Business Immigration: Initial Client Contact

Transcription

1 BUSINESS IMMIGRATION 2010 UPDATE PAPER 1.1 Business Immigration: Initial Client Contact These materials were prepared by David L. Thomas of Thomas Immigration Law Group, North Vancouver, BC, for the Continuing Legal Education Society of British Columbia, October David L. Thomas

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3 1.1.1 BUSINESS IMMIGRATION: INITIAL CLIENT CONTACT I. Initial Client Contact...2 A. Introduction...2 II. Assessing the Prospective Business Applicant...2 A. Basic Business Structures...2 B. Types of Business Vehicles Proprietorship Partnership Corporations...4 III. Supporting Documentation for Business Applications...5 IV. Financial Statements...6 A. What Kinds of Financial Statements Are There?...6 B. Balance Sheet Issues Kinds of Assets Kinds of Liabilities What are Shareholder Loans or Advances? What is the Book Value of an Asset, and How Does that Differ from the Market Value?...7 C. Income Statement Issues What is Depreciation, and Why is this Important? How is Net Income Determined?...8 D. IRPA Issues: What are the Following, and Where Do I Find Them?...8 E. How Do I Find the Value of a Company?...9 V. Filling Out the Forms and Including the Financial Statements...9 VI. Currency Fluctuations...11 VII. Final Thoughts...11

4 A. Introduction I. Initial Client Contact Business categories for immigration to Canada come in a wide variety these days, presenting more and more options for practitioners to find a solution for clients. However, in practical terms, the prudent practitioner should always canvass possibilities for a non-business avenue first. While many clients may only qualify in one of the business categories, an applicant that might also qualify as a skilled worker or in another economic category might be better off going down that route. There are several reasons: 1. Business applications come with a certain cost, and are usually much more expensive to the applicant in financial terms. 2. Business applications do, in most cases, usually take longer to process. 3. Business cases are complicated to prepare and endure a heightened level of scrutiny at the Visa Office. 4. Visa officers generally have an aversion to processing Business Applications. Reason No. 4 is obviously just the opinion of this writer. But inasmuch as that statement is true, the underlying problem would seem to be a lack of direct experience in the business world, insufficient training and inadequate policy manuals. Having said that, the same can be said for many immigration law practitioners. Many do not have experience in business, or with business documentation, and sometimes that leads to the application getting off on the wrong foot. The job of every immigration lawyer is to make their client s complicated life appear simple and understandable by the immigration officer. There should be no unanswered questions. The obvious questions that will come to mind for the officer should be dealt with up front. All of the references should be made, supporting documentation should be numbered and identified. Sometimes even the purpose of enclosing certain documentation should be made clear. In other words, it is our job to make the assessment of the application simple and easy for the visa officer. However, the immigration lawyer needs to understand the fundamentals in order to deliver that clear and perfect window into their client s business world. This paper will address some of the very basic concepts in business, financial statements and pragmatic issues surrounding the completion of forms and organizing the supporting documentation. II. Assessing the Prospective Business Applicant A. Basic Business Structures This may be very basic information for some, but it is important to understand the context in which your client has conducted business in their home country. In some ways, this is the starting point for unravelling their story and determining what documents may be available. B. Types of Business Vehicles Most businesses are carried on in one of three modes:

5 1. Proprietorship This just means the business owner carries on the business as an ordinary person. Business Advantages: low cost just start doing business one tax return Disadvantages: no limited liability fewer tax strategies available 2. Partnership Two or more people carry on business as partners. Partners may contractually bind their partners. Business Advantages: low start-up costs maybe some tax advantages Disadvantages: unlimited liability (except for Limited Partnerships ) one partner may create legally binding obligations for the other without their knowledge

6 Corporations Corporations are separate legal entities. They are separate from the people that own them and run them. The liability of the company is usually limited. Generally speaking, liability does not extend to the shareholders or the directors. Shareholders Directors Corporation Business Advantages: limited liability defer taxes split income Disadvantages: increased accounting and legal costs In assessing your client s background, you need to understand in what form they have carried on their business in their home country. There may be variations of the above three modes. However, in first determining the structure of their operation, you will then be better guided in knowing what documentation to ask for.

