Technology, Media & Telecommunications

Time to stand up
and be counted.
Services to an Emerging Technology Company
Table of Contents
Introduction ................................................................................................... 1

Fees ........................................................................................................ 1

Other Work .............................................................................................. 1

Contents of the Document.......................................................................... 1

Your First Year Service Plan ............................................................................. 2

Business Plan ........................................................................................... 2

SR&ED Investment Tax Credits ................................................................... 2

Cash Flow Plan.......................................................................................... 3

Financial Statements and Disclosure............................................................ 3

Accounting Policies .................................................................................... 3

Financial Records ...................................................................................... 4

Financing ................................................................................................. 4

Review Corporate Structure........................................................................ 4

Quarterly Meetings .................................................................................... 4

ViaTech.................................................................................................... 4

Areas of Interest ............................................................................................ 5

Corporate Taxation: The Basics................................................................... 5

Scientific Research and Experimental Development (SR&ED) Tax Incentive ...... 5

Stock Option Plans .................................................................................... 6

$750,000 Capital Gains Exemptions ............................................................ 7

About Deloitte ................................................................................................ 8

Deloitte – Burlington Region ....................................................................... 8

Deloitte Canada ........................................................................................ 8

Deloitte Touche Tohmatsu.......................................................................... 8

© 2007 Deloitte & Touche LLP Services to an Emerging Technology Company i

Introduction
The purpose of this document is to outline briefly our service plan to an emerging
technology company. In this regard, we believe that our service plan approach can
add substantial value for you and your business.

You will see from our approach that we are committed to you, and your business,
and are prepared to make an investment to see you succeed. In short, if you
succeed, we succeed.

Fees
A common question or concern is how will I be charged for all of these services
when I am dealing with a big firm.

As indicated, we are prepared to make an

investment in your business. Our first year fee
quote covers all of the services outlined in our
section entitled “Your First Year Service Plan”.

At the end of the year we will show you the total

costs incurred so that you can see the investment
that we have made.

We should point out however, that if you do an IPO “We are prepared to
or sell the business, we would like to recover this make an investment in
investment. This would be spelled out in detail in your business”
an engagement letter.

Other Work
This document outlines in general terms the work that we will perform for our
“base” proposed fees. There may be other projects however that we would propose
and invoice separately.

Contents of the Document

The remainder of this document discusses the services that an emerging technology
company would typically require in its first year of working with us, and provides
some level of detail on certain areas that are typically of significant interest to such
companies. The topics are chosen based on our significant experience working with
emerging technology companies in Waterloo region.

1
Your First Year Service Plan
Below is an outline of the services that we would normally provide within the first
year of our relationship with a relatively new, emerging technology client. However,
the actual services will of course depend on your unique business as well as your
needs.

Business Plan
There are many reasons why a business plan is prepared. Some of these reasons
may include:

• Putting your plan on paper helps to get you focused.

• The plan can help you share the vision for the business with other partners
or employees in the business.

• The plan can help to get employee buy-in and be a motivator if they
participate in the development of the plan.

• If any form of financing is required, a business plan is mandatory.

With respect to our role we will do the following:

1. If you do not have a business plan, we will give you some guidance as to the
construction of such a plan, as well as some initial input related to how you
may wish to develop your plan in light of our understanding of your business
and industry, or

2. If you have a draft business plan, we will review this plan and meet with you
to provide our initial thoughts and comments.

If you then require other specific work to help you with your business plan, such as
market validation studies or preparation of cash flows, we would discuss with you
what our fee arrangement would be.

SR&ED Investment Tax Credits

If you are developing, adapting, or otherwise improving technology, then you may
be eligible for scientific research and experimental development (SR&ED)
investment tax credits. These credits, which may total up to 68% of your costs, are
often fully refundable, providing significant cash inflows.

If appropriate, we will discuss the SR&ED program with you in detail to ensure that
you can take maximum advantage of the incentives that are available under the
program.

