He haunts us still...

It can be a blessing or a curse to have a distant relative who was rather famous. Take, for example, J.R. Booth, shown above, who died in 1925. To put it briefly, he was my paternal grandmother's maternal grandmother's half-uncle, and probably the richest man in Canada when he passed on. Sadly, none of that wealth came our way, although my grandmother used to brag about receiving a gold coin at Christmas from him. As she was born in 1910, there would not have been that many, and none were found in her estate when she passed away in 1997. This was another of the mysteries she took to her grave. But I digress.

His name came up in an English court case this month, because of his involvement in a company that mined for nickel. His main interests were in the  lumber industry, and he also controlled the largest railway in the world owned by a single person, the Canada Atlantic Railway. He also owned a cement company, which became part of Canada Cement in 1910. Nickel mining, however, was a completely different business. In 1915, the Ontario Nickel Commission was appointed to inquire into the province's nickel industry, and its 1917 report gives some fascinating background to what was going on. A report by the Canadian Department of Mines in 1912 also provides useful information.

Involvement with Dominion Nickel-Copper

In 1904, the Dominion Nickel-Copper Company was formed to take over ownership of the Whistle Mine, which can be seen here:



Booth, together with M.J. O'Brien and other associates,took over Dominion Nickel-Copper in 1907, as reported here. O'Brien is not mentioned in the original report, as the acquisition was attributed to the Booth and McFadden Syndicate. McFadden appears to be J.J. McFadden of Renfrew, where O'Brien also lived, so it appears one was the agent for the other. McFadden would later make his fortune after the war through lumber mills in Blind River and Thessalon.

That company bought the Murray Mine, the site of the first nickel find in the Sudbury Basin, in 1912, and sought  to revive the operation and make it a viable competitor against International Nickel, controlled by J.P. Morgan.

 Acquisition  by British America Nickel

Their reach probably exceeded their grasp, as in 1912 they later granted an option to the British America Nickel Company, formed by F.S. Pearson and controlled by the British Government and Kristiansand Nikkelraffineringsverk A/S of Norway, to take over the company. British America also controlled other copper-nickel interests in the Sudbury region, including the later-famous Falconbridge properties. That option was exercised in 1913. The extent of the deal was detailed in a report in the Canadian Mining Journal:



Note the significant players mentioned here. William Mackenzie was involved in the successful deal with Pearson—understandable, as the two were already associated together in Brazilian Traction, Light and Power—but the Guggenheims of New York wanted to get in instead. This was quite the rarified atmosphere, even back then. The original name "Canadian Nickel Corporation" was not used, as the actual incorporation papers were in the name of "British America Nickel Corporation, Limited" as reported here.

What made British America's business model unique was that they aimed to be the only nickel miner in Ontario that would also smelt and refine on site, instead of sending the ore for further treatment outside the Province. It would also have exclusive North American rights to the Hybinette smelting process developed by its Norwegian investor.

As a result of the 1913 disposition, J.R. Booth became the second-largest bondholder in British America, second only to the British Government itself. O'Brien, with some others, had much smaller amounts. There was also an issue of debenture stock secured by a floating charge, which was held by the British Government and the Norwegian company. It was that whole arrangement that would cause some awkward circumstances later on.

In 1916, the British Government signed a ten-year contract to purchase all the nickel output of British America, and the bonds were replaced by a new issue of mortgage bonds, secured by the assets of the company. The terms of the underlying deed of trust could be altered at any time by a vote of the bondholders, representing at least ¾ of the bonds' value.

The dispute

At the end of the war, the nickel market took a real beating, and the Canadian Bank of Commerce was granted a prior lien bond in 1920 which had priority over the mortgage bonds. British America then defaulted on an interest payment in 1921, and a reorganization was proposed, in which the mortgage bonds would be replaced by 'A' Income Bonds, which would have a lower priority to First Income Bonds having a first charge on the property of the corporation. 'B' Income Bonds could be issued later on which would rank pari passu with the 'A' Income Bonds, but the latter could be converted into other securities at any time through extraordinary resolution. The remainder of the supply contract with the British Government would also be cancelled. A committee of four people would be appointed to make the decision, thus bypassing any requirement of an extraordinary resolution by the bondholders.

In order to make this work, J.R. Booth had to give his support, because of the significant holding of bonds he had. He was induced to approve, after being promised a gift of shares bearing a par value of CAD 2 million in British America.

