Frequently Asked Questions

1What do I do if I’m being sued?
by Jack W. Hope

If you have been served with a court document it is very important that you obtain legal advice right away. Generally this document will set out the details of a claim that someone is making against you. That person could be a bank, a business partner, a business creditor, someone who feels that they have been harmed or damaged by the conduct of your business, or anyone else who feels that they may have a claim against you for money or a reason to ask a court to interfere with the way in which you conduct your business. In rare cases, a court may even be asked to tie up or freeze your property pending the resolution of the dispute. All of these claims are commenced by a court document which must be answered within a limited time period. In some cases, there may even be a court hearing, known as a motion, scheduled within a day, or a few days, of you receiving the document and it is essential that you respond appropriately. All court documents should be taken to a lawyer so that you know what type of claim you are facing and so that you do not miss your time limit for filing a response. If you do miss your time limit the party making the claim may be able to obtain a judgement against you without any further notice to you and with this judgement the claimant could seize all the money in your bank account or your company bank account, send a sheriff to seize your assets or your business equipment or garnishee your salary, or intercept any debts owed to you, including any money that your customers may owe to you or your business. Even if you feel that you have no defence to the claim, it is still important to contact a lawyer who can help you negotiate a settlement. It is very often possible to work out an arrangement with creditors whereby you can pay a discounted amount, or pay over time. Even if you choose not to see a lawyer, you should contact the lawyers who have issued the claim against you, whose name will appear on the documents, in order to try and work out a settlement.

To contact the author, please email jhope@sthilaw.com

The information contained in this message is general and should not substitute for the advice and counsel of a licensed lawyer.
2What are the advantages and disadvantages of incorporation?

by Jack W. Hope

There are three main advantages to setting up your business as a corporation:

The first, and perhaps most important, advantage is that the owners of a corporation are not generally liable for the debts of the corporation. A corporation is considered to be a separate legal entity from its owners, known as shareholders, as well as from the people who run it, known as directors and officers. Accordingly, if the corporation owes its suppliers money, or, for example, is sued for breach of contract or negligence, the shareholders, directors and officers are not personally liable for these debts. There are some exceptions to this rule. If, for example, a shareholder has personally guaranteed a debt, such as a bank loan or a lease, he or she will continue to be personally liable along with the corporation. One can also be found personally liable for a corporate debt if it appears that there was fraud involved.

Additionally, those who run a corporation or its directors may be personally responsible for certain taxes or other government obligations, especially with respect to funds that have been collected by the corporation but not remitted to the government. Another distinct advantage to incorporation is that, with the assistance of an accountant, one can expect to pay considerably less income tax if the business is relatively successful. At modest rates of income it may in fact be more expensive from an income tax point of view to have a corporation but once there is a significant level of income, your accountant can use the corporate structure to arrange your affairs to your best tax advantage.

A third advantage of incorporation is that you can raise money for your company by selling shares in it to investors who will then own a percentage of the company but, depending on the type and amount of shares that you sell them, may not have any say in how the company is run. Indeed, the company may not even be obliged to pay the investors any dividends, or return on their investment, unless the directors of the company feel that the company can afford it. Because of the limited liability nature of a corporation, some investors may feel more secure in buying shares of a corporation than they would in investing money in a partnership, where the possibility exists that they may be considered a partner and sued for partnership debts if something goes wrong.
The main disadvantage of incorporation is that it involves an expense to set up and an expense to maintain on an annual basis because of the need to use the services of a lawyer and an accountant. A corporation also involves more record keeping, bookkeeping and the need for meetings of shareholders and directors.

To contact the author, please email jhope@sthilaw.com

The information contained in this message is general and should not substitute for the advice and counsel of a licensed lawyer.

3Are corporations expensive?

by Jack W. Hope

A limited liability company, also known as a corporation, is more expensive to set up than a simple sole proprietorship or partnership. Between legal fees and government and other costs one can expect to spend more than a $1,000.00 to set up a simple corporation. In addition, it will cost several hundred dollars per year to maintain corporate status and file the necessary legal documents on an annual basis. Additional accounting fees can also be expected as a corporation must file its own separate tax returns and its bookkeeping records are more complicated than the records would be for a simple sole proprietorship or partnership. While it is generally true that one will pay less income taxes if a successful business is structured as a corporation, it may be that a business that does not yet have a significant income will pay greater income taxes as a corporation than if it was set up as a simple sole proprietorship or partnership.

