No decision to establish or invest in a business abroad should be made without a basic understanding of the legal framework in which the business operates or will operate. The following broad overview of the Canadian legal environment will help potential US and other investors to become familiar with significant business laws and practices in Canada. However, this summary provides only an introduction to the Canadian system, and in no way constitutes an exhaustive analysis of the many statutes, regulations and conventions relevant to doing business in Canada. Accordingly, the prudent investor should discuss any Canadian investment proposal with Canadian legal counsel.
government and legal system
Like the United States, Canada has a federal system of government. The Canadian federal state consists of a federal government, ten provincial governments and three territorial governments, each with its own sphere of legislative competence. Additionally, the provincial governments may delegate legislative authority to local municipal governments. At all levels, governments may delegate regulatory power to specialized administrative agencies, boards or commissions. Consequently, a business may well be subject to federal, provincial and municipal legislation, as well as administrative regulation and the common law developed by the courts.
foreign investment legislation
Investment Canada Act
Whenever a non-Canadian establishes a new Canadian business or acquires control of an existing Canadian business (regardless of whether that “Canadian business” is then owned by non-Canadians), a Notification under Canada’s foreign investment legislation is required. This is a straightforward two-page form which can be filed pre- or post-closing. There is no filing fee and, in the ordinary course, submission of the form does not trigger a substantive review.
However, in limited cases investments are “reviewable” and Ministerial approval is required. The minimum timing for a review is 45 days, but can be longer. The test to determine whether an investment is “reviewable” is complex, but largely depends upon (i) the book value of the assets of the Canadian business, (ii) whether a Canadian entity or Canadian assets are being acquired directly (as opposed to indirectly through the acquisition of shares of a parent company located outside Canada), and (iii) whether the target’s business activities in Canada are cultural in nature (broadly defined but includes, in particular, book publishing and distribution and the distribution of films).
The test for approval is whether the transaction is likely to be of “net benefit to Canada” based on a broad range of economic factors. If the relevant Minister decides that a transaction is not of net benefit to Canada, he or she is required to provide reasons for the decision. If the Minister decides that a transaction is of net benefit to Canada, he or she may (but is not required to) provide reasons for the decision and allow these reasons to be made publicly available.
There are also special criteria applicable to acquisitions by foreign state-owned enterprises, and the Government can consider national security issues when reviewing transactions.
The Federal Cabinet is empowered to review, and ultimately to block, any investment it considers “could be injurious to national security”. No specific definition of national security is provided in the ICA. It is possible that national security grounds could be invoked to review investments by non Canadians in areas as diverse as mining (particularly uranium and other materials of military importance), finance, transportation, ports, electricity, oil and gas, and pipelines.
specific industry legislation
In addition to the ICA, other statutes contain ownership and investment restrictions with respect to specified industries, such as financial services, airlines, broadcasting and telecommunications. Any proposed investment or acquisition in these sectors therefore must be assessed in light of the specific regulatory regime to which that industry is subject.
currency or exchange controls
Notably, Canada has no system of currency or exchange controls restricting the repatriation of Canadian business capital or earnings to non-Canadian investors.
alternative vehicles for doing business
Foreign investors most often conduct business in Canada through either a Canadian branch operation or a Canadian subsidiary corporation. A foreign business might instead enter the Canadian market by forming an unlimited liability company, partnership, or joint venture with other parties. Alternatively, the foreign business may establish one or more Canadian sales representatives, distributors or franchisees.
A number of considerations must be addressed when choosing the appropriate commercial vehicle for entering the Canadian market. Tax consequences and limited liability tend to be the key considerations for most businesses. Incorporation of a limited liability subsidiary corporation is an attractive option because it ensures that Canadian operations will have a legal existence separate from that of the parent. However, if the Canadian operations are not expected to generate profit for some years, initial operation as a branch could produce considerable tax savings (as discussed more fully below).
