Overview

Conventions

To which major air law treaties is your state a party?

Cape Town ConventionThe Cape Town Convention and the Protocol on Matters Specific to Aircraft Equipment were first ratified by Canada on 1 April 2013 and are currently in effect in all Canadian provinces. Statutes have been enacted in each province to allow the convention’s application on a provincial level.

The federal government introduced stop-gap provisions in 2005 before the convention’s ratification but these were repealed after the convention’s adoption. These provisions are similar to those found under the convention’s Alternative A and were implemented to ensure that the Canadian market remained competitive with the rest of the world.

Due to the existence of stop-gap provisions before the convention’s ratification, some argue that only agreements concluded and registered under the convention on or after 1 April 2013 are subject to Alternative A in Canada. This is considered to be one of the most predominant conflicts with local laws.

New York ConventionThe New York Convention was ratified by Canada on 12 May 1986. As such, parties can apply to any superior district or county court to ask for the enforcement of a foreign arbitral award.

OtherBesides the Cape Town Convention, Canada also ratified the Chicago Convention on 13 February 1946.

Domestic legislation

What is the principal domestic legislation applicable to aviation finance and leasing?

Due to Canada’s constitutional structure, the power to legislate on particular matters is divided between the federal and provincial legislatures. Sections 91(10) and (13) of the British North America Act and the provision for peace, order and good government provides Parliament with the right to legislate on issues such as interprovincial and international transport and health and safety. As a result, the Canada Transport Act, the Aeronautics Act, the Canadian Aviation Regulations and many other laws, regulations and orders have been enacted by the federal government. The following issues are governed by federal law:

  • local ownership requirements;
  • aircraft requirements;
  • passenger rights;
  • piloting;
  • permits and certificates; and
  • aircraft registration.

For aircraft financing, the principles applicable to secured transactions fall under the provincial jurisdiction.

With respect to property law, Quebec’s laws are derived from its French heritage, whereas other provinces’ and territories’ laws are based on English common law.

As the Geneva Convention has not been ratified by Canada, in order to perfect a security interest or ensure the validity, priority or enforceability of a lease over an aircraft, the registration (or publication in Quebec) involves:

  • the International Registry, whereby any international interests must be registered; and
  • the Civil Code of Quebec (CCQ) and the Personal Property Security Act (PPSA) of the applicable province or territory.

QuebecIn Quebec loan financing is typically secured by a security interest called a hypothec and governed by the CCQ.

Leases, leasings and instalment sales are title-based instruments, which are also governed by the CCQ. This regime differs from the common law regime because the title aspect is of high importance.

Common law provincesConcerning the legislative framework for secured transactions, each province has enacted their own PPSA which provides similar rules. In the various PPSAs, a ‘security interest’ is defined as any interest in personal property that secures payment of performance of an obligation without considering the title aspect of this personal property. Moreover, some contractual devices are considered as security interests under the PPSAs, including:

  • conditional sales contracts; and
  • leases with a term of more than one year.

Federal lawBankruptcy and insolvency fall under the federal jurisdiction (Section 91, Paragraph 32 of the British North America Act) and therefore the Bankruptcy and Insolvency Act. In certain cases, the Company Creditor’s Agreement Act may also apply.

Governing law

Are there any restrictions on choice-of-law clauses in contracts to the transfer of interests in or creation of security over aircraft? If parties are not free to specify the applicable law, is the law of the place where the aircraft is located or where it is registered the relevant applicable law?

There are no restrictions regarding choice-of-law clauses (Article VIII(2) of the Protocol). This rule applies in Canada because it has ratified the Protocol. Hence, the applicable law of the debtor’s location will apply regardless of the law chosen by the parties.

However, Article 3097 of the CCQ applies for a lease, leasing or instalment sale in Quebec. Thus, if an aircraft’s main hangar is located in Quebec, the right should be governed by Quebec law and registered in Quebec.

Further, the creation of a hypothec (the Quebec equivalent to a security interest) must be governed by Quebec law under Article 3105 of the CCQ if the domicile (ie, a corporation’s head office) of the grantor is in Quebec. Registration should also be made in Quebec.

Under the PPSAs, the security interest or purchase money security interest must be registered where the registered office, chief executive office or place of business of the grantor is located.

Further, both Article 5(3) of the Cape Town Convention and Article VIII, Paragraph 3 of the Protocol provide that it is the domestic rules of law which are applicable, and not the conflict of laws rules of that jurisdiction. Hence, this excludes the possibility of transfer to the laws of another jurisdiction.

