Doing business in Canada

doing business in Canada 2 | doing business in Canada Canada is one of the world’s premier locations for business investment. Boasting an exceptional wealth of natural resources, a sound financial system and world-class infrastructure, Canada is known for innovation in a wide range of sectors. And with generous research and development incentives, low corporate tax rates, and easy access to major U.S. markets, Canada is a top destination for foreign companies seeking a foothold in North America. As one of Canada’s leading business law, advocacy and intellectual property law firms, Gowlings understands the challenges of establishing and conducting business in this country. With offices in major cities across Canada and in London, Moscow and Beijing, we provide effective counsel and insightful business solutions that help our clients access the full potential of the Canadian marketplace. Doing Business in Canada was developed by Gowlings to provide business executives, foreign counsel and investors with an overview of the legal aspects of Canadian business operations. The information in this guide is current as of September 2014 and is for general information purposes only. It does not constitute a legal opinion or other professional advice. If you are doing business in Canada or planning to do so, it is highly recommended that you seek detailed and specific advice from experienced professionals. To learn more about doing business in Canada and the services that Gowlings provides, please visit us at gowlings.com © 2014 Gowlings doing business in Canada | 3 a. Introduction to the legal structure of Canada 7 1. Historical background 7 2. Federal and provincial jurisdiction 8 3. Branches of government 8 4. Common law and civil law traditions 9 b. Business structures 10 1. Sole proprietorship 11 2. Partnership 11 3. Corporation 11 4. Branch operations 12 5. Joint venture 13 c. Securities law and corporate governance 14 1. Distribution of securities 15 2. Listing in Canada 15 3. Initial public offerings 15 4. Continuous disclosure requirements 16 5. Civil liability 16 6. Financial reporting requirements 17 7. Shareholder meetings 17 8. Expedited public financings and private placements 17 9. Prospectus-exempt distributions 17 10. Early warning reporting 18 11. Take-over bids 18 12. Insider reporting 19 13. Insider trading and tipping 19 14. Corporate governance 19 15. Québec 20 16. Dealer, adviser and investment fund manager registration requirements and exemptions 20 d. Secured financing 21 1. Banks 21 2. Other financial institutions 22 3. Security 22 e. Taxation 23 1. General tax rules 24 2. General application of Canadian tax to non-residents 26 3. Canadian taxation of a Canadian resident subsidiary 29 4. Canadian taxation of a branch operation in Canada 31 f. Mergers and acquisitions 34 1. Planning a private M&A transaction 35 2. Regulatory approvals 36 3. Tax matters 36 4. Employment and labour matters 36 g. Employment law 39 1. The contractual nature of the employment relationship 40 2. Termination of employment 40 3. Duty of confidentiality 42 4. Restrictive covenants 43 5. Legislation governing the employment relationship 43 6. Labour relations 47 7. Public health insurance 48 8. Workers’ compensation 48 9. Employment Insurance 49 10. The Québec Charter of the French Language 49 table of contents 4 | doing business in Canada h. Immigration and work permit considerations 50 1. Canada’s Immigration and Refugee Protection Act (IRPA) 51 2. Canada’s entry and work permit rules: A general overview 51 3. Labour Market Impact Assessments (LMIAs) through Service Canada 51 4. LMIA-exempt work permit categories 52 5. Permanent resident status 54 6. Provincial nominee programs 55 7. Other immigration issues 55 8. Other considerations 56 9. Conclusion 56 i. Competition and antitrust law 57 1. Mergers 58 2. Criminal matters 60 3. Reviewable practices 61 j. Regulation of foreign investment 65 1. Canadian business 66 2. Foreign investor 66 3. Acquisition of control 66 4. Review thresholds 67 5. Review 69 6. National security 70 7. State-owned enterprises 70 8. Sector-specific legislation 70 k. International trade 71 1. Importation of goods 72 2. Anti-dumping and countervailing duties 72 3. Export controls and sanctions 73 4. Controlled goods regime 75 5. Investor-state disputes 75 6. Canada’s blocking legislation: The Foreign Extraterritorial Measures Act 75 7. Proactive trade compliance 75 l. Environmental protection 76 1. Federal environmental laws 77 2. Provincial environmental laws 79 3. Municipal measures 80 4. Common law 80 m. Real estate and urban development 81 1. Foreign investment 82 2. Investment vehicles 82 3. Acquisitions and dispositions 83 4. Due diligence 83 5. Title insurance 84 6. Land-use planning 84 7. Leasing 85 8. Financing 85 9. Environmental concerns 86 10. Environmental risk assessment 86 11. Development controls 87 12. Real estate broker and mortgage broker legislation 87 n. Intellectual property 88 1. Copyright 89 2. Patents 91 3. Trademarks 96 4. Enforcement of intellectual property rights 98 o. Privacy law 100 1. The privacy landscape in Canada 101 2. Employers 102 3. Reporting privacy breaches 102 4. Cross-border transfers and outsourcing 104 5. Enforcement 104 p. Advertising and marketing 105 1. Packaging and labelling 106 doing business in Canada | 5 2. “Product of Canada” and “made in Canada” claims 106 3. IP and copyright 106 4. Environmental claims 107 5. Contests and promotions 107 6. “Sale” claims 107 7. Puffery and hyperbole 108 8. Canadiana issues 108 9. Advertising in Québec 108 10. Penalties for false and misleading advertising 109 11. Private remedies for false and misleading advertising 109 12. Canada’s Anti-Spam Legislation 109 q. Canada’s Anti-Spam Legislation 110 1. Overview 111 2. Commercial electronic messages (CEMs) 111 3. Jurisdiction 111 4. Consent 111 5. Email disclosure requirements 113 6. Exemptions 113 7. Use of third-party lists 114 8. Amendments to the Competition Act and the Personal Information Protection and Electronic Documents Act (PIPEDA) 114 r. Bankruptcy and restructuring 115 1. Legislation and court system 115 2. Restructuring 116 3. Receiverships 117 4. Bankruptcy 118 s. Lobbying 121 1. Registrable communications 122 2. Lobbying 122 t. Franchise law 125 1. Franchise disclosure legislation 126 2. The disclosure obligation 126 3. The duty of fair dealing 127 4. The right of association 128 5. Province of Québec 128 u. Oil and gas 129 1. Land ownership in Canada 130 2. Typical agreements used in the Canadian oil and gas industry 131 3. Protecting your interest 132 v. Mining 133 1. Exploration and mining rights 134 2. Foreign investment 134 3. Tax issues 135 4. Raising capital 135 5. Environmental, health and safety regulations 136 6. Aboriginal considerations 136 6 | doing business in Canada doing business in Canada | 7 a | introduction to the legal structure of Canada 1. Historical background Unlike the United States, Canada was not created by a unilateral declaration of independence from the colonial occupation of England. There was no “Canadian revolution” or other similar act that dramatically gave birth to an autonomous and independent Canada. Rather, Canada gained independence from England through a gradual legislative and political process. Canada’s principal constitutional document is the Constitution Act, which includes the Canadian Charter of Rights and Freedoms. 8 | doing business in Canada 2. Federal and provincial jurisdiction Canada is a federal state with a federal government based in the capital city of Ottawa, Ontario. There are 10 provinces and three territories, and, accordingly, 10 provincial governments and three territorial governments, each based in the various provincial and territorial capitals. The powers of both levels of government are outlined in the Constitution Act, 1867. In summary, the federal government is empowered to deal with issues concerning the “peace, order and good government of Canada,” which, for the most part, means issues of national importance that transcend provincial borders. These matters include national defence, foreign affairs, criminal law, immigration, banking, the national currency, international trade and intellectual property. The provinces are empowered to deal with issues that are more regional in nature, such as direct taxation within the province, natural resources, education, social programs (such as welfare and health care), and rights related to private property and commerce. There are also many areas of joint federal-provincial responsibility. While the territorial governments are subject to federal jurisdiction, they have authority over a range of local government programs and initiatives. In keeping with the separation of federal and provincial jurisdiction, the Criminal Code, the Bankruptcy and Insolvency Act, the Competition Act, the Bank Act, the Patent Act and the Trade-marks Act are federal statutes having force and effect throughout the country. However, many of the laws that affect Canadians on a day-to-day basis are within provincial and territorial jurisdiction. For instance, matters relating to property are within provincial jurisdiction, so each of the provinces has its own regimes for land registration and personal property security. All of the provinces except Québec now have a personal property security regime that is similar, though not identical, to the corresponding provisions of the U.S. Uniform Commercial Code. 3. Branches of government The government’s power in Canada is separated into three branches: legislative, executive and judicial. a. Legislative power Federally, the legislative branch is the Parliament of Canada. Parliament consists of two houses: the House of Commons and the Senate. The Senate, like the British House of Lords, has effectively lost all legislative power. Senators in Canada are appointed by the prime minister rather than democratically elected. The result is that the House of Commons is the sole source of federal legislative authority in Canada. Members of the House of Commons (known as members of Parliament or “MPs”) are elected for a term of five years, but are eligible for re-election. The political party with a majority of seats in the House of Commons forms the Government of Canada, and the leader of this party is the prime minister of Canada. Each province and territory also has a legislature to which members are elected. The leader of a province is known as a provincial premier. The heads of territorial legislatures are known as leaders. b. Executive power The prime minister (or the provincial premier or the territorial leader, as the case may be) appoints a cabinet, which consists of selected members of the respective legislature. Each member of cabinet is known as a minister and is given a portfolio of governmental responsibility, which primarily involves directing the relevant bureaucracy. The cabinet and associated bureaucracies form the Canadian executive branch of government. It is in this sense that legislative and executive authority are combined in the offices of the prime minister and the cabinet. doing business in Canada | 9 c. Judicial power The Supreme Court of Canada is the final court of appeal for all lower courts in Canada. Appeal is available only by leave. There are two separate court systems that exist beneath the Supreme Court of Canada. The first, the Federal Court system, hears cases on issues that come solely under federal jurisdiction. The second is formed by the provincial court systems, which deal with civil and criminal matters within the province. The provincial court systems usually include trial and appellate divisions. The Canadian Charter of Rights and Freedoms (the Charter) is the Canadian equivalent to the U.S. Bill of Rights. Although the Charter was not introduced into the Canadian Constitution until 1981, it has had a significant impact on the balance of power within Canada. Parliament is no longer the supreme power, as its actions have become subject to judicial scrutiny in a manner that did not exist prior to 1981. Any court in Canada can review any act of Parliament if there are grounds to believe the act violates the Charter. If there is a violation, the court is empowered to declare the act, or any of its constituent parts, beyond the power of the government that enacted it and therefore of no legal force. No provision of any act, even prior to the enactment of the Charter, may derogate from the guarantees it affords. However, in certain circumstances, some rights guaranteed by the Charter can be overridden by Parliament. All that is necessary is an express declaration that the law will operate notwithstanding the Charter. This is contained in Section 33 of the Charter and is known as the “notwithstanding clause.” The Québec Charter of Human Rights and Freedoms applies in Québec, not only to the parliament, but also to persons, corporations, partnerships and trusts. 4. Common law and civil law traditions The Canadian legal system is based on the common law tradition of the United Kingdom. In this respect, common law principles in Canada, such as those found in the law of tort, contract or property are quite similar to those of the United States and the United Kingdom. Québec stands as an exception, as its legal system evolved from the French civil law system. In Québec, as a general rule, the civil law system applies to private law matters while the common law system applies to public law situations. Thus, to the extent Québec is empowered by the Canadian Constitution to make laws, Québec uses a civil code (the Civil Code of Québec). Learn more about Gowlings’ services at gowlings.com 10 | doing business in Canada b | business structures As is the case in most common law jurisdictions, a person or entity wishing to operate a business in Canada can choose from several different business structures. The appropriate structure is determined on a case-by-case basis depending on the nature and location of the business, liability and general issues of exposure, the entity’s financing requirements, and tax considerations. There are three basic structures available: sole proprietorship, partnership and corporation. Foreign businesses may also conduct business within Canada through branch operations or a joint venture. doing business in Canada | 11 1. Sole proprietorship A sole proprietorship is employed when the business is owned and operated by the individual responsible for the business and its liabilities. This structure is extremely simple with few legal complications. However, some requirements, such as licensing, may exist. This structure is best suited for small enterprises, as all benefits and liabilities of the business flow through to the individual. One shortcoming is that the liability of the enterprise is the same as the liability of the individual operating the business. Unlike a corporation, assets of the sole proprietor are at risk in honouring the liabilities of the enterprise. Another shortcoming is that opportunities for tax planning are limited, as the profits of the business flow through to the individual and are taxed in his or her hands. 2. Partnership A partnership exists when two or more individuals or corporations carry on business together with a view to profit. In Canada, the provinces have exclusive jurisdiction with respect to partnerships, and accordingly, each province has enacted specific partnership legislation. The common law provinces (all provinces excluding Québec) recognize the general partnership and the limited partnership, while Québec also recognizes the undeclared partnership. An undeclared partnership is deemed to exist when the partnership does not make the required declaration of partnership as prescribed by legislation concerning the legal publication of partnerships. In Québec, a partnership is a contract by which two or more individuals or corporations agree to carry on an activity that may be the operation of an enterprise by providing property, knowledge and/or activities, and by sharing the profits. a. General partnership Each partner is liable for the debts and obligations of the partnership on an unlimited basis. In Québec, creditors must first seek reimbursement from the property of the partnership so that the personal property of the partner is not applied to the payment of creditors of the partnership until its own creditors have been paid. b. Limited partnership A limited partnership is composed of at least one general partner and any number of limited partners. General partners manage the affairs of the partnership and are liable to an unlimited extent to creditors of the partnership. Liability of the limited partners is limited to the amount of capital contributed. Limited partners must not participate in the management of the partnership or they risk losing their limited liability. c. Undeclared partnership The undeclared partnership is a de facto partnership. Each partner retains ownership of the property constituting the partner’s contribution to the undeclared partnership. Partners are also liable for the debts and obligations of the other partners on an unlimited basis, provided the debts have been contracted for the use or operation of the common enterprise. For tax purposes, a partnership is not recognized as a distinct entity. Rather, the profits and losses of the partnership flow through, on a proportionate basis, to the partners who must pay tax on these amounts in their personal tax returns. 3. Corporation A corporation is a legal entity distinct from its shareholders. In Canada, a corporation is endowed with all the legal abilities of a natural person in that it can own property, carry on business, borrow, lend, sue or be sued. Shareholders of the corporation do not own the business or assets of the corporation and, except in certain exceptional circumstances, are not personally responsible for its liabilities. Corporations offer limited liability, ease of transfer of assets and perpetual existence. Since a corporation is a distinct legal entity, it must pay tax on its income. The corporation is by far the most common business structure in Canada. 12 | doing business in Canada a. Incorporation under federal or provincial law A corporation may be created under either federal or provincial law. Generally, if the business of the corporation will be conducted in only one province, the company is incorporated provincially. Companies that wish to carry on a business subject to federal regulation must be incorporated under federal law and sometimes, such as in the case of banks, under industry-specific legislation. In addition, particular local nuances in the provincial statutes may result in a foreign investor favouring federal incorporation. b. Public disclosure The scope of public disclosure required of a corporation varies widely with the jurisdiction of incorporation, the type of business being conducted and whether the corporation is a public-offering or non-offering entity. c. Officers, directors and shareholders In Canada, as in other common law jurisdictions, a corporation is composed of three groups: officers, directors and shareholders. In small, private corporations, the same individual or individuals may, at different times, act in all three capacities. In public corporations, this is typically not the case. The officers of a corporation are responsible for the daily management of its affairs. The directors of the corporation appoint the officers, and the shareholders of the corporation elect the directors. While the board of directors is not responsible for the day-to-day affairs of the business, it is charged with managing the business of the corporation. There are liabilities attached to the office of director, but insurance may be purchased to shield members of the board from certain liabilities. d. Residency requirements Foreign investors must consider residency requirements. The federal statute requires that at least 25 per cent of a corporation’s directors be resident in Canada. Where there are fewer than four directors, the Canada Business Corporations Act requires that one director be resident in Canada. Each province has different residency requirements that investors wishing to incorporate in Canada should consider. e. Unlimited liability companies An unlimited liability company (ULC) can be incorporated under the provincial laws of Alberta, British Columbia and Nova Scotia. Unlike shareholders of other corporations, shareholders of a ULC are personally liable for the liabilities of the company. These entities are generally used by foreign investors to gain advantageous tax treatments. Though ULCs are taxed as corporations in Canada, they are eligible for “checkthe-box” election in the United States and may be taxed as either a corporation or a flow-through entity. Corporate legislation in each of the three provinces differs. A number of factors must be considered when determining where to incorporate, including costs, the extent of shareholder liability, requirements concerning director residency or head office location, and any restrictions imposed on the ability to finance third parties or to pay dividends. 4. Branch operations A foreign corporation may conduct business within Canada through a branch operation after obtaining a licence or otherwise registering in the province(s) where it carries on business. Although the definition of “carrying on business” varies from province to province, a corporation may be found to be carrying on business if: • It has a resident agent, representative, warehouse, office or place where it carries on its business in a province. • It holds an interest in real property located in a province other than by way of security. • The type of business to be carried on is one that the province has chosen to regulate. Generally, a corporation does not carry on business in Canada merely because it takes orders for or buys or sells goods, wares and merchandise, or offers or sells services of any type, by use of travellers or through advertising, correspondence or the Internet. Branch offices are popular because they enjoy certain tax doing business in Canada | 13 advantages. However, because a branch office is not a legally distinct entity from the parent company, the parent will be exposed to the debts, liabilities and obligations of the Canadian operation. There are penalties for failure to obtain a licence where required. Furthermore, without a licence, a foreign corporation might not be capable of maintaining a proceeding in a court or tribunal in respect of a contract made by it. The procedure for obtaining a licence is generally uncomplicated, provided the name of the corporation is not similar to that of any other corporation or business entity in the jurisdiction. 5. Joint venture The term “joint venture” describes any arrangement where two or more persons agree to contribute goods, services or capital to a common commercial enterprise. With no statute currently governing joint ventures in Canada, they are governed by the contracts arrived at between private parties. The terms of collaboration, the nature of co-venturers’ respective contributions, and the arrangements regarding management and sharing of profits are typically set out in the contract. Learn more about Gowlings’ services in this area at gowlings.com/businesslaw 14 | doing business in Canada c | securities law and corporate governance Canada currently does not have a federal securities regulator as other major capital markets do. Rather, each province and territory has its own securities regulatory authority and its own set of laws, regulations, rules and policies. The 13 provincial and territorial securities regulators work together to harmonize regulation across the country through rules known as “national instruments.” Also, issuers can often rely on a “passport” system that allows them to deal directly with only one or two regulators. doing business in Canada | 15 Efforts by the federal government to establish a national securities regulatory system were complicated and delayed by a decision of the Supreme Court of Canada in late 2011, which determined that a thenproposed federal statute governing securities was unconstitutional. The federal government and the provinces of British Columbia, Ontario, New Brunswick and Saskatchewan are currently pursuing a co-operative capital markets regulatory system. 1. Distribution of securities In Canada, unless otherwise exempt, a distribution of securities cannot be completed without the filing of a prospectus. This requirement is intended to protect investors. A prospectus is a comprehensive disclosure document providing detailed information on the issuer’s business and the securities being offered. Furthermore, if the distribution of securities is made by an entity that is engaged in the business (or holding itself out as engaging in the business) of trading in securities, the entity must be registered as a dealer. This helps to ensure that securities are sold by qualified people who have a duty to know their clients and assess the suitability of their clients’ investments. Reporting issuers (i.e., public companies) may avoid prospectus requirements by distributing securities to “accredited investors” (i.e., specified institutional investors and individual investors who meet a certain threshold of net worth or taxable income). Private corporations in Canada may avoid prospectus requirements by relying on a “private issuer” prospectus exemption. This exemption applies in cases where the corporation has fewer than 50 shareholders, securities that are closely held by a prescribed group of non-public investors (i.e., family, close friends and business associates, and accredited investors), and a restriction on the transfer of the corporation’s securities. 2. Listing in Canada The Toronto Stock Exchange (TSX) and the TSX Venture Exchange (TSX-V) are the two major Canadian public stock exchanges. Lately, there has also been an increasing number of junior issuers listing on the recently rebranded Canadian Securities Exchange (CSE). In Canada, opportunities exist for corporations to go public and access the capital markets at a much earlier stage than in other markets, such as the U.S. In some circumstances, the CSE and the TSX-V (through a two-tiered system with different levels of listing requirements) facilitate listing at a pre-revenue stage. Many non-Canadian corporations list in Canada as a first step toward listing in the U.S. 3. Initial public offerings The process for completing an initial public offering (IPO) in Canada generally takes three to four months. An issuer must first file a preliminary prospectus with securities regulators for their review and comment, followed by a final prospectus. A prospectus must contain “full, true and plain disclosure of all material facts” related to the issuer’s business and the securities being offered. It must also include three years of audited financial statements prepared in accordance with International Financial Reporting Standards (IFRS) or U.S. Generally Accepted Accounting Principles (GAAP) with a reconciliation to IFRS. Securities regulators are required to provide their comments within 10 business days of the date the preliminary prospectus is filed. An issuer is not permitted to file a final prospectus until all comments from regulators are settled. Recent amendments to the prospectus rules provide significantly greater clarification on the rules governing the pre-marketing and marketing of the public distribution of securities, including with respect to marketing materials and road shows. An issuer planning a public offering in multiple Canadian jurisdictions will generally rely on the “passport” system. Under the passport system, a preliminary prospectus filed and cleared with the issuer’s principal regulator is automatically accepted by the other provincial regulatory systems. An issuer that becomes listed in Canada upon completion of an IPO, or that otherwise becomes a reporting 16 | doing business in Canada issuer in Canada (e.g., through acquisition of a Canadian public company by way of share exchange), will be required to comply with Canadian requirements on timely and periodic disclosure, financial reporting, and corporate governance, as well as the policies of the exchange on which its securities are listed. 4. Continuous disclosure requirements The continuous disclosure obligations of a reporting issuer fall into two categories: periodic disclosure and timely disclosure. Periodic disclosure occurs at regular intervals and consists of quarterly and annual financial statements, quarterly and annual management discussions and analysis, an annual information form (for TSX issuers), and shareholder meeting materials. In Canada, reporting issuers are required to file their continuous disclosure and timely disclosure documents on sedar.com, a free electronic database for investors and others. Canadian securities legislation also requires insiders of reporting issuers to report their security holdings and any direct and indirect transactions involving those holdings. The principal requirement for timely disclosure is that a reporting issuer must issue and file a press release “forthwith” when a material change in its affairs occurs or when material information relating to its affairs becomes known to management. A “material change” is a change in the business, operations or capital of the reporting issuer that would reasonably be expected to have a significant effect on the market price or value of any of the securities of the reporting issuer. The definition also includes situations where a decision to implement a change referred to previously is made by the board of directors or other persons acting in a similar capacity, or by senior management of the reporting issuer who believe that confirmation of the decision by the board of directors, or other such persons acting in a similar capacity, is probable. 5. Civil liability Breach of timely and continuous disclosure requirements, including a misrepresentation in publicly disclosed communications, can result in civil and administrative proceedings against a reporting issuer. Possible consequences include being placed on a list of defaulting reporting issuers maintained by most securities regulatory authorities, the issuance by the securities regulatory authorities of a temporary or permanent cease-trade order, or delisting by the TSX or the TSX-V. Reporting issuers in all Canadian jurisdictions have liability to investors under Canadian securities legislation for damages for misrepresentations in a publicly disclosed communication (such as an information circular or public oral statement) or failure to make timely disclosure. Plaintiffs are deemed to have relied on either the misrepresentation or on the reporting issuer having complied with its disclosure obligations. However, provincial securities laws do set limits on liability and provide for defences. Leave of the court is required for an action to proceed. Court approval is also required for settlements, and costs are awarded to the prevailing party as determined by the court. In addition to the reporting issuer, directors and officers of the reporting issuer, and other persons who knowingly influence the release of a misrepresentation, also have liability to investors under Canadian securities legislation. Generally, a defendant will not be liable for a misrepresentation in a publicly disclosed communication if the defendant proves that: • Before the release of the information containing the misrepresentation, the defendant conducted or caused to be conducted a reasonable due-diligence investigation. • At the time of the release, the defendant had no reasonable grounds to believe the document or statement contained the misrepresentation. Similarly, a defendant will not be liable for breaches of timely disclosure obligations if the defendant shows that, before the failure to make timely disclosure first occurred, the defendant conducted or caused to be conducted a reasonable due-diligence investigation, doing business in Canada | 17 and that the defendant had no reasonable grounds to believe that the failure to make timely disclosure would occur. 6. Financial reporting requirements An issuer listed on the TSX must file audited annual comparative financial statements accompanied by an auditor’s report with securities regulators within 90 days of its financial year-end. For an issuer listed on the TSX-V or CSE, the time period is 120 days. The board of directors must approve these financial statements before they are filed. Interim comparative financial statements are required on a quarterly basis and must be filed with securities regulators within 45 days of the end of the financial period for TSX-listed issuers and within 60 days for issuers listed on the TSX-V or CSE. These statements are generally reviewed by auditors but are not required to be audited. A reporting issuer is required to deliver annual or interim financial statements to security holders only upon request, provided the reporting issuer has sent a request form to each security holder. 7. Shareholder meetings A meeting of shareholders of a corporate issuer must be held each year, generally no later than six months following its fiscal year-end. Typically, a corporate issuer must mail a notice of a shareholder meeting to all registered shareholders entitled to vote at the meeting, to the directors of the corporation and to the auditors at least 21 days prior to the meeting. Along with the notice, reporting issuers are also required to send to shareholders a management information circular describing the matters to be voted on at the meeting and providing other corporate disclosure and proxy voting instructions. The notice and all documentation related to the meeting must be mailed concurrently to all holders of non-voting equity securities. In lieu of mailing these materials to shareholders, a new “notice and access” regime permits these materials to be made available and accessible to shareholders through the Internet, so long as certain conditions are satisfied and notice is provided to shareholders. The requirements of applicable corporate statutes must also be considered. 8. Expedited public financings and private placements A reporting issuer that has established a minimum 12-month continuous disclosure record in Canada and has filed an annual information form (AIF) is generally eligible to complete a public offering on an expedited basis by filing a short form prospectus. An AIF is a disclosure document filed within 90 days of an issuer’s financial year-end that contains the corporate and nonoffering disclosure found in a long form prospectus. Only TSX-listed issuers are required to file an AIF. A short form prospectus describes the securities being offered and incorporates by reference certain documents previously prepared and filed by the issuer, such as the most recent AIF, management information circular, annual and interim financial statements, and any material change reports. The short form prospectus is usually cleared by securities regulators across Canada within one week. 9. Prospectus-exempt distributions Certain exemptions permit issuers to distribute securities without filing a prospectus. Most notably, these exemptions include distributions to accredited investors and employees, and distributions of securities with an acquisition cost to the purchaser of not less than $150,000 in cash. Examples of accredited investors include: • Registered investment advisers and dealers, financial institutions, governments and government agencies, insurance companies, pension funds, and certain investment funds. • Individuals and corporations that meet certain income or financial asset thresholds. 18 | doing business in Canada Prospectus exemptions are also available for certain non-financing distributions, such as securities exchange take-over bids and distributions made in connection with a business combination or a reorganization transaction. Prescribed notice of a prospectus-exempt distribution of securities must be filed with the applicable securities regulators in certain circumstances, together with the payment of a prescribed filing fee. If an offering memorandum is delivered to a Canadian investor in respect of such prospectus-exempt distribution, certain provincial securities regulators require it to be filed as well. 10. Early warning reporting A person who acquires 10 per cent of the voting or equity securities of a reporting issuer (including convertible securities and rights to acquire voting or equity securities) is required to comply with the “early warning” provisions of Canadian securities law. These provisions include the obligation to issue a press release and to file an early warning report. The purpose of the early warning report is to disclose to the market that a particular investor holds a significant ownership stake in the reporting issuer and to provide information on the investor’s intentions with respect to the investment. A further report and press release are required for each additional two per cent of the voting or equity securities acquired. Relaxed early warning reporting requirements are available to certain eligible institutional investors who declare no intention to acquire over 20 per cent of an issuer’s securities. Amendments to the early warning reporting requirements were proposed in 2013 to reduce the reporting threshold to five per cent, to require additional reporting for both increases and decreases in ownership of at least two per cent, to include certain equity derivative positions in calculating the reporting threshold, and to enhance the content of the early warning disclosure that must be publicly filed. To date, these amendments have not been passed. Subject to certain exemptions, a person is prohibited from acquiring greater than 20 per cent of the voting securities of a reporting issuer unless the person first complies with the take-over bid rules of Canadian securities law, which require that an offer to acquire securities be made to all shareholders. 11. Take-over bids A take-over bid is an offer made by a person (or group of persons acting in concert) to acquire from securities holders (i.e., not from treasury) voting or equity securities of any class of an issuer that, together with outstanding securities of the class already owned, exceeds 20 per cent of the outstanding voting or equity securities of such class. Generally, a take-over bid is made by mailing a takeover bid circular to all shareholders and filing it with the applicable securities regulators. The take-over bid circular describes the terms and conditions pursuant to which the offeror will purchase the issuer’s securities from shareholders and, where the consideration includes securities, also contains disclosure relating to the offeror and the securities being offered. A minimum threshold for shareholder acceptance is a typical condition of a take-over bid, with 66 ²/3 per cent and 90 per cent being the most common thresholds. An acceptance level of 66 ²/3 per cent generally permits the offeror to eliminate the remaining shareholders who have not tendered their shares under the take-over bid pursuant to a second-stage transaction, such as an amalgamation. If an offeror acquires 90 per cent of the shares of a class not owned by the offeror, the acquirer is permitted by most Canadian corporate statutes to compulsorily acquire the remaining shares. There are very few exemptions from the take-over bid rules. The most useful exemption requires that securities be purchased by private agreement from no more than five sellers in respect of an offer to acquire that is not made generally to shareholders at a price not exceeding 115 per cent of the market price of the securities. Generally, the market price is equal to the average closing price of the securities on the stock exchange during the 20 trading days preceding the doing business in Canada | 19 date of the agreement. Another exemption permits the purchase of no more than five per cent of a class of securities during any 12-month period at prices not exceeding the market price of the securities. 12. Insider reporting Directors, chief executive officers, chief financial officers and chief operating officers of a reporting issuer, of a significant shareholder (those holding more than 10 per cent of the voting shares) of a reporting issuer, or of a major subsidiary of a reporting issuer, as well as significant shareholders of a reporting issuer, are generally considered to be “reporting insiders” and, under Canadian securities laws, are required to file insider reports. Other employees of a reporting issuer, by virtue of their responsibilities or their access to information and their ability to exercise power or influence, may also be considered “reporting insiders.” Insider reports are intended to provide the marketplace and regulators with disclosure relating to a reporting insider’s direct or indirect beneficial ownership, control or direction over securities of the reporting issuer. A reporting person must file publicly available reports within 10 days of becoming a reporting insider and within five days of subsequent changes in security ownership. 13. Insider trading and tipping Insider trading involves buying or selling a security of a reporting issuer with knowledge of material information about the reporting issuer that has not been publicly disclosed. Tipping involves providing material undisclosed information to a person other than in the necessary course of business. Insider trading and tipping are serious offences, and conviction in Ontario can result in a fine of up to $5 million, imprisonment for up to five years less a day and/or banishment from trading in securities. Defendants have a defence to an insider-trading or tipping allegation if they prove that they reasonably believed that such material information had been generally disclosed. 14. Corporate governance In response to the U.S. Sarbanes-Oxley Act of 2002, Canada’s securities regulatory authorities have promulgated a series of corporate governancerelated instruments. For example, TSX-listed issuers are required to have an audit committee composed of at least three directors, all of whom must be both “independent” and “financially literate.” Issuers listed on the TSX-V are required to have an audit committee composed of at least three directors, the majority of whom are not officers, employees, or control persons of the issuer or any of its associates or affiliates. The CSE provides greater flexibility on audit committee composition. 20 | doing business in Canada In addition, these instruments set out a list of nonbinding corporate governance guidelines that reporting issuers are encouraged to consider in developing their own practices. While compliance with the guidelines is voluntary, mandatory disclosure is imposed on reporting issuers with respect to whether or not their corporate governance practices comply. Other corporate governance recommendations include: • A board consisting of a majority of independent directors with an independent chair or lead director, and with the independent directors holding regularly scheduled meetings at which non-independent directors and members of management are not in attendance. • Written board and board-committee mandates that outline the functions and responsibilities of the board and its committees. • Clear position descriptions for the chair of the board, the chair of each board committee and the chief executive officer. • A written code of business conduct and ethics. • Nominating and compensation committees composed entirely of independent directors. • Orientation for new directors and continuing education opportunities for all directors. • Regular board, board committee and individual director assessments regarding effectiveness and contributions. In 2014, Ontario proposed amendments to the corporate governance disclosure requirements that would require a TSX-listed issuer to provide annual disclosure relating to women on its board and in senior management, as well as the issuer’s policies on director term limits. 15. Québec Documents of a contractual nature, such as prospectuses and take-over bid circulars (tender offer materials), must be translated and sent to Québec residents in French. Québec is also the only jurisdiction in Canada that currently has specific legislation regulating derivatives. 16. Dealer, adviser and investment fund manager registration requirements and exemptions Any person or company that engages in (or holds itself out as engaging in) the business of trading in securities in Canada (including acting in furtherance of a trade, such as the marketing of securities) must be registered as a dealer in each province or territory where such business activities are undertaken. A person or company registered as a broker or dealer in a jurisdiction outside Canada may rely on an “international dealer” exemption, which, subject to certain pre-notification filings (and the payment of an annual fee if trading in Ontario and/or Saskatchewan), generally permits a dealer to trade in non-Canadian securities to Canadian institutional investors and ultra-high-net-worth individuals. Portfolio managers with Canadian clients must be registered as advisers in the Canadian jurisdictions where the clients reside. Portfolio managers registered in this manner, or those that are exempt from registration in their home jurisdictions, may rely on an “international adviser” exemption, which, subject to certain pre-notification filings (and the payment of an annual fee if advising Ontario and/or Saskatchewan clients), generally permits them to act for institutional investors and ultra-high-net-worth individuals, as long as less than 10 per cent of their revenue is derived from Canadian clients. The administrative fund managers of Canadian and certain non-Canadian investment funds (including private hedge funds) responsible for directing the business, operations or affairs of an investment fund (which may or may not be the same entity as the fund’s investment adviser/portfolio manager) must be registered as investment fund managers and meet certain minimum risk-free capital, insurance and other compliance requirements. Learn more about Gowlings’ services in this area at gowlings.com/cfma and gowlings.com/anticorruption doing business in Canada | 21 d | secured financing 1. Banks The banking system in Canada is sophisticated and well-regulated. Bank loans are available from domestic banks as well as foreign bank subsidiaries operating in Canada or Canadian branches of foreign banks. The six largest Canadian banks command most of the market and provide debt financing, cash management and investment services across the country. Some of these banks also have subsidiaries operating in the United States and outside of North America. 22 | doing business in Canada Banks in Canada are regulated under the Bank Act (Canada), which authorizes and governs domestic banks (Schedule I), foreign subsidiary banks that are controlled by eligible foreign institutions (Schedule II) and foreign bank branches of foreign institutions (Schedule III). With increasing competition in this area, a business borrower has a wide range of financing sources and options. 2. Other financial institutions There are also a number of non-bank lenders in Canada that provide debt financing, usually in the form of asset-based loans, term loans or mezzanine debt. Among these institutions are trust and loan companies, credit unions, caisses populaires (primarily in Québec) and, in some instances, insurance companies. 3. Security Loans can be unsecured or, more commonly, secured against the property of the borrower and any guarantors. There are no statutory financial assistance rules in Canada that prohibit a corporation from giving guarantees to a lender in respect of loans made to a corporation’s subsidiary or parent. Security can be taken against personal property (including accounts receivable, securities and intellectual property) and against real property. a. Personal property Each of the common law provinces and territories has enacted a personal property security act (PPSA) that governs the creation, perfection and enforcement of personal property security interests. PPSA legislation is similar to Article 9 of the Uniform Commercial Code in the U.S., although there are some differences in handling the perfection of a security interest in certain types of assets like deposit accounts and intellectual property. Each province has its own electronic registry system to record PPSA security interests granted by borrowers and guarantors over their personal property. Although the PPSA legislation in each of the common law provinces and territories is similar in concept, the provisions and requirements vary slightly. Consequently, security given by corporate borrowers with assets in multiple provinces and territories will need to comply with the statutes of each of those jurisdictions, and PPSA registrations in multiple provinces and territories may be necessary. The choice of the province or territory of registration depends on where the chief executive office of the relevant borrower or guarantor is located, where the assets are located, and what types of assets are subject to the security interest. The Civil Code of Québec governs equivalent matters in Québec, where security over personal property is generally taken by way of a movable hypothec, with or without delivery. Movable hypothecs must be registered in the province’s Register of Personal and Movable Real Rights (RDPRM). Québec also has particular requirements for the execution of instruments (e.g., certain instruments must be executed in front of a notary), and certain formal requirements for security documents and the timing of their registration that differ from those of the common law provinces and territories. b. Real property A lender may take security over real property by way of a charge/mortgage of land, a debenture or, if real property is to be secured in Québec, an immovable hypothec. Most provinces and territories have an electronic land registry system to record mortgage and other secured interests in real property. Although these registry systems are similar in concept, each jurisdiction has certain provisions and requirements. c. Bank Act (Canada) security Pursuant to the Bank Act (Canada), Schedule I, Schedule II and Schedule III banks also have the ability to take security from certain types of borrowers over certain types of property specified in the Act, such as raw materials, work in progress or finished goods in the inventory of businesses. Certain formal requirements must be met in order to take Bank Act (Canada) security. Special security documents must be executed by the borrower to obtain this security, and a separate registration system is involved. Bank Act (Canada) security is available only to secure the repayment of direct loans and advances made to a borrower, and is not available to secure a guarantor’s liabilities. Learn more about Gowlings’ services in this area at gowlings.com/financialservices doing business in Canada | 23 e | taxation In Canada, an income tax is levied by both the federal and provincial governments, and a variety of other taxes, including federal and provincial value-added and sales taxes, are also imposed. This section focuses on income tax and discusses some of the principal income tax considerations that apply to non-residents of Canada who wish to invest or carry on business in Canada. Although a wide variety of business structures are available, the following discussion mainly addresses the income tax considerations that apply to Canadian subsidiaries and branch operations. 