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Doing Business in Canada A Legal Overview Stikeman Elliott llp DOING BUSINESS IN CANADA A Legal Overview A skilled workforce, abundant natural resources and a stable political and economic environment have made Canada one of the world's premier locations for business investment. Groundbreaking free trade agreements with the U.S., Mexico and several other countrieshaveenhancedthisstatus.Moreover,theopportunitiesfor businessdevelopmentinCanadaatthebeginningofthetwenty‐first centuryextendbeyondtraditionalareasofCanadianstrengthtothe rapidlyexpandingfieldofhightechnology. This publication is designed to give those interested in pursuing Canadian business opportunities an overview of Canadian law as it relatestobusinessandinvestment. © STIKEMAN ELLIOTT LLP Stikeman Elliott LLP Canadian Business Law. Worldwide. Stikeman Elliott is recognized internationally for the sophistication of its business law practice. It frequently ranks as a top firm in domestic and international capital markets, M&A and corporate-commercial law by industry league tables and directories, and is widely regarded as a leader in business litigation. Its other areas of expertise include banking and finance, restructuring, competition/antitrust, real estate, tax, labour and employment, and intellectual property The firm has developed in-depth knowledge of a wide range of industries including energy, mining, financial services, insurance, infrastructure, retail, telecommunications and technology. Located in Toronto, Montréal, Ottawa, Calgary and Vancouver, its Canadian offices are among the leading practices in their respective jurisdictions. Stikeman Elliott is also prominent internationally, with a longstanding presence in New York, London and Sydney and extensive experience in China, South and Southeast Asia as well as in central and eastern Europe, Latin America, the Caribbean and Africa. Because Stikeman Elliott has grown through internal expansion, rather than through mergers, the firm’s clients can expect a consistently high level of service from each of its eight offices. Its offices frequently work together on major transactions and litigation files, and regularly collaborate with prominent U.S. and international law firms on cross-border transactions of global significance. Stikeman Elliott Offices Montréal 1155 René-Lévesque Blvd. West, 40th Floor Montréal, QC, Canada H3B 3V2 Tel: (514) 397-3000 Toronto 5300 Commerce Court West, 199 Bay Street, Toronto, ON, Canada M5L 1B9 Tel: (416) 869-5500 Ottawa Suite 1600, 50 O’Connor Street Ottawa, ON, Canada K1P 6L2 Tel: (613) 234-4555 Calgary 4300 Bankers Hall West, 888 - 3rd Street S.W. Calgary, AB, Canada T2P 5C5 Tel: (403) 266-9000 Vancouver Suite 1700, Park Place, 666 Burrard Street Vancouver, BC, Canada V6C 2X8 Tel: (604) 631-1300 New York 445 Park Avenue, 7th Floor New York, NY 10022 Tel: (212) 371-8855 London Dauntsey House, 4B Frederick’s Place London EC2R 8AB England Tel: 44 20 7367 0150 Sydney Level 12, 50 Margaret Street Sydney, N.S.W. 2000, Australia Tel: (61-2) 9232 7199 STIKEMAN ELLIOTT LLP stikeman.com This publication provides general commentary only and is not intended as legal advice. © Stikeman Elliott LLP Doing Business in Canada A Legal Overview A Brief Introduction to Canada ............................................................................ SECTION A BRINGING YOUR BUSINESS TO CANADA Foreign Trade, Investment and Immigration ....................................................... SECTION B ORGANIZING YOUR BUSINESS Types of Business Organization ......................................................................... SECTION C FINANCING YOUR BUSINESS Securities Law and Capital Markets .................................................................... SECTION D SOCIAL POLICY LAW Employment Law................................................................................................. SECTION E Environmental Law.............................................................................................. SECTION F Consumer Protection Law ...................................................................................SECTION G Canada’s Languages .......................................................................................... SECTION H GENERAL COMMERCIAL LAW Conflict of Laws .................................................................................................... SECTION I Competition/Antitrust ........................................................................................... SECTION J Intellectual Property ............................................................................................ SECTION K Real Estate .......................................................................................................... SECTION L Bankruptcy and Insolvency ................................................................................ SECTION M Electronic Commerce .......................................................................................... SECTION N Privacy.................................................................................................................SECTION O Taxation ............................................................................................................ SECTION P SECTOR SPECIFIC COMMERCIAL LAW Broadcasting- and Telecommunications .............................................................SECTION Q Energy and Natural Resources ........................................................................... SECTION R Unless otherwise stated, all figures in this book are in Canadian Funds. The Canadian dollar is currently approximately at par with the U.S. dollar. DOING BUSINESS IN CANADA A A Brief Introduction to Canada Essential Facts .................................................................................................................... 2 About Canada’s Geography and People ...................................................................... 2 About Canada’s History ................................................................................................. 3 Canada’s Government and Legal System .......................................................................... 4 General .......................................................................................................................... 4 Parliamentary Democracy ............................................................................................. 4 Federal State ................................................................................................................. 6 Constitutional Monarchy ................................................................................................ 6 Legal Systems ............................................................................................................... 6 Further Information.............................................................................................................. 7 © STIKEMAN ELLIOTT LLP MAY 2016 A BRIEF INTRODUCTION TO CANADA A Brief Introduction to Canada ESSENTIAL FACTS About Canada’s Geography and People Canada occupies the northern half of the North American continent, with the exception of Greenland, Alaska, and the French islands of St-Pierre and Miquelon. It is the second largest country in the world, with a land mass approaching ten million square kilometres (over 3.8 million square miles). The vast majority of Canada’s 35 million people live in the southern third of the country. English and French are Canada’s official languages, with French predominating in the province of Quebec, and English predominating elsewhere. Many other languages are also spoken, reflecting the vast number of immigrants that the country has attracted, and continues to attract, from every corner of the globe. Province (*Territory) Pop. 1 (’000) Area 2 (’000 km ) Capital Largest City St. John’s St. John’s Newfoundland & Labrador Nova Scotia Prince Edward Island New Brunswick Quebec Ontario Manitoba Saskatchewan Alberta British Columbia *Nunavut *Northwest Territories *Yukon 526 405 944 146 755 8,236 13,730 1,271 1,129 4,146 4,658 37 44 36 55 6 73 1,542 1,076 648 651 662 945 2,093 1,346 482 Halifax Charlottetown Fredericton Quebec City Toronto Winnipeg Regina Edmonton Victoria Iqaluit Yellowknife Whitehorse Halifax Charlottetown Saint John Montréal Toronto Winnipeg Saskatoon Calgary Vancouver Iqaluit Yellowknife Whitehorse CANADA 35,676 