mccarthy.ca Doing Business in Canada Navigating Opportunities for Investment and Growth Cover_wspine_final.indd 1 14-03-04 9:19 AM Doing Business in Canada Navigating Opportunities for Investment and Growth mccarthy.ca Table of Contents mccarthy.ca iii TABLE OF CONTENTS Introduction 3 Canada 7 Business Organizations 11 Foreign Investment Laws* 17 Review Thresholds 18 General 21 Competition Law* 27 Merger Regulation 27 Abuse of Dominant Position 29 Criminal Violations 30 Corporate Finance and Mergers & Acquisitions 33 Public Off erings and Private Placements 33 Mergers & Acquisitions 36 Bank Loans and Other Loan Capital 43 Taxation* 47 Income Tax 47 Carrying on Business Through a Canadian Subsidiary 48 Carrying on Business in Canada Through a Branch Operation 50 Foreign Currency Controls and Repatriation of Income 51 Sales and Other Taxes 55 Federal Goods and Services Tax 55 Provincial Sales Tax 56 Provincial Payroll Taxes 56 Other Taxes 57 Manufacture and Sale of Goods 61 Regulations and Product Standards 61 Consumer Protection 62 Product Liability 63 *Information in this chapter has been updated and is current as of March 1, 2015 Table of Contents Doing Business in Canada iv Real Property 69 Land Registration Systems 69 Planning Legislation 69 Title Opinions and Title Insurance 71 Environmental Assessments 72 Non-Resident Ownership 72 Proceeds of Crime Legislation and Real Estate Developers 73 Some Taxes on the Transfer of Real Property in Canada 73 Financing 76 Common Forms of Ownership/Interest 76 Common Investment Vehicles for Real Property in Canada 77 Co-Ownership Arrangement 78 Condominiums 78 Nominees 78 Pension Funds 79 Public-Private Partnerships 83 Aboriginal Law 87 Intellectual Property* 93 Patents 93 Copyright 95 Trade-marks 96 Domain Names 97 Other Intellectual Property 98 Information Technology* 101 Export Control of Technology 101 Consumer Protection — Internet Agreements 101 Evidence Laws 102 E-Commerce Statutes 103 Anti-spam, Anti-spyware 104 Cyber-Libel 104 Jurisdiction 104 Criminal Law 105 *Information in this chapter has been updated and is current as of March 1, 2015 Table of Contents mccarthy.ca v Language* 109 Outside Québec 109 Inside Québec 109 Immigration 115 Permanent Residence 115 Work Permits 116 Temporary Entry 118 International Trade and Investment 121 The World Trade Organization 121 The North American Free Trade Agreement 122 Canada - European Union Comprehensive Trade and Economic Agreement 123 Other Free Trade Agreements 123 Bilateral Investment Treaties 124 Agreement on Internal Trade 124 Duties and Taxes on the Importation of Goods 125 Other Requirements for Imported Goods 126 Trade Remedies 127 Export and Import Controls 127 Controlled Goods Program 128 Trade Embargoes 129 Government Procurement of Goods and Services 129 Anti-Corruption Legislation 130 Employment* 135 Employment Standards 135 Labour Relations 138 Human Rights 138 Occupational Health & Safety 140 Privacy 140 Employment Benefi ts 140 Privacy Laws* 145 Environmental Regulation 151 *Information in this chapter has been updated and is current as of March 1, 2015 Table of Contents Doing Business in Canada vi Dispute Resolution 155 Canada’s Court System 155 Class Actions 156 Alternative Dispute Resolution 157 Electronic Discovery 158 Bankruptcy and Restructuring 161 Bankruptcy and Insolvency Act (BIA) 161 Companies’ Creditors Arrangement Act (CCAA) 165 Government Relations 171 Government Procurement 177 McCarthy Tétrault: A Profi le 185 Contacts at McCarthy Tétrault 186 Introduction mccarthy.ca 1INTRODUCTION INTRODUCTION Introduction INTRODUCTION mccarthy.ca 3 INTRODUCTION What are the key considerations when planning to establish or acquire a business in Canada? What are the potential opportunities, and where are the possible pitfalls? DOING BUSINESS IN CANADA WAS DEVELOPED BY McCARTHY TÉTRAULT AS A BASIC GUIDE TO THE LEGAL ASPECTS OF ESTABLISHING OR ACQUIRING A BUSINESS IN CANADA. Doing Business in Canada was developed by McCarthy Tétrault as a basic guide to the legal aspects of establishing or acquiring a business in Canada. It is written for the non-resident businessperson, but with few exceptions the same considerations apply when all parties are based in Canada. We’ve organized this guide into what we hope you’ll fi nd to be a useful and userfriendly resource. Beginning with an overview of the Canadian political and legal systems, the guide proceeds through the areas of law most likely to aff ect your business decisions: foreign investment, international trade, corporate fi nance, mergers & acquisitions, competition, taxation, intellectual property, real property and others. The discussion in each section is intended to provide general guidance, and is not an exhaustive analysis of all provisions of Canadian law with which your business may be required to comply. For this reason, we recommend you seek the advice of one of our lawyers on the specifi c legal aspects of your proposed investment or activity. With offi ces in Canada’s major commercial centres, McCarthy Tétrault has substantial presence and capabilities to help you successfully complete any business transaction in Canada. As indicated in the Table of Contents, certain chapters have been updated and are current as of March 1, 2015. Unless otherwise indicated, the information in this publication is current as of November 2013. Introduction mccarthy.ca 5INTRODUCTION CANADA Canada CANADA mccarthy.ca 7 CANADA Canada is the second-largest country in the world, with an area of approximately 10 million square kilometres and a population just under 35 million. Its developed portion constitutes less than one-third of its total territory, and roughly 50% of its population resides within about 150 kilometres of its southern boundary with the United States — in the highly industrialized corridor between Windsor, Ontario and Québec City, Québec. Canada’s two offi cial languages are English and French. As one of the eight largest economies of the industrialized countries, Canada is a member of the world’s Group of Eight (G8) industrialized nations. Currently, approximately 73% of Canada’s exports go to the United States, 5% to the European Community, 4% to the United Kingdom and 2% to Japan. Canada is by far the largest trading partner of the United States, with almost 15% more imports and exports than the U.S. has with China, and approximately three, four and six times larger than with Japan, CANADA IS A FEDERAL STATE, WITH GOVERNMENTAL JURISDICTIONS DIVIDED AMONG A NATIONAL GOVERNMENT, 10 PROVINCIAL GOVERNMENTS AND THREE TERRITORIAL GOVERNMENTS. Germany and the U.K., respectively. The Toronto Stock Exchange (TSX) and the TSX Venture Exchange rank third among North American exchanges and eighth among world stock exchanges in terms of market capitalization. More resource company stocks are listed on the TSX than anywhere else in the world. Canada is a federal state, with governmental jurisdictions divided among a national government, 10 provincial governments and three territorial governments. The Constitution Act, 1867 provides the federal and provincial governments with exclusive legislative control over enumerated lists of subjects, and also provides exclusive legislative control to the federal government over residual subjects not clearly assigned to the provincial governments. Each of Canada’s two levels of government is supreme within its particular area of legislative jurisdiction, subject to the limits provided by the Canadian Charter of Rights and Freedoms, which forms part of the Constitution Act, 1982. The federal government has legislative jurisdiction over, among other Canada Doing Business in Canada 8CANADA matters, the regulation of trade and commerce, banking and currency, bankruptcy and insolvency, intellectual property, criminal law and national defence. The provincial governments have legislative jurisdiction over, among other matters, real and personal property, civil rights, education, health care and intra-provincial trade and commerce. Certain aspects of these provincial powers are delegated to municipal governments, which enact their own bylaws. Both levels of government are based on the British parliamentary system. At the federal level, the Prime Minister is the head of government; at the provincial level, the Premiers. These individuals are the leaders of the political parties that have either the greatest number of seats in the House of Commons or the provincial legislatures, respectively — or that have, at a minimum, the support of a majority of the members of the House of Commons or provincial legislatures, respectively. When establishing or acquiring a business in Canada, one must be concerned with the federal laws as well as the laws of the provinces or territories within which the business will be conducted. In nine of the 10 provinces and in the three territories, the legal systems are based on common law. In Québec, the legal system is based on civil law. In this publication, we have chosen to refer primarily to Ontario legislation, but the legislation and programs of the other common law provinces are similar to those of Ontario. We have included references to Québec legislation — in particular, under the heading Language. Lawyers in the various offi ces of McCarthy Tétrault would be pleased to conduct a review of the federal and provincial laws and regulations and municipal bylaws relevant to your particular business operation. Introduction mccarthy.ca 9INTRODUCTION BUSINESS ORGANIZATIONS By Sven Milelli Business Organizations mccarthy.ca BUSINESS ORGANIZATIONS 11 BUSINESS ORGANIZATIONS A wide variety of legal arrangements may be used to carry on business activity in Canada. Some of the more commonly used arrangements are corporations, limited partnerships, partnerships, trusts, co-ownerships, joint ventures and unlimited liability companies. The selection of the appropriate form of business organization will depend in each case upon the circumstances of the investor, the nature of the activity to be conducted, the method of fi nancing, income tax ramifi cations and the potential liabilities related to the activity. Generally, one of the fi rst issues faced by a foreign entity contemplating carrying on business in Canada is whether to conduct the business directly in Canada as a Canadian branch of its principal business or to create a separate Canadian entity to carry on the business. The following issues should be taken into consideration before making this decision: - the treatment of Canadian business income for tax purposes in the proponent’s home country; - the advisability of isolating the assets of the principal business from claims arising out of the Canadian business; - whether one or more parties will own the Canadian enterprise; - criteria for the availability of federal, provincial and municipal government incentive programs; and - Canadian tax considerations. A foreign entity carrying on a branch operation in Canada must be registered in each of the provinces in which it carries on business. In addition, foreign entities must complete many of the same disclosures and fi lings with the federal and provincial governments as are required of Canadian corporations. Of the forms of business organization referred to above, the corporation with share capital is the entity most oft en used to carry on commercial activities in Canada. Unlike the limited partnership, partnership, trust, coownership or joint venture, the corporation is a legal entity separate from its owners. The shareholders do not own the property of the corporation, and the rights and liabilities of the corporation are not those of the shareholders. The liability of the shareholders is generally limited to the Business Organizations Doing Business in Canada 12BUSINESS ORGANIZATIONS value of the assets they have invested in the corporation to acquire their shareholdings. In addition to the advantages of limited liability, the securities of a corporation are generally more readily marketable. As a CORPORATE SHARES ARE OFTEN SEEN AS MORE ATTRACTIVE INVESTMENTS THAN UNITS IN PARTNERSHIPS OR JOINT VENTURES. result, corporate shares (and debt instruments) are oft en seen as more attractive investments than units in partnerships or joint ventures. In some situations, there may also be tax advantages to using a corporation. Unlike a corporation, a partnership is not a separate legal entity, but a relationship that exists between the parties who carry on business in common with a view to profi t. Partners share in the profi ts, losses and net proceeds on dissolution. The most signifi cant advantage of a partnership is that it is permitted to “fl ow through” losses to its partners that may, subject to certain rules in the Income Tax Act (Canada), be used as deductions against the partners’ other income. The most signifi cant disadvantage of a general partnership is that each of the partners is personally liable for the liabilities of the partnership, and their personal assets are exposed in the event the partnership assets are insuffi cient to cover such liabilities. The exposure of a partner to liability can be minimized by using a limited partnership rather than a general partnership. In a limited partnership, the liability of a limited partner is limited to the extent of its investment in the partnership, so long as it takes a passive role in the business and governance of the limited partnership. In each case, the selection of the form of business organization best suited to carry on business in Canada will depend entirely on individual circumstances. Where a corporation is the preferred vehicle for carrying on business within Canada, consideration must be given to the appropriate jurisdiction for incorporation. The nature of a corporation’s particular undertaking (e.g., banking) may be such that it falls within the exclusive legislative purview of either the federal or provincial governments, with an attendant requirement to incorporate under a specifi c statute. However, corporations not specifi cally subject to such legislation may be incorporated under the federal laws of Canada or under the laws of any one of the provinces or territories. Business Organizations mccarthy.ca 13BUSINESS ORGANIZATIONS The principal federal corporate statute is the Canada Business Corporations Act (CBCA), which is modeled on modern business statutes THERE ARE MINOR DIFFERENCES BETWEEN THE VARIOUS FEDERAL AND PROVINCIAL CORPORATE STATUTES THAT CAN AFFECT THE CHOICE OF JURISDICTION OF INCORPORATION, DEPENDING UPON THE PARTICULAR CIRCUMSTANCES. in the United States. Most provinces and territories in Canada also have their own corporate legislation, based largely on the CBCA. There are minor diff erences between the various federal and provincial corporate statutes that can aff ect the choice of jurisdiction of incorporation, depending upon the particular circumstances. A foreign investor will fi nd the following features of Canadian corporate legislation of interest: - Under the CBCA, 25% of a Canadian corporation’s directors must be “resident Canadians” (i.e., individuals resident in Canada who are either Canadian citizens or Canadian permanent residents). Directors’ residency requirements for corporations established under the laws of the provinces or territories diff er from one jurisdiction to another. Several provinces and territories have no residency requirements at all. - The board of directors of a Canadian corporation must consist of at least one individual, but can have an unlimited number of directors. - Each director must be an individual person, and a director may not appoint an alternate to serve in his or her place. - Directors are generally subject to a number of liabilities and obligations under corporate law, as well as under a range of other federal and provincial laws, including those relating to the environment, tax, securities, pensions and employment. - The shareholders of a Canadian corporation can, in most cases, enter into a “unanimous shareholders’ agreement” to restrict the powers of the board of directors. To the extent the powers of the directors are so restricted, the liabilities and obligations of the directors will generally be transferred to the shareholders. - Single shareholder corporations are permitted and directors need not hold shares in the corporation. Business Organizations Doing Business in Canada 14BUSINESS ORGANIZATIONS - Minority shareholders of a Canadian corporation have signifi cant statutory rights and remedies and eliminating minority shareholders can oft en be diffi cult and costly. - The board of a Canadian corporation must approve the corporation’s fi nancial statements annually and present them to the corporation’s shareholders. - Generally, there is no requirement to fi le a Canadian corporation’s fi nancial statements with a government body, except in the case of a public company. - The requirement that the corporation’s fi nancial statements must be audited varies by jurisdiction; in most cases it is possible for the corporation’s shareholders to consent to exempt it from the audit requirement, except in the case of a public company. - The identities of a Canadian corporation’s shareholders are not a matter of public record and a corporation is not obliged to disclose the names of its shareholders, unless it is a public company. - Meetings of the board of directors and, in certain limited circumstances, the shareholders of a Canadian corporation need not take place in Canada. - Resolutions of directors or shareholders may be passed by a written instrument signed by all of the directors or shareholders, as the case may be, in lieu of a meeting. - The statutory books and records of a Canadian corporation, including those maintained in electronic form, must be kept in Canada. United States businesses coming to Canada may, in certain circumstances, use unlimited liability companies (ULCs) as a vehicle for their business activity in Canada because of the favourable treatment aff orded to ULCs as “fl ow-through” entities under U.S. tax law. U.S. advice should be obtained. In addition, the recent changes that result from the Fift h Protocol to the U.S. Convention should be considered, as in certain circumstances they may eliminate the tax benefi ts associated with such entities or give rise to adverse tax consequences without proper tax planning. See Taxation. FOR MORE INFORMATION, PLEASE CONTACT: Richard Balfour 604-643-7915 [email protected] Introduction mccarthy.ca 15INTRODUCTION FOREIGN INVESTMENT LAWS Review Thresholds 18 General 21 By Shanon Grauer Foreign Investment Laws FOREIGN INVESTMENT LAWS mccarthy.ca 17 FOREIGN INVESTMENT LAWS* The Investment Canada Act (ICA) is the only federal foreign-investment law of general application. Certain statutory provisions restrict foreign investment and ownership in specifi c areas, including the fi nancial services, air transportation, and broadcasting and telecommunications sectors. There are also foreign-investment disincentives for media and publishing. The ICA was amended in a number of signifi cant respects, with eff ect from March 2009. These amendments are discussed below. Transactions involving “national security,” including minority investments, are now also reviewable. One of the ICA’s stated purposes is to encourage investment in WHETHER A FOREIGN INVESTOR ESTABLISHES A CANADIAN OPERATION THROUGH AN ACQUISITION OR BY STARTING UP A NEW CANADIAN BUSINESS, THE INVESTMENT MAY BE SUBJECT TO THE FOREIGN INVESTMENT REVIEW REQUIREMENTS OF THE ICA. Canada by non-Canadians, as this contributes to economic growth and employment opportunities. Two federal ministers are responsible for administering the ICA: the Minister of Industry and the Minister of Canadian Heritage and Offi cial Languages. The Minister of Industry has appointed a Director of Investments to advise and assist the Minister in administering the ICA for noncultural matters. If an investment by a non-Canadian relates to a cultural business, the Minister of Canadian Heritage and Offi cial Languages is responsible. Consequently, any required review process for cultural businesses as defi ned under the ICA will be done through Canadian Heritage instead of Industry Canada. The Minister of Canadian Heritage and Offi cial Languages has appointed a Director of Investments to advise and assist the Minister in administering the ICA for cultural matters. Whether a foreign investor establishes a Canadian operation through an acquisition or by starting up a new Canadian business, the investment may be subject to the foreign investment review requirements of the ICA. Investments to establish a new Canadian business, and acquisitions of control of existing businesses that do not exceed applicable thresholds, are subject to “notifi cation,” which requires only the fi ling *Updated and current as of March 1, 2015 Foreign Investment Laws Doing Business in Canada 18FOREIGN INVESTMENT LAWS of a short information form either before or shortly aft er completion of the transaction. However, investments to acquire control of Canadian businesses that exceed applicable thresholds are subject to “review,” which requires the fi ling of more detailed information concerning the target business and the investor’s plans for it. The review process generally takes at least 45 days and focuses on whether the proposed transaction “is likely to be of net benefi t to Canada.” Review Thresholds Generally, when a non-Canadian is acquiring control of a Canadian INVESTMENTS TO ACQUIRE CONTROL OF CANADIAN BUSINESSES THAT EXCEED APPLICABLE THRESHOLDS ARE SUBJECT TO “REVIEW.” business, review by the Minister-appointed Director and approval by the Minister are required in the following cases: - Where there is a direct acquisition of control of a Canadian business through the acquisition of voting shares of a corporation incorporated in Canada or through the acquisition of voting interests of a non-share capital corporation, partnership, trust or joint venture carrying on that business, or by the acquisition of substantially all of the assets used to carry on that business, the book value of the assets of the Canadian business is $5 million or more. - Where there is an indirect acquisition of control of a Canadian business through, for example, the acquisition of the foreign parent of a corporation incorporated in Canada if either a) the Canadian business has assets of $50 million or more in value, or b) the Canadian business represents more than 50% of the assets of the acquired group of entities and the Canadian business has assets of $5 million or more in value. The value of the assets is usually calculated by using book values based on the most recent audited fi nancial statements for the relevant entity. As a result of the North American Free Trade Agreement (NAFTA), the Agreement Establishing the World Trade Organization (WTO), amendments made pursuant to the renegotiation of the General Agreement on Tariff s and Trade (GATT) and the policy of the Director, the thresholds for review referred to above are modifi ed in some instances with respect to the acquisition of control of a Canadian business, by what the ICA defi nes as a “WTO Investor” (a person or entity from countries Foreign Investment Laws mccarthy.ca 19FOREIGN INVESTMENT LAWS that are members of the WTO), or by another non-Canadian where the Canadian business is controlled by a WTO Investor. These modifi cations are made in the following cases: - For the direct acquisitions referred to above, the threshold value of assets of the Canadian business that will trigger the review requirement for an acquisition by or from a WTO Investor is increased from $5 million to $369 million for 2015 (this threshold is adjusted at the beginning of each calendar year for infl ation and economic growth). However, the March 2009 amendments and April 2013 amendments aff ect the review thresholds as described below. - For indirect acquisitions by or from a WTO Investor, there will be no review, regardless of the value of Canadian assets. Review may be required if the investment involves either the acquisition of control of a Canadian business (regardless of the value of the assets) or the establishment of a new Canadian business in an area concerning Canada’s “cultural heritage or national identity.” Areas of “cultural heritage and national identity” include book publishing, magazine publishing, fi lm production and distribution, television and radio and music production and distribution. With certain exceptions, a non-Canadian may not implement a reviewable investment until the investment has been reviewed and the Minister is satisfi ed, or deemed to be satisfi ed, that the investment “is likely to be of net benefi t to Canada.” If the Minister initially decides that the investment will not be of such benefi t, the non-Canadian will be given an opportunity to make representations and submit undertakings with respect to the investment with a view to satisfying these requirements. In determining “net benefi t to Canada,” the Minister is required to give consideration to: - the eff ect of the investment on the level and nature of economic activity in Canada; - the degree and signifi cance of participation by Canadians in the Canadian business and the industry of which it forms a part; - the eff ect of the investment on productivity, industrial effi ciency, technological development and product innovation and variety in Canada; Foreign Investment Laws Doing Business in Canada 20FOREIGN INVESTMENT LAWS - the eff ect of the investment on competition within an industry in Canada; - the compatibility of the investment with national industrial, economic and cultural policies; and - the contribution of the investment to Canada’s ability to compete in IN DECEMBER 2007, THE MINISTER OF INDUSTRY ISSUED GUIDELINES THAT APPLY TO REVIEWABLE TRANSACTIONS FOR THE ACQUISITION OF CONTROL OF A CANADIAN BUSINESS, WHERE THE PROPOSED ACQUIROR IS AN ENTERPRISE CONTROLLED DIRECTLY OR INDIRECTLY BY A FOREIGN GOVERNMENT. world markets. In December 2007, the Minister of Industry issued guidelines that apply to reviewable transactions for the acquisition of control of a Canadian business, where the proposed acquiror is an enterprise controlled directly or indirectly by a foreign government (“state-owned enterprise”). The guidelines refl ect the potential concerns the Minister may have regarding the “governance and commercial orientation” of some state-owned enterprises. The guidelines specify that the Minister will examine the corporate governance and reporting structure of the state-owned enterprise, and that part of this examination will include whether the state-owned enterprise adheres to Canadian standards of corporate governance — including, for example, commitments to transparency and disclosure, independent members of the boards of directors, independent audit committees, equitable treatment of shareholders and adherence to Canadian laws and practices. In making the net benefi t determination, the guidelines state that the Minister will assess whether the Canadian business to be acquired by the state-owned enterprise will continue to have the ability to operate on a commercial basis and specify a number of important indications. These include where exports go, where processing takes place, the participation of Canadians in the operations and the level of capital expenditures to maintain the Canadian business. A state-owned enterprise can therefore anticipate that it may be required to provide undertakings beyond those normally expected of a privately owned company, in order to secure approval by the Minister. Foreign Investment Laws mccarthy.ca 21FOREIGN INVESTMENT LAWS In December 2012, the Prime Minister of Canada announced that two state-owned enterprises would be permitted to acquire control of Canadian businesses. One was CNOOC’s acquisition of Nexen Inc., the other was Petronas’ acquisition of Progess Energy Resources Corp. At the same time, the Prime Minister announced important changes to Canada’s policy for reviewing investments in Canada by stateowned enterprises. These new guidelines indicate that the rules will be changing. The Prime Minister stated that in the future, while each case will be examined on its own merits, the Minister of Industry will fi nd the acquisition of control of a Canadian oil sands business by a foreign stateowned enterprise to be of net benefi t (and therefore allowed) only in exceptional circumstances. It remains to be seen what the rules will be in other economic sectors besides energy. On April 29, 2013, the Government of Canada introduced Bill C-60 which, eff ective June 26, 2013, amended the ICA by codifying the defi nition of “state-owned enterprise” (SOEs) to include an entity controlled or infl uenced, directly or indirectly, by a government or agency of a foreign state. This amendment also gives the Minister under the ICA retroactive power to determine that an entity is controlled in fact by a SOE and also retroactive power to determine whether there has been an acquisition of control in fact by a SOE. The Bill will also allow the government to extend the timeline for natural security reviews. As of Nov. 12, 2013, the Bill has not come into force. It is worth noting that in October 2013 there was the rejection of Allstream (Manitoba Telecom Services’ network subsidiary) proposed acquisition by Accelero Capital, a corporation controlled by the Egyptian billionaire Naguib Sawiris. While the Industry Minister referenced the national security provisions of the Investment Canada Act, exactly what threat is posed was left unsaid other than the comment “MTS Allstream operates a national fi bre-optic network that provides critical telecommunications services to businesses and governments, including the Government of Canada.” General Presently, not all investments in Canadian businesses by non-Canadians are subject to review or notifi cation under the ICA. For example, the ICA contains a number of exempt transactions, such as the acquisition of shares by a person whose business is dealing in securities. An investment Foreign Investment Laws Doing Business in Canada 22FOREIGN INVESTMENT LAWS to acquire an interest in an existing Canadian business that does not result in an acquisition of control under the ICA will also generally not be subject to notifi cation or review. Information submitted under the ICA is treated as confi dential and, subject to certain exceptions, will not be disclosed to the public. It is also subject to the Minister’s new powers, described below. Compliance with provisions of the ICA does not bar review or action by the Competition Bureau under the merger provisions of the Competition Act. See Competition Law. As indicated, care must be taken to ensure that the ICA’s requirements are met and that compliance is achieved with any legislation relating to foreign investment restrictions applicable to specifi c industries or activities. Some of the signifi cant changes included in the March 2009 amendments to the ICA are: - Increase of WTO thresholds. The thresholds for review of WTO investments in a Canadian business will be increased to $600 million, $800 million and $1 billion, respectively, over the next several years. Aft er that, the applicable threshold will be determined on an annual basis using a prescribed formula. This may decrease the number of investments that are subject to pre-closing review. It is worth noting that, pursuant to the April 2013 amendments, SOEs will remain subject to the current lower $354 million threshold. Investments by non-Canadians will still be subject to an obligation to submit a postclosing notifi cation. - Removal of most sector-specifi c thresholds. The $5 million threshold for investments in transportation businesses, fi nancial services businesses and uranium businesses has been removed, but will be maintained for investments in cultural businesses and certain direct investments by non-WTO investors. Pre-closing review for transportation and uranium investments may still be subject to preclosing government scrutiny. The Minister of Transport conducts preclosing reviews of proposed transactions involving a transportation undertaking that raise public interest issues and that exceed the prenotifi cation thresholds under the Competition Act. Further, although Foreign Investment Laws mccarthy.ca 23FOREIGN INVESTMENT LAWS the lower threshold for certain businesses has been repealed in the ICA, the new national security review criteria described above could still provide a mechanism for the Minister to review investments in a uranium business at the Minister’s option. - Thresholds based on “enterprise value.” Currently, the threshold for THE GOVERNMENT HAS THE AUTHORITY TO REVIEW PROPOSED INVESTMENTS (INCLUDING MINORITY INVESTMENTS) WHERE THE RESPONSIBLE MINISTER HAS “REASONABLE GROUNDS TO BELIEVE THAT AN INVESTMENT BY A NON-CANADIAN COULD BE INJURIOUS TO NATIONAL SECURITY.” review is based on the aggregate value of all assets being acquired as shown in the fi nancial statements for the Canadian business for the prior year. The calculation will be changed from one based on the value of assets to one based on “enterprise value,” to be defi ned in regulations that are still pending and a Regulatory Impact Analysis Statement, a draft of which have been Gazetted. The following will likely apply: (a) In the case of a Canadian business that is a publicly traded entity, the enterprise value of the assets of the Canadian business will be calculated as the market capitalization of the entity, plus its liabilities, minus the entity’s cash and cash equivalents. (b) In the case of a Canadian business that is not a publicly traded entity, or where there is an acquisition of all or substantially all of the assets, the enterprise value of the assets of such a business will continue to be calculated according to the current method of