O'Brien, to put it mildly, was not a happy camper. This move would strip any real security from the bonds he held, and the possibility of later conversion into other securities could effectively make them worthless if any other adverse developments in the nickel industry were to happen. He took the matter to the Supreme Court of Ontario to get the result overturned. He won, and the result was later upheld at the Appellate Division of the court. Both rulings can be found here.

That was not the end of it. The final court of appeal in those days was the Judicial Committee of the Privy Council, and they upheld the Ontario courts in 1927.  They described the whole affair thus:

At the trial in the Supreme Court of Ontario Kelly J. held that what was really done was that the majority at the meeting did not act in the bona fide exercise of the rights which the majority might exercise, but in consideration of what would benefit the Nickel Corporation and the personal interests of those whose votes were to be secured. The vote had been influenced by special negotiations in advance of the meeting. … There was an appeal to the Appellate Division, where Ferguson J.A. delivered the judgment. He agreed with Kelly J. in holding that the votes neither of Mr. Booth nor of the British Government would have been given for the scheme had they been influenced only by what was most in the interest of the bondholders. Both of these may, he thought, have acted honestly if mistakenly. But what really moved them was not a legitimate consideration of the improvement of their security, but that they felt that a refusal to approve the scheme would result in serious loss to other persons who had lent to or invested in the corporation. They wished to give these persons a chance, even if a risk to the bondholders had to be taken in doing it. This the Appellate Division held to have been improper.

The law that governs this type of decision-making has consequentially been expressed in these terms:

To give a power to modify the terms on which debentures in a company are secured is not uncommon in practice. The business interests of the company may render such a power expedient, even in the interests of the class of debenture holders as a whole. The provision is usually made in the form of a power, conferred by the instrument constituting the debenture security, upon the majority of the class of holders. It often enables them to modify, by resolution properly passed, the security itself. The provision of such a power to a majority bears some analogy to such a power as that conferred by s. 13 of the English Companies Act of 1908, which enables a majority of the shareholders by special resolution to alter the articles of association. There is, however, a restriction of such powers, when conferred on a majority of a special class in order to enable that majority to bind a minority. They must be exercised subject to a general principle, which is applicable to all authorities conferred on majorities of classes enabling them to bind minorities; namely, that the power given must be exercised for the purpose of benefiting the class as a whole, and not merely individual members only. Subject to this, the power may be unrestricted. It may be free from the general principle in question when the power arises not in connection with a class, but only under a general title which confers the vote as a right of property attaching to a share. The distinction does not arise in this case, and it is not necessary to express an opinion as to its ground. What does arise is the question whether there is such a restriction on the right to vote of a creditor or member of an analogous class on whom is conferred a power to vote for the alteration of the title of a minority of the class to which he himself belongs.

In other words, no dirty tricks are allowed in proceedings like these, and decisions must be taken in the best interests of the class of investors. But some people just can't help but try.

Consequences to this day

That is what happened in the English case this month. Two companies were seeking to merge under a scheme of arrangement, which under English law must receive the approval of a majority of investors, together representing ¾ of the value of the shares. In order to thwart the merger, one employee shareholder gave away one share each to 434 people, and registered the transfers immediately prior to the meeting taking place to approve the scheme, as sanctioned by the Court. All 434 intended to vote against the transaction, but the Chairman of the meeting disallowed their votes, resulting in the scheme's approval. The Court ruled that the Chairman acted properly, and what J.R. Booth did in the 1920s was quoted prominently to explain why this had to be so.

It was explained here that meetings that are sanctioned by the Court operate under slightly different principles than shareholders' general meetings that are governed by normal corporate legislation:

50. There was some debate also in the course of argument as to the powers of the chairman of a court meeting to reject votes cast of his own motion. It seems to me that the court must indeed have an inherent power to direct the mode in which meetings are to be held .... Moreover, once a court has directed that a meeting take place, I cannot see why the chairman should not conduct the meeting in accordance with normal principles. He may have many decisions to make in order to achieve the objective of the meeting. The court would normally, I think, only interfere with such decisions if they were perverse, made in bad faith, contrary to the court's directions, or on the basis of a mistaken understanding of the law .... It seems to me that the validity of votes cast at the court meeting is to be judged as at the time of that meeting and not with the benefit of hindsight that may be acquired after the meeting and before the sanction hearing. Conversely, the sanction of the court is to be evaluated as a matter of discretion on the basis of all the facts placed before the court at that hearing.

