NEW RULES FOR RAISING CAPITAL

One of the biggest challenges for any new business is raising the money needed to get the business started. Many entrepreneurs start with a loan from family, friends or a financial institution. For companies based on a new concept or technology, a bank loan may not be available until the product or service is proven. A loan from family or friends may not cover the costs of research and development.

Another method for raising money is to sell shares to investors. However, the regulations and restrictions that apply have made this method too costly for many new businesses. In response to this concern, the British Columbia Securities Commission adopted new rules in April to make it easier for businesses – especially small and medium size businesses – to raise money from investors. The new rules also increase the opportunities for investors to make speculative investments in amounts that fit within their personal comfort levels.

The rules create four new and expanded exemptions from the prospectus disclosure requirements that apply to companies raising money from the public.

The four exemptions are summarized below:

  • Accredited Investor Exemption – allows companies to raise any amount of money from financial institutions, pensions, investment dealers, established companies and wealthy individuals (as defined in the rules) without a disclosure document.
  • Family, Friends and Business Associates Exemption – allows companies to raise any amount of money from family members, close friends and close business associates (as defined in the rules) without a disclosure document.
  • Private Issuer Exemption – allows “private issuers” (generally companies with less than 50 shareholders) to raise money from family members, close friends, business associates and wealthy individuals without a disclosure document.
  • Offering Memorandum Exemption – allows companies to raise any amount of money from anyone provided that the investor acknowledges the risks of investing and receives an offering memorandum – a short, simple disclosure document. Investor protection provisions have been added giving purchasers almost identical rights to those they get under a prospectus. The rights include a two-day right to cancel the purchase and broader rights to cancel or sue for damages if there is a misrepresentation in the offering memorandum.

The new rules are the results of a joint project of the B.C. and Alberta Securities Commissions. The new rules apply in both provinces (although Alberta has additional restrictions for the offering memorandum exemption). If we can help your company take advantage of these new rules to raise capital, or if you have questions about how they might affect you as an investor, please call us.

FEDERAL INCORPORATION FEES REDUCED

The fees to incorporate and maintain a federal corporation have been substantially reduced. Yes, you read that correctly: the fees were cut in half, effective April 1, 2001. For example, the federal incorporation fee has been reduced from $500 to, depending on the method of incorporation, $200 to $250.

According to a regulatory impact analysis done by the federal Corporations Directorate, the fees from incorporations and annual returns generated over 80% of the Corporation Directorate’s revenues. In its most recent fiscal year, the revenues from fees collected by the Corporations Directorate exceeded the costs of administration by over $4 million.

This surplus situation is contrary to federal government policy, which policy is due in large part to a 1998 decision of the Supreme Court of Canada regarding probate fees. In that case, the Supreme Court of Canada held that it was unconstitutional to impose a tax by regulation, since taxes must be approved by Parliament or the legislature. While fees can be set by regulation, the court held that probate fees were not a fee but a tax because there was no link between the amount of the fee and the cost of the service provided. (Both Ontario and B.C. subsequently introduced probate tax legislation to comply with the decision.)

Under the Corporation Directorate’s new fee schedule, the fees will more closely match the cost of the service provided.

The vast majority of B.C. companies are incorporated under provincial jurisdiction, in part because of previously lower provincial fees. Now that federal fees are lower, we expect that federally incorporated companies will become more popular in B.C. If you are considering incorporating, and want to know more about the pros and cons of each jurisdiction, give us a call. 

NEW TRUSTS CREATE NEW ESTATE PLANNING OPPORTUNITIES

If you are over 65, proposed amendments to the Income Tax Act permit you to use two new types of inter vivos trusts to achieve your estate planning goals. (An inter vivos trust is a trust created during your lifetime, as opposed to a testamentary trust, which takes effect upon death.)

A trust is a legal relationship and, for tax purposes, is a separate legal entity. When you transfer property to a trust, you no longer legally own it, even though you can continue to control and benefit from it. Inter vivos trusts have always been available as a tool for estate planning. However, because of the tax rules that apply to inter vivos trusts, they have not been widely used.

