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Law and Taxation in Valuation

PART I: LAW

MODULE 1: Introduction to the Legal Framework and Legal System for Conducting Business in Canada

1.1 INTRODUCTION: The Importance of the Law
1.2 THE BASIS OF LAW
1.2.1 The Constitution
1.2.2 Statute Law
1.2.3 Court Decisions
1.3 THE COURT SYSTEM AND OTHER TE RESOLUTION MECHANISMS
1.3.1 Provincial Courts
1.3.2 Federal Courts
1.3.3 Administrative Tribunals
1.3.4 Alternative Dispute Resolution
1.3.5 Approaches to Alternative Dispute Resolution
1.3.6 Forums of Alternative Dispute Resolution
1.3.7 The CBV’s Role in Arbitration
1.3.8 Disadvantages of ADR
1.4 INTERPRETING STATUTES
1.4.1 The Literal Approach
1.4.2 The Liberal Approach
1.5 INTERPRETING CASE LAW
1.5.1 Stare Decisis
1.5.2 Obiter Dicta
1.6 LEGAL RESEARCH
1.7 PRACTICAL IMPLICATIONS FOR CBVS
1.7.1 Loss Quantification and Valuation
1.7.2 Valuation and Fairness Opinions Pursuant to Ontario Securities Regulations
1.7.3 Expert Evidence and the Rules of Evidence
1.8 CONCLUSION

MODULE 2: Rights and Obligations

2.1 INTRODUCTION
2.2 STATUTES AND REGULATIONS
2.3 CONTRACTS
2.3.1 The Elements of a Contract
2.3.2 Contractual Defects
2.3.3 Breach of Contract
2.3.4 Remedies for Breach of Contract
2.3.5 Limitation of Liability
2.3.6 Misrepresentation
2.3.7 Privity of Contract
2.3.8 Termination of Contracts
2.4 TORTS
2.4.1 Categories of Torts
2.4.2 Limitation of Liability
2.4.3 Remedies in Tort
2.4.4 Negligence Tort
2.5 PROFESSIONAL LIABILITY
2.5.1 Liability in Contract
2.5.2 Liability in Tort
2.5.3 Tort of Negligent Misrepresentation
2.5.4 Fiduciary Duty
2.6 CONCLUSION

MODULE 3: Forms of Business Ownership

PART I: FORMS OF BUSINESS ENTITIES BEING VALUED

3.1 SOLE PROPRIETORSHIP
3.2 PARTNERSHIP
3.2.1 The Nature of Partnerships
3.2.2 Relationships among the Partnership, the Partners and Third Parties
3.2.3 Relationship of Partners to Persons Dealing with Them (The Mandatory Rules)
3.2.4 Relationship of Partners to One Another (The Default Rules)
3.2.5 Partnership Agreements
3.2.6 The Dissolution of Partnerships
3.2.7 The Individual Partnership Interest
3.2.8 The Registration of Partnerships
3.3 LIMITED PARTNERSHIP
3.4 LIMITED LIABILITY PARTNERSHIP
3.5 JOINT VENTURES
3.5.1 Joint Ventures versus Partnerships
3.5.2 Joint Venture Agreements
3.5.3 Fiduciary Duty of Joint Venturers
3.6 SYNDICATE
3.7 INCOME TRUSTS
3.7.1 Types of Income Trusts
3.7.2 Valuing Income Trusts
3.7.3 Creating an Income Trust
3.8 CORPORATIONS
3.8.1 Legal Nature of a Corporation
3.8.2 Advantages of Carrying on Commerce by Means of a Corporation
3.8.3 The Rules Governing the Operation of a Corporation
3.8.4 The Creation of a Corporation
3.8.5 The Articles of Incorporation
3.8.6 The Corporation’s By-laws
3.8.7 Unanimous Shareholders’ Agreements
3.8.8 Limitations of a Corporation as a Legal Entity
3.8.9 Shares of the Corporation
3.8.10 The Position of Majority Shareholders
3.8.11 The Role of the Directors and Officers
3.8.12 Duties of the Directors and Officers
3.8.13 Duties of Directors to Shareholders
3.8.14 Directors’ Liability
3.8.15 Corporate Governance
3.8.16 Statutory Rights of the Majority Shareholders
3.8.17 The Position of Minority Shareholders
3.8.18 Statutory Rights of Minority Shareholders and Creditors
3.9 UNLIMITED LIABILITY CORPORATIONS
3.9.1 Why Unlimited Liability?

