Companies established in many countries cannot escape transfer pricing.

Transfer prices are the prices at which related entities located in different countries trade, including the sale of goods, services or intellectual property.

In Canada and most countries, these prices must be established by respecting the arm’s length principle, which stipulates that the conditions for related entities’ transactions must be the same as those that would have been agreed upon by non-related entities.

While companies established abroad must comply with transfer pricing rules, they can also use them to optimize their tax situation. Therefore, it is in their best interest to know these rules as soon as they plan on expanding abroad.

A planning tool

The proper use of transfer pricing can help a group minimize its tax burden. In fact, economic theory states that the greater the work performed, risks assumed and assets held, the higher the expected returns. Therefore, it would be to a group’s benefit if value-added functions, valuable assets and high risk activities were within a jurisdiction with a lower tax rate since a greater portion of the group’s profits will be taxed at a favourable rate.

Documenting transfer pricing

The Canada Revenue Agency (CRA) is one of the most aggressive tax bodies in the world when it comes to auditing transfer pricing. When it deems that the arm’s length principle is not being observed, the CRA can adjust the transfer pricing and impose a penalty. This penalty will apply if the adjustment increase exceeds the lesser of $5,000,000 and 10% of gross income.

However, the penalty will not apply if the taxpayer can prove that, through transfer pricing documentation, serious efforts were made to comply with the arm’s length principle. This documentation is therefore essential for companies established abroad as it must provide a complete description of transactions between the group’s entities and demonstrate the method used to determine the transfer pricing.

Your Raymond Chabot Grant Thornton consultant can help you better understand these issues.

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Eric Dufour
Vice-President, Partner | FCPA, FCA | Management consulting

There comes a time in the life of any business when it needs financing. Some hints on how to structure your approach and improve your chances of getting the necessary financing, be it at the start up phase, during an expansion or for an acquisition are presented below.

1. Be realistic about the possibility of getting subsidies

While business owners may dream of getting partly or fully non-refundable contributions to finance their business, this option is not available to everyone. It might look like some businesses have a knack for easily finding subsidies, but, often, it’s a matter of circumstances.

It’s unlikely, for example, that you can get major subsidy financing to open a restaurant. On the other hand, in some cases, over 80% of the research and development activities of a biotechnology company could be financed. Generally, the agri-food (other than restaurants), culture, high tech and industrial manufacturing sectors are more likely to qualify for subsidies than retail or service businesses. Nevertheless, regardless of the type of business you operate, you should look into the programs available, particularly in the areas of labour training or product development.

2. Don’t start your business without having planned the financing

Believe it or not, some entrepreneurs start their business plan without validating all the costs beforehand and ensuring that they have the necessary financing. Most of the time, they quickly find themselves short of funds and unable to finish their project. That’s when they turn to their financial institution for financing and end up having to deal with complex and endless processes.

Other than the lack of funds, what makes creditors reluctant in such a situation is the manager’s attitude. Entrepreneurs who launch a project without first validating the costs and their ability to cover them show a decided inability to plan and manage. A potential investor could view this as risky behaviour.

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3. Make sure you have sufficient guarantees

Investors always want to protect their investment, so asking for a guarantee is an essential step. It’s not surprising that your financial institution will want to use the equipment you’re about the purchase as collateral. People often forget, though, that a business’s financial health is a far more important guarantee than a mortgage. Your financial institution will not automatically grant a loan simply because you can provide the equipment as security. The lender generally has no interest in realizing the guarantee if the business is not doing well. Creditors rarely come out ahead by seizing a client’s property and having a bankruptcy trustee sell it. However, they will be on the winning side if their client is successful and wants to borrow again for a future expansion phase.

When financing a business, common practices include requiring a mortgage and personal guarantee and sometimes, other guarantees may be required. This may be the case, for example, if your financial institution requires a universal hypothec on all of the business’s present and future property. This is not necessarily a problem provided you have a good business relationship with your bank and know your projects will be supported. It could become a burden though if you don’t have your creditor’s support.

