Doing Business

in Canada
2011
Finding Opportunities
and Avoiding Pitfalls
Doing Business
in Canada
2011
Finding Opportunities
and Avoiding Pitfalls

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TABLE OF CONTENTS
Introduction 1
Canada 2
Business Organizations 5
Foreign Investment Laws 10
Competition Law 17
Corporate Finance and Mergers & Acquisitions 21
Bank Loans and other Loan Capital 29
Taxation 31
Sales Tax 36
Manufacture and Sale of Goods 38
Real Property 43
Public Private Partnerships 55
Aboriginal Law 57
Intellectual Property 60
Information Technology 65
Language 71
Immigration 74
International Trade and Investment 78
Employment 90
Privacy Laws 97
Environmental Regulation 101
Dispute Resolution 103
Bankruptcy and Restructuring 108
Government Relations 115
McCarthy Tétrault: A Profile 120

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 1
Introduction

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. It is written for the non-resident
businessperson, but with few exceptions the
DOING BUSINESS
same considerations apply when all parties
IN CANADA WAS
are based in Canada.
DEVELOPED BY
We’ve organized this guide into what we MCCARTHY TÉTRAULT
hope you’ll find to be a useful and user- AS A BASIC GUIDE TO
friendly resource. Beginning with an overview THE LEGAL ASPECTS
of the Canadian political and legal systems, OF ESTABLISHING
the guide proceeds through the areas of OR ACQUIRING A
law most likely to affect your business BUSINESS IN CANADA.
decisions: foreign investment, international
trade, corporate finance, 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 specific
legal aspects of your proposed investment or activity. With offices in
Canada’s major commercial centres, McCarthy Tétrault has substantial
presence and capabilities to help you successfully complete any
business transaction in Canada.

The information in this publication is current as of December 15, 2010

unless otherwise indicated. If you would like an electronic copy of
this publication, you can find it under the Publications section of our
website at [Link].

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Canada

CANADA
Canada is the second-largest country in the world, with an area of
approximately 10 million square kilometres and a population exceeding
33 million. Its developed portion constitutes less than one-third of its
total territory, and roughly 50 per cent 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 official 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. The Toronto Stock Exchange (TSX)
and the TSX Venture Exchange rank third
AS ONE OF THE
among North American exchanges and
EIGHT LARGEST
eighth among world stock exchanges in
ECONOMIES OF THE
terms of market capitalization. Many of the
INDUSTRIALIZED
world’s largest resource companies are listed
COUNTRIES, CANADA
on the TSX. Currently, approximately 75 per
IS A MEMBER OF THE
cent of Canada’s exports go to the United
WORLD’S GROUP
States, eight per cent to the European
OF EIGHT (G8)
Community, two per cent to China and
INDUSTRIALIZED
two per cent to Japan.
NATIONS.
At the beginning of 2010, Canada faced
three major challenges in the current global economic and financial
market environment, namely:

¬ the impact of tighter credit conditions and equity market losses

stemming from global financial market dislocations;
¬ the economic slowdown in the United States and other key
economies, and its impact on demand for Canadian exports; and
¬ the sharp drop in prices for many commodities produced in Canada,
which is dampening Canadian profit and income growth.
In 2010, the sharp rise in many commodity prices and the return of more
balanced credit markets globally resulted in increased mergers &
acquisitions activities in Canada, particularly in the oil & gas and mining
sectors, and very good financial results for many of Canada’s natural

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Canada

resource companies. In addition, Canadian companies continued to

benefit from low interest rates, the availability of credit and a generally
more robust economy than is currently seen in other industrialized
countries. A combination of rigorous regulation, strong capitalization
and the conservative practices of Canadian banks has distinguished
and insulated the Canadian banking system from the more dramatic
losses experienced by banks in other major countries.

Canadian business activity is expected to continue to increase in

2011, with natural resources continuing to lead the way. However,
most economists predict slower growth
in 2011 than was seen in 2010, but with
A STABLE POLITICAL
unemployment rates remaining at or near
ENVIRONMENT,
2010 levels, the Canadian dollar continuing to
COMBINED WITH A
strengthen against the US dollar and inflation
STRONG FINANCIAL
remaining low.
SYSTEM AND AN
A stable political environment, combined INCREASING DEMAND
with a strong financial system and an FOR OIL, GAS,
increasing demand for oil, gas, minerals and MINERALS AND OTHER
other commodities, are expected to result COMMODITIES, ARE
in continuing interest in Canada’s natural EXPECTED TO RESULT
resource companies. The relative strength IN CONTINUING
of the Canadian economy is also attracting INTEREST IN
attention from a variety of US and other CANADA’S NATURAL
foreign interests. RESOURCE
COMPANIES.
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.

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Canada

The federal government has legislative jurisdiction over, among other

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
WHEN ESTABLISHING
of the political parties that have either the
OR ACQUIRING
greatest number of seats in the House of
A BUSINESS IN
Commons or the provincial legislatures,
CANADA, ONE MUST
respectively — or that have, at a minimum, the
BE CONCERNED
support of a majority of the members of the
WITH THE FEDERAL
House of Commons or provincial legislatures,
LAWS AS WELL AS
respectively.
THE LAWS OF THE
When establishing or acquiring a business PROVINCES WITHIN
in Canada, one must be concerned with WHICH THE BUSINESS
the federal laws as well as the laws of the WILL BE CONDUCTED.
provinces 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 offices
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.

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Business Organizations

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 financing, income tax ramifications and
A WIDE VARIETY
the potential liabilities related to the activity.
OF LEGAL
Generally, one of the first issues faced by ARRANGEMENTS
a foreign entity contemplating carrying on MAY BE USED TO
business in Canada is whether to conduct CARRY ON BUSINESS
the business directly in Canada as a ACTIVITY IN CANADA.
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 filings 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 often used to carry on

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Business Organizations

commercial activities in Canada. Unlike the limited partnership,

partnership, trust, co-ownership 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 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 result, corporate shares (and
debt instruments) are often 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 profit. Partners share
in the profits, losses and net proceeds on THE EXPOSURE OF A
dissolution. The most significant advantage PARTNER TO LIABILITY
of a partnership is that it is permitted to CAN BE MINIMIZED
“flow through” losses to its partners that BY USING A LIMITED
may, subject to certain rules in the Income PARTNERSHIP RATHER
Tax Act (Canada), be used as deductions THAN A GENERAL
against the partners’ other income. The PARTNERSHIP.
most significant 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
insufficient 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.

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Business Organizations

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 specific statute.
However, corporations not specifically 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.

The principal federal corporate statute is the Canada Business

Corporations Act (CBCA), which is modeled on modern business
statutes in the United States. Most
provinces and territories in Canada also THERE ARE MINOR
have their own corporate legislation, based DIFFERENCES
largely on the CBCA. There are minor BETWEEN THE
differences between the various federal VARIOUS FEDERAL
and provincial corporate statutes that AND PROVINCIAL
can affect the choice of jurisdiction of CORPORATE
incorporation, depending upon the particular STATUTES THAT CAN
circumstances. AFFECT THE CHOICE
A foreign investor will find the following OF JURISDICTION
features of Canadian corporate legislation of OF INCORPORATION,
interest: DEPENDING UPON
THE PARTICULAR
¬ Under the CBCA, 25 per cent of a CIRCUMSTANCES.
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 differ 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.

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Business Organizations

¬ 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 GENERALLY, THERE
be transferred to the shareholders. IS NO REQUIREMENT
¬ Single shareholder corporations are TO FILE A CANADIAN
permitted and directors need not hold CORPORATION’S
shares in the corporation. FINANCIAL
¬ Minority shareholders of a Canadian STATEMENTS WITH
corporation have significant statutory A GOVERNMENT
rights and remedies, and eliminating BODY, EXCEPT IN THE
minority shareholders can often be CASE OF A PUBLIC
difficult and costly. COMPANY.

¬ The board of a Canadian corporation must approve the corporation’s

financial statements annually, and present them to the corporation’s
shareholders.
¬ Generally, there is no requirement to file a Canadian corporation’s
financial statements with a government body, except in the case of a
public company.
¬ The requirement that the corporation’s financial statements must
be audited varies by jurisdiction; in most cases it is possible for the
corporation’s shareholder(s) 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.

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Business Organizations

¬ 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 (US) 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
afforded to ULCs as “flow-through” entities under US tax law. US advice
should be obtained. In addition, the recent changes that result from the
Fifth Protocol to the US Convention should be considered, as in certain
circumstances they may eliminate the tax benefits associated with such
entities or give rise to adverse tax consequences without proper tax
planning. See Taxation.

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Foreign Investment Laws

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 specific areas, including the financial
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 significant respects,
with effect from March 2009. These amendments are reflected in the
report below. Transactions involving “national security,” including
minority investments, are now also reviewable.

One of the ICA’s stated purposes is to encourage investment in

Canada by non-Canadians, as this contributes to economic growth
and employment opportunities. Two federal
ministers are responsible for administering
WHETHER A
the ICA: the Minister of Industry and the
FOREIGN INVESTOR
Minister of Canadian Heritage. The Minister
ESTABLISHES
of Industry has appointed a Director of
A CANADIAN
Investments to advise and assist the
OPERATION THROUGH
Minister in administering the ICA for non-
AN ACQUISITION
cultural matters.
OR BY STARTING UP
If an investment by a non-Canadian relates A NEW CANADIAN
to a cultural business, the Minister of BUSINESS, THE
Heritage is responsible. Consequently, INVESTMENT MAY
any required review process for cultural BE SUBJECT TO
businesses as defined under the ICA will be THE FOREIGN
done through Canadian Heritage instead of INVESTMENT REVIEW
Industry Canada. The Minister of Heritage REQUIREMENTS OF
has appointed a Director of Investments THE ICA.
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 “notification,” which requires only the filing

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Foreign Investment Laws

of a short information form either before or shortly after completion of

the transaction. However, investments to acquire control of Canadian
businesses that exceed applicable thresholds are subject to “review,”
which requires the filing 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 benefit to Canada.”

Review Thresholds
Generally, when a non-Canadian is acquiring control of a Canadian
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-
INVESTMENTS TO
share capital corporation, partnership,
ACQUIRE CONTROL
trust or joint venture carrying on that
OF CANADIAN
business, or by the acquisition of
BUSINESSES THAT
substantially all of the assets used to
EXCEED APPLICABLE
carry on that business, and the book
THRESHOLDS
value of the assets of the Canadian
ARE SUBJECT TO
business is $5 million or more.
“REVIEW.”
¬ 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 per cent
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 financial 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 Tariffs and Trade (GATT) and the policy of the Director,
the thresholds for review referred to above are modified in some

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Foreign Investment Laws

instances with respect to the acquisition of control of a Canadian

business by what the ICA defines as a “WTO Investor” (a person or
entity from countries that are members of the WTO), or by another
non-Canadian where the Canadian business is controlled by a WTO
Investor. These modifications are made in the following cases:

¬ For the direct acquisitions referred to

above, the threshold value of assets of
WITH CERTAIN
the Canadian business that will trigger the
EXCEPTIONS, A NON-
review requirement for an acquisition by
CANADIAN MAY
or from a WTO Investor is increased from
NOT IMPLEMENT
$5 million to $299 million (for 2010; this
A REVIEWABLE
threshold is adjusted at the beginning of
INVESTMENT UNTIL
each calendar year in accordance with
THE INVESTMENT
an inflation index), subject to annual
HAS BEEN REVIEWED
adjustment for inflation and economic
AND THE MINISTER
growth. However, the March 2009
IS SATISFIED, OR
amendments affect the review thresholds
DEEMED TO BE
after 2010 as described below.
SATISFIED, THAT
¬ For indirect acquisitions by or from a WTO THE INVESTMENT “IS
Investor, there will be no review, regardless LIKELY TO BE OF NET
of the value of Canadian assets. BENEFIT TO CANADA.”
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, film 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 satisfied, or deemed to be satisfied, that the investment “is
likely to be of net benefit to Canada.” If the Minister initially decides that
the investment will not be of such benefit, 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.

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Foreign Investment Laws

In determining “net benefit to Canada,” the Minister is required to give

consideration to:

¬ the effect of the investment on the level and nature of economic

activity in Canada;
¬ the degree and significance of IN DECEMBER 2007,
participation by Canadians in the THE MINISTER OF
Canadian business and the industry of INDUSTRY ISSUED
which it forms a part; GUIDELINES
¬ the effect of the investment on THAT APPLY TO
productivity, industrial efficiency, REVIEWABLE
technological development, and product TRANSACTIONS FOR
innovation and variety in Canada; THE ACQUISITION
OF CONTROL
¬ the effect of the investment on OF A CANADIAN
competition within an industry in Canada; BUSINESS, WHERE
¬ the compatibility of the investment with THE PROPOSED
national industrial, economic and cultural ACQUIROR IS AN
policies; and ENTERPRISE OWNED
¬ the contribution of the investment to BY A FOREIGN STATE.
Canada’s ability to compete in 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 owned
by a foreign state. The new guidelines reflect the potential concerns
the Minister may have regarding the “governance and commercial
orientation” of some state-owned enterprises (i.e., enterprises that are
controlled directly or indirectly by foreign governments). The guidelines
specify that the Minister will examine the corporate governance and
reporting structure of the state-owned entity, and that part of this
examination will include whether the non-Canadian entity 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.

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Foreign Investment Laws

In making the net benefit determination, the guidelines state that the
Minister will assess whether the Canadian business to be acquired by
the foreign-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 foreign-
government-controlled entity 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.

General
Presently, not all investments in Canadian businesses by non-Canadians
are subject to review or notification under the ICA. For example, the ICA
contains a number of exempt transactions,
such as the acquisition of shares by a person CARE MUST BE TAKEN
whose business is dealing in securities. TO ENSURE THAT THE
An investment to acquire an interest in an ICA’S REQUIREMENTS
existing Canadian business that does not ARE MET AND THAT
result in an acquisition of control under the COMPLIANCE IS
ICA will also generally not be subject to ACHIEVED WITH
notification or review. ANY LEGISLATION
Information submitted under the ICA is RELATING TO
treated as confidential and, subject to FOREIGN INVESTMENT
certain exceptions, will not be disclosed to RESTRICTIONS
the public. It is also subject to the Minister’s APPLICABLE TO
new powers, described below. SPECIFIC INDUSTRIES
OR ACTIVITIES.
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 specific industries or
activities.

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Foreign Investment Laws

Some of the significant changes included in the March 2009

amendments to the ICA were:

¬ 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 six years. After that, the
ALTHOUGH THE
applicable threshold will be determined
LOWER THRESHOLD
on an annual basis using a prescribed
FOR CERTAIN
formula. This may decrease the number
BUSINESSES HAS
of investments that are subject to
BEEN REPEALED IN
pre-closing review. Investments by
THE ICA, THE NEW
non-Canadians will still be subject to
NATIONAL SECURITY
an obligation to submit a post-closing
REVIEW CRITERIA
notification.
DESCRIBED COULD
¬ Removal of most sector-specific STILL PROVIDE A
thresholds. The $5-million threshold for MECHANISM FOR THE
investments in transportation businesses, MINISTER TO REVIEW
financial services businesses and uranium INVESTMENTS IN A
businesses has been removed, but will URANIUM BUSINESS
be maintained for investments in cultural AT THE MINISTER’S
businesses and certain direct investments OPTION.
by non-WTO investors. Pre-closing review
for transportation and uranium investments may still be subject
to pre-closing government scrutiny. The Minister of Transport
conducts pre-closing reviews of proposed transactions involving a
transportation undertaking that raise public interest issues and that
exceed the pre-notification thresholds under the Competition Act.
Further, although 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
review is based on the aggregate value of all assets being acquired
as shown in the financial 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 defined in
regulations yet to be published.