Title transfer

Transfer of aircraft

How is title in an aircraft transferred?

There is no specific rule in regard to the transfer of title in an aircraft in Canada. However, the  steps below must be completed by the aircraft’s owner.

AirframeThe original owner must notify Transport Canada within seven days from the transfer of ownership. The transfer typically occurs after the delivery of a document evidencing ownership from the original owner to the buyer.

To transfer a title under Quebec’s regime, the bill of sale (or other evidence of sale) must be filed with Transport Canada.

EngineThere is no separate registry for aircraft engines. The Cape Town Convention allows for registrations against engines at the International Registry and Canadian deals include registrations at the International Registry, when applicable.

Transfer document requirements

What are the formalities for creating an enforceable transfer document for an aircraft?

There is no specific requirement under the Quebec or common law regime. Only an evidentiary document must be filed.

Registration of aircraft ownership and lease interests

Aircraft registry

Identify and describe the aircraft registry.

The Aeronautics Act (Canada) has established a Canadian civil aircraft register. The person that holds custody and control (eg, the operator) of an aircraft (rather than the owner) must:

  • submit an application to register the aircraft;
  • submit proof that they have such custody and control; and
  • pay application fees.

In the Canadian Aviation Regulations, any Canadian that is also an owner can register an aircraft in the Canadian Aircraft Register. A ‘Canadian’ can be either a physical person or a legal corporation that has 75% of its voting rights held by Canadians. On the other hand, an ‘owner’ is any person that has legal custody and control of an aircraft, regardless of the legal title. Thus, the Canadian Aircraft Register is neither a security register nor a title register, but rather an operator-based register. In the Canadian Aviation Regulations, a person is deemed to have control over an aircraft when it has complete responsibility for the operation and maintenance of such aircraft.

Transport Canada is a governmental agency responsible for delivering aircraft certificates of registration, which must be requested and obtained by the aircraft’s owner (as defined in the Canadian Aviation Regulations). However, the certificate does not confer any legal title to the aircraft.

Besides the Canadian Aircraft Register, after the Cape Town Convention’s ratification, all security interests that qualify as international interests must also be registered at the International Registry.

Both the Cape Town Convention and the Protocol on Matters Specific to Aircraft Equipment cover a broad range of agreements, both current and prospective, creating or evidencing a security agreement, a title reservation agreement or a leasing agreement of an aircraft object.

‘Security agreements’ are defined as agreements in which a chargor grants or agrees to grant to charge an interest in or over an object to secure the performance of any existing or future obligation of the chargor or a third person. That definition covers most forms of security interest and hypothecs and also includes security trusts.

Under Article 2(2) of the Cape Town Convention, title reservation agreements are not security agreements. The definition includes a consignment agreement where title will typically pass.

Under Article 1(q) of the Cape Town Convention, a leasing agreement is an agreement by which one person (the lessor) grants a right of possession or control of an object to another person (the lessee) in return for a rental or other payment. The definition includes the more common financial leases as well as rental agreements. The Civil Code of Quebec refers to leases and leasings. Under Article 2(4) of the Cape Town Convention, the applicable law will determine whether a lease or leasing is a leasing agreement.

Registrability of ownership of aircraft and lease interests

Can an ownership or lease interest in, or lease agreement over, aircraft be registered with the aircraft registry? Are there limitations on who can be recorded as owner? Can an ownership interest be registered with any other registry? Can owners’, operators’ and lessees’ interests in aircraft engines be registered?

In the Canadian Aircraft Register, there is no provision for the registration of aircraft title or security interests. There is also no separate register for aircraft titles or mortgages.

Security interests and title retentions are registered at provincial registries or at the International Registry.

Registration of ownership interests

Summarise the process to register an ownership interest.

There is no need to register an ownership interest. However, the bill of sale must be filed with Transport Canada.

Title and third parties

What is the effect of registration of an ownership interest as to proof of title and third parties?

Aircraft registration is mandatory. Registration allows the legal operation of an aircraft in Canada and internationally, subject to compliance with international conventions.

As of 1 April 2013, following Canada’s ratification of the Cape Town Convention, any international interests that have been registered at the International Registry are effective against third parties and take priority over any interests that were registered after, whether internationally or nationally.

In common law provinces, security interests are perfected and registered to be enforceable against third parties. The security interest must first attach. For that to occur, the debtor must sign a written agreement that contains a sufficient description of the secured object. Then, a financing statement must be filed with the appropriate register.

