the CEN-TA PEDE

david ingram's US/Canadian Newsletter

FREE U.S. TAX ASSISTANCE

The U.S. Internal Revenue Service will be providing free assistance on U.S. income tax issues at the Vancouver Consulate from March 3 - 17, 1995. Please call the Consulate to schedule an individual appointment or to register for seminars. (604) 685-4311, ext 246

The E-2 U.S. Investor's Visa 78

Over the last few months, an amazing number of individuals have approached my office about going to the U.S. to work or about expanding into the U.S. or about claiming their U.S. citizenship.

We are also updating the "BORDER BOOK" which is running into a snag because of a shortage of newsprint. Because of the newsprint shortage, we are cutting a 260 page book down to 160 pages so the problem of what to take out and what to leave in is very real.

While looking for new information, I was fortunate enough to obtain a copy of the following which was written by Dennis Olsen, the U.S. Consul in Vancouver in 1992, 1993 and part of 1994. Mr Olsen's background includes a stint as law clerk for the U.S. Court of Appeals in Denver; Director of the Marshall Island Legal Services Corporation in Micronesia; Associate Professor at Gonzaga Law School; Fulbright Professor in Malawi, East Africa; and political and consular officer for the U.S. Foreign Service in the Philippines and Guatemala. Mr. Olsen is fluent in Spanish and has affiliations with immigration consultants in Taipei, Beijing and Manila.

He is available now as a U.S. Immigration Attorney in Everett, Washington at (206) 304-1030 or at the office of his Vancouver partner Michael Jacobsen at (604) 736-0065.

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NEW LIMITATIONS ON E-2 INVESTOR VISAS

by

Dennis F. Olsen

In the fall of 1993, the U.S. State Department adopted new regulations which limit and complicate the kinds of investments Canadians must make when applying for investor visa status in the U.S. These regulations require the commitment of fixed percentages of capital when Canadians and citizens of other treaty signatory countries make capital investments in U.S. businesses in order to obtain "E" investor visas.

A long standing treaty provides for investment in a business as a basis for obtaining residence in the U.S. This is known as "treaty investor" status and is embodied in the E visa. The E visa provisions allow a Canadian - either an individual or a company - to purchase an existing American business or create a new business and then apply for a non-immigrant visa based upon this business ownership. In Western Canada, these applications are usually processed through the U.S. Consulates in Vancouver and Calgary.

The E visa regulations require the commitment of a fairly large amount of money, a "substantial" investment in the words of the regulations. Investments in the range of twenty-five to fifty thousand dollars are generally considered the minimum amount that satisfies this requirement. Next, the regulations require that this money be "committed," that is unconditionally paid toward the purchase or creation of the business. New regulations adopted in July of 1993, add a third financial requirement: the committed capital must represent a certain percentage of the over-all value of the business.

THE WAY IT WAS

Before the new regulations, this requirement of investment as a percentage of the stated value of the business was present only as an implicit part of the more general "substantiality" test. The Consul adjudicating the case could make an over-all appraisal of the size of the investment to determine its "substantiality," decide if a reasonable portion of it was firmly "committed" and approve the visa based on these generalized criteria. This method of assessing E visa applications was compatible with investor practices. In cases where the value of the purchased business was high - over, say, $250,000 - the "substantiality" was easily found and payment of a reasonable amount of the large investment was generally accepted as a sufficient "commitment." In the case of the $250,000 business, a pay-in of $50,000 was probably enough.

This approach reinforced the basic purpose of the treaty investor program which was - and still is - to induce responsible entrepreneurs to bring investment capital to the U.S. and establish businesses that will create jobs and otherwise benefit the local economy. The bigger the business that could be established with available capital, the more jobs and benefits to the U.S. economy. So if the purchase of a business whose total value was $50,000 where $25,000 had been committed would qualify for E status, then a down payment of the same $50,000 to buy a much more substantial business was even better since it represented a more serious undertaking in which the investor had a great deal more at stake and a great deal more to offer the local economy. NOT SO under the new rules.

THE NEW RULES

The new regulations impose a recommended schedule of fixed percentages of capital that must be committed in order to qualify for a visa. The percentage required depends on the total value of the business. The "Proportionality Test," as it is called in the new E visa regulations, require a high percentage of committed capital in small businesses. In businesses valued below $100,000, the required capital commitment is 75 to 100%. In the $100,000 to $500,000 range, the requirement is 60%; between $500,000 and a million, 50% is required. In the case of big businesses above a million, only 30% is required.