valuation. In other words, the enterprise value will continue to be the book value of the Canadian business’ gross assets. (c) In the case of state-owned enterprises that are controlled by a WTO member, the current review threshold based book value will continue to apply and will be updated each year, in accordance with the ICA. This threshold is determined by calculating the growth in Normal Gross Domestic Product at market prices as published by Statistic Canada for specifi ed periods, multiplied by the amount determined for the previous year. - Vague criteria and potentially broad review. The government has the authority to review proposed investments (including minority Foreign Investment Laws Doing Business in Canada 24FOREIGN INVESTMENT LAWS investments) where the responsible Minister has “reasonable grounds to believe that an investment by a non-Canadian could be injurious to national security.” No fi nancial threshold will apply to a national security review and there is no defi nition of “national security.” The government may deny the investment, ask for undertakings, provide terms or conditions for the investment or, where the investment has already been made, require divestment. Review can occur before or aft er closing and may apply to corporate reorganizations where there is no change in ultimate control. Regulations are still pending on this topic. - Information produced can be shared with other investigating agencies. The Minister will be able to compel a party to provide information within the context of a review application that the Minister “considers necessary.” In addition, for information produced with respect to a national security review, the Minister may communicate this information to prescribed investigative bodies, which may also disclose the information to others for the purposes of that agency’s investigation. Generally, information provided to the Minister in the context of investment review is protected from disclosure to other government agencies unless necessary for the purposes of the administration and enforcement of the ICA. FOR MORE INFORMATION, PLEASE CONTACT: Oliver Borgers 416-601-7654 [email protected] Introduction mccarthy.ca 25INTRODUCTION COMPETITION LAW Merger Regulation 27 Abuse of Dominant Position 29 Criminal Violations 30 By Oliver Borgers Competition Law COMPETITION LAW mccarthy.ca 27 COMPETITION LAW* The federal Competition Act (Act) provides for criminal sanctions against persons involved in agreements with competitors that fi x prices, restrict supply or allocate customers or markets, or that are involved in bid-rigging, deceptive telemarketing, or wilful or reckless misleading advertising off ences. A civil regime regulates the less egregious forms of misleading advertising. The Act also contains non-criminal or administrative provisions that allow the Competition Tribunal, on application by the Commissioner of Competition, to review certain business practices, and, in certain circumstances, to issue orders prohibiting or correcting conduct to eliminate or reduce its anticompetitive impact. Reviewable practices include mergers, agreements among competitors, abuse of dominant position, or monopoly, and a number of vertical practices between suppliers and customers such as price maintenance, tied selling, refusal to supply and exclusivity arrangements. Private parties are also able to apply to the Competition Tribunal to challenge certain types of reviewable conduct, such as price maintenance, exclusive dealing, tied selling and refusal to deal. The Competition Tribunal also has the power to impose BECAUSE OF THE SMALL SIZE OF THE CANADIAN DOMESTIC ECONOMY, GREATER CONCENTRATION MAY BE ACCEPTABLE IN CERTAIN INDUSTRIES. monetary penalties for abuse of dominant position. Merger Regulation Mergers, meaning the acquisition of control over a signifi cant interest in the whole or a part of a business, do not require advance approval under the Act, although they may be subject to pre-merger notifi cation requirements (described below). If the Commissioner of Competition believes that a merger is likely to prevent or lessen competition substantially, and the Commissioner of Competition challenges the merger before the Competition Tribunal, the merger is then subject to review by the Competition Tribunal. If an adverse fi nding is made, the Competition Tribunal may issue an order preventing or dissolving the merger in whole or in part. The Act includes a list of criteria to be considered by the Competition Tribunal when determining whether a merger substantially lessens competition. Such criteria are generally similar to those found in U.S. case law, although their application may be diff erent. Because of the small size of the Canadian domestic economy, greater concentration may be acceptable in industries *Updated and current as of March 1, 2015 Competition Law Doing Business in Canada 28COMPETITION LAW where even a relatively high percentage of the Canadian market would still not allow for optimal effi ciency and international competitiveness. This is why the thresholds that could trigger government review, such as those relating to market share, will in many industries be higher in Canada than in the U.S. Larger mergers require pre-merger notifi cation and the fi ling of information with the Commissioner of Competition. Generally, for a merger to be notifi able (i.e., subject to pre-merger notifi cation), two threshold tests must be met: the “size of parties test” and the “size of transaction test.” Under the “size of parties test,” the parties to the transaction, together with their respective affi liates (defi ned to include all corporations joined by a 50%-plus voting link), must have assets in Canada or gross revenues from sales in, from and into Canada in excess of $400 million in the aggregate. The size of transaction threshold is met where the assets in Canada or gross revenues from sales in and from Canada generated by such assets exceeds a stipulated amount (an annually adjusted amount). The 2015 Act “size of transaction” threshold is $86 million, which is expected to increase in 2016. In general and with certain exceptions, these asset and revenue values are calculated using book values based on the most recent audited fi nancial statements for the relevant entity. Pre-merger notifi cation involves the fi ling of a notifi cation form with the Commissioner of Competition. A transaction that is subject to pre-merger notifi cation may not be completed until the applicable waiting period has expired. The initial waiting period is 30 days. If, within this initial period, the Commissioner of Competition issues a supplementary information request (SIR), then the waiting period is extended to 30 days aft er a complete response to the SIR has been provided to the Commissioner of Competition. Unlike the Investment Canada Act, where the relevant minister approves the proposed transaction, the passing of the applicable waiting period under the Act does not preclude the Competition Bureau from subsequently opposing the merger at any time within one year aft er the merger has been completed. Accordingly, while a transaction may be completed aft er the expiry of the relevant waiting period, the parties will generally wait until they receive an indication from the Commissioner of Competition that the transaction will not be challenged before they complete the transaction. The Commissioner of Competition’s review of Competition Law mccarthy.ca 29COMPETITION LAW complex mergers may take longer than the applicable statutory waiting period. It is possible in some circumstances to obtain an Advance Ruling Certifi cate (ARC) from the Commissioner of Competition and thereby avoid the pre-merger notifi cation process. If an ARC is issued in respect of IT IS POSSIBLE IN SOME CIRCUMSTANCES TO OBTAIN AN ADVANCE RULING CERTIFICATE FROM THE COMMISSIONER OF COMPETITION AND THEREBY AVOID THE PRE-MERGER NOTIFICATION PROCESS. a proposed transaction, the Commissioner of Competition will thereaft er be precluded from challenging the transaction, assuming there are no material changes in circumstances prior to closing. It should be noted, however, that the granting of an ARC is discretionary, and that ARCs are typically issued only when it is clear the merger raises no competition issues. The Commissioner of Competition can also, in lieu of issuing an ARC, exempt the transaction from notifi cation and issue a “no action letter” indicating that the Commissioner of Competition does not have grounds to challenge the transaction, which is usually suffi cient comfort for the merging parties to proceed. A $50,000 fi ling fee is payable in respect of any transaction that is subject to pre-merger notifi cation. Abuse of Dominant Position Abusing a dominant position in a market constitutes a reviewable practice that could give rise to an order (including monetary penalties up to $15 million) by the Competition Tribunal if it results in a substantial lessening of competition. To start with, there must be a dominant position or control of a market. A monopoly is not a prerequisite, but there must be a relatively high market share such that the dominant fi rm or fi rms can, to a substantial degree, dictate market conditions and exclude competitors. There must also be an abuse of such dominant position by the practice of anti-competitive acts. There is nothing wrong with market dominance as such; what causes a problem is the adoption by a dominant player of predatory or exclusionary business tactics. When a dominant fi rm attempts to exclude potential competitors or to eliminate existing competition, the Competition Tribunal can be called upon to intervene. It is not always easy to distinguish competitive from anti-competitive practices. There is nothing wrong with tough competition, even from a dominant fi rm. However, when a fi rm’s intention is to eliminate competition or prevent entry into or expansion in a market, there could Competition Law Doing Business in Canada 30COMPETITION LAW be an abuse of dominant position. The Act includes a non-exhaustive list of anti-competitive acts. These include selling at prices lower than acquisition costs in order to discipline or eliminate a competitor, inducing a supplier to refrain from selling to competitors, or a vertically integrated supplier charging more advantageous prices to its own retailing divisions. Predatory pricing is also a practice that could constitute an anticompetitive act. Criminal Violations It is a crime under the Act (subject to available defences) to enter into an agreement or arrangement with a competitor to fi x prices for the supply of a product, allocate customers or markets for the production or supply of a product, or restrict the production or supply of a product. It is also a crime to engage in bid-rigging. These practices are prohibited regardless of their eff ect on competition. Deceptive telemarketing and wilful or reckless misleading advertising are also off ences under the Act. Penalties for persons found guilty of such activities include imprisonment for up to 14 years and/or multi-million dollar fi nes. A violation of the criminal provisions of the Act can also result in a civil suit for damages by the person or persons who have suff ered a loss as a result of such violation. FOR MORE INFORMATION, PLEASE CONTACT: Oliver Borgers 416-601-7654 [email protected] Introduction mccarthy.ca 31INTRODUCTION CORPORATE FINANCE AND MERGERS & ACQUISITIONS Public Off erings and Private Placements 33 Mergers & Acquisitions 36 By Ian Michael and Benjamin Silver Corporate Finance and Mergers & Acquisitions mccarthy.ca CORPORATE FINANCE AND MERGERS & ACQUISITIONS 33 CORPORATE FINANCE AND MERGERS & ACQUISITIONS Canada has well-developed and sophisticated capital markets. The main sources of capital are Canadian chartered banks, other fi nancial institutions (including pension funds, mutual funds and insurance companies), public markets and government agencies. Securities of Canadian and foreign public companies can be listed and traded on one or more of Canada’s stock exchanges. The Toronto Stock Exchange (TSX) is the country’s largest stock exchange. Canada also has active over-the-counter markets for a variety of other securities, including, in particular, debt securities. Canadian chartered banks are the principal source of revolving lines of credit and term loans. Public Off erings and Private Placements In Canada, securities law is currently regulated under provincial jurisdiction and consequently, each Canadian province and territory currently has its own separate securities regulator as well as its own securities legislation. Nonetheless, securities legislation in Canada is largely harmonized through the use of national and multilateral instruments adopted by an umbrella organization comprising all of the provincial securities regulators (the Canadian Securities Administrators or CSA) and implemented as law by the provinces. Further, the “principal regulator” or “passport” system adopted by each province of Canada (other than Ontario, which has Canada’s largest capital market) allows many aspects of securities law to be eff ectively regulated by only one participating jurisdiction (i.e., the “principal regulator” in the circumstances), in addition to Ontario. These aspects include the review and receipt of prospectuses, compliance with continuous disclosure obligations and obtaining exemptions from various provisions of securities law. In September 2013, two provinces, Ontario and British Columbia, agreed with the federal government to establish an independent Cooperative Capital Markets Regulator with a head offi ce in Toronto that would regulate securities markets in Ontario and British Columbia and any other Canadian jurisdiction that later joins the organization under a single set of regulations. This combined regulator is proposed to be operational sometime in 2015. When debt or equity securities are off ered to the public in Canada, whether as part of an initial public off ering or not, a prospectus must Corporate Finance and Mergers & Acquisitions Doing Business in Canada 34CORPORATE FINANCE AND MERGERS & ACQUISITIONS be fi led with the securities regulatory authorities in those provinces and territories where the securities are being off ered. The prospectus will be reviewed by the principal regulator under the passport system described above. A copy of the prospectus must also be provided to potential investors. The prospectus must contain full, true and plain disclosure of the nature of the securities being off ered and the business of the issuer. Where securities are being off ered in Québec, the prospectus must be translated into French. The requirement to prepare a prospectus can be avoided where the THE REQUIREMENT TO PREPARE A PROSPECTUS CAN BE AVOIDED WHERE THE SECURITIES ARE OFFERED ON A EXEMPT BASIS EXCLUSIVELY TO INSTITUTIONAL OR OTHER “ACCREDITED INVESTORS” BY WAY OF A PRIVATE PLACEMENT. securities are off ered on an exempt basis exclusively to institutional or other “accredited investors” by way of a private placement, although in such cases market practice may nonetheless dictate the delivery to investors of an “off ering memorandum” containing disclosure that is oft en substantially equivalent to a prospectus. There are a number of other prospectus exemptions, including those for the issue of securities by “private issuers” or to employees, or the issue of short-term commercial paper with an approved rating and bank debt, in which case generally either no disclosure document or an abbreviated one is used. Securities sold on an exempt basis may be subject to resale restrictions. Shareholders of Canadian public companies are not generally aff orded statutory or contractual pre-emptive rights. Accordingly, new equity issues are typically eff ected by way of public off ering or private placement, rather than by way of rights off erings to existing shareholders. Issuers with equity securities listed on certain Canadian exchanges can take advantage of Canada’s short-form prospectus distribution system, which enables capital to be raised in the public markets quickly by preparing and fi ling a shorter prospectus that incorporates by reference the issuer’s most recent fi nancial statements and other continuous disclosure documents. Generally, issuers eligible for this system can clear a prospectus with the provincial securities authorities within four business days of fi ling a preliminary prospectus. In the case of more Corporate Finance and Mergers & Acquisitions mccarthy.ca 35CORPORATE FINANCE AND MERGERS & ACQUISITIONS senior issuers, it is common for Canadian underwriting syndicates to enter into a “bought deal” arrangement. This constitutes an enforceable agreement by the underwriters to purchase the securities being off ered for sale, even before the fi ling of a preliminary prospectus, with the result that the syndicate incurs the risk of price fl uctuations in the market from the time of signing the “bought deal” letter with the issuer until the closing of the off ering. In such cases, a preliminary prospectus must be fi led within four business days of the signing of the bought deal letter, and the syndicate may begin to solicit purchasers immediately upon signing the letter. For issuers that do not qualify under the short-form system, prospectus clearance can oft en take from three to six weeks, and sometimes longer. Canadian securities laws also provide issuers with the ability to fi le a base shelf prospectus for an aggregate dollar amount of securities (which may be unallocated between debt, equity and other securities) for subsequent issuance over a period of up to 25 months. At the time of an actual distribution of securities qualifi ed by the base shelf prospectus — and not later than two business days aft er the determination of the off ering price of the securities — the issuer simply fi les a relatively brief supplement to the prospectus containing the specifi c terms of the securities then being off ered, as well as any additional information that was not available to the issuer at the time the prospectus was fi led. Although there are exceptions (e.g., where innovative, structured or derivative products are being distributed), supplements to the base shelf prospectus are not reviewed, allowing issuers to act quickly and take advantage of narrow windows of opportunity for fi nancing in the markets. An issuer fi ling a prospectus, listing its securities on a Canadian stock exchange or acquiring a Canadian reporting issuer through a share exchange transaction, will become a “reporting issuer,” and thereby become subject to various continuous and timely disclosure obligations. These include the requirement to prepare and fi le quarterly and annual fi nancial statements and the related management’s discussion and analysis, as well as an annual information form and reports with respect to material changes in the aff airs of the issuer. Directors, offi cers and other “insiders” of the issuer will be required to fi le reports with respect to any trading they conduct in securities of the issuer and will be precluded from trading in the issuer’s securities if they possess any Corporate Finance and Mergers & Acquisitions Doing Business in Canada 36CORPORATE FINANCE AND MERGERS & ACQUISITIONS material non-public information about the issuer. Management information circulars must be prepared for annual and special shareholder meetings and must contain prescribed disclosure, including comprehensive disclosure on executive compensation in the case of annual general meetings or other meetings where directors will be elected or executive compensation will be voted on. CERTAIN FOREIGN ISSUERS THAT HAVE BECOME REPORTING ISSUERS IN CANADA MAY GENERALLY SATISFY THEIR ONGOING CONTINUOUS DISCLOSURE OBLIGATIONS IN CANADA BY FILING THEIR HOME JURISDICTION DOCUMENTS. Foreign issuers that meet certain conditions and have become reporting issuers in Canada, whether by listing on a Canadian exchange or by acquiring a Canadian reporting issuer through a share exchange transaction, may generally satisfy their ongoing continuous disclosure obligations in Canada by fi ling their home jurisdiction documents. The CSA has adopted various instruments modeled on U.S. Sarbanes-Oxley legislation. These include a national instrument on auditor oversight, a national instrument requiring CEO and CFO certifi cations and a national instrument on audit committees. In addition, a national instrument and a national policy have been adopted on corporate governance. The latter sets out guidelines for corporate governance; the former requires issuers to disclose, on an annual basis, their corporate governance practices. Canadian and U.S. securities regulatory authorities have implemented a multi-jurisdictional disclosure system (MJDS) that enables securities of large U.S. issuers to be off ered to the public in Canada using a U.S. registration statement that has been reviewed only by the U.S. Securities and Exchange Commission (SEC). Corporations with securities listed on a Canadian stock exchange are subject to the rules and regulations of that exchange. Mergers & Acquisitions Take-Over Bids (Tender Off ers) Harmonized provincial and territorial securities laws regulate the conduct of any public take-over bid. A public take-over bid is defi ned generally as an off er made to a person in a Canadian province or territory to acquire Corporate Finance and Mergers & Acquisitions mccarthy.ca 37CORPORATE FINANCE AND MERGERS & ACQUISITIONS voting or equity securities of a class of securities, which, if accepted, would result in the acquiror (together with persons acting in concert with the acquiror) owning 20% or more of the outstanding securities of such a class of a target company. A take-over bid must off er identical consideration to all shareholders, with no “collateral benefi t” to any shareholder permitted and must be open for acceptance for 35 days. The bidder must provide shareholders of the target company with a circular containing prescribed information about the off er, as well as prospectuslevel disclosure about the acquiror (including pro forma fi nancial statements) if its shares form part of the consideration being off ered. If the bidder is a TSX-listed company and is issuing shares under the off er (whether structured as a take-over bid or as a “business combination” discussed below) that would cause dilution to its shareholders of more than 25%, it will be required by the TSX to seek approval from its own shareholders prior to completing such an off er. The directors of the target company must also send a circular to shareholders that includes the board’s recommendation as to whether the shareholders should accept the off er or, if the board declines to make a recommendation, an explanation of why no recommendation has been made. Both the bid circular and the directors’ circular must be translated into French if the take-over bid is being made in Québec (unless a de minimis or other exemption from the translation requirement is obtained in Québec). When the bid is made by an “insider” of the target company, special rules apply. In particular, a formal valuation of the target company’s shares prepared by an independent valuator under the supervision of an independent committee of the target company’s board will generally be required. Certain take-over bids are exempt from compliance with the foregoing requirements. These include: transactions involving the acquisition of securities from not more than fi ve shareholders of the target company, provided that the price paid does not exceed 115% of the prevailing market price; normal course purchases on an exchange not exceeding 5% of the issuer’s outstanding securities in a 12-month period; the acquisition of securities for which there is no published market of a company that is not a reporting issuer and has fewer than 50 shareholders exclusive of current or former employees; and foreign take-over off ers where, inter alia, the number of shares held benefi cially by Canadian shareholders is reasonably believed to be less than 10% of Corporate Finance and Mergers & Acquisitions Doing Business in Canada 38CORPORATE FINANCE AND MERGERS & ACQUISITIONS the total outstanding shares, and Canadian shareholders are entitled to participate on terms at least as favourable as other shareholders. Generally, under corporate statutes, where a bidder successfully acquires 90% of the voting shares of a target company (other than shares held by it or its affi liates prior to making the off er) pursuant to a public takeover bid made to all shareholders, the shares of those who did not tender their shares to the off er can be acquired at the same price as under the off er pursuant to a statutory compulsory acquisition procedure. Where this procedure is not available because the 90% threshold has not been reached, but at least 66 ⅔% of the outstanding shares have been acquired under the bid, the shares of the remaining shareholders who did not tender their shares to the off er may also generally be acquired by way of a business combination (see below) at the same price as under the off er. Notice is required to be given to the market pursuant to “early warning” disclosure requirements in the event of an acquisition of equity or voting securities representing 10% (5% where a take-over bid has already been made) of a class of securities of a target company (including shares benefi cially owned by the purchaser and its joint actors). The purchaser must give this notice to the market by issuing a press release forthwith and fi ling, within two business days, an “early warning” report in the prescribed form (which must include disclosure of investment intention on the part of the purchaser including with respect to the acquisition of additional securities of the class). A press release is required to be issued and an additional report fi led if there is a change in a material fact contained in a prior report, or upon the acquisition of a further 2% of the class of securities. In 2013, a proposal was made to, among other things, lower the disclosure threshold under the early warning disclosure regime to 5% and to limit the ability of certain passive institutional investors to take advantage of an alternative reporting system of summary monthly reporting if they were engaged in certain activities generally associated with shareholder activists. Such proposal is still under review by the securities regulatory authorities at this time. Business Combinations Acquisitions of Canadian public companies are frequently eff ected not Corporate Finance and Mergers & Acquisitions mccarthy.ca 39CORPORATE FINANCE AND MERGERS & ACQUISITIONS by way of a take-over bid but through a “business combination,” i.e., a statutory procedure, such as an amalgamation, consolidation or plan of arrangement, under the target company’s corporate statute. This business combination requires approval by the target company’s shareholders at a meeting held for such a purpose. In such a case, a management information circular containing prescribed information will be prepared by the target company and mailed to its shareholders. The plan of arrangement is the most common form of business combination, as it provides maximum fl exibility for various aspects of a transaction that might not be possible to eff ect under another statutory procedure, and will generally permit securities of the off eror to be issued to U.S. holders of the target company without requiring such securities to be registered in the U.S. Plans of arrangement require both court approval (based on a fi nding that the arrangement is “fair and reasonable” to aff ected stakeholders) and shareholder approval (generally by a majority vote of 66 ⅔%). If the acquiror in the business combination is related to the target company or if a related party is receiving a “collateral benefi t,” certain special rules will generally apply. In particular, approval by a majority of minority shareholders (i.e., shareholders unrelated to the acquiror or any related party who receives a collateral benefi t) will generally be required, in addition to the shareholder approval required under applicable corporate law. Where the related party is acquiring the target company or is a party to a concurrent “connected transaction” of a certain threshold size, then a formal valuation of the target company shares, prepared by an independent valuator under the supervision of the target company’s board or an independent committee of directors, may be required. Related-Party Transactions The securities laws of certain Canadian provinces contain complex rules governing transactions between a public company and parties that are related to it (i.e., major shareholders, directors and offi cers) and that are of a certain threshold size. These rules are designed to prevent related parties from receiving a benefi t from a public company to the detriment of its minority shareholders without their approval. FOR MORE INFORMATION, PLEASE CONTACT: David Tennant 416-601-7777 [email protected] Introduction mccarthy.ca 41INTRODUCTION BANK LOANS AND OTHER LOAN CAPITAL By Stephen Furlan Bank Loans and Other Loan Capital BANK LOANS AND OTHER LOAN CAPITAL mccarthy.ca 43 BANK LOANS AND OTHER LOAN CAPITAL Bank loans in Canada are readily available from sophisticated domestic banks as well as from non-Canadian foreign bank subsidiaries and Canadian branches of non-Canadian banks. The Canadian banking system is well regulated and Canadian banks are well capitalized. The Canadian banking system won international praise for its resiliency in the recent global banking crisis and bank credit continues to be available in Canada. Canada also has competitive non-bank lenders that are particularly active in the asset-based loan, mezzanine debt and project fi nance markets. As well, there are two federal government fi nancial institutions that provide fi nancing — the Business Development Bank of Canada, which off ers fi nancing to small- and medium-sized businesses; and Export Development Canada, which is specifi cally targeted to assist Canadian exporters with fi nancing. Floating-rate loans are oft en indexed to a “prime rate” set by a Canadian bank on a periodic basis and based on the rate announced weekly by Canada’s central bank, the Bank of Canada. Fixed-rate loans are typically priced off long-term Government of Canada bond rates. Other forms of borrowing and interest rate pricing (such as LIBOR loans and bankers’ acceptances) are also off ered. Borrowers generally incur some fees associated with such transactions. These typically include legal costs, commitment and processing fees and other charges. Short- and long-term loans in Canada can be unsecured or secured against the real or personal property of the borrower. Lenders may insist that unsecured loans be supported by a parent company guarantee, or by a “negative pledge,” where the borrower agrees (with some exceptions) not to grant security over its assets. All provinces provide an electronic registry for the recording of security interests over personal property. All provinces also have established land registry systems to record interests in real property. See Real Property. Canada has no currency restrictions. Loans are available in multiple currencies, but are most commonly denominated in Canadian and U.S. dollars. Due to the competitive nature of Canada’s loan markets, interest rates are oft en lower for comparable credits compared to other jurisdictions, particularly the U.S. Where Canadian tax rates are higher than those of a Bank Loans and Other Loan Capital Doing Business in Canada 44BANK LOANS AND OTHER LOAN CAPITAL foreign jurisdiction, the benefi ts of deducting interest expenses for loans in Canada are correspondingly higher. There are other tax advantages when borrowing in Canada. For example, thin-capitalization rules do not apply to arm’s-length third-party debt to limit the deductibility of interest. In addition, Canadian withholding tax will generally not apply to interest (other than certain types of interest) paid on arm’s-length third-party debt. Finally, Nova Scotia, Alberta and British Columbia have unlimited liability companies. These are hybrid entities that create taxplanning opportunities for U.S. cross-border transactions. See Taxation. A number of federal and provincial programs and agencies provide grants A NUMBER OF FEDERAL AND PROVINCIAL PROGRAMS AND AGENCIES PROVIDE GRANTS AND/OR LOANS TO CANADIAN BUSINESSES. and/or loans to Canadian businesses. The availability of government assistance will depend upon a number of factors. These include the location of the proposed investment, the number of jobs that will be created, the export potential for the product or service, whether the investment would be made without the government assistance and the amount of equity the owners of the business are investing. Foreign ownership of a corporation does not generally preclude the availability of government assistance programs. All provinces and territories in Canada (other than Prince Edward Island) have Securities Transfer Act (STA) legislation. These acts govern, among other matters, the transfer of securities and other investment property and work with personal property security legislation to regulate the perfection of security interests in securities and other investment property, including securities in uncertifi cated form. The STA legislation was modelled aft er Revised Article 8 of the Uniform Commercial Code of the United States. This approach was taken so that there could be a more consistent regime governing the transfer of securities and other investment property cross-border between Canada and the U.S., as well as a uniformity of approach across Canada. FOR MORE INFORMATION, PLEASE CONTACT: Barry Ryan 416-601-7799 [email protected] Introduction