24 | doing business in Canada Since Canadian income tax rules are complex and subject to change, the information here is not intended to be comprehensive, and this discussion is not intended to constitute tax or legal advice. 1. General tax rules a. Residence in Canada The application of Canadian income tax is based on a taxpayer’s residence. Although residence is generally a question of fact, there are a few specific rules. For example, a corporation is deemed to be resident in Canada for purposes of the Income Tax Act (ITA) if it was incorporated under Canadian federal or provincial law any time after April 26, 1965. A corporation incorporated outside of Canada can also be resident in Canada if its “central management and control” is located in Canada. In the absence of evidence to the contrary, the location of a corporation’s central management and control — that is, the location of its highest level of corporate control — is generally understood to be the place where the corporation’s board of directors meet. However, the courts and tax administrations examine the facts in detail to determine the location where the true management and control is exercised. b. Sources of income Canadian resident corporations are taxable on their worldwide income from every source, including business income, property income and gains arising on the disposition of capital property (in other words, capital gains). Income is usually classified as business income if a certain degree of commercial activity is present. Property income is derived from more passive activities, such as the collection of interest, dividends, rents and royalties. Presently, only 50 per cent of a capital gain is taxable, so the classification of property as capital or otherwise for tax purposes is important. Property is generally considered to be capital property if it is held as an investment and not as a trading asset. For example, the building in which a business has its offices would normally be considered capital property, as would equipment or machinery that is used by the business in the course of earning income. However, property that is acquired for the purpose of generating a profit on resale will generally be considered inventory rather than capital property. c. Canadian-controlled private corporations A Canadian-controlled private corporation (CCPC) receives preferential tax treatment, including reduced tax rates on a specified amount of its active business income. Special planning is required if a non-resident wishes to carry on business in Canada through a CCPC. To qualify as a CCPC, a private corporation must not be controlled directly or indirectly by non-residents, public corporations or any combination of the two. A “private corporation” is essentially a corporation that (i) is resident in Canada, (ii) is not a public corporation and (iii) is not controlled by one or more public corporations (subject to certain limited exceptions). Control of a CCPC includes not only holding a sufficient number of shares to elect a majority of the directors, but also the ability to control the corporation in fact. In determining whether there is control by a non-resident or a public corporation, all shares held by non-residents and public corporations are aggregated. Therefore, even if 51 per cent of the voting shares of a corporation were widely spread among a very large number of non-resident persons or public corporations, the corporation would not be considered a CCPC. Where 50 per cent of the voting shares of a private corporation are held by a Canadian resident and 50 per cent of the voting shares are held by a non-resident, it may be possible for the corporation to qualify as a CCPC, provided that no other facts give the nonresident control. d. Withholding tax on passive income of non-residents The ITA imposes withholding tax at a rate of 25 per cent on the gross amount of certain payments made by a resident of Canada to a non-resident, including management fees, dividends, rents and royalties. doing business in Canada | 25 This rate may be reduced pursuant to an applicable tax treaty. Withholding tax is not imposed on arm’s-length interest payments unless the interest is “participating debt interest” (being, in general, interest determined by reference to receipts, sales, income, profits, or cash flow of the debtor or a related person). Furthermore, under the Canada-U.S. Income Tax Convention (1980), commonly referred to as the Canada-U.S. Tax Treaty, interest paid to a resident of the U.S. may be exempt from Canadian withholding tax even if the recipient does not deal at arm’s length with the payer. The 25 per cent withholding tax on dividends may also be reduced under an applicable tax treaty. For example, Article X(2) of the Canada-U.S. Tax Treaty provides for a withholding tax rate of five per cent on dividends paid or credited by a Canadian corporation to a corporation resident in the U.S. if the U.S. resident holds 10 per cent or more of the Canadian corporation’s voting shares. Otherwise, under the Canada-U.S. Tax Treaty, the withholding tax rate applicable to dividends is generally reduced to 15 per cent. In addition, Canada has eliminated the withholding tax on computer software and certain other intellectual property royalty payments under the Canada-U.S. Tax Treaty. e. Tax treaties In addition to reducing or eliminating withholding tax, most tax treaties with Canada generally provide that the business profits earned by non-residents from carrying on business in Canada are not subject to tax under the ITA except to the extent that such profits are attributable to a permanent establishment of the non-resident in Canada. Permanent establishments are discussed later in this section under “Canadian taxation of a branch operation in Canada.” f. Transfer pricing in non-arm’s-length transactions The ITA generally imposes tax on transactions between related parties based on the price and terms that would have applied between unrelated parties. The ITA adopts the “arm’s-length principle” in its transfer pricing rules to counteract the potential for abuse. The transfer pricing rules relate to all types of non-arm’s-length inter-company transactions involving property, services, intangibles and any cost-contribution arrangements such as research and development costsharing or management-fee cost allocations. Canadian taxpayers are taxed on their transactions with non-arm’s-length non-residents on the basis of terms similar to those that would have applied had the parties been dealing at arm’s length. Canadian taxpayers that transact with non-arm’s-length non-residents are also required to prepare and retain certain documentation under the ITA. Failure to do so may result in significant penalties if the terms of their transactions are ultimately held not to be arm’s-length terms. These rules apply to related persons and to parties who, as a matter of fact, do not deal with each other at arm’s length. g. General filing and reporting requirements In general, every corporation that is taxable in Canada must file a Canadian income tax return within six months of the corporation’s taxation year-end, regardless of whether the corporation has realized a profit and regardless of whether the corporation’s income is exempt from Canadian tax pursuant to the terms of a tax treaty. The ITA sets out penalties for failing to file or for providing incorrect or incomplete information on a return. Currently, the filing of consolidated Canadian income tax returns by related corporations is not permitted. Each corporation must file its own return and may not utilize any losses of related corporations to offset the income, although certain deductions may be transferred among members of qualifying corporate groups in limited circumstances. Corporations making specified payments, including wages and other remuneration, must submit periodic information returns detailing such payments and must remit withholding tax on such payments. Canadian resident corporations and foreign corporations carrying on business in Canada are also subject to reporting requirements in respect of transactions with non-arm’slength non-residents. 26 | doing business in Canada h. General anti-avoidance rule The ITA includes a general anti-avoidance rule (GAAR), which is a relatively broadly worded provision that can result in the re-characterization of transactions for Canadian tax purposes to deny a “tax benefit” resulting from an avoidance transaction. The ITA broadly defines a tax benefit as a reduction, avoidance or deferral of tax or other amount payable, or an increase in a refund of tax or other amounts. An avoidance transaction is a transaction or series of transactions that gives rise to a tax benefit that may reasonably constitute a misuse or abuse of any provision of the ITA, the Income Tax Regulations, the Income Tax Application Rules, a tax treaty or any other enactment relevant to computing tax. When such a misuse or abuse occurs that results in a tax benefit, the CRA is allowed to determine the tax consequences to the taxpayer in a manner that is reasonable in the circumstances in order to deny the tax benefit. i. Payroll tax Employers, including non-resident employers, are required to register with the CRA. They are also required to withhold and remit to the receiver general for Canada withholding tax from salaries, wages and taxable benefits paid to employees (whether resident or non-resident) for employment services performed in Canada. They must also pay and remit other amounts such as Canada Pension Plan contributions and Employment Insurance Act contributions. These obligations can arise in respect of a non-resident employer that has staff temporarily in Canada, including where the non-resident employer has no permanent establishment in Canada. Where a payee is a non-resident individual and exempt from Canadian tax pursuant to a treaty between Canada and the payee’s country of residence, the payee may be able to obtain a waiver from income tax withholding from the CRA. Payers can be relieved of their obligation to withhold income taxes only if the payee can obtain such a waiver and present the CRA with a copy. Relief from the obligation to make Canada Pension Plan contributions may be available if social-service coverage continues in the individual’s country of residence. Additional withholding in respect of tax may be required for services or work performed in Québec. j. Regulation 105 withholding The ITA requires all persons to withhold and remit to the CRA 15 per cent of any fees, commissions or other amounts paid to non-residents for services rendered in Canada (other than salary or wages paid to an officer or employee, or a former officer or employee, which are subject to a different payroll tax as described previously). This requirement applies even when the non-resident has no permanent establishment in Canada or is entitled to an exemption under a treaty for Canadian tax on income from performing services |in Canada. The amount withheld and remitted is not determinative of the tax liability of the non-resident, but is applied on account of the tax liability (if any). If the person performing the services is eligible for an exemption from Canadian income tax on its Canadian business income under a treaty, the person may recover the tax withheld (commonly referred to as “Regulation 105 amount”) by filing a Canadian tax return. There is also a process whereby the non-resident can obtain a waiver of the requirement of the payer to withhold the Regulation 105 amount in certain circumstances, but the waiver must be applied in respect of each contract and prior to any payment. k. Scientific research and experimental development The ITA provides generous incentives through a system of tax deductions and credits to taxpayers for expenditures incurred for scientific research and experimental development (SR&ED) related to business carried on in Canada by the taxpayer. In conjunction with similar tax incentives provided under various provincial laws, Canada has an attractive tax environment in which to engage in SR&ED. These incentives are significantly enhanced for taxpayers that are CCPCs. 2. General application of Canadian tax to non-residents Canada imposes income tax under the ITA on a taxpayer’s income for each taxation year. While residents of doing business in Canada | 27 Canada are taxed on their worldwide income, with a few exceptions, non-residents are only subject to Canadian income tax on their Canadian source income. Non-residents who were employed or carried on business in Canada during the year or disposed of “taxable Canadian property” are liable to pay income tax on their taxable income earned in Canada, which will be comprised of their income from those three sources. Non-residents are also subject to withholding tax on passive income such as dividends, rent and royalties from Canadian sources (withholding tax is discussed in more detail earlier in this section). A non-resident of Canada who resides in a country that has a tax treaty with Canada may benefit from exemptions or reduced rates of tax in Canada under that treaty. a. Carrying on business in Canada i. Income tax In many cases it will be obvious whether business is being carried on in Canada. However, there are situations where the location of the business is not as clear for tax purposes. Determining whether a non-resident is carrying on business in Canada for income tax purposes requires an analysis of all of the facts, including the place where contracts are concluded and the place of operations from which profits arise. In addition, a non-resident will be deemed to be carrying on business in Canada for the purposes of the ITA if the non-resident does any of the following: • Produces, grows, mines, creates, manufactures, improves, packs, preserves or constructs, in whole or in part, anything in Canada, regardless of whether the non-resident sells it or exports it from Canada without selling it • Solicits orders or offers anything for sale in Canada • Disposes of timber resource property, Canadian real property (other than capital property) or, in certain circumstances, Canadian resource property If a non-resident does carry on business in Canada in a year, the non-resident may be required to file an annual Canadian income tax return. A non-resident corporation that carries on business in Canada in a taxation year must file a return for the year, regardless of whether it has realized a profit in Canada and regardless of whether its income is exempt from Canadian tax under an applicable income tax treaty. If such an exemption is available, it is claimed when filing the Canadian tax return. By way of contrast, a non-resident individual is generally only required to file a return if tax is payable under the ITA, or if he or she has a taxable capital gain on certain property or disposes of certain taxable Canadian property. Where a non-resident carries on business in Canada, both Canadian federal and provincial or territorial income tax may be imposed. In addition to income tax, a variety of indirect taxes could be applied to business operations in Canada, as discussed here. ii. Value-added taxes (VAT) A non-resident that carries on business in Canada may be liable to pay, collect or remit a Goods and Services Tax (GST) or Harmonized Sales Tax (HST). In addition, a non-resident that carries on business in Canada may be required to register for GST/HST purposes. A nonresident that is required to register, but that does not have a permanent establishment in Canada, is required to post a recoverable security with the CRA on registering for GST/HST purposes. The GST/HST applies to most supplies of property and services made in Canada, and the GST applies to most importations of goods into Canada. The GST applies at a rate of five per cent and the HST at a rate of between 13 and 15 per cent, depending on the province in which the supplies are made or deemed to be made. Because the GST/HST is intended to be a consumption tax and, therefore, is not intended (in general) to be borne by businesses, GST/HST paid by a business is generally recoverable if the business is registered for GST/HST purposes and makes GST/HST-taxable supplies. Certain supplies are considered to be exempt from GST/HST, including certain supplies of financial services, residential real property, health care and educational services. Businesses that make exempt supplies may not be permitted to fully recover GST/ HST paid or payable on property and services acquired 28 | doing business in Canada for related purposes and, therefore, will bear the burden of the tax as a cost of their business activities. In addition to the GST, the province of Québec imposes a VAT in the form of the Québec sales tax (QST) at a rate of 9.975 per cent. The QST is administered by a separate tax authority under distinct legislation from the GST/HST, such that separate registrations are required. The tax base, exemptions and recoverability are similar as that between the GST/HST and QST. iii. Provincial sales taxes British Columbia, Saskatchewan and Manitoba each impose their own form of provincial sales tax (PST) similar to state sales-and-use taxes in the U.S. There must be a degree of connection to a province in order for a seller to be obliged to register to charge and collect the PST for that province. The required degree of connection depends on the provincial rules. British Columbia imposes its PST at a rate of seven per cent, Manitoba at a rate of eight per cent, and Saskatchewan at a rate of five per cent, though the rates can vary for certain supplies. Most supplies of goods, including most computer software, are subject to PST, while real property and most other intangible personal property are not. PST also applies to a limited range of taxable services that vary from province to province. Each province also provides for different exemptions from tax, though all provinces have a general exemption for goods purchased for resale purposes. iv. Books and records Persons carrying on business in Canada must maintain books and records regarding their Canadian operations at a Canadian place of business, or otherwise make them available for audit by the CRA. Recent court decisions have confirmed the CRA’s ability to make wide requests for documents and information in the context of an audit. Failure to comply with such a request may result in the documents and information not being admissible in the defence of an assessment for tax. b. Taxable Canadian property A non-resident is generally taxed in Canada on any capital gain from the disposition of “taxable Canadian property.” For this purpose, “taxable Canadian property” includes: i. Real property or resource property located in Canada. ii. Eligible capital property or inventory that was used in carrying on a business in Canada (with some limited exceptions). iii. A share of the capital stock of a corporation (other than a share listed on a designated stock exchange), an interest in a partnership or trust (other than a mutual fund trust or an income interest in a trust resident in Canada) at a particular time if, at any time during the previous 60-month period, more than 50 per cent of the fair market value of the share or interest was derived directly or indirectly from certain Canadian properties (e.g., real property situated in Canada, Canadian resource properties, timber resource properties, or options or interests in such properties). iv. A share of the capital stock of a corporation that is listed on a designated stock exchange, a share of a mutual fund corporation or a unit of a mutual fund trust at a particular time, if both of the following conditions applied at any time during the previous 60-month period: • The taxpayer (including people not dealing at arm’s length with the taxpayer) owned 25 per cent or more of the issued shares or units of any class of the capital stock of the corporation or more than 25 per cent of the issued units of the trust. • More than 50 per cent of the value of the shares or units was derived directly or indirectly from certain Canadian properties (e.g., real property situated in Canada, Canadian resource properties, timber resource properties, or options or interests in such properties). v. Options or interests in the properties described in (i) to (iv). A non-resident that disposes of taxable Canadian property is generally subject to notification and withholding tax requirements. Subject to certain exceptions, the ITA requires a non-resident that disposes of taxable doing business in Canada | 29 Canadian property to notify the CRA of the disposition no later than 10 days after the disposition. A non-resident vendor will also be required to remit withholding tax to the CRA or provide appropriate security. Once the non-resident has given the required notice and paid the required withholding tax, the CRA will issue a certificate of compliance (commonly known as a “Section 116 certificate”) to the non-resident vendor. If a Section 116 certificate is not obtained, the purchaser must remit to the CRA 25 per cent of the gross purchase price within 30 days of the end of the month in which the disposition occurs, and has the right to withhold this amount from the purchase price or otherwise recover such amount from the non-resident vendor. It is usually advantageous for the non-resident to obtain a Section 116 certificate from the CRA, since a certificate will be issued based on a payment of withholding tax calculated with reference to the gain arising from the disposition. Without the Section 116 certificate, the tax withheld by the purchaser is based on the gross selling price of the property. These withholding obligations and notification requirements apply even if a loss arises on the disposition. However, they do not apply to certain dispositions of taxable Canadian property that would otherwise be exempt from Canadian tax under Canada’s tax treaties. 3. Canadian taxation of a Canadian resident subsidiary a. Income tax liability A subsidiary that has been incorporated anywhere in Canada is considered to be resident in Canada for income tax purposes. It is subject to federal and provincial taxation in Canada on its worldwide income in the manner indicated in the previous discussion on Canada’s general tax rules. Canada’s corporate tax rates have been gradually reduced in recent years and are now relatively low. Combined federal and provincial rates on general business income of a corporation are currently between 25 and 31 per cent, and range between 25 and 27 per cent for the most populous provinces of British Columbia, Alberta, Ontario and Québec. b. Business and property income The ITA provides that a taxpayer’s income from a business or property is the profit from that source for the taxation year. “Profit” is to be computed initially using applicable general commercial and accounting norms, but is subject to many specific adjustments under the ITA. c. Capital gains and losses Capital gains receive preferential treatment under the ITA since only 50 per cent of a capital gain (also referred to as a “taxable capital gain”) is included in income. A capital gain is the amount by which the proceeds of disposition of a capital property exceed its adjusted cost base and reasonable costs of disposition. Fifty per cent of a capital loss (also referred to as an “allowable capital loss”) is deductible but generally only against taxable capital gains. The amount by which taxable capital gains exceed allowable capital losses incurred in a taxation year is included in the corporation’s income and is subject to tax at the regular rates. Where allowable capital losses exceed taxable capital gains, the excess, or net capital loss, may be carried back three years and carried forward indefinitely, but may only be used to offset taxable capital gains of those other years. d. Deductibility of expenses In general, in order to be deductible, expenses must be incurred in the year for the purpose of gaining or producing income from business or property. Generally, only current expenses are deductible in computing taxable income. Capital expenditures are not generally deductible, although an amount representing depreciation may be deducted pursuant to the capital cost allowance (CCA) regime, which is discussed later in this section. The accounting and tax treatment of expenses are not always the same. 30 | doing business in Canada i. Meals and entertainment expenses Generally, only 50 per cent of food and entertainment expenses may be deducted under the ITA, even if they were incurred solely for bona fide business purposes. ii. Interest Generally, interest is deductible only to the extent that it is paid or payable on a debt incurred for the purpose of earning income from business or property. A number of restrictions may apply. For example, the “thin capitalization” rules restrict the interest deduction that a corporation resident in Canada can deduct on a debt owing to a “specified non-resident.” For taxation years beginning after 2012, the permissible amount of debt to specified non-residents is one and one-half times the equity. In general, interest on debt in excess of this limit is non-deductible and deemed to be a dividend from which the Canadian payer must withhold tax (see “withholding tax on passive income of non-residents”). Specific rules apply for the purpose of calculating both the amount of debt and equity affected by these restrictions. Canada is also proposing to change the withholding tax rules on certain back-to-back loan arrangements involving non-residents. iii. Loss carry-overs Losses realized from business or property are fully deductible in the year that they are incurred. To the extent that all or any portion of these losses remain unused and were incurred in or after 2006, they may be carried back three years and forward 20 years. For losses arising before 2006, the carry-forward period is shorter, ranging from seven to 10 years depending on the circumstances. Capital losses may only be deducted against capital gains and may be carried back three years and forward indefinitely. The ITA restricts the ability of a corporation to use loss carry-overs after control of the corporation has been acquired. In general terms, losses from property do not survive an acquisition of control, while business losses incurred before the acquisition of control may only be used to offset income after the acquisition of control from the same or a similar business. e. Capital cost allowance (CCA) The ITA explicitly disallows the deduction of capital expenditures with limited exceptions. For example, instead of claiming a deduction for depreciation, the ITA permits the deduction of CCA. For this purpose, the Income Tax Regulations (the Regulations) require the grouping of depreciable assets into various classes. A deduction for CCA may be claimed annually based on the total undepreciated capital cost (UCC) of each class of asset at the rate prescribed by the Regulations. CCA is generally computed on a decliningbalance basis and, in most cases, only half of the amount that is normally deductible can be claimed in the first year that an asset is acquired. In addition, CCA may only be claimed on an asset when the asset is “available for use” for the purpose of earning income as that term is defined in the ITA. Detailed rules specify when a particular property becomes “available for use.” CCA is a discretionary deduction, thus the taxpayer is not required to claim it in a particular year. When a depreciable property is sold, the proceeds of disposition are deducted from the UCC of the class. If that deduction results in a negative balance for the class, the negative balance may be included in income as a recapture of CCA. A resulting positive balance may be deducted from income as a terminal loss if no assets remain in the class. The disposition of depreciable property may also give rise to a capital gain. f. Repatriation of funds: Dividends The ITA generally imposes a 25 per cent withholding tax on dividends paid by a Canadian subsidiary to its non-resident shareholder. This rate may be reduced by a treaty. For example, under the Canada-U.S. Tax Treaty, the rate of withholding tax on a dividend paid by a wholly owned subsidiary may be reduced to five per cent. The Canadian subsidiary is required to deduct or withhold this tax from the dividend. g. Repatriation of funds: Paid-up capital A Canadian subsidiary of a non-resident shareholder may distribute paid-up capital without Canadian doing business in Canada | 31 withholding tax, even if the subsidiary has undistributed earnings and profits. A number of corporate law and tax requirements must be satisfied in connection with a return of capital. h. Management, rental and royalty payments The ITA generally imposes a 25 per cent withholding tax on the payment of management fees, rent and royalties, subject to reduction under Canada’s tax treaties. Under many of Canada’s tax treaties, management fees charged by a non-resident parent to a Canadian subsidiary are not subject to Canadian withholding tax if the non-resident does not have a permanent establishment in Canada. i. Inter-corporate loans i. Loans from non-resident parent to Canadian subsidiary The “thin capitalization” rules in the ITA may disallow a deduction for interest payable by a Canadian subsidiary on debts owing to a “specified non-resident person” if such debts exceed certain limits. Subject to an applicable tax treaty, a Canadian subsidiary must withhold tax on interest paid to nonarm’s-length parties or on participating debt interest. A notable exception is available for U.S. residents under the Canada-U.S. Tax Treaty, which eliminates withholding tax on interest paid by a Canadian subsidiary to a U.S. parent, provided that the U.S. parent qualifies for the benefits of that treaty and that the interest is not participating debt interest. ii. Loans from Canadian subsidiary to non-resident parent If a Canadian subsidiary lends money to its non-resident parent and the loan is not repaid within one year from the end of the subsidiary’s taxation year during which the loan was made, the entire principal amount of the loan will be deemed to be a dividend paid to the parent, and withholding tax will be payable on the amount of the deemed dividend. Even if the full principal amount of the loan is repaid within the time required, if an appropriate interest rate was not charged, a deemed taxable benefit may arise, which would result in a deemed dividend and Canadian withholding tax. 4. Canadian taxation of a branch operation in Canada A non-resident corporation that carries on business in Canada must pay Canadian income tax on income earned in Canada. Generally, however, Canada’s tax treaties provide that a corporation’s business profits will only be subject to Canadian income tax to the extent that they are attributable to a Canadian permanent establishment. a. Permanent establishment Whether a Canadian permanent establishment exists depends on the facts. Generally, a permanent establishment is a fixed place of business through which the business of the non-resident is wholly or partly carried on. Tax treaties generally provide that a permanent establishment includes a place of management, a branch, an office, a factory or a workshop. As such, depending on the nature of its activities, a branch operation in Canada will often have a permanent establishment in Canada. A permanent establishment can arise in many other circumstances as well. For example, the CRA considers computer equipment, such as a server that connects to the Internet, to be tangible property having a physical location that may constitute a place of business of a non-resident person if it is at the disposal of the person (in other words, if it is owned or leased and used by the person). On the other hand, the mere use of a computer or server owned by a third party will not generally constitute a fixed place of business if the computer or server is not at that person’s disposal. Agents and employees in Canada may constitute a permanent establishment in some circumstances. Care is required, but in appropriate circumstances a non-resident corporation will not be considered to have a permanent establishment in Canada by reason of having sales representatives in Canada, provided the representatives do not have or habitually exercise authority to conclude contracts in the name of the non-resident. 32 | doing business in Canada Under many of Canada’s tax treaties, a building site or construction or installation project constitutes a permanent establishment, but generally only if it lasts more than 12 months. Under the Canada-U.S. Tax Treaty, if a U.S. enterprise is providing services in Canada and is not otherwise found to have a permanent establishment in Canada, it will nevertheless be deemed to be providing the services in Canada through a permanent establishment if: • The services are provided in Canada for an aggregate of 183 days or more in any 12-month period. • The services are provided with respect to the same or a connected project for a customer who is either resident in Canada or who maintains a permanent establishment in Canada. b. Branch tax In addition to Canadian federal and provincial income tax, a non-resident corporation carrying on business in Canada through a Canadian branch operation is subject to a branch tax. Under Part XIV of the ITA, the branch tax is 25 per cent of after-tax income that is not reinvested in Canada. Where the rate of withholding tax on dividends is reduced by tax treaty, as is usually the case, the rate of the branch tax is often reduced to the same rate. The ITA generally provides that branch tax is levied on the after-tax Canadian earnings of the business carried on in Canada less any amounts that are reinvested in the Canadian business. A tax treaty may modify the method of calculating the earnings for branch tax purposes. In addition, a tax treaty may exempt the first $500,000 of a non-resident corporation’s income from branch tax. The branch tax is intended to approximate the Canadian withholding tax that would have been payable on dividends paid by a Canadian-resident subsidiary to its non-resident parent. In the absence of this branch tax, a Canadian branch could be more tax-efficient than a Canadian subsidiary. A branch is not a legal entity, and the financial and tax accounting for branches may be more complex than for a Canadian subsidiary. For example, the determination of the non-resident’s proportionate share of the parent corporation’s overall general and administrative expenses can raise difficult questions. Non-resident corporations wishing to carry on business in Canada through a branch face the potentially serious practical problem of preparing financial statements for the branch in a manner that will be acceptable to both the CRA and the tax authorities of its country of residence. On June 26, 2012, the competent authorities of the U.S. and Canada entered into an agreement regarding the application of Article VII of the Canada-U.S. Tax Treaty. That agreement provides that the competent authorities will interpret Article VII in a manner entirely consistent with the fully authorized Organisation for Economic Co-operation and Development approach. A description of the ramifications of this agreement and, more particularly, the taxation benefits to U.S. corporations carrying on business through a permanent establishment is beyond the scope of this publication. However, this agreement should be taken into consideration when deciding whether to carry on business operations in Canada through a branch rather than a Canadian subsidiary. c. Books and records When a corporation carries on business through a Canadian branch, all of its books and accounting records with respect to its Canadian operations must be kept at its Canadian place of business or other designated place. They must also be made available for audit by the CRA. d. Taxation of non-resident employees of a branch The taxation of employees of a branch depends on whether the employees are (or become) Canadian residents. Residency is generally determined based on the extent of the residential connections with Canada. However, an individual may also be deemed to be a resident of Canada, for example, by sojourning in Canada for 183 days or more in the year. Where an individual is resident in Canada and continues to be resident in the other country (in other words, if the individual is a dual resident), Canada’s tax treaties contain tiebreaker rules for determining where doing business in Canada | 33 the individual will be considered resident for tax purposes. Where an individual is a dual resident, the tiebreaker rule in a particular tax treaty may result in that individual being regarded as nonresident in Canada. Generally, a treaty tiebreaker rule provides that an individual is resident in the jurisdiction in which he or she has a permanent home available to him or her. If the individual has a home in both or neither places, then the next consideration is the individual’s centre of vital interests — that is, the state in which his or her personal and economic ties are closer. If these considerations are not determinative, certain treaties will then consider the individual’s habitual abode, followed by his or her citizenship. Failing this, the respective tax authorities must be called upon to settle the matter. Employees who move to Canada and become Canadian residents are taxable on their worldwide income. On the other hand, employees who are non-residents of Canada are taxed only on their Canadian source income, which would include remuneration received for employment duties they physically exercise in Canada. However, in some situations, a tax treaty may deny Canada the right to tax such remuneration. For example, under the Canada-U.S. Tax Treaty, Canada will generally not tax a U.S.-resident employee of a U.S. employer on his or her employment income for a particular calendar year if either of the following conditions is met: • The remuneration does not exceed $10,000 in respect of employment in Canada during the particular calendar year. • The employee is present in Canada for periods that do not exceed 183 days in that year, and the remuneration is not borne by a Canadian branch. Canada’s other tax treaties generally apply rules similar to those of the Canada-U.S. Tax Treaty, with the exception of the $10,000-safe-harbour rule. As a result, Canada’s tax treaties will often deny Canada the right to tax non-resident employees temporarily working in Canada — provided they are in Canada for less than 184 days and their remuneration is not borne by a Canadian branch. This exemption does not preclude the obligation of the employer, whether resident or non-resident, to withhold income tax or Canada Pension Plan contributions from a U.S. resident’s remuneration for the services performed in Canada, unless a waiver is obtained from the CRA. e. GST/HST Non-resident corporations with a permanent establishment in Canada are deemed to be resident in Canada for GST/HST purposes, and may be required to register for and collect GST/HST on all taxable supplies of property and services made through the permanent establishment. Special rules may require self-assessment for GST/HST on intangible property and services sourced from outside of Canada. f. Unlimited liability companies In some circumstances, it may be advantageous to incorporate a Canadian subsidiary as an unlimited liability company (ULC). These special corporate vehicles are available under the laws of the provinces of Nova Scotia, Alberta and British Columbia. A ULC may be considered to be a flow-through or fiscally transparent entity for U.S. tax purposes. However, for Canadian purposes, a ULC is not fiscally transparent and is taxed as a Canadian corporation. As well, certain benefits under the Canada-U.S. Tax Treaty are not available to ULCs. For general information on ULCs, see section B, “Business structures.” Learn more about Gowlings’ services in this area at gowlings.com/tax 34 | doing business in Canada f | mergers and acquisitions Canada is an ideal location in which to establish and grow a business, including by way of mergers and acquisitions. There are a number of advantages to choosing Canada: • It has strong international trade arrangements and ties. • Businesses operating in Canada have access to a large market across North America due to the North American Free Trade Agreement. • Canadian banks and financial institutions are open to financing investment and expansion, and are frequently ranked as the soundest financial institutions in the world. • The country’s business operating costs are the second lowest in the G-7. • Canada has one of the world’s most attractive tax regimes. doing business in Canada | 35 If you are planning on buying or selling a privately owned business in Canada, it is highly recommended that you seek detailed and specific advice from professionals experienced in M&A transactions. For more information about private M&A transactions in Canada and the range of services that Gowlings provides, please visit us at gowlings.com/cfma. 1. Planning a private M&A transaction a. Structuring of M&A for a private Canadian company There are two common forms used to structure mergers and acquisitions of private businesses in Canada: share purchase transactions and asset purchase transactions. In a share purchase transaction, the buyer purchases all, or a majority of, the issued and outstanding shares of the target corporation from its shareholders. An asset sale involves the negotiated purchase of the assets (or certain assets) of a company without acquiring the entity that owns them. An asset purchase transaction is typical when only a single property or division is of interest, or the new owner wishes to cap legacy liability exposure. A third and less commonly used form is the combination of two corporations through an amalgamation under corporate statute. The choice of form to be used is a threshold issue that is determined through negotiation by a buyer and seller, which typically involves significant input from the parties’ tax advisers. For tax reasons, buyers generally prefer asset transactions (unless the buyer is specifically looking to acquire certain tax attributes of the target), while sellers generally prefer share transactions. The transaction parties also need to consider that asset transactions are generally more complex than share transactions since they require parties to obtain a larger number of consents and to transfer a larger number of diverse assets. However, asset transactions may be the only practical structure when the parties want to transfer some but not all of the assets of a business. Furthermore, the additional due diligence required in the context of a share transaction may impose longer pre-acquisition time frames. b. Due diligence Due diligence is the process undertaken by the buyer to familiarize itself with the business and assets of the seller/target. The scope of the due diligence generally varies depending on the nature of the business being acquired, the industry in which the business operates, and other legal and business considerations. In addition, the nature of the due diligence is dictated by the structure of the acquisitions. In the context of a share transaction, legal due diligence typically involves: (i) a review of the corporate records of the target corporation (as further described later in this section), (ii) a review of any contract or agreement to which the target corporation is a party, (iii) public searches in connection with corporate status, encumbrances and litigation, (iv) a review of the target corporation’s intellectual property, (v) a review of certain governmental records regarding the target corporation that can only be accessed with the written consent of the target corporation (related, for example, to tax, employment or the environment), and (vi) other diligence as dictated by the nature of the target corporation’s business. Corporate records should be reviewed to verify the number and type of issued shares of the target corporation. A review of these records (particularly the board of directors’ minutes) may also provide valuable insight into the business of the target corporation and may help uncover potential liabilities that can be addressed prior to the closing of the acquisition. Legal due diligence in the context of an asset transaction is generally the same, though the scope is concentrated on matters that are related to the assets or liabilities being acquired/assumed. c. Amalgamation An amalgamation is a statutory means to effect a merger or acquisition by consolidating existing corporations into a new corporation. As discussed earlier, this method is a less commonly used alternative to share and asset transactions. In Canada, the term “amalgamation” does not have the same broad meaning given to it as in the United States, where it is generally used to describe mergers or acquisitions effected by a number of legal means. 36 | doing business in Canada 2. Regulatory approvals a. Ontario Bulk Sales Act Ontario’s Bulk Sales Act (BSA) was designed to protect trade creditors of a business when the business disposes of its “stock in bulk.” The BSA applies to every sale in bulk outside the ordinary course of business. The sale of a business’ assets in the context of an M&A transaction will almost always be deemed to be a sale in bulk outside the ordinary course of business. When a seller fails to comply with the BSA, a transaction is voidable and the buyer may be liable to the creditors of the seller. To comply with the BSA, the buyer must: (i) obtain a statement of trade creditors from the seller, (ii) ensure that adequate provisions are made for payment of creditors and (iii) complete post-closing filings. A seller may also be exempted from compliance with the BSA by obtaining a court order that provides for such exemption. b. The Investment Canada Act and the Competition Act Acquisitions or investments that exceed certain thresholds are subject to review under the Investment Canada Act (foreign investment review) and pre-notification under the Competition Act. Canadian M&A is generally based on “free market” principles, with minimal regulatory involvement. 3. Tax matters Acquisition vehicle and the use of a Canadian subsidiary Typically, a non-Canadian acquirer would establish a Canadian subsidiary to act as the acquisition vehicle. In addition to achieving business objectives, a Canadian subsidiary may provide a number of advantages to the acquirer from a Canadian tax perspective. These advantages may include: (i) facilitating the deduction of interest on financing for the acquisition against the income of the Canadian target, (ii) creating high paid-up capital in the shares of the Canadian subsidiary to facilitate repatriation of funds back to the non-Canadian parent corporation free of Canadian withholding tax, and (iii) positioning the acquirer for a possible “bump” in the tax cost of the Canadian target’s non-depreciable capital property. To take advantage of some of these benefits, it may be necessary to carry out a subsequent amalgamation of the acquisition vehicle and Canadian target. Care is required in designing the share structure of the Canadian subsidiary and arranging for it to be properly capitalized and financed for the acquisition. Where assets, rather than shares, are being acquired, it is even more important to consider using a Canadian subsidiary. If the non-Canadian buyer buys Canadian business assets directly, it will be liable for debts and liabilities that arise from the operations. It will also be liable for Canadian tax on the income from those assets and any business carried out in Canada, and will have to file Canadian income tax returns every year to report its income from Canadian operations. By using a Canadian subsidiary to acquire the assets and to conduct the Canadian operations, the subsidiary becomes responsible for reporting the income and paying tax on the income instead of the non-Canadian parent. 