our Raison d’Etre

Inside This Issue: Acquiring Distressed Businesses – Opportunities and Issues

Best Practices to Attract and Retain Key Employees

Should You Bonus Down to the Small Business Limit?

IT & People – An Excellent Retention Tool

Multi-Family Office – What Is It and Is It Right For You?

our

Raison d’EtreTM

Fuller Landau • Spring 2008

Welcome to the latest issue of our business magazine: Our Raison d’Etre.TM

Wow! Another incredible year at Fuller Landau! The results of 2007 reflect the many successes of Fuller Landau’s past, as well as the strong potential for our future. As we enter a new year, we continue to focus on our three pillars of success; progressive technology, highly developed people programs and exceptional business development, and we do so with new additions to the Fuller Landau team as well as a new award recognizing us as an employer of choice for professionals. We continue to be known for our progressive culture and high standard for quality. This is truly a tribute to our people and their ability to focus on our business model, the Raison d’Etre, a commitment to helping our clients maximize their wealth.

An Award Winning YearFor the second year in a row, Fuller Landau was selected by Canadian Business magazine as one of the Top 50 Best Workplaces in Canada! This award positions us among the leading employers in the country – and our selection was based on the outstanding feedback of our team members! In addition, we are proud to be recognized as one of the 25 Best Small and Medium Employers in Canada as reported by The Globe & Mail. Fuller Landau’s commitment to being an employer of choice for professionals, and its exceptional quality of organizational processes and leadership feedback helped to earn our firm the #11 spot on the list. That is #11 in the country!

These awards follow our past recognition as one of Canada’s Top 100 Employers by MacLean’s magazine, our receipt of the Practice Innovation Award from Practical Accountant magazine and our receipt of the Internal Technology Innovation Award from the Leading Edge Alliance. As we continue to establish a reputation for excellence, we become more sought after by the best and the brightest in the accounting and consulting industry sector. In turn, our clients benefit from working with top professionals and thereby receiving outstanding service.

Events and InitiativesOur annual seminar series has been a great success. As in past years, we have developed a series of relevant topics that concentrate on helping our clients increase their personal net worth. Our next two seminars focus on improving profitability through business process improvement and building your business through acquisitions. Please see page 12 for a full schedule and registration information.

We continue to develop our women’s initiative, alumni and recruiting programs, all testimony to our dedication of resources in developing our people. The result of these programs is a cohesive team of professionals who have made a long-term commitment to the Firm. Participating in the annual ride for Juvenile Diabetes, the Institute of Chartered Accountants of Ontario’s (ICAO) Free CA Tax Clinics, and the Ride to Conquer Cancer are just some of the ways we are giving back to our community this year. With many new ideas and initiatives in the works, 2008 promises to be another successful and innovative year for Fuller Landau.

We hope you find the latest edition of the Raison d’Etre to be value-added and informative. We wish you and your family best wishes for the new year and look forward to what is to come in 2008.

Best wishes!

Michael Epstein, CAManaging Partner

ServicesAssurance• Audit• Review&Compilation• SpecialAuditReports

Tax• CorporateTax• Estates&Trusts• PersonalTax• InternationalTax• CommodityTax

Financial Advisory • CorporateFinance• BusinessValuations& LitigationSupport• Restructuring&Insolvency• Investor&LenderServices

Consulting• StrategicGrowth&Profitability• CustomerLoyalty• StrategicHRManagement• ProcessImprovement• TechnologyEnablement

Wealth Management• InvestmentAdvisory• ComprehensiveFamily FinancialPlanning• IntegratedPersonal&Business NetWorthStrategies• TaxStrategies• EstatePreservation• RiskManagement• FinancialAdministration

Succession Planning• FamilyAdvisory• BusinessAdvisory• Tax&EstatePlanning• SellingyourBusiness• ManagingYourMoney

Dear Clients and Friends:

w w w. f u l l e r l a n d a u . c o m

A L I G N M E N T

PE

RS

ON

AL

BU

SIN

ES

S

EnhancingBusiness

Value

Personal TaxPlanning andCompliance

Assurance/Tax Planning and Compliance

Wealth Management/Investment Advisory

©2008 Fuller Landau

Realizing Value:Succession/

Exit Strategies

IncreasePersonal

Net Worth

Contents

Fuller Landau guarantees neither the accuracy nor completeness of information contained in this publication and is not responsible for any errors or omissions or for results obtained by others as a result of reliance upon such information.This publication does not, and is not intended to, provide legal, tax or accounting advice. For more information on any of the issues addressed in this publication, please contact Fuller Landau directly at --.

Our Raison d’Etre™

Enhancing Business Value3 PhantomStockPlans

4 AcquiringDistressedBusinesses–OpportunitiesandIssues

6 BestPracticestoAttractandRetainKeyEmployees–

anAnalysisofPrivateCompanyStockOptions

Personal Tax Planning and Compliance8 EmployeeGiftsandAwards

Assurance/Tax Planning and Compliance 9 ShouldYouBonusDowntotheSmallBusinessLimit?

Wealth Management/Investment Advisory10 Multi-FamilyOffice–WhatIsItandIsItRightForYou?

Technology Tip13 IT&People–AnExcellentRetentionTool

Inside Fuller Landau

3

8

9

10

13

14

A L I G N M E N T

PE

RS

ON

AL

BU

SIN

ES

S

EnhancingBusiness

Value






Exit Strategies

IncreasePersonal

Net Worth

EnhancingBusiness

Value

Phantom Stock Plans Recruiting, retaining and motivating key employees is a key-success factor for the majority of businesses today. Our experience at Fuller Landau is that all successful businesses plan for their future success.