Subject to certain exceptions, a business may incorporate under the federal corporate statute or any of the provincial statutes. In either case, incorporation is accomplished simply by filing Articles of Incorporation and paying a modest fee to the appropriate government authority.
A number of factors guide the investor in choosing between federal and provincial incorporation. Quite often, due consideration must be given to whether the company needs to protect its business name across the country. While a federal corporation may carry on business in every province under its corporate name, similar rights may not apply to the provincially incorporated company. Thus, an issue could arise if the provincially incorporated company’s name conflicts with that of an existing corporation or business entity in another province. On the other hand, provincial incorporation may offer advantages, particularly where corporate operations are restricted to a single province.
Canadian corporations generally act through a board of directors elected by the shareholders. If the subsidiary is incorporated under the federal statute, at least 25% of the subsidiary’s board generally must be resident Canadians, defined as Canadian citizens or permanent residents ordinarily residing in Canada. For corporations involved in uranium mining, book publishing, distribution or retailing, or film or video distribution, a majority of the board members of the corporation must be resident Canadians. Provincial corporations statutes impose a range of differing requirements for the residency of directors. Ontario, for example, requires that 25% of the directors be resident Canadians except where an Ontario corporation has less than four directors, in which case at least one director must be a resident Canadian. Certain other provinces have no residency requirement. Both the Federal and Ontario Business Corporations Acts permit shareholders to use a unanimous shareholder agreement to partially or entirely restrict the directors’ powers to manage the corporation’s business and affairs.
A foreign corporation operating a branch usually must obtain an extra-provincial licence from each province wherein it intends to conduct business. The law of each such province should be consulted. For example, to receive an Ontario extra-provincial licence, the foreign corporation must conduct and submit a corporate name search establishing that the company name complies with Ontario law.
As already noted, the foreign investor must carefully consider local tax laws when structuring inbound investments. The federal, provincial and municipal governments of Canada each impose taxes on businesses in Canada.
The Fifth Protocol to the Canada-United States Income Tax Convention (1980), as amended (the “Treaty”), which entered into force on December 15, 2008 (the “Protocol”), has materially impacted the manner in which many businesses engage in Canada-US cross-border tax planning. Some of the implications of the Protocol are noted below.
Both the federal and provincial governments impose a tax on income. The federal Income Tax Act (the “ITA”) and corresponding provincial statutes impose tax on the world-wide income of Canadian residents. By contrast, non-residents are generally taxed only on income derived from Canadian sources.
income tax on a Canadian branch
A United States resident corporation entitled to the benefits of the Treaty, is generally subject to Canadian federal income tax on income earned from carrying on business through a Canadian “permanent establishment”. The Treaty defines a permanent establishment of such a corporation as a fixed place of business through which the corporation (a “US Resident Corporation”) wholly or partly carries on business. Such fixed places of business include: places of management, branches, offices, factories, workshops, sites of natural resource extraction, and building sites or construction or installation projects lasting more than twelve months. A permanent establishment also exists where a dependent agent, acting on behalf of a US Resident Corporation, has authority to conclude contracts in the corporation’s name and habitually exercises this power in Canada. US enterprises that provide services in Canada will also generally be deemed to provide such services through a permanent establishment in Canada where (a) the services are performed by an individual who is present in Canada for 183 days or more in a 12 month period and, during the periods in which the individual is present in Canada, more than 50% of the enterprise’s gross active business revenue consists of income derived from such services performed in Canada by the individual; or (b) the services are provided in Canada for 183 days or more in a 12 month period with respect to the same or connected1 project for customers who are either Canadian residents or who maintain a permanent establishment in Canada and the services are provided in Canada in respect of that permanent establishment.