4. Employment and labour matters a. Buyers’ obligations toward employees in a nonunionized workplace A buyer of shares steps into the shoes of the employer. All employer obligations continue to be borne by the target and all employment terms remain in existence at closing. Thus, all obligations (both to existing and ex-employees) remain with the business acquired, except to the extent assumed and satisfied by the seller pursuant to the purchase agreement. Typically, indemnity provisions will be negotiated between the seller and buyer, but the target still remains on the hook to satisfy all obligations to existing and ex-employees. Subject to statutory successor employer rules, the buyer of assets does not inherit pre-closing obligations — except to the extent assumed by the buyer pursuant to the purchase agreement, or in Québec. The buyer doing business in Canada | 37 is on the hook for all obligations arising from the date of rehiring. Again, negotiated indemnity provisions may reduce the buyer’s exposure under statutory successor employer obligations, but the buyer still remains on the hook to satisfy those obligations to rehired employees. In Québec, the buyer of assets inherits mostly all pre-closing obligations. For further details about successor employer rules, refer to “Re-employment” below. b. Obligations of a buyer of shares versus a buyer of assets in a non-unionized workplace Except in Québec and subject to any contrary obligations in the purchase agreement, a buyer of assets: (i) is free to “cherry pick” which employees, if any, will be offered employment with the buyer, (ii) is not required to match pre-closing terms of employment (subject always to compliance with statutory requirements), and (iii) will not have any obligations toward employees who are not offered or do not accept employment with the buyer. However, except in Québec and subject to any contrary provisions in the purchase agreement, a buyer of shares inherits a target with all employees, all existing terms of employment and all obligations on closing. A share purchase does not, in itself, change (or give the buyer/target any right to change) employment status or employment terms. c. Re-employment For statutory purposes, a buyer generally cannot simply re-employ the employees and ignore the employees’ service history. However, for other purposes, a buyer may be able to do so (except in Québec). Technically, a buyer is not obliged to recognize prior service for non-statutory purposes (e.g., when considering eligibility for stock option awards or under internal severance policies). At the federal and provincial levels, for both unionized and non-unionized workplaces, statutory “successor employer” provisions ensure that for statutory purposes, the sale of a business (whether via share or asset purchase) does not interrupt employment for employees of the acquired business who are employed by the buyer after closing. Some exceptions apply, such as when there is a prolonged break in service between the last day of employment with the acquired business, and the first day of employment with the buyer (Ontario, for example, requires at least a 13-week period of nonemployment to “break the chain”). Absent a sufficient break in service, terminating employment at or before closing and then rehiring after closing will not suffice to “break the chain” of service for statutory purposes. In a non-unionized environment, if the buyer wants to “break the chain” for non-statutory purposes, the buyer must include enforceable written provisions in an employment agreement or hiring letter clearly specifying that prior service will not be recognized except to the minimum extent required by applicable employment/labour standards legislation. In Québec, the Civil Code of Québec and labour standards legislation generally prohibit a buyer of assets to re-employ the employees as new employees without recognizing their seniority with the acquired business. d. Employment agreements or outstanding claims Typically, termination/severance and change of control obligations are embedded within employment agreements or hiring letters. A clear understanding of all termination/severance-related obligations is critical. Because of the “reasonable notice” concept, these obligations are often much more significant than they might first appear — for further information, see section G, “Employment law.” A buyer should carefully review all termination/severance-related provisions (and potential enforceability risks) under all employment agreements, hiring letters, variable compensation or incentive plans (cash-based and equity-based), and policies. Note whether change of control provisions/agreements are “single trigger” (triggered by closing, regardless of re-employment), or “double-trigger” (triggered only if the employee is not rehired, or is terminated at or within a specified period after closing). A buyer should also pay attention to pending lawsuits, outstanding employee complaints, government 38 | doing business in Canada investigations and recent terminations (unless a release agreement has been executed by the ex-employee). e. Changing terms of employment As noted earlier, except in Québec, a buyer of assets has significant control over terms of employment at the point of rehiring, so ideally, such changes will be implemented through pre-hiring employment agreements or hiring letters. However, a buyer of shares does not have any automatic right to alter terms of employment after closing. In a non-unionized workplace, in order to change terms of employment post-closing, the buyer must follow proper notification processes. If changes affect essential terms of employment and are disadvantageous to an employee (e.g., a 15 per cent salary reduction), the acquired may face a claim from an objecting employee. Even if the employee does not object, if a dispute later arises, certain changes may be unenforceable unless “fresh consideration” is provided to the employee (e.g., a modest signing bonus or stock option grant). Mere continuation of employment is not sufficient “fresh consideration.” Failure to properly implement changes can result in a claim for breach of contract or constructive dismissal (if the change or cumulative changes amount to a fundamental change). Thus, the introduction of significant changes needs to be managed carefully so as to minimize risks and maximize retention of desired employees. f. Pensions and benefits Existing pension and benefit entitlements will have to be addressed if shares of the target are acquired or, in the context of an asset purchase, if there is a collective agreement or employment contract(s) that requires such pensions and other benefits to be provided. The manner in which these pension and benefit entitlements are addressed depends on the specific facts and circumstances of the transaction and of the parties involved. An acquirer should consult with its advisers at an early stage to consider these matters. g. Acquisition of a distressed business in Canada The buyer of a seriously financially distressed business in Canada faces many of the same challenges that would be presented in the United States and other jurisdictions. If the target is insolvent or near insolvency, timing is critical in preserving, as best one can, enterprise value. Ideally, the buyer of a distressed business will want to gain the maximum leverage in controlling the speed and trajectory of the sale process. However, exercising such control in a Canadian court-supervised process is inherently problematic since the court will always prefer to expose the target to the largest market for the longest time possible under the circumstances. The use of “toe hold” distressed lending/investing can give the buyer an initial advantage in terms of having the opportunity to become well-known to the target’s management and stakeholders, gaining access to valuable due diligence on the target, and participating in the formulation of the sale process. Stepping up to be the “stalking horse bidder” may also permit the buyer to participate in the formulation of the subsequent competitive sale process from a structural and timing perspective, and to set a price floor and a modest break fee. The use of credit bidding in a Canadian court-supervised sale process (whether in reorganization or receivership proceedings) continues to grow. Canadian court-supervised sale processes, in many instances, have adopted the standard features of the United States’ sale process (e.g., with a competitive or auction model being utilized). It is important to note that Canadian courts have only recognized credit bidding in circumstances where assets being sold were fully charged by the security underlying the credit bid. Equally, the credit bid process should not be used as a foreclosure process, and for that reason, it will likely only be used within the context of a competitive sale process. Learn more about Gowlings’ services in this area at gowlings.com/cfma doing business in Canada | 39 g | employment law Employment and labour law can be complex for foreign and domestic employers alike. Before becoming an employer in Canada, there are certain logistical requirements. An employer must be registered as an employer with the Canada Revenue Agency or Revenu Québec (if the employee is based in Québec). Furthermore, depending on the size of the payroll, an employer may also have to register with provincial taxation authorities. 40 | doing business in Canada The vast majority of employers are governed by provincial laws. An employer operating in more than one province must comply with the specific legislation in each province. Approximately 10 to 12 per cent of the workforce is governed by federal laws, such as the Canada Labour Code and the federal Employment Equity Act. Even if employers are federally regulated, they must still conform to certain provincial laws. While the laws are substantially similar across the country, there are important variations regarding minimum wage and hours, vacation entitlements, entitlements upon termination, and basic health and safety. This adds significant complexity to managing a workforce in Canada. The bulk of the discussion that follows assumes that the employee is non-unionized, as there are very different requirements imposed on the employer once a union and collective agreement are in place. Some of these requirements are discussed later in this section under “Labour relations.” In many cases, the collective agreement imposes its own regime that substitutes for the statutory regimes discussed in this section. 1. The contractual nature of the employment relationship Canadian employment law is based on the premise that the employment relationship is one of contract. In the absence of written contractual terms, the courts will imply a host of contractual obligations on both parties. The general law of contracts (such as offer and acceptance, duress, and frustration) also plays an important role in employment law. While there are some narrow exceptions for certain industries and sectors, most employment contracts are assumed to be of indefinite duration and can only be terminated by specific events such as: • Resignation of the employee • Termination for just cause • Termination without cause • Death • Frustration of the employment relationship Certain employees governed by federal, Québec and Nova Scotia laws enjoy significant protection against termination without cause not afforded to employees in other jurisdictions. These protections are outlined later in this section. Limited-term contracts are expected to be the exception to the norm and need to be established on the evidence. The best evidence is, of course, a written agreement. However, the courts have deduced the existence of a term contract from the parties’ conduct, job titles and/or the wording in a job posting. Term contracts come to an end at a predetermined point in time or, in some cases, when a specific event or milestone is reached. Subject to certain statutory requirements, limited notice or other formalities are required upon the end of a term contract. Nonetheless, great care should be taken in drafting offers of employment for term employment. 2. Termination of employment As previously stated, most employment relationships are considered to be of indefinite duration. There is virtually no “at will” employment in Canada. Some courts have even found that “probationary” employees are entitled to a fair opportunity to demonstrate their competence. In most cases, in order to terminate employment without notice or compensation in lieu, the employer must prove just cause. The onus on the employer is an extremely high one and requires compelling evidence. The vast majority of employer-initiated terminations will be terminations without cause, where the employer will provide working notice or monetary compensation in lieu of notice. a. Termination without cause In most cases, an employee who is terminated without cause is entitled to notice of termination or pay in lieu of notice. However, certain employees governed by federal, Québec or Nova Scotia laws have special protections against terminations without cause, of which employers need to be aware. doing business in Canada | 41 i. General In general, an employee’s entitlement to notice (i.e., “reasonable notice”) is derived both from statute and the common law. The applicable provincial and federal employment statutes prescribe only the minimum period of notice or payment in lieu of notice that must be given to a dismissed employee. It is a common and serious mistake to assume that the statutory minimums are the only obligations on the employer in the event of a termination without cause. Statutory minimums usually range from one to eight weeks of notice. In Ontario, some employees are also entitled to an additional lump-sum payment known as “statutory severance,” which ranges from five to 26 weeks of regular earnings. There may be separate and additional obligations in situations involving the termination of a group of employees, including the obligation to provide additional notice and the obligation to provide advance written notice to a specific government department. In the absence of a contractual stipulation to the contrary, judges will routinely imply an obligation on the employer to provide far more generous notice periods than prescribed by the statute. Factors that the courts have reviewed in determining what constitutes reasonable notice include: • Years of service • Seniority within the organization • Salary and other compensation • Employee’s chances of employment upon termination • Employee’s health • Employee’s education • Promises of job security, even if not enforceable at law • Whether the employee was enticed from secure employment There have been cases where employees with longterm service have been awarded 24 months of notice or compensation in lieu of notice. If the employee is successful in finding other employment, the earnings from mitigation will be deducted from any award otherwise payable by the employer. However, mitigation does not reduce the employer’s obligation to provide the statutory minimum requirements of notice and, in Ontario, severance. An employee’s failure to act reasonably in terms of mitigation can also reduce damages. Provincially regulated employees outside of Québec can contract out of the obligation to provide reasonable notice at law. However, the contract cannot and should not make any effort to contract out of the statutory minimum notice or severance. Where a contract does not comply with the minimum standards in the applicable statute, the offending provision will be considered void. The courts will not simply impose the minimum statutory notice required by the statute, but will order reasonable notice, which is usually significantly greater than the notice period the employer intended. ii. Quebéc The Civil Code of Québec specifically provides that employees may not contractually waive their right in advance to obtain damages for insufficient notice of termination or where the manner of “resiliation” (the Civil Code word for termination) is abusive. Therefore, it is important that a contractual termination clause reflect the prevailing norms in jurisprudence regarding what is fair and appropriate notice upon termination. It should be noted that, in Québec, an employee who believes that he or she was dismissed without cause can challenge the employer’s decision if the employee has at least two years of uninterrupted service with the same employer. Therefore, when employees have more than two years of uninterrupted service, an employer needs good and sufficient cause to terminate their employment or must be able to demonstrate that the termination was a result of a genuine restructuring, such as an overall reduction in force. An employee may apply to the Commission des normes du travail (Québec’s provincial labour standards board) in order to seek reinstatement or damages in lieu of reinstatement. 42 | doing business in Canada iii. Nova Scotia In Nova Scotia, an employee with 10 years of service may seek reinstatement or damages in lieu of notice through the Nova Scotia Labour Standards Tribunal. An employer would have to prove good reason or just cause for the termination. The Tribunal has the power to order reinstatement with back wages or an appropriate alternate remedy if the employee does not wish to return to work. The employer can attempt to avoid reinstatement (but not compensation for reasonable notice) by proving that the termination was related to a genuine restructuring, such as downsizing or plant closures. iv. Federally regulated employers Federally regulated employers, such as banks, interprovincial trucking companies and airlines, are governed by the Canada Labour Code. Non-managerial employees with 12 months of service may challenge their termination and seek reinstatement from the Canada Labour Board, or seek damages in lieu. The onus is on the employer to establish just cause for the dismissal or that the compensation offered is appropriate and reasonable. The Canada Labour Board has established significant case law that it will review the employee’s job functions and role in the organization in determining whether an employee was managerial or not. Job titles are not determinative of the issue. Many mid-level managers would not be considered to be true managers for the purposes of the Canada Labour Code. b. Termination with cause If an employer wishes to terminate an employee due to the employee’s conduct without providing notice or compensation in lieu, the employer must establish just cause. This is a heavy onus to discharge in the courts and tribunals in Canada. Effectively, the employer must establish that the employee’s conduct amounted to a repudiation of the employment contract. Examples of just cause include serious acts of dishonesty, gross misconduct such as violence or harassment, breach of the duty of confidentiality, persistent neglect of duties, or gross insubordination. c. Resignation Employees may resign their employment. While the law implies a duty to provide reasonable notice, there are very few cases where an employer has been able to obtain redress from the courts or tribunals due to inadequate notice. These cases usually involve highly placed executives or professionals, and are often coupled with serious misconduct, such as theft of a corporate opportunity, flagrant solicitation of clients or misappropriation of employer trade secrets. d. Resignation by employee due to constructive dismissal In certain cases, employees may resign their employment on the basis that the employer has made unilateral and fundamental changes to the employment relationship. Examples of constructive dismissal include a significant reduction in pay, changes to the structure of compensation, a relocation outside the normal commuting area or a demotion in the corporate hierarchy (even if pay and job title are grandfathered). In some cases, employees have successfully argued that workplace harassment or discrimination constituted constructive dismissal. An employee who establishes constructive dismissal is able to sue for damages equivalent to the notice the employer would have had to pay upon termination of employment. Employers contemplating significant changes to an employment relationship should implement strategies to avoid a claim of constructive dismissal, including providing advance notice of any changes. Written contracts of employment may also preserve an employer’s right to implement certain types of changes that would otherwise be considered a constructive dismissal. 3. Duty of confidentiality All employees have an obligation to keep secret the confidential information of their employers. It is prudent to have a written agreement regarding what constitutes confidential information and to implement procedures to maintain the confidentiality of sensitive information. Courts are prepared to enforce the duty of confidentiality with an injunction. doing business in Canada | 43 4. Restrictive covenants Employers often wish to implement post-termination restrictions on employees’ business activities. These clauses are usually divided into two categories: nonsolicitation and non-competition clauses. The general rule is that any restrictive covenant: (a) must be limited to what is strictly necessary to protect the employer’s legitimate interests, (b) must be reasonable, and (c) cannot be contrary to public policy. Courts typically examine reasonableness in terms of duration, scope and geographic limits. The clause must be clear and precise. Courts will generally not “bluepencil” or redact unenforceable clauses in order to make them enforceable. According to Canadian law, there is a strong public-policy interest in permitting individuals to work freely in the workplace. Non-solicitation clauses limit the employee’s ability to solicit customers or employees. Although the courts generally enforce well-drafted non-solicitation clauses, care must be used to ensure that the scope of the clause is not excessive. Non-competition provisions are enforceable only in exceptional cases. The onus is on the employer to establish why the non-competition clause is necessary and why a non-solicitation clause is inadequate. Different rules apply, however, if the non-competition clause is part of an overall corporate acquisition, where it can be established that the purchaser required the clause in order to preserve the value of the assets or shares purchased. In certain cases, courts will enforce a restrictive covenant with an injunction. Legal advice should be obtained regarding the proper drafting of confidentiality, non-solicitation and noncompetition clauses. 5. Legislation governing the employment relationship The Canadian workforce is heavily regulated. As previously discussed, depending on the industry and type of business, an employer may be regulated federally, provincially or a mix of both. The following are the main types of legislation that exist in virtually every jurisdiction. a. Employment standards All jurisdictions provide minimum standards with respect to the minimum terms of employment. Typically, employees are not permitted to contract out of the minimum protections afforded by the statute. The specific provisions vary by jurisdiction but can be easily verified by checking governmental Internet resources or calling the appropriate department’s information line. Employment standards can be quite complex, and the legislation can often be varied by obscure regulations that apply to specific industries. Certain exemptions apply to certain types of employees, such as managers or professionals, regardless of industry. There are often methods to obtain special permits to receive exemptions to the minimum requirements by applying to the appropriate ministry or department. i. Hours of work The statutes will typically provide for maximum hours per day and per week, as well as mandatory intervals between shifts. There are often methods for obtaining exemptions to these rules by applying to the relevant authority. ii. Overtime pay The legislation will typically set a threshold of hours per week beyond which employees will be entitled to overtime. The threshold varies across the country but typically ranges between 40 and 44 hours per week. The legislation often establishes methods to “average” overtime over a longer period of time in order to permit different types of scheduling. Time off in lieu of overtime pay at the employee’s request is generally permitted. iii. Public or statutory holidays Canadians generally enjoy at least eight public holidays: New Year’s Day, Good Friday, Victoria Day (last Monday before May 25), Canada Day (July 1), Labour Day (first Monday in September), Thanksgiving Day 44 | doing business in Canada (second Monday in October), Christmas Day and Boxing Day (December 26). The first Monday in August is often observed as an additional holiday in many provinces. In certain parts of Canada, the third Monday in February is observed as an additional holiday. Remembrance Day (November 11) is a holiday that is observed by all provinces except Ontario, Québec and Manitoba. In Québec, according to the National Holiday Act, employees are also entitled to a paid holiday on St. Jean Baptiste Day (officially known as Fête nationale du Québec), which is June 24. Businesses are typically required to be closed on statutory holidays, although many exemptions exist. Employers usually have to pay a significant premium to employees who work on a statutory holiday. iv. Vacation Employment standards laws generally prescribe minimum vacation entitlements. The minimum vacation entitlement is typically two weeks per year. The employer may determine when employees take vacation. In certain provinces, vacation entitlements increase after a predetermined number of years of service. Employees in Saskatchewan are entitled to three weeks per year. Vacation entitlement may increase over time in certain jurisdictions. The calculation of vacation pay can be quite tricky, as the entitlement to vacation pay is often a percentage of all earnings. Commissions and bonuses can often make it difficult to keep track of vacation pay owing. v. Pregnancy leave Most pregnant employees are entitled to 17 to 18 weeks of unpaid leave, depending on the jurisdiction. An employer cannot force or require an employee to go on pregnancy leave early. vi. Parental leave New parents and adoptive parents are entitled to take parental leave of approximately 32 to 37 weeks, depending on the jurisdiction. At the end of the pregnancy and/or parental leave, an employee is entitled to be reinstated. The rules regarding the nature of reinstatement differ slightly across jurisdictions. In Ontario, for example, the requirement is to reinstate to the same job if it still exists, or to a comparable job if it no longer exists. In Québec, if the employee has taken a parental leave longer than 12 weeks, the reinstatement obligation is to the same or a comparable position. If the parental leave is shorter, the employee must be reinstated to the same position as before. vii. Emergency leave/family responsibility/bereavement Most jurisdictions permit employees to take a certain number of unpaid days off for personal reasons. Each jurisdiction deals with it slightly differently. In some cases, leave due to the death of a family member is dealt with under a specific bereavementleave section, while in other jurisdictions, the statute establishes a number of reasons why an employee can take a limited number of days off. These reasons include the death of a family member but can also include the illness of the employee or immediate family members, accidents, a household crisis, or unexpected interruptions in childcare plans. viii. Family medical leave/compassionate care leave Employees who need time off to take care of a seriously ill or dying relative are entitled to leave without pay ranging from eight to 12 weeks, depending on the jurisdiction. Employees may be entitled to benefits under the Employment Insurance Act during this period. ix. Military/reservist leave All jurisdictions provide job-protected leave for members of the reserve forces who are called into active duty or are required to participate in reservist training. x. Sick leave/organ donor leave Depending on the jurisdiction, there may be specific protection granted to employees who need to take time off due to illness. In several provinces, special protection is granted to employees who need time off to donate an organ. xi. Other leaves Various jurisdictions are considering codifying the right doing business in Canada | 45 to new leaves in compelling circumstances. On October 29, 2014, Ontario will add three new job-protected leaves — Family Caregiver Leave, Critically Ill Child Care Leave, and Crime-Related Child Death and Disappearance Leave. These three leaves will significantly expand the types of leave available to Ontario employees. xii. Jury duty All jurisdictions provide job protection in order to enable an employee to serve on a jury. In addition, many jurisdictions will fine an employer significant amounts for not permitting an employee to serve on a jury. xiii. Equal pay for equal work Canadian employers are prohibited from differentiating between male and female employees who perform substantially the same kind of work in the same establishment, requiring essentially the same skill, effort and responsibility. In such circumstances, different rates of pay are prohibited, except where differences are attributable to a seniority system, a merit system, a system that measures earnings by quantity or quality of production, or a differential based on any factor other than sex. The courts and tribunals have established that titles are not determinative and that careful regard should be paid to the actual duties. b. Pay equity Québec, Ontario and federally regulated employers are subject to pay-equity obligations. The scope of obligations differs with the size of the workforce. The legislation is an effort to redress the gender gap in compensation. In essence, it seeks to ensure that there is equal pay for work of equal value. It requires employers to analyze jobs across their organization, review them for value (based on a number of statutory criteria) and examine whether there are compensation disparities between male-dominated and female-dominated jobs within the organization. Where female jobs are underpaid, the legislation prescribes a schedule for pay increments that have to be implemented to redress the balance. Although other jurisdictions have similar legislation, the scope is limited to the public sector. c. Benefit plans Employers are not required to provide employee benefit plans. In Canada, spousal plans must cover both common-law and same-sex spouses. While Canada does have good public health care, there are gaps and most reputable employers offer some form of additional private coverage for the additional health, prescription drug and dental requirements of employees. d. Human rights Human rights codes across Canada prohibit discriminatory practices with respect to employment. Generally, these codes provide that every person has a right to equal treatment with respect to employment without discrimination based on race, ancestry, place of origin, colour, ethnic origin, citizenship, creed, sex, sexual orientation, age, record of offences (e.g., a conviction for which a pardon has been granted), marital status, same-sex partnership status, family status or disability. Discrimination on the basis of pregnancy is defined as discrimination on the basis of sex. The Ontario legislature amended its human rights code to make discrimination on the basis of gender identity 46 | doing business in Canada and gender expression illegal. This amendment is explicitly intended to protect the transgendered population. While it is the first jurisdiction in Canada to explicitly protect transgendered employees, it is predicted that this type of amendment will be forthcoming in other jurisdictions. Furthermore, legal commentators have indicated that the general prohibition against discrimination on the basis of “gender” may be broad enough to protect the rights of Canada’s transgendered population. Employees also have a right to freedom from harassment due to any of the foregoing prohibited grounds in the workplace by the employer, an agent of the employer or by another employee. At one time, mandatory-retirement policies were very common across Canada. However, mandatory retirement is increasingly treated as a form of age-related discrimination unless the employer can establish a bona fide occupational reason why an employee must retire at a certain age as opposed to undergoing individualized fitness or aptitude tests. There is no legislated mandatory-retirement age. In large part, however, pensions are structured around a presumed retirement date of age 65, and it may be financially disadvantageous for an employee not to start retirement at age 65. Employers are expected to be vigilant about any allegations of discrimination and harassment. Where there are reasonable grounds to believe a concern exists, employers are expected to investigate fairly, promptly and competently. Depending on the results of the investigation, employers are required to implement appropriate remedial and corrective measures. e. Employment equity The federal Employment Equity Act provides for employment equity for women, Aboriginal peoples, people with disabilities and members of visible minorities. It is designed to remove inequality in the workplace by eliminating systemic barriers facing historically disadvantaged groups. The Act applies to all federally regulated employers who employ 100 or more people. Employers must identify and remove offending policies and practices, and, in place of these policies, employers must institute positive policies and practices to achieve a proportionate representation of people from historically disadvantaged groups in the employer’s workforce. Such employers must also file annual reports concerning the number of persons they employ and the number of persons they employ in designated groups, with a breakdown by occupational groups and salary ranges. The Federal Contractors Program applies to suppliers of goods and services to the federal government that have 100 or more employees and are bidding on contracts worth $200,000 or more. It imposes on such private-sector employers obligations to implement employment equity in the workplace. Federal contractors can be audited for compliance and, where the results are unsatisfactory, given a specific time period for remedying any gaps. Québec has also instituted the Québec Contractors Program, which is designed to promote the employment of women, visible and ethnic minorities, and Aboriginal peoples. Because of the limited scope of employment equity, most employees are not used to completing questionnaires regarding their ethnicity or race. f. Occupational health and safety The provinces regulate workplace health and safety in Canada to ensure that employers provide a safe work environment. There are stringent rules requiring the posting of safety legislation, the existence and updating of written policies, the establishment of workplace safety committees, safety training, the use of personal protective equipment, and the handling of hazardous materials. Employers, supervisors and workers all share obligations to maintain a safe workplace. It should be noted that a failure to maintain a safe workplace can lead to both civil and criminal consequences. Many jurisdictions in Canada have tried to deal with workplace violence in a proactive manner. In addition, Ontario also imposes specific obligations on employers to be mindful of the possible impact of domestic violence on workers and the workplace. doing business in Canada | 47 Employers in Canada, depending on the legislative framework, may have obligations to create and conduct risk assessments, institute and update policies, train employees, and introduce physical and electronic safety measures that help protect the workforce from violence in the workplace. Where there are complaints of workplace violence, employers generally have a duty to conduct a prompt, fair and competent investigation. Furthermore, in Ontario, where there are reasonable grounds to believe that an employee is at risk due to domestic violence, such as stalking from a domestic partner, the employer has an obligation to take active steps to help prevent the employee from becoming a victim. The province of Québec was the first North American jurisdiction to outlaw “psychological harassment” in the workplace. The province of Saskatchewan has followed suit. In general, the laws aim to prevent egregious bullying in the workplace and do not protect against the normal psychological stresses in the workplace, such as difficult conversations about performance. Employers in Québec and Saskatchewan have specific obligations with respect to the prevention of psychological harassment in the workplace. Ontario and British Columbia have enacted specific provisions regarding workplace bullying and harassment in its occupational health and safety legislation. Employers have a specific obligation to have antiharassment policies, train their employees about the law and investigate allegations of workplace harassment. Under the Criminal Code, directors and executives may face criminal prosecution for negligence that leads to serious injury or death. Under the various occupational health and safety laws across the country, there are significant fines and penalties if an employer fails to comply with applicable legislation. Fines can be as high as $500,000 where death or serious injury occurs, and fines in the range of $100,000 to $150,000 are quite common. Recently, a public school board was fined $275,000 for a violation of Ontario’s Occupational Health and Safety Act that ended up killing a student. An Ontario company was fined $750,000 (plus victim surcharge) for the deaths of four employees when a scaffold broke and workers did not have proper lifelines. Fines are separately assessed against the corporate entity as well as supervisory employees who were derelict in their duty. g. Canada/Québec Pension Plan The Canada Pension Plan (or, in Québec, the Québec Pension Plan) is administered by the government and requires contributions from both employers and employees at prescribed rates. Employers are required to deduct a percentage of an employee’s pensionable earnings and remit that amount to the federal government together with an equal amount contributed by the employer. In 2014, the contribution rate, except in Québec, is 4.95 per cent of annual income (capped at $52,500), to a maximum of $2,425.00 for both the employer and employee. The contribution rates in Québec are slightly higher at $2,535.75 for each of the employer and employee. h. Private pensions Private pensions are heavily regulated. Federal and provincial laws regulate the terms, conditions and administration of private pensions. 6. Labour relations Canadian law recognizes the right of employees to unionize. Each jurisdiction has enacted comprehensive legislation with respect to the right of workers to unionize. While the legislation recognizes an employer’s right to fair comment during a unionization drive, the legislation precludes “unfair labour practices,” such as coercion, intimidation, threats, promises or undue influences. The labour boards closely scrutinize any employer communication during a certification drive. The line between fair comment and unfair labour practice is sometimes difficult to ascertain. Once an application for certification is granted, legislation imposes a temporary “freeze” preserving the status quo while the collective agreement is negotiated. Once a union is certified, the employer is required to negotiate a collective agreement that governs the 48 | doing business in Canada workplace. Many jurisdictions also have a process by which the parties can be ordered to binding arbitration of the first collective agreement post-certification. The legislation also provides for grievance arbitration of workplace disputes. Canadian labour boards have broad remedial powers. Successor-rights provisions are designed to ensure that bargaining rights survive the sale or divestiture of a business. A sophisticated body of case law interpreting both federal and provincial labour laws has been developed by the Canada Industrial Relations Board, the provincial labour relations boards and various arbitration panels. Although the courts have the power to review the decisions of the labour boards, considerable deference is given to their specialized expertise. 7. Public health insurance Canada has a public health-care system that covers almost all legal residents of Canada. The public healthcare system, often referred to as “medicare,” is limited. For example, visits to physicians and in-hospital treatments are covered, but prescription drugs and routine dental visits are not. Certain vaccines are included, but others are not. Because of the gaps in the public health-care system, many employers also provide their employees with private extended medical coverage, the particulars of which can vary greatly. While the public health-care system is largely paid for through general revenues, several provinces, including Ontario, British Columbia and Québec, have imposed a payroll tax on employers to help defray the cost of the medicare system. New Canadian residents, including employees transferred to Canada, are not covered by public health insurance for the first three months of their stay in Canada. As such, special health insurance must be purchased. 8. Workers’ compensation a. Introduction Workers’ compensation is a system of disability benefits payable to a worker who is injured on the job or while performing job duties. The scheme is intended to relieve the injured worker of the delay, cost and difficulty of suing an employer in a tort action or in a civil action for negligence in the workplace. Compensation is to be provided expeditiously and without proof of fault. In turn, employers are required to fund the system through payroll assessments but are shielded from the risk of lawsuits and damages from employees injured on the job. In practice, the Canadian schemes operate by having assessments levied upon employers, which are then gathered into a common fund from which benefits are paid to workers who are disabled as a result of workplace injuries or disease. Administration and adjudication are carried out by a statutory corporation known in most provinces as the Workers’ Compensation Board, but known as the Workplace Safety Insurance Board in Ontario and the Commission de la santé et de la sécurité du travail in Québec. b. Determination of employer contributions The legislation governing workers’ compensation is provincial in scope, so the particulars of each statute may vary from province to province. However, the statutes generally apply automatically, and the coverage is compulsory for most employers. If coverage is mandatory, an employer must register immediately with the appropriate authority and commence paying a certain percentage of payroll as the employer’s premium. Premiums vary greatly, depending on the nature of the industry. Where an industry is excluded from the compulsory coverage, it may be possible to opt in. The employer may apply to the appropriate board for the coverage of the business or undertaking. If the application is accepted, which is the normal practice, the business or undertaking of that employer will be covered. Rates are usually established by examining the employer’s industry group and then adjustments are made doing business in Canada | 49 based on claims experience. Surcharges arising from actual claims can be significant. The money is collected into an accident fund from which benefits are paid. Employers are prohibited from seeking any indemnity or contributions from workers for assessments or other liabilities under the applicable legislation. c. Benefits Injured workers are entitled to income replacement if the injury results in an inability to work. In addition, benefits will cover health-care needs arising from the injury, such as prescription drugs, assistive devices and therapy. Workers may also be entitled to a lump-sum amount if the injury results in a permanent impairment. d. Duty to accommodate rehabilitated workers The legislation generally requires an employer to re-employ a worker injured on the job either to the preinjury position or to other suitable employment. This obligation is intended to reduce the accident costs arising from workers’ compensation claims as well as to encourage reintegration of injured but rehabilitated workers into the workplace. Where reintegration into the former workplace is not feasible due to the nature of the injury, an employee may also qualify for job retraining. 9. Employment Insurance The federal government, through Human Resources and Skills Development Canada, administers a program called Employment Insurance (EI), which provides payments for a period of time to workers who lose their jobs. The purpose of the program is to cushion the blow of unemployment for a worker while also encouraging the worker to search for new employment. The program is paid for through premiums collected from employees and employers through a payroll deduction made by the employer and submitted to the government. Almost all full-time employees as well as part-time and casual employees are covered under the Employment Insurance program, provided they meet specified minimum requirements. An employee will not be entitled to benefits if he or she resigned without good reason or was fired for cause. Employment Insurance also provides income replacement during maternity and parental leaves. In Québec, however, employees must apply to the Québec Parental Insurance Plan (QPIP), which provides more generous benefits to new parents. One interesting feature of the QPIP is that it provides certain benefits that can only be used by the new father and cannot be transferred or shared with the new mother. This benefit is designed to encourage new fathers to take an active role in parenting a new infant right from the beginning. 10. The Québec Charter of the French Language This legislation is designed to make French the default language of work in Québec. It requires that written communications to staff in general (e.g., employee handbooks, benefit booklets, memos, etc.) be in French only or bilingual (French/English). Employers should be careful to respect the requirements of this legislation in terms of workplace intranet and computer-software resources. Communications with a specific employee, such as offers of employment, disciplinary memos, and notices of promotions or salary increases, should also be in French unless the employee specifically requests that they be in English. If so, there should be a written directive from the employee that communications ought to be made in English. It is illegal to make knowledge of any language other than French a job requirement unless the employer can establish that such language skills are truly required. Learn more about Gowlings’ services in this area at gowlings.com/employment 50 | doing business in Canada h | immigration and work permit considerations Canada’s immigration legislation and programs are designed to assist the entry into Canada of business people and foreign skilled workers. The Canadian system also facilitates the entry of foreign entities and business people seeking to start new businesses or subsidiaries in Canada. Immigration issues should be considered well in advance whenever a foreign entity or worker wishes to enter Canada to conduct business. The most appropriate immigration strategy and entry option will need to be identified. It must be determined whether the foreign national requires a work permit or if they may enter Canada as a business visitor. doing business in Canada | 51 1. Canada’s Immigration and Refugee Protection Act (IRPA) The IRPA and its regulations affect business operations, human resource planning and potential liability. For example, the legislation influences: • The ability to hire foreign workers for positions in Canada • Foreign service providers or business people wishing to come into Canada for business purposes • The ability of foreign nationals to acquire Canadian permanent resident status • Companies and individuals by exposing them to potential liability for breaches of the IRPA 2. Canada’s entry and work permit rules: A general overview As a general rule, no person other than a Canadian citizen or permanent resident may work in Canada without valid authorization. As such, the first question to ask is whether or not a foreign national entering Canada requires a work permit. A work permit is a document that specifies the entity that the foreign national is legally entitled to work for in Canada, the occupation and the location of employment. The work permit also has a specific validity period and sets out conditions that the foreign national must not breach. The distinction between a genuine business visitor and a foreign national requiring a work permit is not always clear. Under the IRPA, “work” has a broad definition: “an activity for which wages are paid or commission is earned, or that competes directly with the activities of Canadian citizens or permanent residents in the Canadian labour market.” Business visitors are typically foreign nationals who enter Canada temporarily to engage in international business activities for a short time. These individuals must meet the following general criteria: • Business visitors must have no intent to enter the Canadian labour market. • The intended activity in Canada must be international in scope. • The primary source of remuneration must be outside of Canada. • The accrual of profits of their employer must be outside of Canada. A foreign national will usually be allowed entry as a business visitor if the purpose of their entry falls under one of the following activities (note: this is a nonexhaustive list of potential business visitor activities): • Attending business meetings • Exploring business opportunities in Canada • Negotiating the sale of non-Canadian-origin goods to Canadian customers • Providing some types of after-sales service to Canadian customers • Training Canadians employed within the same corporate group as the trainer • Attending seminars or trade shows If, after assessing the person and the purpose of the entry, it is determined that a work permit is required, the next step is to determine whether there is any work permit category under the IRPA, under an international agreement (such as NAFTA) or under any government program that fits the situation. If there is not, the employer must first apply to Service Canada to obtain a Labour Market Impact Assessment (formerly called a Labour Market Opinion) allowing employment to be offered to a foreign national instead of to a Canadian citizen or permanent resident. 3. Labour Market Impact Assessments (LMIAs) through Service Canada Generally, the goal is to avoid the LMIA process if possible and use a non-LMIA work permit category. This avoids the risk of Service Canada denying the LMIA request. As well, having to apply for an LMIA will delay the overall time frame for obtaining a work permit compared to non-LMIA work permits. 