Further to the above, after discussing what projects you may undertake, we can
also assist you in making contact with a number of other agencies, such as IRAP,,
that can provide additional assistance, whether it be financial or otherwise, with
respect to the development of your products. It is very common for research and
development projects to be eligible for both IRAP and SR&ED funding, which
together may fund nearly 80% of eligible project costs!

2
Cash Flow Plan
In a start up, or growing technology business, cash is king. Therefore, we will
review with you a number of areas and strategies to either preserve or enhance
cash flow. Some of these strategies include the following:

• Tax effective remuneration strategies.

• Expediting scientific research and experimental development investment tax

credit refunds.

• Assistance in identifying other funding sources.

• Expediting GST refunds.

• Effective loss utilization strategy.

Financial Statements and Disclosure

There are 3 levels of assurance that we can provide on a company’s financial
statements:

1. Notice to Reader – we provide no assurance that the financial statements

are correct but simply compile them from information provided by
management. A notice to the reader explaining this fact is included with the
financial statements. These financial statements only include a basic level
of note disclosure.

2. Review Engagement Report – we provide negative assurance to the reader.

That is, we indicate that in the course of our review we have not discovered
anything that makes us believe the financial statements are not materially
correct. These financial statements include full note disclosure.

3. Audit Report – we provide positive assurance to the reader that the financial
statements are materially correct. These financial statements include full
note disclosure.

The appropriate level of financial statement assurance varies depending on the

situation. Obviously the more assurance provided, the greater the scope of work to
be performed. In many cases, Notice to Reader financial statements are sufficient
and are prepared primarily for the purpose of tax filings. This typically changes
when a company seeks third party investment. An angel investor or venture
capitalist will likely demand a Review Engagement or Audit Report as a condition of
their financing.

One note of caution, if an Initial Public Offering is planned within 5 years, an Audit
Report may be appropriate from the outset. In most cases, a 5 year history of
audited financial statements is a mandatory requirement for an IPO.

Accounting Policies
Even for emerging companies, proper selection and a thorough understanding of
accounting policies is critical. Nothing will tarnish a company’s credibility faster
than errors in published financial statements. Some of the recent accounting rules
under Canadian and US Generally Accepted Accounting Policies are extremely
complex, particularly around the issue of revenue recognition. We will typically
work with a company to ensure they establish sound policies right from the outset.

Of course, if we provide a Review Engagement or Audit Report on the financial

statements, we conduct a detailed reviewed of the accounting policies used in
preparing the financial statements, and provide full disclosure of such policies in the
notes to the financial statements.

3
Financial Records
Although mundane, it is critical that you set up an accounting system so that you
can obtain timely financial information with which to manage your business, and to
benchmark against your plan. In general, it is recommended that you do the
bookkeeping and accounting work in-house, as it allows you to better manage and
control your business. If you have a system, we will provide our comments.

In some cases, you may simply not have the resources to do the bookkeeping work,
or set up a system. In that case we can make an introduction to a local bookkeeper
that would be cost effective.

Financing
Your financing needs may be immediate or not for a year or two. Either way, we
will arrange a meeting with our corporate finance group to discuss your business
and your financing needs. Out of this meeting, you can expect the development of
a plan of action that you would need to begin to follow in order to attract financing.

Note that if you wanted to then pursue this plan of action, we would discuss with
you at that time our fee arrangement to actively assist you in attracting financing.

Review Corporate Structure

In many cases, your focus is simply on the business. However, we will discuss with
you a number of options and alternatives related to the corporate structure to
ensure that it is the most advantageous structure for purposes of raising financing
or going public, as well as to ensure that the initial shareholders’ estate and tax
planning opportunities are taken into account.

Quarterly Meetings
Although we are accessible at any time, we like to
initially diarize quarterly meetings to ensure that
we get together to keep abreast as to the progress
that you are making in your business. In some
cases, it may be most efficient to discuss business
over the telephone, however, we are certainly
available for a breakfast or lunch in order to get
caught up.

Again, although we try to formally set up these “We get together to keep
meeting times, we are always accessible if you abreast as to the
have an immediate need. If other thoughts or progress that you are
opportunities come to our mind, we would of course making in your business”
call.

