The announcement by the CRA that businesses that fall over a threshold must electronically file their HST returns is a long time coming.  From the government’s perspective I can’t understand why they didn’t do this earlier in order to get their information and payments earlier similar to personal taxpayers e-filing their income tax returns.  The government told us they wanted individuals to e-file because it made things more productive and easier at CRA, so this seems like a natural progression.  I’m surprised though they didn’t make it mandatory for all businesses because it would actually probably reduce their collections for late filers of GST/HST.

For GST & HST registrants with $1.5 million total supplies purchased for a fiscal year you will be required to electronically file their GST/HST returns.  The exception to this rule would be charitable organizations.

Currently there are 5 methods of filing a GST / HST return:

1. Electronically (netfile)
2. Telephone (telefile)
3. Paper
4. Electronica data interchange (EDI)
5. Internet file transfer

Another major exception will be for builders in Ontario and BC which currently provide a GST rebate or credit paid by home purchasers will have to Telefile or Netfile.

If you want to amend a prior GST / HST return you must do so in writing to CRA.

Penalties from CRA will apply if you’re supposed to electronically file your return.  The exact amount of penalties has yet to be determined.

If you currently aren’t filing electronically your return you can do so July 1, 2010 if you choose.

For Ontario and BC registrants you must Netfile your returns if the following apply:

• Registrants that are required to recapture the input tax credit (ITC) from the provincial portion of the HST.
• Builders who must report transitional housing information (transitional tax adjustment or transitional new housing rebate)
• Builders who have a “grandfathered clause” where they made new home sales and the home buyer cannot claim the GST / HST rebate

What Registrants have to Recapture ITC’s?

For the first five years after the implementation of the HST, organizations in BC and Ontario who have greater than $10 million taxable sales and /or financial institutions will not be able to claim ITC’s on the provincial portion ie. BC 7% for certain supplies such as:

1. Telecommunication services, except toll free numbers and internet access
2. Energy ie. (Natural gas, electricity) except if you’re a farm or the energy is used to manufacture goods for resale.
3. Road vehicles weighing less than 3,000 kg
4. Food, beverages, and entertainment.

After the 5 year period, full ITC’s will be able to be claimed over a 3 year phase in period.

Businesses will have to report Recaptured ITC’s as a Result on the HST form

More policies is a result of these exceptions and phase in periods which businesses small and large need to pay attention to when July 1st comes along.

Links:

CRA News Release: http://www.cra-arc.gc.ca/nwsrm/rlss/2010/m01/nr100104b-eng.html

Simply Accounting: http://www.simplyaccounting.com/community/forums/t/7306.aspx

Quickbooks 2010: http://quickbooks.intuit.ca/accounting-software/2010-quickbooks-features.jsp

CRA: GST/HST Administration Checklist: http://www.cra-arc.gc.ca/E/pub/tg/rc4346/rc4346-09e.pdf

Deloitte: New Housing Rebates & Transition rules: http://www.deloitte.com/assets/Dcom-Canada/Local%20Assets/Documents/Tax/EN/ca_en_tax_BCHST_NewHousingRebate_TransitionalRules120909.pdf

Written by Richard Wong, CMA                            Email: rwong@firstchoicecapital.ca

Our last TEC Advisory board meeting we discussed the usual things such as how is business been this past month, what major issues are on the table & what you’re doing about it, and what major issues do your clients have at this time.  Nothing out of the ordinary, except sales cycles are taking longer which leads me to ask the question how many companies out there currently have salespeople who have not been trained for those bad times? We all know its easy to sell during good times, for many it was make a couple of calls and get the deal signed, but now I would say that consensus around the table is that we haven’t seen sales cycles like this in over the past decade!

The point that was being made was that we need to start training our younger sales staff the art of sales and getting to the real needs and objectives of the prospect and letting them know that it will take longer to close sales in today’s business environment.  The alternative is that are you leaning on your more experienced sales staff, or in other words people probably in their 40’s or 50’s who have been through tough economic times and know that they have to do a lot more digging to qualify prospects and know more sales techniques to better meet the needs of prospects?

Sales are tough today, do you have the right people, invested in the right systems, and training and touching customers more often to maintain those relationships?  If not, your shareholders, owners, and bankers could be asking the more difficult questions of you.