52 | doing business in Canada The Canadian government made major changes to the LMIA rules in June 2014. Before the changes, an LMIA was called a Labour Market Opinion or LMO. The application package for an LMIA must be prepared with great care. The entity wishing to hire or engage the foreign national must demonstrate that it has met Service Canada’s recruiting requirements and that the wage being offered meets the prevailing wage rate for the occupation and the location where the foreign national will work. Service Canada reviews a number of factors when assessing an LMIA application, including whether: • The employer has made reasonable efforts to hire or train Canadian citizens or permanent residents. • The work of the foreign national is likely to result in direct job creation or job retention for Canadians or permanent residents. • The work is likely to result in the creation or transfer of skills and knowledge for the benefit of Canadians and permanent residents. • The work is likely to fill a labour shortage. • The wages and working conditions are sufficient to attract Canadian citizens or permanent residents. • The job offer is genuine. If an LMIA is granted by Service Canada, it can then be used to obtain a work permit. If the foreign national will be working in the province of Québec, special rules apply. Usually, in addition to the LMIA from Service Canada, a Québec Acceptance Certificate (CAQ) must be obtained from the Québec immigration ministry (ministère de l’Immigration et des Communautés culturelles). There are special rules for LMIA applications where an employer is seeking to hire foreign nationals for low-skill positions. 4. LMIA-exempt work permit categories There are a number of potentially useful LMIA-exempt work permit categories that businesses seeking to hire or bring foreign workers into Canada should consider. Some of the main categories are listed here. a. Intra-company transferees This work permit category is useful for transferring managerial or specialized personnel to Canada from a related foreign entity. The general rules are: • The applicant must be an executive or manager, or have “specialized knowledge,” and must be transferring into such a position. • The applicant must have been employed full-time with the related foreign entity outside Canada for at least 12 consecutive months in the three-year period prior to the application. • There must be a proper relationship between the foreign entity and the Canadian entity receiving the transferee (e.g., parent-subsidiary or affiliates owned and controlled by a common parent company). Initial work permits are usually granted for up to a three-year period. There are time caps that may limit the overall length of time that a foreign national may stay in Canada under this category. Executive or managerial transferees have a time cap of seven years while “specialized knowledge” transferees may be in Canada under this type of work permit for up to five years. This work permit category is often used when a foreign company wishes to start doing business in Canada. When setting up the corporate and ownership structure of a new business in Canada, consideration should be given to designing it in a way that will allow for the use of this work permit category. There are special rules for startup situations where the Canadian branch or subsidiary has recently been set up. For example, the initial work permit will be granted for only one year so that the viability of the Canadian operation may be examined prior to granting a renewal of the work permit. b. North American Free Trade Agreement (NAFTA) professional category The NAFTA professional category may be used by eligible American and Mexican citizens. doing business in Canada | 53 NAFTA lists 63 professions that may be eligible for a work permit. The foreign applicant must usually have a university degree related to a listed profession, and the applicant must be entering to apply the skills of that profession. A three-year work permit, which is renewable, may be obtained. Some of the professions listed under NAFTA are computer systems analysts, engineers, scientific technicians, management consultants, medical and some allied professions, and many in scientific categories, such as chemists, geologists and biologists. c. Other free trade agreements with entry provisions Canada also has free trade agreements (FTAs) with work permit provisions that are relatively similar to NAFTA’s professional category with Peru, Chile and Colombia, so eligible professionals from those countries may also have special work permit options. Some FTAs also have special provisions to assist with obtaining intra-company transferee work permits. Canada and the European Union (EU) have announced that they have entered into an FTA. The Canada-EU FTA will have mobility and work permit provisions, but these will only come into effect when the Canada-EU FTA is ratified and implemented, which may take some years. d. NAFTA investor or trader categories These work permit categories are potentially available to American and Mexican applicants who will be employed in Canada by enterprises with American or Mexican nationality. American or Mexican nationality means that at least 50 percent of the entity established in Canada must be held by American or Mexican citizens or entities. For the NAFTA investor category, the foreign national applicant must (i) be seeking entry solely to develop and direct the enterprise (“develop and direct” means that the applicant should have controlling interest in the enterprise), or (ii) if an employee be in a position that is executive or supervisory or that involves essential skills. However, a one-year work permit may be granted to an employee not possessing essential skills if the employee is needed for the startup of a new enterprise, such as a technical employee needed to train Canadians who will be hired by the new business. As well, a substantial investment has to be made. There is no set rule on what constitutes a “substantial” investment. It will depend on the circumstances and the nature of the business. The objective of the NAFTA investor category is to promote productive investment in Canada. Therefore, an applicant is not entitled to this status if the investment, even if substantial, will produce only enough income to provide a living for the applicant and the applicant’s family. For the NAFTA trader category, the foreign national applicant must be entering Canada to carry on substantial trade in goods or services principally between Canada and the United States or Mexico. To be “substantial trade,” over 50 per cent of the total volume of trade conducted by the entity in Canada must be between Canada and the United States or Mexico. The applicant must be employed in a capacity that is executive or supervisory, or that involves essential skills or services. Initial applications under this category must be made to a Canadian visa office outside Canada. The initial work permit is issued for a maximum of one year. Work permit extensions under this category may be granted for two years at a time. Generally, the intra-company transferee category is a preferable option. However, in situations where the corporate structure does not support that category or where the applicant has not worked for the related foreign company for at least 12 months, the NAFTA investor or trader category may provide a solution. e. Entrepreneurs There is a work permit category for entrepreneurs to enter Canada where they will be setting up a business that will hire Canadians to operate it. This is intended to allow the temporary entry of foreign nationals who will set up the business but who will leave Canada once it is up and running. f. Spousal employment program Spouses (including common-law and same-sex spouses) of most foreign nationals working in Canada may apply for a work permit under the Spousal 54 | doing business in Canada Employment Program. The principal foreign national must be working in a position that is at a higher skill level. Typically, this includes management, professional occupations, and technical or skilled trades workers. This program may assist companies in their recruiting efforts since accompanying spouses will usually be able to work in Canada. 5. Permanent resident status Many foreign workers who obtain work permits in Canada wish to apply for permanent resident status. Canada’s permanent resident rules are designed to help such foreign nationals transition to permanent status. If permanent resident status is obtained, the foreign national no longer requires a work permit to work in Canada. doing business in Canada | 55 Canada historically had permanent resident programs aimed at business people (investors and entrepreneurs), but these federal immigration categories have been shut down. If a foreign national intends to settle in Québec, they will need to qualify for permanent resident status under Québec’s immigration system. Québec offers a skilled worker category as well as programs for investors and entrepreneurs. There are also special programs offered by other provinces that may lead to permanent resident status as outlined below. 6. Provincial nominee programs Canadian provinces have provincial nominee programs (PNPs) in place. Each of these provincial programs is different, but generally the PNPs are designed to facilitate the recruitment of foreign skilled workers who are able to address skills shortages within the nominating province. Foreign nationals who qualify under a PNP are able to apply for permanent resident status using the nomination from the province. If a foreign national is nominated under a PNP, he or she may obtain a work permit while the permanent resident application is being processed. Some PNPs also have categories for business people or entrepreneurs. Each of these PNPs has its own unique eligibility requirements and criteria, but the goal is to attract experienced business people or entrepreneurs to purchase or set up businesses that will create employment for Canadians. 7. Other immigration issues There are a number of other immigration considerations that need to be reviewed when bringing a foreign worker to Canada. a. Is an entry visa required? Depending on the citizenship of the foreign national, an entry visa (called a Temporary Resident Visa) may be required before the person may enter Canada. Where this is the case, the foreign national must apply for both the work permit and the entry visa at a Canadian visa office outside Canada. Business visitors from countries that require an entry visa must also apply at a visa office before travelling to Canada. There is also an option to apply online through Immigration Canada’s website. b. Is an immigration medical required? Foreign nationals who have lived in certain designated countries for more than six months in the 12 months prior to the application, and who are coming to Canada for more than six months, require an immigration medical as a condition of entry. This requirement may delay the application process as a work permit applicant who needs an immigration medical must apply through a visa office outside Canada. c. Admissibility issues A foreign national (and any accompanying dependants) seeking entry to Canada may be inadmissible due to criminal convictions, medical conditions or prior entry refusals. If any of these potential admissibility issues apply to a foreign national, the situation must be assessed well in advance to determine whether entry is possible. Where a candidate is inadmissible due to criminality, steps can sometimes be taken to remedy the situation depending upon the seriousness of the offence, the length of time since it occurred and the number of convictions. d. Dependants The accompanying spouse and children of a foreign worker will need to obtain immigration documentation. Spouses may qualify for a work permit under the spousal employment program. Children may need a visitor record or study permit. e. Renewals of work permits Once a work permit is obtained, the ongoing status of foreign nationals working in Canada must be carefully monitored to ensure that a renewal of the work permit is obtained well in advance of its expiry date. If an 56 | doing business in Canada LMIA is the basis for the work permit, a new LMIA will need to be obtained before the work permit may be renewed. f. Changes in position or circumstances If a foreign worker’s job in Canada is to change (such as a change in position, remuneration, duties or location of work), the nature of any change needs to be assessed in advance to determine if a new LMIA and/or new work permit is needed. In addition, corporate changes such as mergers or acquisitions may require a new work permit to be obtained if the foreign national’s employer will be different than the employer named on the work permit. 8. Other considerations There are numerous practical considerations beyond identifying the proper immigration or work permit category to use. a. The application package and supporting documentation It is imperative to put together a strong application package when applying for an LMIA or a work permit. By ensuring that an application is well documented and complete, the likelihood of it being approved is significantly increased. The extent and content of the material included in the application package will depend on the work permit category and the particular circumstances of each situation. b. Employment issues Offers of employment and employment contracts for foreign workers must be carefully crafted. Offers of employment to foreign workers should be made conditional on the worker obtaining a work permit and maintaining valid status to work in Canada. Transferred employees and foreign hires should be required to sign an employment contract during the hiring process to govern the employment relationship. c. Tax issues Different tax rates or dual tax-filing obligations may need to be addressed in intra-company transfer situations. As well, there may be tax issues or withholding issues for the company or for personnel whenever services are being rendered in Canada even where the foreign national may not be directly remunerated in Canada. d. Obtaining provincial health coverage Health coverage is provided by provincial governments in Canada. Transferees or foreign national hires on work permits and their dependants will usually be eligible for public health coverage. The eligibility rules of the province in question need to be examined. Private coverage should be arranged prior to entry to cover any waiting period. Extensions of work permits should be obtained early to avoid potential disruption in public health coverage. e. Social insurance numbers Foreign workers need a social insurance number to be paid employment income in Canada. This may be obtained from a local Service Canada office or by mail. The work permit must be obtained prior to applying for a social insurance number. 9. Conclusion Companies doing business in Canada may need to hire or engage foreign nationals to address their human resource needs. When hiring or recruiting foreign nationals, companies need to be aware of the applicable immigration rules, issues and options. When hiring a foreign national in Canada, or when sending a foreign national to Canada for business purposes, it is also imperative to prepare strong application materials to support the immigration status being sought. Learn more about Gowlings’ services in this area at gowlings.com/immigration doing business in Canada | 57 i | competition and antitrust law Competition law in Canada is set out in a single federal statute, the Competition Act. Related regulations, guidelines, interpretation bulletins and case law all provide guidance as to how the Competition Act is administered and enforced. The Competition Act is primarily administered and enforced by the Competition Bureau (the Bureau) and the Public Prosecutions Service of Canada. Certain provisions of the Competition Act also allow private parties to initiate enforcement proceedings. The purpose of the Competition Act is to maintain and encourage competition in Canada, and it addresses three categories of conduct: mergers, criminal matters and reviewable practices.1 1 The Competition Act also contains civil and criminal provisions relating to advertising and marketing matters. For more information, see section P, “Advertising and marketing.” 58 | doing business in Canada 1. Mergers The Competition Act defines a merger as the acquisition or establishment — whether by purchase or lease of shares or assets, or by amalgamation, combination or otherwise — of control over or a significant interest in all or part of a business. The Bureau has adopted an expansive interpretation of this definition. It has indicated that it will generally not consider the acquisition of less than 10 per cent of the voting shares of a corporation to be a merger. It may consider the acquisition of between 10 and 50 per cent to be a merger, depending on whether the facts suggest that the purchaser will acquire the ability to materially influence the economic behaviour of the target. The Bureau has also taken the position that contractual arrangements, such as shareholders’ agreements or management agreements, can also be considered mergers, provided they confer control over all or part of a business. Unless the Bureau issues an advance ruling certificate (discussed later in this section), it has the right to challenge any merger prior to its completion and for one year following its completion. This right applies to all mergers, including those that do not exceed the mandatory pre-notification thresholds (also discussed later in this section). As a result, although this is uncommon, the Bureau has challenged some mergers that did not exceed the pre-notification thresholds. a. Notifiable mergers Mergers that exceed certain thresholds must be prenotified to the Bureau and may not be completed until either: (i) the statutory waiting period has expired and the Bureau has not obtained an order prohibiting closing, or (ii) the Bureau has completed its review and rendered a disposition that permits closing. b. Thresholds Notification is required if both of the following thresholds are exceeded: • Party size: The parties, together with their affiliates, have assets in Canada or annual gross revenues from sales from or into Canada (exports and imports) that exceed $400 million. • Acquired business size: The aggregate value of the assets in Canada to be acquired, or the annual gross revenues from sales in or from Canada generated by such assets, exceeds $82 million.2 Additional thresholds apply to proposed acquisitions of equity securities or equity interests. Specifically: • The proposed acquisition of voting shares of a publicly traded corporation will not be notifiable unless, following completion of the transaction, the purchaser will own more than 20 per cent of the voting shares (or more than 50 per cent if, prior to the transaction, the purchaser already owned more than 20 per cent). • The proposed acquisition of voting shares of a private corporation will not be notifiable unless, following completion of the transaction, the purchaser will own more than 35 per cent of the voting shares (or more than 50 per cent if, prior to the transaction, the purchaser already owned more than 35 per cent). The financial threshold analysis is based on the most recently available audited financial statements, provided that they are sufficiently recent. If audited financial statements are outdated, do not exist or do not contain sufficiently granular information, the analysis will be based on unaudited financial statements, and internal books and records. The threshold analysis must be updated to reflect material developments (such as acquisitions, divestitures or write-downs) that occur subsequent to the currency date of the financial statements on which the initial analysis was based. If a proposed transaction exceeds the applicable thresholds: • Notification is required even if the transaction obviously raises no substantive competition law concerns. • Failure to comply with the notification provisions can result in a substantial administrative monetary penalty and/or criminal conviction. 2 The figure of $82 million applies in 2014. It is adjusted annually based on the change in Canada’s GDP. doing business in Canada | 59 c. Notification procedure Notification can be effected in two ways: (i) the filing of a prescribed notification form by each of the parties, and/or (ii) requesting an advance ruling certificate. It is not uncommon to submit both types of notification. i. Prescribed notification form The prescribed notification form requires information about the business of the parties and their affiliates, including a narrative description of the business and its operations, financial statements, and customer and supplier lists. Strategic documents relating to the transaction — including business and marketing plans, board papers, and competition analysis — must also be submitted. This should be kept in mind when such documents are being prepared. The submission of complete prescribed forms, as determined by the Bureau, triggers a statutory 30-day waiting period. During this time, the parties may not complete the transaction unless the Bureau completes its review and renders a disposition that permits the parties to close. During the initial 30-day period, the Bureau has the right to issue a supplementary information request (SIR). SIRs are generally reserved for transactions that appear to raise significant competition law concerns. SIRs are relatively rare, with only about half a dozen issued per year. SIRs require the production of substantial additional information, and it is not uncommon for it to take several months for the parties to complete their responses. The issuance of a SIR has the effect of extending the waiting period until 30 days after compliance with the SIR as determined by the Bureau. ii. Advance ruling certificate Another way of effecting notification is to request an advance ruling certificate (ARC). An ARC request is a letter, typically submitted by the purchaser’s counsel, that describes the parties, the transaction and the relevant industry, and explains why the transaction should not be of concern to the Bureau. An ARC is the best possible outcome for the parties — especially for the purchaser as it insulates the transaction from subsequent challenge, provided the transaction is completed within one year of issuance of the ARC. Accordingly, the Bureau typically only issues ARCs in respect of transactions that do not raise material substantive concerns. In situations where the information provided in an ARC request is sufficient for the Bureau to complete its review but the Bureau is neither comfortable enough to issue an ARC nor concerned enough to challenge the transaction, the Bureau will typically issue a no action letter (NAL) and waive the parties’ obligation to submit prescribed forms. Essentially, a NAL advises the parties that while the Bureau has no current plans to challenge the transaction, it reserves the right to do so within one year of closing. As a practical matter, parties can take a high degree of comfort from a NAL as it generally indicates that the transaction will not be subsequently challenged. Since 1986, when merger review was introduced in Canada, the Bureau has only challenged one transaction after issuing a NAL — a challenge it subsequently abandoned. An ARC request does not trigger a statutory waiting period. However, the Bureau has issued guidelines indicating that it will endeavour to complete its review of transactions that it considers to be “non-complex” within 14 days of receiving a complete ARC request, and within 45 days of receiving a complete ARC request for transactions that it considers to be “complex.” Non-complex transactions are readily identifiable by the clear absence of competition issues, and include transactions where there is no or minimal competitive overlap between the parties. Complex transactions involve the merger of competitors or the merger of customers and suppliers where there are indications that the transaction may, or is likely to, create, maintain or enhance market power. The vast majority of transactions are classified as non-complex, with the Bureau completing its review within 14 days following classification. From the parties’ perspective, and particularly the purchaser’s, closing after an affirmative clearance from the Bureau in the form of an ARC or a NAL is generally 60 | doing business in Canada preferable to closing solely on the basis of the passive expiration of the statutory waiting period. Nevertheless, parties have the right to close on the basis of a passive expiration of the statutory waiting period without having received confirmation as to what the Bureau may do. d. Filing fee The filing fee is $50,000. This applies regardless of whether notification is effected by way of prescribed forms, ARC request or both. The issue of which party should pay the filing fee is a matter of business negotiation between the parties and should be addressed in the transaction’s purchase agreement. Common arrangements include the purchaser paying 100 per cent of the filing fee or the parties agreeing to each pay half. e. Test The test that the Bureau applies in determining whether to challenge a proposed transaction is whether the transaction would prevent or lessen (or be likely to prevent or lessen) competition substantially. This test, as judicially defined, seeks to determine whether the transaction would give the merged firm the ability to profitably raise prices in the post-merger competitive environment or would create, maintain or enhance the merged entity’s ability to exercise market power. f. Possible outcomes The possible outcomes of a merger review can generally be summarized as follows: • The Bureau renders a disposition that permits the parties to close according to their desired schedule without any changes to the transaction. This occurs in the vast majority of cases. • The Bureau takes longer than the parties would desire to complete its review. Closing is delayed but ultimately not challenged, and proceeds without any substantive change to the transaction. While not uncommon, this is certainly not typical. • The Bureau agrees not to challenge the transaction on the basis of concessions made by the parties, such as the divestiture of certain assets. In the relatively rare situations where the proposed merger raises significant competitive concerns, this is a common outcome. • The Bureau challenges the transaction before the Competition Tribunal (the Tribunal), a specialized quasi-judicial tribunal, by seeking an order to prohibit its completion. If the transaction is already complete, the Bureau seeks an order requiring that the transaction be undone or requiring the purchaser to sell part or all of the acquired business to a third party. This is extremely uncommon. 2. Criminal matters As a result of significant amendments to the Competition Act that took effect in March 2009 and March 2010, several criminal offences were repealed and/or converted into reviewable practices. As a result, the Competition Act has effectively been left with only two criminal-offence provisions: conspiracy and bidrigging.3 Both offences are per se illegal, meaning that the effect of the conduct on competition is irrelevant. The standard of proof is beyond a reasonable doubt. The penalties for violating these provisions are severe. Conviction may result in a combination of a substantial fine for the corporation and culpable individuals, prison time for culpable individuals, class action proceedings, civil damages awards, and reputational damage. The trend in Canada appears to be toward more frequent prosecution, higher fines and more jail sentences. An investigation or allegation that does not ultimately result in conviction can still be, and usually is, costly, disruptive and damaging to reputations. Accordingly, it is generally prudent to avoid conduct that could give rise to even the appearance of a violation of the Competition Act’s criminal provisions. a. Conspiracy It is unlawful for competitors to agree to: • Fix, maintain, increase or control prices (including discounts, rebates, allowances, concessions or other advantages). 3 The price-discrimination, predatory-pricing and promotional-allowances provisions were repealed. The applicable conduct can still be challenged under the more general reviewable-practice provision relating to abuse of dominance. The price-discrimination provision was converted into a reviewable practice. The Competition Act also contains criminal provisions that address false and misleading advertising. These provisions are discussed in section P, “Advertising and marketing.” doing business in Canada | 61 • Allocate sales, territories, customers or markets. • Fix or control the production or supply of a product. A “competitor” is broadly defined to include any person who it is reasonable to believe would be likely to compete with respect to a product. The definition includes existing competitors as well as potential competitors. The alleged agreement need not be written (and often is not) and can be proved solely on the basis of circumstantial evidence. There must be proof of an agreement in order for there to be a conviction. The Competition Act sets out an ancillary restraint defence and a regulated conduct defence. The ancillary restraint defence applies where the challenged agreement is ancillary to, and necessary to give effect to, a broader agreement that is not itself unlawful. An example of this would be a temporary non-compete covenant in an asset purchase agreement, pursuant to which the seller agrees not to compete with the buyer with respect to the purchased business. The regulated conduct defence applies where conduct that would otherwise violate the Competition Act is authorized and specifically required by other legislation. An example of this would be provincial agricultural marketing-board legislation that requires producers to limit quantities and sell at specific prices. The penalty for conspiracy is imprisonment for up to 14 years and/or a fine of up to $25 million. b. Bid-rigging Bid-rigging occurs when: • Two or more persons agree that one or more of them will not submit a bid/tender, or will submit and then withdraw a bid/tender in response to a request for bids/tenders. • Bids/tenders are submitted that are arrived at by agreement between two or more bidders. Unless the agreement is made known to the persons who requested the bids before the bids are submitted. The penalty for bid-rigging is imprisonment for up to 14 years and/or a fine at the discretion of the court. c. Immunity The Bureau has established an immunity program under which the first conspirator to report a conspiracy may receive immunity from criminal prosecution (but not civil damages arising out of private causes of action) if that conspirator, among other things, did not coerce others into participating in the conspiracy and co-operates in the prosecution of other conspirators. Subsequent immunity applicants may receive some form of leniency in the form of reduced fines but will not qualify for full immunity. d. Private actions The Competition Act provides private parties with a right to sue to recover actual damages suffered as a result of a violation of the Competition Act’s criminal provisions. In theory, private parties have the right to initiate proceedings to prove both the violation of a criminal provision and their damages. As a practical matter, private parties tend to rely on convictions or guilty pleas that result from government (i.e., Public Prosecutions Service of Canada) enforcement to prove the violation, and their actions are limited to proving their damages. Private claims typically take the form of class actions. 3. Reviewable practices The Competition Act’s reviewable-practices provisions address conduct that is presumptively lawful. Such conduct can only be prohibited if the Tribunal finds that, depending on the reviewable practice in question, the conduct substantially prevents or lessens competition or has an adverse effect on competition. The standard of proof is a balance of probabilities. For all but one of the reviewable practices, the only remedy available is a prohibition order. The underlying theory is that parties should not be punished for engaging in conduct that is presumptively lawful. Abuse of dominance is the exception, and can result in a divestiture order and potentially significant administrative monetary penalties. The Bureau may initiate proceedings before the Tribunal in respect of all of the reviewable practices. 62 | doing business in Canada Private parties have the right to initiate proceedings before the Tribunal with respect to certain reviewable practices, but they first need to obtain leave of the Tribunal. a. Competitor agreements This provision applies to all agreements between competitors other than those specifically covered by the criminal conspiracy provision previously discussed. Examples of such agreements include joint ventures and strategic alliances. While such agreements often promote competition and enhance efficiency, they can be anti-competitive in some circumstances. If, upon application by the Bureau, the Tribunal finds that a proposed or existing agreement between competitors has, or is likely to have, the effect of preventing or lessening competition substantially, the Tribunal may order that the agreement be terminated or amended. The Tribunal may not make an order against an agreement that is likely to result in efficiency gains that will be greater than (and will offset) the effects of any prevention or lessening of competition. This is provided that the gains in efficiency would not likely be attained if an order were made. b. Abuse of dominance At the outset, it is worth noting that dominance alone is not problematic under the Competition Act; it is the abuse of dominance that the Competition Act seeks to address. In order for the Bureau to succeed in an abuse of dominance case, it must convince the Tribunal that: i. One or more businesses have market power in one or more relevant markets in Canada or a part of Canada. Market power is the ability to profitably charge prices above competitive levels for a sustained period of time. A finding of market power generally requires the combination of a high market share and barriers to entry (e.g., high sunk costs or regulatory restrictions). There have been less than 15 cases pursued under the abuse of dominance provision since it was added to the Competition Act in 1986, and nearly all of them involved a party (or parties) with market shares substantially above 50 per cent. ii. The dominant business or businesses have engaged, or are engaging, in a practice of anti-competitive acts. To be considered anti-competitive, the intended purpose and effect of the acts must be exclusionary, disciplinary or predatory, and directed at one or more competitors. While a customer or supplier can be central to the facts of an abuse of dominance case, the anti-competitive act itself must be directed at a competitor (e.g., entering into a long-term exclusivity arrangement with a supplier for the purpose of rendering that supplier unavailable to a competitor, or offering below-cost pricing to a critical customer of a competitor). iii. The anti-competitive acts are having, or will likely have, the effect of preventing or lessening competition substantially. A finding of a substantial prevention or lessening of competition is based on a “but for” test (i.e., whether prices in the applicable market would be lower but for the conduct in question). If the Tribunal finds abuse of dominance, it may order the transgressing business or businesses to cease the acts in question and/or take certain actions, such as the divestiture of assets or shares, that the Tribunal considers necessary to overcome the effects of the anti-competitive practice. The Tribunal may also impose an administrative monetary penalty of up to $10 million for an initial transgression and up to $15 million for each subsequent transgression. The power to impose administrative monetary penalties was added to the Competition Act in 2009. To date, no administrative monetary penalties have been imposed. The Bureau is, for the first time, seeking administrative monetary penalties in two related cases that are currently before the Tribunal. These cases involve alleged behaviour similar to what had previously been subject to a consent order issued by the Tribunal. doing business in Canada | 63 c. Price maintenance Price maintenance occurs when a supplier — by agreement, threat or promise — influences upward or discourages the reduction of the price at which a seller sells, offers to sell or advertises a product within Canada. Price maintenance also occurs when a supplier refuses to supply a product to, or otherwise discriminates against, a seller because of the low pricing policy of that seller. If a supplier suggests a minimum resale price to a reseller, that suggestion constitutes price maintenance unless the supplier also makes it clear that the reseller is under no obligation to follow the suggestion, and that it will in no way suffer in its business relationship with the supplier if it fails to follow the suggestion. If the Tribunal finds that price maintenance has had or is likely to have an adverse effect on competition in a market, the Tribunal may order the supplier to cease engaging in the challenged conduct and/or accept the seller as a customer on usual trade terms. The Bureau or an affected seller (with leave of the Tribunal) may seek such an order from the Tribunal. Prior to March 12, 2009, price maintenance was a per se criminal offence. In the more than five years since its conversion to a civil reviewable practice, numerous suppliers have engaged in various forms of price maintenance, yet only one case has ever been considered by the Tribunal, and that case was not a typical price maintenance case. (It involved various fees Visa and MasterCard impose on merchants who accept their cards, rather than a situation where a supplier influences upward or discourages the reduction of the price at which a reseller sells or advertises the supplier’s product.) d. Refusal to deal If a supplier refuses to supply a would-be customer, the Tribunal may order the supplier to supply the would-be 64 | doing business in Canada customer on usual trade terms if the Tribunal finds that: i. The would-be customer is substantially affected in his or her business, or is precluded from carrying on business due to an inability to obtain adequate supplies on usual trade terms. ii. The reason that the customer or potential customer is unable to obtain adequate supplies is because of insufficient competition among suppliers. iii. The customer or potential customer is willing and able to meet the usual trade terms of the supplier or suppliers of the relevant product. iv. The relevant product is in ample supply. v. The refusal to deal is having or is likely to have an adverse effect on competition in a market. The Bureau or a would-be customer (with leave of the Tribunal) may seek such an order from the Tribunal. e. Tied selling Tied selling is a form of refusal to deal in which a supplier agrees to supply a customer with a product only on the condition that the customer: i. Acquire a second product from the supplier. ii. Refrain from using or distributing, in conjunction with the supplier’s product, another product that is not manufactured or designated by the supplier. Tied selling includes inducing a customer to agree to these conditions by offering to supply the customer on more favourable terms. If the Tribunal finds that tied selling is engaged in by a major supplier or is widespread in a market and is likely to: (i) impede entry or expansion of a firm, (ii) impede introduction of a product or expansion of sales, or (iii) have any other exclusionary effect with the result that competition is or is likely to be lessened substantially, the Tribunal may prohibit the continuation of the practice or impose any other requirement necessary to overcome the anticompetitive effects of the practice. The Bureau or an affected customer (with leave of the Tribunal) may initiate proceedings before the Tribunal. f. Exclusive dealing Exclusive dealing occurs when a supplier, as a condition of supply, requires a customer to deal only or primarily in products supplied or designated by the supplier, or refrain from dealing in a specified product except as supplied by the supplier. Exclusive dealing includes inducing a customer to agree to these conditions by offering to supply the customer on more favourable terms. The required proof and remedial action are the same as described under tied selling. As with tied selling, the Bureau or an affected customer (with leave of the Tribunal) may initiate proceedings before the Tribunal. There have only been a few cases involving exclusive dealing and tied selling since these provisions were added to the Competition Act in 1976. What little case law exists suggests that in order for the Bureau or an affected private party to have a viable case, the alleged tied selling and/or exclusive dealing must make it nearly impossible for a competing supplier to enter or exist in a market. g. Vertical market restriction Vertical market restriction occurs when a supplier, as a condition of supply, requires a customer to supply a product only in a defined market, or exacts a penalty from the customer if the product is supplied outside a defined market. If the Tribunal finds that the practice is engaged in by a major supplier or is widespread in a market and is likely to substantially lessen competition, the Tribunal may prohibit the continuation of the practice or impose any other requirement necessary to overcome the anticompetitive effects of the practice. The Bureau or an affected customer (with leave of the Tribunal) may initiate proceedings before the Tribunal. There have been no cases involving the direct application of the vertical market restriction provision since it was added to the Competition Act in 1976. Learn more about Gowlings’ services in this area at gowlings.com/competition doing business in Canada | 65 j | regulation of foreign investment Foreign investment in Canada is regulated by the federal Investment Canada Act (ICA). Its purpose is to encourage foreign investment on terms that are beneficial to Canada. While the ICA is primarily administered by Industry Canada, the Department of Canadian Heritage administers the ICA in relation to defined “cultural businesses,” which will be discussed later in this section. In general, the acquisition of control of an existing Canadian business or the establishment of a new Canadian business by a foreign investor is subject to notification or review. 66 | doing business in Canada Notification is a simple process involving the completion of a prescribed form to provide basic information about the foreign investor and the Canadian business. It is not an impediment to the closing of an acquisition. In fact, it can be submitted within 30 days of closing and is usually submitted after closing. Where review is required, the foreign investor must submit more detailed information about itself and the Canadian business before closing, including its detailed plans for the Canadian business. Where review is necessary, the foreign investor may only complete the proposed investment if the minister of industry or the minister of Canadian heritage, as applicable, determines it to be of “net benefit to Canada.” Whether the investment is reviewable, or merely notifiable, depends on a combination of the following factors: • The value of the assets of the Canadian business. • Whether the investor is controlled by residents of a World Trade Organization (WTO) member state. • Whether the Canadian target carries on a defined cultural business. • Whether the investment is to be effected directly, through the acquisition of a Canadian business, or indirectly, through the acquisition of a foreign business of which the Canadian business is a subsidiary. Certain transactions involving foreign investors are exempt from the provisions of the ICA, such as internal corporate reorganizations that involve no change of ultimate control, realization of security held by a foreign entity on Canadian assets, bona fide estate transfers, and acquisitions of control of Canadian businesses subject to review under other Canadian legislation, such as the Bank Act (Canada). 1. Canadian business A business is deemed Canadian when it has: • A place of business in Canada • One or more individuals in Canada who are employed in connection with (but not necessarily by) the business • Assets in Canada that are used to carry on the business 2. Foreign investor A foreign investor is essentially a non-Canadian. With respect to individuals, a Canadian is a Canadian citizen or, subject to certain qualifications, a permanent resident of Canada within the meaning of Canada’s immigration legislation. With respect to a business undertaking, including one owned by a government, the undertaking is considered Canadian if it is Canadian-controlled. Provisions relating to Canadian control are detailed and complex, but generally: • If one Canadian, or two or more Canadian members of a voting group, owns a majority of the voting interests of an entity, the entity is Canadian-controlled. • Conversely, if one non-Canadian, or two or more non-Canadian members of a voting group, owns a majority of the voting interests of an entity, the entity is not Canadian-controlled. • With respect to a widely held public company that is not controlled in fact through the ownership of voting shares, the corporation is deemed to be Canadian-controlled if at least two-thirds of the board of directors is Canadian. 3. Acquisition of control The ICA contains detailed and complex provisions relating to the acquisition of control of a Canadian business by a foreign investor. To summarize: • The acquisition of a majority of a corporation’s voting shares is deemed to be an acquisition of control. • The acquisition of less than a majority but more than one-third of a corporation’s voting shares is considered an acquisition of control, unless it can be established that the acquiring party will not have control in fact of the corporation. For example, a 40 per cent acquisition would not result in control if doing business in Canada | 67 another shareholder owned the remaining 60 per cent and a shareholders’ agreement limiting the larger shareholder’s rights did not exist. • The acquisition of less than one-third of a corporation’s voting shares is deemed to not be an acquisition of control. 4. Review thresholds Thresholds differ depending on the characteristics of the investor and the investment in question. If the review thresholds are not exceeded, the investment is subject to the simple notification procedure previously described. a. Direct investment by a WTO resident investor in a non-cultural business The proposed direct acquisition of a Canadian business by an investor that is a resident of a WTO member is reviewable if the book value of the assets of the Canadian business — as stated on its financial statements at the end of its most recently completed fiscal year — exceeds $354 million.1 A lower threshold applies if the Canadian business is engaged in cultural business activities. The government plans to replace the book value threshold with a threshold based on enterprise value. The value will initially be set at $600 million and will increase incrementally to $1 billion over the following four years (with subsequent increases to follow). It is not yet known when the new threshold will take effect. The new threshold will not apply to investments by foreign state-owned enterprises (SOEs). SOEs will remain subject to the book value threshold. b. Direct investment by a WTO resident investor in a cultural business The proposed direct acquisition of a Canadian cultural business by an investor that is a resident of a WTO member is reviewable if the book value of the assets of the Canadian business exceeds $5 million. Cultural businesses include: • The publication, distribution or sale of books, magazines, periodicals or newspapers in print or machine-readable form, but not including the sole activity of printing or typesetting books, magazines, periodicals or newspapers. • The production, distribution, sale or exhibition of film or video recordings. • The production, distribution, sale or exhibition of audio or video music recordings. • The publication, distribution or sale of music in print or machine-readable form. • Radio communications in which the transmissions are intended for direct reception by the general public, any radio, television and cable television broadcasting undertakings, and any satellite programming and broadcast network services. The ICA does not provide an exemption for de minimis involvement in a cultural business. Thus, even if a Canadian business is primarily involved in non-cultural business activities, a minimal involvement in cultural business activities will trigger the review obligation if the $5-million threshold is exceeded. When review is required in respect of a proposed acquisition of a Canadian business that involves both non-cultural and cultural business activities, applications for review must be submitted to Industry Canada (in respect of the non-cultural aspects of the business) and the Department of Canadian Heritage (in respect of the cultural aspects of the business). c. Indirect investment by a WTO resident investor Indirect investments by WTO resident investors are not reviewable unless they involve the acquisition of a Canadian cultural business, in which case the $5-million threshold applies. It should be noted that structuring a transaction for the purpose of avoiding review (e.g., incorporating a corporation outside of Canada, the sole assets of which are the shares of the Canadian corporation, and then purchasing the shares of the foreign corporation) is not permissible. 1 The figure of $354 million applies in 2014. It is adjusted annually based on the change in Canada’s GDP. 68 | doing business in Canada d. Direct investments by a non-WTO investor A proposed direct acquisition of a Canadian business by an investor that is not a resident of a WTO member is reviewable if the book value of the assets of the Canadian business exceeds $5 million, regardless of whether the Canadian business is engaged in noncultural or cultural business activities. e. Indirect investment by a non-WTO investor The proposed indirect acquisition of a Canadian business by an investor that is not a resident of a WTO member is reviewable if: • The book value of the assets of the Canadian business exceeds $50 million. • The book value of the assets of the Canadian business exceeds $5 million and the value of the assets of the Canadian business represents more than 50 per cent of the value of the assets of the target’s entire international business. As with indirect acquisitions by residents of a WTO member, the $5-million threshold also applies if the Canadian business is engaged in cultural business activities. f. Discretionary powers In addition to reviews that result from the application of the aforementioned rules, the government has other discretionary powers to order a review. doing business in Canada | 69 For example: • The government can review any investment that “could be injurious to national security.” • The government can deem that an entity is an SOE in fact or deem that there has been an acquisition of control. • With respect to most types of cultural businesses, the government can: » Elect to review the acquisition of control of an existing business or the establishment of a new Canadian business within 21 days of receiving the foreign investor’s notification. » Deem a business that carries on, or proposes to carry on, any such business to be non-Canadian on the basis that the business is controlled in fact by one or more non-Canadians. 