A US Resident Corporation carrying on business in Ontario through a permanent establishment (as defined in both Ontario tax legislation and the Treaty) generally is liable for tax at a combined general rate of 33% on conventional business income attributable to the permanent establishment. Broken down, this rate consists of federal tax at a rate of 19% and Ontario tax at a rate of 14%.2 Lower rates apply in respect of certain manufacturing and processing income. The applicable provincial income tax rates in the provinces of Quebec and Alberta in respect of conventional business income attributable to those provinces are currently 11.9% and 10% respectively. The other provinces similarly levy income tax on business income attributable to permanent establishments in those provinces.
Ontario also imposes a corporate minimum tax on corporations that are subject to regular Ontario tax and that (either alone or together with associated corporations) have either total assets with a value of more than CDN$5 million or total revenue of more than CDN$10 million. The Ontario minimum tax that a corporation pays in any future year may be credited against regular Ontario income tax owing over the subsequent twenty years.3 The province of Quebec imposes a similar tax on corporations.
In addition to the aforementioned basic corporate income taxes, a US Resident Corporation that carries on business in Canada through a permanent establishment, and is entitled to claim the benefits of the Treaty, is generally liable to pay a 5% federal branch profits tax. The federal branch profits tax generally applies to after-tax profits that are not invested in qualifying Canadian assets. By virtue of the Treaty, the first CDN$500,000 of branch earnings will generally be exempt from branch profits tax. The branch profits tax is designed to equal the withholding tax that would have been levied on dividends paid by a Canadian subsidiary to its US parent corporation had a Canadian subsidiary been utilized to carry on the subject business activities.
If it is anticipated that the Canadian activities of a US Resident Corporation will give rise to losses, it may be prudent for the US Resident Corporation to conduct its Canadian activities through a Canadian branch, rather than a corporate subsidiary, subject to overriding commercial considerations. Operating through a branch may allow a US Resident Corporation to apply branch losses for US income tax purposes.
income tax on a Canadian subsidiary
A subsidiary incorporated in Canada is deemed to be a Canadian resident and is, therefore, subject to tax in Canada on its world-wide income. The above-noted tax rates for non-resident corporations carrying on business in Ontario, Quebec and Alberta also apply to Canadian subsidiaries operating in those provinces. However, the federal branch tax does not apply to Canadian subsidiaries.
If a Canadian subsidiary borrows from its US parent corporation or from other specified non-residents, the ability of the subsidiary to deduct interest is subject to the limitations imposed by the Canadian thin capitalization rules. In essence, these rules preclude the Canadian subsidiary from deducting interest on the portion of its interest-bearing loans from certain specified non-residents that exceeds two times its equity (i.e., essentially paid-up capital and contributed surplus attributable to certain specified non-residents and non-consolidated retained earnings).
Certain types of amounts paid or credited by a Canadian subsidiary to a US Resident Corporation are subject to Canadian withholding tax. Such amounts include dividends, certain royalties, and certain interest payments. Under the ITA, the payment of such amounts by a Canadian resident to a non resident of Canada may be subject to Canadian Part XIII withholding tax levied at the statutory rate of 25%. However, the applicable rate of Canadian Part XIII withholding tax may be reduced by virtue of the Treaty in cases where the recipient of the subject payments is entitled to claim the benefits afforded by the Treaty. The Treaty reduced withholding tax rate in respect of dividends is 5% where the beneficial owner of the dividends is a US resident company that owns at least 10% of the Canadian subsidiary’s voting stock (otherwise, the applicable Treaty reduced rate is 15%). The Treaty reduced withholding tax rate in respect of royalties is 10%. Effective January 1, 2008, conventional interest payments made to “arm’s length” non-resident lenders are generally not subject to Canadian withholding tax. Under the Treaty, non participating interest payments made to US resident lenders with which a Canadian resident borrower is “related” or deemed to be “related” for the purposes of the Treaty may be subject to a reduced rate of Canadian withholding tax of 4% in respect of payments made in 2009 and 0% thereafter.