mccarthy.ca 45INTRODUCTION TAXATION Income Tax 47 Carrying on Business Through a Canadian Subsidiary 48 Carrying on Business in Canada Through a Branch Operation 50 Foreign Currency Controls and Repatriation of Income 51 By Douglas Cannon Taxation TAXATION mccarthy.ca 47 TAXATION* Income Tax Income taxes are imposed at the federal level, as well as by the various provinces and territories. Federal income tax is levied on the worldwide income of every Canadian resident and, subject to the provisions of any applicable income tax convention, levied on the Canadian source income of every non-resident who is employed in Canada, who carries on business in Canada or who realizes a gain on the disposition of certain types of Canadian property. Generally, a province or territory will also impose an income tax on persons resident, or carrying on business, in the provincial INCOME TAXES ARE IMPOSED AT THE FEDERAL LEVEL, AS WELL AS BY THE VARIOUS PROVINCES AND TERRITORIES. or territorial jurisdiction. Certain provinces also tax nonresidents on gains realized on the disposition of certain types of Canadian property situated in the province. The combined federal and provincial rate of income tax imposed on corporations varies widely depending on the nature and size of the business activity carried on, the location of the activity and other factors. In 2014, the highest combined rate of income tax applicable to non-Canadian-controlled private corporations was about 31%, while the lowest rate applicable to the ordinary business profi ts of such a corporation was about 25%. Tax credits and other incentives are also available in certain circumstances to reduce the eff ective tax rates. Individuals are subject to graduated rates. These rates depend on the type of income, the province of residence and other factors. In 2014, the highest marginal combined federal and provincial rate of tax on taxable income of an individual was about 50%, while the lowest top marginal combined federal and provincial rate was about 39%. Canada also levies a 25% withholding tax on the gross amount of certain types of Canadian source income of non-residents. Payments subject to withholding tax include dividends, certain types of interest, rents, royalties and certain management or administration fees. Withholding tax can also apply to payments made between nonresidents if the payments relate to a Canadian business or to certain *Updated and current as of March 1, 2015 Taxation Doing Business in Canada 48TAXATION types of Canadian property. Generally, there is no Canadian withholding tax on interest paid by a Canadian resident to arm’s-length nonresidents of Canada (other than interest that is contingent on the use of or production from property in Canada, or interest that is computed by reference to revenue, profi t or cash fl ow). An applicable income tax convention may reduce or eliminate the relevant rate of withholding tax. While withholding taxes are imposed on the non-resident recipient, the payer is responsible for withholding the tax from amounts paid to the non-resident and for remitting the withheld amount to the government. The following sections highlight some of the principal tax matters that should be considered in deciding whether to carry on business in Canada through a Canadian subsidiary or as a branch operation. A CORPORATION INCORPORATED IN CANADA WILL BE RESIDENT IN CANADA AND SUBJECT TO CANADIAN FEDERAL INCOME TAX ON ITS WORLDWIDE INCOME. Carrying on Business Through a Canadian Subsidiary A corporation incorporated in Canada will be resident in Canada and subject to Canadian federal income tax on its worldwide income. As noted above, income of the subsidiary may also be subject to provincial and/or territorial income tax. The combined federal and provincial/territorial income tax rate to which the subsidiary is subject will depend on the provinces and territories in which it conducts business, the nature of the business activity carried on and other factors. The calculation of the subsidiary’s income will be subject to specifi c rules in the Income Tax Act (Canada) and any applicable provincial or territorial tax legislation. Income includes 50% of capital gains. Expenses of carrying on business are deductible only to the extent they are reasonable. Neither federal nor provincial/territorial income tax is deductible in computing income subject to the other level of tax. Generally, dividends may be paid between related Canadian corporations on a tax-free basis. Groups of corporations may not, however, fi le consolidated income tax returns. Accordingly, business losses of the subsidiary will not be available, for Canadian tax purposes, to off set income of an affi liated company. Transactions between the subsidiary and any person with whom it does Taxation mccarthy.ca 49TAXATION not deal at arm’s length, including its parent corporation, will generally have to be eff ected for tax purposes on a “fair-market-value” basis. Certain contemporaneous documentation may also be required under Canada’s transfer pricing rules. The debt/equity structure of the subsidiary will be subject to thincapitalization rules, which operate to deny the deduction of interest payable to specifi ed non-residents by the subsidiary to the extent that the subsidiary is “thinly capitalized.” The subsidiary is considered to be thinly capitalized where the amount of debt owed to the non-resident shareholder is more than 1.5 times the aggregate of the retained earnings of the corporation, the corporation’s contributed surplus that was contributed by the non-resident shareholder and the paid-up capital of the shares owned by the non-resident shareholder. Interest that is not deductible because of the thin-capitalization rules is deemed to have been paid as a dividend and is subject to withholding tax as such. In some cases, the subsidiary may be established as an unlimited liability company (ULC) under the laws of Alberta, British Columbia or Nova Scotia. This may be done to access the advantages of both a branch and a subsidiary operation for a U.S. parent corporation. The reason is that while a ULC is treated as a corporation for Canadian tax purposes, we understand that it may be treated as a branch for U.S. tax purposes. U.S. tax advice should be obtained on this point and certain provisions in the Canada-United States Income Tax Convention (1980) (U.S. Convention) should also be considered, as in certain cases they may eliminate the tax benefi ts associated with such hybrid entities or give rise to adverse tax consequences without proper tax planning. The withholding tax regime, briefl y described above, will apply to the subsidiary’s payments to non-residents, including interest and dividends. In the case of payments by a subsidiary to a U.S.-resident parent, the U.S. Convention eliminates the withholding tax on interest (other than certain types of interest, such as interest determined with reference to profi ts or cash fl ow or to a change in the value of property). The benefi ts of the U.S. Convention are, subject to some exceptions, available only to certain “qualifying persons,” as defi ned in the Limitation on Benefi ts provisions of the U.S. Convention. The 2014 Canadian federal budget expanded on a previously announced Taxation Doing Business in Canada 50TAXATION initiative to introduce anti-treaty shopping measures in Canada’s tax treaties and domestic law. However, shortly aft er the 2014 budget, the Organization for Economic Co-operation and Development (OECD) released a discussion draft of its report regarding Action 6 of its Action Plan on Base Erosion and Profi t Shift ing, which related to “treaty abuse”. As a consequence the domestic anti-treaty shopping measures have been put on hold. Carrying on Business in Canada Through a Branch Operation Subject to the provisions of any applicable income tax convention, a non-resident corporation will be subject to Canadian income tax on business BRANCH TAX MAY, IN SOME CIRCUMSTANCES, FAVOUR THE ESTABLISHMENT OF A SUBSIDIARY BY THE FOREIGN BUSINESS RATHER THAN A BRANCH. profi ts from carrying on business in Canada through a branch operation. A non-resident carrying on business in Canada must also pay a branch tax. The branch tax essentially takes the place of the withholding tax that would have been payable on dividends paid by a Canadian subsidiary carrying on the business. As the withholding tax is imposed on dividends when they are paid and the branch tax is imposed when the profi ts are earned, this factor may, in some circumstances, favour the establishment of a subsidiary by the foreign business rather than a branch. If the non-resident of Canada is: (i) a resident of a jurisdiction that has entered into an income tax convention with Canada; and (ii) entitled to the benefi ts of that convention, generally the non-resident will be taxable on its business profi ts earned in Canada only to the extent that such profi ts are attributable to a permanent establishment situated in Canada. Under certain of Canada’s income tax conventions, a non-resident may have a signifi cant business presence in Canada without being deemed to have a permanent establishment in Canada. As noted above, in the case of the U.S. Convention treaty benefi ts are generally available only to U.S. residents who are qualifying persons. A thorough review of the applicable convention is crucial in determining the relative merits of establishing a branch or a subsidiary business in Canada. Generally, the income of the branch will be computed under the Taxation mccarthy.ca 51TAXATION same rules that are applicable to the computation of the subsidiary’s income. The 2013 Canadian federal budget proposed to extend the thin-capitalization rules to non-resident corporations carrying on business in Canada through a branch. If the Canadian operation will incur start-up losses, it may be possible for the non-resident to deduct these losses in computing its income for its domestic tax purposes if the Canadian business is carried on through a branch operation. When the Canadian business becomes profi table at some future time, it may be possible to transfer the branch operation to a newly incorporated Canadian subsidiary with no signifi cant adverse Canadian income tax consequences. Foreign Currency Controls and Repatriation of Income There are no foreign exchange or currency controls in Canada, nor are there exchange restrictions on borrowing from abroad, on the repatriation of capital or on the ability to remit dividends, profi ts, interest, royalties and similar payments from Canada. As noted above, there may be a withholding tax payable on the repatriation of certain types of income, including interest, dividends and royalties. FOR MORE INFORMATION, PLEASE CONTACT: Douglas Cannon 416-601-7815 [email protected] SALES AND OTHER TAXES Federal Goods and Services Tax 55 Provincial Sales Tax 56 Provincial Payroll Taxes 56 Other Taxes 57 By Wendy Brousseau Sales and Other Taxes mccarthy.ca SALES AND OTHER TAXES 55 SALES AND OTHER TAXES The federal government and most of the provinces have sales tax regimes. Federal Goods and Services Tax The federal government imposes a 5% multi-stage, value-added tax called the Goods and Services Tax (GST), which applies to taxable supplies (e.g., supplies of most types of property, including intangibles and services) made in Canada. Certain types of property and services, including most fi nancial services, are exempt for GST purposes and certain supplies, defi ned as zero-rated supplies, which include exports, are taxed at a rate of 0%. GST is also levied on taxable goods imported into Canada, and there are THE FEDERAL GOVERNMENT AND MOST OF THE PROVINCES HAVE SALES TAX REGIMES. self-assessment obligations on certain purchasers of imported services and intangibles. The GST is a value-added tax and it applies at each stage of the production and distribution chain. Generally, businesses making taxable supplies of property and services must register for, collect and remit the applicable GST on their supplies made in Canada. While GST applies to every transaction throughout the distribution chain, it is imposed on the ultimate consumer; accordingly, businesses involved in commercial activities are entitled to recover the GST they pay through an input tax credit mechanism. It is not always easy to determine whether supplies made to or by nonresidents of Canada attract GST; accordingly, consideration of specifi c rules is required. For example, whether GST applies to recent e-commerce developments requires close examination. Harmonized Sales Tax Five provinces currently have harmonized their provincial sales taxes with the GST: Ontario, Nova Scotia, New Brunswick, Newfoundland and Labrador and Prince Edward Island (as of April 1, 2013). In those provinces, the Harmonized Sales Tax (HST) made up of the federal 5% GST component and the provincial component, which varies from 8 to Sales and Other Taxes Doing Business in Canada 56SALES AND OTHER TAXES 10%, applies on the same basis as the GST. Accordingly, the discussion above regarding the GST also generally applies to the HST. It should be noted, however, that Ontario and Prince Edward Island have implemented temporary restrictions on the ability of certain large businesses to claim input tax credits with respect to the provincial component of the HST, on certain specifi ed supplies. Once it is determined that a supply is made in Canada, it must then be determined whether the supply is made in a harmonized province and therefore subject to HST. Detailed rules apply to determine whether a supply is made in a harmonized province, which vary depending on the type of supply at issue. While the 12% HST (made up of the 5% federal component and the 7% provincial component), was implemented in the Province of British Columbia on July 1, 2010, as of April 1, 2013, the province repealed the HST and re-implemented the GST and the B.C. Provincial Sales Tax. Eff ective January 1, 2013, the Province of Québec harmonized the Québec sales tax (QST) with the federal GST; however, unlike other harmonized provinces, the QST is a separate tax imposed under provincial legislation. As of January 1, 2013, the QST rate is 9.975%. Provincial Sales Tax B.C. (as of April 1, 2013), Saskatchewan and Manitoba currently impose a single incidence provincial sales tax (PST) (in addition to the GST) on the end-users of most tangible personal property and certain services in the provinces. General rates of PST vary from 5 to 8%. Alberta does not impose a PST; accordingly only the 5% GST applies in Alberta. Provincial Payroll Taxes Manitoba, Ontario and Newfoundland and Labrador levy an employer payroll tax that is calculated based on a percentage of remuneration paid in the province (subject to a certain threshold). Québec also levies a similar employer tax in the form of contributions to a provincial health services fund. Sales and Other Taxes mccarthy.ca 57SALES AND OTHER TAXES Other Taxes The federal government imposes other taxes, including customs duties and excise taxes. Various provinces also impose other taxes, including provincial capital taxes (oft en limited to fi nancial institutions), fuel, gas, insurance taxes and real estate transfer taxes. Most municipalities impose annual taxes on the ownership of real estate. In 2008, the City of Toronto enacted a municipal land transfer tax. FOR MORE INFORMATION, PLEASE CONTACT: Brian Pel 416-601-7841 [email protected] MANUFACTURE AND SALE OF GOODS Regulations and Product Standards 61 Consumer Protection 62 Product Liability 63 By Caroline Zayid Manufacture and Sale of Goods MANUFACTURE AND SALE OF GOODS mccarthy.ca 61 MANUFACTURE AND SALE OF GOODS Regulations and Product Standards The Canada Consumer Product Safety Act came into force in 2011. This legislation prohibits the manufacture, importation or sale of consumer products that pose a “danger to human health or safety.” It also expands the federal government’s powers to regulate, inspect, test and recall consumer products and creates a wide array of related off ences and penalties. Manufacturers, importers and retailers need to comply with stringent requirements to maintain required records concerning their products. In addition, federal statutes such as the Food and Drugs Act, the Hazardous Products Act, the Consumer Packaging and Labelling Act and the Textile Labelling Act (and regulations made under them), as well as a range of provincial regulations, can directly aff ect business operations in Canada, since goods that fail to comply with the statutory and regulatory FAILURE TO COMPLY WITH STATUTORY OR REGULATORY REQUIREMENTS CAN RESULT IN CRIMINAL PROSECUTION, CIVIL LIABILITY — OR BOTH. requirements may not lawfully be sold. For example, regulations made under the Hazardous Products Act cover items as diverse as cellulose insulation, mattresses, booster cushions, tents, pacifi ers and children’s sleepwear, and also describe product standards that must be met before such products can lawfully be sold in Canada. Regulations under the Food and Drugs Act, the Consumer Packaging and Labelling Act, and the Textile Labelling Act contain detailed provisions concerning a wide range of goods and products. Failure to comply with statutory or regulatory requirements can result in criminal prosecution, civil liability — or both. The Standards Council of Canada (SCC) is a federal Crown Corporation with a mandate to promote effi cient and eff ective development and application of standards. It carries out a variety of functions designed to ensure the eff ective and coordinated operation of standardization in Canada. The SCC oversees Canada’s National Standards System, a network of more than 400 organizations and 15,000 volunteers involved in the development, promotion and implementation of standards. Manufacture and Sale of Goods Doing Business in Canada 62MANUFACTURE AND SALE OF GOODS The National Standards System does not itself develop standards or verify the conformity of products or services to standards, but accredits those organizations that do develop standards or verify the conformity of products or services to standards, such as the Canadian General Standards Board (CGSB), a federal government organization, and the Canadian Standards Association (CSA), an independent non-profi t organization. The CSA develops standards and tests products to certify that the products meet the CSA’s published standards. CSA certifi cation is mandatory under government regulation for some products (e.g., toys that are operated electrically) and voluntary for others. The CSA certifi cation mark ensures that a product meets a basic level of conformity to the product features deemed essential by the published standard. Once a standard is published by the CSA, product manufacturers may elect to have their products tested by either the CSA or another approved certifi cation laboratory, in order to obtain CSA certifi cation. Aft er certifi cation, CSA representatives conduct regular, unannounced, on-site visits to manufacturing locations to ensure that the products continue to meet CSA standards. Where CSA certifi cation is mandatory, manufacturers may be required by inspectors appointed under the Hazardous Products Act to pull or recall non-conforming products. Consumer Protection The Canada Consumer Product Safety Act gives the federal government authority to deal with products that may pose a danger to human health and safety. Any safety incidents involving the product must be reported. Manufacturers, employers and retailers are also required to report recalls or similar measures involving the product anywhere in the world. The government also receives reports directly from consumers. Such reports can lead to inspections, requirements for product testing or product recalls. Federal and provincial governments have also enacted specifi c legislation that prohibits deceptive or unfair business practices (including misleading advertising), imposes sanctions on businesses engaging in such conduct and provides additional protection for Canadian consumers. Class actions, which are becoming increasingly popular as a consumer protection tool in Canada, are oft en based on alleged breaches of the Competition Act or provincial consumer protection statutes. Manufacture and Sale of Goods mccarthy.ca 63MANUFACTURE AND SALE OF GOODS To ensure that consumers are not misled, the Competition Act contains important provisions concerning advertising of products and promotion of business interests. Making a representation to members of the public that is false or misleading in a material respect, and making this representation knowingly or recklessly, is punishable by substantial fi nes and even jail terms. False or misleading statements can also lead to liability to consumers for monetary damages. See Competition Law. Provincial statutes such as Ontario’s Consumer Protection Act, 2002 are also aimed at providing protection for consumers in their dealings with corporations and businesses. These statutes provide consumers who have been harmed by deceptive or unconscionable business practices with a variety of statutory remedies, including damages, punitive damages and rescission of agreements. Specifi c, consumer-friendly contract terms may be mandated. Other contract terms, such as waivers of implied statutory warranties or terms requiring any disputes to be submitted to binding arbitration or purporting to ban a consumer from initiating or participating in a class action, may be unenforceable against consumers. For a discussion of the application of consumer protection laws to online commerce, see Information Technology — Consumer Protection — Internet Agreements. Product Liability Any business involved in the design, manufacture, distribution or sale of products is a potential defendant in a product liability claim. Claims may be based on breach of a contract or on negligence; sometimes they are based on both. Product liability claims are also popular subjects for class action litigation in Canada. See Dispute Resolution — Class Actions. Provincial statutes such as the Ontario Sale of Goods Act provide that warranties of fi tness for purpose and of merchantable quality are implied in contracts between buyers and sellers for the sale of goods. Parties can contract out of the implied terms, except in the case of consumer or retail sales. A buyer of a product purchased from someone other than the product’s manufacturer may not rely on the implied warranties under the Sale of Goods Act in a claim against the manufacturer. However, the buyer may be able to assert a contract claim against the manufacturer for breach of warranty if a collateral warranty was provided by the Manufacture and Sale of Goods Doing Business in Canada 64MANUFACTURE AND SALE OF GOODS manufacturer and that warranty is found to be a representation inducing the sale. Contract claims are strict liability claims. Absence of negligence is not a defence. Oft en, no contractual relationship will exist between a product manufacturer and the ultimate purchaser or user, and as a result, many product liability claims are tort-based claims alleging negligence. Claimants must prove that: - a duty of care was owed to them; - the product was defective; - there was a failure to meet the applicable standard of care; and - the claimants suff ered damage caused by the defendant’s negligence. The mere presence of a defect in a product can justify an inference of negligence in the manufacturing process. Where a product is not necessarily defective, but is or could be dangerous, a product liability claim may be based on a failure to provide adequate warnings concerning the use of the product and/or a failure to warn of risks associated with use of the product. The duty to warn is a continuing duty and can be triggered by information that becomes known aft er the product is in use. In defi ning the standard of care, Canadian courts will assess the reasonableness of the defendant’s conduct with regard to industry standards. However, if the industry standard is inadequate, a defendant may be found negligent despite conforming to it. Although conformity with regulatory standards can be highly relevant to the assessment of reasonable conduct in a particular case, meeting those standards alone will not necessarily absolve a manufacturer of liability. Generally, a manufacturer’s duty is to take reasonable care to avoid causing either personal injury or damage to property. However, where a product has not in fact caused any physical injury or damage to property, a person may still recover damages for economic losses (e.g., the cost of repairing a defective product) where the failure to take reasonable CONTRACT CLAIMS ARE STRICT LIABILITY CLAIMS. ABSENCE OF NEGLIGENCE IS NOT A DEFENCE. Manufacture and Sale of Goods mccarthy.ca 65MANUFACTURE AND SALE OF GOODS care resulted in defects that pose a real and substantial danger of actual physical injury or property damage. FOR MORE INFORMATION, PLEASE CONTACT: Lara Nathans 416-601-8470 [email protected] REAL PROPERTY Land Registration Systems 69 Planning Legislation 69 Title Opinions and Title Insurance 71 Environmental Assessments 72 Non-Resident Ownership 72 Proceeds of Crime Legislation and Real Estate Developers 73 Some Taxes on the Transfer of Real Property in Canada 73 Financing 76 Common Forms of Ownership/Interest 76 Common Investment Vehicles for Real Property in Canada 77 Co-Ownership Arrangement 78 Condominiums 78 Nominees 78 Pension Funds 79 By Godyne Sibay, Valérie Mac-Seing, Paul Galbraith and Douglas Cannon Real Property REAL PROPERTY mccarthy.ca 69 REAL PROPERTY Land Registration Systems Each Canadian province has its own systems for registering interests in real property, as property legislation is constitutionally a provincial responsibility in Canada. In Ontario, for example, there are two land registration systems: registry and land titles. The older of the two is the registry system, which merely provides for the public recording of instruments aff ecting land and does not guarantee the status of title. Most Ontario properties, however, are in the land titles system, which is operated by the province pursuant to the Land Titles Act. Title to land within this system is guaranteed by the province. Where the land titles system applies, each document submitted for registration is certifi ed by the province and, until this certifi cation is complete, the registration is subject to amendment at the request of the registry offi cials. In other provinces, registration systems vary. In the western provinces, for example, land falls exclusively within the provincial land titles systems. These systems are similar to the one in Ontario, creating an “indefeasible title” that is good against the world, subject only to certain limited exceptions. In Atlantic Canada, on the other hand, registry systems dominate land registration, except in New Brunswick, where its land titles system encompasses most of the land in the province. Québec has its own unique system for registering interests in land, which in its eff ect is more similar to a registry system than to a land titles system. Canadian provinces have been working to modernize their land registration systems by automating the paper-based records and converting to electronic systems. In most of Canada, real property instruments can be registered and obtained electronically. In addition, in many provinces, including Ontario, registration occurs in real time. In other words, upon registering an instrument against specifi c land, the instrument will immediately thereaft er appear on the title relating to such land. Planning Legislation All Canadian provinces regulate property development to some degree, and oft en this regulation occurs at the municipal level. Offi cial plans, zoning bylaws, development permits, subdivision bylaws and servicing Real Property Doing Business in Canada 70REAL PROPERTY bylaws are the primary means by which municipalities control land use and development. MOST PROVINCES HAVE LEGISLATION GRANTING POWER TO MUNICIPALITIES TO REGULATE THE SUBDIVISION AND SERVICING OF LANDS. At the provincial level, the subdivision of land is restricted by statute in a number of Canadian provinces. In Ontario, the Planning Act is the main statute that controls subdivision. In British Columbia and many other provinces, the Land Title Act is the main statute that controls subdivision. In addition, most provinces have legislation granting power to municipalities to regulate the subdivision and servicing of lands. In most cases, instruments such as transfers, subdivision plans or separation of title, which result in the issuance of separate titles, and instruments such as leases, mortgages or discharges, which deal with part of a parcel, require subdivision approval. Subject to certain exceptions, the Planning Act in Ontario prohibits any transfer or mortgage of land or any other agreement granting rights in land for a period of 21 years or more (this includes leases and easements) unless the land is already described in accordance with a plan of subdivision or the transaction has previously received the consent of the appropriate governmental body. If the proposed transaction does not fall within one of the exceptions outlined in the Planning Act, then it may be necessary to obtain a severance consent for the transaction to proceed. The process to obtain a consent typically takes at least 90 to 120 days to complete. A number of changes recently introduced by the Ontario government will directly impact how development approval applications are prepared, submitted, processed and appealed. The goal of the province seems to have been to put greater control of the development approval process in the hands of municipalities, although the real eff ect of these changes may be to require applicants to look farther down the road, past the municipal process, to eventual appeals to the Ontario Municipal Board (OMB), and to take careful steps to put their applications on OMB-ready footing from the outset. Many provincial statutes (including Ontario’s) provide that no interest in land is created or conveyed by an improper transaction carried out Real Property mccarthy.ca 71REAL PROPERTY contrary to the governing legislation. Investors in real property in Canada need to consider the possible application of subdivision control regulations both at the provincial and municipal level when they are contemplating subdivision and development of land. Title Opinions and Title Insurance Rights in land are not required to be registered. That said, registration in the appropriate land registry offi ce is essential to protect an owner’s priority over subsequent registered interests and to protect an owner against loss from a bona fi de third party. On an acquisition, in addition to registering a deed in the appropriate land registry offi ce, a lawyer’s opinion on title is typically issued to the purchaser of real property following closing. However, the use of commercial title insurance as an alternative to the traditional lawyer’s opinion on title continues to gain popularity, particularly for lenders (since the available protections are broader for lenders). Unlike a traditional lawyer’s title opinion, title insurance provides protection against hidden risks such as fraud, forgery and errors in information provided by third parties (e.g., a government ministry). Fraud, in particular, represents a signifi cant loss when it does occur and this is a risk generally better assumed by a title insurer. (Note, however, that for commercial properties coverage is typically only provided for fraud that occurred prior to the date of placement of the policy.) Also, unlike a traditional lawyer’s title opinion, title insurance is a strict liability contract — the policy holder is not required to prove that the title insurer has been negligent in order to receive compensation for a covered loss (up to the amount insured, which is typically the purchase price for an owner’s policy and the mortgage amount for a lender’s policy). There are two types of commercial title insurance policies that may be issued: (i) an owner’s policy that protects the purchaser against loss or damage arising from disputes regarding property ownership; and (ii) a loan policy that protects the lender against loss or damage arising from the invalidity or unenforceability of the lien of the insured mortgage. While the benefi ts of an owner’s policy remain in eff ect only as long as the insured owner possesses title to the property, the benefi ts of a lender’s policy automatically run to the insured lender’s successors and/ or assigns, thereby facilitating the sale of mortgages in the secondary market. Real Property Doing Business in Canada 72REAL PROPERTY There is a wide variety of diff erent title insurance packages and varying premiums for such coverage, and there is no regulation of title insurance rates in Canada. Policy premiums are negotiated, and when a premium is paid to the title insurer such premium constitutes consideration for both the policy and any endorsements (the total price of which is typically lower than the combined price for premiums and endorsements in the U.S.). Environmental Assessments In Canada, there is a legislative framework at both the provincial and federal THE LIABILITY FOR IMPROPER ENVIRONMENTAL PRACTICES RUNS WITH THE LAND AND CAN BE INHERITED BY FUTURE OWNERS OF THE PROPERTY. level that governs the duties of land owners with respect to the storage, discharge and disposal of contaminants and other hazardous materials connected with the property. The liability for improper environmental practices runs with the land and can be inherited by future owners of the property. In certain circumstances, any “guardian” of a property, such as a tenant, may face liability for contamination. Additionally, it is incumbent