The vast majority of our clients are mid-market privately-owned businesses engaged in a variety of businesses and industries. For most, in order for these businesses to survive and successfully grow in the future, they need to shift their operational orientation from a short-term reactive (survival) mentality to a pro-active long-term professionally managed business model. Concurrent with the change in management systems, these privately- owned businesses will often require management skills, experience and objectivity of key employees to assist the company in its longer-term orientation.

Attracting, recruiting and retaining key employees over the long-term will require both stimulating and challenging job opportunities within a company as well as creative compensation programs which satisfy the entrepreneurial needs of the key employees.

Properly designed long-term incentive plans will help focus and motivate key employees on the longer-term business goals and objectives of a company. These plans can create an environment whereby the goals of the shareholder(s) and key employees are congruent and focused on improving business value. A great plan will allow the shareholders to view his/her management team as business partners rather than employees and may lead to attracting and retaining key employees for many years.

Case StudyA Fuller Landau client (referred to herein as “PrivateCo”) planned for significant growth over the next five years. To their credit, they recognized the need for a comprehensive dynamic strategic business plan to create a blueprint for long-term viability. One of the key components of the business plan was to retain their key people and specifically address the long-term needs of their executive management team (referred to herein as “EMT”) because the shareholders recognized that they were integral to the future success of the company.

The shareholders had the following concerns with respect to their five year business plan: 1. How to retain sufficient profits to enable/finance growth? 2. How to recruit and keep talented employees at the executive level? 3. How do you make your compensation/benefits plans attractive without jeopardizing the financial viability of your business? 4. How do you motivate employees to look beyond current years’ earnings – annual bonus and balance that view with building long-term value? 5. How do you fairly compensate key employees without significantly diluting shareholder ownership? 6. How do you defer larger bonus payments to employees until a significant event occurs (e.g. sale of the business)? 7. Generally, how to retain these key employees over a longer-term horizon?

In addition, the shareholders of PrivateCo identified the following goals in respect to a long-term incentive plan for key employees: 1. Design a plan to afford the EMT the opportunity to participate in the future value of the company upon a sale of the business. 2. Provide meaningful long-term wealth creation for the individual members of the EMT. 3. Maximize the value of the company with optimized management focus and effort. 4. Be very lucrative to the individuals of the EMT. 5. Minimize tax implications for all parties. 6. Ensure that the long-term goals of the shareholders and the EMT are congruent. 7. Attract one or two additional key executive management team members.

Armed with this information, PrivateCo approached Fuller Landau (“FL”) for advice and direction.

After considering the client’s goals, their concerns and their strategic plan, we proposed a phantom stock plan.

Acquiring Distressed Businesses –Opportunities and IssuesEntering 2008, many Canadian businesses find themselves at a crossroads as they are faced with the challenges of offshore competition, an increasingly weakening U.S. export market and appreciation of the Canadian Dollar. The combination of these factors continues to put pressure on Canadian manufacturing including the automobile sector. Hospitality, gaming and tourism related sectors are also likely to feel the effects of Americans spending their vacation dollars at home. Other export oriented sectors, such as the forestry industry, will continue to struggle with the effects of a downturn in the U.S. housing market and the strong Canadian Dollar. However, the presence of this market turbulence could present opportunities for strategic buyers – companies looking to expand their business through strategic acquisitions.

There are advantages to acquiring distressed businesses through a formal insolvency process, including the opportunity to acquire going-concern businesses at a discounted price or an acquisition opportunity that might not have been possible but for its financial distress. Although there may be significant rewards for the buyer, significant risks exist. Knowledge of acquisition strategies for distressed businesses will provide buyers with a definitive advantage. This article is intended to briefly highlight for the uninitiated, alternative Court-sanctioned sale processes for insolvent Canadian businesses.

Insolvent and Distressed BusinessesWhere the value of the business’ assets is less than its liabilities, the business is technically defined as insolvent. The sole fact of technical insolvency may not hinder the business’ ability to continue if it has continuing financial support. Alternatively, a business is also technically defined as insolvent where it does not have sufficient liquidity/financing to meet its liabilities as they generally become due. In these circumstances, not only is the business insolvent but it is in jeopardy of losing its ability to continue operating in the normal course – commonly known as a “distressed business”.

A Court approved insolvency process is the most commonly used method to convey the insolvent business’ assets. The buyer’s procedural objective is to obtain a “vesting order” from the Court that vests the assets with the buyer free and clear of almost all of the previously attached liabilities.

Phantom Stock Plans was authored by David D’Cruz of the Fuller Landau Assurance Group.TocontactDaviddirectly,pleasecall(416)[email protected].

What is a phantom stock plan?Essentially, a phantom stock plan is a “right” granted to an employee by an employer to participate in the sale of the business on some defined terms and conditions. The most important term would be the percentage participation that an employee would receive upon the sale of a business or conversely the percentage dilution that the shareholders are prepared to accept.

Accordingly, a phantom stock can be an effective and efficient way to motivate key employees so that their contribution to the business is to increase the value of the company using the “motivation of ownership”.

Therefore, Phantom Shares have the attraction of share ownership when a business is sold without some of the associate implications of share ownership such as: the need to purchase/sell shares; there is no voting interest and it is not necessary to enter into a shareholders agreement.