However, in Quebec perfection (or publication) of the security interest is done once it has been properly registered in the Register of Personal and Movable Real Rights. Again, a sufficient description of the underlying object and the specific sum secured must be indicated. After the publication of a movable hypothec, third parties are presumed to be aware of the creditor’s rights.

With regard to aircraft leases, registration is just like any other security interest and must be done in the relevant personal property register.

The 15-days rule must be followed in any province following the creation of a purchase money security interest to have priority over any other security interest in the same type of collateral (in common law provinces) or to have the effects of the ownership interests being effective against third parties and retroactive to the date of registration (in Quebec).

Registration of lease interests

Summarise the process to register a lease interest.

Leases must be filed with Transport Canada to demonstrate the Canadian owner’s legal custody of an aircraft. A ‘lease’ is defined as an agreement in which the lessee has legal custody and control and the right to exclusive possession of the aircraft regarding the operation of an aircraft. The lessee is responsible for airworthiness and maintenance of the aircraft during the term of the lease. Rather than register the lease, a short-form lease is typically filed at Transport Canada to maintain the confidentiality of an operation.

Leases need not be notarised.

Leases that are subject to the Cape Town Convention must be registered at the International Registry. If there is any aircraft object involved, an international interest must be registered against the airframe and the engine.

In common law provinces, leases must be registered within 15 days of their creation to have priority over any other security interest in the same type of collateral granted by the debtor (see “What is the effect of registration of an ownership interest as to proof of title and third parties?”).

On the other hand, leases and leasing agreements can both be registered at the Register of Personal and Movable Real Rights, but there is a distinction between the two types of lease on the form. However, there is a special time requirement that applies to these types of lease over certain categories of assets, such as aircraft. If registration occurs within 15 days of their creation, the effects are retroactive to the date of creation.

A ‘lease’ is defined in the Canadian Aviation Regulations as an:

agreement in respect of the operation of an aircraft for hire or reward that specifies a commencement and termination date and, during the term of which, the lessee has legal custody and control and the right to exclusive possession and use of the aircraft.

During the term of a lease, the registered owner (ie, lessee) is responsible for maintenance and airworthiness.

For the registration process to be successful with Transport Canada, a short-form lease containing basic statutory terms must be filed, accompanied by a short-form bill of sale.

Certificate of registration

What is the regime for certification of registered aviation interests in your jurisdiction?

The following must be obtained:

 

  • a certificate of registration; and
  • a certificate of airworthiness.

In order to obtain a certificate of registration that notes the aircraft type, the serial number, the registration marks and the owner, the ‘owner’ (as defined in the Canadian Aviation Regulations) must contact Transport Canada. The certificate of registration does not convey any title to the owner.

A certificate of airworthiness is required to fly an aircraft. Applications must also be submitted to Transport Canada and the basic information in relation to the aircraft and its engine – including the manufacturer, model and serial number – must be provided by the owner. On receipt of an application, Transport Canada has five days to grant a certificate.

Once and aircraft obtains a certificate of airworthiness, it is deemed to satisfy the obligations set out in the International Civil Aviation Organisation’s (ICAO’s) Convention on International Civil Aviation and can fly through the airspace of all ICAO-contracting states.

Deregistration and export

Is an owner or mortgagee required to consent to any deregistration or export of the aircraft? Must the aviation authority give notice? Can the operator block any proposed deregistration or export by an owner or mortgagee?

See “What are the principal characteristics of deregistration and export powers of attorney?” and “If the Cape Town Convention is in effect in the jurisdiction, describe any notable features of the irrevocable deregistration and export request authorisation (IDERA) process”.

Powers of attorney

What are the principal characteristics of deregistration and export powers of attorney?

Following the adoption of the Cape Town Convention, the irrevocable deregistration and export request authorisation (IDERA) is an important document used to deregister an aircraft (see “If the Cape Town Convention is in effect in the jurisdiction, describe any notable features of the irrevocable deregistration and export request authorisation (IDERA) process”).

Cape Town Convention and IDERA

If the Cape Town Convention is in effect in the jurisdiction, describe any notable features of the irrevocable deregistration and export request authorisation (IDERA) process.

AircraftRegarding an aircraft, there are two different circumstances:

  • an IDERA was obtained and registered with Transport Canada; or
  • no IDERA was registered.

In the first situation, when the beneficiary of an IDERA seeks deregistration for the purposes of exportation, all that is required is the filing of the IDERA with Transport Canada. There are no other formalities. On reception of the filed IDERA, Transport Canada will acknowledge and confirm its receipt. Afterwards, the beneficiary may proceed by requesting the deregistration of the aircraft.