4. Consider alternative financing sources

Business owners sometimes forget that banks are not the only sources of financing. There is a considerable range of organizations that provide funding, such as government departments, business development banks, local organizations and specific funds. In fact, there are so many potential sources that financial institutions and organizations are developing increasingly persuasive strategies to attract new clients. What they all have in common is the will to finance a project with minimal risk on their part. If your financial situation is precarious and your project quite risky, you may not find anyone willing to lend you the funds. In some cases, you could consider having several creditors share the risk. In others, you could resort to more costly strategies, such as lease financing for equipment. This option should not be considered without first having examined all other possibilities.

5. Build a relationship of trust with your creditors

Getting financing can depend on the relationship of trust you are able to develop with your lender. There is nothing to be gained trying to gloss over any financial difficulties your business may be experiencing or even trying to hide a bankruptcy that dates back 20 years. In any event, this will likely come to light anyway. Your honesty in dealing with your lender will certainly be a factor should you need additional financing because of difficulties. A poor manager will almost certainly fail, even with a good project, but a good one finds a way to pull through, even during difficult times. It’s up to you to show your lender what type of entrepreneur you are.

6. Plan your working capital requirements appropriately

In most business projects, you need to plan properly so you have sufficient working capital to see you through until you start earning some income. Usually, it’s not easy to accurately predict when and how much money will be needed. Not only must you avoid underestimating what’s needed, you also have to provide for enough manoeuvrability in the event sales are not as high as anticipated. It’s better to have some excess cash at the beginning rather than having to ask for a new loan, which could be seen as an inability to assess your needs and your business project’s potential profitability.

One of the most complex aspects of working capital is being able to convince your lender to inject significant cash from the outset, even if you don’t think you’ll really need it. This requires preparing sufficiently optimistic financial forecasts to convince the lender that are also just pessimistic enough to justify the need for considerable working capital. It’s a very fine line that divides the two.

7. Consider your lender as a business partner

When lenders refuse a loan application, it’s not necessarily because they don’t fully understand the project. On the contrary, they may have understood it very well. Lenders generally have extensive business experience and a wide range of clients. They know which businesses are profitable and which are not. They are in an excellent position to grasp your project’s potential, especially if you are newcomer to the business world.

Good lenders will consider themselves to be a business partner. Unless they see serious problems in your business, they won’t tell you how to manage it, but they will help you find ways to improve your management if necessary. As with any business partner, they’ll support you during difficult times, but not at any cost. When you’re earning income, they are as well, but if you’re losing money, oftentimes, they are also. They may be prepared to inject more funds in your business when you need some, but they will expect you to be prepared to do the same. Business managers who consider their lenders as their business partner significantly increase the chances of building attitudes that contribute to obtaining financing when they need it.

04 May 2017  |  Written by :

Éric Dufour is a vice-president at Raymond Chabot Grant Thornton. He is your expert in management...

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Technology plays a key role in a company’s growth and efficiency; in fact it is essential to maintain one’s competitive edge. Yet, rapid technological change is constantly creating new threats. Companies therefore need to adapt and adjust their security measures in order to keep pace with the changes.

Guarding against cyber attack is a major challenge

No company is immune to cyber attacks. According to the International Business Report (IBR) published by Grant Thornton International in the fall of 2016, one out of five companies around the world (21%) were victims of a cyber attack in the 12 preceding months, as compared to 15% in 2015. A total of 2,500 business leaders based in 36 countries were surveyed for the study.

The explosion of data generated by digital technology, now exacerbated by Internet of Things (IoT) devices, combined with the high level of connectivity among organizations, creates many opportunities for cyber criminals to do some damage. In the manufacturing sector, for example, all data production, acquisition and management systems are inter-connected and companies work with a network of suppliers and distributors. These are all areas of vulnerability for a company.

Cyber crime is very costly for the global economy. According to the IBR, cyber attacks cost a total of US$280 billion each year.  The attacks are carried out by criminals who often are well organized, some even acting as mercenary hackers on behalf of governments and organized crime groups. These hackers use increasingly sophisticated methods to penetrate an organization’s defences.

Canada is not immune to cyber attack!

Unfortunately, Canada is not immune to the problem. Almost 19% of companies surveyed for the IBR study reported that they had been the victim of an attack in the previous year. The aim of these attacks was primarily to damage infrastructure (IT systems, databases, etc.) or to steal money by making fraudulent requests or threatening to hack the company’s computer systems (e.g., Ransomware attacks).

