Legal

Cosmetics Company Uncovers Hidden Cash

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Executive Summary

Sometimes even the best-managed companies can overlook a hidden store of cash. Consider the case of Cosmetica Laboratories Inc., a highly successful, fast growing Toronto cosmetics manufacturer. Cosmetica, listed on Deloitte's Canada's 50 best managed companies over the past three years, is a vertically integrated company that develops and manufactures makeup for brand names around the world. Revenues have been growing rapidly year over year with calls coming in from prospective clients on a regular basis. The major challenge indicated towards the cash in on R&D (Research & Development) tax credits. When Deloitte partner Keith Pennells visited the company's headquarters in Scarborough, Ontario, in 2002, he was impressed. But Pennells, along with R&D tax specialist Naton Aronshtam, noticed that something was missing. Cosmetica's gleaming labs were busy with a multitude of highly trained technicians in white lab coats. Yet in its 15-years of running, the company had never filed a successful claim for R&D tax credits. At the end of a four-hour visit, a conclusion was reached that the company was neglecting a significant source of cash. Pennells saw his overall task as helping to streamline the financial infrastructure of this successful company. The cash generated from the R&D tax credits helped pay for the broader task - audits, personal tax planning, corporate tax planning and compliance, negotiating new banking arrangements, advising on potential investors, and helping to purchase Cosmetica's operating facility. Through Pennells, Deloitte helped structure the acquisition to minimize tax and helped Cosmetica with some of the other terms of the deal.

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