51. In directing the chairman to hold a court meeting, the court is effectively directing him to take all appropriate steps to hold a fair meeting for the purpose of ascertaining the votes of the class for or against the scheme. He must, for example, be able to reject proxies if they obviously do not emanate from the member in question. The court would, it seems to me, wish to respect the decisions made by its appointed chairman as to the proper conduct of the court meeting, unless one of the defaults mentioned above were established. 

I've known meetings in the past where such squeeze plays breezed through quite easily. It's obvious these days that such unfairness will not be tolerated, but it's taken some considerable time and effort to get there. Not just the lawyers, but all other parties, should be glad that's the case.

The Canadian tax reach

Some time back, I posted about the extent to which the US tax authorities can tax the income of foreign corporations. There are similar considerations at hand for when foreign corporations operate in Canada, albeit on different principles. The most important questions are:

• Is a corporation resident in Canada?
• Is it carrying on business in Canada?

These must be read together with the basic requirements of s.2 of the Income Tax Act, where liability to tax arises where:

• a person is resident in Canada, or otherwise
• a person is employed in Canada, carries on a business in Canada, or disposes of a taxable Canadian property.

This is reinforced by the requirement in s. 150(1)(a) to file the appropriate returns, which also covers other circumstances where tax is payable, or the income is exempt is exempt as provided under the provisions of an applicable tax treaty. In the latter case, a return must be filed together with the specified declaration claiming treaty protection.

Who is a Canadian resident?

We must first deal with where persons are deemed to have such status or not:

• s. 250(4) deems any corporation incorporated in Canada after 26 April 1965 to be a Canadian resident, as well as any similar corporation formed before 27 April 1965 that was a Canadian resident or carried on business in Canada.
• if an applicable tax treaty so provides, s. 250(5) will deem a corporation to be resident in the other country and not resident in Canada.

Otherwise, common law principles govern whether a corporation is resident in a jurisdiction or note. This is said to be "where the central management and control resides." This is said to be the place where the board of directors holds its meetings, but that cannot be said to automatically apply. A recent case in the High Court of Australia held several foreign corporations to be resident there, as the meetings of the board acted only as a rubber stamp to actions undertaken by a principal in Sydney. This was held to be distinct from a previous case where the board did not blindly accept the actions of others, as it actively discussed whether such moves would indeed be appropriate to accept. Tax treaties with the UK and Switzerland did not act to shield the taxpayers in the recent case, as the act of incorporating within those jurisdictions was insufficient to override where the actual management and control were taking place. The impact of this decision could be huge, and it will be interesting to see if the CRA picks up on it.

Who carries on business in Canada?

Common law principles govern whether business is carried on, and s. 253 deems certain activities undertaken by a non-resident as constituting such activity. Applicable tax treaties will usually specify that income earned by a non-resident is taxable only where it can be attributable to a permanent establishment.

The most important factor in determining where a business is being carried on is the place where the contract is made. Other factors such as the place of delivery and the place of payment (among others) may also play a role, but the analysis can be quite complicated.

The definition of a permanent establishment is generally left up to the tax treaties, but the following situations can arise:

• a fixed place of business will constitute a PE
• an agent authorized to conclude contracts on behalf of the foreign corporation can also be said to be a fixed place
• in some circumstances, office space made available by a subsidiary to a parents' employees can be a fixed place
• executives who can act on behalf of both a parent and subsidiary are problematic, as their presence in the other country's office can also constitute a PE
• similarly, it can be argued that a foreign corporation that is constantly seeking guidance from a manager in a Canadian parent can be said to possess a Canadian PE
• certain tax treaties (such as the one with the US) can specify that, where services are being provided, days spent in the other country will trigger a PE when the total passes a specified threshold
• there can be other complications, such as in the manner that e-commerce platforms are structured

This is not an exhaustive list, and discussions are taking place at the international level as to whether such scope should be widened. That is an area that should be watched closely.

Summary

This is a very short article on a very complex topic, and I have known of many companies that did not get this right. Foreign corporations must consider the various issues carefully before proceeding to enter the Canadian market. Similar issues also arise in assessing whether foreign entities are subject to GST/HST, but the rules are slightly different and must be assessed separately.

Domicile: it still matters

Depending upon the nature of the critical event, and where it took place, the question will arise as to whether you should take into account a person's:

• residence;
• citizenship; or
• domicile.

The last factor will strike some as rather surprising, but it can have surprising results. I will discuss this first, and address the others in separate entries.