In the second situation, it is possible for a registered ‘owner’ (as defined in the Canadian Aviation Regulations) to request a deregistration by filing a requisition with the Canadian Aircraft Register. The Canadian aircraft authorities would not notify any party except the registered owner, as they do not consider the interests of beneficial owners or secured creditors.

Bilateral agreements between Canada and each of the United States, the United Kingdom and Poland authorise the occurrence of deregistration without a certificate of airworthiness for export.

Aircraft mortgagesOn an international level, when an international interest needs to be deregistered, a request must be sent to the International Registry.

In common law provinces, a discharge can be filed online using a set form. In Quebec a paper copy of a voluntary discharge form must be signed and brought to the Register of Personal and Movable Real Rights . In both cases, confirmation of registration is sent back electronically.

Aircraft leasesThe deregistration of any international security interest must be filed with the International Registry.

Under common law and civil regimes, deregistration of a lease is done in the same manner as for aircraft mortgages (described above).

If there is a change in an operator’s legal custody and control of an aircraft, the operator must provide a copy evidencing such change to the Canadian aircraft register within seven days.

Security

Security document (mortgage) form and content

What is the typical form of a security document over the aircraft and what must it contain?

In common law provinces, owners can grant a security interest (a concept introduced in the Personal Property Security Acts (PPSAs)), whereas in Quebec owners can grant a movable hypothec (under the Quebec Civil Code). Regardless of the jurisdiction, the two security instruments must be perfected through registration in the appropriate provincial register (unnecessary if registration is done under the Cape Town Convention) (see “What is the effect of registration of an ownership interest as to proof of title and third parties?”).

In Quebec, for a movable hypothec to be valid, the following conditions must be met:

  • a grantor and a secured party must be included;
  • valid secured obligations must be provided;
  • there must be capacity to alienate the property by the grantor;
  • the property should be sufficiently described in the written agreement;
  • a specific sum with a determinable interest rate must be granted for the hypothec; and
  • it must be governed by Quebec law.

In common law provinces, for a security interest to be valid, the following conditions must be met:

  • a grantor and a secured party must be included;
  • valid secured obligations must be provided;
  • a written contract must exist;
  • there must be capacity to alienate the property by the grantor;
  • the interest must be attached to the underlying collateral; and
  • notice letters must be sent to prior ranking filers within the deadline specified in the PPSA (typically before the date of registration of the purchase money security interest (PMSI)), in the case of a PMSI on aircraft, engines or airframes that are considered inventory.

Most security documents are drafted in English, but in Quebec they are drafted in French.

Security documentary requirements and costs

What are the documentary formalities for creation of an enforceable security over an aircraft? What are the documentary costs?

No documentary formalities are necessary in common law provinces or Quebec.

In Quebec when there is a syndicate of lenders, the hypothec must be notarised and granted to a hypothecary representative.

Security registration requirements

Must the security document be filed with the aviation authority or any other registry as a condition to its effective creation or perfection against the debtor and third parties? Summarise the process to register a mortgagee interest.

In Quebec, the proper jurisdiction to register a security interest for a movable property which is used in more than one jurisdiction (ie, an aircraft) is the one in which the owner is domiciled. In common law provinces the conflict of laws refers to the location of the owner. The ‘location’ of the owner is defined as follows in the different PPSAs, except for the Ontario PPSA:

  • the debtor’s place of business;
  • if the debtor has more than one place of business, the place of their chief executive office; or
  • if the debtor has no place of business, their principal residence (ie, the place of their registered office).

In Ontario, when the debtor is a corporation that has been incorporated under provincial law, the location is the jurisdiction of its incorporation. When the debtor is a corporation that has been incorporated under federal law, the location is the jurisdiction in which its registered office or head office is situated.

In sum, under Canadian law, registration should be done in the province of the location or domicile of the debtor or owner. Further, in common law provinces, all security interests under a PPSA should be registered in a financing statement that is to be filed electronically, whereas security interests in Quebec are to be published by filing an application for registration with the Register of Personal and Movable Real Rights.

PMSIs and security interests (in common law provinces) and hypothecs, leases and leasings (in Quebec) over aircraft parts are also subject to the same national registration requirements but must be individually identified.

It is prudent to register security interests over objects governed by the Cape Town Convention, both at the provincial property registry level and with the International Registry. In doing so, objects that do not fall under the definition of ‘aircraft objects’ found in the Cape Town Convention are covered by relevant security.

Registration of security

How is registration of a security interest certified?