5. Review Where review is required, the foreign investor must submit an application for review and may not complete the proposed investment until the minister of industry and/or minister of Canadian heritage, as applicable, has determined it to be of “net benefit to Canada.” In the application, detailed information is required about the foreign investor, the Canadian business and the foreign investor’s plans for the Canadian business. To determine whether the proposed investment is likely to be of net benefit to Canada, the government considers factors including: • The effect of the investment on the level and nature of economic activity in Canada, including its effect on employment, resource processing, the utilization of parts, components and services produced in Canada, and exports from Canada. • The degree and significance of participation by Canadians in the business. • The effect on productivity, industrial efficiency, technological development, product innovation and product variety in Canada. • The effect on competition within any industry in Canada. • Compatibility with national industrial, economic and cultural policies. • Its contribution to Canada’s ability to compete in world markets. In considering these factors, the minister of industry or the minister of Canadian heritage, or both as applicable, will consult with other relevant federal government departments as well as the governments of affected provinces, which are typically provinces in which the Canadian business has assets or employees. A determination of net benefit to Canada is usually based on undertakings made by the foreign investor in relation to the factors outlined previously. Undertakings are legally binding commitments made by a foreign investor that typically remain in effect for three to five years and are subject to compliance reviews and audits over that time. In our experience, the government is most concerned with securing undertakings that relate to specific levels of employment in Canada, the inclusion of Canadians in management positions, capital investment in the Canadian business and further development in Canada of Canadian-sourced technology. However, the specific focus of the undertakings varies depending on the nature of the business. a. Timing The ICA provides the minister of industry and/or minister of Canadian heritage, as applicable, with 45 days to determine whether a proposed investment would be of net benefit to Canada, along with a unilateral right to extend the review period by 30 days. Additional extensions require the agreement of the foreign investor, without which the applicable minister would likely reject the investment. In our experience, it is not uncommon for the review of large and complex transactions with significant political overtones to extend beyond 75 days. b. Possible outcomes The government may either approve the proposed investment or reject it. Almost all proposed investments are ultimately approved based on undertakings negotiated between the investor and the government. Only a handful of high-profile and/or politically contro- 70 | doing business in Canada versial transactions have been rejected. For transactions that could raise significant political concerns, foreign investors should not underestimate the importance of an effective government relations strategy. c. Fee There is no filing fee for either an application for review or a notification. 6. National security In 2009, the ICA was amended to provide the government with the right to review any investments that “could be injurious to national security.” The right applies to minority investments, internal reorganizations and the establishment of new Canadian businesses, not just the acquisition of control of existing Canadian businesses. It can also apply to investments in businesses with tenuous links to Canada, as a review can be ordered in respect of an investment in a business if “any part” of its operation is in Canada. There is no minimum investment size below which a review on national security grounds may not be ordered. The government provides no guidance as to what kind of investment could constitute a threat to national security. The national security provision empowers the government to prohibit any proposed investment, impose conditions on its completion, or require divestiture of a completed investment. In early 2013, the government amended the national security provisions to provide itself with additional flexibility in relation to national security matters. Although full information on the government’s use of the national security powers in the context of particular transactions is not public, it is known that the government has invoked these powers on at least a few occasions. The biggest risk to foreign investors posed by the national security review powers relates to transactions that do not exceed the applicable mandatory threshold and can therefore be completed before being notified, as it is possible that the government could conduct a review and order divestiture after closing. The government may not commence a national security-related review more than 45 days after receiving an investor’s notification. Therefore, to address this risk in the context of transactions that could possibly raise national security-related concerns, due to the nature of the acquired Canadian business and/or the foreign investor, the investor can submit a notification more than 45 days before closing, and include a closing condition in the purchase agreement that either no national security review shall have been commenced, or any such review that is commenced shall have been concluded on terms satisfactory to the investor. 7. State-owned enterprises (SOEs) In late 2007, the government issued guidelines to clarify how the “net benefit to Canada” test will be applied in the context of proposed investments by foreign SOEs. In late 2012 and early 2013, the government provided additional guidance with respect to the application of the net benefit to Canada test and amended various provisions of the ICA in relation to SOEs. Essentially, the purpose of the guidelines is to ensure that the acquired Canadian business will continue to be operated on a commercial basis with transparent corporate governance and reporting requirements, rather than to serve the non-commercial, political objectives of a foreign state. The purpose of the amendments is to subject SOE purchasers to a lower review threshold than non-SOE purchasers. 8. Sector-specific legislation In addition to the general ICA process, various federal and provincial statutes place additional restrictions on foreign ownership in specific industries. Learn more about Gowlings’ services in this area at gowlings.com/international doing business in Canada | 71 k | international trade In recent years, Canada has negotiated aggressively and has concluded numerous new trade agreements that were built upon, and have gone beyond, the North American Free Trade Agreement (NAFTA) model. With the gains in NAFTA firmly in place, Canada and the United States have endeavored to intensify North American economic co-operation through enhanced border co-operation and regulatory harmonization within the “Beyond the Border” initiative. In addition, Canada has been active in wrapping up several investment treaties, thus securing protection for Canadian investors abroad. 72 | doing business in Canada While integration provides enhanced opportunities, it also gives rise to a need to comply with the legal framework governing trade and customs in each country, and a need to understand the recourse available when investment and trade disputes arise. 1. Importation of goods a. Duties and tax In Canada, customs duties are levied on imported goods that are classified under the Schedule to the Customs Tariff, in accordance with the harmonized system of customs classification. Duties represent the principal tax levied on goods imported into Canada. In addition to customs duties, imported goods and some services are subject to the federal Goods and Services Tax (GST). For more information on the GST, see section E, “Taxation.” While tariff classification is based on the harmonized system, goods may be classified differently in Canada than in other countries, which often raises the question of whether the components within an imported product undergo the necessary tariff shift to claim preferential treatment under a trade agreement such as NAFTA. There are many special tariff items under the Customs Tariff that allow for duty relief, such as goods destined for particular end uses. Canada also has duty-relief programs for temporary importations, as well as duty drawbacks and deferrals. b. Valuation Classification of a product under the Customs Tariff provides the rate of duty, which is then applied to the value for duty to calculate the duty payable. Canada’s system of customs valuation is based on the World Trade Organization’s Customs Valuation Code, which has been implemented into Canada’s Customs Act. Transaction value is the primary valuation method in respect of imported goods. It is the price actually paid or payable for the goods sold for export to a purchaser in Canada, subject to certain upward and downward adjustments. Issues relating to transaction-value methodology often arise in related-party transactions due to the requirement that the value for duty reflects an “arm’s-length” transaction. There is often a tension between transferpricing objectives from a tax perspective and a customs perspective. A balance must be achieved to establish a transfer price that satisfies customs while maximizing tax-planning objectives. c. Rules of origin Preferential rates of duty are accorded to products that originate in a country with which Canada has a free trade agreement, such as NAFTA, or agreements between Canada and Panama, Peru, Israel, Chile and other states. Where a product “originates,” so as to benefit from a trade agreement, is determined by rules of origin, which may involve complex calculations and analysis of both the tariff classification and value of the components that make up an imported product. d. Appeals Tariff classification, valuation and origin issues may all be appealed at the first level internally with the Canada Border Services Agency (CBSA), and then to an independent tribunal, the Canadian International Trade Tribunal (CITT). e. Import restrictions Canada maintains quantitative restrictions (tariff rate quotas) primarily on sensitive agricultural products under the authority of the Export and Import Permits Act, which authorizes an import control list. A permit must be obtained to import these products unless a permit exemption applies. 2. Anti-dumping and countervailing duties The Special Import Measures Act (Canada) deals with dumping by foreign manufacturers/exporters, as well as subsidies received by foreign manufacturers. Dumping occurs when goods are sold for export at a price lower than that at which they are domestically sold in the country of origin under comparable doing business in Canada | 73 conditions and terms of sale. The difference between the “normal” value and the export price is the margin of dumping. A subsidy is a financial or other benefit that is granted by the administration of the country of origin to a manufacturer of exported goods. Subsidies may be subject to countervailing duties. While the CBSA determines the amount of dumping or subsidy, Canada does not impose duties on the dumped or subsidized goods unless the CITT finds that the dumping or subsidization has caused or threatens to cause material injury to a domestic producer. In recent years, dumping and subsidy actions before the CITT have often resulted in success for foreign manufacturers. 3. Export controls and sanctions a. Export controls Canada has a comprehensive regime for export controls and sanctions that is administered primarily by the Department of Foreign Affairs, Trade and Development (DFATD), with enforcement assistance from the CBSA. Three lists established under the authority of the Export and Import Permits Act govern exports of goods and technology from Canada to various destinations: the Export Control List, the Area Control List and the Automatic Firearms Country Control List. Under the Act, it is an offence to export or transfer goods or technology included on the Export Control List or to a destination on the Area Control List, except under the authority of a permit. Canada does not have a “licensing” system similar to the U.S., which makes it necessary for each exporter of a controlled good or technology to apply for a permit where one is required. The minister of foreign affairs has issued several general export permits (GEPs) that allow exports of controlled goods or technology to specific destinations without the requirement to apply for an exporterspecific permit, when certain conditions are met. In the absence of an applicable GEP, exporters must apply for an individual export permit (IEP) to export controlled goods or technology, or to export to a controlled destination. DFATD has recently added more categories of “broad base” permits that authorize multiple shipments to multiple destinations over a certain time period, particularly for cryptography exports, which has created significant compliance problems for Canadian exporters. Detailed schedules to the Export Control List, which set out the specific goods and technology that are controlled, are included in the Government of Canada’s A Guide to Canada’s Export Controls, which is available online at international.gc.ca. While Canada’s export control regime focuses on “export or transfer” versus “origin,” item 5400 of the Export Control List respects the United States’ controls on the re-export of U.S.-origin goods by requiring a permit to export U.S.-origin goods and technology from Canada. DFATD usually considers a good to be of U.S. origin if it contains greater than 50 per cent U.S. content. General Export Permit No. 12 allows the export or transfer of U.S.-origin goods/technology without an individual export permit, except to Cuba, North Korea, Iran, Syria or any destination on Canada’s Area Control List. Export permits are not required for most controlled goods or technology destined to a final consignee in the U.S. Those items that do require an export permit to the U.S. are identified on the Export Control List by virtue of a statement indicating that the control applies to “all destinations.” No goods or technology may be exported or transferred from Canada to a country on the Area Control List without an individual export permit. The countries currently listed include Belarus and North Korea. A number of specific export controls are imposed by legislation administered by government departments other than DFATD. These controlled products include wheat and barley, certain cultural property, rough diamonds, endangered species, ozone-depleting substances, hazardous waste, and certain wild plants and animals. 74 | doing business in Canada b. Sanctions Canada has two main statutes that authorize the imposition of trade and economic sanctions: the United Nations Act and the Special Export Measures Act. In addition to export controls, regulations passed pursuant to these acts impose various other measures, such as limitations on official and diplomatic contacts, restrictions on economic activity between Canada and states that are the targets of sanctions, and the seizure or freezing of property situated in Canada. Export controls are normally limited to arms and related material and technical assistance, but may be broader for a particular state, such as Canada’s very restrictive sanctions on Iran and Syria. doing business in Canada | 75 4. Controlled goods regime Public Works and Government Services Canada manages the Controlled Goods Program (CGP), which requires mandatory registration and regulation of persons and entities who examine, possess or transfer defence goods as defined in Canada’s Defence Production Act. The CGP was created in 2001 to strengthen the Canada-U.S. agreement on defence trade controls and is essential to maintaining the Canadian exemption with respect to the U.S. International Traffic in Arms Regulation (ITAR) regime. In October 2011, the CGP began implementing the Enhanced Security Strategy (ESS), which imposes heightened security requirements on registered persons and entities. These heightened requirements were adopted to allow Canadian registrants to make use of the new ITAR dual-national rule, which amends the treatment of dual and third-country nationals in a manner that resolves the conflict that existed between the ITAR restrictions and Canadian human rights laws that prohibit discrimination based on nationality. 5. Investor-state disputes Canada is party to a number of trade and investment agreements that permit an investor of a foreign country to bring a claim against the Canadian government for a breach of an obligation owed to the investor under the treaty, by either the federal government or a province. The investor-state provisions of NAFTA have given rise to a number of claims brought against Canada. Obligations owed to investors under Canada’s investment treaties include: (i) the requirement to accord national treatment and a minimum standard of treatment, (ii) the prohibition against the adoption of certain performance requirements (e.g., domestic content requirements) and (iii) the commitment to pay compensation for expropriation. Canadian investors abroad can also bring similar claim against their host country’s government under the numerous investment treaties now in force between Canada and foreign countries, such as Benin, Honduras and Venezuela. 6. Canada’s blocking legislation: The Foreign Extraterritorial Measures Act The Foreign Extraterritorial Measures Act (FEMA) provides for the enactment of orders to prevent compliance by Canadian companies with extraterritorial measures of other countries. There is currently only one order in force under the Act: the Foreign Extraterritorial Measures (United States) Order. This order creates a dangerous “catch-22” for related Canadian and American companies by prohibiting a Canadian company from complying with American extraterritorial measures restricting trade between Canada and Cuba. If the company complies with U.S. law, it faces serious sanctions under FEMA. On the other hand, if it does not comply with U.S. law, it may face serious sanctions under the U.S. laws that prohibit trade with Cuba. The FEMA order also imposes an obligation on Canadian companies to “report” communications received that relate to an extraterritorial measure of the U.S. pertaining to Cuba, and imposes strict penalties for non-compliance to this obligation. FEMA issues often arise in the context of mergers between Canadian and American companies where the Canadian companies have existing Cuban businesses. 7. Proactive trade compliance Failure to comply with the numerous laws and regulations that govern trade with Canada can result in serious penalties and prosecution, as well as disruptions in business operations. It is important for companies intending to do business in Canada to retain experienced trade counsel, both to ensure compliance and to identify strategies that enhance the ability to operate competitively in the Canadian market. Learn more about Gowlings’ services in this area at gowlings.com/trade 76 | doing business in Canada l | environmental protection As Canada is an expansive country with a substantial industrial base, plentiful natural resources, and significant coastal, Arctic, forested and agricultural regions, it faces a wide range of potential environmental issues. Canada’s Constitution Act, 1867 divides legislative power between the federal Parliament and the provincial legislatures. While many specific areas of jurisdiction are enumerated in the Act, the power to enact legislation with respect to the environment is not. Canadian courts have decided that the power to create environmental law is shared between the two levels of government. Authority to enact environmental law is within the scope of a government’s powers so long as the primary purpose falls under at least one of its enumerated powers listed in the Constitution Act, 1867. For example, federal environmental laws are often enacted under the federal Parliament’s exclusive jurisdiction to legislate concerning criminal law, fisheries, and peace, order and good government. Provincial environmental laws are generally premised on the provincial power to legislate concerning property and civil rights, and matters of a purely local nature. Municipal governments also play a role in Canadian environmental law, but to a much lesser extent. As municipal jurisdiction is not addressed in the Constitution Act, 1867, it is defined by each province’s governing statute concerning local government. In addition to government-created law, environmental obligations and liabilities may be incurred pursuant to contract and common law. 1. Federal environmental laws a. Canadian Environmental Protection Act, 1999 Canada’s primary environmental regulatory statute is the Canadian Environmental Protection Act, 1999 (CEPA). CEPA establishes the federal authority to regulate with respect to a broad range of environmental concerns, ranging from toxic substances to environmental emergencies. Under CEPA, any substance listed in Schedule 1 is classified as a toxic substance and subject to a series of specific controls. In particular, the minister of the environment has authority to require any person to provide samples and information with respect to a substance. Additionally, CEPA outlines procedures for substances that are newly introduced to Canada. The importation or manufacture of any substance not listed on the Domestic Substances List is prohibited above prescribed volume thresholds until the substance and its risks can be assessed by Environment Canada and Health Canada. CEPA also imposes a duty to report and a duty to take remedial action on persons who own or are in control of a spilled toxic substance. Persons who contribute to the initial release of a toxic substance may also be subject to the same duties. Under CEPA, the director is given authority to issue orders in the case of environmental emergencies. A variety of enforcement powers are provided for under CEPA. Any person in breach of the Act’s provisions may face monetary penalties or, in certain cases, imprisonment. Officers and directors may be subject to prosecution if they authorize, assent to or acquiesce in the commission of an offence, or if they fail to take all reasonable measures to ensure compliance. Diversion from the standard prosecution process may be available through Environmental Protection Alternative Measures agreements (EPAMs). In June 2012, key provisions of the Environmental Enforcement Act came into force, amending the sentencing and penalty provisions of CEPA and a host of other federal environmental legislation. Most notably, the new penalty provisions introduce mandatory minimum fines and dramatically increased maximum fines. The new provisions also provide for a doubling of the minimum and maximum penalties where a person is convicted of a subsequent similar offence under CEPA or another environmental act. Under the new regime, smaller corporations are subject to lower fines than large-revenue corporations. The National Pollutant Release Inventory (NPRI), as authorized by CEPA, makes the reporting of emissions mandatory where the amount of emissions is equal to or in excess of the reporting threshold, and where one or more of the substances emitted is included in the NPRI Substances List. Facilities that are required to report must submit a detailed accounting of their emissions to Environment Canada. The collected information is made publicly accessible. doing business in Canada | 77 b. Canadian Environmental Assessment Act, 2012 The Canadian Environmental Assessment Act, 2012 (CEAA) replaced the former Canadian Environmental Assessment Act. Under the new Act, projects cannot be required to undergo a federal environmental assessment unless they are specifically designated under the regulations or by the minister of the environment. This differs from the former Act, under which many types of projects — even very small ones — could require an environmental assessment, for example, if they involved federal government funding or required certain federal regulatory approvals. The Regulations Designating Physical Activities prescribe a list of projects ranging from transmission lines to textile factories. If a project is designated in these regulations, the proponent is required to submit a project description for screening by the Canadian Environmental Assessment Agency (the Agency). The Agency has 45 days to determine if a federal environmental assessment is required. If the project falls under the auspices of the National Energy Board or the Canadian Nuclear Safety Commission, an environmental assessment is automatically triggered, and no preliminary screening by the Agency is conducted. Some projects may be subject to both CEAA and provincial environmental assessment legislation (as discussed later under “Provincial environmental laws”), and there may be a need to co-ordinate the two. If the minister of the environment is satisfied that the substantive requirements of the CEAA can be accomplished through a provincial assessment process, the minister may substitute the provincial process for the CEAA process. For major projects that engage both CEAA and provincial environmental assessment legislation, a joint federal-provincial review panel may be established. A project will be permitted to proceed only where the minister, or other applicable decision-maker, is satisfied that the project is not likely to cause significant adverse environmental effects — or, if such effects are likely, Cabinet then determines that they are “justified in the circumstances.” Once the decision is made, a decision statement is issued, which sets out the conditions with which the proponent must comply. Failure to comply with the conditions is an offence under the CEAA and can result in fines or an injunction. c. Fisheries Act Under the Fisheries Act, the federal government exercises regulatory authority over water pollution and water quality. The Act prohibits the deposit of deleterious substances into water frequented by fish, a provision that has been interpreted strictly by the courts to capture virtually any release of a contaminant, regardless of volume or concentration. The Act also prohibits carrying out work that results in “serious harm to fish that are part of a commercial, recreational or Aboriginal fishery, or to fish that support such a fishery,” unless the work is authorized by a permit or the regulations. A number of sector-specific regulations have been made under the Fisheries Act that establish effluent standards, and impose monitoring and reporting requirements. For example, there are separate regulations directed at the mining industry, the pulp and paper industry, and large wastewater systems. d. Transportation of Dangerous Goods Act, 1992 The shipping, handling and transportation of dangerous goods are regulated by the Transportation of Dangerous Goods Act, 1992 (TDGA), as well as provincial statutes. The TDGA creates a complete and comprehensive system of regulation. All provinces have directly adopted an identical regime with respect to intraprovincial transportation. Eight classes of “dangerous goods,” ranging from organisms to explosives, are defined in a schedule to the Act. The Act also addresses issues such as labelling requirements and emergencies, and provides a full suite of enforcement measures. Additional specific and detailed requirements can be found in the Transportation of Dangerous Goods Regulations. e. Other federal legislation In Canada, special purpose legislation applies to the approval of fertilizers, pesticides, and food and drugs. The sale, manufacture, distribution, import or export of substances may be prohibited if they are not otherwise approved under the applicable legislation. 78 | doing business in Canada doing business in Canada | 79 2. Provincial environmental laws Environmental laws and their enforcement vary from province to province. Matters under provincial jurisdiction include air emissions, water and wastewater treatment and discharges, waste management, and the release of contaminants, including issues relating to contaminated lands and brownfield redevelopment. Listed industrial or commercial establishments in Québec permanently ceasing their activities are required to perform a site characterization study and may be required to submit a land rehabilitation plan for approval. Additional areas of provincial regulation include pesticide use, underground and above-ground storage tanks, and the transportation of dangerous goods. Provincial environmental laws prohibit the discharge of pollutants into the environment, but definitions of a pollutant and the environment vary from province to province. A new emission source or facility that may impact the environment typically requires an environmental approval for the particular emission. Strict conditions 80 | doing business in Canada may accompany such an approval. Existing sources of emissions may also be subject to further controls through the issuance of administrative orders. Several provinces also have environmental assessment laws. Details of the environmental assessment legislation vary from province to province. In Ontario, environmental assessment legislation primarily applies to public-sector undertakings; however, significant private-sector undertakings may be required to undergo a comprehensive environmental assessment for the purpose of identifying and evaluating the need for the undertaking, the alternatives to the undertaking, and alternative methods of accomplishing the undertaking. A breach of provincial environmental laws may be enforced through voluntary abatement measures, administrative orders, administrative fines or prosecutions. In Ontario, which introduced the stiffest provincial penalties for major environmental offences in 2000, a repeat corporate offender may face a fine of up to $10 million for each day the offence occurs or continues. A repeat individual offender may face up to $6 million per day plus five years less a day in prison. There may also be a forfeiture of profits gained through non-compliance and liability for cleanup costs, as well as a series of other remedies. In Ontario, the Environmental Bill of Rights imposes on the province public notification obligations with respect to legislation or regulatory initiatives, as well as to proposed applications and activities. This allows for enhanced public participation and the ability of the public to initiate law enforcement activities. Canada’s three federal territories, the Northwest Territories, Yukon and Nunavut, are not specifically empowered by the Constitution Act, 1867. Their legislative powers are derived from the powers granted to them by the federal government through enabling legislation. Environmental law in the three territories is generally similar to federal environmental law. 3. Municipal measures Municipalities may regulate activities through legislation, including sewer-use bylaws, noise bylaws and property-standards bylaws. In addition, municipalities in Ontario and Québec integrate environmental approvals with planning approvals. Some municipalities require comprehensive environmental site investigations and public notification prior to issuing certain permits. For example, before issuing a planning approval or building permit, a municipality may require verification of contamination of the subject property and impose the implementation of a remedial plan plus financial assurance as conditions of approval. In Québec, a municipality cannot issue a construction permit or approve a subdivision of land where the land in question is listed in the municipal registry of contaminated lands unless the project or subdivision is consistent with an approved rehabilitation plan. Details of bylaws and municipal requirements vary from municipality to municipality. 4. Common law Common law causes of action relating to environmental matters include nuisance, negligence, strict liability and trespass. Although judicial decisions may vary from jurisdiction to jurisdiction, the common law principles generally apply to every jurisdiction in Canada except Québec, which is a civil law jurisdiction. Additional opportunities to commence litigation exist through class-action legislation in specific provinces and through specific provisions within certain provincial legislation. Learn more about Gowlings’ services in this area at gowlings.com/envirolaw doing business in Canada | 81 Real estate is a broad category that covers buying, selling, developing, leasing and financing across a wide range of sectors — from mining, forestry, and oil and gas to light-to-heavy industrial, commercial, residential, recreational, retail, office, condominiums, subdivisions, urban development, brown fields, and mixed-use development. As a result, Canada attracts investors, businesses and individuals from far and wide seeking to invest in its varied real estate assets. m | real estate and urban development 82 | doing business in Canada 1. Foreign investment There are several legal structures available for investment in Canadian real estate. Understanding the principal issues involved in acquiring, developing, leasing and/or financing property in Canada is critical to assisting a foreign investor in properly assessing the risks and rewards associated with any proposed investment. The provinces have primary responsibility for property law in Canada. In all provinces except Québec, property law has developed through the English common law process. In Québec, property law is governed by the Civil Code of Québec (which is derived from the Napoleonic Code). There is no constitutional protection for property rights in Canada. Consequently, property can be expropriated by government and quasi-governmental authorities; but, appropriate compensation must be paid by the expropriating party. All contracts and agreements dealing with real estate should contemplate the potential risks and consequences of either part or all of the lands being expropriated. Interests in land are generally held directly in fee simple or by leases as leasehold interests. Condominium or strata title ownership is also common throughout Canada. All provinces maintain a system of public land titles registration whereby ownership can be verified and through which interests in land are registered. Canada has highly sophisticated land registration systems in place in each province and territory to deal with the ownership of real property. 2. Investment vehicles There are several legal structures available for investment in Canadian real estate, including a corporation (either federally or provincially incorporated), general partnership, limited partnership, co-ownership (often referred to as a “joint venture”), trust, real estate investment trust, personal ownership or any combination of the foregoing. The choice of an appropriate investment structure will be governed by factors such as tax planning requirements, liability issues, business considerations and each foreign investor’s rules and regulations. It is critical to seek tax planning advice before purchasing real property in Canada to minimize tax consequences and maximize tax benefits available in the country. a. Real estate investment trusts (REITs) A REIT is a trust established to consolidate the capital of a large number of investors for the purpose of investment in real estate, often through the direct acquisition of income-producing real estate assets. In addition to investing in income-producing properties, REITs may also buy, develop, manage and sell a wide variety of real estate assets. Investors in the trust are usually issued units, which represent an undivided beneficial interest in the trust, and are then allocated a pro rata share of the income and losses of the trust. The REIT structure has grown in popularity over the past decade, as REITs provide a number of advantages to both real estate companies and REIT unit holders. These include favourable tax treatment and improved tax efficiency on distributions to unit holders, improved access to equity markets for real estate companies, and a generally stable stream of income with the potential for high-yield capital growth for real estate investors. b. Joint venture structures Commercial real estate properties may also be held through a joint venture structure. A joint venture is a relationship between two or more entities that have invested their assets or carry on business together in order to realize a profit. There are several alternative joint venture structures, with the most common being joint venture corporations, partnerships, co-ownerships and co-tenancies. Joint venture corporations are generally structured such that each party holds shares in the corporation and enters into a shareholders’ agreement to govern the corporate relationship. Joint venture corporations enjoy many of the same advantages as corporations in general, including limited liability, ease of administration, and a certainty of legal rights and obligations. A joint venture may also hold property in either a general or a limited partnership. A partnership agreement will typically be used to govern the relationship doing business in Canada | 83 between the persons carrying on the business and to allocate profits and losses between the parties. One of the primary advantages of the partnership structure is its flexibility, because it allows for varied and other nonproportionate sharing of the profits and losses. A tenancy in common or undivided co-ownership, which is a relationship between two or more parties with a direct or indirect ownership interest in property, is also common. Each co-tenant or co-owner has an undivided interest that provides an equal right to use and possession. Co-tenants or co-owners will typically enter into a co-ownership agreement that governs this relationship and the ability of each party to deal with its interest. Co-tenants bear no responsibility for the debts of other co-tenants or co-owners, and have no right to act as agent for any other co-tenant or co-owner. Each co-tenant or co-owner is considered its own entity, and thus each co-tenant is entitled to sell or finance its interest in the joint venture property. We have certainly seen many situations in which joint venture arrangements between parties were not structured properly, which have resulted in serious disputes between the parties. Joint venture agreements should be vetted by counsel to ensure that not only the basic business terms are incorporated into them, but that consideration is also given to practical business, operational, management and termination issues. 3. Acquisitions and dispositions a. Acquisitions To acquire real estate in Canada, parties typically enter into one of (i) a letter of intent, (ii) an offer to purchase or (iii) an agreement of purchase and sale. Notwithstanding what the parties call their document, this agreement should contain all necessary business terms for the transaction, including, without limitation, the description of the land, purchase price, deposit(s), closing date, title and/or due diligence periods, representations and warranties, and any other special terms and conditions that the parties agree to. Some provinces and jurisdictions have real estate boards that dictate the form that is typically used, but parties are generally permitted to use their own form if they decide not to use the local real estate board’s prescribed form. It is always advisable to have a lawyer review any preliminary deal document, such as an offer or agreement of purchase and sale, before it is signed. When purchasing, it is important to seek advice in connection with the various federal, provincial and, sometimes, municipal taxes that may be exigible in connection with a particular transaction, such as land transfer tax, withholding tax for foreign investors, harmonized and provincial sales tax, capital gains tax, developmental and educational charges and taxes, etc. It is always best to have local professionals involved in your real estate transactions, whether you are buying or selling. b. Dispositions It is also important, whether you are buying or selling, to put all of the critical business terms in the letter of intent or agreement of purchase and sale. Certain cities within Canada have established real estate boards that provide standard form agreements of purchase and sale, as well as other precedent agreements. While using these types of precedent agreements are advisable, for more sophisticated acquisitions and dispositions it is advisable to consider longer form agreements that address many more issues, such as the allocation of the purchase price among the real property, building and chattels (if any), conditions precedent for either or both of the buyer and the seller, HST exemption status of the real estate and/or the buyer, scope of representations and warranties, scope and/or limitations on due diligence and deliveries, etc. 4. Due diligence Once the agreement of purchase and sale is signed, it is generally the responsibility of the purchaser (usually through counsel) to conduct due diligence concerning the property being acquired. This includes title to the real estate and any personal property assets being acquired as part of the agreement of purchase and sale, assorted off-title enquiries, road access, adjoining lands searches, zoning compliance, utilities, conservation authority, environmental investigations, heritage 84 | doing business in Canada designations, registered and unregistered easements, municipal agreements, airport zoning bylaws, and survey and lease reviews. In addition, when purchasing a building or structure, it is also recommended to conduct structural, mechanical, electrical and plumbing investigations. 5. Title insurance While title insurance is a recent phenomenon in Canada, it is available across the country. In fact, certain provinces such as Ontario require lawyers to inform residential purchasers that they can either rely on (i) a solicitor’s opinion, (ii) title insurance offered by the Law Society of Upper Canada title insurer or (iii) a third-party title insurance provider. Due to what tends to be more sophisticated and complex title registration systems across the country, title insurance may not be the best option for every transaction. One of the selling features of title insurance in Canada is the cost savings on due-diligence searches, but this is only relevant up to a certain point. 6. Land-use planning A number of provinces in Canada have implemented land-use planning legislation, bylaws and regulations to control the manner in which real estate is developed. Land-use planning is the responsibility of the provincial government and is supervised at the provincial level, but significant planning functions have been delegated to the various regional governments and municipalities. Land-use is controlled through such instruments as the official plan (a long-range general plan for a region or municipality) and zoning bylaws (which regulate, for each parcel of land in the municipality, the uses permitted and other matters, such as required parking and the type, size, height and location of building and structure). For a purchaser of land, both the official plan and particular zoning bylaws are crucial. Most municipalities require that site plans be approved before the construction of any new development. Site plans set out the details of a development (including the location of buildings and related facilities, such as landscaping, services, driveways and parking spaces). Most municipalities require the doing business in Canada | 85 developer to enter into an agreement ensuring construction and ongoing maintenance in accordance with the site plans. Land-use planning legislation not only affects the subdivision and transfer of land, but it also often applies to long-term leases and rights that are given over or in connection with land. In Ontario, for example, any subdivision of land requires the consent of the local committee of adjustment or subdivision control committee pursuant to the Planning Act (Ontario). This requirement also applies to a mortgage or the grant of any other interest in land — such as a lease — for 21 years or more (inclusive of renewals), where the mortgage or interest is granted over only part of a landholding. The failure to obtain such consent when otherwise required will result in the failure of the deed, mortgage or lease to create any interest in the real property. Although there are a number of exemptions to the requirement for consent, most contracts for the purchase of real property in Ontario are made subject to any required consent, and the cost and responsibility for obtaining such consent is usually allocated to the vendor. Anyone wishing to subdivide land in Ontario or to subdivide and sell lots must obtain governmental consent and may be required to submit a draft plan of subdivision for approval. Normally, the municipality will require the developer to enter into development agreements with it whereby the developer agrees to provide sewers, roads and other services for the subdivision, the dedication of certain lands for public use and certain other public benefits. In Québec, an Act respecting land use planning and development gives to each municipality the responsibility for the administration of its territory for municipal purposes. 7. Leasing Leasing is a highly complex area. There are several ways to lease property in Canada. a. Ground leases Property may be leased as well as purchased. One form of leasing arrangement is a long-term ground lease, in which a tenant leases vacant land and develops it. Once the development is complete, the ground tenant sublets space to retail, office or industrial tenants, depending on the type of development. Ground leasehold interests may be bought and sold in a manner similar to fee simple property interests. b. Commercial, industrial and retail leasing Most commercial office and retail space, and much of the standard industrial space in Canada, is available only through a commercial lease. Most commercial lease transactions start with an offer or agreement to lease. Unlike the United States, an offer or agreement to lease is typically a binding agreement that contains the business terms agreed upon by the parties, including the space, term, rent and any tenant inducements. Most commercial leases in Canada are typically on a net/net rental basis, which requires a tenant to pay, in addition to basic rent, a proportionate share of the realty taxes, insurance, utilities and other maintenance charges for the commercial building. In a retail lease, a tenant may also be required to pay rent based on a percentage of its annual gross sales. c. Residential leasing Residential leases are regulated by provincial legislation. In some cases, the applicable provincial legislation will override the terms of the lease agreement, regardless of the intention of the parties. In some provinces, even the ability of the landlord to increase residential rent is limited by provincial regulation. 8. Financing a. Sources of financing Most real estate financing is arranged through institutional lenders such as banks, credit unions, caisses populaires, insurance companies, trust companies and pension funds. However, there are a number of non-institutional and private lenders that lend money in the Canadian financial market as well. As is the case in other countries, credit terms will vary from lender to lender and will depend on the nature of the transaction and the risks involved. 86 | doing business in Canada The Canadian banking system is widely considered the most efficient and safest in the world, ranking as the world’s soundest banking system for the past three years according to reports by the World Economic Forum. The banking and lending industry in Canada is highly regulated. There are a number of federal statutes that govern the industry, such as the Bank Act, Trust and Loan Companies Act, Credit Unions and Caisses Populaires Act, 1994, and the Insurance Companies Act. Canada’s high degree of regulation in its banking systems has been lauded in the most recent debt crisis. b. Interest rates Interest rates on real estate financings can be either fixed for a specified period of time or variable, based on a “prime rate” set by the lending institution on a periodic basis. The prime rate is based on a rate announced by the Bank of Canada from time to time. A borrower may consider borrowing in other currencies and has a choice of interest-rate pricing, including applicable Government of Canada Bond Rates, the London Interbank Offered Rate (LIBOR) and bankers’ acceptances. Certain fees, such as commitment and processing fees, are normally charged by lenders. Typically, it will be the borrower’s responsibility to pay for all of the lender’s legal and other costs in arranging property financing. The Interest Act of Canada dictates, among other things, how interest rates are to be presented to the public to ensure fairness and transparency. c. Primary and collateral security Lenders, whether they are financial institutions or thirdparty arm’s-length lenders, usually take both primary and collateral security in real property and related assets to secure the loan. Typical primary security includes a mortgage or charge, a debenture containing a fixed charge on real property or, in some cases where more than one lender is involved, a trust deed securing mortgage bonds or debentures, including a specific charge over real property. Collateral security often includes general and/or specific assignments of leases and rents, general security agreements, assignments of contracts and insurance policies, and personal guarantees. d. Foreign lenders Because many foreign lenders in Canada are subsidiaries of the world’s major banks, they typically participate by way of syndicated loans, which are often arranged by major Canadian lending institutions. However, there are also Canadian lenders who participate in syndicate lending as well. There has been an increase in syndicate lending since the real estate dip in the early 1990s. Whether through a syndicate or directly, foreign lenders may be subject to certain withholding and other forms of taxes on the interest paid to them, so it is advisable to consult with a tax lawyer. 