9,985 OTTAWA TORONTO 1 December 2014 estimates, courtesy of Statistics Canada. Area figures courtesy of Natural Resources Canada. A2 STIKEMAN ELLIOTT LLP Metropolitan Area Pop. (’000) 2 Representative Industries Toronto, Ontario (GTA) 6,815 Financial, Manufacturing, High Technology, Communications, Entertainment, Automotive, Biotech, Health Montréal, Quebec 4,061 Financial, Petrochemical, Aerospace, Manufacturing, Health, Biotech and other High Technology, Pharmaceutical, Textiles Vancouver, British Columbia 2,504 Financial, Forestry, Entertainment, High Technology, Transport Calgary, Alberta 1,440 Energy, Financial, Agricultural, Transport, High Technology Ottawa-Gatineau, Ontario-Quebec 1,332 High Technology, Manufacturing Edmonton, Alberta 1,363 Energy, Manufacturing, Agricultural, Transport, Biotechnology Winnipeg, Manitoba 793 Manufacturing, Agricultural, Financial, Transport, Textiles Québec City, Quebec 806 Financial, Health, Transport Hamilton, Ontario 771 Manufacturing, Health Kitchener-CambridgeWaterloo, Ontario 511 High Technology, Manufacturing London, Ontario 506 Health, Manufacturing, Financial Halifax, Nova Scotia 418 Transport, Financial, Energy A BRIEF INTRODUCTION TO CANADA The following cities are among Canada’s leading business centres. A selection of some of their most significant areas of economic activity is included in the table: The Canadian offices of Stikeman Elliott are located in Toronto, Montréal, Vancouver, Calgary and Ottawa. About Canada’s History Much of present-day Canada was under the control of France until 1763. Four years earlier, British forces under General James Wolfe had defeated the French under the Marquis de Montcalm at the Plains of Abraham in Quebec City, beginning the end of the period of French rule. The basic duality of Canada – that is, as between English and French speakers – has shaped the country’s history, politics and culture ever since. Under the Quebec Act of 1774, various rights with respect to language, religion and civil law were granted to the large French-speaking population of the modernday province of Quebec. From 1791 to 1841, Ontario (formerly the thinly-populated western frontier of the French territories) and Quebec were separately governed as 2 July 1, 2016 estimates, courtesy of Statistics Canada. STIKEMAN ELLIOTT LLP A3 A BRIEF INTRODUCTION TO CANADA “Upper Canada” and “Lower Canada”, respectively. Pursuant to the 1840 Act of Union, however, the two were united as the Province of Canada. Canada gained its independence from the United Kingdom in stages. The colonial provinces of Canada, Nova Scotia and New Brunswick united to form the selfgoverning Dominion of Canada in 1867, an event referred to by Canadians as “Confederation”. The British North America Act – later renamed the Constitution Act, 1867, but still popularly known as the BNA Act – was the foundational constitutional instrument. (Among other things, the BNA Act once again divided the Province of Canada in two, as “Ontario” and “Quebec”). It was not until the Statute of Westminster 1931, however, that Canada became fully responsible for its relations with other countries, and only in 1982 did the United Kingdom relinquish its remaining (though long unexercised) jurisdiction over Canadian constitutional law. In the years following Confederation, Canada grew to include ten provinces, including Manitoba (1870), British Columbia (1871), Prince Edward Island (1873), Alberta (1905), Saskatchewan (1905), and Newfoundland & Labrador (1949). In the far north are the Yukon Territory and Northwest Territories, the eastern and northern portion of which became the territory of Nunavut in 1999. CANADA’S GOVERNMENT AND LEGAL SYSTEM General Canada is a parliamentary democracy, a federal state and a constitutional monarchy. In this section, we will consider these aspects of the Canadian governmental system, together with the Canadian legal system. Parliamentary Democracy The Legislative and Executive Functions Canada has a parliamentary form of government. The national Parliament, which sits in Ottawa, includes an upper and a lower chamber – the Senate and the House of Commons, respectively. The Senate, whose membership is appointed to age 75, plays a relatively limited part in the political process. Real legislative power rests almost exclusively in the elected House of Commons, whose 308 members (set to rise to 338 members for the next election) are known as Members of Parliament or MPs. MPs represent single-member geographical constituencies, which Canadians often call ridings. Typically, the political party with the largest number of MPs in the House of Commons forms the government. The Prime Minister (the political leader of the country) is the MP whom that party has chosen as its leader. Executive power is concentrated in the federal Cabinet, whose members include the Prime Minister and those other MPs chosen by the Prime Minister to head the various departments A4 STIKEMAN ELLIOTT LLP How Government Policy Is Formed A significant difference between the Canadian parliamentary system and the congressional system found in the U.S. and other countries is the absence of a strict separation between the executive and the legislature. The Prime Minister and other members of the cabinet are themselves legislators and – significantly – it is the convention in Canada that MPs of the governing party vote in favour of all elements of their party’s legislative agenda. Because this convention is only rarely breached, 4 lobbying efforts in Canada tend to be directed toward cabinet and parliamentary committees at the policy formation stage rather than toward legislators at the voting stage. A BRIEF INTRODUCTION TO CANADA of the federal government. 3 Members of the Cabinet are known as Ministers and are usually styled Minister of Finance, Minister of Justice and so forth. Senators may hold Cabinet positions, including the Prime Ministership, but with the exception of the ex officio cabinet position occupied by the Government Leader in the Senate, this is uncommon. Political Parties Canada has several political parties, with some active only in one province or region, while others operate nationally. The principal parties at the federal level, in order of their current representation in the House of Commons, are the Liberal Party of Canada, Conservative Party of Canada, the New Democratic Party of Canada (NDP), the Bloc Québécois (BQ) and Green Party of Canada. While the NDP and BQ are mildly leftist in their politics and the Conservative Party is somewhat to the right, all of the major Canadian political parties tend to be basically centrist, pragmatic, and open to business investment. Generally, wings of the Liberal, Progressive Conservative (PC) and NDP parties dominate political life in the provinces. However, not all are active in each province, and a number of regional parties, such as the Parti Québécois (PQ) in Quebec and the Saskatchewan Party in Saskatchewan, hold seats (and in some cases a majority of seats) in certain provinces. The Prime Minister The current Prime Minister of Canada is the Right Honourable Justin Trudeau, leader of the Liberal Party of Canada. 3 The federal Cabinet is sometimes formally referred to as the “Governor in Council”. It is breached less frequently in Canada than it is even in related parliaments such as that of the United Kingdom. 