PART II: FAIR MARKET VALUE AND FAIR VALUE

3.10 FAIR MARKET VALUE
3.10.1 Elements of Fair Market Value
3.10.2 The Highest Price at which Property would Change Hands
3.10.3 An Open and Unrestricted Market
3.10.4 Informed and Prudent Parties
3.10.5 A Willing Vendor
3.10.6 Neither Party under a Compulsion to Act
3.10.7 Arm’s Length Parties
3.10.8 At a Point in Time
3.11 FAIR VALUE
3.11.1 Methods of “Fair value” Valuation
3.11.2 Stock Market Price as a Basis of Fair Value
3.11.3 Capitalized Earnings Value as a Basis of Fair Value
3.11.4 Liquidation Value as a Basis of Fair Value
3.11.5 The Application of a Minority Discount in the Valuation of the Fair Value of the Shares of a Minority Shareholder
3.11.6 The Context in which the “Fair Value” Valuation takes Place
3.11.7 Premium for Forcible Taking
3.11.8 Post-amalgamation Value in the Determination of Fair Value
3.11.9 Hindsight in Fair Value Valuations
3.12 CONCLUSION

MODULE 4: Risk Management

4.1 INTRODUCTION
4.2 PROFESSIONAL LIABILITY
4.2.1 Liability in Contract
4.2.2 Liability for Negligence
4.2.3 Liability for Negligent Misrepresentation
4.2.4 Application of Negligent Misrepresentation
4.3 CONFLICTS OF INTEREST
4.3.1 Conflicts of Interest Provisions
4.4 PREVENTATIVE PRACTICE
4.4.1 Conflict Checks
4.4.2 The Engagement Letter
4.4.3 Reports
4.4.4 Disclaimer Clauses
4.4.5 Document Retention
4.4.6 Professional Liability Insurance
4.4.7 Risk Management Strategies
4.5 CONCLUSION

MODULE 5: Case Study

PART II: TAX

MODULE 1: Introduction to Canadian Tax Principles

1.1 INTRODUCTION
1.2 FORMS OF BUSINESS ORGANIZATION
1.2.1 Sole Proprietorship (Individual)
1.2.2 Corporation
1.2.3 Trusts
1.2.4 Partnerships
1.2.5 Joint Ventures, Syndicates and Co-ownerships
1.3 TYPES OF INCOME
1.3.1 Business Income
1.3.2 Property Income
1.3.3 Capital Gains
1.4 TAX RATES
1.4.1 Income Taxes
1.4.2 Refundable Part I Tax
1.4.3 Capital Taxes
1.4.4 Commodity Taxes
1.4.5 Part IV Tax
1.5 THEORY OF INTEGRATION
1.6 CONCLUSION

MODULE 2: Tax Assets & Liabilities

2.1 INTRODUCTION
2.2 COMMON TAX ASSETS
2.2.1 Non-depreciable Capital Property
2.2.2 Depreciable Property
2.2.3 Intangibles (or Eligible Capital Property)
2.3 OTHER TAX ASSETS
2.3.1 Losses
2.3.2 SR&ED and Investment Tax Credits
2.3.3 Other Tax Accounts and Balances
2.4 ACQUISITION OF CONTROL RULES
2.4.1 Losses
2.4.2 SR&ED Pools, ITCs and Unused Surtax Credits
2.5 CONCEPT OF CONTROL
2.5.1 De Jure Control
2.5.2 De Facto Control
2.6 TAX LIABILITIES
2.6.1 Transfer Pricing
2.6.2 Characterization of Transactions
2.6.3 Interest Deductibility
2.6.4 Unrealized Gains
2.6.5 Reserves
2.6.6 High Risk Transactions
2.7 CONCLUSION

MODULE 3: Purchase and Sale of a Business

3.1 INTRODUCTION
3.1.1 Valuation Methods and Related Taxes
3.2 LIQUIDATION VALUE
3.3 GOING-CONCERN APPROACHES
3.3.1 Earnings Capitalization Method
3.3.2 Cash Flow Capitalization Method
3.3.3 Discounted Cash Flow Method
3.3.4 Adjusted Asset Method
3.4 THE SALE OF ASSETS VERSUS SHARES
3.4.1 Tax Consequences
3.4.2 Goods and Services Tax (GST)
3.5 TRAPPED-IN CAPITAL GAINS
3.5.1 Timing of the Realization of Income Tax Liability
3.6 BOOK VALUES VS. TAX VALUES
3.6.1 Future Income Taxes
3.6.2 Aggressive Tax Filings
3.7 EARN-OUTS
3.7.1 Earn-out or Forward Take-up of Earnings
3.7.2 Warranty Agreements
3.7.3 Price Abatement Agreement
3.7.4 Fixed Amount Plus Agreements
3.8 CONCLUSION