7 1.1.5 III. Supporting Documentation for Business Applications One of the frustrating things for business immigration lawyers is the lack of documentation checklists from Visa Offices, and sometimes the inconsistency of the documentation being requested. For example, some visa offices do not include any business documentation on their checklists of documents for Business Applicants. Visa Offices who have been using the SAP format will usually send out a checklist when they request the full application to be submitted. However, the lists differ from place to place, and often the applicant is told to provide everything when clearly everything on the list is not applicable. Some Visa Offices provide a link to a checklist on the general CIC Web Site. However, that checklist does not contain any specific business documents. A good starting point for your clients might be to have them start gathering the following documentation: Evidence of a minimum of two and a maximum of five years of Business Experience in the previous 5 years: 1. Financial Statements including Balance Sheets, Income Statements and Notes to the Financial Statements (for the last 5 years if possible and at least for 2 of the previous 5 years); 2. Corporate/Business Income Tax Returns (for the last 5 years if possible and at least for 2 of the previous 5 years); 3. Municipal permits, business licenses and company/business registration documents; 4. Payroll Records (if necessary to document the full-time job equivalents and supervision of at least 5 fulltime employees for 2 of the last 5 years); 5. Documentation to prove ownership, such as Share Certificates, Corporate Shareholder Registers, Partnership Agreements of other such documentation; 6. Certificate of Incorporation of the Company, if applicable; 7. Company Brochures, if available; 8. Any third-party reviews or articles written about you or your business; 9. Sample of major Sales Invoices or major Purchase Contracts; 10. Sample of Business Banking Records sample starting 5 years ago, if applicable with last 3 months available. Documentary Evidence to Demonstrate the Legally-Obtained Net Worth of at least CDN$800,000: 1. Personal Income Tax returns for the last two years; 2. Itemized personal bank statements for the last three months; 3. Original letter from client s bank manager attesting to their standing with the bank and their business background (if they ll do it); 4. Proof of assets and liquid funds available for transfer to Canada (such as copies of bank statements, proof of real property ownership with valuation/appraisals, investment portfolio statements, investment certificates; mortgage statements, etc.); 5. Proof of assets and liquid funds available for transfer to Canada (such as copies of bank statements, proof of real property ownership with valuation/appraisals, investment portfolio statements, investment certificates; etc.); 6. Proof of any liabilities (such as copies of mortgage statements, bank loan statements and other obligations, etc.); and 7. Personal Statement of how you obtained the majority of your net worth (a statement of where most of it originated, through investment, real estate appreciation, inheritance, stock options, etc.).

8 1.1.6 Each business application will be different, and in certain countries, the documentation will vary. It is prudent to be flexible with your list. Start with the basics. Once you have assessed the documentation provided, ask for missing pieces to the puzzle, or more detailed documentation if it will be helpful. Also exercise some common sense. If your client says he/she has 25 employees, and the gross revenues of the business are recorded as $200,000, then maybe they are not telling the whole story. Facts that don t make sense should be challenged by the lawyer. Get to the bottom of the story before the application is submitted. Finally, third-party reviews are excellent. If there is a newspaper article, or business magazine review of your client s business, generally this will go a long way. It will be easy for the officer to read, and it will encapsulate what the business and the applicant are all about. It will also give the officer some additional piece of mind that your client is not bogus or a criminal. IV. Financial Statements (This following section was written by Jeffrey S. Lowe and updated with permission by David L. Thomas) Financial statements are a picture of a company s financial situation at a particular point in time. They record how a company has done in the previous period (usually the past year), as well as what its assets and liabilities are at a particular date. For federal Business Applications, the applicant should try to provide the most recent 5 years of financial statements. For lawyers practising Business Immigration, these are the most important documents you need to analyze. In keeping with the whole philosophy of IRPA, the regulations regarding Entrepreneurs (and Investors) are designed to be objective, and easier to assess based upon documentary evidence. They leave much less room for subjective interpretation, unlike the previous Immigration Act. In different countries, there are different norms and terminologies, which can make things quite confusing; however, the general principles are very similar whether you are looking at financial statements from the US, China, Iran, Taiwan, Egypt, or any place in between. When analyzing a financial statement for submission with a business immigration file, you should always ensure that you understand it well enough to highlight the relevant portions to the immigration officer. If you can t explain how the financial statements establish your client s business background, the immigration officer will be left to his or her own interpretation, which may or may not be favourable to your client. Three out of the four criteria in determining Business Experience under IRPA come directly from the Financial Statements of the investor/entrepreneur s business: Revenues, Net Profit after taxes, and Net Assets. A. What Kinds of Financial Statements Are There? In general, there are three basic kinds of Financial Statements that a business will have: 1) Income Statement: This Statement sets out the Income of a business over a given period. Basically, it sets out the Revenues that a business has generated in a given period, less the Expenses that the business has incurred in that period. 2) Balance Sheet: This Statement is a Snapshot of the company s financial situation at a particular date. All of the company s assets, and all of its liabilities, are set out on that date, and anything left over is considered to be the Owners (or Shareholder s) Equity. 3) Statement of changes in financial position: This is a statement which reconciles the differences between the financial statements and the actual cash balances available to the company. For example, if the company buys a Truck for $100,000 cash, but only records a Depreciation