4 STIKEMAN ELLIOTT LLP A5 A BRIEF INTRODUCTION TO CANADA Federal State General Canada is a federal state in which legislative authority is constitutionally divided between one national and thirteen local jurisdictions. Canada’s ten principal local jurisdictions are known as provinces. The governments of the three sparsely populated northern territories exercise many of the powers of provincial governments. In addition, the provinces and territories delegate certain powers to cities, towns, and other municipalities, effectively creating a third level of government. The governments of the provinces are generally similar in form to the federal government, although the provinces have unicameral parliaments – there being no equivalent of the Senate at the provincial level – and generally use different names for their political entities, notably the names “Legislative Assembly”, 5 “Premier” and “MLA”, 6 which generally take the place, in provincial contexts, of the federal terms “Parliament”, “Prime Minister” and “MP”, respectively. Division of Powers The constitutional division of powers in Canada is complex, but as a general rule the federal government has jurisdiction over matters of national and international importance, while the provinces have jurisdiction over matters of local importance. For example, the federal government has authority over trade and commerce, criminal law and intellectual property, while the provinces have authority over property law and, generally speaking, over the law of contract. With respect to property and contract matters, it is important to note that while English common law forms the basis of the private law of most of Canada, the province of Quebec is a civil law jurisdiction. Constitutional Monarchy Canada is a constitutional monarchy, although Canada’s continuing recognition of Queen Elizabeth II as head of state has more symbolic than practical significance. When she is not present in Canada, the Queen’s ceremonial functions in Canadian public life are performed by her Canadian representative, the Governor General. The current Governor General of Canada is His Excellency the Right Honourable David Johnston. Legal Systems As noted above, two distinct legal systems exist in Canada. In the largely Frenchspeaking province of Quebec, private law is established by a Civil Code conceptually similar to that of France and other continental European countries. The other provinces and territories are common law jurisdictions. While historically the common law provinces of Canada have tended to attach more importance to British 5 6 A6 In Quebec, “National Assembly”; in Newfoundland, “House of Assembly”. In Ontario, “MPP”; in Quebec, “MNA”; in Newfoundland, “MHA”. STIKEMAN ELLIOTT LLP FURTHER INFORMATION For further general information about Canada, we recommend the Canadian Government’s website at www.gc.ca, which provides links to government departments and programmes as well as to the official websites of Canada’s provinces and territories. Additional statistical information may be found on the website of Statistics Canada at www.statcan.gc.ca. Regular updates concerning Canadian legal developments may be found on Stikeman Elliott’s website: www.stikeman.com STIKEMAN ELLIOTT LLP A BRIEF INTRODUCTION TO CANADA than to American precedent, in recent years American case law has become increasingly influential with Canadian courts and legislators, particularly with respect to commercial matters. A7 DOING BUSINESS IN CANADA B Foreign Trade, Investment and Immigration Foreign Trade and Trade Agreements................................................................................ 2 Canada’s Trading Relationship with the United States ................................................. 2 Free Trade Agreements ................................................................................................. 2 NAFTA ........................................................................................................................... 2 Other Free Trade Agreements ....................................................................................... 5 Regulation ........................................................................................................................... 6 Exempt Transaction Types ............................................................................................ 6 Reviewable Transactions ............................................................................................... 7 Investments by State-Owned Enterprises (“SOEs”) .................................................... 10 Notifiable Transactions ................................................................................................ 11 Immigration ....................................................................................................................... 12 Temporary Entry .......................................................................................................... 13 International Agreements ............................................................................................. 13 Permanent Residence ................................................................................................. 14 Import/Export ..................................................................................................................... 17 Import Regulations ....................................................................................................... 17 Export Regulations ....................................................................................................... 21 Government Programs................................................................................................. 22 © STIKEMAN ELLIOTT LLP MARCH 2008 FOREIGN TRADE, INVESTMENT AND IMMIGRATION Foreign Trade, Investment and Immigration FOREIGN TRADE AND TRADE AGREEMENTS In recent years, Canada has been a full participant in the effort to reduce global trade barriers. Free trade agreements have been negotiated with the United States and several other countries. Moreover, regulation relating to foreign investment has been streamlined to make it easier to complete multi-jurisdictional transactions. Canada’s Trading Relationship with the United States Canada and the United States have long been each other’s largest trading partners with trade between the two countries having reached US$1.5 billion per day. Access to the U.S. market, greatly enhanced by free trade accords, can be one of the most attractive aspects of doing business in Canada. Nearly every major Canadian city is within a few hours, by road or rail, of major American markets. One striking example of the closeness of the economic ties between the two countries is the almost seamless integration of Canada’s industrial heartland of southern Ontario and Quebec with America’s Northeastern and Midwestern states – particularly with respect to the auto industry and other heavy industry – but increasingly also with respect to high technology, communications and other growing areas of business. Free Trade Agreements Canada is one of the leading trading nations in the industrialized world. Since the 1980s, successive Canadian governments have recognized the benefits of international trade liberalization and have negotiated a series of free trade agreements. The first of these was the Canada-U.S. Free Trade Agreement (FTA) of 1989. A few years after implementation of the FTA, when the United States and Mexico were embarking upon bilateral free trade negotiations, Canada was invited to join the discussions. The fruit of these trilateral negotiations was the North American Free Trade Agreement (NAFTA), which has largely governed the trading relationships among Canada, the United States and Mexico since 1994. Canada has subsequently concluded bilateral free trade arrangements with Chile, Israel and Costa Rica. Negotiations toward further agreements are underway in a number of forums. NAFTA The core of NAFTA consists in objectives and provisions that resemble those in the FTA. Most of the rights and obligations of the FTA are reiterated in one form or another in NAFTA. Rather than repealing the FTA, Canada and the United States agreed by exchange of diplomatic notes that NAFTA will, as long as it remains in force B2 STIKEMAN ELLIOTT LLP NAFTA improved upon the FTA in many respects. Some of these are discussed at greater length below, but we should mention in passing a few others. One significant change is the presence in NAFTA of intellectual property provisions (made possible by Canada’s decision to dismantle its compulsory licensing scheme respecting pharmaceutical patents). NAFTA also includes provisions addressing certain environmental concerns. Finally, NAFTA incorporates new provisions respecting anti-competitive and private business practices as a means of attaining the other objectives of the agreement. Rules of Origin NAFTA incorporates more detailed rules of origin than the FTA. Initially the modification of the rules of origin for automotive goods, which increased the North American content requirement from 50% to 65% were particularly significant. In addition, the rules of origin for textiles and apparel goods were also tightened through the rule of origin known as “yarn forward” (i.e. textile and apparel goods must be produced from yarn made in a NAFTA country in order to qualify for preferential treatment). The net effect of this tightening is offset, at least in part, by increases in the tariff rate quotas applicable to goods that do not otherwise meet the NAFTA rules of origin. FOREIGN