Why domicile matters

The general rule

A person can only have one domicile at any given time, which signifies where his permanent home will be for the foreseeable future.  The domicile of origin is acquired at birth. That continues until the age of majority is reached, at which time he (or she) can adopt a domicile of choice. That arises from permanently moving to a new place, and being legally able to do so. Therefore, you cannot permanently move to a new country if you only have a temporary visa to go there, or if you are only attending a post-secondary institution. Neither the intent nor the ability are there. The domicile of choice can revert back to the domicile of origin when you permanently move away from the latter without yet establishing a new permanent home. This can get ugly, especially when more than two jurisdictions come into play, as seen in an Alberta case in 2011.

There is also a domicile of dependency, is conferred on legally dependent persons by operation of law. It will be that of the person on whom the person is dependent, and will change when that latter person's domicile changes. This currently extends only to people who are mentally incapable.

Domicile is normally that of the nation, but it is normally that of the Province or State in ones that are organized in a federal structure. In the United Kingdom, domicile exists in England and Wales, Scotland, or Northern Ireland, and the Isle of Man and the Channel Islands of Jersey and Guernsey (all being Crown dependencies) have separate domiciles as well

The historical rule

Historically, at birth, a child acquired the domicile of its father where the father was still alive at the time of birth. Otherwise, it will acquire the mother's domicile if the father is no longer alive, or if it is born out of wedlock. Where there were no known parents, as in the case of a foundling, the domicile will be that in which the child was found.

The doctrine of dependency extended to married women, who acquired the husband's domicile upon marriage, and to minors (then called infants) who took on the relevant parent's subsequent domicile of choice.

Perverse effects of the rule

Here is a relatively simple application of the rules. A person is born in Ontario, whose father was then working in Canada on a temporary work visa. The father then decides to become a landed immigrant, and settles in Ontario permanently. Upon attaining the age of majority, the child then decides to leave Ontario, but dies before being able to establish a permanent home elsewhere. In which jurisdiction should the child's will be probated?

It would be England. The child's domicile of origin is England, because his father was not able to establish an Ontario domicile by the time of the birth. The child would then acquire a domicile of dependency at the time the father became a landed immigrant. However, when the child leaves to seek his fortune elsewhere, his domicile will revert to his domicile of origin, and will remain that way until a new domicile of choice has been established. And that can happen even if the child has never set foot in England!

There is another example I can across which is even more over the top but still accurate. A goes from England (in which he is domiciled) to India, intending to return to England when he reaches 60 after having made his fortune. He marries in India and has child B there, who grows up with similar intentions. A dies in India. B marries in India as well and has child C there, who grows up with similar intentions as well. B dies in India.

C's domicile is in England. This is because domicile arises from permanent intentions, as well as permanent presence in a particular place. Because A always intended to return to England, India never became a domicile of choice. B's domicile of origin therefore was England and, because he always intended to go to England to retire, India never became a domicile of choice either, and therefore C's domicile of origin is England as well. This could extend indefinitely, as long as each generation desires to eventually move to England eventually, and thus decides not to make India the domicile of choice once the age of majority is reached.

Effect on marriage and death

A valid marriage depends on two components: It has to be valid under the law where the ceremony is performed, and it has to be valid under the law of the parties’ ante-nuptial domicile. If crossing borders may be involved, it is still a good idea to double-check the rules of each jurisdiction before you go ahead.

Under current law, a Canadian divorce is effective if one of the parties has been resident in a province for at least one year. From 1968 to 1986, there had been an additional requirement that the petitioner had to have been domiciled in Canada. Prior to 1968, the requirement was for domicile in a province where divorce was available (which ruled out proceedings in Quebec and Newfoundland).

If annulment is sought, the grounds become murkier. Generally speaking, a wife can gain a domicile of choice and then petition to annual a void marriage (on grounds of consanguinity, being underage, or bigamy). However, she can only petition in a court in her husband's domicile where the marriage is voidable (because of lack of valid consent or the marriage not being consummated).

The other area where domicile is important in Canada is when a person dies, and his estate is governed by the law governing his domicile at that time in all respects other than for real (or immoveable) property situated beyond its borders.

Reform of the law in Ontario

Ontario has simplified the law of domicile in several stages. In 1958, the adoption laws were changed to effectively provide that an adoptee's domicile of origin would become that of his adoptive parents as if born in wedlock, and that came into force on 1 January 1959.