In computing taxable income, a Canadian subsidiary may generally carry unused business losses back three years and forward twenty years in accordance with the detailed rules in the ITA. However, because Canada does not have a consolidated tax reporting system, losses incurred by a Canadian corporation cannot be applied to reduce the taxable income of affiliated Canadian corporations. Subject to certain restrictions, historical business losses may generally be assumed by a Canadian successor corporation following an amalgamation or by a Canadian parent corporation after its wholly-owned subsidiary is wound-up. Where control of a corporation has been acquired, use of business losses is restricted to prevent trading in losses.
Transfers of goods or services between a US Resident Corporation and its Canadian subsidiary must be executed at an arm’s length price. Should the parties agree to a different price, the Canadian tax authorities may recharacterize the transaction as having been executed at an arm’s length price for income tax purposes pursuant to the Canadian transfer pricing rules. Taxpayers must also contemporaneously document the basis for their transfer prices in respect of non arm’s length transactions, as failure to do so may result in the imposition of penalties.
capital gains realized by US Resident Corporations
A US Resident Corporation is subject to Canadian income tax on taxable capital gains realized on the disposition of certain types of Canadian property. A capital gain is generally equal to the difference between the proceeds of disposition and the acquisition cost of a particular piece of property. One-half of a capital gain earned by a taxpayer is generally required to be included in the computation of taxable income for Canadian tax purposes.
The types of Canadian property held by a US Resident Corporation that may give rise to a liability for Canadian capital gains tax on their disposition include real property situated in Canada, property used in carrying on business in Canada that forms part of the business property of a Canadian permanent establishment, and shares of a Canadian subsidiary whose value is derived principally from real property situated in Canada.
use of hybrid/fiscally transparent entities
The above discussion applies to US corporate entities (for example, US “C” corporations) that are entitled to claim the benefits afforded by the Treaty. However, not all US residents will be entitled to claim Treaty benefits. The entry into force of the Protocol has resulted in some substantial changes with respect to the types of US entities that may claim the benefits of the Treaty. Most notably, the Canadian taxing authorities have historically been of the view that US limited liability companies (“US LLCs”) are not entitled to claim the benefits afforded by the Treaty. However, by virtue of the changes introduced by the Protocol, a US resident that is considered to have derived income through an entity, such as a US LLC, for US tax purposes, may be able to claim the benefits afforded by the Treaty in respect of such income where, by virtue of the US entity being treated as fiscally transparent under US law, the US tax treatment of the income derived through the entity is the same as it would have been had the income been derived directly by the US resident.
On the other hand, the Protocol effectively denies Treaty benefits to certain hybrid entities. Of particular significance, US resident shareholders of a Canadian unlimited liability company formed under the laws of the provinces of Alberta, British Columbia or Nova Scotia (a “ULC”), which has “checked-the-box” to be treated as a disregarded entity for US tax purposes, will generally not be entitled to claim Treaty benefits in respect of amounts paid to, or derived by, the US shareholder from the ULC. Accordingly, the general statutory rate of withholding tax (i.e., 25%) will be exigible in respect of such payments to the extent withholding tax is applicable. Special consideration should be given to the hybrid entity amendments set forth in the Protocol as they will come into effect on January 1, 2010.
The provincial governments of Nova Scotia, Quebec, Ontario and Manitoba each impose a capital tax. The capital on which such capital tax is imposed generally consists of the aggregate of a corporation’s equity and most indebtedness minus a specified deduction amount and an allowance for certain reserves and other stipulated balance sheet items. The rates of provincial capital tax range from 0.225% in Ontario to 0.4% in Manitoba. Ontario’s general capital tax rate is 0.225% and applies to corporations (other than those engaged primarily in manufacturing and resources activities) in a corporate group with taxable capital in excess of CDN$15 million. A US Resident Corporation carrying on business in Ontario through a branch may be subject to Ontario capital tax in respect of capital employed in Ontario. The Ontario capital tax rate will be reduced to 0.15% as of January 1, 2010, and will be completely eliminated as of July 1, 2010.
