MGT393H5 Study Guide - Midterm Guide: Withholding Tax, Canada Revenue Agency, Home Hardware

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MGT 393 FALL 2015 - MIDTERM GENERAL GUIDE Please note that this is not a model response but
rather a general guide setting out issues and considerations that could be covered.
QUESTION ONE (50 marks) (45 minutes)
Philip Gopa is a 4th year UT Commerce student specializing in small business studies. Philip is also a big fan of
Dragon’s Den, a television show where successful business people invest in small businesses, often providing their
expertise to the small business. Philip has decided to begin a small business of his own. It will be an “investing”
corporation. His plan is that the new corporation would either invest in other businesses (e.g. own shares) or
manufacture and deliver the products that other inventors have developed.
Although Philip has great ideas and has significant motivation, his venture needs money. At a first year Commerce
orientation event on September 5, 2015, Philip met Carol Lee and Rohan Sahni. Carol and Rohan are both 1st year
international students; aged 18 and from very wealthy families. Philip explained to Carol and Rohan that he was
offering them an opportunity of a lifetime and that their involvement would be very pleasing to their parents; he also
told them that this investment would make them a “team” and be something to be proud of and would improve their
resumes and chances of remaining in Canada. Carol and Rohan both readily agreed. (contract law has not been
covered yet in the course so no expectation of any contractual obligations. This statement is intended to set the
stage for their relationship. Although they have not formed a partnership the expectation set is that they were a
cohesive group (like partners) and this may be relevant when discussing the actions that Philip takes later,
especially if consider the oppression remedy. is oppressive or unfairly prejudicial to or that unfairly
disregards the interests (OBCA)
Specifics as explained to Carol and Rohan were as follows: 1. Philip would proceed to incorporate ComVest Inc.
[“CVI”] (which he later did on September 27, 2015); 2. Philip would be President and Carol and Rohan would each
be Vice-Presidents (officers); 3. Each would be on the Board of Directors (for now) and Carol and Rohan agreed
with Philip in writing that they would always vote as instructed by Philip; 4. Carol and Rohan would invest $250,000
each, in exchange for which they would receive 24 voting Class B Common Shares. Philip, given that he was the
“brains” would invest $52 and receive 52 Class A voting Class A Common Shares. The Articles of Incorporation for
CVI contained a restriction that stated, “The corporation shall be precluded from entering into a contract, other than
for investment purposes.” This provision was added at Rohan’s request to provide some protection to Carol and
him. Several relevant facts to note and perhaps incorporate into legal analysis 1. Incorporated after date entered
into lease contract [Issue (related): Pre-incorporation contract ] 2. Carol and Philip are minority shareholders
however as between them they do have 48%. [Issue (related) Minority shareholder rights; 48% could be significant
if a fundamental change (appraisal remedy matter = does not appear to happen here); 3. All shareholders are also
directors and officers. Carol and Philip may have in writing agreed to vote as Philip tells them by corporate law
have an obligation to act (a) act honestly and in good faith with a view to the best interests of the corporation;
and (b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable
circumstances. [Issue (related): relate to actions taken by directors/officers]; 4. Restriction in AofI preclude
contract other than “investment” (e.g. lease??) [Issue (related) : indoor management rule.]
On, September 10, 2015, Rohan and Philip went to look at some office space to rent near UT for CVI. They met
with the building owner who showed them a 1500 square feet office suite. The suite was larger than they needed,
but Philip thought that it would be perfect given the location. Philip had to go to another meeting and so asked
Rohan to stay behind to finish the paperwork (a five year lease) with the building owner. Rohan remained and
signed the lease “on behalf of ComVest Inc.”. [pre-incorporation] On October 10, 2015, CVI entered into a two-year
lease with Professor Monnae, to rent to the professor 500 square feet from which the Professor was to operate a
private consulting firm.[validity; indoor management]
Things at CVI happened very quickly. In October Philip (and sometimes Carol and Rohan) met with entrepreneurs
who wanted CVI to invest in their business. Several investments (inventions) were rejected before they ever got to
the presentation stage. For example, one inventor had developed a “water broom” that was connected to a garden
house for quick cleaning. Philip said the idea “was stupid”. As it turned out, CVI was able to invest in three
software related ventures. After selecting these investments, Philip told Carol and Rohan that all this hard work is
deserving of a dividend and a dividend of $500 per share was declared and paid. The cheques were signed by
Philip who, besides being a director, was the President and VP Finance of CVI. Rohan said that he thought
dividends were only paid from profits to which Philip explained, “in Canada, employees like us can get paid either