The age of majority was reduced from 21 to 18 effective 1 September 1971. This was followed by the abolition of illegitimacy effective 31 March 1978. On the same date, s. 68 of the Family Law Reform Act, 1978 granted separate legal personality for married women, and simplified the law of domicile as it applied to minors:

68. Subject to subsection 2, a child who is a minor, 

(a) takes the domicile of his or her parents, where both parents have a common domicile; 
(b) takes the domicile of the parent with whom the child habitually resides, where the child resides with one parent only; 
(c) takes the domicile of the father, where the domicile of the child cannot be determined under clause a or b; or 
(d) takes the domicile of the mother, where the domicile of the child cannot be determined under clause c . 

(2) The domicile of a minor who is or has been a spouse shall be determined as if the minor were of full age.

The latest rule is found at s. 67 of the Family Law Act, effective 1 March 1986:

67. The domicile of a person who is a minor is, 

(a) if the minor habitually resides with both parents and the parents have a common domicile, that domicile; 
(b) if the minor habitually resides with one parent only, that parent’s domicile; 
(c) if the minor resides with another person who has lawful custody of him or her, that person’s domicile; or 
(d) if the minor’s domicile cannot be determined under clause (a), (b) or (c), the jurisdiction with which the minor has the closest connection.

 

Legal impact

You can see that most of the reforms have been to domicile by dependency. Domicile of origin, together with the doctrine of reversion, has remained essentially intact.

The 1978 reform relating to illegitimacy appears to have been retrospective. The following key dates appear to be prospective only:

• 1 January 1959: replacement of domicile of origin upon adoption.
• 1 September 1971: ability of those between 18 and 21 to acquire a domicile of choice.
• 31 March 1978: the ability of married women to acquire a separate domicile of choice.

The effect of the reforms relating to the domicile of minors appears to merely displace the effects of the existing common law rules on domicile of dependency.

Does it matter anywhere else?

Are there other instances where domicile may become a concern? The answer is yes, and more than you might realize:

• Many US states use domicile to determine liability for their income taxes, including New York and California, and residency is used as a position to sweep in other potential taxpayers within its scope.
• The US has a federal estate tax in which US domicile attracts liability on the value of the worldwide estate, while non-residents face liability only on the value of property located within the US. Most States have similar provisions.
• The UK uses domicile to determine liability for its inheritance tax. In fact, its scope only excludes those estates where domicile is outside the UK, and there are no UK assets in it. Domicile has historically been the basis for its income tax, but the UK has significantly expanded its statutory residence tests to widen the scope for collection, and those taxpayers who are UK-resident but not so domiciled must pay a significant levy to protect their previous status.
• Australia gives priority to domicile in its income tax system.

Those are the most relevant cases for Canadians to think about, but other nations have their own unique rules which may catch people unawares. For instance, I do not know anything about how China (as in the PRC) would affect Chinese-Canadians, so experts in that field would need to be consulted if circumstances warrant.

Takeover

I've been digging into some personal history lately, after having heard that several people I knew back in the early 1980s have recently passed away. I worked with them in a company that had a wonderful work ethic and environment, that also made a lot of money. It no longer exists, because of events that overtook it then, but the perpetrators themselves are no more.

I have written about Canadian Glass Industries Limited before, on another blog. However, how it collapsed would provide a great case study. I will just give a broad outline of it here.

Canadian Glass was previously known as Glaverbel Industries Inc, and it was taken over by Pilkington Glass Industries Limited (then a subsidiary of Pilkington plc) in 1976. As a condition of its acquisition, Pilks was required to keep Canadian Glass at arm's length to determine its own strategy and direction. The head office was moved to Toronto in 1979, and it occupied premises separate from Pilks, although only several blocks apart. The acquisition did reveal several surprises, such as the fact that CGIL could borrow money at prime, but PGIL had to pay prime plus 1! That was the first of several embarrassments, including the equally unavoidable fact that CGIL was a much more profitable operation. PGIL's Contract Division was its only operation elsewhere in the group that even came close to matching those results.

I joined Canadian Glass as its Corporate Controller in September 1980, and enjoyed it immensely. The job had broad scope, I had full responsibility for issuing consolidate financial results and preparing and filing all corporate and capital tax returns, and I was required to travel to all divisions across Canada to check on how things were happening out in the field. I got along well with everyone there, and the feeling was mutual, as my boss soon advised me.