Federal Goods and Services Tax (GST) and Harmonized Sales Tax (HST)
The GST is a 5% multi-stage value-added tax that generally applies to domestic supplies of most types of property and services outside of the Canadian provinces of Nova Scotia, New Brunswick and Newfoundland/Labrador. The GST does not apply in the Canadian provinces of Nova Scotia, New Brunswick and Newfoundland/Labrador where HST applies. These three provinces have combined an 8% provincial sales tax component with the 5% federal GST rate for a 13% HST rate. In Ontario’s Budget released on March 26, 2009, Ontario proposed to eliminate its 8% provincial retail sales tax and introduce a HST similar in nature to the HST currently in place in the foregoing three provinces.
A registered supplier generally collects the GST or HST at the time of sale, or on lease or licence payments, as agent for the federal tax authorities. Registration with the federal government for the GST automatically results in HST registration as well. A non-resident of Canada who carries on business in Canada and makes taxable supplies in Canada must generally register for the GST/HST.
Certain types of transactions are specifically exempted from GST/HST (e.g., provision of financial or educational services) or are taxable at a 0% rate, that is, zero-rated (e.g., sale of medical devices) such that no GST or HST applies. GST and HST are not generally intended to be costs of doing business. Registered businesses can generally claim input tax credits (ITCs) on their GST/HST returns to recover GST or HST payable by them on their business expenses, including on capital account. A person cannot claim an ITC to the extent that it acquires or imports a property or service for other than commercial activities (such as for making exempt supplies or for personal use). Public sector entities may be entitled to claim rebates of GST or HST at applicable recovery rates. Imports of goods into Canada generally attract GST at the border. HST generally applies at the border to goods imported into Canada for personal use by residents of HST provinces. Persons must also pay GST or HST (through a self-assessment system) on imported services and intangible property intended for exempt or personal activities. Many “exports” of goods and services to non-residents of Canada are zero-rated so that no GST or HST applies.
Provincial Retail Sales Taxes
The provinces of Ontario, Manitoba, Saskatchewan, British Columbia and Prince Edward Island currently impose a single stage retail sales tax (tax is paid only by the final consumer, business, institution, or individual). The rate of this tax varies from province to province, with the current rate in the province of Ontario being 8%. (See, however, discussion above regarding proposal to introduce HST effective July 1, 2010.) Subject to specific exemptions, the consumer pays the retail sales tax on tangible personal property and certain taxable services at the time of purchase or import. A licensed vendor, lessor, or licensor collects this tax as agent for the provincial tax authority. A “purchaser” or “user” may be required to self-assess and remit tax on goods imported into a province, or goods originally purchased for re-sale but converted for their own use. Persons making taxable “sales” within a province in which they carry on business must obtain a vendor’s retail sales tax licence in the province.
Quebec levies a 7.5% multi-stage value-added sales tax (QST), which generally mirrors the GST and HST in nature. The 7.5% QST is imposed on the amount paid for a taxable supply, plus the 5% GST thereon, for an effective combined rate of 12.88%. The Government of Quebec has announced, however, that the QST will be increased to 8.5% as of January 1, 2011.
Canada levies customs duties on certain goods imported into Canada and applies additional excise taxes and duties on specific goods. The tariff classification and origin of imported goods determines the applicable rate of the customs duty. If the goods satisfy specific rule-of-origin criteria, they may qualify for preferential rates of duty. For example, US or Mexican goods which satisfy the NAFTA Rules of Origin generally qualify for duty-free entry.
The “transaction value” of imported goods is generally used to determine the value of the goods for purposes of calculating customs duty. Transaction value is defined as the sale price in a sale for export to the purchaser in Canada, adjusted by specified additions and deductions. GST applies to most imported goods, regardless of whether customs duties apply. However, the importer, or another person involved in the transaction, may be eligible to recover the GST paid on imported commercial goods by way of ITC claims. Consumer imports of goods may attract HST, provincial retail sales tax or QST.