Written by Richard Wong, CMA          email: rwong@firstchoicecapital.ca

Private company financing is in many ways easier to get as you don’t have the regulatory hurdles you would as a publicly traded company on a stock exchange.  The most important reason why some companies stay private instead of going public though is being able to keep control of the business, making decisions which generally are best for the long term success of the organization.

Shareholders complain to management and directors through primarily stock performance, rather than necessarily the business performance.  Stagnant growth or maintaining profits are not sexy enough for most stock analysts and shareholders, while in a private company the owners’ can think about the long term health of a company and make decisions based that way.  Think of it another way, the owners’ don’t have golden parachutes, their retirement strategy is to build the strength of their companies in order to hand it down to family or sell it for a healthy profit.  This kind of decision also mirrors how private companies are financed such as below:

1. Credit card
2. Operating lines of credit
3. Operating assets lease financing
4. Accounts receivable financing
5. Mezzanine Debt
6. Subordinated debt
7. Private equity financing

These financing methods apply to start ups to established companies and each a have purpose in the growth or the business life cycle and also reflect the amount of equity a company is willing to give up in order to attain growth.  The earlier stages are boot strapping a company to growth with equity being grown by the owners and the later stages are potentially giving up equity for orderly succession or exit strategies.

Written by Richard Wong, CMA     rwong@firstchoicecapital.ca

Growing up in a small business environment, watching your parents work harder and harder to make a good life for us as children I believe that my parents probably worked too hard and didn’t give themselves the opportunity to maximize the value of their businesses before retiring.

Succession planning should start earlier, not at age 65 when people retire, but several years before in order to determine an exit strategy which either passes along the family business to the siblings or to get the businesses ready for sale.  In Canada according to a CFIB (Canadian Federation of Independent Business) 70% of small businesses owners will retire in the next 5 years.  That provides 2 business scenarios for small business owners, one, that the businesses will be hopefully passed along to one of their siblings in order to quickly deal with the succession planning issue or two, that there will be a lot of small businesses coming up for sale.

But I believe that one of the biggest hurdles to succession planning is that small business owners who have had businesses for a long period of time actually think of their businesses as being part of the family like another child and there’s the emotional tug of war on deciding to give up the business even to their children if that’s the route they choose.  The more difficult decision is to decide to sell the business to an outsider and that’s probably one of the biggest reasons why people outside the business might view it as procrastination, but to the small business owner it could be more an emotional factor.  My parents were already past retirement age when they decided to sell some of their businesses and hang onto a few others.

This delay hurts both the employees of those businesses as well as the owners in that their is a definite lack of plan of going forward and the owner’s passion has already waned and they’re no longer really interested in running their businesses, but don’t want to necessarily letting go.

These businesses have been profitable but the owners’ have had a hard time taking time away from the day to day running of the business, or taking a step back to look at their business at the 10,000 foot level and trying to setup their business to become saleable at the most attractive price.

A study released late last year by business transition specialists ROCG Americas found only one in 10 owners received a price for their business near what they wanted or expected. The primary reason given was improper or lack of planning.

ROCG conducted the survey in North America and found that businesses with revenues between $1 and 100 million said that they were either too busy to plan for a business sale or it was too early to start thinking about it, even though 84% of them said it was important to their retirement plans.

“Many business owners are not aware of the complexity involved in the succession planning process, particularly in executing a divestiture transaction,” says Michele Middlemore, vice-president of Aon Corp.’s M&A Transaction Advisory Group. “Almost always, they underestimate the time and work and difficulty involved in getting something like that done. More often than not, they tend to postpone dealing with it and are not prepared adequately when the time is upon them.”

Businesses should be planning 2 or 3 years in advance for the divestiture.

One of the big ideas to put in place is the movement of the value of the business is from the business owner to that of the business itself.   Since small business owners are generally the drivers of the business, it’s usually been in the sales and marketing roles and this is one of the areas which has to be transitioned over to the company.  This is easier said than done, in that one quite often that there isn’t the bench strength to take over and this has to be brought into the company.  Their might be changes in technology which might be needed to brought into the company as well to allow to compete better.

One can look at the succession planning in a way is like embarking on a new business plan and here a corporate financial advisor can help with getting an independent valuation of a business to let owners know where the strengths and weaknesses lie and what to expect as a potential starting point for a dollar value of a business sale.