A phantom stock plan would take into account the following features: • Vesting. • Forfeiture of rights in the event of employee resignation or termination. • Percentages can be increased or decreased. • Percentages can vary depending upon the employee. • A valuation methodology is often established tied to the triggering event of a sale of business, e.g participation in a sale might start after a threshold valuation is established. This is to recognize that a baseline value existed before the employee commenced employment with a business. • A triggering event could occur if the employee retires, dies or is unable to work due to a long-term illness. • Recognition that the “right” to participate does not equate to legal title in shares, thereby avoiding any risk that creditors would have a claim on an employee’s assets, i.e. shares.

Phantom stock plans also have several tax advantages that are attractive to both business owners and the key employees.

First, when a key employee receives share rights under a company’s phantom stock program, CRA does not recognize that receipt as taxable income to the employee until he or she actually receives the money. This typically occurs when the company is sold or when the employee retires and is cashed out (assuming all other terms and conditions of the plan are met). Secondly, although on receipt of the funds, the payment is treated as employment income in the hands of the recipient, the employee benefits from the deferral of tax on the increase in value.

Lastly, the company is entitled to a full deduction for the payment.

Therefore, determining and understanding what your company is worth is essential when setting up phantom stock plans. Unless a business owner has gone through a purchase and sale of the business process or meaningful tax reorganization, they often do not have a true understanding of the value of their business. This is an essential first step before establishing a phantom stock plan.

ConclusionThe shareholders of PrivateCo decided to implement a version of the employee phantom stock plan that was tailored to meet their specific needs. They identified a prospective realization plan with an ultimate goal of selling the business within a specified timeframe. The plan was laid out in a document that described who was eligible for the plan, how the plan was to be administered and the many other terms and conditions associated with the “right” to participate.

Retaining key employees will help your business succeed. Fuller Landau can help guide your business, including assisting you in attracting, motivating and retaining key employees.

Canadian Restructuring and Insolvency StatutesThere are two principal Canadian statues that govern the restructuring and disposition of insolvent corporations. The Companies’ Creditors Arrangement Act (CCAA) is primarily utilized for the restructuring of larger and more complex insolvent corporations. Alternatively, the Bankruptcy and Insolvency Act (BIA) is a more streamlined process, suitable for smaller and likely less complex corporate restructurings. Both CCAA and BIA restructurings are Court supervised.

CCAA and BIA restructuring proceedings are intended to provide the debtor with an opportunity while under “creditor protection” to develop a plan or proposal to its creditors that will allow the business to continue and avoid bankruptcy liquidation. Creditors will be asked to accept some fractional payment of their debt in full settlement of their claims against the corporation and maintain the prospect of a continuing customer as compared to what will likely be a nil recovery in bankruptcy. From an operational restructuring perspective, the statutes provide a stable platform to concurrently complete operational changes such as: shedding unprofitable divisions, disclaiming leases, selling redundant assets and reducing staff head counts. In most cases, the significant costs and liabilities normally associated with these steps are included in the fractional settlement payment to creditors, in particular employee termination costs. From the strategic buyer’s perspective, the value of the insolvent distressed business should be measured against its potential upside value post-restructuring.

CCAA/BIA Restructuring SalesMore frequently, formal restructuring proceedings are a vehicle within which the business is marketed and sold on a going-concern basis. Typically, the debtor maintains control of the business through the sale process that culminates in a Court approved sale, where the buyer obtains a vesting order. The restructuring plan is promoted as the sale of the business and its continuation under new ownership (and likely new management, which could be a positive for creditors). In these situations, the buyer has the opportunity to concurrently effect operational changes while possibly avoiding a significant portion of the inherent costs and liabilities. More importantly, the business’ assets are acquired on an unencumbered basis and available as collateral for future growth financing.

Alternatively, restructuring proceedings are commenced by the insolvent company with the sale agreement negotiated with the designated buyer in hand, commonly known as “pre-packaged deals”. In these situations, the buyer agrees to fund the settlement payment to creditors contingent upon the creditors’ approval of the sale of the business. Upon the creditors’ acceptance of the buyer’s proposal, the business continues and the amount of the predecessor business’ liabilities assumed by the buyer is crystallized. The buyer might also simultaneously purchase the company’s shares to take advantage of any tax loss carry-forwards that normally exist in these circumstances.

A restructuring sale process might also be instituted at the recommendation and insistence of the company’s secured lenders. Historically, secured lenders would enforce their security and have the Court appoint a Receiver to sell the business (in whole or in part) to recover their debt. A sale process conducted by a Court appointed Receiver broadcasts to the marketplace that the business’ assets are being liquidated on a more urgent and discounted basis than a business in a restructuring. Even if the business is continued on an interim basis by a Receiver, customers, suppliers and employees usually migrate fearing the ultimate termination of operations and the business’ value quickly evaporates. The resultant transaction price will likely be negatively affected by the connotation of a receivership as compared to a restructuring sale. The ultimate outcome – continuation of the business under new ownership – might be the same yet the additional uncertainty and stress of the Receivership on the business, normally reduce recoveries to stakeholders and can undermine the ability of the business to continue.

Receivership SalesThere are, however, circumstances where a Receivership is an effective method to complete the sale of an insolvent business’ assets where a sale process under a formal insolvency is not practical or might jeopardize operational continuity. In these situations, the going-concern value of the business is typically significantly less than the amount of secured debt encumbering the assets. Normally, the business’ secured lenders with the consent and assistance of the distressed business, initiate a marketing process for the business prior to any Court protection being granted. The Receiver is only appointed by the Court at the request of the secured lender principally to complete the pre-arranged sale transaction to a designated buyer.