MODULE 4: Corporate Reorganizations

4.1 INTRODUCTION
4.1.1 Provisions in the Income Tax Act
4.2 TRANSFER OF PROPERTY TO A CORPORATION –SECTION 85
4.2.2 Basic Rules
4.2.3 Section 85 Examples
4.2.4 Deemed Benefit Rule in Paragraph 85(1)(e.2)
4.2.5 Adjusted Cost Base of Transferred Property
4.2.6 Price Adjustment Clauses
4.2.7 Amended and Late Filed Elections
4.3 SHARE CAPITAL REORGANIZATION – SECTION 86
4.3.1 Basic Rules
4.4 STATUTORY AMALGAMATION – SECTION 87
4.4.1 Basic Rules
4.4.2 Valuation Implications – Computation of Paid-up Capital
4.4.3 Valuation Implication – Cost of New Shares
4.4.4 Valuation Implications - Other
4.5 WINDING-UP OF A SUBSIDIARY – SUBSECTIONS 88(1) AND 88(2)
4.5.1 Purpose of Subsection 88(1)
4.5.2 Basic Rules
4.5.3 Valuation Implications
4.5.4 Purpose of Subsection 88(2)
4.6 ALLOWABLE ELECTIONS – SECTION 22
4.7 CONCLUSION

MODULE 5: Transfer Pricing

5.1 INTRODUCTION
5.1.1 Arm’s Length Principle
5.1.2 The Arm’s Length Principle and Fair Market Value
5.2 CANADIAN LEGISLATION AND ADMINISTRATIVE GUIDANCE
5.2.1 Summary of Section 247 of the Act
5.2.2 Information Circular 87-2R
5.3 COMMON TYPES OF TRANSACTIONS
5.3.1 Tangible Goods
5.3.2 Intangibles
5.3.3 Management or Service Fees
5.3.4 Cost Contribution Arrangements
5.3.5 Financial Transaction
5.4 IDENTIFYING INTERCOMPANY TRANSACTIONS AND TRANSFER PRICING ISSUES
5.4.1 Comparable Uncontrolled Price Method (CUP)
5.4.2 Resale Price Method (RPM)
5.4.3 Cost Plus Method
5.4.4 Profit Split Methods
5.4.5 Transactional Net Margin Method
5.4.6 Unspecified Methods
5.4.7 Summary of Transfer Pricing Methods
5.5 COMPONENTS OF A TRANSFER PRICING STUDY
5.5.1 Statement of Facts/Functional Analysis
5.5.2 Economic Analysis
5.5.3 Selection of Comparable Companies
5.5.4 Financial Analysis/Development of an Arm’s Length Range
5.6 APPLICATION OF A TRANSFER PRICING STUDY TO AN EQUITY VALUATION
5.6.1 Reviewing a Transfer Pricing Study
5.6.2 Transaction-Specific Considerations when Evaluating Intercompany Transactions
5.6.3 Impact of Intercompany Transactions on a Valuation
5.6.4 Tax Reserves and Transfer Pricing Policies
5.7 JURISPRUDENCE INVOLVING TRANSFER PRICING AND VALUATIONS
5.8 CONCLUSION

MODULE 6: Other Topics

6.1 NON-COMPETITION AGREEMENTS
6.1.1 Court Precedents
6.1.2 Rules Introduced Effective October 7, 2003
6.2 TREATMENT OF DAMAGES AND AWARDS
6.2.1 Taxation of Awards
6.2.2 Deductibility of Legal Fees
6.2.3 Personal Injury Awards
6.2.4 Compensation resulting from Expropriation
6.3 TRUSTS
6.3.1 History, Rules and Residence
6.3.2 Trust Income
6.3.3 Trust Taxable Income and Taxes Payable
6.3.4 Special Rules
6.3.5 Alter-ego Trusts and Joint-partner Trusts
6.3.6 Income Trusts
6.4 GOODWILL AND OTHER ELIGIBLE CAPITAL PROPERTY
6.5 RECENT TOPICS OF INTEREST
6.5.1 Tax Disputes
6.5.2 Court Cases
6.5.3 Valuation of Non-cash Wages
6.6 CONCLUSION

MODULE 7: Assignments

• Managing The Law, McInnes, Kerr, VanDuzer, Carmody, Pearson Prentice Hall. (Ref# 0132042762)
•  CICBV Casebook**
• Canadian Tax Principles, Clarence Byrd & Ida Chen. (Ref# 9781553852681)
• Canada Valuation Service, Student Edition, Ian R. Campbell, Carswell (Ref# 0459280147)