ViaTech
ViaTech is a group of professionals that work with growing technology companies.
The purpose of the group is to be a sounding board for you and to provide general
input or to assist you with any specific issues or concerns that you may have. This
service is provided by the group free of charge.

As a member of this group, we would be pleased to coordinate a meeting. At this

meeting, it is typical that you would tell the group a bit about your background,
where you are today and what your future plans are. At that point, you may either
have specific issues or questions that you would like to discuss or alternatively the
group can simply probe further into your plans and provide insights as to areas to
consider.

4
Areas of Interest
The purpose of this section is to simply give you an overview of a number of topics
of common interest to emerging technology companies.

Corporate Taxation: The Basics

The following is a very brief overview of some of the taxation basics of a corporation
that is a Canadian Controlled Private Corporation.

• Losses can be carried back three years and forward twenty years.

• The first $400,000 (calendar 2007) of taxable income attracts tax at

approximately 19%.

• For taxable income in excess of $400,000, the tax rate is approximately

36%. Income taxed at this rate is effectively “double taxed” when
withdrawn from the corporation.

• Monthly income tax instalments are required. They are based on the lesser
of last year’s actual tax, and your estimated tax for the current year.

• In general, your final tax payment is due 3 months after the fiscal year end.

Scientific Research and Experimental Development (SR&ED) Tax

Incentive
Canada has one of the most generous tax incentive programs in the world for
eligible SR&ED work.

The Benefits
For a qualifying Canadian Controlled Private Corporation, the benefits include the
following:

• Federal refundable credit of 35%

• Ontario refundable credit of 10%

• 100% write-off of certain capital expenditures

Eligibility
It is important to note that there is specific eligibility criteria that must be met in
order to obtain these tax incentives. If any of the following indicators are present,
you may be doing qualifying SR&ED work.

• You are developing something faster, more efficient, stronger, etc.

• You have successfully applied under the IRAP program.

• You have a number of engineers or PhDs on staff.

• You have tried several different approaches to solve a technical problem.

How to Claim
The submission for eligible SR&ED is made with your annual tax return. There are
essentially two components. The first is the technical write-up for each project,
which is generally no more than 3-4 pages per project.

5
The second component is the accumulation of the costs attributable to each project.
In general, the costs include wages and salaries, materials consumed in the
development work, certain capital equipment and a portion of overhead.

However, instead of calculating the overheads that would be allowed, you can
instead choose to claim what is referred to as the “proxy” amount. The proxy is
65% of the eligible salaries and wages attributable to a project, and represents the
notional overheads attributable to a project.

Example
If you have a project in which there is $100,000 of salaries and wages attributable
to it, and no other costs, the SR&ED tax credits would be as follows.

Salaries and Wages $100,000

Proxy amount 65% 65,000
Total eligible amount $165,000

Ontario Credit ($165,000 x 10%) $16,500

Federal credit [(165,000 – 16,500) x 35%] 51,975

$68,475

Stock Option Plans

The basic pros and cons of a stock option plan are as follows:

Pros
• Helps to attract and retain talented people.

• May help to motivate employees and executives.

• May be a way of making up for salaries and wages that are below market
due to cash flow constraints.

• It may be a way of raising capital.

Cons
• The set up and administration of a stock option plan can take time, and
money.

• The value of the shares of a privately held company may be very hard to
determine.

• You now have other shareholders to be accountable to.

The Valuation Issue

In general, if you are planning on doing an IPO in the future, or are planning to
quickly grow and then sell, the pros of a stock option typically outweigh the cons.

Canadian Taxation for Options

• No tax implications when the option is granted.

• No tax implications when the option is exercised.

• When the shares are sold, there is a taxable benefit calculated as the
difference between the exercise price and the fair market value of these
shares at the date of exercise.

• There may be a 50% reduction of this benefit in certain circumstances.

6
 • When a share is sold, there may also be a capital gain calculated as the
difference between the selling price and the fair market value of the share
at the date the option was exercised.