In December 1980, Ford Motor Company reached an agreement with Pilks plc to acquire its Canadian operations. As part of its negotiations with Ottawa, Ford got the conditions relating to the 1979 Glaverbel acquisition cancelled. Ford's takeover occurred in the spring of 1981. That resulted in a particular witches' brew of corporate cultures coming into play:

• Ford had (and still has) a particularly forceful brand of management, where specific targets are set and pressure is brought throughout the organization to ensure such targets are achieved. In the early 1980s, the focus was on reducing headcount throughout all activities within an organization. I really do mean all activities, and not just through voluntary measures such as incentives for early retirement (which tends towards somewhat patchy results). I should also mention that Ford had a fairly unified management structure, where top managers crossed over quite often between management and finance functions and back again. I was familiar with this, having grown up listening to my father's stories about how this had been applied at Ford's Oakville operations.
• Pilkington had a decentralized country-by-country management structure, and the Canadian operation was fairly regimented in its approach. The finance side was quite humourless, and initiative was not expected but obedience was. There was a fair bit of bureaucracy there, which tended to slow things down. On the other hand, they always felt they were superior to CGIL, contrary to the evidence at hand.
• Canadian Glass was quite relaxed in comparison, and collaboration was encouraged at all levels. At each division, the General Manager and Controller had equal authority and responsibility, and I was expected to deal with all of them. Response to any concerns was quite quick in both directions, and no issues were allowed to fester. Again, financial results were quite good throughout all divisions.

Note the priority of the cultures involved. Looking back now, it was quite predictable who was bound to lose when headcount reductions were forced through. The Pilks crowd were essentially looking for job security. As one of the first steps, the CGIL head office was closed in April 1982, and all of us moved across to the Ford Glass offices. And then the reductions started, albeit discreetly at first.

I sawit then occurring in a rather blatant manner in 1983, when I was given a survey form to identify what proportion of my time was spent on various activities. I noted that no-one else was being given such forms, and it didn't take a rocket scientist to figure out what was going to happen. I just gave some (*ahem*) wild guesses, and it was shortly after that I was told that my position was now redundant. Several weeks after that, I heard through the grapevine that those managers were shocked to discover that I was doing the workload of six of their people combined , and they really had to scramble to try and figure out how to divide up what had to be done!

I went ahead and got my RIA the following year, which was transformed into the CMA designation in July 1985. There have been interesting moments since that time, but none were ever as exciting or as enjoyable.

Aftermath

And what happened to that operation since? It has essentially gone the way of all flesh:

• In 1988, Ford sold its entire glass operation to Asahi Flat Glass (owned by Mitsubishi), which is now known as AGC.
• Their float glass manufacturing plant in Scarborough,originally established in 1967, was shut down around 1999. Another float plant had been established at St-August-de-Demaures in Quebec in 1992, but that one shut down in 2008 because of manufacturing overcapacity in the North American market.
• All of the fabrication, contracting and retail centres in Canada have now been sold off or closed. There is only one automotive glass facility here now, as shown on AGC's map.

On a broader scale, I believe I got off a lot better than many others then. Many accountants came face to face with job losses for the first time in their lives. At Coopers + Lybrand, now part of PwC, the practice for articling students had been to allow them three chances to write the UFE (the CA final exam) before they would be told to leave if they still could not pass. Around that time, that was cut back to allow them only one kick at the can, as most UFE graduates decided to stay on at the firm instead of having a large proportion decamping to positions in private enterprise. From that point on, the senses of job security and loyalty were permanently shaken, and they have never really settled back down since. These days, it can be said that many actually suffered from a type of post-traumatic stress disorder from these events, although it was never described as such, and that had wide-ranging effects over the following decades that have never been discussed.

The desire for headcount reductions continues unchecked everywhere, and almost every acquisition seems to result in another head office being hollowed out as a result. I've heard it said that the fat has now been trimmed off everywhere, and now we're cutting into the bone!

I see the potential for several case studies and/or theses in several academic fields. I wonder who would be interested in following up on this?

"Going concern" v "insolvency": there is a difference

There are still too many among directors and senior management that believe an auditor's assessment of  a company as a going concern is the same as as a directors' assessment of its potential for insolvency. That is not a correct view, because the two concepts can diverge either way:

• an entity may still be capable of paying its debts as and when they fall due, but at the same time not be a going concern because the directors intend to liquidate or significantly curtail its operations within the relevant reporting period; and
• a company may still meet the criteria of being a going concern because of its intention and capacity to maintain the scale of its operations, while still facing significant uncertainty in being able to pay longer-term debts as and when they fall due.

An entity's status as a going concern arises from IAS 1, which is its current foundation  in Canadian GAAP. Securities laws require it to be addressed in an annual report's Management Discussion and Analysis, although the Ontario Securities Commission has noted major deficiencies in that regard.

The directors' assessment for the potential of insolvency is preemptive in nature, and arises from both statutory and contractual duties. CPA Canada has noted that there is a crucial need to ensure an early determination, in order to employ available  options and avert potential default on a timely basis.