To contact the author, please email jhope@sthilaw.com

The information contained in this message is general and should not substitute for the advice and counsel of a licensed lawyer.

4Breach of contract and fraud

by Jack W. Hope

Contracts are promises or agreements that will be enforced by a court. Not all promises are considered to be contracts because certain basic requirements of the law of contracts have to be met. Many personal and business arrangements, however, will qualify as an enforceable contract even if they are not in writing. While some contracts, such as those for the sale of land, have to have a written component, the vast majority of contracts can be enforced in court even if they are verbal or only partially written. The law of contracts is quite complex but will generally hold people to their deals once they have come to an agreement. It is sometimes possible to avoid the burden of a contract if you are a minor, that is under eighteen years of age, but this exception does not apply if the contract is one for necessities of life. It is also sometimes possible to avoid the burden of contracts if there has been some form of misrepresentation or fraud by the other party. Sometimes, however, you will not be able to rely upon the exaggerated statements or representations of a sales person once you have signed a contract, so it is important that you include as conditions or terms of the contract any representations or claims made by the salesman that you are especially relying upon.

There is generally no grace period in which you can change your mind about a contract once it has been signed, although there are special provisions for two particular types of contracts. If you purchase a brand new condominium it is sometimes possible to change your mind within ten days of purchase. This does not apply to any other type of real estate, however. Similarly, if a door to door salesman approaches you at your home you may be permitted up to forty-eight hours to change your mind after having signed a contract with such a person. In both these examples, it is important that your choice to cancel be made in writing and communicated properly and in accordance with the terms of the contract. In virtually all other situations, you are bound by your signature immediately.

If you break a contract, you are generally responsible to the other party for the profit they would have made had you honoured the contract. If you agree to buy an item at a certain price and fail to follow through, the other party may have to sell it at a considerably lower price and can sue you for the shortfall, or deficiency. Generally, you are responsible for any reasonably foreseeable consequences of your breach of contract. The aggrieved party, however, also has a legal duty to take all reasonable efforts to minimize his damages and his failure to do so can form part of a defence.
The commission of fraud in relation to contracts is particularly serious. Not only can it lead to criminal charges as well as civil liability, it can certainly provide the other party to the contract with a reason to end the deal or to both end the deal and sue for all damages or losses arising out of the contract. Questions of contract law can be complex and the advice of a lawyer should generally be sought before entering into a contract or before taking any step which may affect your rights or obligations under a contract if you are unsure as to the consequences.

To contact the author, please email jhope@sthilaw.com

The information contained in this message is general and should not substitute for the advice and counsel of a licensed lawyer.

5When can directors and officers become personally liable for the debts of the corporation?

by Jack W. Hope

Generally speaking, directors and officers are not liable for the debts of the corporation. There are some significant exceptions to this rule, however. First of all, if a director or officer uses the corporation as part of a fraudulent transaction or scheme, he or she will not be able to hide behind the corporate status to avoid personal liability. Even without fraud, a director can still be liable to employees of the incorporation for up to six months of back pay if their wages have not been paid. Directors may also be personally responsible to the provincial and federal governments for unremitted provincial sales tax and G.S.T., as well as for some other government obligations or remittances the corporation is obliged to make. Directors may also be liable to the corporation itself if they have authorized the payment of money to shareholders without leaving enough funds in the company to pay the corporation’s creditors. Because directors are allowed to sometimes sell shares in the company to people for property, rather than for money, they can be liable to the company for any shortfall if they overvalue the property they take in exchange for shares. Both directors and officers can be liable to their own corporation if they do not act in the best interests of the corporation, if they make secret profits from the corporation’s business or if they in any way act in conflict of interest with the corporation. Directors and officers may also find that they can sometimes be fined personally under certain laws, such as environmental protection statutes, if they permit their corporations to break those laws. Accordingly, it is important that directors and officers conduct themselves carefully and ethically in order to avoid problems of this sort.

To contact the author, please email jhope@sthilaw.com

The information contained in this message is general and should not substitute for the advice and counsel of a licensed lawyer.