Financial losses are not the greatest fear. In fact, 31.6% of organizations surveyed consider that the main consequence of a cyber attack would be the amount of time spent dealing with the aftermath. Other consequences include damage to the company’s reputation (29.2%), the loss of clients (10.2%) and lost revenues (9.8%).

Exemplary cyber security practices are therefore essential to reassure and attract customers, who want a secure environment for their electronic transactions. They also demand that personal information be adequately safeguarded. Companies must pay especially close attention to this matter and ensure that they are well versed in, and adhere to, federal and provincial legislation.

Safeguarding measures that are part of the corporate strategy

Cyber security is more than a set of binding measures to protect a company’s data and systems. Such measures must be a part of the company’s strategic approach in order to ensure that its operations are more efficient and secure.  To be truly effective, cyber security must become part of a company’s ethos and fully adopted and implemented by all company employees at all levels and strictly monitored for adherence by connected partners.

Prevention and preparedness remains the best way to deal with cyber attacks, knowing full well that no defensive measures are perfect.

The first step consists in calling upon experts to assess the risk factors—both within the company and in its broader network—in addition to its cyber security weaknesses. This information can then be used as the basis for developing and implementing a policy, as well as security procedures and mechanisms (such as penetration tests), to reduce these risks as much as possible and react quickly in the event of an attack.

Since every organization is different, tailored solutions must be developed according to the company’s area of activity, structure, dependence on technology, supply chain, network and sales methods, etc.

Finally, it is important to remember that cyber security is everyone’s business and must be part of the corporate culture. As soon as new employees are hired, they must learn about the policies and procedures that must be followed and then be reminded of these policies and procedures in different ways on a recurring basis. For example, it could be ensured that each person is acting responsibly by discussing cyber security during annual performance appraisals.

For more information, as well as some cyber security tips, do not hesitate to contact our experts, Garry Blaney and Greg Jenson.

This article was written following a study conducted by Grant Thornton International. To access the original content, consult the study.

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Sebastian Alberione
Senior Manager | Eng. | Tax

Data management is critical for businesses.

To find out more about data governance and the related issues, I met with Marcelo Cardoso, Co-founder of Prodago Solutions, which provides data governance advisory services and markets Prodago (Lean Data Governance Platform).

How does a data governance process add value to a business?

The main value of data governance is the ability to explore data and facilitate innovation using digital transformation initiatives. Without a governance process, the business could be exposed to data quality issues that could have a significant impact. Today, data are at the heart of all organizational decisions and transformations (analytics, business intelligence, artificial intelligence, automation, etc.). Organizational transformation and innovation initiative do not see the light of day without quality data.

What do businesses generally do?

There is always some form of data governance in a business, even though it may go by another name. Defining data formats for new IT systems or configuring intranet user access rights are examples of data governance. The main issue is that, generally, organizations react to problems rather than identifying the risks underlying data used in the most critical business processes and operations and applying preventive corrective measures.

What are the greatest errors to avoid and what approach do you suggest?

The most common error when implementing such processes is the failure to link governance measures and business objectives. The traditional approach consists in setting up an “organization”. A committee is created and a network of data managers for the various sectors is identified, but this does not always work.

We suggest identifying a sector’s business objectives and analyzing transformation initiatives in terms of these objectives (for example, a 3600 view of clients). The critical processes associated with these initiatives and the data they use are then identified. Corrective measures (data rules and responsibilities) are applied if gaps are found in the quality of data needed to ensure the performance and security of the processes.

It’s important to have some traction within the organization and set priorities because data governance cannot be implemented across the board unless the relative importance of the data has been determined. This requires considerable effort.

Technology is evolving rapidly and data are increasingly more prevalent (internet of things, megadata, etc.). How does this impact governance?

Organizations are aware that data are no longer just the result of a business process, they now see data as an asset. More and more, data are becoming the responsibility of the business side of an entity rather than just the IT department. In recent years, advances in areas such as artificial intelligence, predictive analyses, etc. mean that entities are making more intensive use of data and not necessarily in the context in which the data were created. Data are collected from various sources and cross-referenced to generate value. Governance is essential in this context.

To call on the services of Marcelo and his team, visit website contact page.

If you would like to further explore this topic, Marcelo suggests visiting this site for some interesting articles.

25 Apr 2017  |  Written by :

M. Alberione is your expert in taxation for the Montréal office. Contact him today!

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