Land Transfer Tax
A buyer of real property situated in Ontario must pay a land transfer tax, based on the value of the consideration paid, at the rate of 0.5% on the first CDN$55,000 of value, 1% on the next CDN$195,000 of value, and 1.5% on the balance, except in the case of a single family residence or two such residences, where a rate of 2% applies on any consideration which exceeds CDN$400,000. A buyer of real property situated in Quebec must pay a land transfer tax at the rate of 0.5% on the first CDN$50,000 of value, 1% on the next CDN$200,000 of value, and 1.5% on the balance. The province of Alberta does not impose a land transfer tax.
Local governments levy annual real estate taxes on real property owners. These taxes are generally based on the assessed value of the property. In addition to the land transfer tax imposed by the Ontario government, effective February 1, 2008, buyers of real property in Toronto, Ontario, are required to pay municipal land transfer tax. The Toronto land transfer tax regime is similar to the provincial regime. Municipalities also levy local business taxes.
In general, only a Canadian citizen or permanent resident may work in Canada without a valid employment authorization. Non-residents may seek either temporary or permanent permission to work in Canada. The employment authorization procedure seeks to ensure that positions secured by non-Canadians could not have been filled from the Canadian labour force.
An employee of a corporation that conducts business outside Canada is exempt from the general employment authorization rules if that employee will be in Canada for less than ninety days to consult with or inspect a corporate subsidiary or branch. Similarly, non-Canadian employees, entering the country temporarily to work as senior executives or managers, establishing a permanent and continuing Canadian affiliate also receive favourable treatment.
Depending upon the country of origin, the individual may also need a visa to enter Canada. If so, the visa routinely is sought at the time of application for an employment authorization. As for US and Mexican citizens, NAFTA has substantially relaxed entry requirements for those who qualify as business visitors, traders, investors, intra-company transferees, and specialized professionals.
As part of its economic strategy, Canada encourages recruitment of business immigrants likely to contribute to economic development through increased capital formation and job creation. Three categories of business immigrants qualify for admission to Canada.
The first group consists of self-employed applicants. To qualify, the individual must have both the intention and the ability to establish a business that will contribute to Canadian economic, cultural, or artistic life and which will employ himself or herself.
Entrepreneurs comprise the second category. The entrepreneurial applicant must have the ability to establish or purchase a business that will significantly contribute to the economy. The business must also employ one or more Canadian citizens or permanent residents, other than the immigrant and his or her dependants. Finally, the applicant must be in a position to actively participate in management of the business on an on-going basis.
Investors constitute the last category of immigrants who may qualify. Designed to attract experienced business people willing to make a permanent investment in Canada, to qualify as an investor a person must have a minimum net worth of CDN$800,000 and be willing to invest CDN$400,000. The federal government acts as an agent on behalf of the provinces which secure the investment.
In addition to the above, other opportunities to qualify for permanent admission may exist for individuals in particular circumstances.
labour and employment law considerations
Legislative authority over labour and employment is divided between the federal and provincial governments. Federal law governs employment in federal works, undertakings and businesses such as aeronautics, banking, and communications. The vast majority of employment relationships in Canada are governed by provincial authority.
All Canadian jurisdictions have enacted minimum standards for the basic terms and conditions of employment. Such legislation may include minimum standards for matters such as working conditions, hourly wages, hours of work, overtime pay, statutory holidays, vacation, maternity leave, parental leave, individual and mass termination and lay-off. Neither employers nor employees are free to avoid or “contract out of” the minimum standards by individual contract.
trade unions and collective bargaining
Federal and provincial legislation also governs collective bargaining between employers and trade unions. A trade union may be certified as exclusive bargaining agent for an appropriate group of employees, known as the bargaining unit. Managers and other employees in a position of confidence concerning labour relations are usually excluded from the bargaining unit. Once the union is certified, the employer must bargain with the union in good faith and attempt to reach a collective agreement. A strike or lockout can be called lawfully only after compulsory bargaining procedures expire. Legislation also prohibits any strike or lock-out during the term of the collective bargaining agreement. Any disputes arising from or subject to the agreement must be resolved through grievance and arbitration procedures.