upon a potential purchaser to inspect a property and assess environmental risks, as government offi cials in Canada cannot certify that properties are free of environmental risk. Commercial lenders in Canada will customarily require the completion of an environmental assessment of a property before the advance of funds. Non-Resident Ownership Non-residents may purchase, hold and dispose of real property in Canada as though they are residents of Canada, pursuant to the federal Citizenship Act. However, each province has the right to restrict the acquisition of land by individuals who are not citizens or permanent residents, in addition to corporations and associations controlled by such individuals. For example, in Québec, a non-resident (individual, corporation or any other legal entity) is not entitled, directly or indirectly, to acquire farm land except with the authorization of the Commission de protection du territoire agricole du Québec. Each province has diff erent legislation as regards the particularities of foreign ownership of Canadian real property. In Ontario, for example, Real Property mccarthy.ca 73REAL PROPERTY non-citizens have the same rights as Canadians to acquire, hold and dispose of real property, though corporations incorporated in jurisdictions NON-RESIDENTS WHO DISPOSE OF REAL PROPERTY SITUATED IN CANADA ARE SUBJECT TO WITHHOLDING TAX REQUIREMENTS UNDER THE FEDERAL INCOME TAX ACT. other than Ontario must obtain a licence to acquire, hold or convey real property. Non-residents who dispose of real property situated in Canada are subject to withholding tax requirements under the federal Income Tax Act (ITA), as described below. Proceeds of Crime Legislation and Real Estate Developers In January 2008, new amendments and regulations with respect to the federal Proceeds of Crime (Money Laundering) and Terrorist Financing Act were made. These came into force on Feb. 20, 2009, and address transactions involving, among other groups, real estate developers (generally defi ned as those who sell new developments to the public, other than in the capacity of a real estate broker or sales representative). The amendments impose mandatory reporting and recordkeeping requirements on real estate developers, who are obligated to report suspicious transactions, large cash transactions and any property in their possession that is owned or controlled by terrorists. They are also required to keep records of funds received, large cash transactions and client information, copies of offi cial corporate records and suspicious transaction reports, and to ascertain the identity of any individual: a) who conducts a large cash transaction (taking reasonable measures to determine whether that individual is acting on behalf of a third party); b) for whom they must keep a client information record or receipt of funds record; and c) for whom they must send a suspicious transaction report. They must also develop a compliance regime that includes, among other things, the appointment of a compliance offi cer, written compliance policies and ongoing compliance training programs. If real estate developers fail to comply with these requirements, criminal or administrative penalties may be imposed. Some Taxes on the Transfer of Real Property in Canada Withholding Obligations The ITA contains provisions that protect Canada’s ability to collect taxes when a non-resident disposes of “taxable Canadian property” (which includes, among other types of property, real property situated in Canada). Real Property Doing Business in Canada 74REAL PROPERTY Unless (i) the purchaser has no reason to believe, aft er making reasonable inquiries, that the vendor is not a non-resident of Canada; (ii) the purchaser concludes aft er reasonable inquiry that the non-resident person is resident in a country with which Canada has a tax treaty, the property disposed of would be “treaty-protected property” if the non-resident were resident in such country, and the purchaser provides the Canada Revenue Agency with a required notice; or (iii) the purchaser is provided with an appropriate certifi cate in respect of the disposition issued by the Canada Revenue Agency, the purchaser will be liable to pay as tax on behalf of the nonresident up to 25% of the purchase price of land situate in Canada that is capital property and up to 50% of the purchase price of land inventory situate in Canada, buildings and other depreciable fi xed-capital assets. If the non-resident vendor does not provide the purchaser with an appropriate certifi cate (or the purchaser is not satisfi ed that the conditions of either (i) or (ii) have been met), the purchaser will generally deduct from the purchase price the amount for which the purchaser would otherwise be liable. Québec tax legislation imposes similar requirements in respect of the disposition of immovable property situate in the Province of Québec. It should be noted that gains realized by a non-resident on the disposition of IN ALL CANADIAN PROVINCES, LAND TRANSFER TAXES ARE GENERALLY IMPOSED ON PURCHASERS WHEN THEY ACQUIRE AN INTEREST IN LAND BY REGISTERED CONVEYANCE AND, IN SOME CASES, BY UNREGISTERED DISPOSITION. Canadian real estate are generally not, subject to certain exceptions, exempt from tax under Canada’s treaties, and therefore real estate in most cases will not qualify as “treaty-protected property” for purposes of the ITA. Accordingly, absent an appropriate certifi cate, most purchasers acquiring real estate from non-residents will withhold from the purchase price and remit the withheld amount to the applicable taxing authority. Land Transfer Tax In all Canadian provinces, land transfer taxes (or in Alberta, “registration fees”) are generally imposed on purchasers when they acquire an interest in land (typically including a lease in excess of 40 or 50 years, though the threshold is 30 years in British Columbia) by registered conveyance and, in some cases, by unregistered disposition. Provincial rates vary widely. In Ontario, for example, land transfer tax Real Property mccarthy.ca 75REAL PROPERTY is calculated on the “value of the consideration” paid for the interest transferred, whereas in Alberta the fees assessed against a purchaser are based on the value of the land being acquired by the purchaser, and in British Columbia the tax is calculated on the “fair market value” of the interest transferred. In Québec, the calculation is made on the basis of imposition that equals the greatest of a) the consideration furnished for the transfer; b) the consideration stipulated for the transfer; and c) the market value of the immovable at the time of its transfer. Of note, the City of Toronto has recently mandated an additional land transfer tax for conveyances within the city that is roughly equivalent to the Ontario land transfer tax (resulting in what is essentially a doubling of the total land transfer tax payable when real property is conveyed in Toronto). In addition, the City of Montréal has, via bylaw, set a higher rate than what is provided for under the provincial legislation for the calculation of duties for any part of the basis of imposition that exceeds $500,000. Federal Goods and Services Tax, Provincial Sales Tax, and Harmonized Sales Tax In Canada, the Goods and Services Tax (GST), currently at a rate of 5%, is generally payable upon a supply of real property (this includes a sale). See Sales and Other Taxes — Federal Goods and Services Tax. The vendor is responsible for collecting GST from the purchaser of the real property unless the purchaser is entitled to self-assess under the GST legislation, which requires that the purchaser register with the federal government. The conveyance of previously owned residential property is not subject to GST (except where such residential property has been “substantially renovated”). If the purchase of real property is accompanied by the purchase of certain goods, such as furniture or appliances, then provincial sales tax is payable by the purchaser at a rate determined by each province. See Sales and Other Taxes — Provincial Sales Tax. In Alberta, there is no provincial sales tax. In provinces that have “harmonized” their provincial sales tax with the GST, such as Ontario, the rate of the harmonized tax (HST), currently 13% in Ontario, is generally payable on the sale of any non-residential real property and any new or substantially renovated residential property. The same self-assessment rules that apply to GST apply to HST. In Ontario, HST also generally applies to lease payments in respect of non- Real Property Doing Business in Canada 76REAL PROPERTY residential real property made by a GST/HST registrant, though certain leases of real property that are exempt under the GST rules are also exempt under HST rules. See Sales and Other Taxes — Federal Goods and Services Tax — Harmonized Sales Tax. Financing Real estate fi nancing for commercial, industrial, retail, multi-family residential, mixed-use, condominiums, hotels, casinos and other types of real estate can be structured in a variety of ways, including: - conventional mortgage lending; - public and private capital market fi nancing; ADDITIONAL SECURITY USUALLY INCLUDES ASSIGNMENTS OF RENTS, LEASES, AND OTHER CONTRACTS, GUARANTEES AND GENERAL SECURITY AGREEMENTS. - portfolio loans; - acquisition fi nancing; - permanent fi nancing; - public and private bond fi nancings; - syndications; - restructurings; and - securitization. Banks, pension funds, credit unions, trust companies and other entities all arrange such fi nancing on credit terms that vary on the basis of the transaction itself and the risks involved. Various rate and term combinations are off ered. See Bank Loans and Other Loan Capital. There are various instruments used to take primary security over real property in Canada, such as a mortgage or charge, a debenture containing a fi xed charge on real property and trust deeds securing mortgage bonds (where more than one lender is involved). Additional security usually includes assignments of rents, leases and other contracts, guarantees and general security agreements. Common Forms of Ownership/Interest Generally, both asset acquisitions and share acquisitions are common in Canada. Canadian real estate transactions typically involve the following common forms of ownership/interest in real property: freehold, condominium, mortgage/charge, easements and leasing. In Québec, Real Property mccarthy.ca 77REAL PROPERTY where the real property regime is based on civil law concepts, these forms of ownership/interest in real property all have their equivalents, but other types of interests, based mainly on surface or building rights, also exist. Developments on Aboriginal lands are subject to a unique set of legal regimes governing ownership interests and security arrangements. See Aboriginal Law. Common Investment Vehicles for Real Property in Canada There are various avenues for investment in real property in Canada, including corporations, partnerships, limited partnerships, trusts, coownerships and condominiums. See Business Organizations. Each of THERE ARE VARIOUS AVENUES FOR INVESTMENT IN REAL PROPERTY IN CANADA, INCLUDING CORPORATIONS, PARTNERSHIPS, LIMITED PARTNERSHIPS, TRUSTS, COOWNERSHIPS AND CONDOMINIUMS. these vehicles has its own nuances and with careful planning and legal advice, investors in the Canadian real property market can structure their investments so as to take maximal advantage, for tax purposes or otherwise, of the available alternatives. A real estate investment trust (REIT) is a special type of trust whereby a trustee agrees to hold real property assets for the benefi t of unitholders as the benefi ciaries of the trust. The trustee (or more commonly, a corporate nominee) will hold legal title to the trust property. One disadvantage of this vehicle is that under common law, benefi ciaries of a trust are potentially subject to unlimited liability. Commercial documentation, however, is generally craft ed so as to limit such liability that may arise in relation to the assets or business dealings of the trust. Like shares of corporations, units of REITs can be publicly or privately held. The units of public REITs may be listed on public stock exchanges, like shares of common stock, and REITs can be classifi ed as equity, mortgage or hybrid. The REIT structure was designed to provide a structure for investment in real estate that is similar to the one mutual funds provide for investment in stocks. Currently, a signifi cant advantage to a REIT is that if its income is distributed to the unitholders, it will be taxed in their hands at their marginal rates rather than at the REIT level. REITs have been generally excluded from Real Property Doing Business in Canada 78REAL PROPERTY the income trust tax legislation changes the federal government enacted in 2007; these require income trusts to be taxed in the same manner as corporations beginning in the 2011 tax year. Legal advice is oft en necessary to determine whether a particular REIT falls within the exclusion provisions and to ensure the REIT continues to qualify for exclusion. Co-Ownership Arrangement A co-ownership arrangement is typically used where joint and several liability is not desirable. The advantages to using a co-ownership arrangement include the following: (i) each co-owner receives its own share of the revenues and pays its own share of expenses; (ii) each coowner decides its own capital cost allowances, subject to the rules in the Income Tax Act (Canada); and (iii) each co-owner can sell, mortgage or otherwise separately deal with its interest. Condominiums Condominium ownership is a form of real estate ownership where the owner receives title to a particular unit and has a proportionate interest in certain common areas. Legal advice is needed to ensure that condominium projects satisfy all local policies and legislative requirements: - structuring the project, e.g. common and shared facilities, exclusive use areas, commercial versus residential facilities, phasing and community associations; - pre-selling units — preparing real estate disclosure statements or prospectuses, complying with securities and pre-marketing regulations; - registering condominium/strata plans, declarations, descriptions and bylaws and developing policies; and - closing and conveying the individual units. Issues can include, for example, obtaining exemptions from the Ontario Securities Commission to permit the sale of rental pool units without a securities prospectus. Nominees Limited partnerships, REITs, trusts and even some corporations will oft en structure their business aff airs so that a separate entity, usually a singlepurpose corporation, holds registered title to real property as “bare Real Property mccarthy.ca 79REAL PROPERTY trustee,” “agent” or “nominee” for the benefi cial owner. For both tax and accounting purposes, the property belongs to the benefi cial owner and appears on its balance sheet; it is not the property of the nominee. Although nominee arrangements may be used for several reasons, they are frequently established to facilitate dealing with property in the land registration system where there is a complex, underlying ownership structure — either to permit the benefi cial ownership of the property to be kept confi dential or to facilitate corporate reorganizations or thirdparty transfers on a land transfer tax-deferred basis. Pension Funds Canadian pension funds have been steadily increasing their presence in the Canadian real property market over the last few years through acquisitions of various portfolios, including Class A offi ce buildings and shopping centres. Pension fund capital has, in fact, recently overtaken public real estate capital as the primary impetus of large real estate transactions in Canada. Pension funds that invest in real estate need to comply with strict national and provincial rules to retain their tax-exempt status. FOR MORE INFORMATION, PLEASE CONTACT: John Currie 416-601-8154 [email protected] PUBLIC-PRIVATE PARTNERSHIPS By Godyne Sibay Public-Private Partnerships mccarthy.ca PUBLIC-PRIVATE PARTNERSHIPS 83 PUBLIC-PRIVATE PARTNERSHIPS Governments worldwide have chosen to meet the infrastructure gap by investing in public-private partnerships (PPP). Canada has joined world leaders such as the U.K., France, Spain, Italy, Portugal, Australia and now the U.S. in supporting PPP. Large infrastructure projects are a key component of Canada’s and every province’s economic stimulus packages, and there is active encouragement of participation by foreign constructors, operators, lenders and equity providers. PPP projects in Canada are found in various industry sectors, including hospitals and health care, justice and corrections, light rail and other mass transit, roads, bridges, schools, recreation and culture, transit, water and wastewater, mining, airports and civil navigation, ports, energy, universities, government services, property management, data centres, defence and communications. In addition, there is a growing secondary market for equity deals in infrastructure projects. International banks were a major participant in infrastructure fi nancing, but this high level of participation has declined and been replaced by a combination of primarily Canadian banks with U.S. and other international banks together with an active private placement and broadly marketed bond market in Canada and the U.S. Government and public support for PPP projects in Canada is high because these projects address the infrastructure backlog, come in on time and on budget and effi ciently transfer signifi cant risks to the private sector. As lifecycle maintenance is built into the cost of PPP projects, this allows for a focus on long-term performance of the asset leading to opportunities to encourage and reward innovation. Many federal, provincial and municipal governments in Canada have established dedicated agencies for the use of PPP to achieve the completion of infrastructure projects. These agencies include Infrastructure Ontario, Partnerships BC, PPP Canada, Infrastructure Québec, SaskBuilds, Partnerships New Brunswick, as well as a dedicated PPP (Alternative Capital Financing) offi ce within the Alberta Treasury Board. There are several diff erent models of PPP in Canada including build- fi nance, design-build-fi nance, design-build-fi nance-maintain (DBFM) and concession and are based on availability payments, revenue and a combination of both. In a typical DBFM PPP: Public-Private Partnerships Doing Business in Canada 84PUBLIC-PRIVATE PARTNERSHIPS - a single entity (Project Company) contracts with the government or a sponsor, which in turn contracts with the contractor and operator partners; - the private sector accepts responsibility for design, construction, fi nancing, maintenance and operations; - the facilities maintenance component covers a long-term period (25- 35 years) with pre-defi ned hand-back conditions; - operating requirements are performance based; EVERY PROVINCE IN CANADA HAS ITS OWN REGULATORY AND LEGISLATIVE REQUIREMENTS. - payment from government or the sponsor begins upon completion of construction (with interim payments in many cases); and - ongoing payments may be performance based and subject to deduction for failures in service delivery. While every province in Canada has its own regulatory and legislative requirements, there is a signifi cant amount of similarity in the procurement process and documentation. Consortia and their contractors must be familiar with and obtain the project-approval requirements of municipalities and local authorities. Unique issues will oft en present themselves — including tax, environmental, lending, structuring, construction, real property and Aboriginal law issues. FOR MORE INFORMATION, PLEASE CONTACT: Marc Dorion 418-521-3007 [email protected] ABORIGINAL LAW By John Doolan Aboriginal Law ABORIGINAL LAW mccarthy.ca 87 ABORIGINAL LAW Business transactions in Canada oft en involve Aboriginal law issues. Where an Aboriginal issue exists for any proposed transaction, it is important to consider the issue in the context of the current law and practices. Aboriginal rights and claims frequently aff ect the acquisition and development of land and natural resources in Canada. This is of particular interest to businesses involved in the energy, forestry, mining and transportation sectors, with respect to developments and activities on lands subject to land claims or claims of other Aboriginal rights. In 1982, Canada voluntarily amended its Constitution and “recognized and affi rmed” the existing Aboriginal and treaty rights of Aboriginal Peoples in Section 35 of the Constitution Act, 1982. The term “Aboriginal Peoples” includes the First Nations (for historical reasons originally, and incorrectly, referred to in Canada as “Indians”), Inuit and Métis peoples of Canada. Canada’s federal Parliament has exclusive legislative jurisdiction over “Indians and lands reserved for Indians,” and has enacted legislation including the Indian Act, the First Nations Fiscal Management Act, the First Nations Land Management Act and the Indian Oil and Gas Act. First Nations and Inuit are under such federal jurisdiction, whereas the relationship between the Métis and Parliament is unclear at law. Aboriginal rights are those rights that have been traditionally exercised by Aboriginal Peoples, and can include customs, traditions and activities integral to the distinctive culture of the Aboriginal group at issue. Aboriginal rights can include rights to hunt, trap, fi sh and gather, and, in cases where Aboriginal title is proven, a right to land itself. Treaty rights are those rights set out in historic and modern treaties. Treaties involve the resolution of historical disputes and claims and the creation of certainty as to the rights and interest of a particular First Nation. Much of Northern Canada is covered by modern treaties and a large portion of Southern Canada is covered by some form of historic treaty. The notable exception is British Columbia, which remains largely uncovered by treaties. There are also a number of unsettled comprehensive claims elsewhere in Canada, including those in Ontario, Québec, Newfoundland and Labrador, New Brunswick, Nova Scotia, the Northwest Territories and Yukon. Aboriginal Law Doing Business in Canada 88ABORIGINAL LAW Developments on property aff ected by Aboriginal claims or interests may be subject to a legally required consultation process with First Nations that may be impacted by the developments. The constitutional recognition DEVELOPMENTS ON PROPERTY AFFECTED BY ABORIGINAL CLAIMS OR INTERESTS MAY BE SUBJECT TO A LEGALLY REQUIRED CONSULTATION PROCESS. and affi rmation of Aboriginal and treaty rights requires the Crown (which includes the federal and provincial governments) always to act honourably when dealing with Aboriginal Peoples. In circumstances where the Crown is considering whether to issue an approval or make some other decision that might adversely aff ect an Aboriginal interest, the Crown has a duty to consult, and, where appropriate, accommodate Aboriginal Peoples. This Crown duty arises when the Crown is aware or ought to be aware of the potential existence of an Aboriginal interest and contemplates a decision or action that might adversely aff ect that interest. The circumstances around the Crown’s duty may be quite complex, and in some cases a single decision of the Crown may potentially impact a number of diff erent First Nations that may have overlapping claims or interests. What amounts to appropriate Crown consultation and accommodation is a matter for legal analysis on a case-by-case basis. The content of the Crown’s duty varies with each project or approval, and the duty does not require the same degree of consultation in all instances where it is engaged. The scope of the Crown’s duty to consult exists on a spectrum, and is proportionate to the strength of the case supporting the existence of the Aboriginal interest, and the degree of the potential adverse eff ect of the Crown’s decision on such interest. Inadequate Crown consultation can lead to approvals or permits being delayed or called into question, protests, community and investor relations challenges or litigation for injunctions or damages, all of which can have serious impacts on project scheduling, costs and certainty. Although the duty to consult is ultimately the responsibility of the Crown, the courts have stated that procedural aspects of consultation may be delegated to and carried out by private entities. It is not uncommon for the Crown to pass on certain requirements associated with the duty to consult to project proponents who are seeking approvals from the Crown. In many cases, the proponent will be the party that has the most information about the proposed project and is the most motivated to Aboriginal Law mccarthy.ca 89ABORIGINAL LAW carry out the consultation. Experienced legal advice is required to guide the proponent through the consultation and approval process in order to ensure that the Crown’s duty is properly carried out and documented for evidentiary purposes. It is common for federal and provincial governments to promote agreements such as impact benefi t agreements or participation agreements between project proponents and First Nations. In some cases, the province will enter into an agreement where tax or other revenue is shared with the First Nation. Such agreements can assist in addressing the concerns of Aboriginal groups, establish stable frameworks allowing development projects to move forward and provide an eff ective means of managing Aboriginal-related risks on projects. These agreements can include a variety of diff erent types of benefi ts for the Aboriginal group, including employment opportunities, support for education and training initiatives, contracting and business opportunities, and capacity building, generally with corresponding assurances to the proponent that create certainty and facilitate the development of the project. Understanding the First Nation’s specifi c interests and objectives is the fi rst step towards a successful agreement and ultimate project approval. Current trends in consultation processes include proponents being asked to fund third-party heritage and environmental assessments and studies to determine the extent of Aboriginal interests and the potential impact of proposed projects. Major projects increasingly provide for equity participation by aff ected First Nations that are seeking to secure ownership interests and long-term revenues for their communities. Projects that involve First Nation equity participation oft en involve more sophisticated advice in order to ensure that the project is fi nanceable and employs the most effi cient tax structure. More and more projects and project assets are being located on Indian Act reserve lands held by First Nations themselves. There are diff erent types of reserve lands in Canada and a number of diff erent regimes that may apply. Specifi c knowledge of the applicable regime is critical. Federal laws do not adequately cover developments on reserve lands and both federal and provincial regulators oft en have signifi cant concerns regarding matters, such as the lack of applicable provincial environmental protection regimes, particularly on major projects. The federal First Nations Commercial and Industrial Development Act is being Aboriginal Law Doing Business in Canada 90ABORIGINAL LAW used frequently by project proponents, governments and First Nations that wish to apply specifi ed provincial laws to reserve land projects where there otherwise would be a ‘regulatory gap’ in the federal regime. Transactions on property that are or might be subject to Aboriginal claims or interests require specifi c knowledge and experience. The regulatory regimes and case law relating to Aboriginal rights and interests are constantly evolving in Canada and it is important to bring the most current information to any project where an Aboriginal right or interest may have an impact. FOR MORE INFORMATION, PLEASE CONTACT: John Doolan 604-643-7938 [email protected] INTELLECTUAL PROPERTY Patents 93 Copyright 95 Trade-marks 96 Domain Names 97 Other Intellectual Property 98 By Alfred Macchione and Dan Glover Intellectual Property INTELLECTUAL PROPERTY mccarthy.ca 93 INTELLECTUAL PROPERTY* The federal laws on patents, copyright and trade-marks provide the principal protection for intellectual property in Canada. Canada is a member of the World Trade Organization (WTO) agreement on TradeRelated Aspects of Intellectual Property Rights (TRIPS) and has agreed to the minimum standards of protection and reciprocal treatment provided in this treaty. Patents Canada is a member of the Paris Convention for the Protection of CANADA IS A MEMBER OF THE PARIS CONVENTION FOR THE PROTECTION OF INDUSTRIAL PROPERTY (STOCKHOLM ACT) AND THE PATENT COOPERATION TREATY. Industrial Property (Stockholm Act) and the Patent Cooperation Treaty (PCT). The Patent Act provides that any new, useful and unobvious invention that falls within the statutorily defi ned categories, namely, art, process, machine, manufacture or composition of matter (or any improvement of any of these) is patentable. Higher life forms per se are not patentable, but engineered genetic material and cell lines containing such genetic material typically are patentable. Algorithms per se are not patentable, but computer program products or methods that implement a tangible solution, or produce a discernable eff ect or change, generally are patentable. In a landmark decision rendered in October 2010, the Federal Court overturned a rejection by the Commissioner of Patents and the Canadian Patent Appeal Board of a patent application by Amazon.com for its “oneclick” online product-ordering technology. The Commissioner of Patents had held that Amazon’s application did not qualify as having patenteligible subject matter under the Patent Act. In overturning this fi nding, the court articulated a new test that does not preclude computerimplemented innovations and business methods from being patented in Canada as long as they meet the general test of what constitutes an “invention” under Section 2 of the Patent Act. In late 2011, the Federal Court of Appeal allowed the appeal of the Federal Court decision. One point of diff erence with the reasoning in the decision at fi rst instance was that the Court of Appeal dismissed the view that a business method *Updated and current as of March 1, 2015 Intellectual Property Doing Business in Canada 94INTELLECTUAL PROPERTY may become patentable subject matter merely because it has a practical embodiment or a practical application. On the other hand, the Court of Appeal agreed with the judge at fi rst instance in his determination that patentable subject matter must either be something with a physical existence or something that manifests a discernible eff ect or change. The Court of Appeal remanded the construction of the patent claims back to the Commissioner of Patents, and the application was issued by the Patent Offi ce shortly thereaft er. The Amazon.com decision is thought by many to herald a new era of increasing acceptance for patents directed to computer-implemented inventions and business methods in Canada. Other patent decisions of note in Canada in recent years have included a unanimous decision of the Supreme Court of Canada which held that Pfi zer Canada’s patent describing and claiming sildenafi l, the active ingredient for the prescription drug VIAGRA®, failed to satisfy the disclosure requirements of the Patent Act. The Court came to this holding THE APPLICATION IN CANADA MUST GENERALLY BE FILED BEFORE THE INVENTION IS MADE AVAILABLE TO THE PUBLIC ANYWHERE IN THE WORLD. on the basis that the specifi cation did not categorically indicate that sildenafi l was the eff ective compound of interest and that the notional skilled person, on reading the patent, would be left to the prospect of further testing to determine which of two stated compounds in the specifi cation would actually work. Another noteworthy decision included a judgment of the Federal Court that invalidated certain of the claims of a patent of Eurocopter for a helicopter landing gear structure, on account that the utility of the claimed structure was not demonstrated nor soundly predicted at the date of fi ling of the subject application. The result stems from a surprising application of the doctrine of sound prediction, one normally more prevalent in the chemical, pharmaceutical or biotechnology fi elds as opposed to the mechanical arts. The decision was upheld by the Federal Court of Appeal in September 2013. A patent grants its owner the exclusive right in Canada to make, sell or use the invention for a fi xed term. In general, the fi rst inventor to fi le for patent protection will be entitled to a patent. There is no requirement that the invention be made in Canada. The application in Canada must generally be fi led before the invention is made available to the public anywhere in the world. A grace period of one year is permitted for disclosures Intellectual Property mccarthy.ca 95INTELLECTUAL PROPERTY originating directly or indirectly from the inventor, but an application by another inventor with an earlier fi ling date will eff ectively prevent the grant of a patent. It is therefore important to fi le as early as possible in Canada or in a Paris Convention country, and not rely on the grace period. The making of an invention available to the public includes publication (e.g., by publication of an earlier patent application or by distribution of a product embodying the invention). Pending patent applications will be published by the Canadian Intellectual Property Offi ce 18 months aft er the earliest fi ling date claimed by the applicant. The patent will last for a maximum of 20 years from the date of