) tasks. Business goodwill is the value of the business over the net assets or book value. This includes the brand name, customer relationships, reputations and other intangibles, which are all fundamental components of business success. Franchising, for instance takes advantage of the built-in goodwill a large company has established.

Now that we have an idea of what goodwill is… what is it? Well, it depends. Sometimes, it is the intangible value of a service or product. Sometimes goodwill is the intangible value of a business (the name, reputation). Goodwill can also be the intangible value of the members of the business. For example, Dan graduates and he partners with his classmate, Steve to start their own dental practice. It takes a few years, but eventually Dan & Steve’s Teeth Shop develops a following of loyal customers. All is going well until one day, Steve has an affair with Dan’s wife and Dan wants him gone. Steve doesn’t mind, but demands to be bought out of his half of the partnership. This is where goodwill comes in.

Since Dan has three patients for every patient Steve has, he might refuse Steve’s asking price on the basis that he (Dan) is more responsible for the success of the business and entitled to a bigger slice of the goodwill. Steve could argue that the goodwill is in the Teeth Shop brand name or that even though Dan works on more patients, he is clearly more responsible for the businesses success because he (Steve) came up with the catch phrase on the television commercials and built name recognition with his billboard idea. Meanwhile, Mrs. Dan decides to file for divorce under the pretense of abuse (Dan hit her with a rake, forcing her into the arms of another man). She wants a piece of Dan’s business and of course, some goodwill. So, how much money should she get? It depends.

As always, in any legal situation, consulting with a lawyer is recommended  Most Canadian lawyers offer a free initial consultation and can advise you on your position on a goodwill dispute.

There are a couple ways to value goodwill- the market share method and the capitalization of excess earnings method. Market share, is what a willing buyer would pay for the business right now (what the business is worth plus goodwill). The capitalization of excess earnings method capitalizes excess earnings or the additional earnings beyond a “reasonable return” on the physical assets and the salary a similar professional could command in the same market for the same service.

Goodwill is difficult to quantify, because it is intangible. We know it’s “there” but putting accurate numbers to it is a challenge and eventually it comes down to what everyone can agree upon.  In the example, if Steve and Dan agree on a 45/55 split they are right. If they agree upon a 30/70 split, they are also right. If an appraiser finds the business to have $30,000 in goodwill using the market method she is as right as an appraiser that finds the business to have $25,000 in goodwill using the capitalization of excess earnings method. It comes down to what everyone can agree on.

www.lawyerahead.ca carries the most comprehensive Canadian lawyer directory.  Find a lawyer for your legal needs by either posting your case or directly contacting a lawyer through the legal directory available to you.

Most Viewed Lawyers for the week ending March 13, 2009

1. Christoper Hicks, Toronto Criminal Lawyer
2. David J. Rotfleisch, Toronto Business Lawyer & Toronto Tax Lawyer
3. Victor Giorgas, Toronto Criminal Lawyer
4. Graydon Sheppard, Hamilton Personal Injury Lawyer
5. Rene Larson, Thunder Bay Lawyer

We will update our “Most Viewed Lawyers in Canada” edition next Monday.

So you have decided to go into business for yourself and now you are wondering what to do. The variety of options can be mindboggling at first, but by consulting with your accountant and lawyer and by doing a bit of homework, one can discern what the appropriate course their business venture should take. One of the first steps after you have decided what sort of business interest (e-store, restaurant, manufacturing, etc) to pursue is to figure out what sort of business structure is best for you.

The three basic business structures, sole-proprietorships, partnerships, and corporations, handle taxes in diverse manners and one should decide whether they expect profits or losses during the startup phase to arrive at the most suitable option.

Although corporations offer the entrepreneur the least amount of liability, they are less than favorable when you expect initial losses. Remember, corporations are legal entities and this means any losses they take stay with them. Entrepreneurs are not allowed to use these corporate losses to hedge against their supplementary incomes. Sole-proprietorships and partnerships tend to benefit the entrepreneur in this circumstance. Unlike corporate losses, which cannot be used, initial losses from starting a sole-proprietorship or partnership can be used to offset other sources of income. When profits are expected, the entrepreneur should consult with his accountant and have them compare the respective tax burdens for each business structure scenario.

Planning for what will happen with the business once the entrepreneur is deceased is another important part of the process. The method of transfer should be analyzed on a case-by-case basis to avoid swamping loved ones with taxes. Gifting the business to your spouse or to a trust for the spouse is one of the simplest ways to defer capital gains tax. Trusts come in handy when you want to ensure the business will be transferred to following generations. Estate freezes, which involve “freezing” the value of the business and allowing future growth in value to be transferred to the next generation without capital gains tax, is valuable because it postpones heavy taxes until the death of the next generation.

Tax and estate planning is a very in depth issue. Hopefully, this post gives you a glimpse into the intricate world of tax and estate law, but please recognize that it is only a glimpse. Jumping in without the guidance of an experienced lawyer and an experienced accountant is not a good idea. Many facets of your business may need special consideration and consulting with your accountant could result in large structural changes to better suit you from tax or other standpoints.