either by way of salary, dividends or other benefits. [statement is incorrect shareholders get dividends;
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employees can get salaries and other benefits (pension etc.)] Issue: Payment of dividend and compliance with
OBCA solvency test and capital maintenance test
A few weeks later, Philip reported that the software investments were not proceeding very well and that Carol and
Rohan would have to invest another $200,000 each or under Canadian law be personally liable for the many
creditor claims that CVI is facing Issue: Do s/h have to invest additional funds/ personal liability for creditor claims
goes against the concept of limited liability; separation of ownership from management; . Rohan in particular was
upset by the demand for additional money and so completed some investigating. He found:
The rent has not been paid for the past few months. The landlord has indicated that he wants payment
from either CVI or Rohan. Philip has been trying to get out of the lease; Facts non-payment of rent may
suggest solvency problems (fact can be integrated to dividend payment); Facts fact that landlord is going
after Rohan should trigger discussion of pre-incorporation contract
Philip as President of CVI has written to Professor Monnae demanding that he vacate his space on the
basis that CVI was not allowed to contract with him, given that the sub-lease was not an investment.
Professor Monnae is now suing CVI; Facts trigger the indoor management rule (also matter of
interpretation)
Philip has been using CVI funds to pay for the rent on his apartment and leased car; Facts Philip
(officer/director) appears to be committing a fraud(???) CVI can sue Philip [derivative action]
Philip on his own had acquired an ownership interest in the water broom that he described as “stupid”. The
water broom has turned out to be a major success as it is being sold to Home Hardware on an exclusive
basis; Facts breach of fiduciary duty of director/officer Philip has taken a corporate opportunity →→
CVI to sue (may require derivative action)
CVI assets are currently minimal but it owes a substantial amount of money to the landlord, marketing
companies and employees as well as to the government for employee income tax withholdings. The
Income Tax Act provides that a director of a company can be liable for income tax withholdings that are not
deducted from the employees’ pay and sent in to Canada Revenue Agency. Facts claims of creditors
need to be explained; Facts CRA liability for withholding tax likely allows for a “due diligence
defence” . Does not appear that Carol or Rohan have been.
REQUIRED: Rohan [user] has approached you, Bea Calm, a legal advisor and analyst [role] employed by Lit, Au,
Gator LLP and has requested that you prepare a memorandum for him that identifies and provides a detailed
legal analysis of the corporate law related issues that you have identified. Your memorandum should detail any
practical advice as well.
Notes Rohan appears to be the primary user of the memo and is most interested in how things impact the
corporation in which he is a shareholder, as well as how he could be impacted by some of the other legal problems
that may arise in his capacity as an officer/director. Rohan is a relatively young individual and new to Canadian
business law and so the memo could also address other things he has been told by Philip that may not be true.
Based on the above the memorandum could incorporate:
ROHAN Personal and other liability
Issue: Could Rohan be personally liable to the landlord
Analysis: Discussion how CVI was not yet incorporated and Rohan signed the agreement as an agent for the
corporation that does not yet exist; did not sign on behalf of “corporation to be incorporated”
Conclusion: Likely has liability
Issue: Could Rohan as a director (along with the others) have liability for dividends declared and paid.
Analysis: Discussion of corporate tests for dividend payment (solvency and capital maintenance); integrate case
facts (not paying rents)appear “offside”
Conclusion: Explain and repercussions (return of funds)
Issue: Could Rohan as a director be liable to CRA for lack of tax remittances.
Analysis: Discuss strict liability and due diligence defense. Does not appear that any due diligence on the part of
any director.
Conclusion: Explain likelihood of being liable to CRA (perhaps when the dividend goes back there will be enough
$$$)
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Document Summary

Mgt 393 fall 2015 - midterm general guide please note that this is not a model response but rather a general guide setting out issues and considerations that could be covered. Philip gopa is a 4th year ut commerce student specializing in small business studies. Dragon"s den, a television show where successful business people invest in small businesses, often providing their expertise to the small business. Philip has decided to begin a small business of his own. His plan is that the new corporation would either invest in other businesses (e. g. own shares) or manufacture and deliver the products that other inventors have developed. Although philip has great ideas and has significant motivation, his venture needs money. At a first year commerce orientation event on september 5, 2015, philip met carol lee and rohan sahni. Carol and rohan are both 1st year international students; aged 18 and from very wealthy families.

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