Also known as “same day sale orders”, these transactions are only possible if the Court is persuaded that no better value could have been generated by a Court approved and supervised sale process. Since the secured lenders have normally consented to the sale and are likely not going to be fully repaid, the Court can usually be convinced that subordinate creditors are not prejudiced by the sale (e.g. they would not have received any recovery from a Receivership sale). Further, the outcome for all stakeholders is better than what could be achieved through a formal Receivership sale process, including the continuation of the business and preservation of employee jobs. There is always a risk that the Court may disagree and compel the Receiver to conduct a sale process. However, when successful, a “same day sales” achieves the objective of a Court approved conveyance of assets free and clear of most liabilities while preserving existing business value. Business operations are normally not disrupted and the potential damage to the business’ value that could occur during a receivership sale process is generally avoided.

Best Practices to Attractand Retain Key Employees – an Analysis of PrivateCompany Stock OptionsOne of the key challenges facing business owners is how to attract and retain key employees. Stock options are often considered an effective means to attract, compensate, reward and retain employees. However, while there are advantages to employee stock option plans, there are also several significant drawbacks.

Stock options provide the holder with a right to purchase a certain number of shares at a given price for a defined period of time. Once the employee exercises his or her options to acquire the stock, they can either hold or sell the shares.

When considering implementing an employee stock option plan, the business owner should consider the following:

Control IssueA stock option plan will provide the employees with an actual ownership interest in the business after the options have been exercised. Ownership entitles employees to a myriad of shareholder rights which could include notice of and attendance at shareholder meetings, the inspection of books and records, and possibly voting privileges.

Contribution/Work Ethic Issue A general problem relates to changing contributions from an employee. Whereas normal bonuses and discretionary profit sharing allocations can be distributed on an annual basis commensurate with the employee’s contribution, once stock options have been granted (and even more so once they have been exercised) an employee could continue to receive the benefit of corporate growth even though his or her contribution had significantly decreased.

Acquiring Distressed Businesses – Opportunities and Issues was authored by Jerry Henechowicz of the Fuller Landau Restructuring & Insolvency Group. TocontactJerrydirectly,pleasecall(416)[email protected].

Other ConsiderationsWhether the sale is effected through a restructuring or receivership proceeding, these transactions may often occur over a very short time frame where buyers are provided limited time to complete due diligence. The sale process timeline, including identifying potential purchasers, due diligence timelines and offer submission deadlines, must be balanced against the insolvent business’ ability to continue operations and ongoing financing needs. There is always the overhanging risk that the longer the process, the more likely the risk of customer, supplier and employee dissipation. Time may be of the essence to complete a sale before value evaporates.

From a buyer’s perspective, if pressures on the business are such that limited due diligence time is possible, the shorter timetable will likely be reflected in increasingly discounted offer prices. Offer prices or deal structure could reflect the added risk of limited due diligence. Other potential purchasers may be deterred by a shorter timeline than they are normally used to and along with the absence of any representations and warranties normally available outside an insolvency process, might abandon the process. The need for a quick going-concern sale can be of considerable advantage to the strategic buyer with the financial agility to capitalize on an opportunity.

Obtaining Court approval for the sale of a distressed business will normally require the co-operation and consent of its secured lenders. As a result, prospective buyers may also consider acquiring the secured lenders debt and security (possibly available at a discounted amount) in advance of the formal insolvency proceeding. This strategy can provide the buyer with an added measure of influence and possible control over the restructuring and sale process. More importantly, the amount paid for the secured lenders security and debt is normally fully repaid to the prospective buyer from the sale proceeds.

ConclusionThis article has highlighted some of the more common processes and issues to be considered in the purchase and sale of a distressed business. The current economic landscape will provide opportunities for the acquisition of insolvent going-concern businesses at potentially significantly discounted prices. Strategic buyers that do not have the necessary risk tolerances and are uncomfortable stepping into the uncertainty of the distressed business marketplace may lose opportunities. A well informed buyer that has the flexibility to adapt to alternative acquisition strategies, will have far less competition in the marketplace and be able to participate in these opportunities.

Fuller Landau’s Restructuring & Insolvency team have acted for debtors, buyers and secured lenders in a variety of restructurings and related distressed business sale transactions. We are available to assist you should the need arise.

For example, assume Paul owned stock options to acquire shares of a class of his employer, PrivateCo. These represent the only shares issued of that class. Before his departure from PrivateCo, he exercised his stock options and acquired shares in the company for $50,000, when the shares were worth $60,000. At the time of acquiring his shares, the paid-up capital (“PUC”) of his shares is $50,000. When Paul’s shares are redeemed, the amount received in excess of PUC is considered a taxable dividend. As Paul’s PUC was $50,000, the excess value of the shares over $50,000 (i.e. $10,000) represents a taxable dividend. Had Paul been able to sell his shares to another shareholder or a third party, he would have had no gain or loss. If employees believe that stock options in private companies can actually be to their detriment, this form of compensation may not be an attractive incentive. Strategies to overcome this include the purchase of the employee’s shares by existing shareholders, establishing a trust to buy employees’ shares, etc.

In circumstances where the company is considering a buy-out of the employee’s shares, the company will likely wish to redeem the shares as opposed to an actual acquisition of the shares. This is because the funds available are usually internal to the corporation. This gives rise to the problem of the employee being unable to utilize the capital gains exemption and the tax implications of a deemed dividend and a capital loss.

ConclusionToday’s marketplace is characterized by intense competition for talent. While there are numerous problems with implementing an employee stock option plan, it can be an effective piece of the compensation puzzle to differentiate your business in order to attract and retain the best talent. As outlined in the article “Phantom Stock Plans” on page 3, a phantom stock plan can be an attractive alternative.