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Foreign Investment Laws

¬ Vague criteria and potentially broad review. The government will

have 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 THE GOVERNMENT
injurious to national security.” No financial WILL HAVE THE
threshold will apply to a national security AUTHORITY TO
review and there is no definition of REVIEW PROPOSED
“national security.” The government may INVESTMENTS
deny the investment, ask for (INCLUDING MINORITY
undertakings, provide terms or conditions INVESTMENTS)
for the investment, or, where the WHERE THE
investment has already been made, RESPONSIBLE
require divestment. Review can occur MINISTER HAS
before or after closing and may apply to “REASONABLE
corporate reorganizations where there is GROUNDS TO BELIEVE
no change in ultimate control. THAT AN INVESTMENT
¬ Information produced can be shared BY A NON-CANADIAN
with other investigating agencies. COULD BE INJURIOUS
The Minister will now be able to compel TO NATIONAL
a party to provide information within SECURITY.”
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.

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Competition Law

COMPETITION LAW
The federal Competition Act provides for criminal sanctions against
persons involved in agreements with competitors that fix prices,
allocate customers or markets or restrict supply, or that are involved in
bid-rigging, deceptive telemarketing, or wilful or reckless misleading
advertising offences. 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 MERGERS, MEANING
Commissioner of Competition, to review THE ACQUISITION
certain business practices, and, in certain OF CONTROL OVER
circumstances, to issue orders prohibiting or A SIGNIFICANT
correcting conduct to eliminate or reduce its INTEREST IN THE
anti-competitive impact. Reviewable WHOLE OR A PART
practices include mergers, agreements OF A BUSINESS,
among competitors, abuse of dominant DO NOT REQUIRE
position, or monopoly and a number of ADVANCE APPROVAL
vertical practices between suppliers and UNDER THE ACT,
customers such as price maintenance, tied ALTHOUGH THEY
selling, refusal to supply and exclusivity MAY BE SUBJECT
arrangements. Private parties are also able TO PRE-MERGER
to apply to the Tribunal to challenge certain NOTIFICATION
types of reviewable conduct, such as price REQUIREMENTS.
maintenance, exclusive dealing, tied selling
and refusal to deal. The Competition Tribunal
also has the power to impose monetary penalties for abuse of
dominant position.

Merger Regulation
Mergers, meaning the acquisition of control over a significant 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 notification
requirements (described below). If the Commissioner of Competition
believes that a merger is likely to prevent or lessen competition
substantially, and the Commissioner challenges the merger before
the Competition Tribunal, the merger is then subject to review by the
Tribunal. If an adverse finding is made, the Tribunal may issue an order
preventing or dissolving the merger in whole or in part.

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Competition Law

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 US
case law, although their application may be different. Because of the
small size of the Canadian domestic economy, greater concentration
may be acceptable in industries where even a relatively high percentage
of the Canadian market would still not allow for optimal efficiency 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 US.

Larger mergers require pre-merger notification and the filing of

information with the Commissioner. Generally, for a merger to be
notifiable (i.e., subject to pre-merger
notification), two threshold tests must be
BECAUSE OF THE
met: the “size of parties test” and the “size
SMALL SIZE OF THE
of transaction test.” Under the “size of
CANADIAN DOMESTIC
parties test,” the parties to the transaction,
ECONOMY, GREATER
together with their respective affiliates
CONCENTRATION MAY
(defined to include all corporations joined
BE ACCEPTABLE IN
by a 50 per cent-plus voting link), must have
CERTAIN INDUSTRIES.
assets in Canada or gross revenues from
sales in, from and into Canada in excess of
$400 million in the aggregate. Under the “size of transaction test,” the
target entity must have assets in Canada or gross revenues from sales
in and from Canada in excess of $70 million. In general and with certain
exceptions, these asset and revenue values are calculated using book
values based on the most recent audited financial statements for the
relevant entity.

Pre-merger notification involves the filing of a notification form with the

Commissioner. A transaction that is subject to pre-merger notification
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 issues a supplementary information request (SIR), then
the waiting period is extended to 30 days after a complete response to
the SIR has been provided to the Commissioner.

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Competition Law

Unlike the Investment Canada Act, where the relevant Minister approves
the proposed transaction, the passing of the applicable waiting period
under the Competition Act does not preclude the Bureau from
subsequently opposing the merger at any time within the next year.
Accordingly, while a transaction may be completed after the expiry of
the relevant waiting period, the parties will generally wait until they
receive an indication from the Commissioner that the transaction will
not be challenged before they complete the transaction. The
Commissioner’s review of complex mergers may take longer than the
applicable statutory waiting period.

It is possible in some circumstances to obtain an Advance Ruling

Certificate (ARC) from the Commissioner and thereby avoid the pre-
merger notification process. If an ARC is
issued in respect of a proposed transaction,
IT IS POSSIBLE
the Commissioner will thereafter be
IN SOME
precluded from challenging the transaction,
CIRCUMSTANCES TO
assuming there are no material changes in
OBTAIN AN ADVANCE
circumstances prior to closing. It should be
RULING CERTIFICATE
noted, however, that the granting of an ARC
(ARC) FROM THE
is discretionary, and that ARCs are typically
COMMISSIONER
issued only when it is clear the merger raises
AND THEREBY AVOID
no competition issues. The Commissioner
THE PRE-MERGER
can also, in lieu of issuing an ARC, exempt
NOTIFICATION
the transaction from notification and issue
PROCESS.
a “no action letter” indicating that the
Commissioner does not have grounds to
challenge the transaction, which is usually sufficient comfort for the
merging parties to proceed.

A $50,000 filing fee is payable in respect of any transaction that is

subject to pre-merger notification.

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

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Competition Law

prerequisite, but there must be a relatively high market share such that
the dominant firm or firms 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 adoption by a dominant player of predatory or exclusionary
business tactics. When a dominant firm 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 firm. However, when a firm’s
intention is to eliminate competition or
IT IS NOT ALWAYS
prevent entry into or expansion in a market,
EASY TO DISTINGUISH
there could be an abuse of dominant
COMPETITIVE FROM
position. The Act includes a non-exhaustive
ANTI-COMPETITIVE
list of anti-competitive acts. These include
PRACTICES.
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 anti-competitive 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 fix 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 effect on competition. Deceptive telemarketing and
wilful or reckless misleading advertising are also offences under the Act.

Penalties for persons found guilty of such activities include

imprisonment for up to 14 years and/or multi-million dollar fines.
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 suffered a loss as
a result of such violation.

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Corporate Finance and Mergers & Acquisitions

CORPORATE FINANCE AND MERGERS &

ACQUISITIONS
Canada has well-developed and sophisticated capital markets. The
main sources of capital are Canadian chartered banks, other financial
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 Offerings and Private Placements

In Canada, securities law is 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,
CANADA HAS WELL-
securities legislation in Canada is largely
DEVELOPED AND
harmonized through the use of national
SOPHISTICATED
and multilateral instruments adopted by
CAPITAL MARKETS.
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 effectively regulated by only one participating jurisdiction in
addition to Ontario. These aspects include the review and receipt of
prospectuses, compliance with continuous disclosure obligations and
obtaining exemptions from certain provisions of securities law.

In March 2009, Parliament passed legislation to establish the Canadian

Securities Transition Office for a three-year period and to provide
funding for that office. In 2010, the Transition Office released a draft
federal Securities Act for public comment. The Transition Office also
released in 2010 a high-level transition plan setting out its proposals to
accomplish the transition to a federal regulator. While the federal

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Corporate Finance and Mergers & Acquisitions

legislation contains provisions that permit provinces to opt out of its

application, the legislation will also face constitutional challenges
before it is finalized. The federal government has submitted the draft
legislation to the Supreme Court of Canada by way of a reference
application to determine whether it is constitutional. At the same time,
the Provinces of Alberta and Québec have initiated provincial reference
applications of their own to their respective Courts of Appeal. These
Provinces, and possibly others, are not expected to submit to the
application of a federal regime.

When debt or equity securities are offered to the public in Canada,

whether as part of an initial public offering or not, a prospectus must
be filed with the securities regulatory
authorities in those provinces and territories
THE REQUIREMENT
where the securities are being offered.
TO PREPARE A
This prospectus will be reviewed by the
PROSPECTUS CAN
principal regulator under the above passport
BE AVOIDED WHERE
system. A copy of the prospectus must
THE SECURITIES
also be provided to potential investors. The
ARE OFFERED TO
prospectus must contain full, true and plain
INSTITUTIONAL OR
disclosure of the nature of the securities
OTHER “ACCREDITED
being offered and the business of the
INVESTORS” BY
issuer. Where securities are being offered in
WAY OF A PRIVATE
Québec, the prospectus must be translated
PLACEMENT.
into French.

The requirement to prepare a prospectus can be avoided where the

securities are offered to institutional or other “accredited investors”
by way of a private placement, although market practice may dictate
the delivery to investors of an “offering memorandum” containing
disclosure that is often 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-rated commercial paper and bank debt, in which case
either no disclosure document or an abbreviated one is used. Issuers
and investors should obtain legal advice in connection with any offering
of securities by way of private placement, since securities sold in this
manner are generally subject to resale restrictions.

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Corporate Finance and Mergers & Acquisitions

Shareholders of Canadian public companies are not generally afforded

statutory or contractual pre-emption rights. Accordingly, new equity
issues are typically effected by way of public offering or private
placement, rather than by way of rights offerings to existing
shareholders. In the case of more senior issuers, it is common for
Canadian underwriting syndicates to enter into a “bought deal”
arrangement in which the syndicate incurs the risk of price fluctuations
in the market from the time of signing the “bought deal” letter with the
issuer (up to four business days before the filing of the preliminary
prospectus, except in the case of an offering under a shelf prospectus
as described below) until the closing of the offering.

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 filing
CANADIAN
a shorter prospectus that incorporates by
SECURITIES LAWS
reference the issuer’s most recent
ALSO PROVIDE
continuous disclosure documents. Generally,
ISSUERS WITH
issuers eligible for this system can clear a
THE ABILITY TO
prospectus with the provincial securities
FILE A BASE SHELF
authorities in four business days. For issuers
PROSPECTUS FOR
that do not qualify under the short-form
AN AGGREGATE
system, prospectus clearance can often take
DOLLAR AMOUNT
from three to six weeks, and sometimes
OF SECURITIES
longer. Canadian securities laws also provide
(WHICH MAY BE
issuers with the ability to file a base shelf
UNALLOCATED
prospectus for an aggregate dollar amount
BETWEEN DEBT,
of securities (which may be unallocated
EQUITY AND OTHER
between debt, equity and other securities)
SECURITIES) FOR
for subsequent issuance over a period of up
SUBSEQUENT
to 25 months. At the time of an actual
ISSUANCE OVER A
distribution of securities qualified by the
PERIOD OF UP TO
base shelf prospectus — and not later than
25 MONTHS.
two business days after the determination
of the offering price of the securities — the
issuer simply files a relatively brief supplement to the prospectus
containing the specific terms of the securities then being offered, as

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Corporate Finance and Mergers & Acquisitions

well as any additional information that was not available to the issuer at
the time the prospectus was filed. 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 financing in the markets.

An issuer filing a prospectus or listing its securities on a Canadian stock

exchange will become a “reporting issuer,” and thereby become subject
to various continuous and timely disclosure
obligations. These include the requirement to CERTAIN FOREIGN
prepare and file quarterly and annual financial ISSUERS THAT HAVE
statements and the related management’s BECOME REPORTING
discussion and analysis, as well as an annual ISSUERS IN CANADA
information form and reports with respect REPORTING
to material changes in the affairs of the ISSUER MAY
issuer. Directors, officers and other “insiders” GENERALLY SATISFY
of the issuer will be required to file reports THEIR ONGOING
with respect to any trading they conduct CONTINUOUS
in securities of the issuer. Management DISCLOSURE
information circulars must be prepared for OBLIGATIONS IN
annual and special shareholder meetings and CANADA BY FILING
must contain prescribed disclosure, including THEIR HOME
for annual meetings comprehensive disclosure JURISDICTION
on executive compensation. DOCUMENTS.
Foreign issuers that meet certain conditions, and that have become
reporting issuers in Canada 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 filing their home jurisdiction documents.

The CSA has adopted various instruments modeled on US Sarbanes-

Oxley legislation. These include a national instrument on auditor
oversight, a national instrument requiring CEO and CFO certifications
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.

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Corporate Finance and Mergers & Acquisitions

Canadian and US securities regulatory authorities have implemented a

multi-jurisdictional disclosure system (MJDS) that enables securities
of large US issuers to be offered to the public in Canada using a
US 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 Offers)
Provincial and territorial securities laws, now harmonized, regulate
the conduct of any public take-over bid. A public take-over bid is
defined generally as an offer made to a person in a Canadian province
or territory to acquire voting or equity
securities of a class of securities, which, PROVINCIAL AND
if accepted, would result in the acquiror TERRITORIAL
(and persons acting in concert with the SECURITIES LAWS,
acquiror) owning 20 per cent or more NOW HARMONIZED,
of the outstanding securities of such a REGULATE THE
class of a target company. A take-over CONDUCT OF ANY
bid must be made to all shareholders on PUBLIC TAKE-OVER
equal terms (i.e., no “collateral benefit” to BID.
any shareholder), and must be open for
acceptance for 35 days. The bidder must
provide shareholders of the target with a circular containing prescribed
information about the offer as well as prospectus-level disclosure about
the acquiror (including pro forma financial statements) if its shares
form part of the consideration being offered. 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 offer, 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).

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Corporate Finance and Mergers & Acquisitions

When the bid is made by an “insider” of the target, special rules

apply. In particular, a formal valuation of the target shares prepared
by an independent valuator under the supervision of an independent
committee of the target’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 five shareholders of the target (provided
that the price paid does not exceed 115 per cent of the prevailing
market price); normal course purchases on an exchange not exceeding
five per cent of the issuer’s outstanding securities in a 12-month
period; the acquisition of securities of a private company (and certain
other non-reporting issuers with fewer than 50 shareholders exclusive
of current or former employees); and foreign take-over offers where the
number of shares held by Canadian shareholders is reasonably believed
to be less than 10 per cent of 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 per cent of the voting shares of a target (other than shares
held by it or its affiliates prior to making
the offer) pursuant to a public take-over
CERTAIN TAKE-OVER
bid made to all shareholders, the shares of
BIDS ARE EXEMPT
those who did not tender their shares to the
FROM COMPLIANCE
offer can be acquired at the public offering
WITH THE FOREGOING
price pursuant to a statutory compulsory
REQUIREMENTS.
acquisition procedure. Where this procedure
is not available because the 90 per cent
threshold has not been reached, but at least 66 ²/³ per cent of the
outstanding shares have been acquired under the bid, the shares of
the remaining shareholders who did not tender their shares to the offer
may also generally be acquired by way of a business combination (see
below) at the offering price.