According to the Business Development Bank of Canada, business succession is a process that requires thought, planning and time to arrange and execute: “Whatever your definition of success, making the commitment to let go of the business and place it in the hands of someone else is perhaps the critical factor that ensures your business transition goes smoothly and profitably,” the bank notes.

Just remember though that succession planning shouldn’t be determined by what the economy is doing or the stock markets, but by personal circumstance, if you’re ready to retire, then you should be planning for it in advance by 2 to 3 years.  The process is a complex one and is similar to building a new business plan, except that you’re trying to help build for the next set of owners’ to succeed and by doing so you and your family will get top dollar for your business you have built over the years.

Written by Richard Wong, CMA     rwong@firstchoicecapital.ca

Myth 1:  The value of my business can be generally determined by using an earnings multiplier of my industry. ie. 3 times EBITDA

This is the most common myth. The earnings multiplier can be useful to get an overall general value based on the industry, but it doesn’t apply to all businesses within the same industry.  For example, your neighbourhood grocery store will not have the same earnings multiplier as the Safeway grocery chain.  Other factors of value such as supplier influence or technological superiority will also have an impact on the company’s value compared to its peers in its industry. Further, sometimes outside 3rd parties — such as the CRA, IRS, banks, courts, trustees, and other interested parties —  will not accept industry multiples to determine value.

Myth 2: Once I have an appraisal done the value will remain constant from year-to-year or period-to-period.

Businesses are not like the Canadian government savings bonds, there is competition, business environment changes,  new suppliers come into an industry if it’s profitable enough, some suppliers decide to divest of themselves, some competitors give up on certain product lines, while others join the market because they think they can make more money than some of its competition.

Businesses by their very nature are dynamic, not static and given this their values can easily change from year to year.

Myth 3: Valuation methods and approaches produce an absolute value.

The truth is, if you were to have 5 business valuators value the same business, all 5 will come up with a different value.  That is because each analyst may use different methods, approaches, discount rates, risk levels, and other variables to estimating the value.  But, if the valuator uses sound valuation methodology and approaches then you can assume the business valuation will be reasonable.

Myth 4:  We can have our accountant or lawyer do a valuation.

While these professionals seem like a good resource for assessing the value of your business, they may not be equipped with either the skill, qualifications, or experience to conduct the valuation process properly.  Even if they do have proper credentials for valuing your business you may want to reconsider having them perform the valuation.  The reason is there is a built in conflict of interest, since they will have an on-going interest in your business after the valuation study is completed, so there is a likelihood the value they derive for your business is biased, either high or low in favor of what you are hoping the outcome will be.

Myth 5:  The Financial statements of the company are good enough to determine value.

A company’s financial statements are the basis for a business valuation, but there are many other factors that affect value.  Some of these include : the competition, industry, economy, organizational structure, management, its capital assets, where along the business/product life cycle, as well as many other factors can affect the value of a business.

So you can see that in the process of a business valuation there are many factors which can determine the value attached.  These business valuation myths don’t use proven methodology, and best practices in determining value.   Taking the wrong approach on valuing your business can cost you a lot in terms of time, by prolonging the sale or financing process or money by not having an objective 3rd party opinion which are used to help settle law suits or prevent financing on time and on desirable terms.

Written by Richard Wong, CMA     rwong@firstchoicecapital.ca

Part 2:  Simon Pimstone, President & CEO of Xenon Pharmaceuticals Interview

As a large part of the life sciences group in BC Simon Pimstone met with Liberal leader Michael Ignatieff on life sciences and explained the issues of funding, and you would think that it would fit in with Ignatieff’s desire to build a larger knowledge based economy and a louder opposition to the Canadian federal government’s budget would have sent that message on behalf of the life sciences community that it does have greater support, especially in the downgrade in future funding in this area.

The Canadian TV & film industry according to industry reports employed 126,900 FTE’s (full time equivalents) and the value of production was $5 billion in the 2006/2007 years.  This compares to the Life Sciences industry in Canada which produced sales of $1.9 billion but the tax breaks are not equal with the Canadian federal government and provincial government film and TV tax credits allowing up to 53.5% of BC labour expenditures on a yearly basis.

