Non-Payment and Extending Credit: Ten Considerations

Non-Payment and Extending Credit: Ten Considerations for Contractors and Suppliers

Your company is not a bank. You are not in the business of lending money over extended periods of time.

Just because the general contractor has not been paid does not mean that you should not be paid (see item #1).

Remember that you have other remedies besides a construction lien. Delivering a written notice of lien can be an effective way to stop the flow of funds on a project. Likewise, a breach of trust claim can be a powerful tool.

Agree upon credit terms in advance. Be consistent, clear and concise. Obtain information about your customer by way of a credit application, including the correct legal name of the business, and current banking information.

Do the Due! Conduct appropriate due diligence including: (a) credit searches; (b) reference checks; (c) property and corporate searches; (d) writ searches.

Identify problems early. Warning signs to watch for include: (a) slow or non-payment; (b) N.S.F. cheques or post-dated cheques; (c) cheques coming from someone other than the customer; (d) re-structuring or presence of outside people such as an accountant or “consultant”.

Get something in return. In exchange for revised credit terms, seek an acknowledgement and agreement on the amount of the outstanding debt, or additional security if necessary.

Lawsuits are inevitable. Good procedures and record keeping reduce the cost of lawsuits and increase the likelihood of recovery in collections. Consider whether your company has a clear mechanism for acknowledgement of receipt or pick-up of product.

Know when to cut your losses. $100 today is worth more than the possibility of $125 two years from now. Don’t be afraid to cut deals!

As hard as it is to believe, general contractors and customers do occasionally lie about the cheque having been mailed out!

Frequently Asked Questions

How do partnerships work and how are they setup?

My friend and I have an idea for a business and we are considering forming a partnership. How does a partnership work and how should one be setup?

Whether or not a partnership exists is a fundamentally a legal question. Ontario’s Partnerships Act says that a relationship between “persons carrying on a business in common with a view to profit” is a partnership within the meaning of the Act. This is important because it means that whether or not you declare yourself to be a partnership, legally speaking, you might be a partnership anyways, whether you intended to or not.

A partnership can exist between you and your friend personally, or even as between two corporations controlled by each of you. Unlike a corporation, however, a partnership has no separate legal existence from the partners themselves and each partner has the power to bind the partnership and each partner is jointly liable for any obligations incurred on behalf of the firm. This is why, when deciding to form a partnership, a partnership agreement can be very practical.

A partnership agreement sets out the rights and obligations for partners in the partnership and provides for what should happen in circumstances of partnership incapacity, retirement or death. Without one, the Partnerships Act will provide for what happens to the partnership in these circumstances, often with unintended results. A partnership agreement can also provide mechanisms for the distribution of partnership income and a process for bringing additional persons into the partnership. Creating a partnership agreement that meets your goals with the help of a commercial Lawyer ensures that your partnership will continue in a manner of your design.

How do we protect our excess cash in our business for retirement?

My husband and I are the sole shareholders and directors of an incorporated retail business. We have been quite successful and are generating cash excess to business requirements. We do not want to pay the cash out to ourselves now, and pay high rates of tax, but at the same time this cash is a significant part of a retirement fund. We have no creditors, other than trade creditors payable in the ordinary course. How do we protect this cash for our retirement?

‍You are asking a good question. In the event of an unexpected economic downturn or legal claim against your active business corporation, the excess cash generated in the business could be exposed to potential creditors. Once the liability is crystalized, it may be too late to take action that will protect the cash. You have also correctly identified that the simplest solution –payment of the cash out to yourselves – attracts undesirable tax consequences.

A cost efficient solution is the creation of a holding corporation. The holding corporation structure, when designed properly, allows excess money from your active business corporation to be paid by dividend to the holding corporation, tax free. The holding corporation is a separate legal entity, and is generally insulated from claims against your active business corporation.

Care is required that the desired tax treatment is achieved in the structuring of the holding corporation. There are other financial planning considerations, such as ensuring the availability of the lifetime capital gains exemption, which must be addressed by the new structure. This type of corporate structuring may also be implemented as part of a broader strategy for business succession and included as part of your estate planning.

Should I incorporate my medical practice as a professional corporation?

I am a practicing family physician with two young children. My accountant mentioned the idea of incorporating my practice into a professional corporation. How does this work?

As a physician, you are generally permitted to create a physician corporation. The Ontario Business Corporations Act (OBCA) and the Regulated Health Professions Act govern physician corporations. Once incorporated, a Certificate of Authorization from the College of Physicians and Surgeons of Ontario (CPSO) is required for your professional corporation to practice medicine in Ontario.

There may be significant benefits to incorporation arising from income splitting through the payment of dividends to adult shareholders and the deferral of tax through retention of excess cash and investing in the corporation.

A professional corporation carries on the practice of medicine with you as both a shareholder and employee of your corporation. It is important to note that under the provisions of the OBCA, a professional corporation does not shield the shareholders from professional liability as acts of a professional corporation are deemed to be acts of the shareholders. Non-voting shareholders who are not members of the CPSO are exempted from any professional liability.

All voting shares of the corporation must be held by a member of the CPSO. Non-voting shares can be held by a parent, spouse or child (and minor children must have their shares held in trust). Professional corporations are only permitted to carry on the practice of the profession or activities that are related to or ancillary to the profession. Furthermore, a professional corporation is permitted to invest its surplus funds in passive investments.

A Lawyer with experience in incorporating professionals can help you set up your professional corporation such that your objectives may be realized.