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Canada’s system of government and its legal regime are quite similar to those in the United States. In Canada various regulatory matters will have to be taken into account while starting a business.

Business Structure

The business structure can be a sole proprietorship, partnership, incorporation or a not for profit organization. For setting any of these business structures the rules and regulation of the state where the business will be set up has to be understood and followed by the business.

From a legal point of view, there are three common types of businesses: sole proprietorship, partnership and corporation. Each has different and important implications for liability, taxation and succession which have been specified below:

Advantages and Disadvantages of Proprietorship

This is the simplest way to set up a business. A sole proprietor is fully responsible for all debts and obligations related to his or her business. A creditor with a claim against a sole proprietor would normally have a right against all of his or her assets, whether business or personal. This is known as unlimited liability.

In a proprietorship, one person performs all the functions required for the successful operation of the business. The proprietor secures the capital, establishes and operates the business, assumes all risks, accepts all profits and losses, and pays all taxes. The proprietor is said to be self-employed.

Advantages

• Low start-up costs

• Greatest freedom from regulation

• Owner in direct control of decision making

• Minimal working capital required

• Tax advantages to owner

• All profits to owner

Disadvantages

Unlimited liability
Lack of continuity in business organization in absence of owner

Difficulty in raising capital

Advantages and Disadvantages of Partnership

A partnership is an agreement in which two or more persons combine their resources in a business with a view to making a profit. In order to establish the terms of the partnership and to protect partners in the event of a disagreement or dissolution of a partnership, a partnership agreement should be drawn up. Standard form partnership agreements can also be purchased for about $5.00 at stationary stores. Partners share in the profits according to the terms of the agreement.

In a General Partnership, two or more owners share the management of a business, and each is personally liable for all the debts and obligations of the business. This means that each partner is responsible for, and must assume the consequences of, the actions of the other partner(s).

A second type of partnership is a Limited Partnership which involves limited partners who combine only capital. They are not involved in managing the business and cannot be liable for more than the amount of capital they have contributed. This is known as limited liability.

A limited partnership also involves general partners, who are involved in management. They are fully liable for the debts and obligations of the business, but may be entitled to a greater share of the profits.

Advantages

• Ease of formation

• Low start-up costs

• Additional sources of investment capital

• Possible tax advantages

• Limited regulation

• Broader management base

Disadvantages

• Unlimited liability

• Divided authority

• Difficulty in raising additional capital

• Hard to find suitable partners

• Possible development of conflict between partners

• Partners can legally bind each other without prior approval

• Lack of continuity

Advantages and Disadvantages of Incorporating

A corporation, also known as a Limited Company, is a legal entity which is separate and distinct from its members (shareholders). Each shareholder has limited liability. A creditor with a claim against the assets of the company would normally have no rights against its shareholders, although in certain circumstances shareholders may be held liable. This type of business can be incorporated at either the federal or provincial level.
Ownership interests in a corporation are usually easily changed. Shares may be transferred without affecting the corporations existence or continued operation.

The following characteristics distinguish it from a partnership or proprietorship:

Limited liability - normally no member can be held personally liable for the debts, obligations or acts of the corporation beyond the amount of share capital the members has subscribed; and

Perpetual succession - because the corporation is a separate legal entity, its existence does not depend on the continued membership of any of its members.

Advantages

• Limited liability

• Possible tax advantage (if you qualify for a small business tax

rate)

• Specialized management

• Ownership is transferable

• Continuous existence

• Separate legal entity

• Easier to raise capital

Disadvantages

• Closely regulated

• Most expensive form to organize

• Charter restrictions

• Extensive record keeping necessary

• Double taxation of dividends

• Shareholders may be held legally responsible in certain

circumstances

• Personal guarantees undermine limited liability advantage

The following legal aspects should be taken care of by all types of business entities:

Employment law

The contract of employment is important in individual employment relationship in Canada. An employer that wishes to define with certainty the terms of employment should enter into written contracts of employment with its employees. In Canada, employments laws relating to unionized workplaces are differentiated from those relating to particular individuals.

Antitrust Law

The Canadian equivalent of the American Anti-trust Legislation is the Competition Act. The Act grants broad power to the Competition Tribunal to prevent an unfair abuse of power by a competitor in a dominant position.

Environmental Protection

Environmental protection is the joint responsibility of Federal and Provincial levels of government. Federal Legislation regulates the import/export manufacturing use in Canada of prescribed substances as well as prescribing obligations in the event of unlawful discharge of toxic substances into the environment. The Act imposes penal sanctions together with a substantial fine if the environmental regulations are not followed.

Patent, Copyright and Privacy Regulation

The Patent Act in Canada grants monopoly to the holder of the exclusive right to manufacture, sell or use an invention in Canada for 20 years from the date of application. In Canada, copyright arises automatically upon creation of a work. Copyright affords the owner the sole right to reproduce or publish the work or any substantial part. Regarding privacy regulations, the Personal Information Protection on Electronic Documents Act passed substantially tracks the provisions of the European Unions data protection directive.