A verification statement issued by the registrar of the applicable register would be issued by the appropriate provincial registry in common law provinces. On the other hand, certified statements of the registration issued by the registrar of the applicable register can be obtained in Quebec.

Effect of registration of a security interest

What is the effect of registration as to third parties?

The general rule for ranking is the first-to register rule. This applies to a hypothec in Quebec and a regular security interest in common law provinces. In common law provinces, a PMSI is first (expect for super-priorities and other unregistered liens) over the aircraft and proceeds thereof in most circumstances where the proper registration procedure was followed.

In Quebec there is no ranking for leases, leasings or instalment (conditional sales). If registration has been made within 15 days of the contract, the conditional seller/lessor has title to the property that is effective against third parties.

Security structure and alteration

How is security over aircraft and leases typically structured? What are the consequences of changes to the security or its beneficiaries?

The key principles in respect to trusts apply in Quebec and common law provinces. If a trustee holds the security for a group of beneficiaries and that same group gets changed, there should be no impact on the grant of the security.

Both airframes and engines can also be subject to different security instruments under Canadian law, including:

  • leasing agreements in Quebec, where the lessor (also the creditor) obtains title of the aircraft from a third party (a seller) in accordance with the instructions of the debtor and leases the property to the debtor. The lessor’s ownership over the aircraft must be registered in the Register of Personal and Movable Real Rights to be opposable to third parties;
  • sales creating a reservation of ownership (instalment sales in Quebec or conditional sales in common law provinces). This reservation of ownership originates from a contract for the sale of an aircraft. The Quebec instalment sale system gives sellers the right to retain title over an aircraft until they are fully paid by the debtor. The same mechanism also exists in the common law provinces as conditional sales. In common law provinces, a PMSI is created; and
  • a hypothec/security interest.

If the same security interests are created under a ‘security agreement’ (as defined in the Cape Town Convention), registration must be done in the International Registry. Title retentions are considered as creating security interests covered by the Cape Town Convention.

Security over spare engines

What form does security over spare engines typically take and how does it operate?

The principle of accession applies to spare parts and components of aircraft under Quebec and common law. Hence, any security interest over an aircraft extends to all spare components that are sufficiently attached thereto (it depends if this collateral is specifically included in a hypothec/security interest, lease, leasing, instalment (conditional sale)) , thus, losing its individuality.

Engines constitute a spare part and are subject to security interests; thus, it is important to consider the application of priority rules. Under certain PPSAs, a security interest that attaches to goods, which then become accessions to an aircraft, confers priority to security interests in the accessions over other security interests with respect to the aircraft has a whole.

However, it is prudent to specifically describe each spare part and/or engine in the hypothec, security interest, PMSI or title retention agreement and register against the same.

Enforcement measures

Repossession following lease termination

Outline the basic repossession procedures following lease termination. How may the lessee lawfully impede the owner’s rights to exercise default remedies?

Under a lease agreement, creditors’ rights can be enforced either before or after the lease termination.

JurisdictionCreditors can initiate proceedings seeking repossession of an aircraft in the event that the debtor defaults under a security agreement creating a security interest (or a hypothec in Quebec). They can enforce self-help remedies depending on the jurisdiction:

  • In common law provinces, self-help remedies are allowed.
  • In Quebec, self-help remedies are not allowed and any enforcement measure must be authorised by a court. With the adoption of the Cape Town Convention, self-help remedies are now permitted in the event of a default made under a lease agreement; however, they have yet to be judicially authorised. Moreover, under Quebec law, unless the debt is certain, liquid and due, a default under a hypothec agreement does not necessarily allow the enforcement of the creditor’s rights (see “Outline the basic measures to enforce a security interest”).

Enforcement of rightsIn addition to jurisdiction, enforcement depends on the right being enforced.

Particularly in Quebec, the following rights exist:

  • personal rights; and
  • in case of a lease/leasing, the right to seize or sue.

Instalment sales are more complex. Article 2 of the Bankruptcy and Insolvency Act makes the reservation of ownership here akin to a security interest (forcing the instalment seller to be involved in the bankruptcy process) and Article 1749 of the Quebec Civil Code forces an instalment seller to use a recovery process similar to those open to a hypothecary creditor.

As regards hypothecs, creditors can either:

  • take possession for purposes of administration;
  • take in payment;
  • sell; or
  • sell under judicial authority.