TRADE, INVESTMENT AND IMMIGRATION between them, take priority over the FTA. 1 In addition, NAFTA encompasses several separate bilateral commitments between Canada and Mexico and the United States and Mexico. In July 2006, Canada, the United States and Mexico implemented measures to liberalize the NAFTA rules of origin applicable to cocoa preparations, cranberry juice, ores, slag and ash, leather, cork, certain textile products, feathers, glass and glassware, copper and other metals, televisions and automatic regulating or controlling instruments. Generally, the changes make it easier for manufacturers of these products to meet the NAFTA rules of origin and to qualify for duty-free treatment under NAFTA. Tariff Elimination Under NAFTA, tariff elimination between Canada and the United States continues to be governed by the FTA tariff elimination schedule. As a result, duties on goods that remained dutiable (approximately 50% of the trade that was dutiable prior to the FTA) were gradually eliminated by January 1, 1999, when trade became duty-free. Tariffs between Canada and Mexico were either eliminated on the coming into force of NAFTA, or were scheduled to be phased out in five or ten equal annual stages. For certain import-sensitive commodities, Mexican tariffs will be phased out over a period of up to fifteen years. 1 Therefore the FTA provisions that Canada and the United States decided not to fully incorporate in NAFTA remain effective as between the two parties. STIKEMAN ELLIOTT LLP B3 FOREIGN TRADE, INVESTMENT AND IMMIGRATION Government Procurement NAFTA allows suppliers of Canadian building materials competitive access to U.S. government construction contracts. Moreover, the United States has agreed to lift certain restrictions that had limited the access of Canadian high technology telecommunications equipment suppliers in respect of rural electrification projects. NAFTA also provides for greater access by Canadian and American businesses to Mexican procurement contracts. Accompanying these developments is a right of access of NAFTA government suppliers to a dispute resolution body in each NAFTA country, whose role is to enforce basic rules of fairness and non-discrimination in the procurement process. Trade in Services With respect to trade in services generally, NAFTA expanded upon the FTA by establishing a clearer set of rules and obligations to facilitate trade in services between the countries and by expanding the scope of the FTA to include land transportation and specialty air services, among others. There has also been a limited opening of financial services to entry from firms based in other NAFTA countries. Foreign Investment Review Although NAFTA does not prevent its signatories from screening foreign investment, it has required them to remove or reduce restrictions on foreign ownership in most industries, thereby resulting in a more open investment regime. Telecommunications The primary effect of the FTA and NAFTA on the communications industry has been in the area of “enhanced” or “value-added” telecommunications. Neither the FTA nor NAFTA applies generally to basic point-to-point telecommunications or to broadcasting, although NAFTA does restrict certain activities of national basic telecommunications service monopolies as a means of ensuring that they do not engage in anti-competitive behaviour. Unlike the FTA, which left the issue of what is an “enhanced” service to be determined by the regulatory body of each country, NAFTA specifically defines “enhanced or value-added services” as telecommunications services that use computer processing applications that: ■ act upon the format, content, code, protocol or similar aspect of a customer’s transmitted information; ■ provide a customer with additional, different or restructured information; or ■ involve customer interaction with stored information. Thus, enhanced services include most services beyond basic and long-distance telephone services — for example, electronic mail, on-line information and data retrieval or processing, and even alarm systems. Each NAFTA country is required to give other NAFTA countries’ carriers and providers of “enhanced or value-added services” the better of national treatment (no less favourable than treatment granted carriers of its own country) and most- B4 STIKEMAN ELLIOTT LLP Telecommunications covered by NAFTA are also subject to the general NAFTA rules respecting investment. Canada, like Mexico and the United States, has taken reservations that permit the retention and application of the Canadian ownership and control requirements described above. Energy NAFTA, like the FTA before it, has reduced the scope of regulatory intervention in the trade in energy, particularly between Canada and the United States. As a starting point, the FTA and NAFTA confirm that trade in electricity and other energy goods will be subject to GATT rights and obligations as well as to the provisions of the FTA and NAFTA Agreements. The tariff elimination provisions of the agreements eliminate existing duties on energy imports and exports and ensure that no new tariffs will be instituted. Canada is also exempt from U.S. oil import fees. The parties agreed to lift most restrictions on energy imports and exports, subject to the conditions under which GATT allows restrictions (these include short supply, conservation of an exhaustible resource, national security or the imposition of price controls). No taxes, duties or charges on the export of any energy good from the U.S. to Canada or vice versa will be imposed unless such taxes, duties or charges are also imposed on such energy goods when destined for domestic consumption. FOREIGN TRADE, INVESTMENT AND IMMIGRATION favoured-nation treatment (no less favourable than treatment granted carriers of any other country). However, NAFTA countries may nonetheless maintain licensing schemes in respect of such services on reasonable and non-discriminatory terms. NAFTA also requires equal access to public telecommunications networks. Notably, NAFTA countries are not allowed to restrain trade by imposing discriminatory rules regarding the attachment of terminal equipment (or any other equipment) to public telecommunications transport networks. The Future of NAFTA On a final note, NAFTA is not exclusionary in nature and expressly provides an accession clause, similar to the provisions for accession to the WTO, permitting other nations to join the free trade area. For example, the Canada-Chile Free Trade Agreement (CCFTA) is anticipated to be a prelude to Chile’s accession to NAFTA. Other Free Trade Agreements In 1996, Canada and Chile concluded the CCFTA, and in 1997 a free trade agreement was entered into between Canada and Israel. More recently, Canada entered into a free trade agreement with Costa Rica, which came into force in 2002. Finally, it should be noted that Canada is an active participant in efforts to create a hemispheric trade pact, known as the Free Trade Area of the Americas (FTAA) that would include virtually all of the countries in North, South and Central America. In addition, Canada is currently negotiating potential agreements with the Central America Four (Guatemala, El Salvador, Honduras, Nicaragua), European Free Trade Association (Iceland, Norway, Switzerland, Liechtenstein), Singapore, the Republic STIKEMAN ELLIOTT LLP B5 FOREIGN TRADE, INVESTMENT AND IMMIGRATION of Korea (South Korea), the Dominican Republic, the Andean Community (Colombia and Peru in particular) and the Caribbean Community (CARICOM). Canada has also launched initiatives with the European Union and Japan and has entered into trade, investment and economic agreements with other nations. REGULATION The Investment Canada Act (ICA) allows the federal government to screen proposed foreign investments to ensure that they are likely to produce a “net benefit to Canada.” The ICA was passed in 1985 and represented a marked change from its predecessor, the Foreign Investment Review Act (FIRA), which required that non-residents prove that their investments would produce a “significant benefit to Canada.” All acquisitions of control of a Canadian business by a “non-Canadian” are subject to the provisions of the ICA – even where the Canadian business is already foreigncontrolled (e.g. a Canadian subsidiary of a U.S. corporation). One common misconception is that the use of a Canadian-incorporated acquisition vehicle takes the transaction outside the scope of the ICA. That is not the case: it is the nationality of the persons ultimately controlling the acquisition vehicle that is determinative for ICA purposes. Depending on the nationality of the investor, the nature of the Canadian business and the book value of the assets of the Canadian business, a foreign investment may be subject either to advance review and Ministerial approval, or merely to ex post notification. A notification is essentially an administrative formality constituting notice of the investment (with certain required information in respect of the investment) to be filed within thirty days of closing. A review application, on the other hand, is more onerous and may constitute a bar to closing until receipt of requisite approval(s) under the ICA. Exempt Transaction Types Exempt from the provisions of the ICA are certain transactions involving: ■ securities dealers and venture capitalists acting in the ordinary course; ■ tax-exempt vendors; ■ banks; ■ the acquisition of government-owned or government-controlled businesses; ■ involuntary acquisitions; ■ the temporary acquisition of a business in connection with the facilitation of financing arrangements; ■ the acquisition of a business in connection with the realization of security; ■ corporate reorganizations; ■ the acquisition of a business the revenue of which is generated from farming carried out on real property acquired in the same transaction; and ■ certain investments by specified insurance companies. B6 STIKEMAN ELLIOTT LLP Reviewable Transactions General The basic rules under the ICA, before it was amended to liberalize the restrictions on NAFTA and World Trade Organization investors, required every “non-Canadian” investor who acquired control of a “Canadian business” to file an application with the Minister of Industry prior to making an investment if: ■ the investor proposed a direct acquisition of a Canadian business with assets with a book value of $5 million or more; or ■ the investor proposed an indirect acquisition of a Canadian business (i.e., an acquisition of a Canadian business through the acquisition of shares of a corporation incorporated outside of Canada) with (i) assets of $50 million or more or (ii) assets valued between $5 million and $50 million if the Canadian assets acquired represented more than half of the assets acquired in the total transaction. It should be noted that an indirect acquisition of a Canadian business with assets valued in excess of $50 million (subject to WTO investor rules) is subject to review (even where the assets of the Canadian business represent less than 50% of the value of the assets acquired in the total transaction), but the application in respect of such an acquisition may be filed up to 30 days following closing. Current Standards for WTO Investors “WTO investors” (i.e. those investors controlled by citizens of WTO-member countries) have been given substantially more freedom to invest in Canada. Also, the ICA provisions relating to the acquisition of a Canadian business under the control of a (non-Canadian) WTO investor by an investor of a third country make it significantly easier for WTO investors to sell their Canadian businesses. FOREIGN TRADE, INVESTMENT AND IMMIGRATION It should be noted, however, that other legislation might also apply to a transaction falling under one of these exemptions. As a result of the WTO amendments, an investment will be reviewable if the asset value of the Canadian business being acquired, as stated in the consolidated audited financial statements in the year immediately preceding the investment, exceeds the following thresholds: ■ if the investor is not a WTO investor, and if the investment is not controlled immediately prior to the investment by a non-Canadian WTO investor, then the general thresholds stated above apply; ■ if the investor or vendor is a WTO investor, any direct investment (i.e. acquisition of the Canadian business itself) of $295 million or more is reviewable with respect to transactions closing in 2008. 2 It should be noted that the purchase price has no bearing on this determination. Rather, it is the book value of all the global assets used in connection with the Canadian 2 The threshold monetary level is increased annually pursuant to an indexation formula. STIKEMAN ELLIOTT LLP B7 FOREIGN TRADE, INVESTMENT AND IMMIGRATION ■ business – regardless of whether the assets themselves are located in Canada – that is relevant for the purposes of this monetary threshold; or if the investor or vendor is a WTO investor, an indirect acquisition (i.e. the acquisition of an entity outside Canada that controls a Canadian business) is exempt from review except in very limited circumstances as described below. Exceptions Relating to Certain Kinds of Business Notwithstanding the higher thresholds generally applicable to WTO investors, they too are subject to the lower thresholds applicable to non-WTO investors in relation to investments in certain sensitive industries. For example, if the Canadian business: ■ engages in the production of uranium and owns an interest in a uraniumproducing property; ■ provides a financial service; ■ provides a transportation service; or ■ is a “cultural business”; the lower thresholds applicable to non-WTO investors (set out in above under “General”) will also apply to WTO investors. Moreover, in the context of these sensitive industries, indirect acquisitions are treated as direct acquisitions and are therefore subject to the $5 million pre-merger review threshold if the assets of the Canadian business represent more than half of the assets acquired in the total transaction. When is a Canadian Business “Acquired”? Under the ICA, a business is “acquired” through the acquisition of control of that business. The ICA contains detailed rules for determining when control of an existing business has been acquired by a non-Canadian. A corporation doing business in Canada might be acquired through a share purchase or an asset purchase. While the ICA allows for Ministerial discretion with respect to characterizing specific transactions, the basic rule is that any transaction in which a non-Canadian acquires the majority of voting shares of a corporation is considered an acquisition of control of that corporation. There is also a presumption that an acquisition of one-third to one-half of the voting shares of a corporation is an acquisition of control (this presumption may be rebutted by demonstrating that there is no control in fact). The acquisition of less than one-third of the voting shares is not considered an acquisition of control. 3 The acquisition of all or substantially all of the assets of a Canadian business is also considered an acquisition of control. For entities that are not corporations (e.g. partnerships), the ICA deems as “acquisitions of control” all and only those transactions in which the majority of 3 The one possible exception is with respect to a cultural business in which case, notwithstanding that less than one-third of the voting shares are being acquired, the Minister can decide on the facts whether control has been acquired. B8 STIKEMAN ELLIOTT LLP The ICA also provides for indirect acquisitions of control, including acquisitions of non-Canadian entities that control Canadian business entities. The ICA is clear that such indirect acquisitions are acquisitions for its purposes. In general, for the purposes of the ICA, where one entity controls another entity, it is deemed to control indirectly any entities that are controlled, directly or indirectly, by that other entity. Ministerial Approval Except as noted below, an investment for which there is a requirement to file an application for review cannot be completed until the Minister of Industry (or in some cases, as discussed below, the Minister of Canadian Heritage) has, or is deemed to have, issued the net-benefit-to-Canada ruling. Once the Minister has received an application for approval of a proposed transaction, a notice must be sent to the applicant within 45 days advising that the Minister is, or is not, satisfied that the investment will be of net benefit to Canada. If the Minister is unable to make this determination within 45 days, the Minister may extend the period by 30 days (or longer if the investor agrees). If the Minister fails to send a notice in the prescribed time, he or she is deemed to be satisfied that the investment will be of net benefit to Canada. FOREIGN TRADE, INVESTMENT AND IMMIGRATION voting interests is acquired. This