Those rules provided that a transfer of assets to an inter vivos trust (except a “spousal trust”) was, for tax purposes, a disposition of the assets at their fair market value, which could result in capital gains tax. As a result, inter vivos trusts have normally been created only in the following situations:

  • to create an inter vivos “spousal trust”, where the spouse is entitled to all of the income, and is the only person who can receive any capital, of the trust during the spouse’s lifetime;
  • to create an inter vivos trust with assets that do not trigger a capital gain (such as cash, unappreciated stocks or a principal residence)
  • to create an inter vivos trust to acquire future growth shares of a corporation as part of an estate freeze transaction.

The proposed amendments to the Income Tax Act create two new inter vivos trusts, the Alter Ego (meaning “other self”) Trust and the Joint Spousal Trust. These trusts enjoy the same benefits of other inter vivos trusts, with the added advantage that transferring assets to these trusts will not trigger any liability for income tax.

To create an Alter Ego Trust, you must meet the following conditions:

  • you must be over the age of 65
  • you must be entitled to receive all of the income of the trust before your death
  • no one else can receive the capital of the trust before your death.

The Joint Spousal Trust has the same requirements except that you and your spouse must be entitled to all of the income of the trust, and no one other than you and your spouse can receive any of the capital while either of you are still living.

If you transfer assets to one of these new trusts, you will no longer legally own them (the trust will), so they will not form part of your estate when you die. During your lifetime you can continue to control the assets as the trustee of the trust, or you can name other trustees to manage the assets for you. You can name beneficiaries who will receive the assets after your death. The trust can be changed or even revoked as long as you have the capacity to make those decisions.

The use of these trusts can be advantageous for many reasons:

1) Probate Avoidance
A trust can avoid probate and probate fees. Because the trust owns the assets, they are not part of your estate when you die. Probate, and the payment of probate taxes, applies only to assets that are part of your estate (click here for more information about avoiding probate fees).

2) Asset Protection
The Wills Variation Act allows your spouse or children to apply to the court to vary your Will if they have not been adequately provided for. Because assets in a trust are not part of your estate, the use of a trust can avoid these claims. This could be useful if you wish to treat your children differently, or if you are in a second marriage and wish to provide for your spouse while also preserving the assets for your children from a previous marriage.

For the same reasons, the use of a trust can potentially protect assets from claims by creditors.

3) Centralized Ownership and Management
While you will likely want to control the assets in the trust, you can name other trustees, such as family members or friends, to manage the assets for you. For example, the trust could provide that if you become incapable, your spouse or another trusted family member would act as trustee in your place. As a result, you will not require a power of attorney for the assets in the trust.

4) Privacy
If your Will is probated, it will become a public document, along with the value of all of the assets that formed your estate. Certain people are entitled by law to receive a copy of your Will after your death. A trust is a private document and can be used to keep your affairs confidential.

To avoid probate and protect assets from claims, many people are giving assets away before they die or putting assets into joint tenancy. This can result in many unintended consequences, including taxes. The Alter Ego Trust and Joint Spousal Trust can help you avoid probate and claims against your estate without the problems that can arise by giving away your assets or putting them into joint tenancy.

So should everyone over age 65 create an Alter Ego or Joint Spousal Trust? Definitely not. Although they have many advantages, other factors must also be considered, including:

  • the transfer of trust assets to other beneficiaries after your death may not qualify as a testamentary trust, so the ability to save taxes using testamentary trusts for income-splitting may not be available
  • for tax purposes, charitable bequests from the trust will not be treated as favourably as charitable bequests under a Will
  • transferring real estate into the trust may require payment of provincial Property Transfer Tax
  • a trust costs more than a Will, and the preparation and filing of an annual tax return for the trust will be an extra cost
  • a Will may still be required if any assets are not transferred to the trust or if assets are acquired after the trust was created
  • it is more difficult to change a trust than a Will.

While these new trusts are not for everyone over 65, they have considerable potential as an estate-planning tool. For a personal review of your estate plan, including whether a trust might be right for you, call us to arrange a consultation (656-3280).