If applied literally, the proportionality test will disqualify a high percentage of current E visa applications. In Vancouver or Calgary, the average E investment is in the $100,000 to $200,000 range. A typical case might be the purchase of a small restaurant or trailer park just across the border. The restaurant is for sale by the retiring American owner for $150,000. The American is willing to take $50,000 down and payment in a year of another $25,000, the balance to be paid in monthly instalments over the next five years. In the past, if other routine requirements were met, an application based on this deal would likely have been approved. Under the proportionality test, the application faces probable rejection at the Consulate. The value of the business is $150,000 and the $50,000 down is only 33% of the total value. Even if the potential E investor were to raise the ante to $75,000 down, the deal 's still only 50% paid for and the E schedule requires 60%.

The proportionality test runs harshly against the grain of typical business practices. In the example above, a $50,000 down payment to buy a going concern valued at $150,000 would likely be accepted by the seller. Based on the many E cases I review in my law practice, $50,000 would be considered acceptable (even generous) by most sellers, especially in the case of high risk investments like restaurants.

Limiting Factor is Cash

In these small business cases, the limiting factor for the buyer is often the amount of ready cash. The restaurant buyer in our example may be willing to put up the 60% but often just doesn't have the money. Here the new rules are often an absolute bar with the investor who has $50,000 and needs $100,000 being no better off than the investor who is broke and needs $50,000. What about borrowing the extra fifty? More bad news: borrowed capital is generally not considered in assessing E applications.

Worse news yet is that the effects of the proportionality test on big investors are just as disconcerting. Where the small business person is limited by the amounts of available capital, the large investor seeks to maximize his market position by controlling the largest amount of assets with the least amount of money. Leverage for the large investor is the name of the game. Here's a direct quote from the regulations: "In the case of a million dollar business, a lesser percentage might be needed, but 50-60% investment would qualify." (Sadly, the drafting of these news laws is even more grotesque than their effect on business.) With huge price differentials in real estate, Canadian entrepreneurs look longingly at land just across the border.

New Rules are against General Business Practice

These proportionality rules strike at the heart of the typical - highly leveraged - real estate purchase. Let's say that a Canadian developer wants to buy a marina in Bellingham for one and a half million. The banks generally require 25% down to finance such a commercial enterprise, or $375,000. The E rules require $750,000, more than twice what the bank wants and hardly a clever leveraging of the buyer's investment capital.

These rules will not stimulate the southern flow of risk capital, to put it mildly. With NAFTA and economic free flow a goal actively mouthed by President Clinton as an important North American priority, the tightening of investor rules seems particularly ill-timed, even hypocritical. Yet the rules themselves do not dictate the unseemly results sketched above. The Foreign Affairs Manual (where the percentage requirements are found) states, "Assessing proportionality requires the use of judgement that takes into account the totality of the factors involved; it is not a simple arithmetic exercise. The following examples (where the ratios are found) are not to be viewed as bright-line requirements." I.E. a responsible developer with $300,000 and bank approved financing to buy a million dollar Marina that employs six Americans ought to be considered "substantial" within the meaning of the rules even if his down payment only represents 33% of the value of the business. This is especially so when the same investor could take a tenth of his $300,000, buy a real estate consulting firm which employs one secretary and obtain a visa easily; the value of the business is 100 percent of the amount of the investment.

The rules are new and hopefully the U.S. Consulates in Canada will apply them in a way that serves the over-all purpose of stimulating rather than thwarting responsible investment. Certainly the rules themselves allow latitude in applying the stated percentages. In fact, these are not really stated as rules but general criteria. If the rules are not - as they self-announce - "bright-line requirements" then they should be interpreted in a way that serves the over-all purpose of the investor treaty and is consistent with American policy statements on free trade.

Unfortunately, numbers, once stated, take on a life of their own. This is especially so in administrative decision making. If the marina investor can depart from the 50% requirement because of the solidity of the over-all investment package, then the consular officer must decide - by how much? And if the Marina case is approved with a $300,000 down payment, then how is the next case where the down payment is slightly less to be decided? However much the rules may undercut normally packaged investment proposals, they will tend to be applied as stated. For under-staffed Consulates with large numbers of cases that must be decided within a short time, this approach achieves both consistency and efficiency. There may be some departures from the stated percentages but not very much.

Rules are Rules

So expect the E rules to be stringently applied. On the bright side, with responsible advice, many responsible investment plans can be structured in a way that allows compliance with the proportionality rules. For example, the rules still allow latitude in the valuation of a business. The proportionality test requires comparison of the amount of investment as a percentage of the "cost of the business."  

Good Will not necessarily Part of Business

Elsewhere, the regulations state that "the cost of an established business is generally its purchase price, normally considered its fair market value." Sometimes an investor is buying different assets, not all of which need to be included in the fair market value of the business. For example, small business sales often contain a covenant not to compete. In our restaurant example, the seller may have agreed within the sales contract not to open a another similar business in the same area. If the total price is $150,000, the fair market value of the covenant not to compete may be $50,000. This latter sum is arguably not part of the "purchase price". When providing criteria for the calculation of purchase price, the E rules generally rely on a listing of "assets necessary to run the business." The covenant not to compete is not necessary to run the business and therefore excludable from the purchase price. The Canadian buyer pays $75,000 down for the $100,000 purchase price and enters into a collateral contract to pay an additional $50,000 on mutually agreeable terms for the covenant not to compete. The E investment ratio is satisfied.