Notice is required to be given to the market in the event of an

acquisition of equity or voting securities representing 10 per cent
(five per cent where a take-over bid has already been made) of a class
of securities of a target (including shares beneficially owned by the

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Corporate Finance and Mergers & Acquisitions

purchaser and its joint actors). The purchaser must give this notice to
the market by issuing a press release forthwith and filing, within two
business days, an “early warning” report in the prescribed form (which
must include disclosure of any intention on the part of the purchaser
to acquire additional securities of the class). A press release is required
to be issued and an additional report is required to be filed if there
is a change in a material fact contained in a prior report, or upon the
acquisition of a further two per cent of the class of securities.

Business Combinations
Acquisitions of Canadian public companies are frequently effected not
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’s corporate
statute. This business combination requires IF THE ACQUIROR
approval by the target’s shareholders at IN THE BUSINESS
a meeting held for such purpose. In such COMBINATION
case, a management information circular IS RELATED TO
containing prescribed information will be THE TARGET, A
prepared by the target and mailed to its FORMAL VALUATION
shareholders. The plan of arrangement AND APPROVAL
is the most common form of business BY A MAJORITY
combination, as it provides maximum OF MINORITY
flexibility for various aspects of a transaction SHAREHOLDERS MAY
that might not be possible to effect under BE REQUIRED.
another statutory procedure. Plans of
arrangement require both court approval
(based on a finding that the arrangement is “fair and reasonable”
to affected stakeholders) and shareholder approval (generally by a
majority vote of 66 ²/³ per cent).

If the acquiror in the business combination is related to the target or

if a related party is receiving a “collateral benefit,” 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 benefit) will generally be required,
in addition to the shareholder approval required under applicable
corporate law. Where the related party is acquiring the target, then

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Corporate Finance and Mergers & Acquisitions

a formal valuation of the target shares prepared by an independent

valuator under the supervision of the target’s board or an independent
committee 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 officers) and that are
of a certain threshold size. These rules are designed to prevent related
parties from receiving a benefit from a public company to the detriment
of its minority shareholders without their approval.

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Bank Loans and other Loan Capital

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 has won international praise for its resiliency
in the current 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 finance markets. As well, there are two federal government
financial institutions that provide financing – the Business Development
Bank of Canada, which offers financing to small- and medium-sized
businesses; and Export Development Canada, which is specifically
targeted to assist Canadian exporters with financing.

Floating-rate loans are often 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-
BANK LOANS IN
term Government of Canada bond rates.
CANADA ARE READILY
Other forms of borrowing and interest rate
AVAILABLE FROM
pricing (such as LIBOR loans and bankers’
SOPHISTICATED
acceptances) are also offered. Borrowers
DOMESTIC BANKS AS
generally incur some fees associated with
WELL AS FROM NON-
such transactions. These typically include
CANADIAN FOREIGN
legal costs, commitment and processing
BANK SUBSIDIARIES
fees, and other charges.
AND CANADIAN
Short- and long-term loans in Canada can BRANCHES OF NON-
be unsecured or secured against the real or CANADIAN BANKS.
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.

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Bank Loans and other Loan Capital

Canada has no currency restrictions. Loans are available in multiple

currencies, but are most commonly in Canadian and US dollars.

Due to the competitive nature of Canada’s loan markets, interest rates

are often lower for comparable credits compared to other jurisdictions,
particularly the US. Where Canadian tax
rates are higher than those of a foreign
A NUMBER OF
jurisdiction, the benefits of deducting
FEDERAL AND
interest expenses for loans in Canada are
PROVINCIAL
correspondingly higher. There are other tax
PROGRAMS AND
advantages when borrowing in Canada. For
AGENCIES PROVIDE
example, thin-capitalization rules do not
GRANTS AND/OR
apply to arm’s-length third-party debt to
LOANS TO CANADIAN
limit the deductibility of interest. In addition,
BUSINESSES.
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 tax-planning opportunities for US cross-
border transactions. See Taxation.

A number of federal and provincial programs and agencies provide

grants 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.

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Taxation

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 or territorial jurisdiction. Certain provinces also tax
non-residents 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. The
INCOME TAXES ARE
federal government has enacted legislation
IMPOSED AT THE
that provides for a gradual reduction of
FEDERAL LEVEL, AS
the federal general corporate income tax
WELL AS BY THE
rate through 2012. In 2010, the highest
VARIOUS PROVINCES
combined rate of income tax applicable
AND TERRITORIES.
to non-Canadian-controlled private
corporations was about 34 per cent, while
the lowest such rate, applicable to the ordinary business profits of such
a corporation, was about 28 per cent. Tax credits and other incentives
are also available in certain circumstances to reduce the effective tax
rates.

Individuals are subject to graduated rates. These rates depend on the

type of income, the province of residence and other factors. In 2010,
the highest combined federal and provincial rate of tax on taxable
income of an individual was about 50 per cent, while the lowest top
marginal combined federal and provincial rate was about 39 per cent.

Canada also levies a 25 per cent withholding tax on the gross amount
of certain types of Canadian source income of non-residents.

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Taxation

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 non-
residents if the payments relate to a Canadian business or to certain
types of Canadian property. Recently enacted legislation generally
eliminated Canadian withholding tax on interest (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, profit or cash
flow) paid by a Canadian resident to arm’s-length non-residents of
Canada. An applicable income tax
convention may reduce or eliminate the THE COMBINED
relevant rate of withholding tax. While FEDERAL AND
withholding taxes are imposed on the PROVINCIAL RATE OF
non-resident recipient, the payer is INCOME TAX IMPOSED
responsible for withholding the tax from ON CORPORATIONS
amounts paid to the non-resident and for VARIES WIDELY
remitting the withheld amount to the DEPENDING ON THE
government. NATURE AND SIZE
The following sections highlight some of OF THE BUSINESS
the principal tax matters that should be ACTIVITY CARRIED ON,
considered in deciding whether to carry THE LOCATION OF THE
on business in Canada through a Canadian ACTIVITY AND OTHER
subsidiary or as a branch operation. FACTORS.

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 and size of the business activity
carried on, and other factors.

The calculation of the subsidiary’s income will be subject to specific

rules of the Income Tax Act (Canada) and any applicable provincial or
territorial tax legislation. Income includes 50 per cent of capital gains.

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Taxation

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, file consolidated income tax returns. Accordingly, business
losses of the subsidiary will not be available, for Canadian tax purposes,
to offset income of an affiliated company.

Transactions between the subsidiary and any person with whom it does
not deal at arm’s length, including its parent corporation, will generally
have to be effected for tax purposes
on a “fair market value” basis. Certain
THE FIFTH PROTOCOL
contemporaneous documentation may also
TO THE CANADA-
be required under Canada’s transfer pricing
UNITED STATES
rules.
INCOME TAX
The debt/equity structure of the subsidiary CONVENTION (1980)
will be subject to thin-capitalization rules, ELIMINATED THE
which operate to deny the deduction of WITHHOLDING TAX
interest payable to specified non-residents ON INTEREST (OTHER
by the subsidiary if the subsidiary is “thinly THAN CERTAIN
capitalized.” The subsidiary is deemed to TYPES OF INTEREST)
be thinly capitalized where the amount of BEGINNING IN 2010.
debt owed to the non-resident shareholder
is more than twice 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.

The withholding tax regime, briefly 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 US-resident
parent, the Fifth Protocol to the Canada-United States Income Tax
Convention (1980) (US Convention) eliminated the withholding tax on
interest (other than certain types of interest, such as interest
determined with reference to profits or cash flow or to a change in the
value of property) beginning in 2010. This change allows for a more
tax-efficient capitalization of a subsidiary by a US person. It should be

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Taxation

noted that the benefits of the US Convention (such as reduced rates or

elimination of withholding tax) are generally only available to certain
“qualifying persons,” as defined in the Limitation on Benefits provisions
of the Fifth Protocol.

We understand that, in appropriate circumstances, an unlimited

liability company (ULC) established under the laws of Alberta, British
Columbia or Nova Scotia may be used to
access the advantages of both a branch
BRANCH TAX
and a subsidiary operation for a US parent
MAY, IN SOME
corporation. The reason is that a ULC, while
CIRCUMSTANCES,
treated as a corporation for Canadian tax
FAVOUR THE
purposes, may be treated as a branch for
ESTABLISHMENT OF
US tax purposes. US tax advice should be
A SUBSIDIARY BY THE
obtained. In addition, the changes to the
FOREIGN BUSINESS
US Convention that result from the Fifth
RATHER THAN A
Protocol should be considered, as in certain
BRANCH.
cases they may eliminate the tax benefits
associated with such hybrid entities or give
rise to adverse tax consequences without proper tax planning.

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 profits 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. 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 a resident of a jurisdiction that has

entered into an income tax convention with Canada, generally the
non-resident will only be taxable on its business profits earned in
Canada to the extent that such profits are attributable to a permanent
establishment situated in Canada. Under certain of Canada’s income
tax conventions, a non-resident may have a significant business
presence in Canada without being deemed to have a permanent

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Taxation

establishment in Canada. As noted above, in the case of the US

Convention treaty benefits are generally only available to US 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 same rules that
WHEN THE CANADIAN
are applicable to the computation of the
BUSINESS BECOMES
subsidiary’s income.
PROFITABLE AT
If the Canadian operation will incur start- SOME FUTURE TIME,
up losses, it may be possible for the IT MAY BE POSSIBLE
non-resident to deduct these losses in TO TRANSFER THE
computing its income for its domestic BRANCH OPERATION
tax purposes if the Canadian business is TO A NEWLY
carried on through a branch operation. INCORPORATED
When the Canadian business becomes CANADIAN
profitable at some future time, it may be SUBSIDIARY WITH
possible to transfer the branch operation to NO SIGNIFICANT
a newly incorporated Canadian subsidiary CANADIAN INCOME
with no significant Canadian income tax TAX CONSEQUENCES.
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, profits,
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.

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Sales Tax

SALES TAX
The federal government and most of the provinces have sales tax
regimes.

Federal Goods and Services Tax

The federal government imposes a five per cent multi-stage value-
added tax called the goods and services tax (GST) that applies to
taxable supplies (i.e., supplies of most types of property, including
intangibles, and services) made in Canada. Certain types of property
and services, including most financial services, are exempt for GST
purposes and certain supplies, defined as zero-rated supplies, which
include exports, are taxed at a rate of zero per cent.

GST is also levied on taxable goods imported into Canada, and there are
self-assessment obligations on certain purchasers of imported services
and intangibles.

As the GST is a value-added tax, it applies THE FEDERAL

at each stage of the production and GOVERNMENT
distribution chain. Generally, businesses AND MOST OF THE
making taxable supplies of property and PROVINCES HAVE
services must register for, and collect and SALES TAX REGIMES.
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 by means of the input tax credit mechanism.

It is not always easy to determine whether supplies made to or by

non-residents of Canada attract GST; accordingly, consideration of
specific rules is required. For example, whether GST applies to recent
e-commerce developments requires close examination.

Harmonized Sales Tax

Five provinces have harmonized their provincial sales taxes with the
GST, namely: Nova Scotia, New Brunswick, Newfoundland and
Labrador, British Columbia and Ontario. In those Provinces, the
harmonized sales tax (HST) made up of the federal five per cent GST

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Sales Tax

component and the provincial component, which varies from seven to

10 per cent, 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 the Provinces of British Columbia and
Ontario 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 specified 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
SOME PROVINCES
made in a harmonized province, which vary
CURRENTLY IMPOSE
depending on the type of supply at issue.
A RETAIL SALES TAX
Provincial Sales Tax ON THE END-USERS
OF MOST TANGIBLE
The Provinces of Saskatchewan, Manitoba PERSONAL PROPERTY
and Prince Edward Island currently impose AND SOME TYPES OF
a retail sales tax on the end-users of most SERVICES.
tangible personal property and some types
of services. General rates of tax vary from
five to 10 per cent. Alberta does not impose a retail sales tax. The
Province of Québec imposes a 7.5 per cent value-added tax that will
increase to 8.5 per cent effective January 1, 2011 and 9.5 per cent
effective January 1, 2012. It is generally, although not completely,
harmonized with the GST.

Other Taxes
The federal government imposes other taxes, including customs duties
and excise duties. Various provinces also impose other taxes, including
provincial capital taxes (often limited to financial institutions) 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.

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Manufacture and Sale of Goods

MANUFACTURE AND SALE OF GOODS

Regulations and Product Standards
In addition to the Competition Act, 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) can directly affect business operations in Canada, since
goods that fail to comply with the statutory and regulatory
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, pacifiers and children’s sleepwear, and
also describe product standards that must
FAILURE TO COMPLY
be met before such products can lawfully be
WITH STATUTORY
sold in Canada. Regulations under the Food
OR REGULATORY
and Drugs Act the Consumer Packaging and
REQUIREMENTS CAN
Labelling Act, and the Textile Labelling Act
RESULT IN CRIMINAL
contain detailed provisions concerning a
PROSECUTION, CIVIL
wide range of goods and products.
LIABILITY — OR BOTH.
Failure to comply with statutory or
regulatory requirements can result in criminal prosecution, civil liability
— or both.

In 2010, Parliament passed the Canada Consumer Product Safety Act.

When it comes into force, likely in 2011, this legislation will prohibit
the manufacture, importation or sale of consumer products that pose
a “danger to human health or safety.” It will also expand the federal
government’s powers to regulate, inspect, test and recall consumer
products, and creates a wide array of related offences and penalties.
Manufacturers, importers and retailers will need to comply with
stringent requirements to maintain required records and to report on
any adverse incidents, including safety recalls and regulatory actions in
other jurisdictions.

The Standards Council of Canada (SCC) is a federal Crown Corporation

with a mandate to promote efficient and effective development and
application of standards. It carries out a variety of functions designed
to ensure the effective and coordinated operation of standardization in

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Manufacture and Sale of Goods

Canada. The SCC oversees Canada’s National Standards System, a

network of over 350 organizations and 15,000 volunteers involved in
the development, promotion and implementation of standards. 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-profit
organization.

The CGSB is one of the largest standards development and conformity

assessment organizations in Canada, and a charter participant in the
National Standards System. It provides
standards development and conformity
WHERE CSA
assessment services, including programs
CERTIFICATION
for certification of products and services,
IS MANDATORY,
registration of quality and environmental
MANUFACTURERS
management systems, and related systems.
MAY BE REQUIRED
The CSA develops standards and tests BY INSPECTORS
products to certify that the products APPOINTED UNDER
meet the CSA’s published standards. THE HAZARDOUS
CSA certification is mandatory under PRODUCTS ACT TO
government regulation for some products PULL OR RECALL
(e.g., toys that are operated electrically) and NON-CONFORMING
voluntary for others. The CSA certification PRODUCTS.
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 certification laboratory, in order to obtain
CSA certification. After certification, CSA representatives conduct
regular, unannounced, on-site visits to manufacturing locations to
ensure that the products continue to meet CSA standards. Where CSA
certification is mandatory, manufacturers may be required by inspectors
appointed under the Hazardous Products Act to pull or recall non-
conforming products.

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Manufacture and Sale of Goods

Consumer Protection
Federal and provincial governments have enacted specific 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 often based on alleged
breaches of the Competition Act or provincial consumer protection
statutes.