Canada’s First Judgment on Intellectual Property and the Internet

Earlier this year, the Supreme Court of British Columbia delivered Canada’s first trial judgment regarding intellectual property rights in the context of the Internet. The case, BCAA v. Office and Professional Employees’ International Union, arose out of a strike by employees of BCAA. The union set up a series of protest websites similar to the BCAA website to spread its views.

The union’s original protest website copied the metatags and the layout of BCAA’s website, and contained trade-marks owned by BCAA. It used the domain name “bcaaonstrike.com”. Later versions of the website contained fewer of BCAA’s trade-marks and metatags.

BCAA sued, claiming that the website’s domain name and metatags, by themselves or in combination with the layout of the website, constituted the tort of passing-off and trade-mark infringement, and that the colours, layout and functionality of the website constituted copyright infringement. Since no Canadian cases had yet dealt with these issues, the court obtained guidance by reviewing several cases from the United States and the United Kingdom.

Passing-Off and Trade-mark Infringement
The court held that the union’s original website did constitute passing-off, as its close similarity to the BCAA website would have caused confusion to the public about the source of the website.

However, the later versions of the website were held not to constitute passing-off. Some of the factors that shaped the court’s decision included the following:

  • The union’s domain name included ‘bcaa”, a trademark of BCAA, but because of the addition of the phrase “on strike” it was not identical to BCAA’s trade-mark
  • The union was not selling competing services, but was exercising its right to free expression guaranteed by the Charter of Rights and Freedoms
  • The subsequent websites included express disclaimers that they were not connected with BCAA
  • BCAA did not provide any evidence of any user actually being confused about the source of the website.

Copyright Infringement
The court agreed with BCAA that the unique design of BCAA’s website was an “artistic work”, and that the union’s substantial copying of the design by the union for its site constituted copyright infringement.

However, because BCAA could not prove that it had suffered any actual losses as a result of the union’s activities (through loss of business, confusion to the public, or damage to reputation), the court awarded only nominal damages of $2,500.

This case has important implications for intellectual property and e-business owners, and is sure to form a cornerstone of future Canadian jurisprudence in this area.

Representation Agreements Streamlined, Power of Attorney Deadline Extended (Again!)

The deadline to make a new Enduring Power of Attorney (originally set for September 5, 2000, then extended to September 5, 2001) was extended again by the provincial government, this time to September 1, 2002.

The stated purpose of the extension is to give people more time to become familiar with Representation Agreements, which are to eventually replace new Enduring Powers of Attorney.

At the same time, the government announced changes to the Representation Agreement Act that will reduce some of the problems and complexities with Representation Agreements. Representation Agreements are legal documents that allow you to choose someone to make personal, health care and financial decisions for you.

These changes come into force on September 1, 2001, and include, for example, simpler signing requirements and the ability to give a representative the same authority that can be given under a Power of Attorney.

As a result of these changes, Representation Agreements will be become a more valuable estate planning tool. If you have any questions about these changes, please call us.

MANDATORY MEDIATION EXPANDED

The BC government has greatly expanded the scope of court actions to which mandatory mediation may apply. Under the new rules, any party to a Supreme Court action can make an assessment that mediation would be productive, and then require the other parties to attend a mediation session. In some cases, mediation can be faster, less costly and less confrontational than a trial.

The only civil actions that do not allow for mandatory mediation are family law cases and actions involving compensation for physical or sexual abuse. The process was initially limited to motor vehicle actions, where it was used in over 3,000 actions since 1998. In 71% of those cases, all issues were resolved.

While the notice to mediate process makes attendance at a mediation session mandatory, it does not require people to settle their dispute: parties can still choose to go to trial if mediation fails.

If you have any questions, please call us.

LOOKING AFTER YOUR LITTLE ONES – Appointing a Guardian

One of the most difficult decisions for parents is choosing a guardian for their children. Most of us do not like to think about our death, especially if we have young children who would be left behind.

Many parents don’t choose a guardian because they don’t want to think about the possibility of dying before their children are grown. Others put off the decision because they can’t agree on who the guardian should be. In doing so, they may be leaving open the possibility of costly custody battles and further trauma to their children.