6Do I need a partnership or shareholders agreement?

by Jack W. Hope

Partnership and Shareholders Agreements are important because they both set out the rights and obligations of the people involved in a business and provide for future eventualities, both foreseeable and unexpected. In many businesses, whether partnerships or corporations, not everyone is going to take an equal role. In some partnerships everyone owns an equal part, in others the partners own different shares. In some businesses, everyone is expected to contribute equally to the business if it experiences financial shortfall. In other businesses only certain people are expected to contribute money whereas others are expected to contribute knowledge, skill or work. All these details should be set out clearly in a partnership or shareholders agreement so that everyone is aware of everyone else’s expectations and of their own legal obligations. In this manner, business can continue smoothly and disputes are avoided.

Partnership and shareholder agreements are also very useful in avoiding future disputes by setting out the rules for certain eventualities at the outset of the business. For instance, if a partner, or shareholder, wishes to leave the business and sell his share to the other partners or shareholders will they be obliged to buy it? If so, how will they determine a fair price? If a partner or shareholder dies will the remaining partners or shareholders be obliged to buy that deceased partner’s or shareholder’s share from his or her estate? If so, how will they work out a fair price, how long will they have to pay for it and where will the money come from? Should partners or shareholders arrange for life insurance payable to the company to finance such a buy-out in the case of their death? If a partner or shareholder becomes insolvent or bankrupt, what happens to that interest or share? What if a partner or shareholder fails to put in a fair day’s work for the business or fails to meet his or her financial obligations? What steps can be taken? These are simply examples of the types of questions that are dealt with in partnership or shareholder agreements. It is usually much easier to work out a formula for solving these types of problems at the outset of the business, well in advance of any disputes. In this manner disputes, when they arise, can be disposed of with considerably less aggravation and expense than might otherwise be the case.

To contact the author, please email jhope@sthilaw.com

The information contained in this message is general and should not substitute for the advice and counsel of a licensed lawyer.

7Should I buy the shares or assets of a business?

by Jack W. Hope

When purchasing a business one of the first questions you must ask is whether the business is a corporation or not. If it is not, you will have no choice but to buy the assets of the business from the former owner, that is the equipment, the inventory, the contractual rights and the goodwill. On the other hand, if the existing business is a corporation you will have the option of buying the assets of the corporation, just as you would from a non- incorporated business, or you could simply buy the shares of the corporation from the former owner and take over as director and officer of the corporation. It is much simpler to buy the shares of the corporation but it is also much riskier. It is simpler because the transaction itself is easier. The shares in the company are simply sold by the old owner to the new owner. The business continues uninterrupted, there is no need to transfer ownership of the various assets and equipment and no need to re-register liens that might attach to the equipment. There is no need to enter into new leases or new contracts with suppliers and business associates (although you may still need a landlord’s consent to the change of ownership). The risk, however, is that by buying the corporate shares you are also buying the corporation’s debts and potential legal problems. Perhaps corporate taxes are owing or may be declared owing after a reassessment or audit. Perhaps someone is planning to sue the company for an act of negligence or a faulty product but no one is aware that this lawsuit is being planned. Perhaps an employee that was fired six months ago will now sue for wrongful dismissal. In any of these cases, the new owners of the company will be obliged to defend and possibly pay for these claims because they have bought the corporation itself, both its assets and its debts.

In order to avoid these problems, many people choose to purchase the assets of a corporation instead of the corporate shares. To accomplish this, it will be necessary to transfer the ownership of all assets and obtain a transfer of the lease of the business premises, together with the consent of the landlord. If anyone holds a lien on any of the equipment they will have to be involved in the transaction and consent to it. The person selling the company will have to prove that all inventory has been paid for. As you can see, the transaction of an asset purchase is more complicated and time consuming, and therefore more expensive. It is, however, less risky in that you do not buy the sometimes hidden debts and legal problems of the corporation because you are setting up your own brand new business entity to carry on the operations of the business you are buying. There can also sometimes be significant income tax and capital gains tax consequences to both the vendor and the purchaser depending on whether the transaction is a share sale or an asset sale. It is important to review this with your accountant before making the final decision.