workers’ compensation and occupational health and safety
The federal Canada Labour Code and various provincial statutes (for example, Ontario’s Occupational Health and Safety Act) regulate occupational health and safety. Additionally, provincial legislation mandates that employers in specified industries contribute levies to the workers’ compensation accident fund. This no-fault statutory system of compensation seeks to address the claims of workers injured on the job or stricken with an industrial disease. In Ontario, the Workplace Safety and Insurance Act is the governing legislation.
pension and employment insurance contributions
Canadian employers must contribute to both the Canada Pension Plan and Employment Insurance on behalf of their employees. Contributions may then be deducted as a business expense for income tax purposes. Furthermore, employers must collect from employee income and remit to appropriate authorities their employees’ income tax, Employment Insurance premiums and Canada Pension Plan contributions.
The federal and several provincial governments have enacted pay equity legislation mandating “equal pay for equal work.” Such legislation is designed to redress gender discrimination in the wages paid to female employees.
public health care
Each Canadian province has a public health care system providing its residents with universal access to medical care in the province. Ontario imposes an employer health tax based on the employer’s gross payroll subject to certain exemptions (approximately 2%). Health care costs for Canadian employers are generally significantly lower than those of US employers.
competition, marketing and products regulation
The Competition Act is Canada’s primary antitrust and trade practices legislation. The Act contains a mixture of criminal offences, discretionary reviewable practices, and private damage actions. Criminal offences, such as conspiracy, bid-rigging and some forms of misleading advertising are prosecuted in criminal courts. As such, the case must be proven beyond a reasonable doubt and strict rules of evidence apply. Non-criminal reviewable practices include mergers, abuse of dominant position, certain agreements between competitors, resale price maintenance, refusals to deal, and various vertical market restrictions. Practices that result in a substantial lessening of competition are subject to restraint and corrective action by the Competition Tribunal (the Tribunal), a specialized adjudicative body for non-criminal antitrust matters. Administrative monetary penalties may be imposed for abuse of dominant position (up to CDN$10 million in respect of the first order, and up to CDN$15 million for subsequent orders.)
The Competition Act applies to any merger, regardless of size, that either occurs in Canada or causes a substantial lessening of competition in Canada. Mergers that stifle competition are regulated by discretionary administrative and civil laws rather than by criminal prohibitions. The Commissioner of Competition (the Commissioner), and ultimately the Tribunal should the Commissioner refer the case, scrutinizes the merger to determine whether it is likely to prevent or lessen competition substantially. Although the Tribunal may not find against a merger solely on the basis of market share, concentration data remains a key consideration in any analysis. Ease of entry into the market, effectiveness of remaining competition, and the likelihood of business failure are other factors that the Commissioner must consider under the Act.
Size-of-parties and size-of-transaction tests determine merger pre-notification filing requirements in Canada. The size-of-parties test requires that the parties to a transaction, together with their affiliates have Canadian assets or annual gross revenues from sales in, from or into Canada exceeding CDN$400 million. The size-of-transaction test requires that the value of the Canadian assets to be acquired, or annual gross revenues from sales generated by those assets, exceeds CDN$70 million. Similar albeit more complicated thresholds apply to acquisitions of voting shares.
If pre-notification is required, the parties may not close the transaction until the mandatory waiting period of 30 days expires. The period commences when the completed filing is delivered to the Commissioner. A fee of CDN$50,000 is payable in connection with a filing. The 30 day waiting can be extended by the Commissioner if she/he requests the parties to supply additional information, much like the second request procedure in the United States. If the Commissioner elects to require the parties to provide additional information that is “relevant” to an assessment of the transaction, a further mandatory waiting period will run until 30 days after the Commissioner’s requirements have been fully satisfied (subject to early termination by the Commissioner). No form is prescribed and the Commissioner’s request is not subject to judicial oversight.
marketing and product regulation
A number of federal and provincial statutes, as well as the common law, regulate advertising and marketing of products in Canada.