In common law provinces, if the lease is a conditional sale contract which contains a right to purchase or create a security interest, provincial statutes may restrict the right to take possession of an aircraft. In the event of default, the civil enforcement agency is the only one that can seize the aircraft. In lessee-initiated bankruptcy proceedings, lessors must respect a 60-day stay period pursuant to Alternative A of the Cape Town Convention. During such period, the lessee must preserve and maintain the aircraft according to the lease. Once the 60-day stay period is over, the lessee must return the aircraft to the lessor unless the default has been resolved or the lessee agrees to abide by future obligations.

If the security interest is an international interest, the substantive rules of the federal law governing enforcement on default are supplementary to the Cape Town Convention.

Secured creditors must:

 

  • apply to Transport Canada to request deregistration of the aircraft; and
  • provide evidence that either a default by the debtor has occurred or that all requirements for repossession by the creditor have been met.
Enforcement of security

Outline the basic measures to enforce a security interest. How may the owner lawfully impede the mortgagee’s right to enforce?

International security interestsWhen other forms of security interest are also international interests, enforcement will fall under the Cape Town Convention. Under the convention, the enforcement’s measures are similar to those available under federal law, except that the remedies of sale by the creditor and the judicial authority do not exist. Hence, remedies available to a creditor include:

  • taking possession or control of the aircraft;
  • selling or leasing the seized aircraft; or
  • collecting or receiving any benefits resulting from the use of the aircraft.

The court’s intervention is optional. However, remedies must be exercised in a commercially reasonable manner, which refrains the courts from interfering with the parties’ security agreement on the mode of exercising enforcement remedies.

The regime contemplated by Alternative A under Article XI of the Protocol on Matters Specific to Aircraft Equipment has been adopted by Canada and was integrated in the Bankruptcy and Insolvency Act. Strict and efficient repossession measures can now be taken. Hence, if a debtor defaults on its obligations and fails to remedy these defaults within 60 days, it must surrender possession of the aircraft in favour of the creditor.

Non-international security interestsSecured creditors can typically apply to the court to have the aircraft relinquished. In common law provinces, self-help remedies can be exercised by a creditor when:

  • the security agreement provides for self-help remedies; or
  • excessive force is not used when the aircraft is being repossessed.

In Quebec creditors must file a notice of exercise of hypothecary recourses with the Register of Personal and Movable Real Rights 20 days before repossessing the aircraft. Unlike in common law provinces, self-help remedies are prohibited in Quebec. Nevertheless, with the ratification of the Cape Town Convention, this position has been overruled with respect to aircraft objects.

The timeframe within which repossession can take place will depend on whether the enforcement is being opposed by other parties with competing claims. If there is no opposition, an order to relinquish the aircraft can be obtained in a few weeks. However, it may take up to one or two years if a trial is required.

If there is contestation, as authorised in the federal law, some provisional grounding measures may be sought, including:

 

  • a seizure before judgment in Quebec; and
  • an interim recovery judgment in the common law provinces.
Priority liens and rights

Which liens and rights will have priority over aircraft ownership or an aircraft security interest? If an aircraft can be taken, seized or detained, is any form of compensation available to an owner or mortgagee?

Despite Article 39 of the Cape Town Convention, federal law governing non-consensual rights and prior claims continue to apply following the government’s declaration. Hence, any non-consensual interests existing over an aircraft at the date of the declaration or created thereafter with a priority over a registered security interest will continue to maintain priority over any international interest. The same principle extends to the hypothec under Quebec law, which is similar to non-contractual liens available in common law provinces.

Under Canadian law, there are many types of lien that may have priority over consensual interests, such as:

  • aviation authorities’ fees – charges associated with the landing, the terminal and airport use may be imposed and collected by Canadian regulatory airport authorities. However, they cannot place a formal right to place a lien on aircraft. They may seek detention if charges are unpaid and can also apply to federal courts to obtain an ex parte seizure order, provided that the aircraft is operated by the debtor when seizure occurs;
  • custom duties – detention and forfeiture may happen when Canadian custom laws are breached, which includes failure to pay excise taxes on aircraft fuel;
  • tax obligations – detention and sale of an aircraft may happen if the debtor fails to fulfil its tax obligations under federal, provincial and municipal statutes;              
  • super-priority claims – concerning the payments that are payable under pension plans and employment insurances, the federal government has super-priorities based on the Bankruptcy and Insolvency Act;
  • repair and storage liens – a special possessory lien for unpaid repair or storage charges exists in most common law provinces and Quebec. This takes priority over consensual security interests. The lien normally remains in effect when the person that is in charge of repairing and storing the object is in possession of it. That same person gains the right to sell the aircraft if the outstanding sums are not paid within a certain timeframe;
  • other detention rights – Transport Canada reserves the right to detain an aircraft but that detention may be done on reasonable grounds, and must not be unsafe or likely to be unsafely operated.