is subject to a general provision, applicable to corporations and non-corporations, that one cannot preclude the application of the ICA by structuring an acquisition as many small transactions, each of which falls below the relevant thresholds. Such multiple transactions will be treated as one transaction, even in cases where they are demonstrably unrelated to one another. There are exceptions to the general rule that an investment subject to review cannot be completed until the Minister has, or is deemed to have, issued a net benefit ruling: ■ Where the Minister is satisfied that delaying the implementation of the investment until the completion of the review would result in undue hardship to the non-Canadian or would jeopardize the operations of the subject Canadian business; ■ An indirect acquisition (i.e. the acquisition of an entity in Canada through the acquisition of a corporation incorporated outside of Canada); and ■ An acquisition of a business involved in an activity appearing on a prescribed list of activities related to Canada’s cultural heritage or national identity, where the federal Cabinet has decided that it is in the public interest to review the acquisition even though it is below the threshold at which review would otherwise take place. In the case of these investments, the review may take place after the completion of the investment, and the investments would remain subject to the net-benefit-toCanada standard. Finally, it is typical for the Minister to require investors to provide legally binding undertakings as a condition to receiving a net-benefit-to-Canada ruling. STIKEMAN ELLIOTT LLP B9 FOREIGN TRADE, INVESTMENT AND IMMIGRATION When is an Investment “Likely to be of Net Benefit to Canada”? In order for an investment to be found “likely to be of net benefit to Canada,” it need only be demonstrated that, on balance, it is likely to produce some benefit to Canada. In making this determination, the Minister will take into account the: ■ effect of the investment on the level and nature of economic activity in Canada; ■ degree and significance of participation by Canadians in the Canadian business and the relevant Canadian industry; ■ effect of the investment on productivity, industrial efficiency, technological development, product innovation and product variety in Canada; ■ effect of the investment on competition within any industry in Canada; ■ compatibility of the investment with national industrial, economic and cultural policies; and ■ effect of the investment on Canada’s ability to compete in world markets. The Minister will also consult with provincial government likely to be affected by the proposed investment. Additionally, the Minister will consult with other federal departments that may have experience or general authority over the matters that factor into the net benefit ruling (e.g. the Competition Bureau, the Canadian Transportation Agency, or the Canadian Radio-television and Telecommunications Commission). Generally speaking, the Minister will not sign the net benefit ruling until it has received a positive response from the relevant federal departments or agencies and provinces. Investments by State-Owned Enterprises (“SOEs”) On December 7, 2007, Canada's Minister of Industry announced that the government would apply special guidelines to the review of Canadian investments by state-owned enterprises (SOEs) under the ICA. 4 In addition to the factors that the Minister of Industry typically considers in deciding whether to approve reviewable investments (as discussed above), the Guidelines identify the “governance and commercial orientation of SOEs” as central considerations in reviewing SOE investments. 5 The Minister will also scrutinize the commercial orientation of the SOE in relation to its prospective operation of the target business, in particular, regarding: “where to export; where to process; the participation of Canadians in its operations in Canada and elsewhere; the support of on-going innovation, research and development; and the appropriate level of capital expenditures to maintain the Canadian business in a 4 The Guidelines define an SOE as an "enterprise that is owned or controlled directly or indirectly by a foreign government." 5 The Guidelines state that the Minister will assess the SOE’s adherence to Canadian standards of corporate governance, such as commitments to transparency and disclosure, independent directors, audit committees and equitable treatment of shareholders, as well as compliance with Canadian laws and practices. The Minister will also consider how, and to what extent the investor is owned or controlled by a state. For example, how is the state directly involved, if at all, in the operation of the SOE? B10 STIKEMAN ELLIOTT LLP Finally, the Guidelines outline the types of binding commitments or undertakings an SOE may be required to provide to pass the “net benefit” test. These include commitments to appoint Canadians as independent directors, the employment of Canadians in senior management, the incorporation of the target business in Canada and the listing of shares of the acquiring company or the target Canadian business on a Canadian stock exchange. Notifiable Transactions General As discussed above, the ICA excludes many transactions from the review process. Most such transactions are, however, still subject to a notification requirement. For instance, non-Canadians undertaking acquisitions that do not meet the thresholds discussed above (Reviewable Transactions) must nevertheless notify Investment Canada within 30 days of making their investment. Non-Canadians establishing new businesses in Canada must do the same unless the new business is “related” to its existing business. No notice is required if an investment is for an expansion of the non-Canadian’s existing business, although the expansion into a related business that is deemed to bear on Canada’s cultural heritage or national identity is subject to notification and potentially reviewable. FOREIGN TRADE, INVESTMENT AND IMMIGRATION globally competitive position”. A central concern of the government is that foreign states may buy up “strategic resources” such that they are in a controlling market position. This would allow the foreign state to limit supply to Canadian customers and instead, funnel the resources to the home country. The government may also be concerned about the non-exploitation of resources such that the proposed investment would reduce the level of economic activity in Canada. Once notification has been made in the prescribed form, the investment may proceed without further government attention unless it is an investment in a prescribed type of business activity bearing on Canada’s cultural heritage or national identity. Cultural Businesses A “cultural business” is a business that does any of the following: ■ publishes, distributes or sells books, magazines, periodicals, newspapers or music in print or in machine-readable form, unless all that it does is print or typeset books, magazines, periodicals or newspapers; ■ produces, distributes, sells or exhibits audio, film, video or music-video recordings; or ■ broadcasts through the media of radio, television or cable television, provides satellite programming or broadcast network services, or engages in radio communication, other than broadcasting, in which the transmissions are intended for direct reception by the general public. STIKEMAN ELLIOTT LLP B11 FOREIGN TRADE, INVESTMENT AND IMMIGRATION The Minister responsible for the review of proposed acquisitions of “cultural businesses” is the Minister of Canadian Heritage, while the Minister of Industry is responsible for the review of all other proposed acquisitions. Where a proposed acquisition involves both a cultural and a non-cultural business, both the Minister of Canadian Heritage and the Minister of Industry will have jurisdiction. An investment in a business relating to Canada’s cultural heritage or national identity may be reviewed on the order of the federal Cabinet even where the thresholds for review set out above (Reviewable Transactions) have not been met. The federal Cabinet has 21 days following notification of such an investment to decide whether to proceed with a review and to notify the investor if a review is to be conducted. Sanctions The ICA provides that where the Minister believes that a non-Canadian investor has acted contrary to the provisions of the ICA, the Minister may send a demand letter requiring