fi ling in Canada, provided all annual maintenance fees are paid in a timely manner. Copyright Canada has acceded to the World Intellectual Property Organization (WIPO) Copyright Treaty CANADA HAS BEEN IMPLEMENTING THE WIPO COPYRIGHT TREATY AND THE WIPO PERFORMANCES AND PHONOGRAMS TREATY. (WCT) and the WIPO Performances and Phonograms Treaty (WPPT). Many of the substantive provisions in the WCT and WPPT, such as the establishment of a “making available” right and the implementation of technical protection measures, were implemented in a major revision to the Copyright Act that came into force in November 2012. The new legislation also provides a new secondary liability remedy against those who “enable” digital infringements, as well as a series of broad new exceptions to copyright protection, including in respect of “reproduction for private purposes”, “timeshift ing”, “technological processes”, “fair dealing for the purposes of education, parody or satire” and “user-generated content.” The new legislation also contains new safe harbours for Internet intermediaries, including for hosts and Internet location tool providers; however, providers should be aware these safe harbour provisions are subject to the new “enablement” remedy and are also subject to a “notice and notice” regime requiring intermediaries to relay notices of claimed infringement to their customers and keep records of customers’ identities. In mid-2012, the Supreme Court of Canada released fi ve new copyright decisions. The most important themes emerging from these decisions include an acknowledgement of the concept of technological neutrality Intellectual Property Doing Business in Canada 96INTELLECTUAL PROPERTY (the idea that digital and non-digital uses should receive comparable treatment under copyright law) and the continued treatment of copyright exceptions as “user rights.” However, it should be noted that the decisions were made under the historical Copyright Act, and may not apply predictably to the new provisions passed in late 2012. In November 2012, the Supreme Court issued another important copyright decision in which it prohibited the creation of copyright-like rights by anybody other than Parliament, in this instance barring a broadcast regulator from imposing a “value for signal” levy on retransmitters of copyright programming. In late 2013, the Supreme Court issued another important decision establishing the test for when copyrights are infringed by way of imitation. The test imposes a qualitative and holistic assessment of the similarities between works, which can be enhanced in certain settings by expert evidence, including for music and soft ware copyrights. Canada is a party to the Berne Convention and the Universal Copyright Convention. Depending on the nature of the work, the owner of copyright in a work has the sole right to reproduce, perform, publish or communicate the work. The Copyright Act provides that copyright arises automatically in all original literary, artistic, dramatic or musical works. The Copyright Act provides that registration is permissive rather than mandatory. However, registration does raise certain presumptions in favour of the registered owner that are useful in the context of litigation. In general, copyright lasts for the life of the author plus 50 years. Since 1993, computer programs are expressly protected, under statute, as literary works. The Canadian government has also recently passed amendments to the Copyright Act, Trade-marks Act and Customs Act that create signifi cant new anti-counterfeiting remedies tying to infringements of copyright. These amendments permit copyright holders and owners of registered trade-marks to submit a “request for assistance” to the Canada Border Services Agency. Through this new system, rights holders may request that border offi cers detain commercial shipments suspected of containing counterfeit or pirated goods, thus enabling the rights holder to begin civil proceedings in court. Trade-marks The Trade-marks Act protects interests in words, symbols, designs, slogans or a combination of these to identify the source of wares or Intellectual Property mccarthy.ca 97INTELLECTUAL PROPERTY services. At present, rights in a trade-mark are created through use in Canada (or in the case of foreign owners, by use abroad and eventual registration in their home country). It is possible to reserve rights by fi ling based on an intent to use a trade-mark in Canada. Registration is permissive and not mandatory. Registration does, however, give the registrant the exclusive right to use the mark throughout Canada and facilitates enforcement. Without a registration, an owner’s rights are limited to the geographic area where the mark has been used. If the trade-mark owner intends to license the mark for use by others, even by a subsidiary company, proper control over its use by the licensee is essential for proper protection. While a trade-mark endures for as long as the owner uses it to identify his or her wares or services, registrations CANADA IS NOT A MEMBER OF THE MADRID AGREEMENT OR THE MADRID PROTOCOL. can be attacked on the basis of non-use or invalid registration. The fi rst term of a registration is for 15 years and is renewable for successive 15- year terms on payment of a renewal fee. Canada is not a member of the Madrid Agreement, the Madrid Protocol, or the Singapore Treaty, but is taking steps toward accession through legislation that is expected to come into force in 2016. These amendments will expand protection to novel “signs” such as letters, colours, holograms, sounds, scents, tastes and textures. They will eff ectively remove the requirement for an applicant to have made “use” of a trade-mark in Canada or elsewhere before obtaining registration. The amendments will also implement Nice classifi cation and shorten the renewal term to 10 years. Domain Names The Internet’s domain name system and the Internet-based practice of meta-tagging present the intellectual property system and especially trade-mark law with some interesting challenges. The confl ict between the registered trade-mark system and a domain names registry is the result of domain name registrations following a “fi rst come, fi rst served” policy, without an initial, independent review of whether the name being registered is another person’s registered trade-mark. At the same time, a domain name in some respects is more powerful than a trade-mark, as there can only be one company name registered for each top-level domain. To obtain a Canadian “.ca” registration, a would-be registrant must Intellectual Property Doing Business in Canada 98INTELLECTUAL PROPERTY meet certain Canadian-presence requirements. These present certain challenges for foreign entities that do not wish to incorporate in Canada. While the ownership of a registered Canadian trade-mark suffi ces to meet the requirement, the owner may reserve only those domain names that consist of or include the exact word component of that registered trade-mark. In Canada, some trade-mark owners have successfully used the doctrine of “passing off ” in combating so-called “cybersquatters.” In other cases, they have argued trade-mark infringement under the Trade-marks Act. To gain control of a domain name, it might also be possible to argue “depreciation of goodwill” under Section 22 of the Trade-marks Act as well as misappropriation of personality rights. The Canadian Internet Registration Authority (CIRA) Domain Name Dispute Resolution Policy (CDRP) is an online domain name dispute resolution process for the “.ca” domain name community. One- or three-member arbitration panels consider written arguments and render decisions on an expedited basis. Among other features, the CDRP permits a panel to award costs of up to $5,000 against a complainant found guilty of reverse domain name hijacking. Other Intellectual Property Patents, copyrights, trade-marks and domain names represent some of the most common types of intellectual property. However, in today’s economy, intellectual property protection takes many additional forms. The common law protects against the misappropriation of trade secrets, personality rights and passing off , among other things. It also protects privacy and personality rights to some degree. A broad range of particular rights and obligations also arise under more specifi c statutes such as the Industrial Design Act, the Integrated Circuit Topography Act, the Personal Information Protection and Electronic Documents Act, the Plant Breeders’ Rights Act, the Competition Act, the Public Servants Inventions Act and the Status of the Artist Act. FOR MORE INFORMATION, PLEASE CONTACT: Barry Sookman 416-601-7949 [email protected] INFORMATION TECHNOLOGY Export Control of Technology 101 Consumer Protection — Internet Agreements 101 Evidence Laws 102 E-Commerce Statutes 103 Anti-spam, Anti-spyware 104 Cyber-Libel 104 Jurisdiction 104 Criminal Law 105 By Charles Morgan Information Technology mccarthy.ca INFORMATION TECHNOLOGY 101 INFORMATION TECHNOLOGY* Export Control of Technology In Canada, the control of exports in technology falls within the mandate of the federal government. These controls apply not just to physical OVER THE PAST DECADE, VARIOUS LEGISLATIVE INITIATIVES HAVE PROVIDED MORE LEGAL CERTAINTY TO DOING BUSINESS ONLINE. shipments, but also to transfers by intangible means, including through the provision of services or training, downloads or other electronic fi le transfers, e-mails, faxes, telephone conversations and face-to-face meetings. Export of certain computers, technology and other products may be controlled by means of the Export and Import Permits Act (EIPA), the United Nations Act (UNA), or the Special Economic Measures Act (SEMA). Under the UNA and the SEMA, Canada can restrict the export of goods, as well as the movement of people and money and the provisions of services, to any country against which the United Nations or Canada has imposed economic sanctions. The Export Control List (ECL) kept under the EIPA restricts certain hightech goods, but is not product specifi c; instead, it provides a set of technical specifi cations that are technology-neutral for the most part and are functional in their description. The ECL also regulates the export of certain soft ware (soft ware generally available to the public is not usually restricted). Soft ware and other items having cryptographic security features are generally covered by export controls, subject to certain limited mass market and public domain exceptions, unless the cryptography employs very low-key lengths. In addition, all U.S.-origin technology that is to be transferred to a destination other than the U.S. is subject to export controls. Consumer Protection — Internet Agreements Over the past decade, various legislative initiatives have provided more legal certainty to doing business online. In Ontario, for example, the Consumer Protection Act, 2002 (CPA) overhauled various existing consumer protection legal regimes and brought them under one roof for consistency and ease of administration. Some important extensions of the law favour consumers. These extensions are particularly germane to online commerce, where a growing number of Canadian consumers *Updated and current as of March 1, 2015 Information Technology Doing Business in Canada 102INFORMATION TECHNOLOGY buy and sell goods and services, though they apply generally outside e-commerce as well. See Manufacture and Sale of Goods — Consumer Protection. The creation of a new implied warranty, for example, requires that services supplied under a consumer agreement be of “a reasonably acceptable quality.” It also extends the implied warranties in the Sale of Goods Act to goods that are leased or traded. Another important change is a provision that prohibits contracting out of the class action proceedings regime. This is designed to counteract the practice of some merchants to provide arbitration as the contractually stipulated dispute resolution mechanism, precisely to avoid a class action scenario. Further, the CPA requires the merchant to provide the consumer with a fairly extensive list of disclosure information before concluding an Internet agreement. The CPA also requires that this information be disclosed to the prospective consumer in a manner that is “clear, comprehensible and prominent”, as well as “accessible.” In addition, a confi rmation screen that summarizes the consumer’s purchase details just before the conclusion of the online purchase is mandatory, along with the requirement that the merchant provide a copy of the Internet agreement to the consumer within 15 days aft er the consumer enters into that agreement. Finally, recent amendments to the CPA set out rules for pre-paid cards such as gift cards, which comprise a growing segment of the consumer economy, especially online. These rules cover a number of requirements and limitations on issuers, such as whether a gift card can have an expiration date or whether the issuer can charge the consumer any fees, among other things. Similar provisions regulate internet agreements and pre-paid cards have been adopted in the majority of Canadian provinces. Evidence Laws Most jurisdictions in Canada have adopted rules of evidence that specifically address electronic documents. The statutes now also provide for the best-evidence rule to be satisfi ed in respect of electronic records, by proof of the integrity of the electronic records system by which the data was recorded or preserved. These provisions allow the integrity of the record-keeping system to be implied from the operation of the underlying computer-related devices. In short, the amendments support the admissibility of electronic evidence, while still permitting a party to challenge the reliability of the computer system or network that produced the evidence. Information Technology mccarthy.ca 103INFORMATION TECHNOLOGY In the current era of electronic word processing coupled with e-mail, strict and literal compliance with litigation discovery rules, such as Rule 30 of the Rules of Civil Procedure (Ontario), would prove very expensive and largely of limited value to participating litigants. Therefore, judges in Canada are increasingly receptive to having parties to litigation follow e-discovery guidelines. These require, for example, that parties contemplating or threatened with litigation must consider e-evidence issues and, among other things, circumscribe the scope of e-discovery in order to comply with Rule 30. See Dispute Resolution — Electronic Discovery. E-Commerce Statutes The Canadian provinces have adopted electronic commerce statutes that address a variety of issues that arise in doing business electronically, such as the validity of using electronic messages to meet the writing requirements for legal documents. Ontario’s Electronic Commerce Act, for example, provides that the legal requirement for a document to be in writing is satisfi ed by a document that is in electronic form — such as e-mail — if it is accessible so as to be usable for subsequent reference. The provincial electronic commerce statutes also stipulate that one can satisfy any legal requirement that a document be signed by an electronic signature. The defi nition of “electronic signature” is very broad and encompasses any electronic information that a person creates or adopts in order to sign a document and that is in, attached to or associated with the document. The federal Personal Information Protection and Electronic Documents Act (PIPEDA) is somewhat narrower and focuses only on “secure electronic signatures,” which is currently taken by the government to mean, essentially, an authentication process based on public key type encryption. In addition to writing and signature rules, most provincial electronic commerce statutes provide that an off er, an acceptance or any other matter material to the formation or operation of a contract may be expressed by electronic information or by an act intended to result in electronic communication, such as touching or clicking an appropriate icon or other place on a computer screen or even by speaking. These rules are useful because they confi rm that contracts made over the Internet will not be unenforceable simply because they were concluded electronically. There is jurisprudence in Canada supporting the Information Technology Doing Business in Canada 104INFORMATION TECHNOLOGY enforceability of “express-click consent” agreements. Where a user is not required to click “I agree” expressly, but rather where the terms say, for example, that using the website denotes consent to the terms, there is less certainty as to enforceability. Anti-spam, Anti-spyware The federal government enacted Canada’s THERE IS JURISPRUDENCE IN CANADA SUPPORTING THE ENFORCEABILITY OF “EXPRESSCLICK CONSENT” AGREEMENTS. Anti-Spam Act (CASL) in December 2010. CASL came into force in 2014. The legislation implements a broad range of requirements intended to reduce spam, identity theft , phishing and spyware. It will also allow businesses and consumers to take civil action against violators and will allow the Canadian Radiotelevision and Telecommunications Commission (CRTC) and the Competition Bureau to seek administrative monetary penalties of up to $1 million for individuals and $10 million for other off enders. Canadian regulators will be given the power to share information and evidence with their counterparts in other countries. Many industry groups consider parts of the legislation to be overreaching because: a) the law governs all forms of “commercial electronic messages” (not merely e-mails used for direct marketing); and b) the law imposes an “opt-in” consent requirement and detailed disclosure requirements to both the delivery of “commercial electronic messages” and to the installation of computer programs on another person’s computer system (whether or not the computer program might be considered “spyware” or “malware”). Cyber-Libel Cyber-libel is posting a publication onto the Internet that is calculated to injure the reputation of another without lawful excuse. Recent Canadian court decisions have awarded signifi cant damages to plaintiff s who were libelled by defendants sending defamatory e-mails and making other similar online postings about plaintiff s. The case law is developing to minimize potential liability of responsible hosts of online discussion forums. Jurisdiction In the criminal, quasi-criminal and regulatory arenas, Canadian courts and Information Technology mccarthy.ca 105INFORMATION TECHNOLOGY regulators seem to have little hesitation assuming jurisdiction over foreign-originated Internet-related conduct they view as harmful to the public good, so long as there is a real and substantial connection to the THE CANADIAN GOVERNMENT HAS MADE USEFUL STRIDES IN COMBATING COMPUTER CRIME BY CONTINUOUSLY AMENDING THE CRIMINAL CODE OVER THE PAST 20 YEARS. court’s or regulator’s own jurisdiction. Criminal Law In general, the Canadian government has made useful strides in combating computer crime by continuously amending the Criminal Code over the past 20 years to keep pace with perpetrators of computer-related crime. However, the Internet and other computerbased technologies and business practices raise a number of novel questions under these amendments, as well as the older provisions of the Criminal Code, highlighting (among other challenges) the diffi culty in enforcing a national criminal law in an increasingly global technology environment. As technology evolves, the applicability of the Criminal Code to certain harmful behaviour remains in question. FOR MORE INFORMATION, PLEASE CONTACT: Charles Morgan 514-397-4230 [email protected] LANGUAGE Outside Québec 109 Inside Québec 109 By Charles Morgan Language LANGUAGE LANGUAGE* Language rules in most of Canada apply primarily to government institutions, not private businesses. Canada’s Constitution grants English and French equal status in Canada’s Parliament and federal courts. Every law must be published in both English and French in some provinces, including Québec. The federal Offi cial Languages Act, given additional profi le by the Canadian Charter of Rights and Freedoms, requires that all federal institutions provide services in either language wherever there is demand for it, or wherever the travelling public is served. Public education is available in either offi cial language, where numbers warrant. Outside Québec CANADA’S CONSTITUTION GRANTS ENGLISH AND FRENCH EQUAL STATUS IN CANADA’S PARLIAMENT AND FEDERAL COURTS. Outside Québec, the main exception to this focus on the public sector is consumer packaging. Regulations under the federal Consumer Packaging & Labelling Act identify specifi c information with which pre-packaged consumer products sold in Canada must be labelled. That information must be set out in both English and French. Exceptions include religious, specialty-market and test products, and language-sensitive products, such as books and greeting cards. Although Canada is bilingual at the federal level, other governments in Canada may apply their own language policies to matters within their jurisdiction. New Brunswick and the three northern territories are offi cially bilingual. Several provinces have adopted legislation to ensure that public services are available in French where warranted; but only Québec’s language legislation regulates how businesses operate. Inside Québec Québec’s Charter of the French Language (Charter) affi rms French as that province’s offi cial language. The Charter grants French-language rights to everyone in Québec, both as workers and as consumers. Anyone who does business in Québec — anyone with an address in Québec and anyone who distributes, retails or otherwise makes a product available in Québec — is therefore subject to rules about how they interact with the public and how they operate internally inside the province. mccarthy.ca 109 *Updated and current as of March 1, 2015 Language Doing Business in Canada 110LANGUAGE In the Workplace In Québec, written communications with staff must be in French, including off ers of employment and promotion and collective agreements. No one may be dismissed, laid off , demoted or transferred for not knowing RULES ABOUT HOW BUSINESSES COMMUNICATE IN QUÉBEC’S MARKETPLACE DIFFER ACCORDING TO WHETHER THE COMMUNICATION IS IN A PUBLIC OR PRIVATE PLACE. a language other than French — but knowledge of English or another language may be made a condition of hiring if the nature of the position requires it. Businesses that employ at least 50 people within Québec for at least six months must register with a provincial regulator (the Québec French Language Offi ce or OQLF) to obtain a francization certifi cate by demonstrating that the use of French is generalized at all levels of the business (including in relation to the use of information technology and in communications with clients, employees and investors). Businesses where the use of French is not generalized at all levels may be subject to a francization program in order to achieve this goal over time. In addition, businesses with at least 100 employees must establish an internal francization committee that monitors the use of French in the workplace. In the Marketplace Rules about how businesses communicate in Québec’s marketplace diff er according to whether the communication is in a public or private place. Billboards and signs visible from a public highway, on a public transport vehicle or in a bus shelter must be exclusively in French. Public signs, posters and commercial advertising located elsewhere may include other languages, but the French text must predominate. Non-French business names must be accompanied by a French version appearing no less prominently, unless the non-French name has been trade-marked and a French version has not. Moreover, anyone carrying on business at a Québec location must register a French language business name. Communications such as leafl ets, catalogues, brochures, order forms, invoices, receipts, user manuals, warranties and product packaging must include French text that is no less prominent than any non-French text displayed. Because such communications are not displayed in a public Language mccarthy.ca 111LANGUAGE place, however, the French text need not predominate. The latter rule applies not only to communications and product labelling, but also directly to certain products that use words. Subject to certain cultural exceptions, for example, the words on toys and games must be available in French alongside any other language version. As regards to soft ware products, if a French-language version of the soft ware exists and has been made commercially available somewhere in the world, then non-French versions may be sold in Québec only if a functionally equivalent French-language version is simultaneously made available in Québec on terms and conditions that are equally attractive to those applicable to the non-French version. Québec courts have held that certain provisions of the Charter apply to websites. For example, product and service descriptions on websites may be subject to French-language requirements since they are akin to a commercial catalogue. Similarly, standard form contracts (such as website terms of use and privacy policies) as well as order forms must be draft ed in French according to the Charter. In general, if a company has a physical address in Québec and its website advertises products or services sold in Québec, then the above-mentioned aspects of the website may be subject to French language requirements. FOR MORE INFORMATION, PLEASE CONTACT: Charles Morgan 514-397-4230 [email protected] IMMIGRATION Permanent Residence 115 Work Permits 116 Temporary Entry 118 By Naseem Malik Immigration IMMIGRATION mccarthy.ca 115 IMMIGRATION The federal government is responsible for immigration, although some provinces have entered into agreements with the federal government enabling them to assume certain policy and procedural objectives. These agreements are called Provincial Nominee Programs. The federal statute governing Canadian immigration law is the Immigration and Refugee Protection Act (IRPA). Permanent Residence Any non-Canadian entering the country and planning to remain as a permanent resident must fi rst apply for, and then be granted, a permanent resident visa. There are a number of diff erent categories under which a person may apply for permanent residence, including skilled workers, investors, entrepreneurs and family class sponsorship. An entrepreneur applicant must demonstrate the intention and ability to establish or acquire a substantial interest in a viable business that will create or maintain job opportunities for Canadians, and must participate actively in the management of the business. An applicant in the investor category must have a minimum net worth and be willing to invest a set amount, either with the federal government or with any of a number of provincial investor programs. Due to recent rule changes the Federal Investor and Federal Skilled Worker programs are no longer viable for most foreign nationals who intend to seek permanent residence. This series of changes has made the various Provincial Nominee programs for permanent residence a more critical component of the permanent resident application system. Provincial Nominee programs are agreements between the federal government and some of the provinces whereby there is a delegation of authority to the provincial government to allow a limited right to select immigrants destined to its province. Each Provincial Nominee Program has its own selection criteria. In 2008, the Department of Citizenship and Immigration Canada introduced a new category for permanent residence called the Canadian Experience Class (CEC). This category allows temporary foreign workers who have garnered a requisite amount of Canadian work experience on a work permit to apply from within Canada for permanent residence, thus bypassing the more complex and restrictive skilled worker category. The Immigration Doing Business in Canada 116IMMIGRATION CEC is also available for foreign students in Canada who have met the appropriate criteria for both post-secondary study and a minimum level of Canadian work experience aft er completing their studies in Canada. This progressive change in immigration policy signals the beginning of a new approach the Canadian government is adopting to encourage more skilled workers to migrate to Canada. In 2013, the amount of time a skilled worker in Canada had to accumulate with respect to Canadian work experience in order to be eligible for this category was reduced from 24 to 12 months. Québec has an agreement with the federal government on immigration matters. The Québec agreement provides for a separate selection process for permanent residents, and some additional procedures for temporary entry that are administered by the government of Québec. WORK PERMIT EXEMPT CATEGORIES INCLUDE THE NAFTA BUSINESS VISITOR AND THE INTRACOMPANY TRAINER. Work Permits Generally, any business-related activity carried on in Canada on a temporary basis by a person who is neither a Canadian citizen nor a Canadian permanent resident, for which remuneration is received, or would reasonably be expected to be received, requires a work permit. There are, however, a number of work permit exempt categories that allow a foreign national, if eligible, to carry on prescribed business activities in Canada without need for a work permit. Work permit exempt categories include the NAFTA Business Visitor and the intracompany trainer. Under certain circumstances, multinational or other foreign companies carrying on business in Canada may transfer executive or senior managerial employees or workers with specialized knowledge to work in Canada on a temporary basis, subject to the person who is to be transferred obtaining a work permit. A person might be eligible for a work permit as an intra-company transfer pursuant to three separate and distinct international agreements — The North American Free Trade Agreement (NAFTA), the Canada-Chile Free Trade Agreement (CCFTA) and the General Agreement on Trade in Services (GATS). These three international agreements liberalized the rules respecting the temporary entry of business visitors, certain professionals and intra-company Immigration mccarthy.ca 117IMMIGRATION transferees who are citizens or permanent residents of the numerous countries that are GATS signatories or citizens of the United States or Mexico (in the case of NAFTA) or citizens of Chile (in the case of CCFTA). Recently, the rules concerning the maximum work permit duration limits for the NAFTA Professional category have been increased from 12 months to three years for any single work permit issued. In addition to certain prescribed work permit categories under these IN ADDITION TO CERTAIN PRESCRIBED WORK PERMIT CATEGORIES UNDER NAFTA, CCFTA AND GATS, THERE ARE ALSO A NUMBER OF OTHER EXEMPT CATEGORIES AVAILABLE UNDER THE REGULATIONS OF THE IRPA, INCLUDING ONE FOR INTRA-COMPANY TRANSFERS. agreements, there are also a number of other exempt categories available under the Regulations of the IRPA, including one for intra-company transfers. In 2008, Citizenship and Immigration Canada also relaxed duration limits for young workers under the post-graduation work permit category, raising duration limits in some cases to three years from the typical 12 months. The post-graduation work permit was also shift ed to an open work permit, which makes it non-employer-specifi c and allows more fl exibility to young graduates to pursue employment options in the Canadian labour market. If an employee is not eligible for any of the exempt categories, he or she can still obtain a work permit if his or her Canadian employer can fi rst obtain a Labour Market Opinion from Service Canada, a federal government agency. To do so, the Canadian employer must demonstrate that granting a work permit to the employee will result in the transfer of skills or technology to Canadians or will result in other types of positive benefi ts, such as job creation. Usually the employer must also show that there are no Canadians available to do the job. Stricter rules for the maximum total duration of some work permits based on Labour Market Opinions went into eff ect in April 2011, which cap the total duration at four years for some types of work. At that time, the foreign national will no longer be able to hold a lawful work permit until a subsequent four years has passed. Tougher new rules concerning penalties for employers who do not comply with immigration laws also Immigration Doing Business in Canada 118IMMIGRATION came into eff ect on April 1, 2011, which can now bar a company from bringing anyone into Canada to work for a mandatory two-year period should it be deemed to have breached Canadian immigration laws. The rules concerning the issuance of Labour Market Opinions changed signifi cantly in 2013. Some of the signifi cant changes include a processing fee for each worker being requested and longer and more numerous types of advertising required in advance of a Labour Market Opinion being fi led to demonstrate that the Canadian labour market was extensively searched prior to the hire of a foreign national. Temporary Entry With respect to temporary entry, nationals of certain countries may also be required to obtain a temporary resident visa (formerly, a visitor visa) to enter Canada, and may be required to undergo a medical examination before arriving for entry to Canada. The rules and regulations governing both permanent and temporary entry to Canada are complex and ever changing. It is therefore prudent for any company to become familiar with Canadian immigration laws before establishing a commercial presence in Canada. FOR MORE INFORMATION, PLEASE CONTACT: Naseem Malik 416-601-8218 [email protected] INTERNATIONAL TRADE AND INVESTMENT The World Trade Organization 121 The North American Free Trade Agreement 122 Canada-European Union Comprehensive Trade and Economic Agreement 123 Other Free Trade Agreements 123 Bilateral Investment Treaties 124 Agreement on Internal Trade 124 Duties and Taxes on the Importation of Goods 125 Other Requirements for Imported Goods 126 Trade Remedies 127 Export and Import Controls 127 Controlled Goods Program 128 Trade Embargoes 129 Government Procurement of Goods and Services 129 Anti-Corruption Legislation 130 By John Boscariol International Trade and Investment mccarthy.ca INTERNATIONAL TRADE AND INVESTMENT 121 INTERNATIONAL TRADE AND INVESTMENT Canada is a member of the World Trade Organization (WTO) and a party to the North American Free Trade Agreement (NAFTA) as well as numerous other regional trade and investment protection agreements. As such, Canada has rights and obligations in a wide range of areas addressed under these treaties. Because of the broad scope of these trade and investment agreements and their binding dispute settlement mechanisms, foreign investors establishing a business in Canada should be cognizant of Canada’s obligations and the remedies available to them, particularly where they are facing discriminatory or otherwise harmful government measures. The regulatory regimes discussed below apply to those doing business in Canada and engaged in the international transfer of goods, services and technology. The World Trade Organization As a member of the WTO, Canada is subject to a broad range of obligations that impact all sectors of the Canadian economy. These obligations govern Canadian measures concerning market access for foreign goods and services, foreign investment, the procurement of goods and services by government, the protection of intellectual property rights, the implementation of sanitary and phytosanitary measures and technical standards (including environmental measures), customs procedures, the use of trade remedies, such as anti-dumping and countervailing duties, and the subsidization of industry. These WTO obligations apply to Canadian government policies, administrative and legislative measures, and even judicial action. They apply to the federal government and also in many cases to provincial and other sub-federal governments. Canada is an active participant in the WTO’s dispute settlement system, both as complainant and respondent. As a result of WTO cases brought against Canada by other countries, Canada has had to terminate or amend off ending measures in numerous sectors, including automotive products, magazine publishing, pharmaceuticals, dairy products, green energy, and aircraft . On the other hand, Canadian successes under the International Trade and Investment Doing Business in Canada 122INTERNATIONAL TRADE AND INVESTMENT WTO dispute settlement system have increased access for Canadian companies to markets around the world. The North American Free Trade Agreement NAFTA came into eff ect on Jan. 1, 1994, and provided for the elimination of trade barriers among Canada, the United States and Mexico. Between GOODS WHOLLY PRODUCED OR OBTAINED IN CANADA, MEXICO OR THE UNITED STATES, OR ALL THREE, WILL QUALIFY FOR PREFERENTIAL TARIFF TREATMENT. Canada and the United States, the process of tariff elimination initiated pursuant to the Canada-United States Free Trade Agreement that came into eff ect on Jan. 1, 1989 was continued under NAFTA. On Jan. 1, 1998, customs duties were completely eliminated with respect to U.S.