In Quebec these do not affect the lessor in a lease/leasing and have a limited effect on an instalment seller (as stated in Article 2 of the Bankruptcy and Insolvency Act, together with Article 1749 of the Civil Code of Quebec).

Enforcement of foreign judgments and arbitral awards

How are judgments of foreign courts enforced? Is your jurisdiction party to the 1958 New York Convention?

The Canadian courts typically recognise and enforce judgments rendered by foreign courts in favour of a secured party.

Taxes and payment restrictions

Taxes

What taxes may apply to aviation-related lease payments, loan repayments and transfers of aircraft? How may tax liability be lawfully minimised?

Canada imposes a value added goods and services tax (GST) at the rate of 5% on all supplies of property and services made in or imported into Canada under Part IX of the Excise Tax Act. Some provinces (eg, Ontario, New Brunswick, Newfoundland and Labrador, Nova Scotia and Prince Edward Island) have harmonised their provincial sales tax with GST to implement the harmonised sales tax (HST). HST has the same operating rules as GST and applies to the same goods and services taxable under GST. The HST rate may vary from one province to another and applies in the participating provinces at the following rates:

  • 13% in Ontario;
  • 15% in Nova Scotia;
  • 15% in New Brunswick;
  • 15% in Newfoundland and Labrador since 1 July 2016; and
  • 15% in Prince Edward Island since 1 October 2016.

In Quebec, the supply of most property and services is subject to Quebec Sales Tax (QST) in addition to GST. QST is calculated at a rate of 9.975% on the selling price excluding GST.

In the majority of commercial activities, tax may be fully recovered through input tax credits (ITC). The registered supplier will account for GST (hereinafter references to GST also incorporate the provincial sales taxes) collected on their taxable supplies and GST paid on their inputs by remitting the difference between the tax collected and the tax paid. When the supplier paid more tax than it collected on its supplies, the excess will be refunded. Thus, GST is imposed only on the value added during each stage of the manufacture and supply process. Ultimately, consumers bear the burden of GST on their purchases as they do not register under the Excise Tax Act and are thus not entitled to recover through ITC.

Loans, leases and transfersLoansIn Canada financial products, such as loans or other forms of credits, are exempt from GST, HST and QST.

Leases Different rules apply depending on whether an aircraft is leased in or outside Canada. If a supply is made in Canada, it is taxable at the standard GST/HST rates. A supply made outside Canada is technically outside the scope of GST/HST. The law provides that where a supply is made by lease, the place of supply is determined only once under the lease agreement, at the beginning of the lease. Whether the supply of property by way of lease is made in or outside Canada is a once-and-for-all test that is irrespective of the separate-supply rule.

TransfersThe place where the transfer of ownership to the aircraft occurs is important. If the transfer of ownership and the delivery happens outside Canada, no GST is applicable. However, if the transfer of ownership and delivery occurs in Canada, GST will be applicable to the transfer unless the non-resident seller is not carrying on business in Canada, in which case a special non-resident rule will apply.

Further, unless the financier or foreign lessor is or is deemed (eg, when it has a permanent establishment in Canada) to carry on business in Canada for the purposes of the Excise Tax Act or the Income Tax Act, it does not have to pay taxes on income in Canada.

Finally, non-residents do not have to register if:

  • they do not carry on business in Canada (except if they make taxable supplies of admissions in Canada for a place of amusement, a seminar, an activity or an event held in Canada); or
  • they sell taxable real property located in Canada other than in the usual course of business.
Exchange control

Are there any restrictions on international payments and exchange controls in effect in your jurisdiction?

No.

Default interest

Are there any limitations on the amount of default interest that can be charged on lease or loan payments?

Yes, there are few Canadian interest rate rules that could create limitations on the amount of default interest that could be charged, including:

 

  • under the Criminal Code, interest rates exceeding 60% per year are criminal rates of interest; and
  • the Interest Act requires that agreements that provide daily, weekly or monthly interest to also contain an express statement of yearly rate of interest (except in real estate mortgages or hypothecs on immovable) and failure to include this statement prevents the lender from charging over 5% interest a year.
Customs, import and export

Are there any costs to bring the aircraft into the jurisdiction or take it out of the jurisdiction? Does the liability attach to the owner or mortgagee?

ImportMost goods imported into Canada are subject to federal GST, which is calculated at the rate of 5% of the duty-paid value of the shipment. This tax must be paid by the importer at the time of entry into Canada and is collected at the border. The importer, if registered for GST purposes, may claim ITC for taxes paid on the imported aircraft. The fee is C$110.