Best Practices to Attract and Retain Key Employees – An Analysis of Private Company Stock Options was authored by Bruce Roher of the Fuller Landau Valuation and Litigation Support Services Group.TocontactBrucedirectly,pleasecall(416)[email protected].

An increased value of the shares may in itself create a problem. The employee may only be able to realize the value of his or her shares on death, departure or retirement. If there has been a substantial increase in the value of the shares, there may be an incentive for the employee to leave the company.

Need for a Shareholders’ AgreementIt will be necessary to establish an appropriate shareholders’ agreement to cover, amongst other things, provisions to deal with the employee’s shares upon his or her death, retirement or termination with or without cause.

It will also be necessary to establish rules dealing with the rights of employees in circumstances where amounts are withdrawn from the company by the majority shareholder(s) by way of dividends and/or bonuses for individual or corporate tax planning purposes.

Valuation IssuesAt the time when the employee wishes to sell his or her shares or have them acquired by the company, it will be necessary to determine their value. There are numerous alternatives, none of which are ideal:

• It may be possible to work with a formula, however, caution must be exercised in that value tends to change as economic circumstances change. Therefore, a formula may become out-of-date and not result in a reasonable valuation; • An independent valuator can determine value from time to time; or • It may be appropriate to obtain and agree on an annual valuation.

From an accounting perspective, a traditional stock option plan requires options granted in the year to be treated as an expense. Accordingly, the value of these stock options will need to be determined on an ongoing basis. Income Tax Issues At the time an employee leaves a privately-owned business, he or she is usually required to sell their shares back to the company. This can lead to a tax pitfall for employees who depart the company.

A L I G N M E N T

PE

RS

ON

AL

BU

SIN

ES

S

EnhancingBusiness

Value






Exit Strategies

IncreasePersonal

Net Worth


• gifts and awards given by closely held corporations to their shareholders or related persons; • disguised remuneration such as a gift or award given as a bonus; or • manufacturer-provided gifts or awards given directly by the manufacturer to the employee of a dealer.

The following examples illustrate CRA’s policies:During 2007, an employee gets married and receives a wedding gift with a fair market value of $350. The employer gives all employees an iPod Nano as a holiday gift. The iPod’s fair market value is $250. Since the total value of the gifts received in 2007 exceeds $500, one of the gifts must be included in the employee’s income. The employer would report the lower value gift in the employee’s income.

The same employer gives an employee a gift on the birth of a child. The gift has a fair market value of $150. The employee also receives an iPod valued at $250 as a holiday gift. Since the total values of the gifts received in 2007 do not exceed $500, there is no amount that would be included in the employee’s income.

Another employee receives a gold watch in recognition of 25 years of service. The gold watch has a fair market value of $400. The employee also receives an iPod valued at $250 as a holiday gift. Since neither the award (the watch) nor the gift (the iPod) exceeds $500, there is no amount that would be included in the employee’s income.

The employer can deduct the cost of all awards and gifts provided to their employees regardless of whether the value of the award or gift is taxable to the employee.

Giving consideration to these policies, an employer can develop recognition programs that not only award employees for achievements, but do so without placing a tax burden on employees.

Employee Gifts and Awards was authored by Gordon Jessup of the Fuller Landau Tax Group. TocontactGordondirectly,pleasecall(416)[email protected].

Employee Gifts and AwardsThroughout this edition of our Raison d’Etre magazine you will read articles with respect to employee retention strategies and best practices. In establishing a retention strategy, an employer may include employee recognition programs ranging from announcing individual accomplishments at firm-wide events, to providing awards for years of service. Many times these programs are put into place without thought to the tax consequences. An employee’s enthusiasm for the award can quickly disappear when advised that tax will be payable (and taxes will have to be withheld).

Recognition programs structured to comply with the guidelines set out by the Canada Revenue Agency (“CRA”) will allow employees to receive gifts and awards free of any tax obligations.

There are two distinct policies. One is in respect of gifts and the other is in respect of awards. The CRA defines an award as marking an employment achievement such as long or outstanding service; while a gift marks a special occasion such as holidays, birthdays, marriage or the birth of a child.

Under the CRA policies, an employer can give each employee up to two non-cash gifts per year, tax-free, provided the cost of the gifts do not exceed $500 (including taxes). An employer can also give each employee up to two non-cash awards per year, tax-free, provided the cost of the awards do not exceed $500 (including taxes). A single gift or award costing the employer more than $500 will require the employer to include the full fair market value of the gift or award in the income of the employee. If two gifts or awards are provided to an employee in the year and the combined cost exceeds $500, then one of the gifts or awards would have to be included in the employee’s income.

In setting out their policy with respect to gifts and awards, the CRA states that regardless of the cost, the following are considered a taxable employment benefit: • cash or near cash gifts and awards such as Christmas or holiday bonuses or near-cash gifts and awards such as gift certificates or store gift cards; • points that can be redeemed for air travel or other rewards; • reimbursements from an employer to an employee for a gift or an award that the employee selected, paid for and then provided a receipt to the employer for reimbursement; • hospitality rewards such as employer-provided team-building lunches and rewards in the nature of a thank you for doing a good job;

However, the proposals only changed the federal legislation and to completely eliminate the double tax effect, amendments to the provincial legislation adopting similar rules was required. While the provinces have adopted the rules, the rate changes (both federal and provincial) necessary to eliminate the double tax effect are transitioned over four years. In 2010, the changes will be fully implemented.