9 1.1.7 expense of $20,000, the $80,000 difference is explained on this statement. (For the immigration lawyer s purposes, this is not as critical a statement to analyze as the Income Statement or the Balance Sheet.) Notes to the Financial Statements The numbers on the financial statements are limited, because they cannot tell the whole story. Notes provide the reader with information like depreciation methods, loans and terms of repayment, and transactions with related parties. From an immigration practitioner s standpoint, the most important Notes to the Financial Statements would deal with Shareholders Loans, and any bonuses paid out to the Shareholders. These are both critical in calculating the ratios for determining Business Experience under the IRPA regulations. B. Balance Sheet Issues 1. Kinds of Assets a. Current Assets: These are generally considered to be assets which are either cash, or can be converted into cash, within one year. These would include such things as cash, term deposits, accounts receivable, inventory, and prepaid expenses. b. Fixed Assets: These are assets that are not expected to be converted into cash within one year. These may include machinery, buildings, leasehold improvements, intellectual property, and other long-term assets. 2. Kinds of Liabilities a. Current Liabilities: These are debts which must be paid within a year, and may include such things as Trade Accounts payable, the portion of long term debt which must be paid in the next year, and other short term debts. b. Fixed, or Long Term, Liabilities: These are debts which are payable over a year from now, and may include long-term bank loans, mortgages, shareholder loans, and so on. 3. What are Shareholder Loans or Advances? Shareholder Loans or Advances can come about in two general ways. The first is where the shareholder has lent money to the company, and not been repaid. The other common way is if there are monies (e.g., salaries, bonuses, interest or dividends) that the company has agreed to pay to a shareholder, but has not paid out. In either case, the company still has a debt to the shareholder of these amounts. From IRPA s standpoint, these monies are still at risk, and represent monies that the shareholder has invested into the business. This is reflected in the IRPA Regulations, as noted below. 4. What is the Book Value of an Asset, and How Does that Differ from the Market Value? The Book Value of an asset is usually the cost of an asset, less any depreciation that has been deducted in the current or previous years. For example, the $100,000 truck would have a Book Value of $80,000 after year one, $60,000 after year two, and so on. While this is usually a reasonable indicator of the value, Book Value sometime differs greatly from the Market Value. For example, if a company purchased a warehouse 10 years ago for $100,000, its Book