To contact the author, please email jhope@sthilaw.com

The information contained in this message is general and should not substitute for the advice and counsel of a licensed lawyer.

8What does limited liability mean?

by Jack W. Hope

Limited liability can occur in two types of business entities. A Limited Partnership allows for certain investors, known as limited partners, to invest money in the partnership and be entitled to a portion of the profits of the partnership without becoming liable for the debts of the partnership. In order for this to work, there must be at least one partner in the normal sense of the term, called a general partner, who manages the business of the partnership and is personally responsible for the debts of the partnership. It is also necessary to file a declaration with the Ministry of Consumer and Commercial Relations setting out the names of the limited partners and the amount that they have invested or have promised to invest in the company. So long as they refrain from participating in the management or control of the partnership business the limited partners’ liability to creditors of the partnership will be limited to the amount they have invested or have promised to invest. If, however, a limited partner does take part in the management or control of the business he or she can lose the status of limited partner and become a general partner and accordingly become personally responsible for all the debts of the partnership.

The second business entity in which one can both be an owner and have limited liability to the creditors of the company is the Corporation. A corporation is owned by its shareholders, and run by its directors and officers. None of these people, and they can in fact be the same people or even a single person, is normally responsible for the debts of the corporation. The corporation may owe money to its suppliers, may default on bank loans, may default on its lease, may be sued for breach of contract or for negligence, and in all of these cases the shareholders, directors and officers of the corporation are normally protected from personal liability. One common exception applies if they have personally guaranteed any of these responsibilities. A bank loan and a lease is very often guaranteed and the guarantor will be continue to be personally liable along with the corporation in that event. Another major exception to the protection provided by corporate status occurs if anyone has been involved in a fraudulent transaction. In that case, one can not hide behind the protection of the corporation. A shareholder may also find that he or she is responsible for paying money back to the corporation if the corporation has paid its shareholders dividends but, as a result, has left itself unable to pay its creditors. Those creditors can then demand that the shareholders put the money they were improperly paid back into the corporation. They are not responsible for the entire debt, but simply to return the money they should not have received in the first place.

To contact the author, please email jhope@sthilaw.com

The information contained in this message is general and should not substitute for the advice and counsel of a licensed lawyer.

9What does a will cover?

by David M. Israel

A will prepared by a qualified professional (a lawyer) should cover all of the testator’s assets and liabilities. There is a way to make wills apply to other provinces of Canada as well as to make them international (apply to other states or countries). As a general rule, a will properly executed in one province will be acceptable for dealing with assets and liabilities in another province. When drafting a will that covers more than one jurisdiction, however, it is very important to take special care to ensure that the will designed to deal with the estate in one province will also operate effectively in other jurisdictions.

To contact the author, please email disrael@sthilaw.com

The information contained in this message is general and should not substitute for the advice and counsel of a licensed lawyer.

10What is a living will?

by David M. Israel

A living will is a written document that gives authority to another individual, or to several persons, to authorize certain medically related events. Living wills are more similar to a power of attorney than to a will. Living wills may, for example, authorize the removal of life sustaining mechanical support systems. They do not, however, give authority to deal with other people the individual’s assets and liabilities.

To contact the author, please email disrael@sthilaw.com

The information contained in this message is general and should not substitute for the advice and counsel of a licensed lawyer.

11When does my will take effect?

by David M. Israel

A will can only take effect after the testator’s death. In other words, it can be written many years prior to death but it is only effective at the time of death. A testator is not restricted from dealing with assets listed in the will. It is recommended, however, that the will should be reviewed every five to ten years to make appropriate revisions and to account for any changes in the testator’s assets. A will can be revoked at any time by tearing up and disposing of the original will or by signing a special document that revokes it. It is important to keep in mind that a new will always revokes a previous will.

To contact the author, please email disrael@sthilaw.com

The information contained in this message is general and should not substitute for the advice and counsel of a licensed lawyer.

12Does one have to itemize assets and liabilities in the will?

by David M. Israel

This is not necessary. The will may be prepared well in advance of an individual’s death and the estate composition may change from day to day. Therefore, it would be counterproductive to try and list assets and liabilities in order to facilitate the administration of the estate.