The most common types of intellectual property are trade-marks, trade secrets (including know-how and show-how), trade-names, patents, industrial designs and copyrights.
A trade-mark is a word, design, combination of words and designs, or slogan used by a business to distinguish wares or services manufactured, sold, leased or performed by the business from those manufactured, sold, leased or performed by others.
Although registration is not essential to acquire or protect trade-mark rights, it does provide a number of significant advantages. Under the Trade-marks Act, registration of a trade-mark in association with wares and/or services, unless proven to be invalid, gives the owner of the mark the exclusive right to use the mark throughout Canada. Registration under the Act can ensure this exclusive right for fifteen years, and may be renewed indefinitely. A registration application may be based on actual use or proposed use of the mark in Canada. Under certain circumstances, foreign applicants may register on the basis of registration and use in a foreign country. In some cases, such applicants may obtain priority for the mark on the basis of a foreign trade-mark application.
The distinctiveness of a trade-mark may be preserved in Canada if all users of the mark, other than the trade-mark owner, are licensed to use the mark by or with the owner’s authority and if the owner of the mark has direct or indirect control over the character and quality of the wares or services in association with which the trade-mark is used.
The name under which a business operates constitutes that business’ trade-name. This is so regardless of whether it is the name of a corporation, a partnership, or an individual. In practice, the trade-name often is an abbreviation of the full corporate name, shortened for convenience. Notably, the Trade-marks Act does not provide for registration of trade-names. While provincial business names legislation does require a business to register its trade-name, such legislation does not provide the registrant with any exclusive right in the registered trade-name.
In Canada, letters patent are available to protect inventions. One may obtain the patent for any new or improved useful art, process, machine, manufacture or composition of matter. Under the Patent Act, the patent holder has the exclusive right, for the term of the patent, to make, construct, use, and sell the invention. Under current Canadian patent law, a patent can protect the holder for a maximum term of twenty years from the date of filing. Applications for a patent are open for public inspection eighteen months after they are filed.
Copyright law protects the owners of a broad range of original works. Such works include art (such as paintings, photographs and diagrams), literature (such as books, business documents and computer programs), drama (such as films and plays) and music. Copyright protects against unauthorized reproduction or performance of the work, as well as the sale, distribution or importation of infringing works.
Under Canadian law, the author of a work is the first owner of the work. However, there are a few exceptions to this principle. For example, employers own the works created by their employees in the course of employment, in the absence of a contrary agreement.
Although registration is not required for copyright protection, registration under the Copyright Act is permitted and does provide significant benefits.
Both the federal and provincial governments, and to some extent municipal governments, regulate environmental matters in Canada. At the federal level, there is general legislation dealing with environmental protection as well as specific regulatory schemes dealing with matters such as fisheries and protection of fish habitat, transportation and handling of dangerous goods, import/export of hazardous wastes, and identification and monitoring of new chemical and biological substances. Provincial legislation deals with waste management, waste reduction and recycling, spills and spill reporting, emission allowances and reporting, contaminated sites and clean up, and environmental assessment and review. An example of municipal regulation is found in Montreal, Quebec where the regulation of industrial air pollution is done by the regional municipal government. Provincial regulation tends to be more comprehensive than its federal counterpart which is more concentrated in the specific areas of regulation such as those noted above. However, there is some degree of overlap and depending on the location and the nature of the activities, a business may face compliance with applicable legislation from all three levels of government.
a cautionary note
The foregoing provides a summary of aspects of Canadian law that may interest investors considering doing business in Canada. A group of McMillan lawyers prepared this information, which is accurate at the time of writing. Readers are cautioned against making decisions based on this material alone. Rather, any proposal to do business in Canada should most definitely be discussed with qualified professional advisers.