compliance. If the investor fails to comply with this demand, the Minister may seek court-imposed sanctions. Possible Amendments to the ICA In June 2005, the former liberal government introduced Bill C-59, An Act to Amend the Investment Canada Act. The proposed amendments would have considerably broadened the Government’s ability to review – and block – a range of foreign investments, and enabled the federal cabinet (upon the recommendation of the Minister of Industry) to review any foreign investment that, in the opinion of the Governor in Council, “could be injurious to national security”, regardless of the value of the assets of the target Canadian business or whether “control” is acquired. While Bill C-59 died on the order paper following the election of a new Conservative government, the ICA is back in the spotlight with the government’s recent announcement that it intends to review the ICA “with the aim of maximizing the benefits of foreign investment for Canadians while retaining our ability to protect national interests.” IMMIGRATION Canada’s Immigration and Refugee Protection Act (IRPA) has been in effect since June 28, 2002. With few exceptions, this law requires that every prospective immigrant apply for and obtain a visa before entering Canada. While the federal government has primary authority over immigration, it has allowed the provinces to exercise considerable discretion in this field, if they so choose, with respect to their own jurisdictions. Quebec exercises significant authority over immigration, as do (to a somewhat lesser extent), Newfoundland & Labrador, New Brunswick, Manitoba, Saskatchewan and British Columbia. Most of Canada’s immigration law is found in the IRPA and its associated regulations, manuals and operating memoranda. The federal Department of B12 STIKEMAN ELLIOTT LLP Outside Canada, the immigration programme is administered by visa officers at Canadian Embassies, High Commissions, and Consulates. Applicants usually have to submit an application at the Canadian post abroad that is responsible for handling applications from their country of residence. The time that it takes to process applications varies, depending on where the application is made. Temporary Entry Those who are neither Canadian citizens nor permanent residents may be granted admission to Canada temporarily. Temporary entry is permitted without a work permit for business purposes provided the person is a permanent employee of a corporation outside Canada carrying on business in Canada, and provided that their activity within Canada is limited to meeting and consulting with other employees of a Canadian parent company, subsidiary or branch office, selling goods to parties other than the general public, or to purchasing Canadian goods and services. In most other cases, a work permit is required by persons who seek admission to Canada to study or work on a temporary basis. Businesspersons and temporary foreign workers falling into this category must generally apply for a work permit at a Canadian Consulate or High Commission outside of Canada prior to arrival, unless their country of origin is one of the countries exempt from this requirement. Exempt countries include the United States, Japan, the United Kingdom, France, Germany, most other European Union countries, and certain Commonwealth countries. Those applicants who qualify for entry under an exemption category (i.e. NAFTA, GATS, or other exempt category, as discussed below) may apply for their employment authorizations upon their arrival at a port of entry to Canada. A work permit is usually issued for an initial period of six months to one year (with exceptions for senior executives), but can be extended. FOREIGN TRADE, INVESTMENT AND IMMIGRATION Citizenship and Immigration directs Canada’s citizenship and immigration policy and programmes which is developed mainly with a view to satisfying the needs of the country’s labour market. As a general principle, the admission of foreign workers must not adversely affect Canadian labour market conditions. In order for individuals who require employment authorization to be admitted to Canada, the Canadian employer must request a Labour Market Opinion (“LMO”) with respect to the temporary employment through the Foreign Worker Unit of the Service Canada Centre, which must be satisfied that employment opportunities for Canadians will not be adversely affected by employing a foreign worker. NAFTA and GATS provide exemptions to the LMO requirement (discussed below), as do certain categories of the Regulations. International Agreements NAFTA makes it easier for U.S. and Mexican businesspersons to work temporarily in Canada on the basis of a streamlined application process under which they are not required to obtain employment authorization and under which they may apply for a work permit at a port of entry. GATS provides similar rules for slightly more STIKEMAN ELLIOTT LLP B13 FOREIGN TRADE, INVESTMENT AND IMMIGRATION restricted categories of citizens of WTO member nations. Other international agreements may apply, such as the Canada-Chile Free Trade Agreement or other bilateral agreements. The following categories of businesspersons may enter Canada to work temporarily without having to apply for a work permit or who may be admitted to Canada at a port of entry: ■ Businesspersons who are categorized as “business visitors” (or as persons seeking to engage temporarily in the trade of goods or services or in investment activities within Canada) (the “business visitor” category); ■ Businesspersons seeking entry temporarily to carry on substantial trade in goods and services between the U.S. or Mexico and Canada and who will be employed in a supervisory or executive capacity (the “traders” category); ■ Investors wishing to enter Canada for the purpose of developing and directing Canadian operations of a business of a U.S. or Mexican corporation in which he or she has invested or will invest significant amounts of capital (the “investors” category); ■ Specified professionals who meet education and experience qualifications set out in NAFTA, who will carry out professional work while temporarily in Canada (the “professionals” category); and ■ “Intra-company transferees”, being senior executives or managers who have been employed by the company, an affiliate or subsidiary for at least one year within the three-year period immediately prior to the application, and who are coming to Canada to work temporarily for the same company, affiliate or subsidiary (the “intra-company transferee” category). Permanent Residence General The permanent residence visa application procedure generally commences with the completion of a pre-application questionnaire upon which a preliminary assessment is made. The applicant is then required to complete the necessary application for permanent residence forms and schedules. For those applicants destined for Quebec, an application for a certificate of selection is also required. Each applicant and his or her spouse and dependents (defined below) must meet the medical and security requirements for admission to Canada. Dependent children of a sponsored foreign national may be included in that person’s application. If one family member is inadmissible, the entire application will fail. A dependent child is either a biological child or an adopted child. Children can be dependent if they meet one of the following conditions: ■ They are under 22 and unmarried or not in a common-law relationship; ■ They have been full-time students since before age 22, attend a post-secondary educational institution and have been substantially dependent on the financial B14 STIKEMAN ELLIOTT LLP Categories of Applicant Those applying for permanent resident status in Canada are assessed according to selection standards designed to determine whether an immigrant is capable of successfully establishing himself or herself in Canada. The IRPA establishes three principal classes under which a prospective immigrant may apply: refugee, economic and family. “Refugees” are foreign nationals with special humanitarian needs; “Economic immigrants” are people with the resources to create new businesses and new jobs for Canadians or who have special skills needed in Canada; and “Family” immigrants are near relations of Canadian citizens and permanent residents. The Point System The IRPA includes regulations setting out specific selection criteria for each class of applicant. For the economic class (see