Most people indicate their preferences when it comes to distribution of an estate by indicating what portion or percentage of the estate should go to whom. This is a good method since it avoids the need to mention any specific assets. It may be best to use a separate record, other than the will, for letting the executors know of existing assets and incurred liabilities. Some people wish to specify that a particular asset should go to a particular beneficiary and these intentions should be spelled out in the will.

To contact the author, please email disrael@sthilaw.com

The information contained in this message is general and should not substitute for the advice and counsel of a licensed lawyer.

13How are beneficiaries chosen?

by David M. Israel

A person may dispose of her estate anyway she likes, subject to relatively few exceptions. The exceptions to this rule deal with debts of the deceased, including any outstanding income taxes (they must be paid out first), and the cost of probating and administering the estate, which includes executor fees and any legal fees and disbursements.
Most married persons leave their estates entirely to their spouses. If the surviving spouse dies or if the individual is unmarried the estate is usually divided equally amongst the children of the marriage, if any. Other relatives and individuals may receive specified amounts under the will, such as “one thousand dollars to each of my grandchildren”.

To contact the author, please email disrael@sthilaw.com

The information contained in this message is general and should not substitute for the advice and counsel of a licensed lawyer.

14What happens if a beneficiary dies before the testator?

by David M. Israel

The distribution of the estate will go more smoothly if there is greater certainty about what happens if one of the beneficiaries dies before the testator. This can be accomplished by specifying that an heir should survive the testator by thirty days before being entitled to his share, to prevent a double probate in the event of a common accident. If the testator did not make specific arrangements and an heir predeceases the testator, that bequest simply fails and is included in the balance or residue of the estate.

Invariably, when bequests are made to children there is an additional stipulation that if a particular child predeceases, or does not survive the period of thirty days after the testator’s passing, then their inheritance would pass down to their children (the testator’s grandchildren).

To contact the author, please email disrael@sthilaw.com

The information contained in this message is general and should not substitute for the advice and counsel of a licensed lawyer.

15Married couples and Common law spouses

by David M. Israel

If a person is married, in most jurisdictions his or her spouse has certain rights with respect to how that person’s estate is distributed in the event of their death, regardless of a will. These rights can be altered by a valid marriage contract however, as a general rule, a spouse is entitled to the same portion of the estate as they would have been entitled to upon a separation or divorce. This is often one-half of the estate but can vary depending upon which exemptions under the Family Law Act may apply in a particular case. This right will expire if not acted upon within certain time limits (in Ontario, six month after death). Thus, even if the will does not leave the other spouse anything from the estate, the spouse has an automatic entitlement to a certain share of the estate. This is an important aspect to consider when deciding whether to claim the entitlement under the will (or applicable intestacy legislation) or elect claiming under the Family Law Act.
In cases of common law spousal relations, the surviving common law partners do not have the same rights with respect to a portion of the estate of a deceased common law spouse. A common law spouse is only entitled to benefits specifically stated in the will unless he or she can prove an interest in certain property based upon other general principles of property or trust law.

To contact the author, please email disrael@sthilaw.com

The information contained in this message is general and should not substitute for the advice and counsel of a licensed lawyer.

16What do executors do?

by David M. Israel

The executor’s duties involve assembling the details of the estate, ascertaining the whereabouts of the beneficiaries under the will, making the application for the process of probating the will and distributing the proceeds of the estate. Also, executors ensure that taxes are filed in a timely fashion.
The executors are expected to act responsibly while making appropriate distributions from the estate. Executors, however, are not personally liable for any debts of the estate unless funds of the estate are diverted to beneficiaries prior to paying the Estate’s debts. Trustees are expected to avoid conflicts in dealing with the assets of the estate and to treat the heirs in an equitable manner.

To contact the author, please email disrael@sthilaw.com

The information contained in this message is general and should not substitute for the advice and counsel of a licensed lawyer.

17Why are executors necessary?

by David M. Israel

Someone needs to be appointed to act on the testator’s behalf after his death; someone that can make informed decisions and sign documents necessary to give effect to the terms of the testator’s will. It is perfectly satisfactory to have only one executor in charge of distributing the testator’s estate. It may be better, however, to name two executors in case one executor dies before the testator does or becomes incapable of acting as an executor.