BC universities produce between 3,000 to 4,000 science graduates of which many do not find employment in Canada, yet all the life sciences is asking for is a fair share of funding to continue to find cures for different diseases that helps all Canadians and the world.    The public cost of educating students who end up working in another country is approximately $48 million (3,000 students * $40,000 expected cost of education * 40% funding from governments, estimated) .  This a huge cost only for a single province, not the entire country where the Canadian people are funding scientists to work in other countries at the end of the day.

What’s important is not providing funding on an ad hoc basis but continued basis even if its smaller amounts to foster an environment of innovation and then onto commercialization opportunities through Genome Canada, CIHR (Canadian Institutional  Health Research) and tax incentives.

Our health system is arguably one of the best in the world, some say the United States, but only if you’re willing to pay $2,000 per month.

SRED is a good funding tool starting from 1995, but really now inadequate for Canada’s life sciences sector as drug development takes much more time and money in order to recoup research funding.  It is only good for Canadian controlled private corporations, (CCPC’s) which many are not anymore because they’re too large and Aspreva Pharmaceuticals & Biovail Pharmaceuticals are some of the few companies which have profits in order to recoup some of these research that takes several years to make create a single drug.  A cap limit on SRED would even be more palatable to the sector ie. $100 million if they took off the CCPC eligibility requirement and the threshold are too low with barely any increases  since 1995.

Even if tax incentives, to entice offices in Canada such as providing tax holidays for bringing in new manufacturing facilities where they employ 200 people which are paying income tax now where they don’t pay personal income tax for the first 2 years with a commitment for 5 years residency then people would be paying taxes and spending that income in the country and province.

Allow investments earned from life science investments in 2009 and 2010 to be exempt from capital gains tax but was ignored by the federal government in the budget.   Use some of the carry forward losses that life science companies have accrued and provide a formula where say 1/2 of all carry forwards are eligible ie. 40 million and provide a cash reimbursement for 25% of the 1/2 which would result in needed funding to continue doing research to reaching the milestones.

The facts are that SRED was really designed for large company models, large drug companies, large aerospace companies, not really the Canadian life sciences sector which the majority are small companies from 5 to 150 people.  The inadequacy of updating the Canadian Scientific Research & Exploration Development tax credit system is costing the Canadian economy jobs in the short and long term, but more importantly the potential cures to the various diseases and cancers out in the world.

Written by Richard Wong, CMA     rwong@firstchoicecapital.ca

According to the BDC small medium sized businesses spend 45 to 65% of their revenue on purchasing materials and services.  This large percentage of the total costs of a business means that small savings, even 1% can mean instant addition to the bottom line but in today’s economy you can achieve even greater savings in the 10% to 20% range is possible.

Try some of the following to cut your spending:

1. Have your controller or hire a consultant do an expenses analysis
   - Review all parts of the product or service cost, break them down individually into:
   - Raw materials costs
   - Taxes, brokerage, tariffs, duties
   - Freight
   - 3rd party warehousing/logistics handling costs
   - Extra vendor charges
   - Vendor payment terms
2. Review your purchasing process on how to evaluate the best choice
   - What type of process is used for deciding to use one supplier over another?
   - How many people need to be in the decision making process, the fewer the number of people, the less the overall internal cost?
   - When deciding to purchase equipment is there a “Net Present Value” analysis of the different choices which examines the benefits over the asset’s life?
   - Have your staff included used equipment purchases as an alternative to purchasing new? Have they visited auctions?
3. Potentially sources from offshore countries
   - Start looking to buying from other countries to compare suppliers.  BDC studies show that only 42% of Canadian companies are saving money, but you could be one of them.
4. Review standardizing the number of parts in your product
5. Reduce the number of suppliers & forge strategic partnerships with a few to get better pricing, terms, or delivery.
6. Think about using technology to help track your business

Written by Richard Wong, CMA   email: rwong@firstchoicecapital.ca

Short updates on Life Sciences funding for March 2009.

BiOptix Diagnostics, Inc.: Series A $3M

BiOptix (Boulder, CO) a commercial focused developer of an array-based biomolecule detection system that addresses many markets that currently cannot obtain the needed sensitivity and throughput in a single solution, closed a $3M Series A finacing.