Even if there are no immediate concerns, auditors must still address whether any material uncertainties may exist that need to be noted in a company's financial statements, and be prepared to issue an adverse opinion if such uncertainties are not addressed therein.

This is further evidence of the current requirement of directors and management to be proactive in addressing their duties, as being reactive will, in almost all cases, will be too late.

In performing their duties, directors must act reasonably.  It has been held that reasonable grounds do not include "unquenchable optimism," and the following list indicates factors that suggest where an unreasonable action has occurred in assessing insolvency:

1. Where, although the officer has never adverted to it, there is at the objective level no reasonable or probable ground of expectation  to the relevant effect;
2. Where the officer himself has a subjective expectation of the relevant kind, that there is no objective ground for the expectation;
3. Where, as a matter of subjective judgment, the officer lacks the expectation yet, unknown to him, there is, on an objective appraisal, a reasonable or probable ground of expectation; and
4. Where the officer does not care whether the postulated event of payment will occur, and it appears that objectively there was no ground of expectation.

On the other hand, directors cannot give a qualified opinion as to material uncertainties, either through an expression of hope or envisaging unlikely scenarios, and the use of boilerplate statements in either the MD&A or the notes to financial statements is viewed as being very unhelpful. For example, if a qualified opinion is being considered as to the availability of financing from a financial institution or shareholder to ensure continuing as a going concern, genuine negotiations with a reasonable likelihood of success should be shown to be underway at the date of the statement.

The future of HR for employers

Last month's ruling by the Supreme Court of Canada in Wilson v Atomic Energy of Canada Ltd—even though it is ostensibly restricted in scope to federally regulated employers—should give pause to all organizations in the management of their workforces. Taken together with other recent SCC judgments, we can see that the HR landscape is becoming quite different in many respects from what many of us have been used to over these past few decades.

This most recent decision has several notable aspects that have far-reaching consequences: Much comment has been made about the inability of federally regulated employers to terminate non-managerial employees without just cause (provided that they have worked for more than twelve months). It was noted that the federal scheme displaced the common law with a scheme requiring reasons to be given for dismissal, and that the payment of a generous package cannot avoid a determination under the Canada Labour Code on whether the dismissal is unjust. I can see this having an impact in dealing with complaints on human rights issues, such as under Ontario's Human Rights Code, where settlements can be reached only after a complaint has been filed. This scheme appears to qualify as another instance where the common law has been displaced in favour of a statutory right.

One commentator has suggested that perhaps, in the federal sphere, probation periods can be extended to twelve months in order to be able to quickly dismiss employees before the Code's protections kick in. I can see several practical reasons why this would not be so easy from the employer's point of view:

• such periods only exist when specified in an employment agreement, and its consequences must be explicitly laid out therein;
• they cannot be unreasonable in length (which will depend on the nature of the position and the qualifications of the incumbent), but can be extended when the agreement explicitly provides for such an option;
• there can be liability for negligent misrepresentation, where the parties are each under a duty to exercise reasonable care to ensure that any representations they make are correct, which can impact on the intent being expressed for the use of probation;
• if the specified period is greater than three months, the agreement must comply with the minimum notice provisions in the Employment Standards Act, 2000;
• liability for wrongful dismissal will still occur if termination occurs before a probation period even begins, as noted in a recent BC case;
• termination within the period does not mean that notice (or pay in lieu thereof) can be avoided, as the common law still requires adequate notice to be given even when statutory notice is not required; 
• keep in mind that employers in Québec are required to act in good faith during all stages of the employment relationship, while the common law provinces have such a duty only during the relationship and its termination.
• termination can only be done in good faith, and that concept should be reinforced by stating within the agreement the purpose for which the probation period is required, for which adequate documentation should be kept to support the employer's assessment of the employee's performance;
• however, there have been cases where a court has held that termination can occur without notice and without reasons when not done in bad faith.

The above list is not exhaustive, but it applies to provincially regulated employers as well, and other concerns may easily arise. These are interesting times indeed!

Paid vs unpaid labour: key distinctions

There have been many assertions I have heard over the years in the private sector as to what rules apply where a worker is being hired, raising distinctions between permanent and casual labour, employment vs independent contractors, and when unpaid work is allowed. Many of those assertions - including ones made by fellow professional accountants - have turned out to be wrong. Here is an outline of what the true situation is for employers, at least as far as Ontario is concerned.