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
FEDERAL AND
that is false or misleading in a material
PROVINCIAL
respect, and making this representation
GOVERNMENTS HAVE
knowingly or recklessly, is punishable by
ENACTED SPECIFIC
substantial fines and even jail terms. False
LEGISLATION THAT
or misleading statements can also lead to
PROHIBITS DECEPTIVE
liability to consumers for monetary damages.
OR UNFAIR BUSINESS
See Competition Law.
PRACTICES AND
Provincial statutes such as Ontario’s IMPOSES SANCTIONS
Consumer Protection Act, 2002 are also ON BUSINESSES
aimed at providing protection for consumers ENGAGING IN SUCH
in their dealings with corporations and CONDUCT.
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. Specific,
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 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.

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Manufacture and Sale of Goods

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 fitness for purpose and of merchantable quality are
implied in contracts between buyers and
sellers for the sale of goods. Parties can
CONTRACT CLAIMS
contract out of the implied terms, except
ARE STRICT LIABILITY
in the case of consumer or retail sales. A
CLAIMS. ABSENCE OF
buyer of a product purchased from someone
NEGLIGENCE IS NOT A
other than the product’s manufacturer may
DEFENCE.
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 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.

Often, 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 suffered 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

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Manufacture and Sale of Goods

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 after
the product is in use.

In defining the standard of care, Canadian courts will assess the

reasonableness of the defendant’s conduct with regard to industry
standards. If the industry standard is
inadequate, though, a defendant may
IN DEFINING THE
be found negligent for conforming to
STANDARD OF CARE,
it. Although conformity with regulatory
CANADIAN COURTS
standards can be highly relevant to the
WILL ASSESS THE
assessment of reasonable conduct in a
REASONABLENESS
particular case, meeting those standards
OF THE DEFENDANT’S
alone will not necessarily absolve a
CONDUCT WITH
manufacturer of liability.
REGARD TO INDUSTRY
Generally, a manufacturer’s duty is to take STANDARDS.
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 care
resulted in defects that pose a real and substantial danger of actual
physical injury or property damage.

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Real Property

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 affecting 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 certified by the
Province, and, until this certification is complete, the registration is subject
to amendment at the request of the registry officials.

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
CANADIAN
good against the world, subject only to certain
PROVINCES HAVE
limited exceptions. In Atlantic Canada, on the
BEEN WORKING TO
other hand, registry systems dominate land
MODERNIZE THEIR
registration, except in New Brunswick, where
LAND REGISTRATION
its land titles system encompasses most of
SYSTEMS BY
the land in the province. Québec has its own
AUTOMATING THE
unique system for registering interests in land,
PAPER-BASED
which in its effect is more similar to a registry
RECORDS AND
system than to a land titles system.
CONVERTING
Canadian provinces have been working to TO ELECTRONIC
modernize their land registration systems 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 specific land, the instrument
will immediately thereafter appear on the title relating to such land.

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Real Property

Planning Legislation

All Canadian provinces regulate property development to some degree,

and often this regulation occurs at the municipal level. Official plans,
zoning bylaws, development permits, subdivision bylaws and servicing
bylaws are the primary means by which municipalities control land use
and development.

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,
MOST PROVINCES
the Land Title Act is the main statute that
HAVE LEGISLATION
controls subdivision. In addition, most
GRANTING POWER
provinces have legislation granting power
TO MUNICIPALITIES
to municipalities to regulate the subdivision
TO REGULATE THE
and servicing of lands. In most cases,
SUBDIVISION AND
instruments such as transfers, subdivision
SERVICING OF LANDS.
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 the changes recently introduced by the Province of

Ontario 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
effect of these changes may be to require applicants to look farther

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Real Property

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 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 office is essential to protect an owner’s
priority over subsequent registered interests
and to protect an owner against loss from a THE USE OF
bona fide third party. On an acquisition, in COMMERCIAL TITLE
addition to registering a deed in the INSURANCE AS AN
appropriate land registry office, a lawyer’s ALTERNATIVE TO
opinion on title is typically issued to the THE TRADITIONAL
purchaser of real property following closing. LAWYER’S OPINION
However, the use of commercial title ON TITLE CONTINUES
insurance as an alternative to the traditional TO GAIN POPULARITY,
lawyer’s opinion on title continues to gain PARTICULARLY FOR
popularity, particularly for lenders (since LENDERS.
the available protections are broader for lenders). Unlike a traditional
lawyer’s opinion on title, 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 significant 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
opinion on title, 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).

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Real Property

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 benefits THE LIABILITY
of an owner’s policy remain in effect only as FOR IMPROPER
long as the insured owner possesses title to ENVIRONMENTAL
the property, the benefits of a lender’s PRACTICES RUNS
policy automatically run to the insured WITH THE LAND AND
lender’s successors and/or assigns, thereby CAN BE INHERITED BY
facilitating the sale of mortgages in the FUTURE OWNERS OF
secondary market. THE PROPERTY.

There is a wide variety of different 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 United States).

Environmental Assessments
In Canada, there is a legislative framework at both the provincial and
federal 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 officials 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.

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Real Property

Non-Resident Ownership

Non-residents can purchase, hold and dispose of real property in

Canada as though they are residents of Canada, pursuant to the
Citizenship Act (Canada). 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.

Each province has different legislation as regards the particularities of

foreign ownership of Canadian real property.
In Ontario, for example, non-citizens have
SUBJECT TO
the same rights as Canadians to acquire,
SOME PROVINCIAL
hold and dispose of real property, though
RESTRICTIONS FOR
corporations incorporated in jurisdictions
NON-RESIDENTS CAN
other than Ontario must obtain a licence
PURCHASE, HOLD
to acquire, hold or convey real property in
AND DISPOSE OF
Ontario. Non-residents who dispose of real
REAL PROPERTY IN
property situated in Canada are subject
CANADA AS THOUGH
to withholding tax requirements under the
THEY ARE RESIDENTS
Income Tax Act (Canada), as described
OF CANADA.
below.

Proceeds of Crime Legislation and Real Estate Developers

In January 2008, new amendments and regulations with respect to
the Proceeds of Crime (Money Laundering) and Terrorist Financing Act
(Canada) were made. These came into force on February 20, 2009,
and address transactions involving, among other groups, real estate
developers (generally defined 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 record-keeping 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 official
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

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Real Property

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 officer, 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 Income Tax Act (Canada) 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 situate
THE INCOME TAX ACT
in Canada). Unless (i) the purchaser has no
(CANADA) CONTAINS
reason to believe, after making reasonable
PROVISIONS THAT
inquiries, that the vendor is not a non-
PROTECT CANADA’S
resident of Canada; (ii) the purchaser
ABILITY TO COLLECT
concludes after reasonable inquiry that the
TAXES WHEN A
non-resident person is resident in a country
NON-RESIDENT
with which Canada has a tax treaty, the
DISPOSES OF
property disposed of would be “treaty-
“TAXABLE CANADIAN
protected property” if the non-resident were
PROPERTY.”
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
certificate in respect of the disposition issued by the Canada Revenue
Agency, the purchaser will be liable to pay as tax on behalf of the
non-resident up to 25 per cent of the purchase price of land situate in
Canada that is capital property and up to 50 per cent of the purchase
price of land inventory situate in Canada, buildings and other
depreciable fixed-capital assets. If the non-resident vendor does not
provide the purchaser with an appropriate certificate (and the
conditions of either (i) or (ii) above are not met), the purchaser is
entitled to 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

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Real Property

property situate in the Province of Québec. It should be noted that

gains realized by a non-resident on the disposition of 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 Income Tax
Act (Canada). Accordingly, absent an appropriate certificate, most
purchasers acquiring real estate from non-residents will withhold from
the purchase price and remit to the Canada Revenue Agency the
applicable amounts.

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
IN ALL CANADIAN
threshold is 30 years in British Columbia) by
PROVINCES, LAND
registered conveyance and, in some cases,
TRANSFER TAXES ARE
by unregistered disposition.
GENERALLY IMPOSED
Provincial rates vary widely. In Ontario, for ON PURCHASERS
example, land transfer tax is calculated on WHEN THEY ACQUIRE
the “value of the consideration” paid for the AN INTEREST IN LAND
interest transferred, whereas in Alberta the BY REGISTERED
fees assessed against a purchaser are based CONVEYANCE AND,
on the value of the land being acquired by IN SOME CASES,
the purchaser, and in British Columbia the BY UNREGISTERED
tax is calculated on the “fair market value” DISPOSITION.
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 may, 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.

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Real Property

Federal Goods and Services Tax, Provincial Sales Tax, and

Harmonized Sales Tax
In Canada, goods and services tax (GST), currently at a rate of five per
cent, is generally payable upon a supply of real property (this includes
a sale). See Sales Tax — Federal Goods and
Services Tax. The vendor is responsible for
collecting GST from the purchaser of the real REAL ESTATE
property unless the purchaser is entitled to FINANCING CAN BE
self-assess under the GST legislation, which STRUCTURED IN A
requires that the purchaser register with VARIETY OF WAYS.
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 Tax —
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 and British Columbia, the rate of the harmonized
tax (HST), currently 13 per cent in Ontario and 12 per cent in British
Columbia, 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 and British Columbia, HST also generally applies to lease
payments in respect of non-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.

Financing
Real estate financing 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 financing;
¬ portfolio loans;

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Real Property

¬ acquisition financing;
¬ permanent financing;
¬ public and private bond financings;
¬ syndications;
¬ restructurings; and
¬ securitization.
Banks, pension funds, credit unions, trust companies and other entities
all arrange such financing on credit terms that vary on the basis of the
transaction itself and the risks involved.
Various rate and term combinations are CANADIAN
offered. See Bank Loans and other Loan REAL ESTATE
Capital. TRANSACTIONS
TYPICALLY INVOLVE
There are various instruments used to
THE FOLLOWING
take primary security over real property in
COMMON FORMS
Canada, such as a mortgage or charge, a
OF OWNERSHIP/
debenture containing a fixed charge on real
INTEREST IN
property and trust deeds securing mortgage
REAL PROPERTY:
bonds (where more than one lender is
FREEHOLD,
involved). Additional security usually includes
CONDOMINIUM,
assignments of rents, leases, and other
MORTGAGE/CHARGE,
contracts, guarantees and general security
EASEMENTS, AND
agreements.
LEASING.
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,
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.

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Real Property

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,
co-ownerships and condominiums. See Business Organizations. Each
of 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 benefit of
unitholders as the beneficiaries of the trust.
The trustee (or more commonly, a corporate
THERE ARE VARIOUS
nominee) will hold legal title to the trust
AVENUES FOR
property. One disadvantage of this vehicle
INVESTMENT IN
is that under common law, beneficiaries of
REAL PROPERTY IN
a trust are potentially subject to unlimited
CANADA, INCLUDING
liability. Commercial documentation,
CORPORATIONS,
however, is generally crafted so as to limit
PARTNERSHIPS,
such liability that may arise in relation to the
LIMITED
assets or business dealings of the trust. Like
PARTNERSHIPS,
shares of corporations, units of REITs can
TRUSTS, CO-
be publicly or privately held. The units of
OWNERSHIPS AND
public REITs may be listed on public stock
CONDOMINIUMS.
exchanges, like shares of common stock, and
REITs can be classified 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 significant 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 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 often necessary to determine whether a particular
REIT falls within the exclusion provisions and to ensure the REIT
continues to qualify for exclusion.

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Real Property

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 co-
owner 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 A CO-OWNERSHIP
projects satisfy all local policies and ARRANGEMENT IS
legislative requirements: TYPICALLY USED
¬ structuring the project, i.e., common WHERE JOINT AND
and shared facilities, exclusive use areas, SEVERAL LIABILITY IS
commercial v. residential facilities, phasing NOT DESIRABLE.
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
often structure their business affairs so that a separate entity, usually
a single-purpose corporation, holds registered title to real property as
“bare trustee,” “agent” or “nominee” for the beneficial owner. For both
tax and accounting purposes, the property belongs to the beneficial
owner and appears on its balance sheet; it is not the property of the
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Real Property

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 beneficial
ownership of the property to be kept confidential or to facilitate
corporate reorganizations or third-party 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 office 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.

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Public Private Partnerships

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 UK, France, Spain, Italy, Portugal and Australia 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 and equity providers. PPP projects in Canada are drawn from
various industry sectors including hospitals and healthcare, justice and
corrections, transportation, schools,
recreation and culture, transit, water and
GOVERNMENTS
wastewater, mining, airports and civil
WORLDWIDE HAVE
navigation, ports, energy, universities,
CHOSEN TO MEET
government services, property management,
THE INFRASTRUCTURE
data centres, defence and communications.
GAP BY INVESTING
In addition, there is a growing secondary
IN PUBLIC-PRIVATE
market for infrastructure projects. Financing
PARTNERSHIPS (PPP).
was originally sourced from foreign banks,
CANADA HAS JOINED
but this source of capital has declined and
WORLD LEADERS IN
been replaced by a combination of Canadian
SUPPORTING PPP.
and foreign banks providing shorter-term
financing together with an active private
placement and broadly marketed bond market in Canada, at least for
projects where the return to the private sector is based on “availability.”

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 versus traditional delivery and efficiently transfer
significant risks to the private sector. As well, lifecycle maintenance is
built into the cost of PPP projects, allowing for a focus on long-term
performance of the asset, and there are opportunities to encourage
and reward innovation.

Federal, provincial and municipal governments in Canada are

establishing frameworks or dedicated agencies for the use of PPP
to achieve the completion of infrastructure projects. These agencies
include Infrastructure Ontario, Partnerships BC, PPP Canada and
Infrastructure Québec, as well as a dedicated PPP (Alternative Capital
Financing) office within the Alberta Treasury Board.

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Public Private Partnerships

There are several different models of PPP in Canada including operation

and maintenance, build-finance, design-build-finance-maintain, design-
build-finance-maintain-operate and concession. In a typical design-
build-finance-maintain PPP:

¬ a single entity (Project Co) contracts with the government or a

sponsor, which in turn contracts with consortium partners;
¬ the private sector accepts responsibility
for design, construction, financing,
EVERY PROVINCE
maintenance and, in some cases,
IN CANADA HAS
operations;
ITS OWN UNIQUE
¬ the facilities maintenance component AND COMPLEX
covers a long-term concession period REGULATORY
(25-35 years) with pre-defined hand- AND LEGISLATIVE
back conditions; REQUIREMENTS.
¬ contracting arrangements are
performance-based and the partner is reimbursed;
— payment from government or the sponsor only begins upon
completion of construction; and
— ongoing payments remain subject to deduction for failures in
service delivery.
Every province in Canada has its own unique and complex regulatory
and legislative requirements. As well, consortia and their contractors are
faced with the project-approval requirements of municipalities and local
authorities. Unique issues will often present themselves — including tax,
environmental, lending, structuring, real estate and Aboriginal law issues.

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Aboriginal Law

ABORIGINAL LAW
In Canada, Aboriginal law often affects the development of land and
natural resources. This is of particular interest to businesses involved in
the energy, forestry, mining and transportation sectors, with respect to
developments and activities on lands covered by treaties, reserve lands
and areas subject to Aboriginal land claims.

In 1982, Canada voluntarily amended its Constitution and “recognized

and affirmed” 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 THE ABORIGINAL
as “Indians”), Inuit and Métis peoples of AND TREATY RIGHTS
Canada. OF ABORIGINAL
PEOPLES HAS
Aboriginal rights are those rights that have BEEN RECOGNIZED
been traditionally exercised by Aboriginal AND AFFIRMED IN
peoples, and can include customs, traditions SECTION 35 OF THE
and activities integral to the distinctive CONSTITUTION ACT,
culture of the Aboriginal group at issue. 1982.
These rights can include rights to hunt, trap,
fish and gather, and, in cases where Aboriginal title has been proven, a
right to land itself.