In B.C., with some exceptions discussed below, a parent can appoint a guardian for children under 19 years in a will. For parents with young children, this is one of the most important reasons for making a will.

There are two types of guardians:

  • the guardian of the person of the child – who has custody of the child and is responsible for the child’s health, education and upbringing
  • the guardian of the estate of the child – who manages the assets of the child

Often the guardian of the person and of the estate is the same person. However, many parents appoint a separate trustee in their will (who is usually also the executor of the will) to manage and disburse the child’s share of the estate.

The trustee should be someone with common sense and sound judgment. Being a financial wizard is not required, since the trustee can hire a professional investment advisor if necessary. The guardian of the person of the child should be someone who shares your values and ideals.

Not every parent is able to appoint a guardian. In order to appoint a guardian upon death, a parent must have been the child’s guardian while the parent was living. The law about guardianship is explained in the following scenarios:

Parents together
A mother and father are joint guardians for so long as they live together. On the death of one parent, the surviving parent becomes the sole guardian. On the death of the surviving parent, the guardian will be the person(s) appointed by the surviving parent.

Parents apart but married or previously married
If a mother and father are or were married to each other but are living separate and apart, they are joint guardians of the estate of the child, but only the parent with whom the child resides is guardian of the person of the child.

As a result, if the custodial parent dies first, the guardian of the person of the child will be the person appointed in the custodial parent’s will. The surviving parent will become the sole guardian of the estate of the child, but will not be the guardian of the person of the child unless appointed by the custodial parent.

In blended families, where children of different parents are living under the same roof, the death of one of the parents in the blended family may result in an unexpected, but forced, separation of the children if guardianship appointments were not updated.

If a mother and father are divorced, the parent granted custody in the divorce proceeding is the sole guardian, unless the court otherwise orders (generally the court will order joint guardianship).

Parents apart and never married
If a mother and father were never married and are living separate and apart, but previously lived together with the child, they are joint guardians of the estate of the child but the custodial parent is the sole guardian of the person of the child, as above.

Parents never together
If a mother and father never lived together with the child, and were not married during the child’s life or 10 months before the child’s birth, the mother is the sole guardian unless the court otherwise orders.

Of course, each of these scenarios is subject to what the court may order, based on the best interests of the child. In addition, in some cases, parents may make a written agreement providing that they are joint guardians or that one of them is the sole guardian.

If a child has no guardian, or the person appointed under a will is unable or refuses to act as guardian, the Public Guardian and Trustee is the guardian of the estate of the child, and the Director under the Child, Family and Community Service Act is the guardian of the person of the child, until a court otherwise orders. For this reason, it may be a good idea to appoint an alternate guardian in case your first choice is not able to act.

If you have been putting off the appointment of a guardian for your children, please use this information to get your affairs in order. We would be happy to provide further guidance.

NEW LICENSING FOR LEAKY CONDO REPAIRS

In 1999 the B.C. government implemented the Homeowner Protection Act, creating the Homeowner Protection Office, and requiring compulsory licensing for builders and mandatory warranty coverage on new homes (click here to see ourarticle about the Homeowner Protection Act).

Under new regulations that came into force on October 1, 2000, repair contractors who arrange, manage or perform building envelope repairs (mainly leaky condo repairs) must be licensed by the Homeowner Protection Office and must offer a warranty on the repairs from a third-party insurance company. A municipality will not issue a building permit for the repair job unless the contractor proves that it is licensed and that the proposed repairs are covered by a third-party warranty. (In areas where a building permit is not required the contractor must still meet these requirements).

The minimum warranty coverage is two years on labour and materials. If 60% or more of any wall is replaced, an additional 5-year warranty on water penetration is required.

These new regulations do not apply to buildings with less than three dwelling units, rental buildings, hotels and motels, dormitories, care facilities, buildings covered by warranty insurance, and buildings with repair costs less than the greater of $10,000 or $2,000 per unit in the building. As well, the regulations do not apply to repairs carried out by the original builder at no charge to the owners or when there is a cost-sharing agreement between the builder and the owners.

If you have any questions about the licensing and warranty requirements under the Homeowner Protection Act, please call us.