In the same way, where the seller agrees to actively assist the new owner during a transition period, a consultation agreement between buyer and seller can be fairly valued and agreed to outside the of the actual purchase agreement. This is, in effect, a severing of the part of a sales contract often included as "good will." Since it is not actually necessary as an asset "needed to run the business," it could be appropriately excluded. In our example, such a sale of good will could be worth a lot if it included performance of services over a period of time. If the fair market value of the consultation agreement is $50,000, the real assets can be sold for $100,000 and the down payment of $75,000 satisfies the proportionality criteria.

Creative Offers will Qualify

In other cases, many businesses are, in fact, incremental sales where purchase of the first increment is independently sufficient to qualify for an E visa. A 75 unit trailer park whose total value is $300,000 could be sold in three parcels. If the sale of the first parcel is otherwise valid under the E criteria - substantial, committed, not marginal and so forth - it may be permissible to base the E application on the independent sale of the first increment and substantially reduce the percentage of committed capital required by the E ratios.

Lastly, in many common situations, other types of visas may more appropriately fit the need of Canadian businesses. The L visa allows for transfers of employees from the Canadian parent company to a U.S. affiliate under a variety of circumstances. The Free Trade agreement allows Canadians from many different occupations to work in the U.S. for American employers. The Immigrant investor visa provides for permanent residence for large investors.

In all these examples, it is important to take the demands of the E visa regulations into account at the earliest possible stage of the negotiations. With good business and legal advice, sales can be structured to both meet the demands of buyer and seller and the E visa ratios. If the requirements of the Canadian buyer's visa application are made known to the seller early on, this structuring can include provisions which responsibly satisfy U.S. visa regulations and still meet the business needs of both parties. Alternatively, other visa provisions may exist which allow residence in the U.S. under suitable circumstances.

Dennis Olsen J.D.

Remember again - That Free US Tax Assistance from the IRS. Call (604) 685-4311, ext 246 to register for individual appointments or for a seminar.

BANKERS / ACCOUNTANTS! Put this Page in your diary for Future Help!

Tax Preparation and Other US / CANADA Information Sources

some of our own CEN-TA RESOURCE Personnel at (604) - Fax (604) 913-9133 are:

* David Ingram - US / CANADIAN Tax Advice and preparation for individuals and corporations. Author of the multi-user, multi-office in house computer personal tax program.

* George Hatton, CA Canadian Corporate and Individual Tax Advice and Preparation. George has written our in house computer Corporate Tax Preparation Program. George and David specialize in RRSP and mutual funds for "out of country" situations.

* Sonja Clark, CA, CPA, LLB - Although she has a law degree from UBC, Sonja does not function as a lawyer. With her CPA and CA degrees and accounting background, Sonja is our US corporate tax specialist.

* D'Arcy von Schleinitz is working on his accounting designation but spends most of his time backing up David Ingram with his clients. 

Other Outside US / Canada resource persons I should mention are:

CANADIAN IMMIGRATION (to Canada)

David Stoller, LLB at (604) 922-4702 (Fax 922-0374)

United States Immigration (to the U.S.) (in alphabetical order)

Greg Boos, LLB in Bellingham at (206) 671-5945 (Fax 676-5459) (Greg Boos is extremely knowledgeable in Native Indian Cross border Issues as well)

Ruben Briones at (604) 278-3360 (Fax 278-3521) is an obliging (but strict) US Immigration Officer in Vancouver for those seeking a Treaty Canada Visa to the US. He is free. If you are looking for a package of U.S. waiver forms, his office can send them out.

Mark Carmel, J.D. at 366 North Broadway, Jericho, New York, 11753, or 1500-5600 Yonge St., Toronto, ON, M2M 4G3, (905) 736-1792, Fax (905) 738-0756, or

Michael Jacobsen J.D. at (604) 736-0065 - Fax (604) 736-0032 or his Everett partner

Dennis Olsen, J.D. (former U.S. Consul in Vancouver, now practicing in Everett, WA) at (206) 304-1030, Fax (206) 304-1065 (Note Dennis Olsen also works with Customs)

Terry Preshaw, J.D., in Vancouver at (604) 689-8472 (Fax 688-0099);

US Tax Preparation - Warren Dueck CA, Ernst & Young, 600 W Georgia, Vancouver, BC (604) 683-7133 - Fax (604) 643-5422

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