-origin products imported into Canada, with the exception of certain supply managed goods, including dairy and poultry products. Eff ective Jan. 1, 2003, virtually all customs tariff s were eliminated on trade in originating goods between Canada and Mexico. While NAFTA eliminates tariff barriers among Canada, Mexico and the United States, each country continues to maintain its own tariff system for non-NAFTA countries. In this respect, NAFTA diff ers from a customs union arrangement of the kind that exists in the European Union, whereby the participating countries maintain a common external tariff with the world. A system of rules of origin has been implemented to defi ne those goods entitled to preferential duty treatment under NAFTA. Goods wholly produced or obtained in Canada, Mexico or the United States, or all three, will qualify for preferential tariff treatment, as will goods incorporating non-NAFTA components that undergo a prescribed change in tariff classifi cation, and that in some cases satisfy prescribed value-added tests. Provided the NAFTA rules of origin are satisfi ed, investors from non-NAFTA countries may establish manufacturing plants in Canada through which non-NAFTA products and components may be further processed and exported duty-free to the United States or Mexico. NAFTA Chapter 11 imposes obligations on Canada concerning its treatment of investors of other NAFTA countries. It also contains an investor-state dispute settlement mechanism, which permits a private investor of one NAFTA country to sue the government of another NAFTA country for loss or damage arising out of that government’s International Trade and Investment mccarthy.ca 123INTERNATIONAL TRADE AND INVESTMENT breach of its investment obligations. Under NAFTA Chapter 11, the federal government can be sued for damages arising out of provincial government measures that are inconsistent with NAFTA’s investment obligations. While NAFTA contains many obligations similar to those found in WTO agreements, it is sometimes referred to as “WTO-plus” because of enhanced commitments in certain areas, including foreign investment, intellectual property protection, energy goods (such as oil and gas), fi nancial services, telecommunications and rules of origin. NAFTA also establishes special arrangements for automotive trade, trade in textile and apparel goods, and agriculture. Canada-European Union Comprehensive Trade and Economic Agreement On Oct. 18, 2013, Canada and the European Union reached an agreement in principle on the terms of the Comprehensive Economic Trade Agreement (CETA). As Canada’s broadest and most signifi cant trade agreement to date, CETA is anticipated to signifi cantly liberalize trade and investment rules applicable to economic relations between the two regions. In addition to reduction and elimination of customs duties, CETA will address trade in services (including fi nancial services), movement of professionals, government procurement (including at the provincial and municipal levels), technical barriers to trade, investment protection and investor-state dispute settlement, and intellectual property protections (including for geographical indications and pharmaceuticals). Once the fi nal text of the agreement is signed, it will then need to be ratifi ed by the respective legislatures of Canada and the European Union. This is expected to occur in within the next 24 months. Other Free Trade Agreements In addition to CETA, NAFTA and the agreements of the WTO, Canada has also negotiated free trade agreements with Colombia, Chile, Costa Rica, Honduras, Jordan, Israel, Panama, Peru and the European Free Trade Association (Iceland, Liechtenstein, Norway and Switzerland). Canada is currently in preliminary talks regarding free trade deals with India, Japan, South Korea, Turkey, Ukraine, Morocco, the Caribbean Community (CARICOM), the Dominican Republic, Singapore, the Andean International Trade and Investment Doing Business in Canada 124INTERNATIONAL TRADE AND INVESTMENT Community, El Salvador, Guatemala and Nicaragua. Canada is also participating in the negotiation of the Trans-Pacifi c Partnership. Bilateral Investment Treaties Bilateral investment treaties (BITs) between Canada and 26 developing countries and former communist-bloc nations are currently in force. Like NAFTA Chapter 11, these BITs govern a range of foreign investment issues, including the treatment of foreign investors and their investments, performance requirements, expropriation and compensation, and government-to-government dispute settlement mechanisms. To investors, perhaps the most important feature of these BITs is that they also contain private investor-state dispute settlement mechanisms that enable foreign investors to sue host governments, including Canada, for damages arising out of breaches of their investment treaty obligations. Foreign investors intending to establish a business in Canada are advised to determine whether their home state has a bilateral investment treaty with Canada; if so, their rights as an investor may be enhanced. Canadianbased businesses will also benefi t from the BIT protections available for their foreign direct investment in developing countries. Canada recently concluded negotiations of BITs with China, Benin, Bahrain, Kuwait, Madagascar, Mali, Senegal, Serbia, Nigeria, Zambia, Cameroon, Côte d’Ivoire, and Tanzania. Canada is currently in the process of negotiating BITs with India, Indonesia, Vietnam, Pakistan and a number of other countries. Agreement on Internal Trade The federal government of Canada has negotiated the Agreement on Internal Trade (AIT) with each of the governments of Canada’s provinces and territories. The AIT contains obligations pertaining to: measures restricting or preventing the movement of goods, services and investment across provincial boundaries; measures relating to investors of a province; the government procurement of goods and services; consumer-related measures and standards; labour mobility; agricultural and food goods; alcoholic beverages; natural resources processing; communications; transportation; and environmental protection measures. The AIT also provides for government-to-government and person-to-government dispute resolution. International Trade and Investment mccarthy.ca 125INTERNATIONAL TRADE AND INVESTMENT Duties and Taxes on the Importation of Goods Importers are required to declare imported goods upon entry into Canada and to pay customs duties and excise taxes, if applicable, to Canada’s customs authority, the Canada Border Services Agency (CBSA). Goods are subject to varying rates of duties depending upon the type of commodity and its country of origin. As a member of NAFTA, Canada accords preferential tariff treatment to goods of U.S. and Mexican origin; in most cases, these goods may be imported duty-free. The amount of customs duties payable is a function of the rate of duty (determined by the tariff classifi cation and the origin of the goods, and as set out in the Schedule to Canada’s Customs Tariff) and the value for duty. Canada has adopted the World Customs Organization’s Harmonized System of tariff classifi cation, as have all of Canada’s major trading partners. In accordance with Canada’s obligations under the WTO’s agreement regarding customs valuation, the value for duty of goods imported into Canada is, if possible, to be based on the price paid or payable for the imported goods, subject to certain statutory adjustments. This primary basis of valuation is called the “transaction value method.” An example of an adjustment that would increase the value for duty of the goods is a royalty payment, if the royalty is required to be paid by the purchaser of the imported goods as a condition of the sale of the goods for export to Canada. An example of an adjustment that would allow for a deduction from the price paid or payable is the transportation cost incurred in shipping the goods to Canada from the place of direct shipment, if such costs are included in the price paid or payable by the importer. If for one reason or another (e.g., where there has been no sale of the goods) the transaction value of the goods may not be used as a basis for the declared customs value, Canadian legislation provides for alternative methods for valuation. These methods must be applied sequentially. In addition to customs duties, GST in the amount of 5% is also payable upon the importation of goods. This GST rate is applied to the duty-paid value of the goods. Provided that they have acquired the goods for use in commercial activity, importers registered under the Excise Tax Act will be able to recover GST paid upon importation by claiming an input tax credit. See Sales and Other Taxes — Federal Goods and Services Tax. International Trade and Investment Doing Business in Canada 126INTERNATIONAL TRADE AND INVESTMENT Other Requirements for Imported Goods Certain imported goods are required to be marked with their country of origin. These generally fall within the following product categories: goods for personal or household use; hardware, novelties and sporting goods; paper products; wearing apparel; and horticultural products. Certain types of goods, or goods imported under specifi c conditions, are exempt from the country-of-origin-marking requirement. Pre-packaged products (i.e., products packaged in a container in such a manner that it is ordinarily sold to or used or purchased by a consumer without being re-packaged) imported into Canada are also subject to requirements under the federal Consumers Packaging and Labelling Act. Consumer textile articles are subject to the requirements of the federal Textile Labelling Act. There are also signifi cant legislative requirements relating to the importation of foods, agricultural commodities, aquatic commodities and agricultural inputs. They are all subject to the inspection procedures of the Canadian Food Inspection Agency. CERTAIN GOODS ARE PROHIBITED FROM BEING IMPORTED INTO CANADA , INCLUDING OBSCENE MATERIALS, CERTAIN HAZARDOUS PRODUCTS AND CERTAIN PROHIBITED WEAPONS AND FIREARMS. Counterfeit trade-mark or pirated copyright goods may be detained upon importation into Canada. In accordance with the Copyright Act and the Trade-marks Act, the owner of a registered trade-mark, the owner or exclusive licensee of a copyright, or the owner of a performer’s performance may apply to the court for an order directing the CBSA to take reasonable measures to detect and detain alleged infringing goods that are being imported into Canada. When the CBSA detects such imported goods, the goods will be detained and the importer will be notifi ed. Certain goods are prohibited from being imported into Canada. These include: materials deemed to be obscene under Canada’s Criminal Code; base or counterfeit coins; certain used or second-hand aircraft s; goods produced wholly or in part by prison labour; used mattresses; any goods in association with which there is used any description that is false in a material respect as to their geographical origin; certain used International Trade and Investment mccarthy.ca 127INTERNATIONAL TRADE AND INVESTMENT motor vehicles; certain parts of wild birds; certain hazardous products; white phosphorous matches; certain animals and birds; materials that constitute hate propaganda; and certain prohibited weapons and fi rearms. Trade Remedies Canada maintains a trade remedy regime that provides for the application of additional duties and/or quotas to imported products, where such products have injured or threaten to injure the production of like goods in Canada. The federal Special Import Measures Act provides for the levying of additional duties on “dumped” products (i.e., products imported into Canada at prices lower than the comparable selling price in the exporting country) if they have caused or threaten to cause injury to Canadian industry. Duties may also be levied in instances of countervailable subsidies being provided by the government in the country of export, and if such subsidized products injure or threaten to injure Canadian industry. Further, Canada may apply safeguard surtaxes or quantitative restrictions on imports, where it is determined that Canadian producers are being seriously injured or threatened by increased imports of goods into Canada. These measures may be applied whether the goods have been dumped or subsidized. Canada also maintains a special safeguard mechanism for imports from China. This mechanism, in force until Dec. 11, 2013, allows Canadian manufacturers to seek the application of surtaxes and/or quantitative restrictions where goods originating in China are being imported into Canada in such increased quantities or under such conditions as to cause or threaten to cause “market disruption.” The Canadian government can also grant such protection where measures applied to imports of Chinese goods into the markets of other WTO members cause or threaten to cause a signifi cant diversion of trade into the Canadian market. Export and Import Controls Canada, for reasons of both domestic policy and international treaty commitments, maintains controls on imports, exports and transfers of International Trade and Investment Doing Business in Canada 128INTERNATIONAL TRADE AND INVESTMENT certain goods and technology and, in the case of exports, their CANADA, FOR REASONS OF BOTH DOMESTIC POLICY AND INTERNATIONAL TREATY COMMITMENTS, MAINTAINS CONTROLS ON IMPORTS, EXPORTS AND TRANSFERS OF CERTAIN GOODS AND TECHNOLOGY. destination country. The federal Export and Import Permits Act (EIPA) controls these goods through the establishment of three lists: the Import Control List (ICL), the Export Control List (ECL) and the Area Control List (ACL). Goods identifi ed on the ICL require an import permit, subject to exemptions (including for goods from certain countries of origin). These include steel products, weapons and munitions, and agricultural and food products such as turkey, beef and veal products, wheat and barley products, dairy products and eggs. The ECL identifi es those goods and technology that may not be exported or transferred from Canada without obtaining an export permit, subject to exemptions for certain destination countries. Controlled goods and technology are categorized into the following groups: dual-use items, munitions, nuclear non-proliferation items, nuclear-related dualuse goods, miscellaneous goods (including all U.S.-origin goods and technology, and certain medical products, forest items, agricultural and food products, prohibited weapons, nuclear-related and strategic items), missile equipment and technology, and chemical and biological weapons and related technology. Export permits must also be obtained for the export or transfer of any goods or technology, regardless of their nature, to countries listed on the ACL. At present, those countries are Burma (Myanmar), Belarus and North Korea. In addition to the EIPA, other Canadian legislation regulates import and export activity, including in respect of rough diamonds, cultural property, wildlife, food and drugs, hazardous products and environmentally sensitive items. Controlled Goods Program The Canadian government has established the Controlled Goods Program under the authority of the Defence Production Act. This program International Trade and Investment mccarthy.ca 129INTERNATIONAL TRADE AND INVESTMENT is a domestic industrial security regime for certain goods and technology that have a military application. It provides for defence trade controls to regulate and control the examination, possession and transfer in Canada of controlled goods and technology. Anyone who deals with controlled goods and technology in Canada must register with the Controlled Goods Directorate and comply with numerous security and other requirements. Trade Embargoes A number of nations are subject to Canadian trade embargoes under CANADA ALSO MAINTAINS VERY SIGNIFICANT PROHIBITIONS ON DEALINGS WITH TERRORIST ORGANIZATIONS AND INDIVIDUALS ASSOCIATED WITH SUCH GROUPS. the United Nations Act, the Special Economic Measures Act, the Freezing Assets of Corrupt Foreign Offi cials Act, and the Criminal Code. Canadian trade controls of varying scope apply to activities involving the following countries: Burma (Myanmar), Belarus, Iran, Lebanon, Côte d’Ivoire, Democratic Republic of the Congo, Egypt, Eritrea, Guinea-Bissau, Iraq, Liberia, North Korea, Pakistan, Somalia, Sudan, Syria, Tunisia and Zimbabwe. Canada also maintains very signifi cant prohibitions on dealings with listed “designated persons,” terrorist organizations and individuals associated with such groups. Unlike the United States, Canada does not maintain a general trade embargo against Cuba. Indeed, an order issued under the Foreign Extraterritorial Measures Act makes it a criminal off ence to comply with the U.S. trade embargo of Cuba, and requires that the Attorney General of Canada be notifi ed of communications received in respect of the U.S. embargo. Government Procurement of Goods and Services Given recent increases in government spending and the passage of stimulus legislation in Canada, the United States and other countries around the world, the disciplines imposed by trade agreements on government procurement have become particularly relevant. Among other things, these agreements restrict the extent to which governments may favour domestic goods and services in their procurement processes. International Trade and Investment Doing Business in Canada 130INTERNATIONAL TRADE AND INVESTMENT NAFTA (Chapter 10), the WTO Agreement on Government Procurement and the AIT (Chapter Five) all set out numerous requirements for procurement of goods and services that must be satisfi ed by the parties to those agreements, including Canada. These requirements include provisions that address technical specifi cations; the qualifi cation of suppliers; the design and issuance of requests for proposals; selective tendering procedures; tender documentation; negotiations that may occur during the tender; the process of submitting, receiving and opening tenders and awarding contracts; limited tendering procedures; and bid challenges. They apply to federal government departments and entities, as well as to various government enterprises and Crown corporations. In PURSUANT TO ITS NAFTA, WTO AND AIT OBLIGATIONS, CANADA’S BID CHALLENGE AUTHORITY FOR FEDERAL PROCUREMENT IS THE CANADIAN INTERNATIONAL TRADE TRIBUNAL. certain circumstances, they also apply to provincial government entities, including municipalities, municipal organizations, school boards and publicly funded academic, health and social service entities. Pursuant to its NAFTA, WTO and AIT obligations, Canada’s bid challenge authority for federal procurement is the Canadian International Trade Tribunal. Where the Tribunal fi nds that a procurement complaint is valid, it may recommend that a new solicitation be issued, the bids re-evaluated, the existing contract terminated and the contract awarded to the complainant or the complainant compensated for its loss of the contract. The Tribunal may also award costs incurred by the complainant in preparing a response to the solicitation. As noted above, CETA contains signifi cant government procurement obligations that apply not only at the federal level, but also at the provincial and municipal levels of government. Anti-Corruption Legislation The federal Corruption of Foreign Public Offi cials Act (CFPOA) makes it a criminal off ence for any person to off er or pay bribe to a foreign public offi cial. This CFPOA prohibits Canadians from directly or indirectly giving, off ering or agreeing to give or off er a loan, reward, advantage or benefi t of any kind to a foreign public offi cial in order to obtain or retain an advantage in the course of business. Canadian companies must International Trade and Investment mccarthy.ca 131INTERNATIONAL TRADE AND INVESTMENT therefore carefully scrutinize their activities abroad, including the actions of their agents and other business partners in other countries to ensure compliance with the CFPOA. In recent years, Canadian corporate culture has been undergoing signifi cant change in response to new and vigorous enforcement of the CFPOA by the Royal Canadian Mounted Police (RCMP) and Crown prosecutors. The widely publicized guilty pleas of Niko Resources Ltd. in June 2011 and Griffi ths Energy in 2013, and ongoing RCMP investigations into the activities of a number of other Canadian companies serve as stark warnings of the very signifi cant costs of non-compliance. With an additional 35 or so RCMP investigations underway, Canadian companies are moving quickly to design and implement anti-corruption policies and procedures as well as transactional risk mitigation strategies. FOR MORE INFORMATION, PLEASE CONTACT: John Boscariol 416-601-7835 [email protected] EMPLOYMENT Employment Standards 135 Labour Relations 138 Human Rights 138 Occupational Health & Safety 140 Privacy 140 Employment Benefi ts 140 By Rachel Solyom Employment mccarthy.ca 135EMPLOYMENT EMPLOYMENT* Employment in Canada is a heavily regulated area, governed by either federal or provincial legislation. The majority of employers are covered by provincial legislation, with the exception of “federal works or undertakings,” which include businesses involved in banking, shipping, railways, pipelines, airlines and airports, inter-provincial transportation, broadcasting and telecommunications. The types of employment-related legislation with which employers operating in Canada should be familiar include legislation dealing with: - employment standards; - labour relations; - human rights; - occupational health and safety; - federal and provincial privacy rules; and - employment benefi ts, including pension, employment insurance and workers’ compensation. The employment relationship in Canada is governed by a broad array of legislation and common law principles. Employers need to be aware of the various legal considerations to avoid unnecessary liability in the workplace. Employment Standards All jurisdictions in Canada have enacted legislation that governs minimum employment standards. Generally, employment standards acts (ESAs) are broad and apply to employment contracts, whether oral or written. The standards defi ned in the ESAs are minimum standards only, and employers are prohibited from contracting out of or otherwise circumventing the established minimum standards. These laws spell out which classes of employees are covered by each minimum standard and which classes of employees are excluded. Although standards vary across jurisdictions, many topics covered are common to all ESAs, including minimum wages, maximum hours of work, overtime hours and wages, rest and meal periods, statutory holidays, vacation periods and vacation pay, layoff , termination and severance pay and leaves of absence. The leaves of absence protected by ESAs vary across provinces, *Updated and current as of March 1, 2015 Employment Doing Business in Canada 136EMPLOYMENT but may include sick leave, bereavement leave, maternity/paternity/parental/ adoption leave, UNLIKE EMPLOYERS IN THE UNITED STATES, CANADIAN EMPLOYERS MAY NOT TERMINATE EMPLOYEES “AT WILL.” reservist leave, compassionate care/family medical leave, organ donor leave, personal emergency leave, family responsibility leave and crime-related death and disappearance leave. Unlike employers in the United States, Canadian employers may not terminate employees “at will.” Generally, employers must provide required notice of termination, unless they have just and suffi cient cause (Cause) to terminate an employee without notice. The length of the required notice period varies among jurisdictions, but generally increases with an employee’s length of service. In Alberta, for example, employees with a minimum of 3 months of service are generally entitled to at least one week’s notice of termination, with a maximum eightweek notice period for employees with 10 or more years of service. Employers are required either to give “working notice” of an employee’s job termination or provide pay in lieu of notice. An employer is not required to give notice or pay in lieu of notice if the termination is for Cause. Cause is a high standard and includes, for example, willful misconduct or serious disobedience. Certain classes of employees, including construction workers, employees on a temporary lay-off and employees terminated during or as a result of a strike or lockout may, on certain conditions, be exempted from the termination notice provisions of the legislation depending on the jurisdiction. In most jurisdictions, special provisions apply where a signifi cant number of employees are terminated within a specifi ed period of time. These provisions include, at the very least, advance written notice to the Director of Employment Standards or an equivalent governmental authority. Some jurisdictions provide for severance pay as an additional benefi t to employees. For example, under the federal rules, all employees who have been employed for 12 consecutive months are entitled to severance pay equal to the greater of: fi ve days of regular pay or two days of regular pay for each completed year of service. Employment mccarthy.ca 137EMPLOYMENT In Ontario, an employee with fi ve or more years of service may be entitled to severance pay if the employer, as a result of the discontinuation of all or part of its business, terminates 50 or more employees in a six-month period or if the employer has a payroll of $2.5 million or more. Severance pay is calculated on the basis of an employee’s length of service and may reach a maximum of 26 weeks of regular pay. As with pay in lieu of notice of termination, employees may be disqualifi ed from receiving severance pay if they have engaged in willful misconduct or disobedience or if they fall within other exceptions specifi ed in the legislation. In addition to minimum statutory termination and severance pay entitlements, a terminated non-union employee may be entitled by common law (or Civil law, in Québec) to additional notice of termination or pay in lieu of notice. This right may be enforced before the courts. The amount of notice will depend on the employee’s individual circumstances, including length of service, age, the type of position held and the prospect for future employment. In most jurisdictions, an employer can limit its liability to the statutory minimum in an employment contract. Employers who wish to avoid or limit liability for common law pay in lieu of notice should therefore have clear terms in written contracts. The manner in which an employer treats an employee at the time of dismissal is also important, because an employer may be liable to compensate an employee for any actual damages caused by tortious conduct. Federally-regulated employers may also face a complaint of unjust dismissal under the Canada Labour Code, which is available to nonunionized employees (not managers) with at least 12 months of service. If an adjudicator fi nds the employee’s complaint is valid, the remedy can include an award for lost wages and benefi ts or, in some circumstances, reinstatement of employment. Similarly, in Québec, an employee with at least two years of uninterrupted service to whom An Act respecting Labour Standards is applicable may make a complaint for dismissal without good and suffi cient cause. Upon fi nding that the complaint is valid, the adjudicator can also order reinstatement, the payment of lost wages and any other order that he or she believes to be fair and reasonable, taking into account all the circumstances of the matter. In Québec, the ESA specifi cally provides all employees — unionized or not — with a right to a psychological harassment-free workplace and creates a special recourse for employees who believe they have been Employment Doing Business in Canada 138EMPLOYMENT victims of such harassment. Employers are required to take reasonable steps to prevent psychological harassment and, should such harassment occur, take reasonable steps to put an end to it. Labour Relations The federal government and each province have enacted legislation governing the formation and selection of unions and their collective bargaining procedures. In general, where a majority of workers in an appropriate bargaining unit is in favour of a union, that union will be certifi ed as the representative of that unit of employees. An employer must negotiate in good faith with a certifi ed union to reach a collective agreement. Failure to do so may result in penalties being imposed. Most workers are entitled to strike if collective bargaining negotiations between the union and the employer do not result in an agreement; however, workers may not strike during the term of a collective agreement. Human Rights The Canadian Charter of Rights and Freedoms (Charter) is a constitutional HUMAN RIGHTS LEGISLATION STATES THAT PERSONS HAVE A RIGHT TO EQUAL TREATMENT AND A WORKPLACE FREE OF DISCRIMINATION ON THE BASIS OF ANY OF THE PROHIBITED GROUNDS. charter that governs the content of legislation and other government actions. It contains anti-discrimination provisions that may be enforced by the courts. In addition, all Canadian jurisdictions have enacted human rights codes or acts that specifi cally prohibit various kinds of discrimination in employment, including harassment. Whereas the Charter applies only to the actions of government, human rights legislation applies more broadly to the actions of private individuals and corporate entities, including employers of virtually every description. Beginning in January 2012, Ontario started enforcing a rolling set of compliance deadlines relating to the implementation of the Accessibility for Ontarians with Disabilities Act, 2005 (AODA). The AODA creates signifi cant obligations for public and private sector organizations in Ontario with respect to accessibility for persons with disabilities, including specifi c obligations relating to accessibility and accommodation in employment. Manitoba has recently enacted similar accessibility legislation with rolling Employment mccarthy.ca 139EMPLOYMENT compliance deadlines set to begin in 2016. Human rights legislation states that persons have a right to equal treatment and a workplace free of discrimination on the basis of any of the prohibited grounds. These vary somewhat