• The company will not receive any deduction in respect of the options.

Alternatives
There are alternatives to a stock option plan that can be implemented that avoid the
introduction of new shareholders yet provide employees with similar incentives. The
viable options depend on the particular situation. We would discuss these
alternatives with you prior to establishing a stock option plan.

$750,000 Capital Gains Exemptions

Every Canadian individual taxpayer has a $750,000 capital gains exemption
available. The exemption is only available to be used against gains realized on
certain qualifying property.

Shares of a qualifying small business corporation (QSBC) qualify for the $750,000
capital gains exemption. In order to be a QSBC, the following, simplified criteria
must be met.

• The company must be a Canadian Controlled Private Corporation.

• You (or someone you are related to) must have owned the shares for 24
months.

• During the last 24 months, at least 50% of the assets of the company must
have been used in an active business carried on in Canada.

• At the date that the gain on the shares is realized, at least 90% of the fair
market value of the assets must be used in an active business carried on in
Canada.

Tax Savings and Proliferation of Exemptions

Each $750,000 exemption can save you as much as $172,500 in income tax. As
such, it is very important that you gain access to the exemption. In addition, with
proper planning you can also access the exemptions of your spouse and children.

What to Watch For

In terms of ensuring that you gain access to your $750,000 capital gains exemption,
the following are a number of areas to watch out for.

• Ensuring that you meet the 50% and 90% rules where you have done a
financing and, therefore may have excess cash in the company.

• Again, ensuring that you meet the 50% and 90% rules where you have set
up foreign subsidiaries or branches. Note that these foreign assets are not
assets of a business carried on in Canada, and therefore not eligible assets
in determining the 50% and 90% thresholds.

• The manner in which you incorporate your business can have an impact on
the 24 month holding period rules.

• How the business has been financed can have an impact on the availability
of your exemption. In addition, your other personal investments may have
an impact on the availability of the exemption.

7
About Deloitte
Deloitte – Burlington Region
Our South Western Ontario operation has over 500 professionals located in five
offices in Kitchener, Burlington, Windsor, London and Niagara. Locally in Burlington,
Deloitte has a complement of 116 professionals:

Total

Assurance and Advisory 47

Tax 32

Consulting 16

Enterprise Risk Services 11

Financial Advisory Services 2

Administration 8

Total 116

Deloitte Canada
Deloitte, Canada's leading professional services firm, provides audit, tax, financial
advisory services and consulting through more than 7,600 people in more than 52
locations. Deloitte & Touche LLP, operates in Québec as Samson Bélair/Deloitte &
Touche s.e.n.c.r.l. The firm is dedicated to helping its clients and its people
excel. Deloitte is the only professional services firm to be named one of the 50 Best
Companies to work for in Canada for 2007 by the Globe and Mail’s Report on
Business Magazine and Hewitt and Associates. "Deloitte" refers to Deloitte &
Touche LLP and affiliated entities. Deloitte is the Canadian member firm of Deloitte
Touche Tohmatsu.

Deloitte Touche Tohmatsu

Deloitte Touche Tohmatsu is an organization of member firms devoted to excellence
in providing professional services and advice. We are focused on client service
through a global strategy executed locally in over 150 countries. With access to the
deep intellectual capital of 135,000 people worldwide, our member firms (including
their affiliates) deliver services in four professional areas: audit, tax, consulting, and
financial advisory services. Our member firms serve over one-half of the world's
largest companies, as well as large national enterprises, public institutions, and
successful, fast-growing global growth companies.

Deloitte Touche Tohmatsu is a Swiss Verein (association), and, as such, neither

Deloitte Touche Tohmatsu nor any of its member firms has any liability for each
other's acts or omissions. Each of the member firms is a separate and independent
legal entity operating under the names "Deloitte," "Deloitte & Touche," "Deloitte
Touche Tohmatsu," or other related names. The services described herein are
provided by the member firms and not by the Deloitte Touche Tohmatsu Verein. For
regulatory and other reasons certain member firms do not provide services in all
four professional areas listed above.