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A contract is a legally binding agreement between two or more persons for a particular purpose. In general, contracts are always formed on the same pattern. A person offers to give another person something; to provide a service or to refrain from doing something. If the offer is accepted, the contract is then valid in principle.

A contract is, therefore an agreement that legally binds the parties to the agreement to do (or not do) what the contract stipulates. The essential elements of a contract are the offer, acceptance, and consideration.

Common law is the system of law that evolved from the decisions of the English royal courts of justice since the Norman Conquest (1066). Today the common law, considered more broadly to include statutes as well as decisions, applies in most English-speaking countries, including all Canadian provinces except Québec. Civil Law is the system of law that evolved from the Roman law compilations of the Emperor Justinian. Today it is found in countries of continental Europe as well as their former colonies and, in Canada, in Québec. Canadian common law and Québec civil law generally follow similar rules in this regard, that is a contract legally entered into represents a legal bond between the parties. Parties are free to contract whenever and for whatever reason they wish.

Five conditions that must be met for a contract to be legally binding

Mutual Consent

The first condition is that there should be mutual consent of both parties. In other words there must be an offer by one side and an acceptance of the offer by the person to whom the offer was made.

Contractual capacity

The second condition is the contractual capacity of both the parties. For a contract to be enforceable it must be between competent parties. All persons are legally authorized to enter into a contract except for the following:

• Minors, who are above 18 years of age,

• Mentally incompetent persons,

• Person who is ineligible from entering into the contract by law.

Purpose

The third condition is that the contract should have an object or a purpose; it must concern a specific and agreed-upon good or service.

Lawful Cause

The fourth requirement of a valid contract is that its provisions be legal. If a purported contract requires an illegal act, the result is a void contract. Parties to an illegal contract have no standing in court. If one party receives money or property under an illegal contract, the other may not sue to recover what was paid under the contract. Contracts to commit crimes or to engage in immoral acts are void.

Written formalities

The fifth condition, which is not required in all cases, is the compliance in certain circumstances to formalities provided by law such as, for instance, a valid written instrument.

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Al khalifa’s lawyers and Michael Jackson’s lawyers finally reached an out of court settlement over the law suit of 7 million issued by Mr. khalifa’s lawyers for Michael Jackson not living up the contractual agreement between the 2 parties. MJ was paid a handsome cash advance for promising Khalifa a record, an autobiography and a stage play. According to Al Khalifa’s testimony he had paid for MJ’s living and travelling expenses during his stay in Bahrain. He further testified he got MJ a Motivational Guru and built a studio in preparation for his record.

In defense of MJ, his lawyers called on the fact it was Al khalifa lavishing Jackson with his gifts based on “mistake, undue influence and misinterpretations”. They also urgued successfully that Michael Jackson was taken advantage of by Al Khalifa at a time of vulnerability and by engaging in-appropriate business tactics.

Where I stand I am pretty sure both of them took advantage of each other. Al khalifa is an aspiring song writer while Jackson was in deep need of financial bailout since his child molestation case in 2005.

If either one was serious about this venture, they would have gotten that in writing with lawyer representations from both parties.

Considering all the talk (and action!) of outsourcing these days, I suppose it was only a matter of time before we outsourced some of our legal work, too. While call centers and technology-oriented operations were the first to head over to India, slowly medical analysis, and now lower-end legal services, are heading there too.

This isn’t something that’s likely to affect most people here in Canada- unless, of course, you happen to be a contract lawyer. The work that’s heading over to India and elsewhere is mainly document review. During the discovery process of a lawsuit, where both sides collect information and build there cases, there’s quite a bit of tedious searching through mountains of documents to find information relevant to the case.

Right now, most document review work is done by contract lawyers- lawyers who work part-time to review documents, here in Canada and the US. Major law firms usually have junior attorneys who do this work. However, contract lawyers cost upwards of $60 an hour, and junior attorneys at major firms usually receive salaries of over $100,000. So, quite a lot of money is going into what is, essentially, relatively simple work.

While academia has harnessed the wonderful strategy of paying students minimum wage to do research grunt work, the legal profession is finding another way to lower costs- outsourcing. Pangea3 and other companies have set up offices in India, supervised by American attorneys, to conduct document review- for only around $30 an hour.

This doesn’t mean your case is about to be phoned in from Mumbai- it will, hopefully, just mean that next time you hire a lawyer, some of those “billable hours” from discovery will be a bit cheaper. Companies like Pangea3 also argue that the work will be done better- since these outsourcing companies are one of the only opportunities for lawyers without family connections to work their way up in the profession. Contract lawyers here, on the other hand, are the bottom of the profession, and not likely to work their way up through this work. So, goes the argument, lawyers in India doing this document review have much more motivation to do it well.

Other lower-level legal work may also move overseas, as the number of companies doing document review increases and companies try to become more competitive. Some corporations here are even trying to use their knowledge of the offshore legal market to force firms here to lower their fees, or at least the markups they charge on document review.

Then again, maybe some of the big-name firms over here who are so convinced that doing this menial work for them is “valuable training experience” will start charging their junior associates to do it! Then again,

save some money for us, someday.

Recent Contracts cases in Business Law that drew most attention from Business Lawyers.

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