To contact the author, please email disrael@sthilaw.com

The information contained in this message is general and should not substitute for the advice and counsel of a licensed lawyer.

18Who can be an executor and a co-executor/alternate executors?

by David M. Israel

An executor can be an individual or a professional corporation such as a trust company that provides executors’ services. An individual executor must be eighteen years of age and legally competent. Usually, the individuals named as executors include a spouse, a child or children, relatives, close friends or associates. It is important to carefully choose executors, selecting them from the group of people whom the testator trusts and who have experience dealing with money. If an executor passes away before the testator, the testator may make a codicil to his will (a short document amending the will) naming his new executor or executors.

Co-executors are executors acting together. Alternate executors act only if a previous named executor or executors are unable to act.
The first choice of executor is usually the spouse as sole executor because, in most cases, the bulk of an estate passes to an individual’s spouse. If the testator decides to appoint his children, it may be wise to appoint all of them as co-executors to avoid any hard feelings between them as well as to share amongst them the responsibility of dealing with the estate.

To contact the author, please email disrael@sthilaw.com

The information contained in this message is general and should not substitute for the advice and counsel of a licensed lawyer.

19Are executors paid?

by David M. Israel

Executors may be compensated for their efforts in distributing the estate and doing all other necessary work. By law, their compensation should be approximately five percent of the value of the estate. The calculation does not amount to taking five percent directly from the estate, however. Adjustments must be made in cases where executors are also beneficiaries under the will. If there is more than one executor, their fee is divided amongst all of them.
It is difficult to estimate the workload of an executor without knowing the size of any given estate. On average, executors may spend between ten and one hundred hours dealing with estate matters. The hours spent and compensation received by the executors is in a direct correlation to both the size and complexity of the estate.

To contact the author, please email disrael@sthilaw.com

The information contained in this message is general and should not substitute for the advice and counsel of a licensed lawyer.

20What about charitable bequests?

by David M. Israel

Although most people prefer to leave their estates to their relatives and friends, the testator may decide to give some or even all of their property to a charitable institution such as a registered charity, a church or a synagogue. This is often the case where there are no children or close relatives remaining to the testator and the estate is therefore given to one or more charitable institutions.

To contact the author, please email disrael@sthilaw.com

The information contained in this message is general and should not substitute for the advice and counsel of a licensed lawyer.

21Appointing a guardian

by David M. Israel

If the testator has or contemplates having children who may be under eighteen years of age at the time of death, it may be a good idea to consider appointing a guardian for the children until they reach the age of majority. This expression of the testator’s will is not strictly binding on the court. As a matter of general practice, however, the court will normally approve guardian(s) as stated in a will provided there is not a surviving parent to challenge the appointment. In the event that there is a surviving parent, that parent will have automatic guardianship of the children.
The appointed guardian may be one individual or several individuals acting as joint guardians at the same time. Also, it is always useful to indicate an alternate guardian just in case the first guardian chosen predeceases or is unable to act in that capacity.

To contact the author, please email disrael@sthilaw.com

The information contained in this message is general and should not substitute for the advice and counsel of a licensed lawyer.

22At what age should children receive their inheritance?

by David M. Israel

A beneficiary can be of any age, and even unborn at the time of making the will. The question of age of the beneficiary arises only in respect of when he or she is entitled to the inheritance. If no age is specified, and the beneficiary is under the age of majority, the inheritance is held in trust until the child becomes 18. If the age is specified, the inheritance is held in trust until the beneficiary reaches that particular age. Typical wills provide that the trustee of those funds may be able to use the funds for the benefit of the beneficiary in the period between the death of the testator and the date upon which the beneficiary becomes entitled to the inheritance. The trust arrangements upon which provide for living, educational or other expenses to be paid prior to the age of entitlement in the will. It is worth noting that most clauses of this nature give a wide range of powers and absolute discretion to the trustee, even to pay out all of the funds prior to the specified age. Thus, it is very important to choose trustees wisely.

There is a growing tendency to increase the specified age of receiving inheritance from eighteen to at least twenty one or older. Most people would now prefer that their children receive their inheritance after completing all schooling. The most preferred age today is twenty-five.

To contact the author, please email disrael@sthilaw.com

The information contained in this message is general and should not substitute for the advice and counsel of a licensed lawyer.