Ontario legislation includes a surtax that effectively eliminates (claws back) the benefits of the Ontario small business deduction where the taxable income for corporations (or associated groups) exceeds the small business limit. While Ontario adopted the eligible dividend concept, it did not eliminate the surtax. The effects of the surtax must be considered when deciding whether or not to bonus.

Our AnalysisOur analysis began by preparing tax estimates for various levels of income so as to determine whether the Ontario surtax would have any impact on the decision to bonus. The 2006 analysis presented another challenge arising from the fact that the small business deduction limits were not the same -- the federal limit was $300,000, while the Ontario limit was $400,000. A L I G N M E N T

PE

RS

ON

AL

BU

SIN

ES

S

EnhancingBusiness

Value






Exit Strategies

IncreasePersonal

Net Worth

Assurance/Tax Planningand Compliance

Should You Bonus Down to the Small Business Limit?The traditional wisdom of paying bonuses to the shareholders to reduce corporate income to the maximum amount that is subject to the small business deduction requires re-thinking due to the number of provisions introduced by the Department of Finance over the last few years.

BackgroundPrior to the recent changes in legislation, dividends paid to a shareholder out of corporate income that was taxed at full corporate income tax rates resulted in a combined corporate and personal tax that was greater than the tax an individual shareholder would pay on a bonus.

The decision to pay a bonus to reduce the corporate income to the amount subject only to the small business deduction considered other factors including:

a) the length of time the income will be retained by the corporation; b) whether the company was eligible for the manufacturing and processing tax credit; c) whether the company was claiming scientific research and experimental development tax credits; d) the tax rate of the shareholders receiving the dividend; and e) some non-tax considerations such as banking covenants.

Prior to the changes in the legislation, the analysis revolved around the tax deferral that resulted. The tax deferral was equal to the difference in personal tax that would have been paid on the bonus and the corporate tax paid on the income in excess of the small business limit. The deferral in Ontario was approximately 10%. For corporations that would not be paying out dividends to the shareholders for many years, the double tax effect was secondary to the immediate tax deferral.

Changes in RulesIn 2006, the Federal Government introduced the concept of eligible dividends being dividends paid from corporate earnings that were subject to the high rate of corporate income tax. The intention of the government was to remove the “double tax” effect.

Multi-Family Office – What Is It and Is It Right For You?A single family office is a private company that manages investments and trusts for a single affluent family. The company’s financial capital is the family’s own wealth, often accumulated over many generations or after the sale of a family business. The range of family office services vary depending on the goals of the specific family. Some family offices offer strictly strategic and investment management services, while others offer everything from strategic planning to financial and tax planning, wealth transfer planning, financial recordkeeping, real estate management and philanthropic advisory services.

Individual families start family offices to take advantage of any of the following benefits: • One central source for information on, advice about or overseeing of all the family’s financial matters. • Pooling of investment funds across a family group, resulting in lower investment management fees and better service than individual family members could attain on their own. • A dedicated team of professionals who are focused on a single family’s goals in a completely confidential manner. • Continuity from generation to generation on issues of family trusts, family values, or family philanthropy. • Access to professional advisors who can educate family members about their responsibility of ownership and governance.

While asset size is not the only factor in the decision to establish a single family office, however in most cases, it makes financial sense for a family with liquid wealth in excess of $75 million to start and staff a single family office. As a result of the high threshold required to create a single family office, many high net worth families are opting for multi-family office structures.

Family offices have long been prevalent in the United States. Single family offices began in the late 1800s and have expanded and grown as these managers took on the affairs of friends. The number of multi-family offices in the United States rose 30% in 2006 and make up almost 4% of the high net worth marketplace. It is estimated that there are between 2,500 and 3,000 family offices in the United States.

Our analysis discovered that the double tax cost was at least 6% and as high as 9% for companies that had taxable income between $400,000 and $1,000,000. A company with $3,000,000 of taxable income would subject their shareholders to an additional tax cost of at least $130,000, depending upon when the retained earnings would be distributed by way of dividend. We concluded that all other considerations being equal, companies earning $3,000,000 or less, should continue to bonus down to the small business limit. Companies earning more than $3,000,000 would have to consider the length of time the company would retain the income and the rate of return it would earn on the additional cash it would have as a result of the tax deferred before concluding whether to bonus or not. What we did discover was that the greater the corporate income, the less time a company had to retain the income to offset the double tax effect. There became no hard rule of thumb once corporate income exceeded $3,000,000.

The analysis for 2007 was very similar to 2006 as there were only minor rate changes effective for 2007 and the increase in the federal small business deduction limit to equal Ontario’s $400,000. As a result, our conclusions for 2007 remain the same as those for 2006.

On October 30, 2007, the Federal Government announced additional corporate tax reductions. Along with previously announced reductions, the top corporate tax rate for 2008 will be 19.5%, down from 22.12% for 2007. The corporate tax rate will be reduced each year until 2012 when it reaches 15%.

The additional tax reductions might finally change the rule of thumb for corporations earning less than $3,000,000, and likely not to change the rule for companies earning greater than the small business deduction limit (currently $400,000), and less than $1,000,000 as the Ontario surtax is too great to overcome.

For 2008, a company with $3,000,000 of taxable income would only need to earn an after-tax rate of return of 10% for three years to offset the double tax effect. If it is likely to earn such a rate of return and the shareholders intend to leave the retained earnings in the company for 3 years or more, then it would be better off to pay the top corporate tax and not bonus down.

For 2009 and subsequent years, the required after-tax rate of return is even lower. In fact, in 2012 the double tax effect will be completely eliminated and there will even be a small tax savings to having the corporation pay the top corporate tax.