Treaty rights are those rights set out in historic and modern treaties.
With some exceptions, treaties usually involve the giving up of certain
interests or rights by Aboriginal peoples in return for expressly set out
“treaty rights,” such as the right to hunt or fish over a defined treaty
territory. 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, Labrador, New Brunswick, Nova Scotia, the Northwest
Territories and Yukon.

Effecting transactions on or relating to lands subject to some

Aboriginal interest, including First Nation reserve lands, requires specific

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Aboriginal Law

knowledge about and experience in dealing with such lands. Parliament

has exclusive legislative jurisdiction over Indians and lands reserved for
Indians, and has enacted an array of legislation including the Indian Act,
the Indian Oil and Gas Act and the First Nations Land Management Act.
First Nations and Inuit are under such federal jurisdiction, whereas the
relationship between the Métis and Parliament continues to be
debated.

Furthermore, developments on lands subject to Aboriginal claims or

interests may be subject to a legally required consultation process. The
constitutional recognition and affirmation
of Aboriginal and treaty rights requires
DEVELOPMENTS ON
the Crown (which includes the federal and
LANDS SUBJECT TO
provincial governments) always to act
ABORIGINAL CLAIMS
honourably when dealing with Aboriginal
OR INTERESTS MAY
peoples. In circumstances where the Crown
BE SUBJECT TO A
may make a decision that might adversely
LEGALLY REQUIRED
affect an Aboriginal interest, the Crown has
CONSULTATION
a duty to consult, and, where appropriate,
PROCESS.
accommodate Aboriginal peoples. This
Crown duty arises when the Crown has
knowledge, real or constructive, of the potential existence of an
Aboriginal interest and contemplates conduct that might adversely
affect this interest.

What amounts to appropriate Crown consultation 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
an Aboriginal interest, and the degree of the potential adverse effect of
the Crown decision on such interest.

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 private entities. It is not uncommon for the Crown
to pass along certain requirements associated with the duty to consult
to applicants or project proponents. Inadequate Crown consultation

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Aboriginal Law

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.

It is common for governments to promote, and for the private sector to

consider, entering into agreements with the relevant Aboriginal groups
(sometimes referred to as access, participation or impacts and benefits
agreements). Such agreements can assist in addressing the concerns
of Aboriginal groups and establish stable frameworks for development
projects to move forward. These agreements can include an array of
benefits 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 facilitate the development
of the project.

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Intellectual Property

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 WTO treaty on Trade-Related Aspects of Intellectual
Property (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 (Stockholm text) and the
Patent Cooperation Treaty (PCT).

The Patent Act provides that any new, useful and unobvious invention
that falls within the statutorily defined categories, namely, art, process,
machine, manufacture or composition of
matter (or any improvement of any of these)
CANADA IS A
is patentable. Higher life forms per se are not
MEMBER OF THE
patentable, but engineered genetic material
PARIS CONVENTION
and cell lines containing such genetic
(STOCKHOLM TEXT)
material typically are patentable. Algorithms
AND THE PATENT
per se are not patentable, but computer
COOPERATION
program products or methods that
TREATY (PCT).
implement a tangible and useful solution
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 of
[Link] for its “one-click” online product-ordering technology.
The Commissioner had held that Amazon’s application did not qualify
as having patent-eligible subject matter under the Patent Act. In
overturning this finding, the court articulated a new test that does not
preclude computer-implemented 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.
If it survives appeal, this decision may herald a new era of increasing
acceptance for patents directed to computer-implemented inventions
and business methods in Canada.

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Intellectual Property

A patent grants its owner the exclusive right in Canada to make, sell or
use the invention for a fixed term. In general, the first inventor to file 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 filed before the invention is made available to the public
anywhere in the world. A grace period of one year is permitted for
disclosures originating directly or indirectly
from the inventor, but an application by CANADA HAS
another inventor with an earlier filing date SIGNED BUT NOT
will effectively prevent the grant of a patent. IMPLEMENTED THE
It is therefore important to file as early as WIPO COPYRIGHT
possible in Canada or in a Paris Convention TREATY (WCT)
country, and not rely on the grace period. AND THE WIPO
The making of an invention available to the PERFORMANCES
public includes publication (e.g., by AND PHONOGRAMS
publication of an earlier patent application or TREATY (WPPT).
by distribution of a product embodying the
invention). Pending patent applications will
be published by the Canadian Intellectual Property Office 18 months
after the earliest filing date claimed by the applicant. The patent will last
for a maximum of 20 years from the date of filing in Canada, provided all
annual maintenance fees are paid in a timely manner.

Copyright
Canada has signed but not implemented the WIPO Copyright 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, are not provided for in the Copyright
Act. Canada also lacks clear statutory guidelines or safe harbours for
Internet Service Providers. In June 2010, the Canadian government
delivered a draft Bill that is now being studied by a Parliamentary
Committee. The draft Bill, in addition to addressing international treaty
obligations, 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 a “reproduction for private
purposes” exception and a “user-generated content” exception.

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Intellectual Property

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.

Trade-marks
Canada is not a member of the Madrid Convention or the Madrid
Protocol.

The Trade-marks Act provides for the protection of interests in words,

symbols, designs, slogans or a combination of these to identify the
source of wares or services. Rights in a
trade-mark are created through use in
CANADA IS A PARTY
Canada (or in the case of foreign owners,
TO THE BERNE
by use abroad and eventual registration in
CONVENTION AND
their home country). It is possible to reserve
THE UNIVERSAL
rights by filing based on an intent to use
COPYRIGHT
a trade-mark in Canada. Registration is
CONVENTION.
permissive and not mandatory. Registration
CANADA IS NOT A
does, however, give the registrant the
MEMBER OF THE
exclusive right to use the mark throughout
MADRID CONVENTION
Canada and facilitates enforcement. Without
OR THE MADRID
a registration, an owner’s rights are limited
PROTOCOL.
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 can be
attacked on the basis of non-use or invalid registration. The first term
of a registration is for 15 years and is renewable for successive 15-year
terms on payment of a renewal fee.

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Intellectual Property

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 conflict between the THE INTERNET’S
registered trade-mark system and a DOMAIN NAME
domain names registry is the result of SYSTEM AND THE
domain name registrations following a INTERNET-BASED
“first come, first served” policy, without an PRACTICE OF META-
initial, independent review of whether the TAGGING PRESENT
name being registered is another person’s THE INTELLECTUAL
registered trade-mark. At the same time, PROPERTY SYSTEM
a domain name in some respects is more AND ESPECIALLY
powerful than a trade-mark, as there can TRADE-MARK
only be one company name registered for LAW WITH SOME
each top-level domain. INTERESTING
CHALLENGES.
To obtain a Canadian “.ca” registration,
a would-be registrant must 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 suffices 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 “cyber-squatters.”
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 Registry 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.

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Intellectual Property

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 specific
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.

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Information Technology

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
shipments, but also to transfers by intangible means including through
the provision of services or training,
downloads or other electronic file transfers, OVER THE PAST
e-mails, faxes, telephone conversations and DECADE, VARIOUS
face-to-face meetings. Export of certain LEGISLATIVE
computers, technology and other products INITIATIVES HAVE
may be controlled by means of the Export PROVIDED MORE
and Import Permits Act (EIPA), the United LEGAL CERTAINTY
Nations Act (UNA), or the Special Economic TO DOING BUSINESS
Measures Act (SEMA). Under the UNA and ONLINE.
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 high-
tech goods, but is not product-specific; instead, it provides a set of
technical specifications that are technology-neutral for the most part
and that are functional in their description. The ECL also regulates the
export of certain software (software generally available to the public is
not usually restricted). Software and other items having cryptographic
security features are generally covered by export controls, subject to
certain limited mass market and public domain exceptions or unless the
cryptography employs very low-key lengths. In addition, all US-origin
technology that is to be transferred to a destination other than the US
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

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Information Technology

to online commerce, where a growing number of Canadian consumers

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
RECENT
Act to goods that are leased or traded.
AMENDMENTS TO THE
Another important change is a provision
CPA SET OUT RULES
that prohibits contracting out of the class
FOR PRE-PAID CARDS
action proceedings regime. This is designed
SUCH AS GIFT CARDS,
to counteract the practice of some suppliers
WHICH COMPRISE A
to provide arbitration as the contractually
GROWING SEGMENT
stipulated dispute resolution mechanism,
OF CONSUMER
precisely to avoid a class action scenario.
ECONOMY,
Further, the CPA requires the supplier to
ESPECIALLY ONLINE.
provide the consumer with a fairly extensive
list of 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
confirmation screen that summarizes the consumer’s purchase details
just before the conclusion of the online purchase is mandatory, along
with the requirement that the supplier provide a copy of the Internet
agreement to the consumer within 15 days after 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 consumer economy, especially online. These rules cover
a number of requirements and limitations on issuers, such as if a gift
card can have an expiration date and any fees the issuer can charge the
consumer, among other things.

Evidence Laws
Most jurisdictions in Canada have provided clarity to evidentiary issues
arising because of computer-generated documents by amending their
evidence law statutes to resolve the issue of what constitutes the

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Information Technology

“original” record in the context of the creation, storage and

communication of electronic information. The statutes now also provide
for the best evidence rule to be satisfied 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.

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 CANADIAN LAWS
of Civil Procedure (Ontario), would prove SUPPORT THE
very expensive and largely of limited value to ADMISSIBILITY
participating litigants. Therefore, judges in OF ELECTRONIC
Canada are increasingly receptive to having EVIDENCE, WHILE
parties to a litigation follow e-discovery STILL PERMITTING A
guidelines. These require, for example, that PARTY TO CHALLENGE
parties contemplating or threatened with THE RELIABILITY
litigation must consider e-evidence issues OF THE COMPUTER
and, among other things, circumscribe the SYSTEM OR NETWORK
scope of e-discovery in order to comply THAT PRODUCED THE
with Rule 30. See Dispute Resolution — EVIDENCE.
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 satisfied by a document that is in electronic
form — such as e-mail — if it is accessible so as to be usable for
subsequent reference. In Québec, the legal value of a document,
particularly its capacity to produce legal effects and its admissibility as
evidence, is neither increased nor decreased because of the medium or

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Information Technology

technology chosen. Under the Québec regime, it is critical to be able to

establish that the “integrity” of a technological document has been
maintained throughout its life cycle. In this regard, certain legal
presumptions apply.

The provincial electronic commerce statutes also stipulate that one

can satisfy any legal requirement that a document be signed by an
electronic signature. The definition of
“electronic signature” is very broad, and
CYBER-LIBEL
encompasses any electronic information
IS POSTING A
that a person creates or adopts in order to
PUBLICATION ONTO
sign a document and that is in, attached
THE INTERNET THAT
to or associated with the document. The
IS CALCULATED
federal Personal Information Protection
TO INJURE THE
and Electronic Documents Act (PIPEDA)
REPUTATION OF
is somewhat narrower, and focuses only
ANOTHER, WITHOUT
on “secure electronic signatures,” which is
LAWFUL EXCUSE.
currently taken by the government to mean,
essentially, an authentication process based
on public key type encryption.

In addition to writing and signature rules, the provincial electronic

commerce statutes provide that an offer, 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 confirm that contracts made over the
Internet will not be unenforceable simply because they were concluded
electronically. There is jurisprudence in Canada supporting the
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.

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 significant damages to

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Information Technology

plaintiffs who were libelled by defendants sending defamatory e-mails

and making other similar online postings about plaintiffs. 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 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
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 THE CANADIAN
crime. However, the Internet and other GOVERNMENT
computer-based technologies and business HAS MADE
practices raise a number of novel questions USEFUL STRIDES
under these amendments as well as the IN COMBATING
older provisions of the Criminal Code, COMPUTER CRIME
highlighting (among other challenges) the BY CONTINUOUSLY
difficulty in enforcing a national criminal law AMENDING THE
in an increasingly global technology CRIMINAL CODE OVER
environment. As technology evolves, the THE PAST 20 YEARS.
applicability of the Criminal Code to certain
harmful behaviour remains in question. This
requires Parliament to be continuously vigilant in dealing with new
computer-related threats and risks, and to protect people, property and
governments in the Information Age.

After considerable discussion, the Fighting Internet and Wireless

Spam Act was enacted by Parliament in December 2010. Its effective
date has not yet been determined, but once proclaimed into force
the legislation will protect consumers and businesses from online
impediments to safe and effective electronic commerce, including
spam, identity theft, phishing and spyware. It will also allow businesses

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Information Technology

and consumers to take civil action against violators, and will allow
the Canadian Radio-television 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
offenders. Canadian regulators will be given the power to share
information and evidence with their counterparts in other countries.
Some industry groups consider parts of the legislation to be
overreaching.

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Language

LANGUAGE
Language rules in most of Canada govern public life and institutions,
not business. 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 Official Languages Act, given additional profile
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 official language, where numbers warrant.

Outside Québec
Outside Québec, the main exception to this focus on the public sector
is consumer packaging. Regulations under the federal Consumer
Packaging & Labelling Act identify specific
information with which pre-packaged
CANADA’S
consumer products sold in Canada must be
CONSTITUTION
labelled. That information must be set out in
GRANTS ENGLISH
both English and French. Exceptions include
AND FRENCH EQUAL
religious, specialty-market and test
STATUS IN CANADA’S
products, and language-sensitive products
PARLIAMENT AND
such as books and greeting cards.
FEDERAL COURTS.
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 officially 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 affirms French as that
province’s official 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

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Language

in Québec — is therefore subject to rules about how they interact with

the public and how they operate internally inside the province.

In the Workplace
In Québec, written communications with staff must be in French,
including offers of employment and promotion and collective
agreements. No one may be dismissed, laid off, demoted or transferred
for not knowing a language other than
French — but knowledge of English or
RULES ABOUT
another language may be made a condition of
HOW BUSINESSES
hiring if the nature of the position requires it.
COMMUNICATE
Businesses that employ at least 50 people IN QUÉBEC’S
within Québec for at least six months MARKETPLACE
must obtain a francization certificate by DIFFER ACCORDING
demonstrating the generalized use of French TO WHETHER THE
at all levels of the business. Businesses COMMUNICATION IS IN
where the use of French is not generalized A PUBLIC OR PRIVATE
at all levels may be subject to a francization PLACE.
program in order to achieve this goal.
Businesses with at least 100 employees must establish an internal
francization committee to report on progress.

In the Marketplace
Rules about how businesses communicate in Québec’s marketplace
differ 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. Anyone carrying
on business at a Québec location, however, must register a French-
language business name.

Communications such as leaflets, 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

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Language

displayed. Because such communications are not displayed in a public

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. Software products, on
the other hand, must be made available to Québec consumers in French
only where a French-language version of that software exists and has
been made commercially available
somewhere in the world. If no such version
QUÉBEC COURTS
has been marketed elsewhere, however,
HAVE HELD THAT
there is no obligation to create a new
CERTAIN PROVISIONS
French-language version for the Québec
OF THE CHARTER
market; the non-French version may be
OF THE FRENCH
provided on its own. If a French-language
LANGUAGE APPLY TO
version of the software exists and has been
WEBSITES.
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 drafted 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.