from one jurisdiction to another, but generally include race, ancestry, place of origin, colour, ethnic origin, religion, gender (including pregnancy), sexual orientation, gender identity, gender expression, age, marital status, family status and physical or mental disability (which may include a diagnosed dependency), among others. In some jurisdictions, discrimination on the basis of a criminal record that is not related to the individual’s ability or fi tness to perform the job is also prohibited. The law prohibits direct discrimination on such grounds and also constructive or systemic discrimination, whereby a policy that is neutral on its face has the eff ect of discriminating against a protected group. However, employers may maintain qualifi cations and requirements for jobs that are bona fi de and reasonable in the circumstances. The fi rst step in the analysis of discrimination is for an employee to demonstrate that discrimination has occurred, or that he or she has been treated diff erently in a term or condition of employment on the basis of one of the enumerated grounds. Once an employee or former employee THE FEDERAL GOVERNMENT AND ALL PROVINCIAL JURISDICTIONS HAVE ENACTED LAWS DESIGNED TO ENSURE WORKER HEALTH AND SAFETY, AS WELL AS COMPENSATION IN CASES OF INDUSTRIAL ACCIDENT OR DISEASE. can demonstrate that discrimination has likely occurred on the basis of one of the enumerated grounds, the employer has the burden of proof to establish that the off ending term or condition of employment is a bona fi de occupational requirement (BFOR). The duty to accommodate arises when considering whether a workplace requirement or rule is a BFOR. An employer must demonstrate that the workplace rule was adopted for a rational purpose and in a good faith belief that it was necessary, and that it is impossible to accommodate individuals without undue hardship. “Undue hardship” is a high standard: it requires direct, objective evidence of quantifi able higher costs, the relative interchangeability of the workforce and facilities, interference with the rights of other employees or health and safety risks. The employer must assess each employee individually to determine whether it would be an Employment Doing Business in Canada 140EMPLOYMENT undue hardship to accommodate his or her particular needs. Occupational Health & Safety The federal government and all provincial jurisdictions have enacted laws designed to ensure worker health and safety, as well as compensation in cases of industrial accident or disease. Employers must set up and monitor appropriate health and safety programs. In provinces such as Alberta, Saskatchewan, Manitoba and Ontario, occupational health and safety legislation requires a workplace violence and/or harassment policy. The purpose of occupational health and safety legislation is to protect the safety, health and welfare of employees as well as the safety, health and welfare of non-employees entering worksites. Occupational health and safety offi cers have the power to inspect workplaces. Should they fi nd that work is being carried out in an unsafe manner or that a workplace is unsafe, they have the power to order the situation to be rectifi ed and to make “stop work” orders if necessary. Contraventions of the acts, codes or regulations are treated very seriously, and may result in fi nes or imprisonment. Recent changes to the Criminal Code have also increased potential employer liability for failing to ensure safe workplaces. Privacy Employers in Canada must be aware that Canada has privacy laws governing the collection, use, disclosure, storage and retention of personal employee information, as well as an employee’s rights of access to such information. This is especially important in Québec, Alberta and British Columbia, which have already enacted privacy legislation separate from the federal legislation. See Privacy Laws. Employment Benefi ts The Canada Pension Plan is a federally created plan that provides pensions for employees, as well as survivors’ benefi ts for widows and widowers and for any dependent children of a deceased employee. All employees and employers, other than those in the Province of Québec, must contribute to the Canada Pension Plan. The employer’s contribution is deductible by the employer for income tax purposes. Québec has a similar pension plan that requires contributions by employers and employees within Québec. Employment mccarthy.ca 141EMPLOYMENT In addition to the Canada Pension Plan, both employees and employers must contribute to the federal Employment Insurance Plan, which provides benefi ts to insured employees when they cease to be employed, when they take a maternity or parental leave and in certain other circumstances. The employer’s contribution is deductible for income tax purposes. Québec also has its own Parental Insurance Plan, which provides benefi ts to insured employees when they take a maternity or parental leave and to which both employers and employees in Québec contribute. All provinces provide comprehensive schemes for health insurance. These plans provide for medically necessary treatment, including the cost of physicians and hospital stays. They do not replace private disability or life insurance coverage. Funding of public health insurance varies from one provincial plan to another. In some provinces, employers are required to pay premiums or health insurance taxes. In others, individuals pay premiums. In still others, the entire cost of health insurance is paid out of general tax revenues. Employers commonly also provide supplemental health insurance benefi ts through private insurance plans to cover health benefi ts not covered by the public health insurance plan. Employers may be required to provide sick or injured worker benefi ts, in the form of workers’ compensation, a liability and disability insurance system that protects employers and employees in Canada from the impact of work-related injuries. This benefi t compensates injured workers for lost income, health care and other costs related to their injury. Workers’ compensation also protects employers from being sued by their workers if they are injured on the job. Other laws in Canada address additional benefi ts such as private pensions and private benefi t plans. For example, most Canadian jurisdictions have pension standards legislation that establishes minimum requirements for private pension plans. FOR MORE INFORMATION, PLEASE CONTACT: Jacques Rousse 514-397-4103 [email protected] PRIVACY LAWS By Charles Morgan Privacy Laws PRIVACY LAWS mccarthy.ca 145 PRIVACY LAWS* All businesses in Canada are subject to legislation that regulates the collection, use and disclosure of personal information in the course of commercial activity. “Personal information” generally means information about an identifi able individual. The collection, use and disclosure of personal information by private sector organizations and entities within the provinces of British Columbia, Alberta and Québec is regulated by legislation enacted by each of those provinces. Manitoba adopted private sector privacy legislation in 2013, but it is not yet in force. The federal Personal Information Protection and Electronic Documents Act (PIPEDA) governs the collection, use and disclosure of personal information in provinces and in the territories that have not yet adopted substantially similar privacy legislation, as well as in the course of inter-provincial and international commercial activities. PIPEDA also applies (regardless of the province) to all federally regulated undertakings (such as banks and telecommunications service providers). These statutory regimes are all generally built upon the following 10 principles that govern the collection, use and disclosure of personal information: ALL BUSINESSES IN CANADA ARE SUBJECT TO LEGISLATION THAT REGULATES THE COLLECTION, USE AND DISCLOSURE OF PERSONAL INFORMATION IN THE COURSE OF COMMERCIAL ACTIVITY. - accountability; - identifying purposes; - consent; - limiting collection; - limiting use, disclosure and retention; - accuracy; - security safeguards; - openness; - individual access; and - challenging compliance. Unless certain exceptions apply, an individual’s knowledge and consent are required to collect, use or disclose his or her personal information. Explicit consent may be required for more sensitive personal information (e.g., medical or fi nancial information), while implicit consent may be suffi cient for non-sensitive personal information (e.g. mailing address). *Updated and current as of March 1, 2015 Privacy Laws Doing Business in Canada 146PRIVACY LAWS Currently, Alberta’s Personal Information Protection Act (PIPA) and Manitoba’s Personal Information Protection and Identity Theft Prevention Act (PIPITPA) are the only general private sector privacy laws in Canada that impose a statutory obligation on private sector organizations to report privacy breaches. Under Alberta PIPA, organizations must only report (to the Information and Privacy Commissioner of Alberta) privacy breaches that could pose a “real risk of signifi cant harm to an individual.” The Information and Privacy Commissioner of Alberta in turn determines whether an organization needs to notify the individuals aff ected. By contrast, under Manitoba’s PIPITPA, an organization is obligated to notify an individual directly (as opposed to notifying a regulator) if his or her personal information is lost, accessed or disclosed without authorization; no specifi c “harm” threshold applies. Manitoba PIPITPA is not yet in force. With respect to transfers of personal information to service providers located outside Canada, the “openness” principle under PIPEDA has been held by federal privacy regulators to require that notice of such transfers should be provided to aff ected individuals. Alberta’s PIPA requires that organizations notify individuals if they transfer personal information to a service provider located outside Canada. Québec’s privacy legislation requires organizations to take all reasonable steps to ensure that personal information that is transferred cross-border for processing will not be used for new purposes nor communicated to third parties without the consent of the individuals concerned. In addition to general private sector privacy laws, Alberta, Manitoba, New Brunswick, Newfoundland and Labrador, Ontario and Saskatchewan also have specifi c health privacy legislation to protect personal health information. For example, Ontario’s Personal Health Information Protection Act, 2004 establishes rules for the collection, use and disclosure of personal health information by health information custodians in Ontario. Whether PIPEDA or similar provincial legislation is the applicable privacy regime, immediate priorities for most organizations that establish a business in Canada should include: - the adoption of a privacy compliance strategy that identifi es the organization’s compliance with the applicable regulatory regimes; - the adoption of a privacy policy, and personal information management Privacy Laws mccarthy.ca 147PRIVACY LAWS practices, to ensure compliance with applicable privacy laws; - the appointment of an individual who will be responsible for the administration and oversight of the organization’s personal information management practices and who will be prepared to implement any changes required by applicable legislation; - a review of the current personal information practices of the organization IMMEDIATE PRIORITIES FOR MOST ORGANIZATIONS THAT ESTABLISH A BUSINESS IN CANADA SHOULD INCLUDE THE APPOINTMENT OF AN INDIVIDUAL WHO WILL BE RESPONSIBLE FOR THE ADMINISTRATION AND OVERSIGHT OF THE ORGANIZATION’S PERSONAL INFORMATION MANAGEMENT PRACTICES. outside Canada and proposed information practices within Canada, including determining what personal information is collected, and from where; what consents are obtained and what purposes are identifi ed when collecting personal information; where personal information is stored; how personal information is used; when and to whom personal information is disclosed; and how current personal information practices of the organization may need to be changed for the collection, use and disclosure of personal information in Canada; - a review of the organization’s data management infrastructure to ensure that the infrastructure is adequately fl exible and robust to facilitate implementation of the organization’s privacy policies and data management practices; - the implementation of consent language in contracts, forms (including Web forms) and other documents utilized when collecting personal information from individuals (including customers and employees); and - the requirement, where there are contracts with third parties to whom personal information will be disclosed (or where the third party is granted access to the personal information), that the third party agree to appropriate contractual terms, such as: specifying the ownership of the data and ensuring that the third party will provide adequate security safeguards for the information; ensuring that the personal information will be used only for the purposes for which it was disclosed to the third party; ensuring that the third party will cease using (and return Privacy Laws Doing Business in Canada 148PRIVACY LAWS or destroy) the personal information if requested; and providing for indemnifi cation by the third party for any breach of such terms. Implementation of such initial steps may require several months, depending on the size and maturity of the organization. Compliance with privacy laws needs to be considered in any business transaction involving the disclosure or transfer of personal information such as purchases or sales of businesses, outsourcing transactions and securitization transactions. For example, when contemplating the purchase of a business in Canada, it is essential that a review of the privacy policies and practices of the target form part of the due diligence process. If personal information of employees or customers has to be disclosed to the purchaser during the due diligence process, it is also essential that an appropriate confi dentiality regime be established for the process. It is recommended that only personal information that is necessary or likely to aff ect the decision to proceed with a transaction or its terms (including price) be disclosed. Failure to comply with privacy laws can result in complaints to the relevant Privacy Commissioner, orders and fi nes. An organization with defi cient privacy practices may risk adverse publicity for failure to comply with privacy laws. In light of the complexity of privacy laws and the diff erences between the various laws that may apply to an organization or to a particular business unit, ensuring privacy compliance across an organization’s departments may be challenging, particularly for organizations that operate globally. FOR MORE INFORMATION, PLEASE CONTACT: Charles Morgan 514-397-4230 [email protected] ENVIRONMENTAL REGULATION By Joanna Rosengarten Environmental Regulation mccarthy.ca ENVIRONMENTAL REGULATION 151 ENVIRONMENTAL REGULATION Environmental regulation in Canada is an area of shared responsibility between the federal government and the provincial governments, which, in turn, have delegated certain matters to municipal governments. Both the federal and provincial governments have enacted legislation, regulations, policies and guidelines that aff ect industry on environmental ENVIRONMENTAL REGULATION IN CANADA IS AN AREA OF SHARED RESPONSIBILITY BETWEEN THE FEDERAL GOVERNMENT AND THE PROVINCIAL GOVERNMENTS, WHICH, IN TURN, HAVE DELEGATED CERTAIN MATTERS TO MUNICIPAL GOVERNMENTS. matters such as pollution or contamination of the air, land and water, toxic substances, hazardous wastes, and transportation of dangerous goods and spills. In addition, there are requirements for approvals and environmental impact assessments in many areas aff ecting both the public and private sectors. Environmental regulators have broad monitoring and inspection powers, and use a wide range of enforcement mechanisms. These powers and mechanisms extend not only to the businesses involved, but also to corporate directors, offi cers, employees and agents. For example, the Canadian Environmental Protection Act includes provisions for warnings, signifi cant fi nes, imprisonment, injunctions and compliance orders. Canadian courts are also now holding companies, as well as their offi cers and directors and employees, liable for environmental off ences. Liability for contaminated sites is also an important issue in Canada. The law in this area places liability on those persons who cause the pollution and, depending on the particular situation, on those persons who own, occupy, manage or control contaminated sites, or who owned or occupied such sites in the past. Such liability now extends to past owners and occupiers. Consequently, a “buyer-beware” philosophy prevails, making it critical in business and real estate transactions that either the buyer or the lender knows about all past and potential environmental problems associated with a particular business or property. As a result of stringent environmental legislation and the regulatory Environmental Regulation Doing Business in Canada 152ENVIRONMENTAL REGULATION bodies’ vigorous approach to investigating and prosecuting environmental concerns, it is prudent for businesses to seek proper advice concerning environmental due diligence. FOR MORE INFORMATION, PLEASE CONTACT: Pierre Renaud 514-397-7819 [email protected] DISPUTE RESOLUTION Canada’s Court System 155 Class Actions 156 Alternative Dispute Resolution 157 Electronic Discovery 158 By Eric Block Dispute Resolution DISPUTE RESOLUTION mccarthy.ca 155 DISPUTE RESOLUTION Canada’s Court System Under the Canadian Constitution, the judiciary is separate from and independent of the executive and legislative branches of government. Judicial independence is a cornerstone of the Canadian judicial system. Judges make decisions free of infl uence and based solely on fact and law. Canada has provincial trial courts, provincial superior courts, provincial appellate courts, federal courts and a Supreme Court. Judges are appointed by the federal or provincial and territorial governments, depending on the level of the court. Each province and territory (with the exception of Nunavut) has a provincial court. These courts deal primarily with criminal off ences, family law matters (except divorce), traffi c violations and provincial or territorial regulatory off ences. Private disputes involving limited sums of money are resolved in the small claims divisions of the provincial courts. The monetary ceiling for the small claims division in British Columbia, Alberta and Ontario, for instance, is currently $25,000. The superior courts of each province and territory try the most serious criminal cases, as well as private disputes exceeding the monetary ceiling of the small claims divisions of the provincial courts. Although superior courts are administered by the provinces and territories, the federal government appoints and pays the judges of these courts. In the Toronto Region of the Province of Ontario, the Superior Court of Justice maintains a Commercial List. Established in 1991, the Commercial List hears certain applications and motions in the Toronto Region involving a wide range of business disputes. It operates as a specialized commercial court that hears matters involving shareholder disputes, securities litigation, corporate restructuring, receiverships and other commercial disputes. Matters on the Commercial List are subject to special case management and other procedures designed to expedite the hearing and determination of complex commercial proceedings. In addition, judges on the Commercial List are experienced in commercial and insolvency matters. Each province and territory has an appellate court that hears appeals from Dispute Resolution Doing Business in Canada 156DISPUTE RESOLUTION decisions of the superior courts and the provincial and territorial courts. Ontario also has a Divisional Court that serves as a court of fi rst instance for the review of administrative action. It also hears appeals from provincial administrative tribunals, interlocutory decisions of judges of the Superior Court and appeals from the Superior Court involving limited sums of money (currently $50,000). The Federal Court of Canada has limited jurisdiction. Its jurisdiction includes inter-provincial and federal provincial disputes, intellectual property proceedings, citizenship appeals, Competition Act cases, and cases involving Crown corporations or departments or the government of Canada. The Federal Court, Trial Division hears decisions at fi rst instance. Appeals are heard by the Federal Court of Appeal. The Supreme Court of Canada is the fi nal court of appeal from all other Canadian courts. It hears appeals from the appellate courts in each province and from the Federal Court of Appeal. The Supreme Court of Canada has jurisdiction over disputes in all areas of the law, including constitutional law, administrative law, criminal law and civil law. There is a right of appeal in certain criminal proceedings, but in most cases leave must fi rst be obtained. Leave to the Supreme Court of Canada may be granted in cases involving an issue of public importance or an important issue of law. Class Actions Class proceedings are procedural mechanisms designed to facilitate and regulate the assertion of group claims. Almost all Canadian provinces have class proceedings legislation. In provinces without such legislation, representative actions may be brought at common law. Canadian class action statutes are modeled closely on Rule 23 of the United States Federal Court Rules of Civil Procedure, which, together with its state counterparts, governs class action litigation in the United States. Unlike ordinary actions, a proceeding commenced on behalf of a class may be litigated as a class action only if it is judicially approved or “certifi ed.” Generally, the bar for certifi cation in Canada is lower than in the United States. In Canada, common targets of class actions include product manufacturers, insurers, employers, companies in the investment and fi nancial industries and governments. Class actions may involve allegations of product Dispute Resolution mccarthy.ca 157DISPUTE RESOLUTION liability, misrepresentation, breaches of consumer and employment laws, competition law (e.g. antitrust) breaches, securities fraud and breaches of public law. Class actions are becoming an increasingly prominent aspect of business litigation in Canada. Businesses may benefi t from the fact that individual damage awards tend to be lower in Canada than in the United States. In addition, the availability of punitive damages is limited in Canada. Alternative Dispute Resolution Alternative Dispute Resolution (ADR) refers to the various methods by which disputes are resolved outside the courtroom. Such methods include mediation (an independent third party is brought in to mediate a dispute) and arbitration (the dispute is referred to a third party for a binding decision). In Ontario, the Rules of Civil Procedure mandate and regulate mediation in civil cases commenced in Toronto, Windsor and Ottawa. Mediation remains common in other parts of Ontario, and parties to a dispute will oft en agree to non-binding mediation by mutually selecting a mediator. Arbitration may be pursued on an ad hoc basis under a structure provided for in the local jurisdiction or under local statutory provisions. Alternatively, arbitration may be conducted under the administrative and supervisory powers of one of the recognized international arbitration institutes, such as the International Court of Arbitration of the International Chamber of Commerce in Paris, the London Court of International Arbitration or the American Arbitration Association. These bodies do not themselves render arbitration awards, but they do provide a measure of neutrality and an internationally recognized system of procedural rules. One advantage of arbitration compared to domestic court procedure is the confi dentiality of arbitration proceedings. The arbitration process is normally private; hearings are not public and written transcripts of proceedings are not generally available to the public. In addition, the arbitration process may be faster than the court system, and there is generally no right of appeal from an arbitration award. This may lead to disputes being resolved more quickly. Dispute Resolution Doing Business in Canada 158DISPUTE RESOLUTION Electronic Discovery The discovery and production of electronically stored information, commonly called e-discovery, has become an increasingly signifi cant issue in litigation across Canada. A national committee has produced the Sedona Canada Principles to establish national guidelines for electronic discovery. These guidelines are thought to be compatible with the rules of procedure in each of the Canadian territories and provinces. In Ontario, parties are now required to formulate and adhere to a discovery plan to address all aspects of the discovery process, including the THE DISCOVERY AND PRODUCTION OF ELECTRONICALLY STORED INFORMATION, COMMONLY CALLED E-DISCOVERY, HAS BECOME AN INCREASINGLY SIGNIFICANT ISSUE IN LITIGATION ACROSS CANADA. exchange of electronic documents. The parties are required to consult and have regard to the Sedona Canada Principles when preparing their discovery plan. The following principles are among the most signifi cant recommendations of Sedona Canada: - Once litigation is reasonably anticipated, the parties must take good-faith steps to preserve potentially relevant electronic information. - As early as possible in the litigation, the parties should meet and confer regarding e-discovery issues, and should agree upon the format in which electronically stored information will be produced. - In any proceedings, the parties should ensure that the steps taken in the e-discovery process are proportionate to the nature of the case and the signifi cance of the electronic evidence in the case. FOR MORE INFORMATION, PLEASE CONTACT: David Leonard 416-601-7694 [email protected] BANKRUPTCY AND RESTRUCTURING Bankruptcy and Insolvency Act (BIA) 161 Companies’ Creditors Arrangement Act (CCAA) 165 By James Gage Bankruptcy and Restructuring BANKRUPTCY AND RESTRUCTURING mccarthy.ca 161 BANKRUPTCY AND RESTRUCTURING Under Canadian constitutional law, the federal government has exclusive legislative control over bankruptcy and insolvency matters. Insolvency proceedings in Canada may take a variety of diff erent forms. When a corporation becomes insolvent, two options are generally available: (i) WHEN A CORPORATION BECOMES INSOLVENT, TWO OPTIONS ARE GENERALLY AVAILABLE: (I) LIQUIDATE THE CORPORATION’S ASSETS FOR THE BENEFIT OF ITS CREDITORS, OR (II) RESTRUCTURE THE AFFAIRS OF THE CORPORATION. liquidate the corporation’s assets for the benefi t of its creditors, or (ii) restructure the aff airs of the corporation. Although several diff erent legislative regimes are available to eff ect either a liquidation or a restructuring of a corporation, the Bankruptcy and Insolvency Act (BIA) and the Companies’ Creditors Arrangement Act (CCAA) are the two most common federal statutes employed for these purposes. The BIA provides for both restructurings (via BIA proposals) and liquidations (via bankruptcies) of insolvent businesses, while the CCAA is used primarily for the restructuring of more complex corporate businesses, although it can also be used to conduct a sale or liquidation. Bankruptcy and Insolvency Act (BIA) Bankruptcy The term “bankruptcy” refers to a formal procedure under the BIA to eff ect the liquidation of a debtor’s assets by a trustee in bankruptcy. A bankruptcy can either be voluntary or involuntary and can be brought in respect of any insolvent person that has an offi ce, assets or carries on business in Canada, with the exception of banks, insurance companies, trust or loan companies, and railway companies (for which other insolvency legislation exists). A voluntary bankruptcy under the BIA commences when a debtor fi les an assignment in bankruptcy with the Offi ce of the Superintendent of Bankruptcy. An involuntary bankruptcy under the BIA commences when a creditor with a debt claim of at least $1,000 fi les an application for a bankruptcy Bankruptcy and Restructuring Doing Business in Canada 162BANKRUPTCY AND RESTRUCTURING order with the court. This proceeding is brought on behalf of all creditors, although it is not necessary for more than one creditor to join in the application. In order to obtain the bankruptcy order, the creditor must establish that the debtor has committed an act of bankruptcy within six months preceding the commencement of the bankruptcy proceedings. The most common act of bankruptcy is failing to meet liabilities generally as they become due. In addition to being placed into bankruptcy pursuant to a court order made upon application by a creditor, a debtor can also be placed into bankruptcy under the BIA if its proposal (discussed below) is rejected by its unsecured creditors or is not approved by the court. The practical eff ect of a bankruptcy is the same whether it is commenced voluntarily or involuntarily: the debtor’s assets vest in its trustee in bankruptcy, subject to the rights of the debtor’s secured creditors. The trustee in bankruptcy is a licensed insolvency professional or fi rm that is THERE IS AN AUTOMATIC STAY OF PROCEEDINGS BY UNSECURED CREDITORS OF THE DEBTOR UPON THE COMMENCEMENT OF THE DEBTOR’S BANKRUPTCY PROCEEDINGS. HOWEVER, THE STAY DOES NOT AFFECT SECURED CREDITORS. appointed by the bankrupt or the bankrupt’s creditors. There is an automatic stay of proceedings by unsecured creditors of the debtor upon the commencement of the debtor’s bankruptcy proceedings. However, the stay does not aff ect secured creditors, who are generally free to enforce their security outside the bankruptcy process unless the court otherwise orders (which is exceedingly rare). The bankruptcy trustee has many duties. The most important is to liquidate the assets of the debtor for the benefi t of its creditors. In addition, the trustee in bankruptcy is responsible for the administration of claims made against the bankrupt estate in accordance with the relevant provisions of the BIA. If appropriate, the bankruptcy trustee may also investigate the aff airs of the debtor to determine whether any fraudulent conveyances, preferences or transfers at undervalue were eff ected by the debtor prior to the bankruptcy. The creditors will generally meet shortly aft er the debtor becomes bankrupt, and appoint a group of up to fi ve individuals known as Bankruptcy and Restructuring mccarthy.ca 163BANKRUPTCY AND RESTRUCTURING “inspectors” to work with and supervise the trustee in bankruptcy. With the approval of the inspectors, the trustee in bankruptcy may sell the assets of the bankrupt estate. A corporation may not be discharged from bankruptcy unless all of the provable claims against it have been satisfi ed, which may occur by payment in full or pursuant to a successful BIA proposal. BIA Proposals THE RESTRUCTURING PROVISIONS UNDER THE BIA ARE MOST COMMONLY USED FOR SMALLER, LESS COMPLICATED RESTRUCTURINGS. Generally speaking, the restructuring provisions under the BIA are most commonly used for smaller, less complicated restructurings. This means small- and medium-sized corporations tend to use the BIA process, as opposed to the CCAA process (discussed below). A restructuring under the BIA is commenced by a debtor either fi ling a proposal (e.g., its restructuring plan) or fi ling a notice of intention to make a proposal (NOI). Upon the fi ling of an NOI or the fi ling of the proposal itself, the BIA imposes a stay of proceedings against the exercise of remedies by creditors against the debtor’s property or the continuation of legal proceedings to recover claims provable in bankruptcy. Provisions in security agreements providing that the debtor ceases to have rights to use or deal with the collateral upon either insolvency or the fi ling of an NOI have no force or eff ect. The BIA also provides that, upon the fi ling of an NOI or the fi ling of a proposal, no person may terminate or amend any agreement with the insolvent person or claim an accelerated payment under any agreement with the insolvent person simply because the person is insolvent or has fi led an NOI or a proposal. The court can lift a stay in a BIA restructuring if the creditor is able to demonstrate that it will be “materially prejudiced” by the stay or if it is equitable on other grounds that the stay be lift ed. It is more common for a debtor to start the process by fi ling an NOI, rather than by fi ling a proposal immediately. If the debtor fi les an NOI, a copy of the written consent of a licensed trustee in bankruptcy, consenting to act as the proposal trustee in the proposal proceedings, must be attached to the NOI. If an NOI is fi led, the debtor must fi le cash fl ow statements for its business within 10 days and must fi le its proposal within 30 days. Bankruptcy and Restructuring Doing Business in Canada 164BANKRUPTCY AND RESTRUCTURING The court can extend the time for fi ling a proposal for up to a maximum of fi ve additional months, although the court can only grant extensions for up to 45 days at a time. During the process, the debtor normally carries on its business as usual, subject to monitoring by its proposal trustee and the supervision of the court. Ultimately, the debtor may table a proposal to its creditors. The BIA requires a proposal to contain certain terms, including: (i) the payment of preferred claims (such as certain types of employee claims) in priority to claims of ordinary creditors; (ii) the payment of all proper fees and expenses