ConclusionAll companies earning less than $1,000,000 should continue to bonus down to the small business limit. Companies earning up to $3,000,000 may benefit from paying the higher corporate tax depending upon the length of time the income will be retained by the corporation and the rate of return earned on those funds. Before making the bonus down decision, companies should seek advice from their Fuller Landau advisor.

A L I G N M E N T

PE

RS

ON

AL

BU

SIN

ES

S

EnhancingBusiness

Value






Exit Strategies

IncreasePersonal

Net Worth


Should You Bonus Down to the Small Business Limit? was authored by Gordon Jessup of the Fuller Landau Tax Group.TocontactGordondirectly,pleasecall(416)[email protected].

With so many investment firms/advisors trying to penetrate the high net worth market, the question of market saturation arises. There are a lot of firms out there claiming to be in that space selling packaged solutions, but it’s not saturated from the perspective that there are a lot of firms out there actually delivering the service and consultative approach that these clients need.

Using a multi-family office can bring certain benefits that might not be easily achieved through a dedicated single family office. A multi-family office might include a stronger team of professionals to collaborate on complex problems and to bring forward an integrated team of specialists to meet the needs of the clients.

Multi-Family Office – what is it and is it right for you? was authored by Sloan Levett of the Fuller Landau Private Wealth Advisory Group Inc.TocontactSloandirectly,pleasecall(416)[email protected].

While there are only a handful of independent family offices in Canada, the number of high net worth families who fit the multi-family office model will only rise. More than 7,000 Canadians have investable assets in excess of $20 million and approximately 450,000 with between $1 million and $20 million. With this anticipated transfer of wealth expected over the next 10 years – it is anticipated that 70% of Canadian businesses will change hands.

The multi-family office structure responds directly to the often complex needs and demands of the affluent. Since the multi-family office concept evolved from the single family office model, where all services are centered around and customized around the needs of the family, there is a need to replicate that service level and experience with the multi-family office. That means responding to clients in creative ways with customized services, capabilities and product solutions. The integration of specialized services and solutions may extend far beyond those typical of private banks.

The service orientation of a multi-family office is uniquely tailored to meet the needs of the individual family. It is extremely difficult to use a generic approach for this type of client. The process is relationship-intensive and requires a personal approach in order to gain an understanding of how to best serve the family.

Benefits of the Multi-Family Office

Objective financial adviceA multi-family office should not have conflicts of interest. Because most investment managers/private bankers are paid to gather assets under management, they may not have the time or inclination to seek the best financial advice from all providers. However, the team in a good multi-family office works to choose from all suppliers and ultimately deliver “best of breed” investment managers, insurance and loans to their clients.

Creative solutions to financial problemsThe multi-family office team must be knowledgeable about an array of strategies to ensure the best solutions for the financial problems of their clients. This means that the team should comprise of skilled professionals with experience across many technical disciplines including investments, tax, insurance, estate and financial planning.

Costs savingsThrough combining a client’s assets, multi-family offices can implement relationship pricing and offer greater economies of scale shared across multiple clients on investment portfolio management, insurance, etc.

Consistent delivery of servicesThe multi-family office must have the ability to deliver a high quality of service in a consistent manner. This requires the team to work together to solve unique, often complex issues for the client.

Long-term view of relationship buildingMost organizations realize that working with clients in a comprehensive manner leads to deeper and longer lasting relationships. Building good relationships can take a long time.

2008 SEMINAR SERIES EVENT SCHEDULEAll events take place at The Gallery at the Columbus Centre from 7:30 a.m. to 9:15 a.m.

Guests are welcome.

February 20, 2008Business Process Improvement

– How to Improve Your Profitability

May 7, 2008Grow Your Business by Acquisitions

To register, please visit www.fullerlandau.com. For further information please contact Sharon Ireland [email protected] or (416) 645-6582. We look forward to seeing you and your guests at our upcoming events!

the goal of any investment in office technology: an investment in staff capacity. To find out how best to invest in IT, managers should be speaking with staff to find out how they see technology helping them to perform better. Better still, staff should have the freedom to make suggestions about improvements to IT, or even modest budgets for implementation of these suggestions.

Everyone wants to do good work, and they want to do it on time. Employees will become frustrated if your computer system consistently stands in the way of accomplishing work. No one should have to fight with the computer or wait too long to get real work done.

Listen to the needs of your business and upgrade before your computer system becomes the bottleneck for productivity. It does not pay to avoid upgrades if the existing system does not do the job.

Create ValueProperly investing in IT is not an inexpensive proposition, but its value comes from effective use. The goal of IT is to create a responsive and entrepreneurial business culture. When staff know that IT is an investment in them, they are more likely to become engaged. When staff sees new technology as a way of offering better core services, it fosters an office atmosphere that can easily adapt to changes where workers know they are making meaningful contributions to the company. An investment in IT can increase the confidence of workers, by letting them know they are important and valued. Just as you have to be sure that your staff are doing their best for your company, you need to ensure that your IT budget is working for your staff.

The money you spend on technology is an investment in your staff!

The modern office is brimming with technology—laptops, wireless devices, complex databases, and server towers. It often seems like technology has a solution for almost any business problem, but IT cannot replace the common currency of business, human interaction.

Some Things Never ChangeFrom the time when typewriters were state-of-the-art, core business functions have not changed—employees simply have a different set of tools with which to do their jobs. Even in the high-tech sector, businesses initiate and maintain relationships with clients, create and enhance new products, and manage all these functions as efficiently as possible. IT can help staff to accomplish these core tasks, but it cannot replace the human interaction.