9. Environmental concerns Canada is quite sophisticated and advanced in terms of its environmental legislation, due to the abundance of its natural resources. All levels of government have enacted detailed statutes, laws, regulations, bylaws, guidelines, and recommendations concerning the protection of the environment. These laws attribute liability for environmental damage to the owner of land and to polluters of the environment. Tenants often make the mistake of assuming that, since they do not own a property, they are not liable, but in some provinces and jurisdictions, merely being in occupation, management or control of real property may attribute liability. A property owner has certain duties and obligations relating to the discharge of contaminants and hazardous materials into the environment from its property. Note that liabilities associated with improper waste management practices can be inherited by subsequent owners of a property. 10. Environmental risk assessment A purchaser should assess the environmental risks associated with a property being purchased. In Canada, government officials do not “certify” that a property is free from such risks. A property’s environmental status can be ascertained by inspecting applicable company and public records. In many cases, a purchaser will want to do an “environmental audit” of the property, which may include conducting scientific doing business in Canada | 87 testing and a technical analysis of the property. Lending institutions often require such an audit before advancing any funds. The conducting, delivery and review of environmental audits can be complex. One is advised to ensure that the consultants that are retained to do the environmental investigations are approved by the recipient of the report, such as a lender or municipality; otherwise, it may not be acceptable and will have to be conducted again. 11. Development controls Property development is provincially regulated, primarily at the municipal level. Municipalities typically control land use and the density of development through official plans and zoning bylaws. Many municipalities impose development charges on new developments within their jurisdictions. Certain provinces restrict and regulate the ability of an owner to subdivide property. Construction of new projects is also subject to provincial and municipal legislation. In addition to regulating the maintenance of existing structures, building codes set specific standards for the construction of buildings. Before construction commences, most municipalities require building permits, payment of any applicable fees and that all regulatory approvals be obtained by the property developer. 12. Real estate broker and mortgage broker legislation Generally, a person who wishes to dispose of or acquire real estate will seek the assistance of a real estate broker. Real estate brokers are subject to specific regulations in Canada. Each province has legislation that regulates the trade in real estate. Such regulation is designed to better protect consumers and instil confidence in the buying and selling of real estate. Provinces have various types of governing bodies that regulate the purchase and sale of real estate, the conduct of real estate agents and the minimum standards for duty of care to the public when engaged in the purchase and sale of real estate. As with real estate brokers, mortgage brokers, lenders and administrators are subject to specific regulations in Canada. These regulations are governed by various pieces of provincial legislation. In Ontario, the Mortgage Brokerages, Lenders and Administrators Act, 2006 went into full effect in 2008. The Act requires all mortgage brokerages, administrators, brokers and agents to obtain a licence to do business in Ontario. Similar legislation either exists or is under consideration in most of the other provinces. Learn more about Gowlings’ services in this area at gowlings.com/realestate 88 | doing business in Canada n | intellectual property Today’s economy is driven by innovation, and the proper protection of innovation is vital. This section of Doing Business in Canada provides an overview of Canada’s intellectual property regime in four key areas: copyright, patents, trademarks and the enforcement of intellectual property rights. doing business in Canada | 89 1. Copyright Canada is a signatory of the Berne Convention. It has acceded to the principal multilateral treaties seeking to harmonize copyright protection internationally. Accordingly, foreign businesses wishing to do business in Canada will find many similarities between their domestic copyright laws and those governing in Canada. Nevertheless, Canadian copyright laws do possess certain subtleties that should be noted. In particular, for any work to be exploited in Canada, it is important to ensure that the chain-of-title within Canada has been properly secured in accordance with Canada’s Copyright Act. It is also noteworthy that a significant copyright reform bill was recently passed by Canada’s Parliament and introduced into law. a. What can be protected? Copyright protection extends in Canada to any original literary, dramatic, musical and artistic work, and these terms are given broad definition (e.g., computer programs fall within the concept of “literary” works). Copyright can also subsist in other subject matter, such as sound recordings, broadcast signals and performers’ performances. b. How is copyright protection obtained? In Canada, copyright arises automatically upon the creation of an original work. This is defined as one that has not been copied from another source and that is otherwise produced through the exercise of non-mechanical skill and judgment. c. What rights are conferred? Copyright in relation to a work means the exclusive right in Canada to reproduce, publish and perform in public the work (or any substantial part thereof). The broad concept of reproduction includes many individual rights depending on the type of work. For example, in the case of a dramatic work, the right of reproduction includes the sole right of converting it into a novel or other non-dramatic work. Authors of original works also enjoy moral rights that can be asserted to prevent their works from being modified or used to the prejudice of the author’s reputation. An author of an original work enjoys the moral right to be associated with the work and the right to the integrity of the work, meaning that the work cannot be mutilated or used without the author’s permission in association with causes or institutions. d. How long does copyright protection last? Generally, copyright protection lasts in Canada for 50 years following the death of the author, though the term of protection may vary depending on the circumstances of creation and publication. Moral rights in respect of a work subsist for the same term as the copyright in the work. e. Who is the author of the work? The term “author” is not defined under the Copyright Act, but it is understood to mean the person or persons from whom the original expression originates. An “author” in Canada must be a person for most works, and this is true even where a work is made pursuant to a contract. The concept of “work made for hire” does not exist in Canada. An employee or contractor will remain the work’s author even if ownership of copyright comes to vest in the employer or contracting party. f. Must copyright be registered? Registration of copyright is optional in Canada and is not necessary even to enforce a work in Canadian courts. However, registration does confer certain presumptive benefits in that a registration will be deemed evidence of copyright subsistence and ownership as described in the registration. As well, a defendant will not be permitted to assert a lack of knowledge of copyright subsistence in the case of a registered work, and this increases the monetary remedies available to a plaintiff who establishes infringement. g. Who first owns the copyright? Generally, the author of a work is the first owner of copyright. An important exception to this principle 90 | doing business in Canada applies for works created in the course of an employment relationship, where copyright will be first owned by the employer, unless the parties agree otherwise. Where a work is created by joint authors, the copyright will be owned jointly as determined by the scheme of the Copyright Act. In Canada, works created under the direction or control of a government department are subject to Crown copyright owned by the government and are not works deemed to be in the public domain. h. How is copyright assigned or licensed? Copyright can be assigned freely in whole or in part, but no assignment is effective in law unless it is in writing and signed by the copyright owner or its duly authorized agent. The same requirements apply to make an effective exclusive licence. Non-exclusive licences and permissions need not be in writing, although documenting them is highly recommended. Moral rights of an author cannot be assigned but may be waived. Significantly, assigning the copyright in a work does not in itself necessarily constitute a waiver of the moral rights therein. i. Fair dealing and other exceptions Canada’s Copyright Act provides that a number of specific activities do not infringe copyright. Most of these activities are very specific and apply only in particular defined circumstances. In contrast, the concept of “fair dealing” has been defined more broadly as a “user right.” doing business in Canada | 91 In Canada, it is not an infringement of copyright to engage in fair dealing with a work for the purposes of research, private study, criticism, review, education, parody, satire or news reporting (although certain requirements to credit the work’s author and source must be met for certain of these purposes). These permitted fair-dealing purposes are exhaustive, and conduct must fall within one of these categories (and also be fair) for fair dealing to apply. j. Are there copyright collectives in Canada? Canada has a long history of administering copyright protection through copyright collectives, and a welldefined statutory regime governing such collectives is now codified in the Copyright Act. There are several copyright collectives operating in Canada, and they address many of the copyright rights conferred under the Copyright Act. k. How does technology fit into the mix? Recent amendments now in force prohibit the use or sale of technology that circumvents digital locks (also called technological protection measures or TPMs). Other amendments now in force put in place a “notice and notice” regime for Internet service providers (ISPs) and search engines that, if followed, should limit their exposure to infringement claims. 2. Patents Canada enjoys a vibrant economy and a culture of technological innovation in areas such as communication and Internet-related devices and software, clean and renewable technologies, tools and methods used in the harvesting and processing of natural resources, and agricultural and pharmaceutical products and practices. Canada is a signatory of the Paris Convention and has acceded to the principal multilateral treaties that seek to harmonize patent protection internationally. Canada also benefits from intellectual property bilateral agreements with a number of G-20 members. Accordingly, foreign businesses pursuing business in Canada will find many similarities between their domestic patent laws and those governing in Canada. Patents, by their very nature, provide an exclusionary right to an invention by the patent owner. It is natural for companies to capitalize on their research and development expenditures to protect their competitive edge in the Canadian marketplace. However, Canadian patent laws and regulatory practices do possess certain subtleties that should be noted. Accordingly, foreign companies need to be aware of the unique aspects of Canadian patent law and Canadian Intellectual Property Office (CIPO) practice that can significantly influence the scope and costs of obtaining patent protection in Canada. In particular, care should be taken to ensure that applicable patent protection for any significant company technologies to be exploited in Canada has been properly secured in view of the unique Canadian patent system offerings. These include different examination acceleration programs, factors affecting patent filing ability and patent examination advantages — any of which may be used to maximize Canadian patent coverage. a. Acceptable subject matter for patent protection It is important to recognize that most, but not all, technology may be considered patentable in Canada if given careful consideration from a Canadian perspective. A Canadian patent may be obtained in respect of any new invention, including processes, machines, methods of manufacturing or a composition, or any new and useful improvement to these that is applicable to industry. The key is that there must be at least one new and inventive element to the invention or improvement. That being said, Canadian patents cannot be issued to protect a scientific principle or theorem in the abstract without a practical application. Developments in Canadian patent law have confirmed that business methods are currently patentable in Canada, which provides for an increased scope of patent protection in computer-related arts concerning some forms of software and business processes. Claim format and content can make the difference between acceptance or rejection for certain technologies. For example, methods that provide practical 92 | doing business in Canada therapeutic benefits to subjects are considered “methods of medical treatment” and are not patentable in Canada. These claims may be redrafted to instead claim an allowable “use.” Also, higher life forms — such as mice or other mammals, and plants — are not patentable, but a higher life form may be protected by directing claims to a cell comprising a patentable nucleic acid. It is important to note that support for the required claim form or content must be found in the patent application description as filed in Canada. Therefore, consideration should be given to the way in which the subject matter of the Canadian patent application is described in order to best capitalize on Canadian patent protection for the invention. Another important consideration for Canadian patent protection is innovation associated with professional skill (i.e., those personal skills reflecting learned behaviours that can be improved with practice and are prone to refinement through personal experience). A Canadian patent application seeking protection for a deemed professional skill will ultimately be rejected by CIPO. The professional skill distinction can have important ramifications for the patentability of a company’s innovations. Careful consideration and attention must be paid to the description and claim format of the patent application in order to avoid this prohibition. b. Process to obtain patent protection The granting of Canadian patents is within the exclusive jurisdiction of the Canadian federal government, under the control of CIPO, and is governed by the Canadian Patent Act and Patent Rules. Patent protection is requested by filing with CIPO a formally prepared application including background, description, drawings and claims, such that aspects of the invention and its operation are described in sufficient detail for a notional person skilled in the art to carry out the claimed invention. Also included in the filing are the requisite CIPO patent application fees and details concerning the inventor(s) of the invention. Once filed, the claims of the patent application are examined by an assigned patent examiner for novel, inventive and industrial applicability considerations in view of pertinent technology publicly available before the filing date of the patent application, as well as any format considerations. Once deemed allowable by the patent examiner, the patent is issued after payment of the patent issue fee. c. Patent rights and term conferred by patent issuance Enforcement of an issued Canadian patent can be obtained from the Canadian federal courts or the Canadian provincial courts. A Canadian patent is a monopoly granted by the Canadian government that affords the holder of the Canadian patent an exclusive right to manufacture, sell or use an invention throughout Canada for a period of 20 years from the date of the application in Canada. A patent owner or licensee may bring a court action against someone who infringes on the Canadian monopoly to the invention claimed by the patent. d. Ownership of a Canadian patent Generally, the individual inventor that contributed to the invention claimed in the patent is the first owner of the patent. An invention created by joint inventors would be owned jointly by the inventors. An important exception to these principles applies for inventions created in the course of an employment relationship where the owner would be the employer unless the parties agree otherwise. e. Transferring of patent ownership through assignment or licence Patents can be assigned freely in whole or in part, but no assignment is effective in law unless it is in writing and signed by the current patent owner or owners. In the case of joint ownership, it is recognized that assignment by one party cannot dilute the existing patent ownership rights of the other party unless there is an agreement by the parties to the contrary. The same requirements apply to make an effective exclusive patent licence. Non-exclusive licences and permissions need not be in writing although documenting them is highly recommended. doing business in Canada | 93 f. Cost reduction through deferred or reduced patent fees Patenting an invention in multiple jurisdictions can significantly escalate the costs to protect the technology. Seeking patent protection in Canada provides an opportunity to defer and reduce these costs relative to other jurisdictions. In Canada, the examination of a patent application is not automatic upon filing and must be requested by the applicant. Requesting examination of a patent application can be deferred for five years from the Canadian application filing date. During this time, the applicant can further assess the best manner in which the patent application should be pursued without incurring significant costs. An advantage of delaying examination is that examination results from corresponding patent applications in other countries can be influential on the Canadian examination process and expedite prosecution of the Canadian application at reduced cost. An advantage to help maximize patent coverage for a Canadian patent is that there is no limit to the total number of claims or the number of independent claims included in a patent application. There are also no restrictions on the use of multiple dependent claims (i.e., those claims that reference more than one claim) and no excess claim number or multiple dependent claim surcharges. The only surcharge that may impact the number or content of claims is a nominal excesspage printing fee for those patent applications exceeding 100 pages in length. Furthermore, Canada has a “small entity” designation that allows businesses employing 50 or fewer employees and universities to pay reduced patent application-filing, examination and annual-maintenance fees. g. Accelerated examination program for designated green and clean technology patents Examination of a Canadian patent application based on clean or green technology can be accelerated to reduce the time to obtain patent protection. To apply for accelerated examination, the applicant must file a declaration indicating that the application relates to commercial technology that would help to resolve or mitigate environmental impacts or conserve the natural environment and resources. There is no government fee associated with requesting accelerated examination of green- or clean-technology patent applications. Accordingly, companies involved in clean or green technologies should consider this program to obtain accelerated Canadian patent protection. h. Accelerated examination programs under patent prosecution highway (PPH) initiatives Another instance in which Canadian patent protection may be accelerated is where patent protection has already been obtained in other jurisdictions. Canada co-operates with a number of other partner countries in patent prosecution highway programs to allow an applicant — if at least one patent claim has been found allowable by one partner office in one jurisdiction — to have the corresponding patent application advanced out of turn for examination in the other partner office of the other jurisdiction. This provides for patent results obtained in other countries to be used to streamline examination in the corresponding Canadian patent application or, alternatively, allows for the patent results obtained in the Canadian patent application to be used to streamline examination in the corresponding patent application(s) in the other country or countries. i. Advanced examination of Canadian patent applications Accelerated examination of a patent application can also be obtained by the applicant or any other person who alleges that failure to accelerate examination will prejudice the person’s rights. This is typically used in situations where a pending patent application is perceived to be infringed but may be used more broadly by the applicant to expedite the patent examination process in other situations. The process to accelerate examination of the patent application is relatively straightforward and inexpensive. Advanced examination of Canadian patent applications is granted automatically in response to payment of a modest fee and a request containing a broad affirmation that the failure to advance the 94 | doing business in Canada application for examination is likely to prejudice that person’s rights. It should be noted that the contents of the Canadian patent application must be open to public inspection (i.e., published by CIPO) in order to request advanced examination, but an applicant can request that the application be open to public inspection along with the advanced examination request where required. An advantage of the advanced examination request is that there is no need to provide any evidence or details to support the affirmation. Currently, an advanced examination procedure typically results in the issuance of a first examination report within three months of the advanced examination request. j. Acceptable delays for patent application filing in Canada Similar to most other countries, Canada is a first-to-file jurisdiction, meaning a patent is issued to the first inventor to file a patent application. Entitlement to a Canadian patent may be determined by a race to file an application with the patent office. To obtain a Canadian patent and avoid later technical challenges to the patent’s validity, it is important that the Canadian patent application is drafted in the correct form with a sufficient and enabling description of the invention. It is also recommended that an applicant not disclose the subject matter of the invention to the public until the Canadian patent application has been filed. Once the decision has been made to file a patent application, it is recognized that patent systems around the world have strict patent application filing timelines. Failure to meet these filing timelines may result in a loss of right to obtain patent protection in certain jurisdictions. However, the Canadian patent system offers a few acceptable delays for Canadian patent-application filing, such as a 12-month grace period, 12-month late international Patent Cooperation Treaty (PCT) filing and no on-sale bar. The 12-month grace period provides the opportunity to file a patent application within 12 months of making an enabling disclosure of the invention to the public by the doing business in Canada | 95 applicant. Accordingly, the Canadian patent system offers filing flexibility in providing this 12-month grace period, measured from the time of the first public disclosure of the invention to when the formal patent application is filed in Canada. It should be noted that a provisional patent application filed in Canada or elsewhere does not negate the requirement to have the Canadian patent application filed within the 12-month period measured from the first public disclosure. Concerning international PCT patent applications, an applicant can file in Canada as a national entry of a PCT patent application up to 42 months after the PCT priority date simply by filing a late national entry request and paying a nominal fee. This late national entry provision allows the applicant an additional 12 months after the standard 30-month PCT national phase entry deadline. In some jurisdictions, such as the United States, a product or service that has been “on sale” for more than 12 months prior to the filing of the patent application may bar obtaining patent protection in that jurisdiction. However, in Canada, early market entry may not bar entitlement to patent the marketed products so long as the sale is not considered an enabling public disclosure of the invention made more than 12 months prior to the filing of the patent application in Canada. k. Procedural flexibility in obtaining Canadian patent protection The examination process before the Canadian patent office is relatively flexible compared to other jurisdictions, and this flexibility can help maximize patent scope and minimize prosecution costs. For example, voluntary amendments to the claims or other parts of the Canadian patent application may be filed at any time in Canada during examination of the patent application. As well, final examination reports, which are rarely encountered, are only issued when it is clear that the examiner and applicant have reached an impasse. This reduced occurrence of final examination reports can allow for ample opportunity to negotiate with the examiner. Furthermore, when interpreting the patent claims, the courts may not consider any submissions made by the patentee during the prosecution of the application when a patent is subsequently litigated. This is in contrast to other countries, where a patentee may be estopped from taking a position with respect to the scope of the claims when the position is contrary to the one taken during prosecution. l. Reduced relationship potential between patent applications of opposed parties Circumstances can arise in which one Canadian patent application can be affected by another Canadian patent application, such as in situations where both applications are directed toward similar subject matter. These patent applications may be owned by the same party or by opposing parties. In Canada, there is limited opportunity for one party to oppose the granting of a patent to another party as there is no Canadian interference or opposition procedure to challenge a competitor’s co-pending patent application. Furthermore, Canada does not use terminal disclaimers between applications owned by the same party. As a consequence, the applicant must amend the claims of the applications to distinguish one from the other. Unlike in other jurisdictions, there is no Canadian continuation application procedure, but the applicant can file claim amendments to a further invention at any time before allowance, or file a divisional application anytime before issuance of the parent patent. The preferred practice for filing divisional applications in Canada is to include or add all desired claims in the pending patent application to allow the Canadian examiner to determine whether separate inventions are claimed. This practice enables the applicant to avoid a later allegation of “double patenting” in the divisional application and provides the potential to have a broader range of inventions claimed within a single application. 96 | doing business in Canada 3. Trademarks A trademark is a word, slogan, symbol or anything else that serves as a distinctive indicator of the source of particular goods or services. In Canada, while trademarks do not need to be registered to be protected, the scope of rights afforded by registration and the available means of enforcement are generally greater for registered trademarks. As such, trademark registration is a good investment for any owner who plans to use a trademark extensively in Canada. A trademark registration in another country with no use or reputation in Canada conveys no protection in Canada. Canadian trademark law shares many similarities with U.S. trademark law, but also has its own particularities. Because the process of registering a trademark under the federal Trademarks Act (Canada) can be technical, it is advisable to consult a trademark lawyer or trademark agent to oversee this process and also to provide advice on protecting and licensing trademarks in Canada. a. Registered and unregistered trademarks If an unregistered trademark has been in use and possesses goodwill, the common law will protect it under the doctrine of passing off. However, the scope of protection for unregistered trademarks is generally narrower than that for registered trademarks. Protection for an unregistered trademark is strictly limited to the geographic boundaries of its use and established goodwill. On the other hand, obtaining a registration for a trademark confers many advantages, including the exclusive right to use the trademark across Canada, without geographic restriction, in relation to the goods or services specified in the registration. Trade names, corporate names or business names may be registrable if such a name is used as a trademark. That is, a trade name may be registered as a trademark if it is used to distinguish a product or service of one company from that of another. If a trade name is not used as a trademark, it may nonetheless be protected under the doctrine of passing off, which protects the goodwill of a business rather than the right to the name itself. Registration can be obtained for a trademark in relation to wares, services or both. In Canada, unlike in many other countries, a single trademark registration can cover multiple classes of wares or services. In Canada, there is no formal requirement for the use of trademark notices such as ®or ™. However, the use of such notices can be helpful when asserting something as a trademark. The use of similar notations to direct consumers to a legend stating the owner’s name and that the use is by a third party under licence is highly recommended, as it gives rise to a statutory presumption of proper licensing. b. Entitlement, prosecution and opposition There are numerous procedural and substantive requirements for the application, processing and registration of a trademark in Canada. Before applying for a trademark, it is advisable to conduct a trademark search to ensure that the trademark is registrable and that the applicant is the party entitled to the registration of the trademark. There are currently three possible bases for registration of a trademark in Canada: the use of the trademark in Canada, the registration and use of the trademark abroad, or the proposed use of the trademark in Canada. Recent legislative changes that are expected to be proclaimed into force sometime in late 2015 will remove the registration and use of the trademark abroad as a basis for registration. Resolution of competing claims to a trademark will likely depend upon which party has first used or made the trademark known in Canada, or has been the first to file an application for registration on the basis of foreign registration or proposed use, depending on the circumstances. Prior to registration, it is possible for a third party to oppose an application for a trademark on specific listed grounds, such as confusion or technical defects in the application. In Canada, technical grounds can be fatal to an application with no opportunity to remedy them, further underlining the need for marks to be prosecuted by experienced trademark counsel. doing business in Canada | 97 c. Term of trademark protection Registered trademarks must be renewed every 15 years upon payment of a renewal fee, which is the only requirement to renew a trademark registration in Canada. It is not necessary to file a declaration of continued use. Recent legislative changes that are expected to be proclaimed into force sometime in late 2015 will reduce the renewal period to 10 years. Nevertheless, registered trademarks are liable to be expunged from the register after an initial grace period if, after a request to show use by the registrar or any other interested party, the trademark owner cannot show that the trademark has been “used” (for the purposes of the Trademarks Act) during the previous three years. Furthermore, if a trademark loses its distinctive character and quality, it ceases to be a protectable trademark. Therefore, a trademark owner must be careful not to allow a trademark to become “genericized” — that is, to become the common name of the goods with which it is associated — or to be usurped by a third party. d. Assignment and licensing of trademarks The Trademarks Act allows registered trademarks to be assigned. Since trademark registrations in Canada can cover multiple wares or services, it may be possible to only partially assign a trademark with respect to some of the wares or services, provided there would be no likelihood of confusion between the two resulting registrations. Territorial assignments of registered marks are generally not permitted under the Trademarks Act. It is also possible to license a trademark under the Trademarks Act. For a trademark licence to be valid and to avoid the risk of a trademark losing its distinctiveness, certain requirements must be met. These include the trademark owner retaining control over the character or quality of the wares or services associated with the trademark. Satisfying the requirements for “control” will vary from case to case. However, typically a bare assertion of control or mere evidence of corporate control of a subsidiary will be insufficient for the purposes of the Trademarks Act. e. Use of trademarks in Québec It is important for all trademark owners to appreciate that special rules apply to the use of trademarks in Québec, due to the Charter of the French Language (the Charter) in that province. The Charter provides that every marking on a product or document, as well as public signs, posters and other commercial advertising, must be drafted in the French language, though they may be accompanied by a translation. However, a regulation to the Charter creates an exception with respect to trademarks: a “recognized trademark” may be used exclusively in a language other than French, unless a French version has been registered. If a French version of the trademark has been registered, it must be used. In the past, both unregistered and registered trademarks have been held to be covered by the exception. However, in the absence of a registration, it may not be possible to prove the existence of a trademark to the satisfaction of the authorities. The Office québécois de la langue française (OQLF), the body that is responsible for enforcing the Charter, takes the view that the “recognized trademark” exception generally requires registration. The requirement is a commercial reality in Québec and extends to the packaging of wares that are sold in that province whether or not they are also intended for other markets. There is also some uncertainty regarding the application of the trademark exception to markings on business signs. The OQLF has adopted the position that trademarks (even registered) featured on store fronts must be accompanied by French descriptive text where the trademark itself is in another language. This interpretation is being challenged in the courts. Trademarks and other terms composed of descriptive elements may be the most likely to be challenged. Therefore, businesses operating in Québec (or selling wares in Québec) that wish to make use of the exception should seek registration of their trademarks, especially where the mark contains descriptive terms, and would be well-advised to seek guidance from Canadian trademark counsel as to compliance with the terms of the Charter and the current position of the OQLF. 98 | doing business in Canada 4. Enforcement of intellectual property rights Intellectual property rights (including patents, trademarks, copyright and industrial designs) are generally enforced through proceedings brought before the Federal Court of Canada. While the provincial courts have concurrent jurisdiction for enforcement of intellectual property rights, the country-wide jurisdiction of the Federal Court gives it the ability to grant an injunction throughout Canada in a single proceeding. Over 95 per cent of all intellectual property cases are brought to the Federal Court. The one exception is where the intellectual property right relates to trade secret law, which, as a matter of property and civil rights, can be enforced only in the provincial courts. For passing off matters, while only the provincial courts can enforce the common law right, the Federal Court has jurisdiction under Section 7 of the Trademarks Act to hear essentially the same action. The Federal Court consists of approximately 25 trial court judges who can sit anywhere in Canada. While the Federal Court has its headquarters in Ottawa, it is essentially a circuit court, with judges travelling throughout the country to hear cases. Any member of any bar of Canada can appear in the Federal Court, regardless of the province in which the court is sitting. A successful plaintiff is generally entitled to its damages and a permanent injunction (assuming the right has not expired) and some of its legal expenses. Depending on the intellectual property right, the successful plaintiff may also elect to appropriate the infringer’s profits. While Canadian courts may grant interlocutory injunctions, these are rarely granted in patent, copyright and design matters. They are sometimes, but still infrequently, granted in trademark matters. Key to obtaining an interlocutory injunction is proving irreparable harm, i.e., harm that is not compensable in damages. a. Patent enforcement In general, patent litigation matters are commenced with a Statement of Claim and proceed through oral and document discovery leading to a trial by judge alone. Proceedings by way of action generally take between two and four years to get to trial. A right of appeal is available to the Federal Court of Appeal, and with leave, to the Supreme Court of Canada. Frequently in infringement proceedings, a defence and counterclaim of invalidity are also raised by the defendant. Alternatively, a potential infringer could commence a proceeding seeking a declaration of non-infringement and/or impeachment of the patent. i. Section 55.2 of the Patent Act Separate and apart from actions for infringement, a procedure is available for certain pharmaceutical patents that is similar to the Hatch-Waxman Act proceedings in the United States. Under this provision, a generic drug manufacturer who is seeking to come to market by virtue of reliance on an originator’s Notice of Compliance must address any patent that has been listed with the minister of health. The initial step is to forward a Notice of Allegation by the second person, at which point the patentee has 45 days within which to commence an application seeking an order prohibiting the minister of health from issuing a Notice of Compliance to the generic. These proceedings are summary in nature, and are not full actions. Consequently there is no right of discovery. Furthermore, because they are summary in nature, any decision is not final, and an action for infringement and/or impeachment may be commenced separately and apart from the Section 55.2 proceeding. b. Trademark enforcement: Passing off, infringement and depreciation of goodwill The owner of an unregistered trademark may enforce rights in that trademark only through an action for passing off. To succeed, the owner of an unregistered trademark must show that it has a commercial reputation or goodwill created through the use of its mark, that another person has sold goods or services in a way that misrepresents them as those of the trademark owner, and that damage is likely to be suffered to the owner’s reputation or goodwill. Mechanisms for enforcing a registered trademark provide a greater ambit of protection than those doing business in Canada | 99 available to an unregistered trademark. In addition to an action for passing off, the owner of a registered trademark may also bring an action for trademark infringement or depreciation of goodwill. The remedies available against a party who infringes a trademark or depreciates the value of its goodwill include injunctive relief, monetary damages or profits, as well as an order for the destruction of the infringing articles. The Canadian Criminal Code also makes certain types of trademark infringement and counterfeiting criminal offences punishable by fine or imprisonment. c. How is copyright enforced and what relief is available? In Canada, copyright can be enforced by way of an action with trial or by a more summary proceeding called an application. An application proceeds on a paper record and does not involve any rights or discovery. An exclusive licensee may commence proceedings in its own name to enforce its rights, but will generally be required to join the copyright owner as a party unless the court orders otherwise. Upon proof of infringement, a copyright holder may obtain a broad range of remedies, including an award of damages, an accounting of profits, permanent injunctive relief and on order of delivery up of infringing materials. A plaintiff can also elect, at any time prior to judgment, to recover “statutory damages” instead of other compensatory monetary remedies. (The right to seek punitive damages is not affected by the selection of statutory damages.) The maximum award of statutory damages is $20,000 per work infringed. Under legislative amendments that have not yet come into force, this maximum will be reserved for commercial infringements. A lower cap will apply to noncommercial infringements. The Copyright Act also makes certain types of copyright infringement a criminal offence. d. Industrial design Industrial designs are also enforced via an action for infringement, in a manner similar to that set out for copyrights, trademarks and patents. With respect to industrial designs, infringement can apply only to elements of design: there is no protection for purely functional elements that may have been taken by a competitor. A successful plaintiff may obtain an injunction and damages for infringement. e. Trade secrets, unfair competition claims and ancillary litigation As noted previously, a breach of trademark secrets can be enforced only in provincial courts. Consequently, where there is a breach of a trade secret and potentially an infringement of a patent, the preferred venue for resolving both matters would be the provincial court with jurisdiction over the defendant. In a similar fashion, other types of proceedings can often be joined together. For instance, a patent and a trademark case can be joined depending on the circumstances. In addition, sometimes an attack based on the Competition Act can be joined with a Patent Act defence. Consequently, intellectual property litigation is not always a matter of simply enforcing one right to the exclusion of others, but often involves a portfolio of issues, both core intellectual property and related matters, touching on areas including trade secret law and competition law among others. Learn more about Gowlings’ services in this area at gowlings.com/ip 100 | doing business in Canada o | privacy law Privacy and the protection of personal information is important to Canadians. With advances in technology, organizations are collecting, storing, transferring and disclosing more personal information about their consumers and employees than they have in the past. The accumulation of personal information increases the risks for organizations that do business in Canada. This is an age of social media, cloud computing, global computer networks and international data flows. Particularly given the advent of class-action lawsuits to remedy privacy breaches, incidents that involve data security breaches and identity theft frequently make headlines in Canada, and privacy protection is an increasingly pressing public-policy concern. doing business in Canada | 101 Canada has enacted comprehensive federal privacy legislation that applies to the private sector. In addition, certain provinces have enacted both comprehensive and industry-specific private-sector privacy legislation. 1. The privacy landscape in Canada a. Federal In Canada, the federal Personal Information Protection and Electronic Documents Act (PIPEDA) regulates the collection, use and disclosure of personal information in the private sector. “Personal information” is broadly defined in PIPEDA and includes any “information about an identifiable individual” whether public or private, with limited exceptions. PIPEDA applies to federal works, undertakings and businesses, and to private-sector organizations that collect, use or disclose personal information in the course of commercial activities in provinces that do not have substantially similar legislation. Examples of federal works and undertakings in Canada include airlines, banks, broadcasting, interprovincial railways, interprovincial or international trucking, shipping or other forms of transportation, nuclear energy, and activities related to maritime navigation. PIPEDA’s application to personal employee information is limited to organizations that are federal works, undertakings and businesses. PIPEDA also applies to all personal information that flows across provincial or national borders in the course of commercial transactions. PIPEDA is a general law that applies to the collection of personal information regardless of the technology used. Compliance with PIPEDA is subject to an overriding standard of reasonableness whereby organizations may only collect, use and disclose personal information for the purposes that a “reasonable person would consider appropriate in the circumstances.” This requirement applies even if the individual has consented to the collection, use or disclosure of their personal information. PIPEDA does not apply in provinces with privacy legislation that the federal government has deemed to be “substantially similar” to PIPEDA. Currently, only Alberta, British Columbia and Québec have comprehensive privacy legislation that has been declared substantially similar to PIPEDA. It should be noted, however, that PIPEDA continues to apply to federal works, undertakings or businesses that operate in those provinces. In addition, health information custodians in Ontario, Newfoundland and Labrador, and New Brunswick (such as physicians, nurses and hospitals) have been exempted from PIPEDA with respect to personal health information, as these provinces have specific health-information privacy statutes that have been deemed “substantially similar” to PIPEDA. Organizations that operate interprovincially or internationally are required to deal with both provincial and federal privacy legislation. b. Provincial Alberta, British Columbia and Québec have also enacted comprehensive private-sector privacy legislation, entitled the Personal Information Protection Act (PIPA) in Alberta and British Columbia, and An Act Respecting the Protection of Personal Information in the Private Sector (Québec Privacy Act) in Québec. Provincial laws are similar in principle to PIPEDA; however, there are important differences in detail. These laws apply generally to all private-sector organizations with respect to the collection, use and disclosure of personal information (not just with respect to commercial activities), and to the personal information of employees. The Québec Privacy Act also applies to private-sector collection, use and disclosure of personal health information. c. Legislative overview All Canadian privacy legislation, including PIPEDA, reflects the following 10 principles set out in the Organisation for Economic Co-operation and Development Guidelines created in the early 1980s: • Accountability • Identifying purposes • Consent • Limiting collection • Limiting use, disclosure and retention • Accuracy • Safeguards • Openness • Individual access • Challenging compliance The overarching rule in Canadian privacy legislation is that organizations may only collect, use or disclose personal information for purposes that a reasonable person would consider appropriate in the circumstances. This rule applies regardless of the consent of the individual whose information is in question. One cannot avoid the reasonableness standard by obtaining consent to an objectively unreasonable collection, use or disclosure of their information. Conversely, in most cases, organizations must have either the express or implied consent of the individual to the collection, use or disclosure of their personal information. All four of the major private-sector statutes apply similar principles: • Personal information may only be collected, used or disclosed with the knowledge and consent of the individual. • The collection of personal information must be limited to what is necessary for identified purposes. • Personal information must be collected by fair and lawful means. Personal information must be protected by adequate safeguards appropriate for the sensitivity of the information — highly sensitive information, such as financial data, must be provided with a proportionately high level of security that should include physical, organizational and technological protection measures. Individuals must be provided with easy access to information about an organization’s privacy policies and practices. Alberta, Manitoba, Ontario, Saskatchewan, New Brunswick, Nova Scotia, and Newfoundland and Labrador have legislation specifically governing the collection and use of personal health information. All provinces and territories in Canada have enacted legislation that regulates the collection, use and disclosure of personal information in the public sector. In specific industry sectors, additional requirements will apply depending on the nature of the consent sought. For example, several provinces, including Ontario and Nova Scotia, impose font size requirements on requests for consent/notice prior to obtaining a credit bureau report. 