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Immigration

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 first apply for, and then be granted, a
permanent resident visa.

There are a number of different categories under which a person may

apply for permanent residence, including skilled workers, investors,
entrepreneurs and family class sponsorship.
An entrepreneur applicant must
IN 2008, THE
demonstrate the intention and ability to
DEPARTMENT OF
establish or acquire a substantial interest in
CITIZENSHIP AND
a viable business that will create or maintain
IMMIGRATION
job opportunities for Canadians, and must
CANADA INTRODUCED
participate actively in the management of
A NEW CATEGORY
the business. An applicant in the investor
FOR PERMANENT
category must have a minimum net worth
RESIDENCE CALLED
and be willing to invest a set amount either
THE CANADIAN
with the federal government or with any of a
EXPERIENCE CLASS
number of provincial investor programs.
(CEC).
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 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 after completion of their studies in Canada. This progressive

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Immigration

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.

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
WORK PERMIT
that are administered by the government of
EXEMPT CATEGORIES
Québec.
INCLUDES THE NAFTA
Generally, any business-related activity BUSINESS VISITOR
carried on in Canada on a temporary basis AND THE INTRA-
by a person who is neither a Canadian citizen COMPANY TRAINER.
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 intra-company trainer.

Work Permits
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 — NAFTA, the Canada Chile
Free Trade Agreement (CCFTA) and the General Agreement on Trade
and Services (GATS). These three international agreements liberalized
the rules respecting the temporary entry of business visitors, certain
professionals and intra-company 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).

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Immigration

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

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-
IN ADDITION TO
graduation work permit was also shifted to
CERTAIN PRESCRIBED
an open work permit, which makes it non-
WORK PERMIT
employer-specific and allows more flexibility
CATEGORIES UNDER
to young graduates to pursue employment
THESE AGREEMENTS,
options in the Canadian labour market.
THERE ARE ALSO A
If an employee is not eligible for any of NUMBER OF OTHER
the exempt categories, he or she can still EXEMPT CATEGORIES
obtain a work permit if his or her Canadian AVAILABLE UNDER
employer can first obtain a Labour Market THE REGULATIONS
Opinion from Service Canada, a federal OF THE IRPA,
government agency. To do so, the Canadian INCLUDING ONE FOR
employer must demonstrate that granting a INTRA-COMPANY
work permit to the employee will result in the TRANSFERS.
transfer of skills or technology to Canadians
or will result in other types of positive benefits, 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 work permits based on
Labour Market Opinions will go into effect in April 2011, which will cap
the total duration at four years. At that time, the foreign national will no
longer be able to hold a lawful work permit until a subsequent four years
has passed and tougher new rules concerning penalties for employers
who do not comply with immigration laws will come into effect.

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Immigration

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.

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International Trade and Investment

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 CANADA IS A
these treaties. MEMBER OF THE
Because of the broad scope of these trade WORLD TRADE
and investment agreements, and their ORGANIZATION
binding dispute settlement mechanisms, (WTO) AND A PARTY
foreign investors establishing a business in TO THE NORTH
Canada should be cognizant of Canada’s AMERICAN FREE
obligations and the remedies available to TRADE AGREEMENT
them, particularly where they are facing (NAFTA) AS WELL AS
discriminatory or otherwise harmful NUMEROUS OTHER
government measures. REGIONAL TRADE
AND INVESTMENT
The regulatory regimes discussed below PROTECTION
apply to those doing business in Canada AGREEMENTS.
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 countervail, 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 levels.

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International Trade and Investment

Canada is an active participant in the WTO’s dispute settlement

system, both as complainant and respondent. As of December 2010,
Canada had brought 33 cases against other WTO member countries
who have taken measures alleged to violate their trade obligations.
Canada has been the target of 16 WTO cases brought by other
countries. As a result of many of these complaints, Canada has had to
terminate or amend offending measures in numerous sectors, including
automotive products, magazine publishing, pharmaceuticals, dairy
products and regional aircraft.

The North American Free Trade Agreement

NAFTA came into effect on January 1, 1994, and provided for the
elimination of trade barriers among Canada, the United States and
Mexico. Between Canada and the United
States, the process of tariff elimination
GOODS WHOLLY
initiated pursuant to the Canada-United
PRODUCED OR
States Free Trade Agreement that came into
OBTAINED IN CANADA,
effect on January 1, 1989 was continued
MEXICO OR THE
under NAFTA. On January 1, 1998, customs
UNITED STATES,
duties were completely eliminated with
OR ALL THREE,
respect to US-origin products imported into
WILL QUALIFY FOR
Canada, with the exception of certain supply
PREFERENTIAL TARIFF
managed goods, including dairy and poultry
TREATMENT.
products. Effective January 1, 2003, virtually
all customs tariffs 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 differs 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
define 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 classification, and that in some cases satisfy
prescribed value-added tests. Provided the NAFTA rules of origin are

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International Trade and Investment

satisfied, 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
CANADA HAS ALSO
investor of one NAFTA country to sue the
NEGOTIATED FREE
government of another NAFTA country
TRADE AGREEMENTS
for loss or damage arising out of that
WITH COLOMBIA,
government’s breach of its investment
CHILE, COSTA RICA,
obligations. Under NAFTA Chapter 11,
JORDAN, ISRAEL,
the federal government can be sued
PANAMA, PERU AND
for damages arising out of provincial
THE EUROPEAN FREE
government measures that are inconsistent
TRADE ASSOCIATION.
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),
financial services, telecommunications and rules of origin. NAFTA also
establishes special arrangements for automotive trade, trade in textile
and apparel goods, and agriculture.

Other Free Trade Agreements

In addition to being a signatory to NAFTA and the agreements of
the WTO, Canada has also negotiated free trade agreements with
Colombia, Chile, Costa Rica, Jordan, Israel, Panama, Peru and the
European Free Trade Association (Iceland, Liechtenstein, Norway and
Switzerland).

Canada is currently negotiating or considering initiating negotiations of

free trade deals with India, South Korea, Turkey, Ukraine, Morocco, the
Caribbean Community (CARICOM), the Dominican Republic, Singapore,
the Andean Community and the Central American Four (El Salvador,
Guatemala, Honduras and Nicaragua).

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International Trade and Investment

In addition, Canada is currently engaged in the negotiation of a

Comprehensive Economic and Trade Agreement (CETA) with the
European Union. If negotiations are successful, the resulting treaty
could be Canada’s broadest and most significant trade agreement to
date — with substantial commitments
across a number of areas, including trade in CANADA IS
goods and services, investment protection, CURRENTLY
sanitary and phytosanitary measures, ENGAGED IN THE
technical barriers to trade, trade facilitation, NEGOTIATION OF A
government procurement, customs COMPREHENSIVE
procedures, regulatory cooperation, labour, ECONOMIC AND
mobility, competition policy, provincial TRADE AGREEMENT
measures and the protection of intellectual (CETA) WITH THE
property, including geographic indications. EUROPEAN UNION.

Most recently, Canada launched free trade

negotiations with India.

Bilateral Investment Treaties

Bilateral investment treaties (BITs) between Canada and 25 developing
countries and former communist-bloc nations are currently in force.
Most recently, negotiations have been concluded with Madagascar
and Bahrain. 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. Canadian-based businesses will also benefit
from the BIT protections available for their foreign direct investment in
developing countries.

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International Trade and Investment

Canada is currently in the process of negotiating BITs with China, India,

Vietnam, Mongolia, Indonesia, Tanzania, Kuwait and Tunisia.

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
THE FEDERAL
restricting or preventing the movement
GOVERNMENT
of goods, services and investment across
OF CANADA HAS
provincial boundaries; measures relating
NEGOTIATED THE
to investors of a province; the government
AGREEMENT ON
procurement of goods and services;
INTERNAL TRADE
consumer-related measures and standards;
(AIT) WITH EACH OF
labour mobility; agricultural and food goods;
THE GOVERNMENTS
alcoholic beverages; natural resources
OF CANADA’S
processing; communications; transportation;
PROVINCES AND
and environmental protection measures.
TERRITORIES.
The AIT also provides for government-to-
government and person-to-government
dispute resolution.

Duties and Taxes on the Importation of Goods

Importers are required to declare the 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 US 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 classification 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 classification, as have all of Canada’s major
trading partners.

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International Trade and Investment

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. CERTAIN IMPORTED
If for one reason or another (e.g., where GOODS ARE
there has been no sale of the goods), the REQUIRED TO BE
transaction value of the goods may not be MARKED WITH THEIR
used as a basis for the declared customs COUNTRY OF ORIGIN.
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 five per cent 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 Tax — Federal Goods and
Services Tax.

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 specific conditions,
are exempt from the country of origin marking requirement.

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International Trade and Investment

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 significant 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 CERTAIN GOODS ARE
Food Inspection Agency. PROHIBITED FROM
Counterfeit trade-mark or pirated copyright BEING IMPORTED INTO
goods may be detained upon importation CANADA, INCLUDING
into Canada. In accordance with the OBSCENE MATERIALS,
Copyright Act and the Trade-marks Act, CERTAIN HAZARDOUS
the owner of a registered trade-mark, the PRODUCTS AND
owner or exclusive licensee of a copyright, CERTAIN PROHIBITED
or the owner of a performer’s performance WEAPONS AND
may apply to the court for an order directing FIREARMS.
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 notified.

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 aircrafts;
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
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
firearms.

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International Trade and Investment

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
CANADA MAY LEVY
have caused or threaten to cause injury to
DUTIES ON “DUMPED”
Canadian industry. Duties may also be levied
PRODUCTS AND
in instances of countervailable subsidies
ON SUBSIDIZED
being provided by the government in the
PRODUCTS IMPORTED
country of export, and if such subsidized
INTO CANADA.
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 December 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 significant diversion of trade into
the Canadian market.

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International Trade and Investment

Import and Export Controls

Canada, for reasons of both domestic policy and international treaty
commitments, maintains controls on imports, exports and transfers of
certain goods and technology and, in the case of exports, their
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 identified on the ICL require an

CANADA, FOR BOTH
import permit, subject to exemptions
DOMESTIC POLICY
(including for goods from certain countries
AND INTERNATIONAL
of origin). These include steel products,
OBLIGATION
weapons and munitions, and agricultural and
REASONS, MAINTAINS
food products such as turkey, beef and veal
CONTROLS ON
products, wheat and barley products, dairy
IMPORTS, EXPORTS
products and eggs.
AND TRANSFERS OF
The ECL identifies those goods and CERTAIN GOODS AND
technology that may not be exported or TECHNOLOGY.
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 dual-use goods, miscellaneous goods (including
all US-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.

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International Trade and Investment

Controlled Goods Program

The Canadian government has established the Controlled Goods
Program under the authority of the Defence Production Act. This
Program is a domestic industrial security
regime for certain goods and technology
CANADA ALSO
that have a military application. It provides
MAINTAINS VERY
for defence trade controls to regulate and
SIGNIFICANT
control the examination, possession and
PROHIBITIONS
transfer in Canada of controlled goods and
ON DEALINGS
technology.
WITH TERRORIST
Anyone who deals with controlled goods ORGANIZATIONS
and technology in Canada must register AND INDIVIDUALS
with the Controlled Goods Directorate and ASSOCIATED WITH
comply with numerous security and other SUCH GROUPS.
requirements.

Trade Embargoes
A number of nations are subject to Canadian trade embargoes of
varying scope under the United Nations Act and the Special Economic
Measures Act. Special trade embargo measures are currently in place for
the following countries: Burma (Myanmar), Iran, Lebanon, Côte d’Ivoire,
Democratic Republic of the Congo, Eritrea, Iraq, Liberia, North Korea,
Sierra Leone, Somalia, Sudan and Zimbabwe. Canada also maintains
very significant prohibitions on dealings with 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 offence to comply with
the US trade embargo of Cuba, and requires that the Attorney General
of Canada be notified of communications received in respect of the
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

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International Trade and Investment

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.

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 satisfied by the parties to those
PURSUANT TO ITS
agreements, including Canada. These
NAFTA, WTO AND
requirements include provisions that address
AIT OBLIGATIONS,
technical specifications; the qualification
CANADA’S BID
of suppliers; the design and issuance of
CHALLENGE
requests for proposals; selective tendering
AUTHORITY
procedures; tender documentation;
FOR FEDERAL
negotiations that may occur during the
PROCUREMENT
tender; the process of submitting, receiving
IS THE CANADIAN
and opening tenders and awarding
INTERNATIONAL
contracts; limited tendering procedures;
TRADE TRIBUNAL.
and bid challenges. They apply to federal
government departments and entities, as
well as to various government enterprises and Crown corporations.
In 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 finds 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.

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International Trade and Investment

Anti-Corruption Legislation
The federal Corruption of Foreign Public Officials Act makes it a
criminal offence for any person to bribe a foreign public official. This
Act prohibits Canadians from directly or indirectly giving, offering or
agreeing to give or offer a loan, reward, advantage or benefit of any kind
to a foreign public official in order to obtain or retain an advantage in the
course of business. It is therefore necessary that Canadian companies
carefully scrutinize their activities abroad, including the actions of their
agents in other countries.

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Employment

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:

¬ employment standards legislation;

¬ labour relations legislation; THE EMPLOYMENT
¬ human rights legislation; RELATIONSHIP
IN CANADA IS
¬ occupational health and safety AFFECTED BY MYRIAD
legislation; REGULATIONS,
¬ federal and provincial privacy legislation; LEGISLATION AND
and COMMON LAW
¬ employment benefits, including pension, PRINCIPLES.
employment insurance and workers’
compensation.
As the following section clearly indicates, the employment relationship
in Canada is affected by myriad regulations, legislation and common law
principles. Employers need to be aware of the various legal concerns so
they can 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 cover all employment contracts, whether oral or
written. The standards defined in the ESAs are minimum standards only,
and employers are prohibited from contracting out of or otherwise
circumventing the minimum standards set out in the legislation. 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

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Employment

all ESAs, including minimum wages, maximum hours of work, overtime

hours and wages, rest and meal periods, statutory holidays, vacation
periods and vacation pay, termination and severance pay, and leaves of
absence. The leaves of absence protected by ESAs vary across
provinces, but may include sick leave, bereavement leave, maternity/
parental/adoption leave, reservist leave and compassionate care/family
medical leave.

Unlike employers in the United States, Canadian employers may

not terminate employees “at will.” Employers must adhere to notice
requirements unless they have sufficient
cause to terminate an employee without
UNLIKE EMPLOYERS
notice. The length of the required notice
IN THE UNITED
period varies among jurisdictions, but
STATES, CANADIAN
generally increases with an employee’s
EMPLOYERS MAY
length of service. In Alberta, for example,
NOT TERMINATE
employees are statutorily entitled to at
EMPLOYEES “AT WILL.”
least one week’s notice of termination, with
a maximum eight-week 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, unless an employee
is terminated for cause. “Cause” includes wilful misconduct or
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 be exempted from the
termination notice provisions of the legislation in each jurisdiction.

In most jurisdictions, special provisions apply where a large number

of employees are terminated within a short period of time. These
provisions include, at the very least, written notice to the Director of
Employment Standards.

Some jurisdictions provide severance pay as an additional benefit to

employees. For example, under the federal scheme, all employees who
have been employed for 12 consecutive months are entitled to
severance pay in the amount of five days of regular pay or two days of
regular pay for each completed year of service, whichever is greater.