of the proposal trustee and incidental to the proceedings; (iii) the payment of certain tax remittances, such as employee source deductions, within six months of the approval of the proposal; and (iv) the payment to the proposal trustee of all consideration to be paid out under the proposal, for distribution to creditors. A proposal must be made to the unsecured creditors generally, either providing for all unsecured creditors to be placed into one class or providing for separate classes of unsecured creditors. A proposal may also be made to secured creditors in respect of any class or classes of secured claims. A proposal is deemed to be accepted by the creditors if all classes of unsecured creditors vote for the acceptance of the proposal by a majority in number and two-thirds in value of the unsecured creditors of each class (other than equity claims). In practice, there is usually only one class of creditors to which a proposal is directed — the unsecured creditors. Parties related to the debtor cannot vote in favour of the proposal. Secured creditors are usually dealt with by individual negotiation, since a commonality of interest within each secured creditor class is required and there are seldom multiple secured creditors that can be grouped together as a class on this basis. Therefore, there is oft en practical benefi t to addressing secured claims within the proposal. If the proposal is approved by the creditors, it must then be approved by the court. When deciding whether to approve the proposal, the court must be satisfi ed that, among other things, the proposal is reasonable, calculated for the benefi t of creditors and meets the technical requirements of the BIA. If a BIA proposal is not approved by the requisite “double majority” of unsecured creditors, the debtor is automatically placed into bankruptcy. Bankruptcy and Restructuring mccarthy.ca 165BANKRUPTCY AND RESTRUCTURING A BIA proposal will also fail if the court refuses to approve the proposal. Finally, if aft er receiving court approval of the proposal the debtor defaults in its performance of the proposal, the court may annul the proposal, which then leads to an automatic assignment of the debtor into bankruptcy. Companies’ Creditors Arrangement Act (CCAA) Generally speaking, the restructuring provisions under the CCAA are most commonly used for larger, more complicated restructurings. This means larger sized corporations tend to use CCAA proceedings to restructure. To qualify to use the CCAA, a company (as defi ned in the CCAA) must be insolvent and must have outstanding liabilities of $5 million or more. To initiate the proceedings, the company brings an initial application to court for an order (referred to as the Initial Order), imposing a stay of GENERALLY SPEAKING, THE RESTRUCTURING PROVISIONS UNDER THE CCAA ARE MOST COMMONLY USED FOR LARGER, MORE COMPLICATED RESTRUCTURINGS. proceedings on creditors (i.e., a freeze on the payment of indebtedness) and authorizing the company to prepare a plan of arrangement to compromise its indebtedness with some or all of its creditors. The materials presented to the court include a proposed form of Initial Order and an affi davit prepared by the company describing its background, its fi nancial diffi culties and the reasons why it is seeking the protection of a court order made under the CCAA. Aft er reviewing the materials and hearing submissions from counsel, the judge exercises his or her discretion whether to make an Initial Order and if so, on what terms. Usually, the Initial Order is made in the form of the order requested by the company, with little or no input from creditors and other stakeholders. However, certain relief can only be granted on notice to secured creditors likely to be aff ected thereby (for example, interim fi nancing) and in any event aff ected parties have the right to apply to court to vary the Initial Order aft er it is made. Typically, an Initial Order does the following things: a) authorizes the company to prepare a plan of arrangement to put to its creditors; Bankruptcy and Restructuring Doing Business in Canada 166BANKRUPTCY AND RESTRUCTURING b) authorizes the company to stay in possession of its assets and to carry on business in a manner consistent with the preservation of its assets and business; c) prohibits the company from making payments in respect of past debts (other than any specifi c exceptions allowed by the court, such as amounts owing to employees) and imposes a stay of proceedings: (i) preventing creditors and suppliers from taking action in respect of debts and payables owing as at the fi ling date; and (ii) prohibiting the termination of most types of contracts by counterparties; d) appoints a monitor (a licensed bankruptcy trustee) as an offi cer of the court, to monitor the business and fi nancial aff airs of the company during the proceedings; e) authorizes the company, if necessary, to obtain interim fi nancing to ensure that it can fund its operations during the proceedings, including setting limits on the aggregate funding and the priority of the security (commonly known as “DIP fi nancing”); and f) authorizes the company to disclaim unfavourable contracts, leases and other agreements, subject to some limited exceptions. The CCAA provides that an Initial Order may only impose a stay of proceedings for a period not exceeding 30 days. Once an Initial Order has been made, the company may apply for a further order or orders extending the stay of proceedings. The intention is to have the stay of proceedings continue until the company’s plan of arrangement has been presented to the creditors and approved by the court. As a general matter, the duration of proceedings under the CCAA usually ranges between six to 18 months from the commencement of proceedings to the sanctioning of a plan of arrangement. However, the proceedings can be much quicker if the terms of the plan of arrangement have already been worked out in advance of the fi ling. The court may terminate the proceedings under the CCAA, upon application of an interested party, if the court believes that it is unlikely that a consensual arrangement will be achieved or that the continuation of the proceedings is otherwise not appropriate. However, such orders are rare, at least at the initial stages of the restructuring. In recent years, the CCAA has also been used as a means by which a sale of particular assets of the company, or the entire business and assets of company, is conducted. The sale process runs on a parallel, alternate track to the restructuring process with a view to maximizing value for the Bankruptcy and Restructuring mccarthy.ca 167BANKRUPTCY AND RESTRUCTURING stakeholders. In such circumstances, approval of the sale must be sought from the court on notice to the aff ected secured creditors, among others, in a process similar to a court receivership sale. During CCAA proceedings, the debtor company typically continues to carry on business as usual. Signifi cant transactions out of the ordinary course of the debtor’s business are usually submitted to the court for approval. The role of the CCAA monitor is generally limited to monitoring and reporting to creditors and to the court regarding the debtor’s business and operations. When a CCAA plan of arrangement is developed, it ordinarily will divide the creditors into classes and will provide for the WHEN A CCAA PLAN OF ARRANGEMENT IS DEVELOPED, IT ORDINARILY WILL DIVIDE THE CREDITORS INTO CLASSES AND WILL PROVIDE FOR THE TREATMENT OF EACH CLASS. treatment of each class (which can be substantially diff erent between classes). The classifi cation of creditors must be approved by the court prior to any creditor meeting on the plan. In this regard, the guiding legal principle set out in the CCAA and applied by the courts in considering classifi cation issues is whether there is a commonality of interest among the creditors in the class. For a plan of arrangement to be approved by the aff ected creditors, a majority in number of the creditors representing two-thirds in value of the claims of each class (other than equity claims), present and voting (either in person or by proxy) at the meeting or meetings of creditors, must vote in favour of the plan of arrangement. Parties related to the company cannot vote in favour of the plan. If the plan of arrangement is approved by the creditors, it must then be approved by the court. In doing so, the court must determine that the plan of arrangement is “fair and reasonable.” Upon approval by the creditors and court, the plan of arrangement is binding on all of the creditors of each class aff ected by the plan. If a class of creditors (other than a class consisting of equity claims) does not approve the plan, the plan is not binding on the creditors within that class. The court cannot sanction a plan if it does not provide for the payment in full of certain Crown claims and certain employee and pension liabilities, or if it does not in eff ect subordinate “equity claims” to the claims of creditors. A plan may include releases in favour of non-debtor third parties in certain cases. Bankruptcy and Restructuring Doing Business in Canada 168BANKRUPTCY AND RESTRUCTURING Additionally, if a debt restructuring involves a reorganization of the share capital of a company, it is possible to reorganize the share capital of the company by way of the CCAA court sanction order without a shareholder vote. In recent years, this device has been used, in eff ect, to extinguish the existing share capital and issue new shares to creditors in satisfaction of their claims or to a new equity investor (whose investment may fund distributions to the creditors). If a CCAA plan is not approved by the requisite “double majority” of creditors, there is no automatic assignment of the debtor company into bankruptcy. Typically, what may lead to the bankruptcy of the debtor is the court’s refusal to extend, or a decision to terminate, the stay of proceedings against the debtor company, thereby allowing creditors to exercise their lawful remedies against the debtor company. If a sale of the assets occurs before the fi ling of a plan and meeting of creditors, consideration would be given to the benefi ts of proceeding toward a plan (presumably, to distribute the proceeds of the sale) as opposed to terminating the CCAA proceedings, for example, by commencing bankruptcy liquidation proceedings. FOR MORE INFORMATION, PLEASE CONTACT: James Gage 416-601-7539 [email protected] GOVERNMENT RELATIONS By Brenda Swick Government Relations mccarthy.ca GOVERNMENT RELATIONS 171 GOVERNMENT RELATIONS In Canada, there is a division of legislative power between Parliament (the federal legislature) and provincial legislative assemblies. They are all based on the British parliamentary model, where the political party with the most members elected to Parliament or to a provincial legislative assembly forms the government. See Canada. For the most part, the governing party that forms the federal or provincial government holds a majority of the seats in the federal or provincial legislature. This usually reduces the relative infl uence of individual elected members of the legislature, as it is rare that members of the governing party vote against a government-supported initiative. However, at the federal level there were a series of “minority governments,” from 2004 – 2011, where the governing party held more seats than any other party in Parliament, but did not hold a majority of the seats. As a result, the relative infl uence of members of Parliament increased during that time. Given the signifi cant role of the federal and provincial governments in the Canadian economy, every enterprise operating in Canada should consider a GOVERNMENT RELATIONS WORK IS NEEDED WHEN AN ENTERPRISE SEEKS TO INITIATE, SUPPORT OR OPPOSE LEGISLATION INITIATIVES, OR SEEKS A CHANGE IN REGULATIONS OR POLICY. government relations strategy. Companies may also engage with government through industry associations. This may be necessary for companies active in industries that are heavily regulated (such as telecommunications, pharmaceuticals, transportation and energy), that can be greatly aff ected by government policy (such as manufacturing and agriculture), or that sell to the government (such as defence and IT companies). Government relations work, which includes lobbying, is generally focused on outreach to government employees, the ministers who form the executive council (i.e., Cabinet) in each province and federally, and members of the legislature who are part of the governing party. Depending on the concern, clients may also choose to lobby members of opposition parties in order to have matters raised in the legislature or at a committee of the legislature. This can be particularly important when a minority government is in power. Government relations work is needed when an enterprise seeks to Government Relations Doing Business in Canada 172GOVERNMENT RELATIONS initiate, support or oppose legislation initiatives, or seeks a change in regulation or policy. A number of government ministries and regional/ political interests may be involved with any given initiative or change, and the enterprise will seek out meetings with all the responsible senior government employees and ministers. For example, enterprises involved in inter-provincial trucking work within a regulatory environment that includes provincial and federal ministries of transportation, industry and commerce and labour. Likewise, private development of hydro-electric power usually requires contact with provincial ministries of energy, lands and environment, as well as the federal ministries of fi sheries and oceans and environment. It may also be necessary to engage the senior elected member in the political party who is “politically responsible” for a given region, as any given initiative or change can aff ect regions diff erently. Two areas of notable interest for government relations are relationships with Aboriginal Peoples and the Canadian system of environmental assessment (EA) which is required for major project approval. In the case of the group of Aboriginal Peoples known as First Nations (the other two groups are the Métis and the Inuit), the First Nations themselves will likely need to be consulted, as they may retain some claim to Aboriginal title or traditional Aboriginal rights to the land. These rights vary across Canada, depending on historical and legal developments. Where First Nations interests are involved, both the federal and provincial governments will also have to be advised and consulted. See Aboriginal Law. I n the area of EA, Canada requires comprehensive environmental assessments when projects involving land use reach a certain threshold of invested capital or when certain types of projects are involved. If the project is under federal jurisdiction (such as inter-provincial pipelines), the federal EA system will be invoked. If the project is strictly within a single province and federal jurisdiction is not involved, generally only the provincial EA process will be invoked. In some cases, both federal and provincial EA processes are invoked. There are dramatic diff erences in the effi ciency and timeline of EA processes in various provinces and that of the federal government. As such, most enterprises considering investments above the EA threshold should develop an early and positive relationship with the appropriate levels of government, so their eventual EA application does not come as a surprise or become controversial. See Environmental Regulation. Government Relations mccarthy.ca 173GOVERNMENT RELATIONS A nother factor to take into consideration is that compared to the United States, Canada’s federal and provincial governments are much more active in the delivery of certain services such as health care, utilities, infrastructure and broadcasting. Investors should seek advice on the attitudes of government toward investments in these and other fi elds before proceeding, as co-ordination and co-operative relationships with government will lead to much more eff ective and effi cient decision-making. I nteraction between the private sector and government offi cials has come under increased scrutiny in recent years. As a result, the regulation of interaction with government offi cials has increased, as has the attention that all concerned pay to such regulations. This includes regulation of the public offi cials themselves through codes of conduct and regulation of those who interact with public offi cials. C odes of conduct for public offi cials generally regulate the public offi cials and not those interacting with them. Such codes of conduct govern what activities a public offi cial may engage in, as well as the hospitality he or she THE REGULATION OF THOSE IN THE PRIVATE SECTOR WHO INTERACT WITH PUBLIC OFFICIALS IS GENERALLY GOVERNED BY LOBBYIST LEGISLATION. may accept, if any. A n enterprise should, for example, avoid inadvertently placing public offi cials in a confl ict-of-interest position that could impede that offi cial from being involved with a given issue and also bring negative attention to the enterprise’s government relations eff ort. T he regulation of those in the private sector who interact with public offi cials is generally governed by lobbyist legislation. Such legislation provides that businesses and their employees may need to register their government relations activities with a central registry. T his central registry is available to the public (usually through the Internet). Federal and provincial lobbyist legislative schemes distinguish between inhouse lobbyists (both for businesses and for organizations) and external consultant lobbyists and impose a “signifi cant duties” test on in-house lobbyists. T he registration of lobbyists has come under increasing scrutiny in almost every jurisdiction in Canada. The Parliament of Canada and Government Relations Doing Business in Canada 174GOVERNMENT RELATIONS most provincial legislatures, including British Columbia, Alberta, Ontario, Québec, Manitoba, Nova Scotia and Newfoundland and Labrador have enacted lobbyist legislation. On Nov. 6, 2013, the p rovincial legislature of New Brunswick i ntroduced lobbying legislation, but its laws are not yet in force. On Dec. 16, 2013, the provincial legislature of Saskatchewan introduced lobbyist legislation that would require persons who are paid to lobby elected offi cials to register their lobbying activities with a proposed government registry. Some cities, such as Toronto a nd Ottawa, also have bylaws requiring lobbyists to register. Lobbying activities in other cities, such as St. John’s, in the Province of Newfoundland and Labrador, and Montréal and Québec City, in the Province of Québec, are regulated by provincial lobbying legislation. The t ypes of communication that may require registration vary from jurisdiction to jurisdiction. Broadly speaking, they include: communications with public offi cials (which includes not only politicians, but also many government employees) with respect to the development of legislative proposals; the introduction, passage, defeat or amendment of legislation; the making or amending of any regulation; the development or amendment of any policy or program; the awarding of any grant, contribution or other fi nancial benefi t; and, in some cases, the awarding of contracts and the arrangement of meetings with public offi cials. A wel l-planned government relations strategy can lead to a productive and professional relationship with responsible decision-makers in government. Both industry and public offi cials benefi t from such relationships, because they ensure that all the facts relevant to a decision are expressed, understood and taken into account. Governments in Canada will generally do their best to be responsive, transparent and eff ective in addressing the needs of enterprises. However, when engaging public offi cials, it is essential for an enterprise to know and follow the rules. FOR MORE INFORMATION, PLEASE CONTACT: Paul Boniferro 416-601-7975 [email protected] GOVERNMENT PROCUREMENT By Brenda Swick Government Procurement mccarthy.ca 177GOVERNMENT PROCUREMENT GOVERNMENT PROCUREMENT Each year, federal, provincial, territorial and municipal governments in Canada purchase more than $150 billion in goods and services. Procurement by the federal government is subject to the requirements PROCUREMENT BY THE FEDERAL GOVERNMENT IS SUBJECT TO THE REQUIREMENTS IN THE WTO AGREEMENT ON GOVERNMENT PROCUREMENT AND CHAPTER 10 OF THE NORTH AMERICAN FREE TRADE AGREEMENT. in the WTO Agreement on Government Procurement and Chapter 10 of the North American Free Trade Agreement. The leading legislation and policies that apply to federal contracts for goods and services include the Financial Administration Act, the Government Contracting Regulations, the Treasury Board Contacting Manual, the Department of Public Works and Government Services Act, and the Standard Acquisition Clauses and Conditions (SACC) Manual. Most purchasing for line departments is done by Public Works and Government Services Canada (PWGSC). The contracting practices and contract awards of federal, provincial, and municipal, academia, school boards and hospitals are subject to the requirements in the Agreement on Internal Trade. Its purpose is to provide equal trade opportunities to domestic suppliers regardless of their province or territory of origin. It does not apply to foreign suppliers, although foreign suppliers with offi ces in Canada, Canadian subsidiaries, or their Canadian distributors can take advantage of this Agreement. Provincial and territorial government tendering practices and contract awards are subject to the obligations and procedural protections set out in the Canada United States Agreement on Government Procurement. Each province and territory has its own separate legislation, with varying degrees of complexity and formality. For example, in Ontario, the Ministry of Government Services Act requires the provincial government to follow the policies and directives established by the Management Board of Cabinet when undertaking procurements relating to the construction, renovation or repair of a public work. In Ontario, the Ministry of Government Services is responsible for developing the procurement Government Procurement Doing Business in Canada 178GOVERNMENT PROCUREMENT policy framework for the Government of Ontario, including guidelines. Procurement policies in Ontario include an electronic tendering system, no preference for local vendors and a confl ict of interest policy. In Ontario, procurements by broader public sector entities including school boards and hospitals are subject to the requirements of the Ontario Broader Public Sector Directive, which includes a Supply Chain Code of Ethics and 25 mandatory requirements. Municipal contracting processes are generally governed by common law THE PRIMARY PROCUREMENT OBLIGATIONS COMMON TO ALL THE TRADE AGREEMENTS INCLUDE: NONDISCRIMINATION BASED ON COUNTRY AND/OR PROVINCE OF ORIGIN; AN OPEN, TRANSPARENT TENDERING PROCESS; A COMPETITIVE PROCUREMENT; AND A FAIR PROCUREMENT PROCESS. and codifi ed in municipal purchasing bylaws, contracting policies and purchasing procedures. Some provincial legislation such as the Ontario Municipal Act requires municipalities to maintain policies related to the procurement of goods and services. Canada has recently signed the Canada EU Comprehensive Economic Trade Agreement, which has signifi cantly opened up provincial, utility and municipal procurements to European suppliers. The Agreement imposes signifi cant standards on the conduct of tendering processes and contract awards on federal, provincial and municipal procurements. The primary procurement obligations common to all the trade agreements include: non-discrimination based on country and/ or province of origin; an open, transparent tendering process; a competitive procurement; and a fair procurement process. There are some minimum monetary thresholds and subject matter exclusions to be considered. The monetary thresholds are diff erent for each of the trade agreements, may fl uctuate year to year, and vary depending on the type of contract and in some cases the identity of the procuring entity. In regard to Canadian defence procurement, the Defence Production Act (DP) gives the Minister of PWGSC the responsibility to administer the DP and the exclusive authority to buy or otherwise acquire defence supplies and construct defence projects required by the Department of Government Procurement mccarthy.ca 179GOVERNMENT PROCUREMENT National Defence. There are security requirements for individuals, facilities and controlled goods and technology. The Industrial Security Program provides security screening services for government contractors before they are entrusted with protected and classifi ed information and assets of the government. The Controlled Goods Program is Canada’s national domestic industrial security program and prevents the proliferation of tactical and strategic technology and assets, including missile technology, military equipment and related intellectual property. Our fi rm is registered to receive controlled goods and technology under the Controlled Goods Program. The Joint Certifi cation Program protects unclassifi ed military critical technical data from common adversaries but allows the data to be transmitted to private U.S. and Canadian entities THERE ARE A MYRIAD OF PROCEDURES AVAILABLE FOR FEDERAL PROCUREMENT RANGING FROM FORMAL TENDERING TO NEGOTIATED PROCUREMENTS. that have a legitimate need for them. There are a myriad of procedures available for federal procurement ranging from formal tendering to negotiated procurements. Practically speaking, the leading forms of procedure are requests for proposals, standing off ers and supply arrangements. Short listing by way of requests for qualifi cations may be used in more complex, high-value solicitations. Specifi cations should be draft ed in such a manner that competition is maximized, unless a restrictive requirement is necessary to meet the government’s legitimate operational needs. Procurement laws generally provide that to be considered for an award, a bid must comply with all mandatory requirements in the request for proposal. In general, an award is to be made to the qualifi ed bidder whose bid is responsive to the terms of the request for proposal or solicitation and is more advantageous to the government considering only price and the non-price related factors included in the bid document. Bidders who are debarred, suspended or declared ineligible may not receive a contract award. In addition there are procedures to allow a department to establish prequalifi cation requirements, which could have the eff ect of excluding non-qualifi ed bidders. Minor amendments of an existing contract may be permissible; however, material amendments expose the purchasing entity to legal risks under Government Procurement Doing Business in Canada 180GOVERNMENT PROCUREMENT the trade agreements and at common law. Government contracts will typically prohibit the transfer of an existing contract to another supplier without the express written permission of the purchasing entity. The extension of an existing contract does not typically require a new procurement provided the original contract explicitly provides for an option to extend. Purchasing undertaken by the federal government is subject to Canada’s bid challenge regime under the jurisdiction of the Canadian International Trade Tribunal (CITT), which is authorized to investigate compliance of federal purchasing entities with the trade agreements. The CITT requires that a complaint be fi led within 10 working days of the day the complainant knew of or should have known of the grounds for the complaint. If the CITT determines that a solicitation, proposed award or contract award does not comply with statute or an international trade treaty requirement, it may recommend that the contracting entity, usually PWGSC, implement any combination of the following remedies: terminate the contract, issue a new solicitation, award a contract or award damages for lost profi ts. It may also be recommended that the contracting agency pay all of the complainant’s bid and proposal preparation costs and all costs associated with fi ling and pursuing the protest. Provincial and municipal authorities have their own bid protest mechanisms. Federal and provincial superior courts may also hear claims by bidders that the solicitations have been carried out in breach of their common law rights in contract or tort. All procurements by federal, provincial and municipal entities are subject to the jurisdiction of the courts and to the concept of “Contract A” and “Contract B” under common law. The courts have held that when a compliant bidder responds to a tender call, a notional contract called “Contract A” is formed. One of the terms of “Contract A” is that the bidder, if selected, is required to honor the terms of its bid by entering into “Contract B” which is the contract to perform the work in question. However, during the bidding process, the parties are governed by the explicit rules in the tendering documents. The purchasing government entity is also subject to a number of implied duties to “Contract A” bidders, including to conduct a fair competition, Government Procurement mccarthy.ca 181GOVERNMENT PROCUREMENT provide proper disclosure, reject non-compliant tenders, award the contract to the winning bidder and award the contract as tendered. FOR MORE INFORMATION, PLEASE CONTACT: Brenda Swick 416-601-7545 [email protected] McCARTHY TÉTRAULT: A PROFILE Contacts at McCarthy Tétrault 186 McCarthy Tétrault: A Profi le mccarthy.ca 185McCARTHY TÉTRAULT: A PROFILE McCARTHY TÉTRAULT: A PROFILE McCarthy Tétrault actively listens to its clients to understand their needs, their business and their industry, then develops the best solutions and strategies to achieve successful outcomes. With this approach, the fi rm has established a position as one of Canada’s leading full-service law fi rms. McCarthy Tétrault’s unifi ed, client-focused teams regularly advise on the PLEASE CONTACT ANY OF THE LAWYERS IN OUR FIRM TO ASSIST YOU IN PROVIDING A DETAILED ANALYSIS OF THE ISSUES RELEVANT TO YOUR SPECIFIC PROPOSED INVESTMENT. largest and most complex transactions and cases involving Canadian and foreign interests. The fi rm provides unequalled depth of legal talent, industry knowledge and practice experience, capitalizing on our size and scale to deliver customized legal services that assist clients in meeting their business goals and protecting their rights and fi nancial interests. With offi ces in Canada’s major commercial centres and in London, U.K., McCarthy Tétrault delivers integrated business law, litigation, tax law, real property law, and labour and employment law services nationally and globally. McCarthy Tétrault lawyers work seamlessly across practice groups, representing diverse Canadian and international clients such as businesses and public institutions from a wide range of sectors, including — among many others — the fi nancial services, power, oil & gas, private equity (including Canadian pension plans), insurance, pharmaceutical, mining, high-tech, telecommunications, life sciences, infrastructure and construction industries. McCarthy Tétrault has also helped structure the largest investment projects in Canadian history and has extensive experience in complex cross-border corporate fi nancings and mergers & acquisitions, as well as the development and fi nancing of major international projects. Firm lawyers have acted as counsel at every level of the federal and provincial court systems in Canada, and frequently appear before regulatory and administrative tribunals, as well as in commercial arbitrations. Please contact any of the lawyers in our fi rm to assist you in providing a detailed analysis of the issues relevant to your specifi c proposed investment. McCarthy Tétrault: A Profi le Doing Business in Canada 186McCARTHY TÉTRAULT: A PROFILE To learn more about Doing Business in Canada, contact: U.S. and International Markets Leaders UNITED STATES David B. Tennant 416-601-7777 [email protected] AFRICA Pierre Boivin 418-521-3012 [email protected] AFRICA David McLeod Smith +44 (0)20 7786 5705 [email protected] CHINA Joyce Lee 604-643-7128 [email protected] CHINA Ian C. Michael 416-601-8023 [email protected] INDIA Richard J. Balfour 604-643-7915 [email protected] INDIA David A.N. Lever 416-601-7655 [email protected] Practice Group Leaders BUSINESS LAW Richard J. Balfour 604-643-7915 [email protected] LABOUR & EMPLOYMENT Jacques Rousse 514-397-4103 [email protected] LITIGATION David E. Leonard 416-601-7694 [email protected] REAL PROPERTY John C. Currie 416-601-8154 [email protected] TAX Douglas A. Cannon 416-601-7815 [email protected] McCarthy Tétrault: A Profi le mccarthy.ca 187McCARTHY TÉTRAULT: A PROFILE Industry Group Leaders CONSUMER & RETAIL Lara Nathans 416-601-8470 [email protected] FINANCIAL SERVICES Barry J. 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Box 10424, Pacific Centre Vancouver BC V7Y 1K2 Tel: 604-643-7100 Fax: 604-643-7900 CALGARY Suite 4000, 421 7th Avenue SW Calgary AB T2P 4K9 Tel: 403-260-3500 Fax: 403-260-3501 TORONTO Suite 5300, TD Bank Tower Box 48, 66 Wellington Street West Toronto ON M5K 1E6 Tel: 416-362-1812 Fax: 416-868-0673 MONTRÉAL Suite 2500 1000 De La Gauchetière Street West Montréal QC H3B 0A2 Tel: 514-397-4100 Fax: 514-875-6246 QUÉBEC CITY Le Complexe St-Amable 1150, rue de Claire-Fontaine, 7e étage Québec QC G1R 5G4 Tel: 418-521-3000 Fax: 418-521-3099 LONDON, U.K. 125 Old Broad Street, 26th Floor London EC2N 1AR UNITED KINGDOM Tel: +44 (0)20 7786 5700 Fax: +44 (0)20 7786 5702 Cover_wspine_final.indd 1 14-03-04 9:19 AM
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