2. Employers In accordance with constitutional limits placed on federal legislation, PIPEDA applies only to the employment information of employees of federally regulated organizations such as banks, airlines and telecommunications companies. Provincial privacy legislation applies to employee information outside of those sectors. Unlike PIPEDA, the Québec Privacy Act does not expressly exclude from the scope of its definition information relating to “professional/employment status” (such as an individual’s name, title or business address, or telephone number at work). Under the Alberta PIPA and the British Columbia PIPA, employers are permitted to collect, use or disclose “personal employee information” without the consent of the employee if it is reasonably required for the purposes of establishing, managing or terminating an employment relationship. PIPEDA does not have a similar provision dealing with the collection, use and disclosure of personal information in the workplace. However, PIPEDA permits reliance on implied consent if the collection, use or disclosure was for purposes that a reasonable person would consider appropriate in the circumstances. Again, the concept of reasonableness is central to whether an employer is required to obtain explicit consent. 3. Reporting privacy breaches Unlike the United States — where the majority of states have enacted mandatory data breach notification rules — Canada currently has limited requirements for organizations to proactively notify individuals or the appropriate regulatory bodies of a data breach in such circumstances. The exceptions are Ontario’s Personal Health Information Protection Act, Newfoundland and Labrador’s Personal Health Information Act, New 102 | doing business in Canada doing business in Canada | 103 Brunswick’s Personal Health Information Privacy and Access Act, and Alberta’s PIPA, all of which require mandatory data breach notification. Alberta is the first Canadian jurisdiction to require mandatory privacy-breach notification in the private (non-health-related) sector. Organizations subject to Alberta’s PIPA are required to notify the province’s information and privacy commissioner if personal information under the organization’s control is lost, accessed or disclosed without authorization, or has in any way suffered a privacy breach where a real risk of significant harm to an individual exists as a result of the breach. Failure to notify the commissioner of a breach in those circumstances is an offence. The notification requirement is only triggered if the harm threshold is met, which is defined as “where a reasonable person would consider that there exists a real risk of significant harm to an individual.” The commissioner has interpreted “significant harm” to mean “a material harm... [having] non-trivial consequences or effects. Examples may include possible financial loss, identity theft, physical harm, humiliation or damage to one’s professional or personal reputation.” Furthermore, the commissioner requires that a “real risk of harm” must be more than “merely speculative” and not simply “hypothetical or theoretical.” A breach relating to highly sensitive personal information, such as financial information, is more likely to meet this standard and require reporting. If a breach meets the threshold of being a “real risk of significant harm” and is reported appropriately, the commissioner will then review the information provided by the organization to determine whether affected individuals need to be notified of the data breach. If so, the commissioner can direct the organization to notify individuals in the form and manner prescribed by PIPA regulations. Outside of Alberta, the current framework for data breach notifications in the private sector is Canada’s federal statute, PIPEDA, which makes data breach notification voluntary. The federal commissioner has published guidelines and checklists that describe circumstances under which disclosure and notification should be made. The federal government has proposed amendments to PIPEDA that would introduce a mandatory data breach reporting mechanism at the federal level. Bill S-4, the Digital Privacy Act, was introduced on April 8, 2014. S-4 proposes a risk-based approach that will require organizations themselves to assess each incident on a case-by-case basis to determine the seriousness of the incident and its potential impact on the affected individuals. S-4 requires mandatory breach reporting to the commissioner and affected individuals based on a test similar to Alberta’s PIPA, where it is reasonable to believe that the breach creates “real risk of significant harm” to an individual. S-4 also requires reporting to other organizations and government institutions if the notifying organization believes that the other organization or the government institution may be able to reduce the risk of harm that could result from the data breach or mitigate that harm. S-4 requires organizations to keep and maintain 104 | doing business in Canada records of any breaches of security safeguards and provide the records to the commissioner on request. However, breach reports and records would remain confidential. In addition, S-4 makes it a criminal offence for an organization to fail to keep prescribed records or to knowingly fail to report breaches in compliance with PIPEDA, subject to fines of $100,000 on indictment or $10,000 on summary conviction. 4. Cross-border transfers and outsourcing Cross-border transfers and outsourcing of Canadian personal information to foreign countries have become subjects of focus in Canada. Much of this attention has centred on concerns that U.S. authorities could use the USA Patriot Act to obtain the personal information of Canadians that is located in or accessible from the U.S. PIPEDA and related provincial legislation do not prohibit the transfer of personal information outside of Canada. However, public-sector privacy legislation in British Columbia and Nova Scotia does impose restrictions on public bodies (and organizations that process personal information on their behalf) with respect to the transfer of personal information. Furthermore, privacy regulators have generally held that notice of such transfers should be provided to affected individuals, along with notice that such personal information may be subject to access requests from foreign governments, courts, law enforcement officials and national security authorities according to foreign laws. PIPEDA requires an organization to provide a “comparable level of protection” when personal information is being processed by a third party through “contractual or other means.” As such, if an organization transfers personal information to a third party, the transfer must be “reasonable” for the purposes for which the information was initially collected, the information must be protected using contractual means, and the organization should be transparent about its informationhandling practices, including notifying individuals. In addition, the Québec Privacy Act requires organizations to consider the potential risks involved in transferring personal information outside of Québec. If the information will not receive adequate protection, it should not be transferred. The Alberta PIPA explicitly imposes obligations on organizations that use service providers outside of Canada to collect, use, disclose or store personal information. Organizations are required to notify individuals that they will be transferring individuals’ personal information to a service provider outside Canada, and to include information on outsourcing practices in the organization’s policies. 5. Enforcement In addition to negative publicity, there are legal and financial consequences for violating privacy legislation. An injured party, be it an individual or organization, must follow the ombudsman’s procedure of filing a complaint with the respective provincial authority or the federal Office of the Privacy Commissioner (OPC). The role of the OPC is to facilitate the resolution of such complaints through persuasion, negotiation and mediation. The OPC may decide to investigate the complaint and to issue a report setting out non-binding recommendations based on the findings. In conducting the investigation, the OPC has a variety of powers, including the power to compel the production of evidence. Once the OPC completes its investigation and issues a report, the OPC or the complainant may apply to the Federal Court to seek enforcement and/or damages under PIPEDA. The OPC can also impose a fine for non-compliance with certain provisions of PIPEDA. Under the Alberta PIPA and the British Columbia PIPA, the applicable provincial privacy commissioner has the power, following an investigation, to direct the organization to remedy the situation. These orders are enforceable in court and are the basis for civil actions. In Québec, orders of that province’s privacy commission (Commission d’accès à l’information) can be appealed to the Québec Superior Court. Learn more about Gowlings’ services in this area at gowlings.com/privacy doing business in Canada | 105 p | advertising and marketing With a well-educated population, a vibrant media industry and relatively clear regulations related to advertising and promotions, Canadians produce some of the best advertising creative in the world. However, foreign advertisers should be aware of the unique aspects of Canadian law and culture that govern advertising in Canada. For example, in the province of Québec, language laws mandate equal prominence of French on all packaging, product warnings and instructions, and greater prominence of French at pointof-sale and, in many circumstances, in advertising and promotions. This requirement reduces the amount of space available to advertisers, especially in the case of packaging for national products. 106 | doing business in Canada 1. Packaging and labelling All prepackaged products sold in Canada are governed by a series of federal packaging and labelling regulations. In order to protect consumers from false claims and harmful or potentially harmful products, certain items, including food and beverage, natural health, tobacco, cosmetic, and consumer chemical products, among others, are subject to more stringent labelling requirements. Federal packaging laws also stipulate that basic information on all products be provided in both French and English — although, outside of Québec, prominence of any particular language is not mandated. Certain foreign-made products sold in Canada also require country-of-origin identification under the Marking of Imported Goods Order. 2. “Product of Canada” and “made in Canada” claims The Competition Bureau has published a number of enforcement guidelines intended to provide assistance to industry and advertisers regarding compliance with legislation (the federal Competition Act) enforced by the Bureau that prohibits false and misleading advertising. One such set of guidelines addresses “product of Canada” or “made in Canada” claims. Under these guidelines, where a product is represented as a “product of Canada,” its last substantial transformation must have occurred in Canada and at least 98 per cent of the total direct costs of production must have been incurred in Canada. For a “made in Canada” claim, in addition to the requirement that the last substantial transformation of the product occurred in Canada, at least 51 per cent of the total direct costs of production must have been incurred in Canada. A “made in Canada” claim must also be accompanied by a qualifying statement disclosing the presence of foreign content (e.g., “made in Canada with imported parts” or “made in Canada with domestic and imported parts”). 3. IP and copyright Under the federal Copyright Act, songs, logos and, in some cases, arguably, even slogans used in Canadian advertisements are protected by copyright. The Copyright Act has been amended recently to allow fair dealing with such works for the purpose of parody or satire, but the extent to which these defences will apply in a commercial or comparative advertising context is very uncertain. The use of competitors’ registered marks and logos in comparative advertising may give rise to additional concerns under Canadian trademark law. While in the U.S. for example, use of a competitor’s trademark in truthful and non-deceptive comparative advertising is generally legal, in Canada, use of competitors’ registered marks or logos, even in a fair and accurate comparative advertising context, may in certain circumstances, be actionable as an unlawful depreciation of the goodwill associated with the registered mark or logo. The Canadian Intellectual Property Office maintains a database of registered and pending trademarks and does not allow registration of confusing or similar marks. See section N for a more complete discussion of the protection and use of intellectual property in Canada. Under Québec law, any “inscription” on a product, as well as signs and commercial advertising, must be in the French language. The legislation provides an exception, however, for “recognized” trademarks within the meaning of the Trademarks Act (unless a French version has been registered). For many years, retailers in Québec had relied on the “recognized” trademark exception on public signs, posters and commercial advertising to display their English-only marks on outdoor signage. However, the use of the “recognized” trademark exception on signage was recently tightened and became the object of highly publicized enforcement actions by the Québec regulator, the Office québécois de la langue française (OQLF). Although the OQLF appears to acknowledge the “recognized” trademark exception (under which trademarks recognized under the Trademarks Act may be used in a language doing business in Canada | 107 other than French in commercial signage), they have taken the position that it is limited to situations where the mark is meant to act as the name of a business. According to the OQLF, English-only trademarks used to designate business names on commercial signage in Québec must be accompanied by a French generic descriptor, phrase or expression. The debate over the use of the “recognized” trademark exception on storefront signage has made its way through the courts in Québec and is currently under appeal to the Québec Court of Appeal. The trial court (the Québec Superior Court) examined the concepts of trademarks and business names under applicable federal and provincial laws, and concluded that a trademark forms part of a legal concept that is governed by its own rules, and differs significantly from that of a trade name or business name. The Court noted that the legislature was well aware of the distinction between a trademark and a business name, and concluded, accordingly, that the Court could not depart from the clear meaning of the “recognized” trademark exception. The judge in first instance therefore ruled that retailers could rely on the “recognized” trademark exception and were not required to add French descriptors to non-French trademarks featured on storefront signage. It remains to be seen whether the Court of Appeal will be of the same view. For further information, see section N, “Intellectual property.” 4. Environmental claims Among the enforcement guidelines issued by the Competition Bureau, as noted previously, are guidelines on the use of environmental claims in advertising. These guidelines, published by the Bureau in conjunction with the Canadian Standards Association, discourage the use of unsubstantiated and vague environmental claims such as “eco-friendly” and “environmentally friendly,” stating that such claims may only be used if they detail the exact environmental benefit in such a way that it can be verified in relation to the specific product. Through the use of commentary and practical examples, the guidelines provide instruction on the proper use of certain common environmental claims and symbols. “Green” marketers in Canada must ensure that all environmental claims are true — not only in relation to the final product, but also in relation to all relevant aspects of the product’s life cycle (i.e., there must be an overall net positive impact on the environment). 5. Contests and promotions The legal rules that govern contests and promotions in Canada contain a number of unique provisions. “Lotteries,” considered as any scheme that awards a prize based on chance and/or where money (or another valuable “consideration”) is paid to participate, are illegal under the Criminal Code. To avoid being considered an illegal lottery, a contest must include a skill-testing element (commonly a mathematical question) and generally must provide a no-purchase entry option. The Competition Act also mandates disclosure of certain material information about the contest, including any regional allocation of prizes, odds of winning and prize values. Special considerations also apply in the case of contests open to Québec residents: in addition to its French language rules for advertising, Québec is the only jurisdiction in Canada that currently imposes the payment of duties, and requires certain pre- and post-contest filings with respect to contests open to its residents. 6. “Sale” claims In order to advertise a “sale” price in Canada, you must have established a “regular” price at which either (i) a substantial number (i.e., more than 50 per cent) of the items have been sold during the relevant time frame (known as a “volume test”), or (ii) the item has been (or will be) offered for sale in good faith for a substantial period of time — i.e., more than 50 per cent of the relevant period (known as a “time test”). Even if the term “regular price” is not used, a higher price referenced directly or indirectly in a “sale” advertisement will be considered a claim as to the “regular” price at which the product or service in question has been sold. (If this regular price is not identified as the seller’s own regular price, it will be considered to be a claim as to the price at which sellers generally, in the 108 | doing business in Canada relevant geographic market, have sold the product or service). As a practical matter, because of the difficulty in projecting in advance the volume of “regular price” sales of any product/service that will actually occur, most retailers in Canada do not rely on the volume test. Instead, they typically use the time test, in which they keep track of the length of time that each item is offered at a price lower than the ordinary selling price, and ensure that this “on sale” period is less than half of the relevant period. The relevant period can be a sixmonth period, 12-month period or even a quarterly period, provided that the items are not seasonal and the time period is followed consistently. 7. Puffery and hyperbole In Canada, the scope for arguing that an advertising claim is just “puffery” (a hyperbolic boast, or a vague and purely self-congratulatory statement of opinion) is probably narrower than in certain other jurisdictions, the U.S. in particular. If the claim can be seen as relating to the performance, efficacy or length of life of the product, it cannot be made without substantive evidence of an “adequate and proper test” to support it. And, if the claim can reasonably be interpreted to be likely to influence the consumer’s purchase decision, it must be assessed in terms of the general impression it creates. However, if a claim is truly so exaggerated or fanciful that no reasonable consumer would rely on it, or is clearly expressed solely as a matter of opinion not subject to objective assessment, even Canadians (and our courts) may be prepared to dismiss it as a “mere puff.” 8. Canadiana issues Canadian regulations also extend legal protection to certain symbols and icons of Canada. For example, the use of real or costumed RCMP officers, or the words “Royal Canadian Mounted Police,” “RCMP” or “Mountie” in advertising requires consent from the RCMP. Additionally, the use of images of the Canadian flag, the 11-point maple leaf symbol, coins and bank bills in advertising is subject to certain conditions or limitations. However, the national anthem, “O Canada,” is in the public domain and is therefore fair game. 9. Advertising in Québec Beyond the aforementioned language issues, Québec has a unique culture and heritage within Canada and has enacted a number of regulations to protect both. Likely the most important to foreign advertisers is Québec’s Consumer Protection Act, which applies to anyone who advertises or sells products or services to consumers in Québec, and imposes strict requirements on the nature and accuracy of advertising. Many Canadian advertisers choose not to open contests to Québec residents due to the additional doing business in Canada | 109 rules enforced by the province’s alcohol and gaming authority, the Régie des alcools, des courses et des jeux. In many cases, national advertisers are forced to make a choice: create parallel advertising campaigns for English and French Canada, or miss out on advertising to the second-most populous Canadian province. Québec law also prohibits (with limited exceptions) commercial advertising directed to children under 13 years of age. 10. Penalties for false and misleading advertising The Competition Bureau is empowered under the federal Competition Act to pursue administrative remedies in relation to misleading advertising and other deceptive marketing practices. The Bureau also has the ability to prosecute misleading advertising as a criminal offence where misrepresentations are made knowingly and recklessly. In most cases, the Bureau will deal with misleading advertising as a civil offence. This route offers a wide range of enforcement remedies, including cease-anddesist orders, the required publication of information notices (i.e., corrective advertising) directed to affected parties and/or administrative monetary penalties. For a first offence, corporate offenders may face penalties of up to $10 million. For subsequent offences, corporations face up to $15 million in penalties. Under the civil route, the Bureau does not need to prove (as they would in a criminal proceeding) that the false or misleading advertising was engaged in deliberately or recklessly. The potential penalties under the criminal provisions include fines and jail. 11. Private remedies for false and misleading advertising In addition to certain remedies available under the common law (e.g., trade libel) or an action for copyright/trademark infringement, the Competition Act provides a statutory right of civil action for damages suffered as a result of misleading advertising. However, proof is required that the advertiser acted “knowingly or recklessly.” The relevant provision of the Competition Act has also been used as the basis for obtaining injunctions in misleading advertising cases. The basic test for obtaining an interlocutory injunction in Canada requires that: (i) there is a serious issue to be tried, (ii) the plaintiff will suffer irreparable harm if the injunction isn’t granted and (iii) the “balance of convenience” favours the plaintiff. Advertising Standards Canada, the main self-regulatory body for the advertising industry in Canada, also administers a confidential trade-dispute procedure for comparative advertising disputes, which is not unlike the NAD process in the U.S. In the right circumstances, it can offer a lower-cost and relatively expeditious alternative to litigation. 12. Canada’s Anti-Spam Legislation On July 1, 2014, Canada’s Anti-Spam Legislation (CASL) came into force, with significant implications for advertisers wishing to promote their goods or services through the use of “commercial electronic messages” (CEMs) sent to an “electronic address” (including email accounts, instant-messaging accounts and other analogous technologies). CASL prohibits the sending of a CEM to a recipient unless the sender has either the express or implied consent of the recipient to do so. CASL stipulates conditions for obtaining express consent and sets conditions for what will constitute a valid “implied” consent under the legislation. It also imposes certain message disclosure requirements on the sender and requires that recipients are given the ability, at no cost, to unsubscribe from receiving CEMs in the future. CASL also amends the Competition Act to make it an offence to send a CEM that is false or misleading in a material respect, or to send or make a false or misleading representation in the sender information, subject matter information, URL, or other locator of a CEM. See section Q for a more complete discussion of CASL and its requirements. Learn more about Gowlings’ services in this area at gowlings.com/adlaw 110 | doing business in Canada q | Canada’s anti-spam legislation Canada’s Anti-Spam Legislation,1 or CASL for short, came into force on July 1, 2014. It is one of the most prescriptive and punitive anti-spam laws anywhere in the world. With penalties of up to 10 million dollars, ensuring CASL compliance has become a priority for anyone doing business in Canada. 1 The full name of the Act is An Act to Promote the Efficiency and Adaptability of the Canadian Economy by Regulating Certain Activities that Discourage Reliance on Electronic Means of Carrying out Commercial Activities, and to Amend the Canadian Radio-television and Telecommunications Commission Act, the Competition Act, the Personal Information Protection and Electronic Documents Act and the Telecommunications Act. doing business in Canada | 111 This section focuses solely on the requirements under CASL pertaining to the sending of electronic messages. While CASL also requires express consent to the unsolicited installation of computer programs, for most businesses operating in Canada, compliance with the anti-spam requirements relating to the sending of “commercial electronic messages” will be of paramount importance. 1. Overview With respect to spam, CASL imposes two primary obligations. First, CASL prohibits the sending of unsolicited commercial electronic messages. This means that, subject to certain exceptions, before sending an electronic message that encourages participation in a commercial activity (including most standard promotional or advertising emails/texts) the sender must have either the express or implied consent of each recipient, as defined under CASL. Second, even where consent exists, CASL requires commercial electronic messages to contain certain disclosures and an unsubscribe mechanism. This section briefly reviews the essential requirements of CASL. 2. Commercial electronic messages (CEMs) CASL applies specifically to commercial electronic messages. A CEM is any message sent to an electronic address that has as its purpose, or one of its purposes, the encouragement of participation in a commercial activity. This includes, but is not limited to, messages that offer to purchase or sell goods or services, that offer to provide a business, investment or gaming opportunity, or that contain advertisements related to any of those things. An electronic message that requests the recipient’s consent to receive further electronic messages is itself a commercial electronic message. To constitute a CEM, the message must be sent by an electronic method of communication. This includes email, texting, social media messaging, or other digital messaging systems where a message is sent by one person to one or more specific electronic addresses. However, CASL does not apply to voice messaging systems nor to the transmission of facsimiles. CASL also does not apply to electronic messages that are displayed to the general public, rather than sent to one or more specific addresses. For example, CASL will not apply to a normal tweet on Twitter or to Facebook wall posts. It will, however, apply to private messages sent through those social media platforms to one or more particular recipients. 3. Jurisdiction CASL applies to any CEM that is either sent from a computer within Canada or accessed by a computer within Canada. Because of this, even organizations operating solely outside of Canada will, in most cases, be required to comply with CASL if they communicate with Canadian clients or customers. 4. Consent Consent is the cornerstone of CASL and most of the complexity of the legislation lies here. In order to send any CEM, unless the message is otherwise exempt (as discussed in more detail later in this section), the sender must have the consent of the recipient to send the message. It is important to note that, under CASL, the onus is always on the sender to prove consent. There are two principal types of consent under CASL: express consent and implied consent. a. Express consent Express consent requires clear and informed consent on the part of the person consenting to receive the messages. The form of consent must be opt-in, rather than opt-out, and the person must be aware of the nature of the messages they are agreeing to receive. Opt-ins cannot be buried in the terms and conditions of another service or contract, and must instead require positive action on the part of the person providing his/her consent with respect to the opt-in. Most commonly, express consent is obtained through a checkbox or a confirmation button on a form, web page, or digital application. Any such checkbox should not be pre-checked, and consent should never be assumed. 112 | doing business in Canada CASL also requires the following information to appear with any request for express consent: • An identification of the types of messages that will be received and the purposes of the consent. • The name by which the person requesting consent carries on business, or that person’s legal name. • The mailing address, and either a telephone number providing access to an agent or a voice messaging system, an email address, or a web address of the person seeking consent. • A statement indicating that the person whose consent is sought can withdraw their consent. Consent can be sought by one party on behalf of one or more other parties, subject to additional disclosure requirements. Once express consent is obtained, the sender may continue to send messages of the type identified in the request for consent until the recipient withdraws their consent. b. Implied consent Implied consent is based on the existence of a prescribed relationship between the sender and recipient or the presence of a specific set of circumstances. Under CASL, implied consent may exist where the sender of the CEM and its recipient have an “existing business relationship.” An existing business relationship applies in the following cases: i. Where there has been a purchase or lease of a product, good, service, land or an interest or right in land within the previous two years by the person to whom the message is sent from the sender, or the person who caused or allowed the message to be sent. ii. Where the recipient accepted a business, investment or gaming opportunity, or engaged in the bartering of anything mentioned in (i) within the previous two years by the recipient with the sender, or the person who caused or allowed the message to be sent. iii. Where a written contract currently exists between the recipient and sender or the person who caused or allowed the message to be sent, or such a contract expired within the previous two years. iv. Where an inquiry or application was made by the recipient in respect of anything in (i) or (ii) above from the sender or the person who caused or allowed the message to be sent, within the previous six months. As is clear from the time limits referred to above, implied consent for an existing business relationship only exists for a limited period of time, and this time limit must be tracked by those relying on the implied consent. Tracking these time limits can be problematic, especially since it requires tracking the expiry of consent in relation to each address where one is relying on implied consent, and it may be difficult to establish the exact times when recent transactions took place, or when the timer begins to run. Due to this difficulty, it is often advisable to seek express consent for any ongoing commercial electronic messaging. Regardless of the time frame given for the use of implied consent from an existing business relationship, if the recipient indicates that he/she no longer wishes to receive ongoing messages, the sender must cease sending CEMs to that recipient within 10 business days. A second form of implied consent exists if the recipient has conspicuously published his/her electronic address, or has given the address to the sender without indicating that he/she does not wish to receive CEMs. Importantly, in order to use this form of implied consent, the message must be relevant to the business, role, functions or duties of the recipient of the message. c. Referrals CASL allows for the limited sending of messages to new contacts based on referrals. Essentially, CASL will deem the sender to have consent to send a single message to a recipient where another individual has referred that person to the sender and provided the proposed recipient’s electronic address. In order for this to apply, the individual who made the referral must be in certain types of prescribed relationships with doing business in Canada | 113 both the sender and a recipient, and the referral message must contain prescribed disclosures and the prescribed unsubscribe mechanism. d. Statutorily defined categories of messages A number of prescribed classes of electronic messages are exempt from the requirement to obtain consent, either express or implied, from the recipient. It should be noted that these messages are not exempt from the application of CASL. Rather, the sending of electronic messages under these categories is analogous to categories of implied consent in that complying with the other elements of CASL, such as including the email disclosure requirements and unsubscribe mechanism, is still required. Such categories of electronic message include, but are not limited to, messages sent to provide a requested quote or estimate regarding a product or service, to provide warranty or product recall information about a product the recipient has purchased, to facilitate or confirm a commercial transaction entered into with the recipient, or to deliver a product or service that the recipient is entitled to receive under the terms of a transaction between the sender and recipient. 5. Email disclosure requirements Even where a sender has obtained express consent or has implied consent to send a commercial electronic message, any CEM sent pursuant to that consent must include prescribed information within the message. It must also include an unsubscribe mechanism, allowing the recipient to easily opt-out of future CEMs from the sender. a. Required information: • The name by which the person sending the message carries on business, or that person’s legal name. • If the message is sent on behalf of another person, the name by which the person on whose behalf the message is sent carries on business, or that person’s legal name. • If the message is sent on behalf of another person, a statement identifying which person is sending the message and which person is the person on whose behalf the message is sent. • The mailing address, and either a telephone number providing access to an agent or a voice messaging system, an email address or a web address of the person sending the message or the person on whose behalf the message is sent. If it is not possible to include all of this information directly in a message, such as in the case of some commercial messages sent by text message, a link may instead be included that leads directly to a web page with the required information. b. Unsubscribe mechanism All CEMs not exempt from CASL must include an unsubscribe mechanism, whether the consent to send the message is express or implied. The unsubscribe mechanism, which is usually in the form of an unsubscribe link at the end of the message, must enable the recipient to indicate, at no cost to them, the wish to no longer receive CEMs from the sender or the person on whose behalf the messages are sent using the same electronic means by which the message was sent. The unsubscribe mechanism must be accessible for 60 days following receipt of the message. The sender must ensure that effect is given to any unsubscribe request within 10 business days. 6. Exemptions There are a small number of complete exemptions from the application of CASL, the most important of which are discussed here. Please note that there are additional exemptions, such as for charitable solicitations and political messages, which are not discussed here. a. Personal or family relationship CASL does not apply to messages sent to narrow classes of family or to those with whom the sender has a close personal relationship, so long as the relationship has previously included direct, voluntary two-way communication. 114 | doing business in Canada b. Not a commercial electronic message Messages that do not meet the definition of CEM because they do not “encourage participation in commercial activity” are outside the scope of CASL. c. Business-to-business exemption Messages sent internally within an organization that concern the activities of the organization are exempt from CASL. More importantly, messages sent from an employee or other representative of an organization to an employee or representative of another organization are exempt if the organizations have an existing relationship and the message concerns the activities of the recipient organization. d. Response to an inquiry or complaint Any message sent in response to an inquiry or complaint, or that is otherwise solicited by the recipient, is exempt from CASL. e. Satisfying a legal right Messages sent to enforce a right, to satisfy a legal obligation or provide notice of a legal right are exempt from CASL. This includes messages sent to collect debts or provide notice of the sender enforcing any contractual right or remedy. 7. Use of third-party lists CASL does not go so far as to eliminate the possibility of using third-party electronic address lists. However, those using third-party electronic address lists must take caution, as CASL imposes a number of requirements on the use of such lists with respect to opt-outs and disclosure. A robust agreement will be required between the list provider and user to ensure these requirements are satisfied, and to provide the list user with assurances that all necessary consents have been obtained and have not been withdrawn. Such an agreement might provide for indemnities against third-party claims arising in connection with misrepresentation or failure to comply with such an agreement. 8. Amendments to the Competition Act and the Personal Information Protection and Electronic Documents Act (PIPEDA) CASL also amended the Competition Act in two important ways. First, the amendments make it an offence to send a CEM that is false or misleading in a material respect. Second, the amendments under CASL make it an offence to send or make a false or misleading representation in the sender information, subject matter information, uniform resource locator (URL) or other locator of a CEM. This latter amendment may make it difficult for businesses to include claims that require qualification or a disclaimer in the subject lines or URLs of CEMs, as it may be impossible to effectively include such qualifying language in the limited space. Additionally, CASL amended PIPEDA to ensure PIPEDA’s exceptions to the requirement for consent to collect, use and disclose personal information do not apply where electronic addresses are collected by the use of a computer program created for that purpose, or where any personal information is collected or used by accessing a computer system in contravention of an act of Parliament. CASL requires the Office of the Privacy Commissioner of Canada, Competition Bureau and Canadian Radio-television and Telecommunications Commission to consult each other and to co-ordinate with respect to their CASL enforcement activities. Learn more about Gowlings’ services in this area at gowlings.com/casl doing business in Canada | 115 r | bankruptcy and restructuring 1. Legislation and court system The Canadian bankruptcy and insolvency regime is divided between the federal and provincial levels of government in accordance with the division of powers set out in Canada’s Constitution. The federal Parliament has authority over bankruptcy and insolvency while the provincial legislatures have authority over securities laws, property and civil rights, including the responsibility for determining the rights and remedies of secured creditors. The result is that various pieces of legislation at both the federal and provincial levels may apply to businesses involved in an insolvency. 116 | doing business in Canada The federal statutes primarily governing insolvency proceedings are: • The Bankruptcy and Insolvency Act (BIA), which sets out Canada’s bankruptcy regime and is the statute used to liquidate a business. It also provides a proposal regime to allow debtors to reorganize and reach compromises with their creditors. • The Companies’ Creditors Arrangement Act (CCAA), which is strictly a restructuring statute, sets out a framework for the reorganization of insolvent companies with debts totalling over $5 million. It provides for plans of arrangement to allow debtors to reach compromises with their creditors or a sale of the business under the supervision of the court. • The Winding-up and Restructuring Act (WURA), which is used primarily to wind up regulated bodies such as banks, insurance companies and trust corporations. The principal provincial statutes affecting insolvency proceedings are: • The Personal Property Security Act (PPSA) • The Courts of Justice Act, Judicature Act and Rules of Civil Procedure (Rules of the Court) All common law provinces have enacted PPSA legislation that establishes a regime for creating valid security interests, determining priorities among creditors and enforcing security interests. This legislation is similar to the various uniform commercial codes in effect in many jurisdictions in the United States. In Québec, however, creation of security interests and determination of priorities is determined by the provisions of the Civil Code of Québec. Registration is made in the Register of Personal and Movable Real Rights. For more information on PPSA legislation, see section D, “Secured financing.” Unlike the United States, Canada does not have a separate bankruptcy court. Rather, the BIA and CCAA assign jurisdiction to provincial courts over which federally appointed judges preside. These courts are of general jurisdiction. However, some provincial courts have established commercial court branches in which insolvency proceedings are commenced. In Ontario, for example, judicial authorities have established a specialized branch called the “Commercial List.” Insolvency proceedings move relatively quickly through the Ontario Commercial List due to its limited mandate and an experienced judiciary. In some of the other jurisdictions without a formal Commercial List, court registries will assign judiciary with commercial insolvency experience to certain insolvency matters in an effort to obtain a similar expedited result to the Commercial List. Being federal enactments, both the BIA and CCAA contain provisions requiring orders made by one provincial court to be recognized and enforced by other provincial courts. 2. Restructuring A restructuring of a corporation’s debt, or a “workout,” usually occurs in one of two ways: informally without court process by agreement between the debtor and its creditors, or formally under either a proposal as outlined in Part III of the BIA or a plan of arrangement under the CCAA. a. Commencing restructuring proceedings under the BIA and CCAA A proposal under the BIA or a plan of arrangement under the CCAA is effectively a contract between an insolvent debtor corporation and its creditors. In either case, the debtor makes a written offer to settle the provable claims of various classes of its creditors. A CCAA plan of arrangement can be made with any particular class or classes of creditors, whereas a proposal under the BIA must include an arrangement with the corporation’s preferred creditors (which includes claims of the trustee, employee claims and landlord claims) and unsecured creditors. In both cases, various classes of secured creditors may be included. Any class of creditors not included cannot be bound by the plan or arrangement. In order to facilitate successful restructurings, the CCAA and BIA provide for a stay of proceedings against a debtor corporation by its creditors, although the CCAA stay is often broader in scope. Both statutes also allow the debtor corporation to remain in possession of its assets during the restructuring process and provide for interim financing to the debtor corporation, known as “debtor-in-possession” financing, or “DIP” financing. doing business in Canada | 117 Lenders providing DIP financing are eligible for “super priority” security over the debtor’s assets. Both statutes have been updated to contain specific guidelines for determining the classification of creditors. The BIA and the CCAA set out a two-stage approval process. Creditors in each class vote on the proposal or plan of arrangement. The threshold for voter approval is by majority (in number) and two-thirds (in value) of the claims of each class voting in person or by proxy. If this threshold for approval is reached, an application is made to the court for approval of the proposal or plan of arrangement. Both the BIA and CCAA provide for a neutral party to monitor progress of the restructuring of the debtor. Under the BIA, a proposal must provide for the appointment of a trustee who has a general duty to monitor the debtor’s business and financial affairs during the restructuring and to report on any material adverse changes. The trustee must also report on the reasonableness of the debtor’s cash flow statement. Similarly, the CCAA requires the appointment of a monitor who must be a licensed trustee in bankruptcy. The monitor carries out a role similar to that of the trustee under the BIA and is responsible for assisting the debtor in dealing with the management of the business during the restructuring, assisting with the preparation of the plan of arrangement or assisting with a sales process. The monitor must also file periodic reports with the court and creditors, and has recently become more involved in the entire restructuring process. b. Differences between BIA and CCAA restructurings Despite the similarities between the BIA and CCAA, there are differences that should be taken into account. Benefits of proceeding under the CCAA include: • Due to the generally liberal judicial approach to the interpretation of the CCAA and the lack of detailed rules of procedure, the CCAA offers significantly more flexibility to a debtor corporation than proceedings under the BIA. • There is no statutory time limit for filing a plan under the CCAA, whereas the BIA sets a maximum period of only six months to file a definitive proposal. • Under the CCAA, the court has the discretion to make third parties who are not creditors of the debtor subject to the stay of proceedings during the restructuring period. • Under the BIA, if the unsecured creditors reject a proposal or the court refuses to approve it, the debtor corporation is automatically declared to be bankrupt. Rejection of a plan of arrangement under the CCAA does not have this automatic effect. Benefits of restructuring under the BIA include: • A stay of proceedings under the BIA is obtained by filing a notice of intention with an administrative officer, while under the CCAA, a stay must be obtained by seeking a court order. • The CCAA applies only to corporations or corporate groups with an aggregate of at least $5 million in debt; the BIA has no such restriction. • Since the BIA contains a detailed code of procedure for restructurings, which is absent from the CCAA, and mandates a shorter time frame, costs are generally lower in a proposal under the BIA, as fewer court applications are required. c. Cross-border insolvencies The BIA and CCAA outline procedures for crossborder insolvencies. These provisions are set out in a modified version of the United Nations Commission on International Trade Law’s (UNCITRAL) Model Law on Cross-Border Insolvency and have worked well in practice. 