Why Invest In IT At All?Young professionals expect a minimum standard of technological infrastructure. Anything less is perceived as unprofessional or old fashioned. In contrast, a company that goes beyond the bare minimum and embraces new technological advancements appears progressive and prosperous.

Embracing new technology demonstrates that your company is vibrant and efficient, which appeals to young talent. Today’s young workers expect computers to do things for them, not because they are lazy, but because they do not want to be bogged down by what they perceive as mindless work. They do not have the patience for menial tasks, and neither should you.

Strike A BalanceCompanies can also go overboard with technology, burdening employees with digital red tape, which stagnates productivity and hurts the bottom line. Too few businesses find the ideal balance between seeming technologically obsessed or rather like ‘old dogs,’ incapable of learning the new tricks. These companies have lost sight of what should be

IT People – An Excellent Retention Tool was authored by Vlad Guzenberg. Vlad is the Firm’s InternalTechnologyDirector.TocontactVladdirectly,pleasecall(416)[email protected]

TECH TIP

IT & People – An Excellent Retention Tool

INSIDE FULLER LANDAUFuller Landau WelcomesNew Marketing Manager

Brent McIntosh recently joined Fuller Landau as our Marketing Manager. In his new role, Brent will oversee all marketing functions, working closely with the Partners and senior professionals in developing and executing strategies geared at continuing the growth of the firm and enhancing client outreach initiatives.

“Brent has extensive experience in helping firms like Fuller Landau expand their presence in the market through the establishment of a professionally designed and executed marketing program” said Michael Epstein, Managing Partner. “We are delighted to have him join the Fuller Landau team.”

Brent has many years of professional services marketing experience, most recently at several leading Canadian law firms. He obtained his Bachelor of Business Administration from Northwood University in Midland, Michigan in 1996.

Fuller Landau Recognized #11 on The Globe and Mail’s“25 Best Small and Medium Employers in Canada”

Fuller Landau is proud to be named among The 25 Best Small and Medium Employers in Canada. This year’s ranking of Canada’s best small and medium employers is the fourth annual undertaking by Queen’s Centre for Business Venturing at the Queen’s School of Business and human resources company Hewitt Associates in partnership with The Globe and Mail.

Becoming a Best Small and Medium Employer is a very detailed and competitive process. This national awards program recognizes top employers with between 50 and 400 employees. This study mirrors the renowned Best Employer in Canada initiative run by partner, Hewitt Associates; however, caters to smaller businesses.

The rankings are primarily determined using the results from anonymous Employee Opinion Surveys. Here, 17 key engagement drivers are detailed and analyzed. The evaluation process also includes the assessment of organization practices and perspectives from the leadership team. This year, more than 150 companies across Canada registered to participate in the study.

Fuller Landau to Participate in the Ride to Conquer Cancer

Later this year, at the invitation of a valued client, the Fuller Landau team will participate in The Ride to Conquer Cancer. The Ride benefits Princess Margaret Hospital and is a brand new endeavour to help conquer cancer. The Fuller Landau team will take part in the two-day cycling journey that covers 200 km, from Toronto to Niagara Falls. The Ride to Conquer Cancer is for anyone who wants to challenge themselves for a great cause.

The Fuller Landau riders will raise important funds to support breakthrough research and discovery of new cancer therapies at Princess Margaret Hospital, one of the top five cancer research hospitals in the world and the only cancer centre in Canada 100% dedicated to cancer research and care.

Fuller Landau Welcomes New Vice President of Mergers & Acquisitions

Jonas Cohen, MBA, CA, recently joined Fuller Landau as a Vice President, Mergers & Acquisitions. In his new role, Jonas will be working on mergers & acquisitions, corporate finance and due diligence engagements.

“Jonas has obtained extensive experience in the areas of assurance and financial advisory at one of the Big Four accounting firms and we believe his expertise will play a significant role in the development and growth of our Firm,” said Michael Epstein, President and Managing Partner of Fuller Landau. “This also demonstrates our Firm’s continued ability to attract the finest talent in Toronto.”

Jonas obtained his Bachelor of Arts from York University. After working as a Financial Advisor for three years, he returned to school to obtain his Masters in Business Administration from the Schulich School of Business. In 2005, he obtained his CA designation. He has also successfully completed the Canadian Securities Course.

Fuller Landau Recognized Two Years ina Row on Canadian Business Magazine’s

“Best Workplaces in Canada” List

Fuller Landau was honored again in 2007 as one of the “Best Workplaces In Canada” as reported by Canadian Business magazine. Fuller Landau appeared at #23 on the list. The firm was recognized along with 49 other Canadian businesses with leading workplace cultures. Two-thirds of the total score came from a 57-statement survey completed by a random selection of employees. Organizations were scored in five basic areas:

Credibility RespectFairnessPrideCamaraderie

The remaining one-third of the score came from an in-depth review of the organizations’ culture including an evaluation of HR policies and procedures. More than 20,000 employees across Canada participated in the annual survey.

Recent Speaking Engagements

Michael Epstein, our Managing Partner has spoken at the following recent conferences:

AICPA Annual Leadership ConferenceMichael spoke on two different topics: (a) Top Challenges facing Leaders in the Accounting Profession Today and (b) How to Create an Employer of Choice Firm

Office Plus Dealer ConferenceTopic: Selling your Business and Creating Value with a Transition Plan

151

Bloo

rSt.

W.

12th

Flo

orTo

ront

o,O

ntar

io M

5S1

S4T

(416

)645

-650

0F

(416

)645

-650

1

our

Raison d’EtreTM

Documents

our Raison d’Etre