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Employment

In Ontario, an employee with five or more years of service may be

entitled to severance pay if his or her employer, as a result of the
discontinuation of all or part of the employer’s business, terminates
50 or more employees in a six-month period, or if his or her 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 disqualified from receiving severance pay if they
have engaged in wilful misconduct or disobedience, or if they fall within
other exceptions specified in the legislation.

In addition to minimum statutory termination pay and severance pay

entitlements, a terminated non-union employee, without a contract
limiting employer liability to the statutory
minimums, may be entitled by common
CANADA AND
law to further reasonable notice of the
EACH PROVINCE
termination or pay in lieu of notice. This right
HAVE ENACTED
may be enforced in the courts. The amount
LEGISLATION
of notice will depend on the employee’s
GOVERNING THE
individual circumstances, including length
FORMATION AND
of service, age, the type of position held
SELECTION OF
and the prospect for future employment.
UNIONS AND
The manner in which an employer treats an
THEIR COLLECTIVE
employee at the time of dismissal is also
BARGAINING
important, because notice periods may be
PROCEDURES.
increased for “bad faith” by the employer in
the manner of termination. Employers who
wish to avoid or limit this additional liability should have clear terms in
written contracts.

Labour Relations
Canada 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 certified as the
representative of that unit of employees. An employer must negotiate
in good faith with a certified union to reach a collective agreement.
Failure to do so may lead to the imposition of penalties. Most workers
are entitled to strike if collective bargaining negotiations between the

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Employment

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 is a constitutional
charter that governs the content of legislation and other government
actions. It contains anti-discrimination
provisions that may be enforced by the
HUMAN RIGHTS
courts. In addition, all Canadian jurisdictions
LEGISLATION STATES
have enacted human rights codes or acts
THAT PERSONS HAVE
that specifically prohibit various kinds of
A RIGHT TO EQUAL
discrimination in employment, including
TREATMENT AND A
harassment. Whereas the Charter applies
WORKPLACE FREE OF
only to the actions of government, human
DISCRIMINATION ON
rights legislation applies more broadly to the
THE BASIS OF ANY
actions of non-government entities, such as
OF THE PROHIBITED
employers of virtually every description.
GROUNDS.
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, age, marital status, family status, and
physical or mental disability, among others. 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 effect
of discriminating against a protected group. However, employers may
maintain qualifications and requirements for jobs that are bona fide and
reasonable in the circumstances.

The first step in the analysis of discrimination is for an employee to

demonstrate that discrimination has occurred, or that he or she has
been treated differently in a term or condition of employment on the
basis of one of the enumerated grounds. Once an employee or former
employee 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 offending term or condition of
employment is a bona fide occupational requirement (BFOR).

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Employment

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 ALL FEDERAL
a high standard: it requires direct, objective AND PROVINCIAL
evidence of quantifiable higher costs, the JURISDICTIONS HAVE
relative interchangeability of the workforce ENACTED LAWS
and facilities, interference with the rights of DESIGNED TO ENSURE
other employees, or health and safety risks. WORKER HEALTH AND
The employer must assess each employee SAFETY, AS WELL AS
individually to determine whether it would be COMPENSATION IN
an undue hardship to accommodate his or CASES OF INDUSTRIAL
her particular needs. ACCIDENT OR
Occupational Health & Safety DISEASE.

All federal and 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. 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 officers have the power to inspect

workplaces. Should they find 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 rectified, and to make “stop work” orders if necessary.
Contraventions of the acts, codes or regulations are treated very
seriously, and may result in fines 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
obligations regarding the collection, use, disclosure, storage and
retention of and access to personal employee information. This is

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Employment

especially important in Québec, Alberta and British Columbia, which

have already enacted privacy legislation separate from the federal
legislation. See Privacy Laws.

Employment Benefits
The Canada Pension Plan is a federally created plan that provides
pensions for employees, as well as survivors’ benefits 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 the purpose of calculating income for tax ALL PROVINCES
purposes. Québec has a similar pension plan PROVIDE
that requires contributions by employers and COMPREHENSIVE
employees within Québec. SCHEMES FOR
In addition to the Canada Pension Plan, both HEALTH INSURANCE.
employees and employers must contribute
to the federal Employment Insurance Plan, which provides benefits 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.

All provinces provide comprehensive schemes for health insurance.

These plans provide for necessary medical treatment, including the
cost of physicians and hospital stays. They do not replace private
disability or life insurance coverage. Revenue collection varies from
one provincial health insurance 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 extended health insurance benefits

through private insurance plans to cover health benefits not covered by
the public health insurance plan.

Employers may be required to provide sick or injured worker benefits,

in the form of workers’ compensation, a liability and disability insurance
system that protects employers and employees in Canada from the

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Employment

impact of work-related injuries. This benefit 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 benefits such as private

pensions and private benefit plans. For example, most Canadian
jurisdictions have pension standards legislation that establishes
minimum requirements for private pension plans.

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Privacy Laws

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 identifiable 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. The federal Personal
Information Protection and Electronic Documents Act (PIPEDA) governs
the collection, use and disclosure of personal information in other
provinces and in the territories, as well as in the course of inter-provincial
and international commercial activities.

These statutory regimes are all generally built upon the following
10 principles that govern the collection, use and disclosure of personal
information:
ALL BUSINESSES
¬ accountability;
IN CANADA ARE
¬ identifying purposes; SUBJECT TO
¬ consent; LEGISLATION THAT
REGULATES THE
¬ limiting collection; COLLECTION, USE
¬ limiting use, disclosure and retention; AND DISCLOSURE
¬ accuracy; OF PERSONAL
INFORMATION
¬ security safeguards; IN THE COURSE
¬ openness; OF COMMERCIAL
¬ individual access; and ACTIVITY.

¬ challenging compliance.
Unless certain “without consent” 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 financial information), while implicit
consent may be sufficient for non-sensitive personal information.

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Privacy Laws

Currently, Alberta’s Personal Information Protection Act (PIPA) is the

only private sector privacy legislation that imposes a statutory
obligation on private sector organizations to disclose privacy breaches.
Proposed amendments to the federal PIPEDA, if enacted, would also
require notification of privacy breaches.

With respect to transfers of personal

information to service providers located
THE PROVINCES OF
outside Canada, the “openness” principle
ALBERTA, MANITOBA,
under PIPEDA has been held by federal
ONTARIO AND
privacy regulators to require that notice
SASKATCHEWAN
of such transfers should be provided to
ALSO HAVE SPECIFIC
affected individuals. Alberta’s PIPA requires
HEALTH PRIVACY
that organizations notify individuals if they
LEGISLATION
transfer personal information to a service
TO PROTECT
provider located outside Canada. Québec’s
PERSONAL HEALTH
privacy legislation requires organizations
INFORMATION.
to consider the potential risks involved in
transferring personal information outside
Canada.

In addition to their general private sector privacy laws, the Provinces of

Alberta, Manitoba, Ontario and Saskatchewan also have specific health
privacy legislation to protect personal health information. For example,
Ontario’s Personal Health Information Protection Act 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 identifies the

organization’s compliance with the applicable regulatory regimes
and sets a time frame for implementation;
¬ the adoption of a privacy policy, and personal information
management practices, to ensure compliance with applicable privacy
laws;

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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 outside Canada and proposed information practices
within Canada, including determining
what personal information is collected,
IMMEDIATE
and from where; what consents are
PRIORITIES FOR MOST
obtained and what purposes are
ORGANIZATIONS
identified when collecting personal
THAT ESTABLISH A
information; where personal information
BUSINESS IN CANADA
is stored; how personal information is
SHOULD INCLUDE THE
used; when and to whom personal
IMPLEMENTATION OF
information is disclosed; and how current
CONSENT LANGUAGE
personal information practices of the
IN CONTRACTS,
organization may need to be changed for
FORMS AND OTHER
the collection, use and disclosure of
DOCUMENTS UTILIZED
personal information in Canada;
WHEN COLLECTING
¬ a review of the organization’s data PERSONAL
management infrastructure to ensure INFORMATION FROM
that the infrastructure is adequately INDIVIDUALS.
flexible 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

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Privacy Laws

will cease using (and return or destroy) the personal information if

requested; and providing for indemnification 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
IF PERSONAL
transactions. For example, when
INFORMATION OF
contemplating the purchase of a business
EMPLOYEES OR
in Canada, it is essential that a review of the
CUSTOMERS HAS TO
privacy policies and practices of the target
BE DISCLOSED TO THE
form part of the due diligence process.
PURCHASER DURING
If personal information of employees or
THE DUE DILIGENCE
customers has to be disclosed to the
PROCESS, IT IS ALSO
purchaser during the due diligence process,
ESSENTIAL THAT
it is also essential that an appropriate
AN APPROPRIATE
confidentiality regime be established for
CONFIDENTIALITY
the process. It is recommended that only
REGIME BE
personal information that is necessary or
ESTABLISHED FOR
likely to affect the decision to proceed with
THE PROCESS.
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 fines. An organization with
deficient privacy practices may risk adverse publicity for failure to
comply with privacy laws.

In light of the complexity of privacy laws and the differences 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.

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Environmental Regulation

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 affect industry on
environmental matters such as pollution
or contamination of the air, land and water,
ENVIRONMENTAL
toxic substances, hazardous wastes, and
REGULATION IN
transportation of dangerous goods and
CANADA IS AN
spills. In addition, there are requirements
AREA OF SHARED
for approvals and environmental impact
RESPONSIBILITY
assessments in many areas affecting both
BETWEEN
the public and private sectors.
THE FEDERAL
Environmental regulators have broad GOVERNMENT AND
monitoring and inspection powers, and use THE PROVINCIAL
a wide range of enforcement mechanisms. GOVERNMENTS,
These powers and mechanisms extend not WHICH, IN TURN,
only to the businesses involved but also HAVE DELEGATED
to corporate directors, officers, employees CERTAIN MATTERS
and agents. For example, the Canadian TO MUNICIPAL
Environmental Protection Act includes GOVERNMENTS.
provisions for warnings, significant fines,
imprisonment, injunctions and compliance orders. Canadian courts are
also now holding companies, as well as their officers and directors and
employees, liable for environmental offences.

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
the buyer or lender know about all past and potential environmental
problems associated with a particular business or property.

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Environmental Regulation

As a result of stringent environmental legislation and the regulatory

bodies’ vigorous approach to investigating and prosecuting
environmental concerns, prudent businesses seek proper advice
concerning environmental due diligence.

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Dispute Resolution

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 influence 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
JUDICIAL
level of the court.
INDEPENDENCE IS
Each province and territory (with the A CORNERSTONE
exception of Nunavut) has a provincial OF THE CANADIAN
court. These courts deal primarily with JUDICIAL SYSTEM.
criminal offences, family law matters (except JUDGES MAKE
divorce), traffic violations and provincial DECISIONS FREE
or territorial regulatory offences. Private OF INFLUENCE AND
disputes involving limited sums of money BASED SOLELY ON
are resolved in the small claims divisions of FACT AND LAW.
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

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Dispute Resolution

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 decisions of the superior courts and the provincial and territorial
courts. Ontario also has a Divisional Court
that serves as a court of first instance for
ALMOST ALL
the review of administrative action. It also
CANADIAN
hears appeals from provincial administrative
PROVINCES HAVE
tribunals, interlocutory decisions of judges
CLASS PROCEEDINGS
of the Superior Court and appeals from the
LEGISLATION.
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 first
instance. Appeals are heard by the Federal Court of Appeal.

The Supreme Court of Canada is the final 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 first 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.

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Dispute Resolution

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
“certified.” Generally, the bar for certification 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
financial industries, and governments.
Class actions may involve allegations of
IN CANADA,
product liability, misrepresentation, breaches
COMMON TARGETS
of consumer and employment laws,
OF CLASS ACTIONS
competition law (i.e., antitrust) breaches,
INCLUDE PRODUCT
securities fraud and breaches of public law.
MANUFACTURERS,
Class actions are becoming an increasingly INSURERS,
prominent aspect of business litigation in EMPLOYERS,
Canada. Businesses may benefit from the COMPANIES IN
fact that individual damage awards tend THE INVESTMENT
to be lower in Canada than in the United AND FINANCIAL
States. In addition, the availability of punitive INDUSTRIES, AND
damages is limited in Canada. GOVERNMENTS.

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
often 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

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Dispute Resolution

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 confidentiality of arbitration proceedings. The arbitration process is
normally private; hearings are not public and
written transcripts of proceedings are not
THE DISCOVERY AND
generally available to the public. In addition,
PRODUCTION OF
the arbitration process may be faster than
ELECTRONICALLY
the court system, and there is generally no
STORED
right of appeal from an arbitration award.
INFORMATION,
This may lead to disputes being resolved
COMMONLY CALLED
more quickly.
E-DISCOVERY,
Electronic Discovery HAS BECOME AN
INCREASINGLY
The discovery and production of SIGNIFICANT ISSUE IN
electronically stored information, commonly LITIGATION ACROSS
called e-discovery, has become an CANADA.
increasingly significant 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 or 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 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 significant

recommendations of Sedona Canada:

¬ Once litigation is reasonably anticipated, the parties must take good-

faith steps to preserve potentially relevant electronic information.

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Dispute Resolution

¬ 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 significance of the electronic evidence in the case.

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Bankruptcy and Restructuring

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 different forms.
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.
Although several different legislative
WHEN A
regimes are available to effect either a
CORPORATION
liquidation or a restructuring of a
BECOMES INSOLVENT,
corporation, the Bankruptcy and Insolvency
TWO OPTIONS
Act (BIA) and the Companies’ Creditors
ARE GENERALLY
Arrangement Act (CCAA) are the two most
AVAILABLE:
common federal statutes employed for
(I) LIQUIDATE THE
these purposes. The BIA provides for both
CORPORATION’S
restructurings (via BIA Proposals) and
ASSETS FOR THE
liquidations (via bankruptcies) of insolvent
BENEFIT OF ITS
businesses, while the CCAA is used primarily
CREDITORS, OR
for the restructuring of more complex
(II) RESTRUCTURE
corporate businesses.
THE AFFAIRS OF THE
Bankruptcy and Insolvency Act (BIA) CORPORATION.

Bankruptcy
The term “bankruptcy” refers to a formal procedure under the BIA to
effect 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 corporation that has an office, assets or carries on
business in Canada, with the exception of banks, insurance companies,
trust or loan companies, and railways.

A voluntary bankruptcy under the BIA commences when a debtor files

an assignment in bankruptcy with the Office of the Superintendent of
Bankruptcy.

An involuntary bankruptcy under the BIA commences when a creditor

with a claim of at least $1,000 files an application for a bankruptcy
order with the court. This proceeding is brought on behalf of all

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Bankruptcy and Restructuring

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 by a creditor initiating the process, 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 effect of a bankruptcy is the same whether it is

commenced voluntarily or involuntarily: most of the debtor’s assets
vest in its trustee in bankruptcy, subject to
the rights of the debtor’s secured creditors.
THERE IS AN
The trustee in bankruptcy is a licensed
AUTOMATIC STAY
insolvency professional or firm that is
OF PROCEEDINGS
appointed by the bankrupt or the bankrupt’s
BY UNSECURED
creditors.
CREDITORS OF THE
There is an automatic stay of proceedings by DEBTOR UPON THE
unsecured creditors of the debtor upon the COMMENCEMENT
commencement of the debtor’s bankruptcy OF THE DEBTOR’S
proceedings, but the stay does not affect BANKRUPTCY
secured creditors, who are generally free PROCEEDINGS, BUT
to enforce their security outside the THE STAY DOES NOT
bankruptcy process. AFFECT SECURED
CREDITORS.
The bankruptcy trustee has many duties.
The most important is to liquidate all of the assets of the debtor
for the benefit 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 affairs
of the debtor to determine whether any fraudulent conveyances,
preferences or transfers at undervalue were effected by the debtor
prior to the bankruptcy.