RENTALS, PETS AND AGE RESTRICTIONS – NEW STRATA BYLAWS COMING

All strata corporations have bylaws to deal with the management, maintenance and use of strata lots and common property. The new Strata Property Act, which came into force on July 1, 2000, contains a set of Standard Bylaws that apply to all new strata corporations.

The Standard Bylaws are the “starting” bylaws for all new strata corporations formed after July 1, except to the extent that different bylaws are filed by the developer at the land title office. Strata corporations formed under the old Condominium Act (pre-existing strata corporations) are not yet affected by the new Standard Bylaws. However, on January 1, 2002, the new Standard Bylaws will become the “default” bylaws for all strata corporations, except to the extent that a strata corporation has filed different bylaws at the land title office.

Currently the “default” bylaws for pre-existing strata corporations are those contained in Part 5 of the Condominium Act. These bylaws can be changed or added to by filing a bylaw amendment at the land title office. Many strata corporations have filed bylaw amendments at the land title office to provide for rental restrictions and other matters. However, to the extent that, on January 1, 2002, a pre-existing strata corporation is relying on some or all of the Part 5 bylaws (as opposed to bylaws filed at the land title office), the new Standard Bylaws will be substituted for those Part 5 bylaws.

As a result, all pre-existing strata corporations should carefully review the new Standard Bylaws. If there is a Standard Bylaw that a strata corporation does not wish to adopt, the strata corporation should replace, amend or disapply this bylaw by passing and filing at the land title office a new “substitute” bylaw before January 1, 2002.

The most controversial bylaws are usually those that deal with rental restrictions, pets and age restrictions. Some questions about how the new Strata Property Act deals with these types of bylaws are answered below.

Can a strata corporation prohibit rentals?
Under the former Condominium Act, a strata corporation could pass a bylaw to “limit” the number of strata lots that may be rented. Various court decisions held that this did not permit a strata corporation to “prohibit” rentals – in other words, the bylaws had to permit at least one rental. Under the new Strata Property Act, a strata corporation may prohibit the rental of strata lots. However, any restriction will not apply to family members (the owner’s spouse, or a parent or child of the owner or of the owner’s spouse).

May a strata corporation screen tenants?
Under the new Act, a strata corporation may control the conduct, but not the choice, of tenants. Strata corporations may no longer screen tenants, establish screening criteria, require the approval of tenants or require terms to be inserted in tenancy agreements.

Can an owner apply for an exemption from a rental restriction bylaw?
Yes, on the grounds that it causes hardship to the owner. The strata corporation cannot unreasonably refuse to grant an exemption. In a recent case, the court stated that economic hardship, combined with a “leaky condo” problem, might be sufficient grounds for an exemption.

What about existing rentals?
If a tenant occupies a strata lot when a rental restriction bylaw is passed, the bylaw will not apply to the strata lot until one year after that tenant moves out. If the strata lot is not rented when the bylaw is passed, the bylaw applies one year after it is passed. If a developer reserved the right to rent a strata lot for a period of time, the rental restriction does not apply until the earlier of the sale of the strata lot by the first purchaser or the expiry of the developer’s rental reservation period.

Are there any new requirements for landlords?
Yes, a landlord must give the tenant a “Notice of Tenant’s Responsibilities” and a copy of the bylaws and rules of the strata corporation. If the landlord does not comply with this requirement, the tenant must still comply with the bylaws and rules, but may terminate the tenancy and have the landlord pay the moving expenses.

Can a strata corporation prohibit pets?
Yes, but the bylaw will not apply to a pet living with an owner or tenant when the bylaw is passed.

Do the Standard Bylaws allow pets?
Yes, the Standard Bylaws permit 1 dog or 1 cat, 2 caged birds, a reasonable number of fish and a reasonable number of small caged mammals.

Can bylaws restrict the age of strata lot owners? 
No, but the bylaws may restrict the age of occupants of strata lots. An age restriction bylaw will not apply to persons occupying a strata lot when the bylaw is passed.

If you have any questions about the Strata Property Act or the Standard Bylaws, please call us.