3. Receiverships The BIA provides for the enforcement of security and the appointment of receivers. A secured creditor planning to enforce its security on all or substantially all assets of an insolvent debtor must give prior notice of this intention and wait 10 days after sending the notice before taking further steps unless the debtor consents to an earlier enforcement. At this time, a receiver will 118 | doing business in Canada likely be appointed. The receiver must give notice of its appointment to all creditors, issue reports on a regular basis outlining the status of the receivership, and prepare a final report and statement of receivership accounts when the appointment is terminated. These reports are available to creditors upon request. A receiver, or receiver and manager, is appointed in one of two ways: privately, by a secured creditor in accordance with a security instrument, or by a court order. a. Private appointment of a receiver Where a security agreement provides for the private appointment of a receiver, the powers of the receiver must also be set out in that instrument. Unlike a court-appointed receiver, a private receiver’s loyalties lie primarily with the creditor that appointed it, and it will work to maximize recoveries for the creditor. Privately appointed receivers usually have broad powers, including the power to carry on the business and to sell the debtor’s assets by auction, tender or private sale. Although private appointments can reduce costs and delays, and provide the secured creditor with greater control over the realization process, it is often advisable to obtain a court appointment. This is especially the case where there are major disputes among creditors or with the debtor, or in any case where it is clear that the assistance of the court will be required throughout the receivership. It is also often important to potential purchasers of the assets of insolvent businesses to have the ability to obtain court approval of asset sales and an order vesting title in the purchaser. b. Court appointment of a receiver The jurisdiction for a court appointment of a receiver is found in the provincial rules of court and in section 243 of the BIA (National Receiver). A receiver can be appointed under the Rules of Court alone, but it is more common for the appointment to be made under both the BIA and the Rules of Court. Court appointment of a receiver typically begins with a secured creditor commencing an action or application against the debtor. The receiver is then appointed in a summary proceeding within the action or application. The order appointing the receiver normally stays proceedings against the receiver, provides the receiver with control over the assets of the debtor, authorizes the receiver to carry on the debtor’s business, authorizes the receiver to borrow money on the security of the assets and, ultimately, authorizes the receiver to sell the debtor’s assets with the approval of the court. If necessary, the court order may authorize the receiver to commence and defend litigation in the debtor’s name. Whereas the duty of a privately appointed receiver is primarily to the secured creditor who appointed it (subject to a general duty to act in a commercially reasonable manner), the court-appointed receiver is an officer of the court and has a duty to protect the interests of all stakeholders of the debtor corporation. By the nature of its appointment, a court-appointed receiver may not be entitled to seek indemnities from those who sought the appointment. However, in practice, secured creditors do, in some cases, provide indemnities. A court appointment may be necessary if the debtor opposes the appointment of a receiver and will not let the receiver take possession. In some provincial jurisdictions, the courts will grant possession orders and affirm the appointment of a private receiver with powers as set out in the security documents, thereby avoiding a court appointment. Other circumstances exist where a court appointment may be preferable. For example, in large, complex matters where the assets and operations of the debtor are located in a number of jurisdictions and security interests are in competition, it is generally in the interest of all concerned to arrange for appropriate management and realization of the assets, pending an ultimate determination by the court of the rights of the various secured creditors. 4. Bankruptcy The administration of bankruptcy is carried out by trustees in bankruptcy who are licensed and supervised by the federal government. When a debtor becomes bankrupt, a trustee is appointed and all of doing business in Canada | 119 the bankrupt’s assets are vested in the trustee. Claims of creditors, other than secured creditors, are stayed. The trustee has a duty to review the validity of all security over the bankrupt’s assets and to apply to the court to set aside security that is not valid. Subject to confirmation of the validity of its security and a very limited stay provision, a secured creditor is entitled to take possession and dispose of all collateral over which it holds security, notwithstanding the occurrence of a bankruptcy. A bankruptcy may occur in one of several ways: • The debtor makes a voluntary assignment into bankruptcy. • The court grants a bankruptcy order on the application of one or more creditors. • Unsecured creditors or the court refuse to approve a restructuring proposal under part III of the BIA. • The proposal is subsequently annulled by the court. In most cases, creditors elect a board of inspectors to guide the general conduct of the bankruptcy proceedings. The trustee requires consent of a majority of the inspectors to sell assets, carry on the business of the bankrupt, commence or continue legal proceedings, or compromise any claims made by or against the bankrupt estate. The major classes of creditors in a bankruptcy are secured creditors, preferred creditors and unsecured (ordinary) creditors. A secured creditor may be represented by an agent or a receiver for the purpose of realizing assets subject to its security. 120 | doing business in Canada a. Priorities under the BIA and CCAA Preferred creditors have priority over unsecured creditors and are able to include in their claims the costs of administration of the bankruptcy, the fees of the trustee, employees’ claims, municipal taxes and claims of a landlord. Claims by the Crown are not preferred claims and, with a few significant exceptions, are mostly unsecured. Unsecured creditors are entitled to share pro rata in the realization of the bankrupt’s assets after payment of preferred creditors and are subject to the claims of secured creditors. The BIA and CCAA create a “super priority charge” for lenders that provide interim financing to debtor companies. Such interim financing is permitted only by court order and requires that existing secured creditors are provided notice. Such a super priority will survive in a bankruptcy if a debtor-in-possession restructuring has failed. The federal and provincial governments have attempted to create a statutory deemed trust or lien against assets in priority to contractual types of security. The objective is to ensure preferential treatment of debts due to the federal and provincial governments, and to employees for certain liabilities. These efforts have been met with limited success. Many of the claims involved are not effective in a bankruptcy. However, claims of the federal government for source deductions for employees that have not been paid by the employer have priority over most secured creditors. Furthermore, there are super priority claims created in the BIA and CCAA for wage and pension arrears, and a federal government plan (the Wage Earner Protection Program, or WEPP) to provide for the payment of wage arrears in an insolvency. b. Avoidance transactions Under the BIA and certain provincial statutes, the trustee may impugn or set aside certain transactions or payments entered into or made by the bankrupt. These are generally fraudulent preferences, fraudulent conveyances and transfers under value. There are limitation periods that apply in each case, and different rules and onuses of proof depending upon whether a transaction/payment was at arm’s length. In practice, Canadians are not as aggressive as their American counterparts in bringing these proceedings. c. Interim receiver An interim receiver is appointed to preserve and protect an estate pending the outcome of insolvency proceedings. Under the BIA, an interim receiver may be appointed by the court in three instances: 1. On or after the filing of an application for a bankruptcy order. 2. On the filing of a notice of intention to file or the filing of a proposal under Part III of the BIA. 3. When an enforcement notice is about to be sent or has been sent by a secured creditor indicating its intention to enforce its security. In all cases, the appointment is of short duration, and the court specifically sets out the powers of the interim receiver. The interim receiver is usually instructed to take possession of the assets and control the receipts and disbursements of the debtor, but not otherwise interfere with the day-to-day business. The interim receiver is the watchdog of the assets during the hiatus between the filing of the application and its hearing, or during the time prior to the appointment of a receiver or the approval of a proposal. Prior to the amendments to the BIA in 2009, interim receivers were often appointed with a mandate similar to that of a receiver. However, the amendments to the BIA ensure that the interim receiver carries out a truly “interim” role. Learn more about Gowlings’ services in this area at gowlings.com/bankruptcy doing business in Canada | 121 s | lobbying Communications between individuals representing a corporation or its employees and government officials may be subject to a requirement that those communications be reported. Specific rules apply to the lobbying of officials in the Canadian federal government, as well as in some provinces and municipalities. Each of these governmental bodies has its own rules, and it is wise to gain an understanding of them before undertaking communications with government officials. 122 | doing business in Canada At the federal level, the Lobbying Act provides that some types of communications between individuals and “public office holders” must be reported. Under the Act, individuals who work with or deal with governmental officials or employees may have an obligation to disclose certain information in relation to those discussions. Corporate employees may also be subject to the Lobbying Act, depending on the nature of their work and the time invested in interacting with any employee of the Government of Canada, including politicians, officials and representatives of Canada. 1. Registrable communications Not all types of communications with public office holders constitute lobbying activities. If the communications with public office holders fall within the following categories, it is likely that such communications must be registered: • The development of any legislative proposal by the Government of Canada or by a member of the Senate or the House of Commons. • The introduction, passage, amendment or defeat of a bill or resolution in the federal Parliament or in a provincial parliament. • The making or amendment of any regulation as defined in subsection 2(1) of the Statutory Instruments Act. • The development or amendment of any policy or program of the Government of Canada. • The awarding of any grant, contribution or other financial benefit by or on behalf of the Government of Canada. • The awarding of any contract by or on behalf of the Government of Canada. • The arrangement of a meeting between a public office holder and any other person to discuss the subjects above. In addition, in some provincial jurisdictions, any communications made in the normal course of selling an individual’s or a corporation’s products or services, or in entering into a contract with a provincial government, are also registrable as lobbying activities. 2. Lobbying a. Public office holder An individual representing an interest group or the employee of a corporation entering into discussions with a public office holder may be considered to be involved in lobbying activities. Pursuant to the Lobbying Act, the term “public office holder” refers to any officer or employee of the Government of Canada, including: • A member of the Senate or the House of Commons and any person on the staff of such a member. • An appointee to any office or body by or with the approval of the governor in council or a minister of the Crown, other than a judge receiving a salary under the Judges Act or the lieutenant-governor of a province. • An officer, director or employee of any federal board, commission or other tribunal as defined in the Federal Courts Act. • A member of the Canadian Armed Forces. • A member of the Royal Canadian Mounted Police. b. Designated public office holder The Lobbying Act includes a specific category of individuals as “designated public office holders” (DPOHs), who are defined as officials responsible for high-level decision-making in government. Specific registration requirements are provided for any communications with a DPOH. The DPOH category includes the following positions: • A minister of the Crown or a minister of state and any person employed in his or her office. • The leader of the Opposition or the senior staff in the offices of the leader of the Opposition, both in the House of Commons and the Senate. • A member of Parliament and any person on the staff of such a member. • A senator and any person on the staff of such a member. • Any public office holder who occupies the senior executive position in a department, whether by the doing business in Canada | 123 title of deputy minister, chief executive officer or by some other similar title. • An associate deputy minister or an assistant deputy minister, or a person who occupies a position of comparable rank. • The chief of the defence staff, the vice-chief of the defence staff, the chief of maritime staff, the chief of land staff, the chief of air staff, the chief of military personnel or a judge advocate general. • Any position of senior adviser to the Privy Council to which the office holder is appointed by the governor in council. • The comptroller general of Canada. Lobbyists are obligated to provide information to the Office of the Commissioner of Lobbying about the communications they have with DPOHs. The Lobbying Act provides for monthly reporting requirements for lobbyists when they lobby a DPOH, need to change their initial registration, or terminate or complete their lobbying undertaking. A monthly report is necessary if a lobbyist initiates oral and arranged communication with a DPOH (e.g., a meeting or telephone conference) that amounts to lobbying as defined under the Act. The monthly report must provide the name of the DPOH, position title of the DPOH, the name of the branch or unit and the name of the department or other governmental organization in which the DPOH is employed, the date of the communication, and the subject matter of the communication. c. Employees or in-house lobbyists At the corporate level, registration is required when one or more employees communicate with public office holders on behalf of the employer and the communications constitute a significant part of the duties of one employee (or would constitute a significant part of the duties of one employee if they were performed by a single employee). This evaluation must be conducted on a monthly basis. In evaluating whether a significant part of an employee’s duties is invested in communications with public office holders, a rule of 20 per cent applies. If 20 per 124 | doing business in Canada cent or more of an employee’s time each month, or of a number of employees taken together, is attributed to communications with public office holders, the activities are likely registrable. Evaluating whether 20 per cent or more of an employee’s duties are in relation to communications with public office holders involves tracking time spent in preparation (i.e., in research, drafting, planning, compiling, travelling, etc.) and the time spent actually communicating with public office holders. For instance, a one-hour meeting may require seven hours of preparation and two hours of travel time. In this case, the time related to lobbying with a public office holder would be a total of 10 hours. Under the Lobbying Act, the legislative reporting obligation (relating to both public office holders and DPOHs) rests with the employee of a company who occupies the most senior position in the business and who is paid for the performance of these duties, usually the president, CEO or executive director. If a report is not filed, or if it is filed incorrectly, incompletely or late, then liability rests with the CEO, who is then subject to possible investigation or prosecution. Although a CEO charged with a strict liability offence under the Act could argue that he or she took all reasonable care and exercised due diligence in order to comply with the Lobbying Act, the onus would lie on the CEO to prove such care was taken. Of even greater concern than the stiff financial penalties that may be levied under the Lobbying Act is the damage to reputation that would result from having the business name tainted in the media and by opposition-party politicians. d. Infractions and enforcement The Office of the Commissioner of Lobbying has significant investigatory powers and a mandate to enforce compliance. As an independent agent of Parliament, the commissioner can ask DPOHs to verify the accuracy and completeness of contact report information submitted by lobbyists and, if necessary, report to Parliament the names of those who do not respond. The commissioner also has the power to prohibit lobbyists convicted of any offence from communicating with the government as paid lobbyists for up to two years and publish the names of violators in parliamentary reports. As well, the Lobbying Act provides for criminal monetary fines of $50,000 on summary convictions for lobbyists who do not comply with the requirements of the Act, and $200,000 on proceedings by way of indictment, not to mention the possibility of up to six months of imprisonment for the former and up to two years of imprisonment for the latter. Learn more about Gowlings’ services in this area at gowlings.com/government doing business in Canada | 125 t | franchise law With a vibrant economy and close proximity to the United States, Canada is the natural first destination for U.S. franchise companies seeking to expand internationally. There are approximately 1,100 franchise brands and 78,000 franchise units operating throughout Canada, crossing more than 40 different sectors of the economy, including retail, hospitality, automotive and health care, accounting for one out of every five consumer dollars spent in Canada on goods and services. 126 | doing business in Canada Franchisors must be aware of the franchise-specific disclosure-only laws currently in effect in five of Canada’s provinces. Although the courts are strictly enforcing the terms of this franchise legislation, Canada provides a great deal of opportunity for franchisors as part of their international expansion program. 1. Franchise disclosure legislation The provinces of Alberta, Ontario, New Brunswick, Prince Edward Island and Manitoba have each enacted franchise disclosure legislation. The Manitoba franchise legislation is the newest, coming into force October 1, 2012. The rights and obligations under the laws are substantially similar in each province and their aim is the same: to regulate the franchise marketplace and protect both prospective franchisees and those already party to a franchise relationship. The law is remedial, intended to address the perceived imbalance of power in the franchisor-franchisee relationship. The franchise legislation adopts three key principles: (i) the obligation imposed on franchisors to provide disclosure, (ii) the duty of good faith and fair dealing imposed upon franchisors and franchisees, and (iii) the right of franchisees to associate. Failure to comply with any of these obligations gives rise to significant remedies for franchisees. Furthermore, a franchisee cannot contract out of the rights granted to it or grant a waiver of the obligations imposed on franchisors under Canada’s provincial franchise legislation. The franchise legislation of each province also provides that provisions in franchise-related agreements that restrict the application of the laws of the province or that restrict jurisdiction or venue to a forum outside the province are void, with respect to claims enforceable under the franchise legislation of that province. On April 2, 2013, the British Columbia Law Institute (BCLI) issued the Consultation Paper on a Franchise Act for British Columbia to examine whether British Columbia should enact franchise legislation. One recommendation in the consultation paper is that B.C. enact disclosure-only legislation that would be substantially similar to that which is in force in the five other Canadian provinces that have enacted franchisespecific legislation. Gowlings has been significantly involved in this initiative, having been consulted by the BCLI in the preparation of the consultation paper. Also, a member of Gowlings’ Franchise and Distribution Law Group has agreed to review the recommendations set out in the document and to lead a subcommittee of the Canadian Franchise Association to provide commentary on the consultation paper to the BCLI. On September 11, 2014, the government of British Columbia announced that it will be consulting with stakeholders and the public on the form that the legislation will take in that province. 2. The disclosure obligation A franchisor wishing to grant a franchise in any of the disclosure provinces must provide a franchise disclosure document to a prospective franchisee not less than 14 days before the earlier of: (i) the signing by the prospective franchisee of the franchise agreement or any agreement relating to the franchise or (ii) the payment of any consideration relating to the franchise. A disclosure document must contain all of the information prescribed by the regulations as well as all other “material facts” that would reasonably be considered relevant to a prospect’s decision to acquire the franchise. The disclosure document must also contain financial statements in either audited or review-engagement form. Each of the current provincial statutes contains an exemption from the requirement to include financial statements for large, mature franchisors who meet the prescribed criteria. a. Material facts “Material fact” is broadly defined to include any information about the business, operations, capital or control of the franchisor or about the franchise system that would reasonably be expected to have a significant effect on the value or price of the franchise to be granted or the decision to acquire the franchise. The requirement for disclosure of information additional to that specifically prescribed by the provincial legislation has led to some of the most significant franchise law decisions in Canada. As a result, disclosure documents must, in many circumstances, be customized to include information applicable to the actual subject matter or location of the proposed franchise to be granted. doing business in Canada | 127 b. Certification A disclosure document must be certified as complete disclosure in accordance with the applicable provincial statute. A dated and signed certificate is a mandatory requirement, not a mere formality, and failure to provide it can result in a determination that no disclosure was provided. The certificate must be dated and signed in the manner prescribed, which is the same under each provincial statute. In particular, a franchisor that is incorporated must ensure that the certificate is signed by two officers or directors (or one, if there is only one) who are named as officers or directors in the disclosure document, and that it is signed in their personal capacity and not on behalf of the franchisor. c. Remedies Franchise legislation is being broadly interpreted to ensure that the principles and purpose of the franchise legislation are met and that a franchisee is provided with the information necessary for it to make an informed decision. There are two separate remedies available to a franchisee arising from a lack of full compliance by a franchisor with its disclosure obligations: rescission and claims for misrepresentation. The right of a franchisee to rescind the franchise agreement arises when the franchisor fails to properly comply with the disclosure requirements. The franchisor is then obliged, pursuant to the rescission remedy, to essentially put the franchisee back into the position it had been in prior to the purchase of the franchise. A franchisor faced with a rescission claim is required to repay the franchisee all monies paid to it, purchase all inventory, equipment and supplies purchased by the franchisee pursuant to the franchise agreement, and compensate the franchisee for all losses incurred to establish and operate the franchised business. Two separate time periods are available to a franchisee to rescind: (i) no later than 60 days after receiving the disclosure document if delivery of the disclosure document did not comply with the delivery requirements of the legislation, or if the contents of the disclosure document did not meet the legislation’s requirements, and (ii) no later than two years after entering into the franchise agreement if the franchisor never provided the disclosure document. Interpretation of the rescission remedy by the courts has blurred these two time periods by deeming a materially non-compliant or deficient disclosure document to be no disclosure at all. As a result, strict compliance with the delivery requirements and with the stipulations for the contents of a disclosure document is a necessity for franchisors developing their systems in Canada. The provision of a generic “standard form” disclosure document will not suffice to protect a franchisor from claims for non-compliance, particularly in those cases where precise details of the proposed franchise grant are known to the franchisor but not fully disclosed. In addition to the rescission remedy, a franchisee can bring a claim for damages if it suffers a loss because of a misrepresentation contained in a disclosure document, or as a result of the franchisor’s failure to comply in any way with its disclosure obligation. In other words, if a franchisee misses the time period for rescission, it can still seek damages for breach of the disclosure obligation. Claims for misrepresentation can be made against not only the franchisor, but also against others in their personal capacity, including any director or officer of the franchisor who signed the certificate of disclosure. “Misrepresentation” is defined broadly to include both an untrue statement of a material fact and an omission to state a material fact that is required to be stated or that is necessary to make a statement not misleading in light of the circumstances in which it was made. A franchisee is deemed to rely on a misrepresentation in a disclosure document and on the information contained in the disclosure document that has been provided. 3. The duty of fair dealing Franchise legislation in Canada imposes on each party to a franchise agreement a duty of fair dealing in its performance and enforcement, which expressly includes the duty to act in good faith and in accordance with reasonable commercial standards. The duty of fair dealing has been interpreted to require that the franchisor enforce the franchise agreement 128 | doing business in Canada in a manner that takes into account the interests of the franchisee (but not to the exclusion of the franchisor’s interests) without malice or ulterior purpose. In effect, the obligation imposes limitations on a franchisor’s discretion in enforcing its strict contractual rights where such exercise negatively impacts the interests of the franchisee. A breach of the duty of fair dealing is imposed on both the franchisor and a franchisee, and entitles the non-breaching party to claim damages for the breach. 4. The right of association Franchisees have the right to associate with other franchisees, and form or join an organization of franchisees without interference from the franchisor. Any provision in a franchise agreement that restricts this right is void, and breach of this right by a franchisor entitles a franchisee to commence an action for damages. This provision has been interpreted by the courts to protect a franchisee’s right to participate in a class action, with the courts refusing to enforce a requirement under the franchise agreement that a franchisee release the franchisor as a condition to the franchisor’s consent to a transfer by the franchisee of its franchise during the course of the class action proceedings. However, the courts will uphold a release given by a franchisee as part of the negotiated settlement of a dispute. 5. Province of Québec The province of Québec is a civil law jurisdiction. While Québec has no franchise-specific legislation, the Civil Code of Québec and the Québec Charter of the French Language each have application to franchising. Québec’s Civil Code contains provisions governing “contracts of adhesion,” which would include franchise agreements and other standard-form agreements of a franchisor. One interesting provision is that terms of a contract that are not fully known to a party, such as a franchisee, at the time of signing, will not be enforceable. In franchising, this could affect the usual franchise agreement term that franchisees must comply with the operations manual and would require franchisors to arrange for a controlled and confidential disclosure of the operations manual to a franchisee before the franchise agreement is signed. The Civil Code also contains a statutory duty of good faith, which is broader than the duty of good faith and fair dealing included in other provincial franchise legislation, as it applies to the negotiation as well as the performance and enforcement of franchise agreements. The Québec Charter of the French Language mandates French as a required language of doing business in Québec and in the workplace in Québec. “Doing business” includes forms, advertising (including websites), posters and signs. In addition, if a French version of a trademark has been registered, it must be used. While this typically results in the equal use of French and English, there are some provisions, such as those governing the use of signs and posters, where the use of the French language must be “markedly predominant.” This usually means a French-to-English ratio of two-to-one in size of wording or number of items. In the workplace, working documents must be available in French. This includes software if French versions exist. Although there are specific laws intended to preserve and entrench the French language in Québec, in practice, they are usually not difficult to comply with, and franchising is significant and well-recognized as a means of doing business in the province. Learn more about Gowlings’ services in this area at gowlings.com/franchise doing business in Canada | 129 u | oil and gas Canada’s wealth of natural resources has contributed to the country’s status as a strong global player on the oil and gas stage. Understanding the law related to petroleum and natural gas rights is key to successfully doing business in this sector in Canada. 130 | doing business in Canada 1. Land ownership in Canada Land in Canada is held publicly by either the federal or provincial government in the name of Her Majesty the Queen (Crown lands), or privately by individuals, corporations or other stakeholders (freehold lands). a. Crown lands In Canada, most mineral rights are owned by the Crown, but Crown ownership of mineral rights varies from province to province. For instance, in Alberta, the Crown owns 81 per cent of the mineral rights, compared to only 20 per cent in Manitoba. The Crown does not conduct exploration or development of oil and gas resources on its own. Instead, mineral rights are granted to individuals, companies or other entities under a tenure system based on English common law principles. Each province has its own legislation by which its tenure system is administered. Pursuant to the applicable legislation, exploration documents or production/development documents are granted. Exploration documents are granted to encourage exploration rather than production, and usually cover a much larger geographical area than production/development documents. These documents are typically referred to as licences or permits. Production/development documents are granted for a term or period of time that may be extended indefinitely if certain continuation criteria are met. These documents are typically referred to as leases. It is important to note that any Crown instrument is subject to the terms of the document itself, along with the applicable provincial/federal legislation incorporated by reference, which specifies many additional material details, such as the amount and manner of calculating the related royalty payments. b. First Nations/Métis/Inuit lands The Canadian Constitution recognizes three groups of Aboriginal peoples: First Nations, Métis and Inuit. Land ownership that has been recognized by treaties or settlement agreements between these groups and the federal government and/or provincial governments is typically held by the governing body of the respective group and is akin to Crown land ownership. • First Nations: “First Nations people” refers to status and non-status “Indian” peoples as defined in the Indian Act of Canada. First Nations reserve lands are managed and regulated by Indian Oil and Gas Canada (IOGC), which is a special operating agency within Aboriginal Affairs and Northern Development Canada (AANDC). • Métis: Alberta has eight Métis settlements, all located within the northern region of the province and comprising approximately 1.25 million acres of land. Settlement lands are owned in fee simple by the Métis Settlements General Council. • Inuit: Inuit are the Aboriginal peoples who reside in Nunatsiavut (Labrador), Nunavik (Québec), Nunavut and the Inuvialuit Settlement Region of the Northwest Territories. Each of these four Inuit groups has settled land claims. c. Freehold lands A fee simple estate is the highest form of non-government land ownership that exists in Canada. It is usually characterized by the issuance of a certificate of title and is subject only to the rights of the federal and provincial governments. An individual, corporation or other entity with a fee simple estate may choose to explore for and develop the natural resources on their lands, or to sell or lease these rights to another party. When a fee simple owner of mineral rights enters into a freehold lease, they are called the “lessor” and the party who leases the mineral rights from the fee simple owner is called the “lessee.” There is no such thing as a standard freehold lease in the Canadian context. Contracting parties may choose to enter into a variety of lease forms that have evolved over the years. In an effort to address common concerns, the Canadian Association of Petroleum Landmen (CAPL) has developed leasehold forms that are being more readily applied on a go-forward basis. Notwithstanding the fact that many freehold lease forms exist, most will address the following terms in some form or another: • The mineral rights granted • The term of the lease and provisions for continuation doing business in Canada | 131 • The initial and (if applicable) bonus consideration • The drilling, delay rental and shut-in requirements • The shut-in well payments and/or obligations • The offset well obligations • The royalty payments • The applicable division of taxes • The manner in which a default and/or termination of the lease will be dealt with It is important to note that freehold leases, like Crown leases, are also subject to applicable provincial/federal legislation but that, generally speaking, all the terms of the freehold lease are contained within the document itself. Negotiating the most favourable terms prior to execution is therefore crucial and should not be taken lightly. 2. Typical agreements used in the Canadian oil and gas industry The following is a brief summary of some of the agreements that are regularly encountered in the Canadian oil and gas industry: a. Farmout agreement This arrangement involves the “farmor,” the beneficial owner (which may or may not be the legal or registered owner), providing another party, the “farmee,” with the opportunity to earn all or a portion of the farmor’s interest under the mineral lease by conducting certain operations on the related lands, often subject to a royalty payable to the farmor, which may or may not be convertible by the farmor back to a working interest. It is not uncommon for farmout agreements to establish an area of mutual interest between the farmor and the farmee for a specified period pursuant to which each is obligated to offer the other the opportunity to participate in the acquisition of adjoining mineral interests. b. Joint operating agreement This arrangement between mineral working interest owners governs the conduct of operations in respect of joint lands, the maintenance of the associated title 132 | doing business in Canada documents, the ownership and disposition of production, the surrender of joint lands, the abandonment of joint wells, the ability of the joint owners to dispose of or grant security in respect of their working interests, and a variety of other matters. The joint operating agreement (JOA) typically adopts an industry-accepted operating procedure in addition to the specific terms of the JOA. The most widely accepted standardized operating procedure is the CAPL Operating Procedure, particularly in the Western Canadian Sedimentary Basin. c. Pooling agreement When the areal extent of individually leased lands is less than the drilling space unit prescribed by the relevant governmental authority for conservation purposes and the efficient production of petroleum substances, a pooling agreement can be used to combine two or more leases. The working interests of the pooling parties in the resulting spacing unit will be equalized, usually on an acreage contribution basis, but occasionally on a reserves basis, and can be effected on a cross-conveyed basis (whereby the actual working interests are conveyed between the parties to the extent necessary) or on a revenue-sharing basis (without an underlying conveyance of working interests). d. Unitization agreement This arrangement consolidates all of the working and royalty interests in a common reservoir (which may be comprised of any number of sections of petroleum and/or natural gas rights) with a view to achieving the most economic and efficient production of the substances from the reservoir. The unit is operated as if there is one lease and one operator for the unitized zones and substances. Unit production is distributed in accordance with a participation formula based on an agreed reserves allocation. There are typically two agreements: a unit agreement among the working and royalty interests, and a unit operating agreement among just the working interest owners. e. Royalty agreement This arrangement may create a legal interest in land or simply a contractual agreement for the payment of monies from the royalty payor to the royalty owner. The royalty is usually based on a specified percentage of the total production, and the related agreement will generally address allowable deductions and the royalty holder’s right to take production in kind. Sometimes, the royalty holder will be granted an option to convert the royalty to a working interest. f. Construction, ownership and operating agreement This arrangement is the most common type of agreement among facility owners to address the terms of ownership, the manner in which operations are conducted (during and after construction), the allocation of facility costs, and the assignability of facility interests. This agreement also sets out the basis for allocating facility products to parties delivering petroleum substances to the facility. 3. Protecting your interest To the extent a working interest owner has a registrable interest in a Crown licence, permit or lease, it is prudent practice to register that interest with the applicable registry. The extent to which your working interest is registrable differs from jurisdiction to jurisdiction, but generally it is difficult to register your interest if you do not own an interest in all of the leased substances, or if your interest is restricted to certain zones or lands. Whether you have a legal and beneficial interest (as a recognized lessee) or a beneficial interest only (pursuant to a further contractual arrangement in respect of that lease, such as a pooling agreement) in a freehold petroleum and natural gas lease, you can protect your interest by registering a caveat, or similar instrument, at the appropriate land tenure management office. A “caveat,” Latin for “let him beware,” acts as a warning to others that you are claiming an interest in a parcel of land. Learn more about Gowlings’ services in this area at gowlings.com/oilandgas doing business in Canada | 133 v | mining Canada is a world leader in the mining industry, both in terms of domestic production and international presence. Canada’s success in the mining industry is partly due to its abundance of natural resources, and top-tier production and processing capabilities, but also its stable and favourable legal and tax regimes. The country’s wealth of mineral resources ranges from industrial raw materials to various precious and base metals. 134 | doing business in Canada Almost 60 per cent of the world’s public mining companies are listed on the Toronto Stock Exchange (TSX) and TSX-Venture Exchange, and 70 per cent of the equity capital raised globally for mining companies is raised on these exchanges. Canadian mining companies have interests in over 100 countries, spanning North and South America, Africa, Australasia and Europe, with the majority of the assets of these companies found in the western hemisphere.1 1. Exploration and mining rights Mining activities are primarily governed by the provincial or territorial legislation in which a project is located. The federal government also has overlapping jurisdiction in a number of areas, such as taxation and the environment. As a general framework, if a party wishes to explore a mineral property in Canada, it must first obtain exploration rights over the property pursuant to relevant provincial or territorial mining legislation, typically on a first-come, first-served basis. Once an exploration program is successfully completed, a party looking to construct and develop a mine must obtain a mining lease along with environmental and other permits. Following a physical or, in some cases, map-based staking process, the particulars of the exploration claim are recorded with the appropriate local authority. A prospecting or similar licence must normally be obtained before any claims may be staked. A claimholder or his/her assignee is typically required to perform minimum prescribed assessment work on the claimed land, and information is to be provided about the presence of a mineral deposit and whether development of the deposit is intended. Under this system, so long as the claim is in good standing and the minimum requirements of the applicable legislation have been met, the claimholder is entitled to apply for and receive a mining lease. A mining lease gives an individual or a company the right to extract minerals from the area(s) to which the lease applies. Mining leases are (a) issued for a specific term, which is renewable, (b) subject to an annual rental charge, and (c) transferable with prior written consent of the appropriate government. In some cases, a plan of survey and evidence that surface rights have been secured are also required to be filed. A mining lease in Ontario, for example, has an initial term of 21 years and is renewable for a further 21-year term. As with other countries, mining companies in Canada must not overlook the complex environmental and social issues associated with mining development, including consideration of local community and Aboriginal rights, and consultation processes. Lastly, mine-closure plans to rehabilitate and restore mining properties are required by mining regulations. 2. Foreign investment Before acquiring any exploration or mining interest — whether directly or through a participation interest (be it debt, equity, option, joint venture, royalty, etc.) — it is important for investors to conduct comprehensive due diligence to confirm the existence and validity of the mineral and mining rights, and other assets acquired, as well as to identify any title defects or encumbrances. It is always advisable to carefully consider Canadian tax, environmental and contractual liabilities that might result from the acquisition or investment. Other aspects to be considered include availability of power, water and other infrastructure, surface ownership and access, and labour and community issues. The regulatory framework whereby large-scale investments in Canada can be reviewed by the federal government is contained in the Investment Canada Act. In addition, mergers and acquisitions are regulated federally under the Competition Act. Canada is party to a number of trade and investment agreements containing investor protection provisions. These agreements generally permit an investor of a foreign country to bring a claim against the Canadian government for a breach of an obligation owed to the investor under the treaty, by either the federal government or a province. 1 http://mining.ca/resources/mining-facts doing business in Canada | 135 3. Tax issues Canada imposes tax on mining operations at three levels: • Federal income tax is imposed on a mining operation’s taxable income. (This is generally calculated as mining revenues less operating expenses, capital depreciation and certain deductions for exploration and pre-production development costs.) • Provincial/territorial income tax is imposed on a similar basis as federal income tax. • Provincial/territorial mining taxes are imposed on a separate measure of production profits or revenues. Mining taxes are fully deductible in computing federal income tax. The federal, provincial and territorial income tax systems will apply to principal stages of a mining operation: (i) exploration and development, (ii) extraction, (iii) processing (generally concentrating, smelting milling and refining), and (iv) subsequent activities, such as fabricating. Special tax incentives and favourable tax treatment are accorded to each of these activities, resulting in a favourable environment for investment in the mineral resource sector. Incentives include enhanced deductions, allowances and credits that may be claimed against the income from the mining operation, either in the year of expenditure or, sometimes, in a prior or subsequent year. Flow-through shares are a tax-favourable mechanism through which an exploration or mining company that qualifies as a “principal-business corporation” is allowed to “renounce” its Canadian development expenses and Canadian exploration expenses and pass them on or “flow them through” to investors. In high-risk industries such as mining and oil and gas, startup corporations may not be profitable and therefore unable to make use of the expenses they incur in their business operations. Investors who hold flow-through shares may use the renounced expenses as deductions against their own taxable income up to the amount of consideration paid for the flow-through share. Different rules may apply to different forms of legal organization. It is therefore important to consider the applicable tax treatment before deciding what type of structure will be used for investment in a mining project. Non-residents of Canada are only subject to Canadian income tax from carrying on a business in Canada, income from employment exercised in Canada and capital gains arising from the disposition of taxable Canadian property, such as a Canadian mining property (see “General application of Canadian tax to non-residents” in section E, “Taxation”). There are various tax treaties with other nations that can ameliorate the Canadian tax treatment of non-residents. 4. Raising capital Raising capital through the markets in Canada is governed by provincial and territorial securities laws and regulators. Section C, “Securities law and corporate governance,” provides a detailed summary of the important legal and business issues to be considered when raising capital in Canada. National Instrument 43-101 — Standards of Disclosure for Mineral Projects (NI 43-101) has standardized the requirements for public disclosure of technical information for mineral projects. The securities regulators emphasize that any disclosure intended to or reasonably likely to be made available to the Canadian public must comply with NI 43-101. Two of the principal requirements under NI 43-101 are (a) the filing of a technical report concerning a material property of a company prepared by or under the supervision of a “qualified person” when listing on a Canadian exchange or raising capital from the public, and (b) that the public disclosure of mineral resources and reserves is made using the categories of the Canadian Institute of Mining, Metallurgy and Petroleum. 136 | doing business in Canada 5. Environmental, health and safety regulations The mining industry in Canada is subject to federal, provincial and territorial environmental laws and regulations. In most instances, the environmental assessment process requires the preparation of an environmental study, and public information or consultation. A social impact study may also be required. A closure plan is required in most jurisdictions prior to commencement of mining operations. Health and safety issues are addressed through the relevant federal or provincial legislation that regulates such things as minimum employment standards, labour relations, and occupational health and safety. 6. Aboriginal considerations Canadian governments have a duty to consult, accommodate and, in some circumstances, obtain the consent of Aboriginal communities with respect to projects that affect their rights or lands. Aboriginal groups can challenge the authorizations of the government allowing mining activities if these have infringed, or will adversely impact, their constitutional and/or treaty rights. Although the duty of consultation is on the applicable level of government and not on the private sector, many private corporations and individuals have negotiated agreements (called impact benefit agreements) to find common ground for the development of a project, including Aboriginal support, and thus have avoided the delays and costs that an Aboriginal challenge may bring. The appropriate level of consultation and business norms of each Canadian jurisdiction tend to vary. It is advisable to obtain local counsel on specific project due diligence. Learn more about Gowlings’ services in this area at gowlings.com/mining montréal • ottawa • toronto • hamilton • waterloo region • calgary • vancouver • beijing • moscow • london • gowlings.com Gowlings provides legal services in Canada and abroad through the entities Gowling Lafleur Henderson LLP, Gowling Lafleur Henderson S.E.N.C.R.L., s.r.l., Gowlings (UK) LLP, and Gowlings International Inc. In 2011, the firm opened the Gowlings International Inc. Beijing Representative Office. © 2014 Gowlings gowlings: expect innovation, results and value Gowlings is a leading international law firm, with over 700 legal professionals serving clients in 10 offices across Canada and around the world. Whether your needs relate to business law, high-stakes litigation or intellectual property matters, we provide a full range of legal services to meet your unique needs and rise to any challenge that comes your way. Learn more at gowlings.com