The creditors will generally meet shortly after the debtor becomes
bankrupt, and appoint a group of up to five individuals known as

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“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.

BIA Proposals
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 BIA restructurings. A restructuring
THE RESTRUCTURING
under the BIA is typically commenced by a
PROVISIONS UNDER
debtor either filing a proposal (i.e., its
THE BIA ARE MOST
restructuring plan) or filing a Notice of
COMMONLY USED
Intention to file a proposal (NOI). A copy of
FOR SMALLER,
the written consent of a licensed trustee in
LESS COMPLICATED
bankruptcy, consenting to act as the
RESTRUCTURINGS.
proposal trustee in the proposal
proceedings, must be attached to the NOI.
Where an NOI is filed, the debtor must file cash flow statements for its
business within 10 days and must file its proposal within 30 days. The
court can extend the time for filing a proposal for up to a maximum of
five additional months, although the court can only grant extensions for
up to 45 days at a time.

The debtor normally carries on its business as normal, subject to review

by its proposal trustee and the supervision of the court. Upon the filing
of an NOI or the filing 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 filing of a notice of intention
to make a proposal under the BIA have no force or effect. The BIA
also provides that, upon the filing of an NOI or the filing 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 filed 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 lifted.

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Bankruptcy and Restructuring

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 on and incidental to the proceedings;
(iii) the payment of 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
A PROPOSAL MAY
secured creditors in respect of any class or
ALSO BE MADE TO
classes of secured claims.
SECURED CREDITORS
A proposal is deemed to be accepted by the IN RESPECT OF ANY
creditors if all classes of unsecured creditors CLASS OR CLASSES
vote for the acceptance of the proposal by OF SECURED CLAIMS.
a majority in number and two-thirds in value
of the unsecured creditors of each class. In practice, there is usually only
one class of creditors to which a proposal is directed — the unsecured
creditors. Secured creditors are usually dealt with by individual
negotiation under the BIA, since a commonality of interest within each
secured creditor class is required and there are seldom groupings of
secured creditors that can be grouped together as a class.

If a BIA proposal is not approved by the requisite “double majority” of

unsecured creditors, the debtor is automatically placed into bankruptcy.
A BIA proposal will also fail if the court refuses to approve it. Finally, if
after 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 restructurings.

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Bankruptcy and Restructuring

To qualify to use the CCAA, a company must be insolvent and must

have outstanding liabilities of $5 million or more. To start the
proceedings, the corporation brings an initial application to court for an
order (referred to as the Initial Order), primarily to seek protection from
proceedings by the corporation’s creditors. If relief under the CCAA is
granted, the court appoints a Monitor, acting
as an independent court officer, to
IF RELIEF UNDER THE
(i) supervise the restructuring process, and
CCAA IS GRANTED,
(ii) report to creditors and the court on the
THE COURT APPOINTS
state of the debtor company’s business and
A MONITOR, ACTING
financial affairs.
AS AN INDEPENDENT
Typically, the Initial Order: COURT OFFICER.

a) authorizes the company to prepare a plan of arrangement to put

to its creditors, but may in certain cases authorize the sale of the
assets of the company;
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 (although in certain cases courts have allowed the payment of
past debts owed to employees and critical suppliers) and imposes
a stay of proceedings that (i) prevents creditors and suppliers from
taking action in respect of debts and payables owing as at the filing
date, and (ii) prohibits the termination of contracts, other than
“eligible financial contracts,” by counterparties but cannot prevent a
member of the Canadian Payments Association from ceasing to act
as a clearing agent for the company;
d) authorizes the company, if necessary, to obtain interim financing to
ensure the company can fund its operations during the proceedings
and determines the rank of the security that will secure such
financing;
e) may authorize the company to terminate unfavourable contracts,
leases and other arrangements other than “eligible financial
contracts,” collective bargaining agreements, financing agreements
where the company is the borrower, and real property leases where

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Bankruptcy and Restructuring

the company is the lessor (and there is a special regime for contracts
concerning the use of intellectual property where the company is
the licensor), and make provision for the consequences (i.e., damage
claims) in the plan of arrangement; and
f) may also create other charges such as charges to secure the
payment of the professional advisors, the indemnification of the
company’s directors and officers with respect to certain claims, and
the obligations of the company under key employee, or other similar,
retention plans.
The CCAA provides that an Initial Order may only impose a stay of
proceedings for a period not exceeding 30 days. Once the Initial Order
has been made, the company may apply for
a further order or orders extending the stay
DURING CCAA
of proceedings. The intention is to have
PROCEEDINGS,
the stay of proceedings continue until the
THE DEBTOR
company’s plan of arrangement has been
COMPANY TYPICALLY
approved by the creditors, sanctioned by
CONTINUES TO CARRY
the court and implemented. The court may
ON BUSINESS AS
terminate the proceedings under the CCAA
USUAL.
upon application of an interested party if the
court believes it unlikely that a consensual
arrangement will be achieved and the continuation of the proceedings
is otherwise not appropriate.

During CCAA proceedings, the debtor company typically continues

to carry on business as usual. Significant 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. During a restructuring,
counterparties to contracts with the debtor are usually prohibited from
terminating those agreements; however, those counterparties may
require that the debtor pay for post-filing goods and services in cash.

Ultimately, the debtor company may table a plan of arrangement and/or

compromise to its creditors. When a CCAA plan is developed, it will
ordinarily divide the creditors into classes and will set out the proposed
treatment of each class (which can be substantially different between

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Bankruptcy and Restructuring

classes). The CCAA does not provide any specific rules for the nature of
the compromise that may be proposed or for determining the classes
of creditors, so it is up to the debtor company to propose the treatment
and classification of creditors under the plan. A plan may be proposed
to all creditors of the debtor company or may only affect certain
creditors, in either case divided into one or more classes.

For a plan of arrangement and/or compromise to be approved by the

affected creditors, a majority in number of the creditors, representing
two-thirds in value of the claims of each
class, must vote in favour of the plan. Parties UPON APPROVAL BY
related to the company cannot vote in THE CREDITORS AND
favor of the plan. If the plan is approved SANCTION BY THE
by the affected creditors, it must then be COURT, THE CCAA
sanctioned by the court. In doing so, the PLAN IS BINDING
court must determine that the plan is “fair ON ALL OF THE
and reasonable.” Upon approval by the CREDITORS OF EACH
creditors and sanction by the court, the CLASS AFFECTED BY
CCAA plan is binding on all of the creditors THE PLAN.
of each class affected by the plan. If a class
of creditors 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 effect subordinate “equity claims” to the
claims of creditors. A plan may include releases in favour of non-debtor
third parties in certain cases.

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 will lead to an unsuccessful restructuring
is the court’s refusal to extend or decision to otherwise terminate the
stay of proceedings by creditors against the debtor company, thereby
allowing those creditors to exercise their lawful remedies against
the debtor.

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Government Relations

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 the 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 influence of individual elected
GIVEN THE
members of the legislature, as it is rare
SIGNIFICANT ROLE
that members of the governing party vote
OF THE FEDERAL
against a government-supported initiative.
AND PROVINCIAL
However, the federal level has seen a
GOVERNMENTS
series of “minority governments,” where
IN THE CANADIAN
the governing party holds more seats than
ECONOMY, EVERY
any other party in Parliament, but does not
ENTERPRISE
hold a majority of the seats. As a result, the
OPERATING IN
relative influence of Members of Parliament
CANADA SHOULD
has increased substantially since 2004.
CONSIDER A
Given the significant role of the federal and GOVERNMENT
provincial governments in the Canadian RELATIONS STRATEGY.
economy, every enterprise operating in
Canada should consider a government relations strategy. Companies
may also engage with government through industry associations. This
may indeed be a necessity for companies active in industries that
are heavily regulated (such as telecommunications, pharmaceuticals,
transportation and energy); that can be greatly affected 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 senior bureaucrats (who are non-partisan), 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

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Government Relations

the legislature or at a committee of the legislature. This can be

particularly important when a minority government is in power.

Government relations work becomes focused on specific issues when

an enterprise seeks to initiate, support or oppose legislation initiatives,
or seeks a change in regulations or policy.
A number of government ministries and
GOVERNMENT
regional/political interests may be involved
RELATIONS WORK
with any given initiative or change, and the
BECOMES FOCUSED
enterprise will seek out meetings with all the
ON SPECIFIC
responsible senior bureaucrats and Ministers.
ISSUES WHEN AN
For example, enterprises involved in inter-
ENTERPRISE SEEKS TO
provincial trucking work within a regulatory
INITIATE, SUPPORT OR
environment that includes provincial and
OPPOSE LEGISLATION
federal ministries of transportation, industry
INITIATIVES, OR
and commerce, and labour. Likewise, private
SEEKS A CHANGE IN
development of hydro-electric power can
REGULATIONS OR
involve provincial ministries of energy, lands
POLICY.
and environment, as well as the federal
ministries of fisheries 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 affect regions differently.

Two areas of notable interest for government relations are relationships

with Aboriginal peoples and the Canadian system of environmental
assessment (EA) 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 Nation interests are involved, both the
federal and provincial governments will also have to be advised and
consulted. See Aboriginal Law.

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Government Relations

In 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 differences in
the efficiency and timeline of EA processes in various provinces and
that of the federal government. As such, most enterprises that want to
make 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.

Another 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,
INTERACTION
infrastructure and broadcasting. Investors
BETWEEN THE
should seek advice on the attitudes of
PRIVATE SECTOR
government toward investments in these
AND GOVERNMENT
and other fields before proceeding, as
OFFICIALS HAS COME
coordination and cooperative relationships
UNDER INCREASED
with government will lead to much more
SCRUTINY IN RECENT
effective and efficient decision-making.
YEARS.
Interaction between the private sector and
government officials has come under increased scrutiny in recent years.
As a result, the regulation of interaction with government officials
has increased, as has the attention that all concerned pay to such
regulations. The elements to this regulation include regulation of the
public officials themselves through codes of conduct and regulation of
those who interact with public officials.

Codes of conduct for public officials generally regulate the public

officials and not those interacting with them. Such codes of conduct
govern what activities a public official may engage in, as well as the
hospitality he or she may accept, if any. The provisions of these codes

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Government Relations

of conduct provide guidance regarding the manner in which a public

official may be engaged. An enterprise should, for example, avoid
inadvertently placing public officials in a conflict-of-interest position
that could impede that official from being involved with a given issue,
and also bring negative attention to the enterprise’s government
relations effort.

The regulation of those in the private sector who interact with

public officials is generally governed by lobbyist legislation. Such
legislation provides that businesses and
their employees may have to register their
THE REGULATION
government relations activities with a central
OF THOSE IN THE
registry. This central registry is available to
PRIVATE SECTOR
the public (usually through the Internet).
WHO INTERACT WITH
The registration of lobbyists has come
PUBLIC OFFICIALS
under increasing scrutiny in almost every
IS GENERALLY
jurisdiction in Canada. The Parliament of
GOVERNED
Canada and several provincial legislatures,
BY LOBBYIST
including British Columbia, Alberta, Ontario,
LEGISLATION.
Québec, Nova Scotia and Newfoundland and
Labrador have enacted lobbyist legislation.
Some cities, such as Toronto, also have bylaws requiring lobbyists to
register.

The types of communication that may require registration vary

from jurisdiction to jurisdiction. Broadly speaking, they include:
communications with public officials (which includes not only
politicians, but also members of the bureaucracy) 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 financial benefit; and, in some cases,
the awarding of contracts and the arrangement of meetings with public
officials.

A well-planned government relations strategy can lead to a productive

and professional relationship with responsible decision-makers
in government. Both industry and public officials benefit from
such relationships, because they ensure that all the facts relevant

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Government Relations

to a decision are expressed, understood and taken into account.

Governments in Canada will generally do their best to be responsive,
transparent and effective in addressing the needs of enterprises.
However, when engaging public officials, it is essential for an enterprise
to know and follow the rules.

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McCarthy 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 firm has established a position as one of Canada’s leading
full-service law firms.

McCarthy Tétrault’s unified, client-focused teams regularly advise

on the largest and most complex transactions and cases involving
Canadian and foreign interests. The
firm provides unequalled depth of legal IF WE CAN ASSIST
talent, industry knowledge and practice YOU BY PROVIDING A
experience, capitalizing on our size and DETAILED ANALYSIS
scale to deliver customized legal services OF THE ISSUES
that assist clients in meeting their business RELEVANT TO YOUR
goals and protecting their rights and SPECIFIC PROPOSED
financial interests. INVESTMENT, PLEASE
CONTACT ANY OF THE
With offices in Canada’s major commercial
LAWYERS IN OUR FIRM.
centres and in London, UK, 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 financial 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 financings and mergers & acquisitions, as well
as the development and financing 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.

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McCarthy Tétrault: A Profile

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.

[Link] Doing Business in Canada 2011

TO LEARN MORE ABOUT DOING BUSINESS
IN CANADA, CONTACT:

Co-Practice Group Leaders, Business Law

CALGARY TORONTO
Owen A. Johnson David E. Woollcombe
403-260-3655 416-601-7555
ojohnson@[Link] dwoollco@[Link]

Regional Business Lawyers

VANCOUVER CALGARY
Robin M. Sirett John S. Osler
604-643-7911 403-260-3554
rsirett@[Link] josler@[Link]

TORONTO OTTAWA
David E. Woollcombe Brenda C. Swick
416-601-7555 613-238-2135
dwoollco@[Link] bswick@[Link]

MONTRÉAL QUÉBEC CITY

Clemens Mayr Marc Dorion, Q.C., Ad.E.
514-397-4258 418-521-3007
cmayr@[Link] mdorion@[Link]

UNITED KINGDOM & EUROPE

Robert J. Brant
+44 (0)20 7786 5701
rbrant@[Link]

Managing Editor
Robert Stephenson
416-601-7880
rstephen@[Link]

Cert no.
no. SW
SW-COC-001731
-COC-001731
VANCOUVER
Suite 1300, 777 Dunsmuir Street
P.O. Box 10424, Pacific Centre
Vancouver BC V7Y 1K2
Tel: 604-643-7100 / Fax: 604-643-7900

CALGARY
Suite 3300, 421 7th Avenue SW
Calgary AB T2P 4K9
Tel: 403-260-3500 / Fax: 403-260-3501

TORONTO
Box 48, Suite 5300
Toronto Dominion Bank Tower
Toronto ON M5K 1E6
Tel: 416-362-1812 / Fax: 416-868-0673

OTTAWA
Suite 200, 440 Laurier Avenue West
Ottawa ON K1R 7X6
Tel: 613-238-2000 / Fax: 613-563-9386

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

UNITED KINGDOM & EUROPE

125 Old Broad Street, 26th Floor
London EC2N 1AR
UNITED KINGDOM
Tel: +44 (0)20 7786 5700 / Fax: +44 (0)20 7786 5702