10 1.1.8 Value after depreciation may be $50,000; however, the Market Value of the warehouse may be $500,000! Thus, in this example, the Book Value understates the Current Market Value of the company s asset by $450,000. In analyzing the Balance Sheet, you should look for anomalies like this, and where possible, obtain the latest appraisals of property assets. C. Income Statement Issues 1. What is Depreciation, and Why is this Important? When you buy a capital asset, such as a piece of equipment or a building, which is used over a number of years, the cost must be amortized over the number of years that the capital asset is useful. For example, if you buy a truck for $100,000, the accountant may divide the expense into $20,000 per year for each of the next five years. The way that Depreciation is calculated will greatly affect the Income Statement, and may make the difference between a company making money and losing money. For example, if you amortized the cost of the truck over 10 years, the expense would only be $10,000 per year instead of $20, How is Net Income Determined? Net income is what is left after deducting all of the expenses from the revenue s. However, if you own or control the company, you can often adjust the net income by paying out more salaries or bonuses to yourself. For example, if a company has $1 Million in revenues, and $950,000 in expenses before paying out any salaries or bonuses to the owners, it could have an income of: a) $50,000, if nothing is paid to the owners; b) Nil, if $50,000 is paid as salary or bonuses to the owners; or c) A loss, if more than $50,000 is paid to the owners. This fact is reflected in the IRPA Regulations, as you will note below. D. IRPA Issues: What are the Following, and Where Do I Find Them? 1. Revenues: This is usually the first line in the Income Statement. 2. Net Profit After Taxes: This will usually be the last line of the Income Statement, or near there. You will sometimes find a figure called Operating Income, after which there will be figures for Extraordinary Items, before the Net Income. Extraordinary Items are usually non-recurring items, which may be profits or losses from the sale of assets, or other unusual transactions. IRPA does not make any distinction between Operating Income and Extraordinary Items, so you would usually include the Extraordinary Items in the Net Profit calculation. Note that in the IRPA definition of Net Income, you may add any salaries or monies paid to the Investor/Entrepreneur or his/her spouse. Check the client s income tax returns, or the Notes to the Financial Statements, to see if these are recorded there. 3. Net Assets: You should refer to the Owner s Equity or Shareholder s Equity section of the Balance Sheet.: This is usually divided into two parts: Share Capital and Retained Earnings (or deficit). i) Share Capital usually reflects what the shares were originally issued for. For example, if 1,000 shares were issued for $100 per share, this would be recorded as $100,000. ii) Retained Earnings usually represent the amount of earnings (or losses) that the company has made, less whatever it has paid out. For example, if a company made $100,000 in its first year, and paid out $30,000 in dividends to its shareholders, it s

11 1.1.9 Retained Earnings would be $70,000. This figure would accumulate over the years, but every time dividends are paid out, or there was a loss, the Retained Earnings figure would decrease. Shareholders Loans, as noted above, are monies owed to a shareholder by the company. Because the shareholder is a separate legal person from the company, this is recorded as a liability. Note that in the IRPA definition of Net Assets, you may add any Shareholders Loans from the Entrepreneur or his/her spouse. Check the Notes to Financial Statements for any indication of this. E. How Do I Find the Value of a Company? In preparing the Net Worth Statements for the client, the forms usually ask for the inclusion of the value of the client s business, or the value of their percentage interest in the business. There is a common misconception that you can determine the market value of a business from its Financial Statements. That is not true, although you can get a good indication of the market value by starting there. The general definition of the market value of a business is the price at which a willing purchaser would buy the business from a willing vendor. While you can get appraisers to give estimates as to what they THINK this value may be, the only accurate test is if you have an actual purchaser and seller in a transaction. In absence of an actual Sale or Offer, here are some suggestions for determining the fair market value of a company: 1. Start with the Book Value: This is the Total Assets minus the Total Liabilities (except for Shareholders Loans, which will probably be sold with the business). 2. Are there any undervalued Assets? If you have a property that was acquired long ago, or intellectual property which was developed at much less than its value today, you may want to get an appraisal to determine the fair market value. Then, you may argue that the value of the company is higher than the Book Value because the true value of those assets is not reflected in this part of the Financial Statements. 3. Goodwill: If a company is earning $100,000 per year, and the Book Value of its assets is only $20,000, there may be Goodwill to the company that is not reflected. In that case, you may want to have an Appraisal done of the company, which may value its Goodwill at between 1 to 5 times its annual earnings. V. Filling Out the Forms and Including the Financial Statements In Canada we are used to reviewing Financial Statements prepared in accordance with Canadian GAAP (Generally Accepted Accounting Principles). There is also US GAAP, which is similar for the purposes of IRPA as described above. There is also the emerging international standard called International GAAP, which is similar to what we normally use here. However, in many countries, the Financial Statements are prepared in a format that is quite foreign. The applicant will also have to have the Financial Statements translated into English or French. This is when the application starts to get thicker. Remember, the immigration lawyer s job is to make the Visa Officer s job easier. When you have Financial Statements with translations, and especially when they are not prepared in accordance with Canadian, US or International GAAP, it is important for the practitioner to show the Visa Officer where the numbers on the Schedule 6 (or other application forms) come from. The writer s general practice is to highlight the numbers on the Financial Statements that are being used. (Highlight the originals and the translated copies so it is easy for the Officer to spot where the numbers come from.