Where unpaid labour is allowed

I can only find the following circumstances where payment would not be allowed:

1. Where the work was undertaken as a volunteer, with no reasonable expectation of being paid (such circumstances would be rare in the private sector, but would more likely be able to occur in the public and non-profit sector);
2. For activity undertaken in the role of a director of a charity (but the Charities Accounting Act does allow for work by a director outside that role to be compensated upon the approval of a prescribed order); and
3. Training given by an employer, in restricted circumstances as specified in the Employment Standards Act, 2000.

There is no statutory definition of a volunteer under Ontario law,but a regulation under the Occupational Health and Safety Act does state that a "volunteer worker" is:

"a worker who performs work or supplies a service but who receives no monetary compensation for doing so other than an allowance for expenses or an honorarium." 

That is not a comprehensive definition in the matter, as it only aids in determining which workers are not counted for assessing whether a joint health and safety committee must be appointed for a workplace. There are few court cases that discuss the unique nature of a volunteer, but more recent ones stress that an organization's vicarious liability does extend to those persons' activities.

Training given by an employer can be unpaid only where it is:

• similar to that which is given in a vocational school,
• for the benefit of the individual, and
• the person providing the training derives little, if any, benefit from the activity of the individual while he or she is being trained,

 and the individual:

• does not displace employees of the person providing the training.
• is not accorded a right to become an employee of the person providing the training.
• is advised that he or she will receive no remuneration for the time that he or she spends in training.

All six of these criteria must be fulfilled, which effectively kills off most such schemes that had been in effect over the course of the last couple of decades. The Ministry of Labour is conducting blitzes of specific industries, such as with magazine publishing in 2014. As well, some managers have asserted that it was OK to give such participants an honorarium at the end of their work term, as the CRA only requires a T4 to be issued where a payment is greater than 500 dollars within a year, but the last criterion above effectively bars that from taking place.

Other statutes to watch out for include:

• the Workplace Safety and Insurance Act, 1997, which extends WSIB coverage to volunteer firefighters, ambulance workers and police auxiliary members;
• the Human Rights Code does apply to volunteer employment;
• OHSA's definition of "worker" includes those receiving no monetary compensation as a result of participating in a secondary school work experience, a program approved by a post-secondary institution, or in a training scheme as prescribed under the ESA, which effectively means that an employer has a statutory duty to provide them a safe workplace together with appropriate training.

"Casual labour" is still labour

Many managers have also asserted that "casual labour" does not have to be passed through payroll, but they conveniently forget the CRA notice outlined above. As long as it constitutes employment, a T4 must be issued. However, the University of Waterloo does have a nice little classification for the types of appointments that are available within its organization, which would be good for others to adopt as well (with necessary modifications). In it, they define "casual earnings staff" as those "employed for less than three months or on intermittent bases or who do not have regularly scheduled hours of work, or who are employed under an arrangement where they may elect to work or not when requested to do so." Note that a one-time engagement would qualify under this definition, and I doubt whether such work would be performed for 500 dollars or less. This definition is in contrast to those given for indefinite or definite-term appointments or for collective bargaining arrangements, but payments for all persons must be processed through payroll.

Employee or independent contractor?

Whether an engagement constitutes employment or a contract for services is highly fact-dependent, and has nothing to do with what an agreement might state. The relationship will depend upon certain factors as determined over the years through the courts, which include:

• control over how, what, where and when work will be done;
• who furnishes the tools and equipment required to perform the work;
• whether a person can subcontract the work or hire assistants to help out
• who bears the financial risk for performing the job;
• who is responsible for making the necessary capital investment and business decisions that can affect the profit or loss on the contract; and
• the opportunity to control proceeds and/or expenses in order to maximize profit.

Again, the University of Waterloo has an excellent matrix covering the various possibilities. It is noteworthy that certain payments will require the issuing of a T4A at year-end, while others need only be accounted for in the contractor's Statement of Business/Professional Income required to be filed with their annual income tax return.

Some companies have attempted to do an end run around by this by claiming that an arrangement is with a separate corporation, as opposed to being with the individual concerned. This can work, but it also problematical, and it raises concerns of liability as well as whether the arrangement is legitimate and not a "sham" transaction. UW's policy is a good framework to help assess whether your arrangements in that regard might hold up.

What can be a "sham" transaction? I've heard of several instances where this was ostensibly in effect, but the principals never bothered to even set up a bank account in the corporation's name to receive the payments, preferring to deposit the cheques into their own personal account. One person even requested that the cheques be made out into his own name! Now that was obvious!