ExportsGoods and services subject to GST, under certain circumstances, could be untaxed when exported from Canada (referred to as ‘zero-rated’). The fee is C$2,500, C$400 or C$200.

Customs dutiesIn addition to import and export fees, customs duties may be collected by the Canada Border Service Agency; in other words, most imported goods are subject to GST and HST in addition to duty. Duties are established by the Department of Finance of Canada and can vary based on the type of good and the location of origin. For instance, Canada is a party to the United States-Mexico-Canada Agreement, which could reduce duties for imports and exports to the co-signatory countries.

Insurance and reinsurance

Captive insurance

Summarise any captive insurance regime in your jurisdiction as applicable to aviation.

In Canada insurance is regulated both federally and provincially by the Office of the Superintendent of Financial Institutions (OSFI) under the Insurance Companies Act.

In order to operate an aircraft, every owner of an aircraft must subscribe for liability insurance covering public liability and risks of injury to or death of passengers. The Air Transportation Regulations set minimum coverage amounts, which may be provided by a single policy or a combination of primary and excess policies, but the minimum coverage amount must be respected. Licensees must file, on an annual basis, a certificate of insurance and accompanying endorsement.

There is no requirement to obtain insurance from a domestic carrier.

Cut-through clauses

Are cut-through clauses under the insurance and reinsurance documentation legally effective?

Although there is no Canadian jurisprudence on the legal effectiveness of cut-through clauses, the OSFI has issued guidelines to ensure that the terms and conditions of insurance and reinsurance contracts are clear and stated that such clauses must not be used to frustrate the scheme of priorities under the Winding-Up and Restructuring Act. However, OSFI also recognises that there may be situations where the interests of insurers and their policyholders may be better served by the use of such clauses and does not intend to restrict its use in such situations where they do not give preferential treatment over other claims under the Winding-Up and Restructuring Act.

Reinsurance

Are assignments of reinsurance (by domestic or captive insurers) legally effective? Are assignments of reinsurance typically provided on aviation leasing and finance transactions?

Assignments of reinsurance are not usually used in aviation leasing and finance transactions in Canada.

Liability

Can an owner, lessor or financier be liable for the operation of the aircraft or the activities of the operator?

The Air Transportation Regulations require a licensed air carrier that uses the aircraft and crew of another air carrier (operating carrier) to hold liability insurance through its own insurance policy or to be named as an additional insured under the operating carrier's policy, which must include a written agreement that the operating carrier will indemnify or hold harmless the contracting carrier for passenger and public liability. This applies to any wet lease, block space and code-sharing agreements into which the two parties have entered. The only exception is where the damages are caused by the licensee’s wilful misconduct or gross negligence.

Strict liability

Does the jurisdiction adopt a regime of strict liability for owners, lessors, financiers or others with no operational interest in the aircraft?

No, only fault-based liability is applied when ordinary activities may cause accidents. Neither the owner, lessor nor financier would be held strictly liable for an operator’s actions. In fact, the operator must indemnify and hold harmless the owner, lessor or financier from liability under its insurance policy, unless wilful misconduct or gross negligence is involved.

Third-party liability insurance

Are there minimum requirements for the amount of third-party liability cover that must be in place?

Section 7 of the Air Transportation Regulations sets the minimum coverage amount for:

  • liability for risks to or death of passengers to C$300,000 per passenger seated on board of the aircraft; and
  • coverage for public liability to:
    • C$1 million if the aircraft is engaged in the service of less than 7,500 pounds;
    • C$2 million if the service is between 7,500 and 18,000 pounds; and
    • C$2 million for services of more than 18,000 pounds and an additional C$150 per number of pounds exceeding 18,000 pounds. The coverage requirements exclude the air carrier’s employees.

Update and trends

Recent developments

Are there any emerging trends or hot topics in aviation finance and leasing in your jurisdiction?

Hot topics in aviation finance and leasing in Canada include:

 

  • cannabis use – with the use of cannabis by adults now legal under Canadian law, questions have arisen as to whether pilots or staff can ever use cannabis and, if so, for how many hours must they be fully sober before they present themselves for work on an aircraft;

 

  • the application of the Foreign Extraterritorial Measures Act (Canada) to deals where US financiers with Canadian operations attempt to restrict use of the aircraft in Cuba;

 

  • issues relating to the Boeing 737 MAX; and

 

  • the Canadian Association of Airline Passengers’ Airline Passenger Bill of Rights, which took effect on 15 July 2019.