NeoVista, Inc.: Series D $18M

NeoVista (Fremont, CA) a clinical-stage device company focused on epimacular beta radiation for the treatment of wet age-related macular degeneration, closed a $18M Series D financing.

Neuraltus Pharmaceuticals, Inc.: Series A $17M

Neuraltus Pharmaceuticals (Menlo Park, CA) a preclinical-stage developer of small-molecule drugs focused on Amyotropic Lateral Sclerosis and dyskinesia, closed a $17M Series A financing.

Nexstim, Oy: Series C $7.9M

Nexstim (Finland) a commercial-stage developer of non-invasive brain imaging technologies focused on cortical mapping prior to surgery, closed a $7.9M Series C financing.

Atritech, Inc.: Series E $30M

Atritech (Plymouth, MN) a clinical-stage medical device company focused on developing minimally invasive technologies designed for the prevention of atrial fibrillation related stroke, closed a $30M Series E financing.

Ikano Therapeutics, Inc.: Series B $9M

Ikano Therapeutics (Lexington, KY) a clinical-stage nasal delivery platform company focused on seizures and pain, closed a $9M Series B financing, the final tranche of a $18M round.

GetWellNetwork, Inc.: Series C $10M

GetWellNetwork (Bethesda, MD) a commercial stage telemedicine provider of interactive patient care solutions, closed a $10M Series C financing.

GlycoVaxyn, AG: Series B $22M

GlycoVaxyn (Switzerland) a preclinical-stage company developing vaccines focused on bacterial caused disease, closed a $22M Series B financing.

Surface Logix, Inc.: Series E $15M

Surface Logix (Brighton, MA) a clinical-stage small molecule company focused on metabolic and cardiovascular disease, closed a $15M Series E financing.

Proteon Therapeutics, Inc.: Series B $38M

Proteon Therapeutics (Waltham, MA) a clinical stage biopharmaceutical company focused on renal and vascular disease, closed a $38M Series B financing.

A Vancouver, B.C. based company A Better Life Brands International specializes in selling delicious coffee and chocolate with a twist, 5 to 10% of all revenues go to the Give a Better Life Foundation where charitable projects are undertaken.  The current projects include building a clean water system in Bulate, Ethiopia a village of 850 people, winter shelter for homeless in Vancouver, and a safe shelter for women and children rescued from the human trafficking trade in Vancouver.

You can vote on which cause you want to help and what a better way to than to buy from a corporate socially responsible company whose founders Sara Davis and Darryl Davis talk the talk and walk the walk.   The coffee is fantastic, I tasted it at a Costco Wholesale a few weeks ago and was impressed with their company and thought wow, another great Vancouver socially corporate responsible company to talk about in today’s economy.

Better Life Brands has appeared on Urban Rush TV show on Shaw Cable, written up in Glow Magazine, but its great where a company like this helps take the lead in this still evolving world of corporate social responsibility.  Another corporate social responsible coffee company is Ethical Bean Coffee, and Frogfile Office Essentials, in Vancouver if you want another example of small companies making a difference here in Vancouver and elsewhere in the world.

The company websites are www.betterlifebrands.com and www.frogfile.ca

Written by Richard Wong, CMA    rwong@firstchoicecapital.ca

In today’s economy people who are looking to start businesses here all over the media that the credit crunch has hit everyone and it’s impossible to get financing. In our business we certainly see that for existing clients with large banks as their creditors it certainly is more trying in determining whether or not to cut back on costs, or deciding on going after acquisitions.

The basis for capital has always been based on “How’s your credit worthiness and what’s the Collateral.”  In Vancity’s case Community business loans are based on “Character & Business Viability.”

This major difference in helping small businesses in BC has amounted to loans of over $13 million for 800 companies.

The question is why would Canada’s largest credit union with over $14 billion in assets and over 390,000 members why would they do this, simply because by helping out small businesses establish themselves in the first 5 years they will in turn likely turn these customers into larger businesses with larger operating credit lines, create more jobs, and help the credit union grow as well.

If larger banks had a small portion of their business directed to helping smaller new businesses they maybe able to do the same, possibly, but Vancity has taken the risk and it seems to have provided a service where potential small business owners can look to for help in financing.

Written by Richard S. Wong, CMA      rwong@firstchoicecapital.ca