12 When you have to make some calculations, such as to Net Profits After Tax, show the Officer where you pulled the numbers from, such as adding in Management Fees or Shareholder Salaries. Highlight the numbers, draw arrows to show how they are added up together.) When filling out the Forms, try to show both the foreign currency amount and the equivalent in Canadian dollars. By including the figure in the foreign currency, the Visa Officer can quickly cross reference the number with the highlighted Financial Statements you have enclosed. By putting in the Canadian dollar equivalent right beside that number, it makes it easy for the Visa Officer to see whether or not the number exceeds the threshold. It is also the practice of the writer to include a table in the covering letter to clearly show the Visa Officer why the applicant meets the Regulatory definition. An example of such a submission might look like this: The enclosed documents (financial statements) show Smith Widgets Ltd. is a Qualifying Business as defined in the Regulations to the Immigration and Refugee Protection Act. The obvious qualifying attributes are the annual sales, the net profit and number of employees. (Further details are set out in the enclosed schedules to the Form IMM0008.) Smith Widgets Ltd. Attribute Requirements based on Mr. Smith s 100% Ownership IRPA Minimum 2006 Actual 2005 Actual Annual Sales C$ 500,000 C$ 1,106, ,759 Euros Net Profit C$ 50,000 C$ 66,786 49,595 Euros Net Assets C$ 125,000 C$ 93,207 69, 216 Euros C$ 1,181, ,148 Euros C$ 124,283 92,293 Euros C$ 85,783 63,703 Euros # of Employees If the ownership is less than 100%, then the IRPA minimums could be changed correspondingly to make the Visa Officer s assessment easier. (See R.88(1) for the math.) For example: Snakebite Remedies Ltd. Attribute Requirements based on Mr. Jones 80% Ownership IRPA Minimum at 80% 2008 Actual 2007 Actual Annual Sales C$ 625,000 C$ 795,380 C$ 746,992 Net Profit C$ 62,500 C$ 63,891 C$ 58,420 Net Assets C$ 156,250 C$ 231,658 C$ 222,251 # of Employees

13 VI. Currency Fluctuations We live in an era where the Canadian dollar is gaining strength against many world currencies. Difficulty might arise when the applicant s business attributes are very close to the minimum attributes in the R.88(1) definition. For example, in 2007, the Korean Won to Canadian dollar exchange rate was: 776. In 2010, it is: 1,087. In other words, in 2007, at the 2007 exchange rate, the applicant s business may have met the minimum figure of C$500,000 for gross Sales. But at the 2010 exchange rate, perhaps the amount of Gross Sales in 2007 is less than the minimum C$500,000. A number of practitioners have found that Visa Officers can be convinced to use the currency exchange rate then in effect when the numbers in the Financial Statements were generated. If fluctuations in currency are going to make a material difference to the application, then practitioners should use a currency exchange web site such as which allows you to search historical exchange rates. The results of the historical searches should be printed and included with the Schedule 6 together with a clear explanation of what rates were used for what years in coming up with the numbers in the boxes. VII. Final Thoughts Business applications can be very challenging for the lawyer. There is a large volume of documentation to deal with, and often the business stories are complicated. However, the best approach is to imagine yourself as the Visa Officer on the receiving end of the application. Make it as clear and understandable as possible. Organize, label and number those supporting documents. Answer the questions up front. Address the anomalies candidly. If you don t understand everything about your client s business, you cannot expect the Visa Officer to get to the level of comfort they need to approve the application.