below), the regulations create a “point system” whereby each candidate for admission is awarded points with respect to a number of criteria of admission. These criteria include education, age, work experience, pre-arranged employment, knowledge of the English and French languages, and personal adaptability. The Regulations provide for administrative discretion by immigration officers in awarding points in appropriate cases where special circumstances warrant. FOREIGN TRADE, INVESTMENT AND IMMIGRATION ■ support of a parent since before age 22 and, if married or a common-law partner, since becoming a spouse or a common-law partner; or They are 22 or over and have been substantially dependent on the financial support of a parent since before age 22 because of a physical or mental condition. Economic Class Immigrants Economic class immigrants fall into two main streams: skilled workers and business immigrants. “Skilled workers” are assessed on a point scale, as described below. Candidates must score at least 75 out of a possible 100 points to be considered. Among the most important criteria are education (25 points), knowledge of official languages (24 points) and employment experience (21 points). Age, arranged employment in Canada and personal adaptability are each worth 10 points. “Business immigrants” fall into the following three categories: 1. Investors. The investor program is available for prospective immigrants wishing to settle in any Canadian jurisdiction except Quebec. Persons qualifying in this class must have a minimum net worth of $800,000 or more, accumulated through their own efforts as businesspersons. Applicants must make an investment of $400,000, payable to the Government of Canada. This investment is allotted to the participating provinces and territories, whose governments use the funds for job-creation or economic development purposes. The original $400,000 is returned to the investor after five years. STIKEMAN ELLIOTT LLP B15 FOREIGN TRADE, INVESTMENT AND IMMIGRATION 2. 3. Investor Class immigrants are not required to start a business in Canada, nor are any terms or conditions imposed on them with respect to their immigration status (this distinguishes the Investor Class from the “Entrepreneurial” and “Self-Employed” categories). The province of Quebec administers its own Immigrant Investor Program, where investments must be made through a designated brokerage firm. The same criteria applies for Quebec, but to take advantage of the Quebec program, the investor must intend to invest and settle in Quebec. Entrepreneurs. Entrepreneur applicants must have a legally obtained net worth of at least $300,000, and must intend and be able to own and actively manage at least one-third of a business that will contribute to the Canadian economy and create at least one full-time job, other than for the entrepreneur and family members. Entrepreneurs and their family members are granted conditional permanent residence. They must report to an immigration officer in Canada on their progress in establishing a business that meets specified requirements and show that they have met these requirements for at least one year within three years of admission to Canada. Self-employed persons. The self-employed immigrant is an immigrant who has the intention and the ability to establish or purchase a business in Canada that will create an employment opportunity for him or herself and make a significant contribution to the economy, cultural and artistic life, or athletic excellence of Canada. This category of immigrant includes professionals such as farmers, artists, dancers and sport personalities. Generally, an initial substantial capital investment will be required. The approval process may also involve a review or recommendation by provincial authorities, and local licensing requirements will apply. A professional who applies as a self-employed person must be qualified to practice his or her profession in Canada at the time of application. Once applicants have fulfilled the requirements of one of these three categories, they are then assessed on a point scale similar but not identical to the one used for skilled workers. This time, the most important criteria is work experience (35 points), followed by education (25 points), and English and French language proficiencies (24 points). Age (10 points) and adaptability (6 points) are also taken into consideration. However, applicants need only obtain 35 of a possible 100 points to pass. Family Class Immigrants Family class applicants must be sponsored by a Canadian citizen or permanent resident who is at least nineteen years of age and can include the Canadian sponsor’s spouse, common-law or conjugal partner, or his or her dependent children (as described in the legislation – see above), parents or grandparents, minor children to be adopted in Canada or orphaned children under 18 who are brothers, sisters, nieces, nephews or grandchildren. B16 STIKEMAN ELLIOTT LLP IMPORT/EXPORT Import Regulations Customs Act Requirements Most statutes regulating the importation of goods into Canada are administered in conjunction with the federal Customs Act. Under the Customs Act, persons bringing goods into Canada must report to Canadian customs officials, make due entry of the goods and pay any duties and tax owing upon importation. Where imported goods are subject to import controls under legislation other than the Customs Act, customs officers have the authority to enforce such regulations at the time of importation. A wide range of enforcement provisions are available to Canadian customs officials, including criminal sanctions and civil penalties that may involve the seizure and forfeiture of goods and the imposition of fines. Customs officials also have substantial audit powers to ensure compliance with import controls, and importers are required to keep extensive books and records. The Administrative Monetary Penalty System (AMPS) largely replaces the potential use of seizure and forfeiture for technical customs violations. AMPS is designed to encourage compliance with the Customs Act, the Customs Tariff, and with the Special Import Measures Act and associated regulations through the introduction of an extensive array of graduated monetary penalties, which take into consideration both the type of infraction and the compliance history of any particular entity. FOREIGN TRADE, INVESTMENT AND IMMIGRATION The sponsor must provide an undertaking either to help the family member and his or her dependants to establish themselves in Canada or, in the case of the young or infirm, to provide for their lodging, care and support. The point system described above does not apply to applicants in the family class. Duties on Imports The Customs Tariff imposes duties on a wide range of goods. Rates of duty depend on the country of origin and the nature of the product being imported. The country of origin is determined in accordance with the Customs Tariff (or with various free trade agreements between Canada and other countries) and will help determine which tariff rate is applicable. The classification of a product is determined under the Harmonized Commodity Description and Coding System, which is also used in the U.S. and most countries of Europe and Asia. The Canadian system for determining the value of goods for duty purposes is based on the international Customs Valuation Code pursuant to the General Agreement on Tariffs and Trade (GATT). Taxes on Imports The Goods and Services Tax (GST), a federal tax with a current rate of 5%, will be imposed on most goods imported into Canada. The GST is imposed on the value for duty of imported goods, plus any applicable duties. Special excise taxes and duties may also be levied with respect to certain goods. Excise taxes are levied on a limited STIKEMAN ELLIOTT LLP B17 FOREIGN TRADE, INVESTMENT AND IMMIGRATION number of goods imported into Canada, including certain automobiles, air conditioners for automobiles and gasoline products. Excise duties are imposed on spirits, wine, beer and tobacco, as well as on cigars and cigarettes produced or manufactured in Canada. An additional customs duty is levied on spirits, wine and beer when they are imported into Canada, in an amount equal to the excise duties that would have been imposed had they been manufactured in Canada. In the case of spirits, wine and tobacco products, the duty payment may be deferred to the time of sale to a retailer. Duty Relief Duty relief in the form of drawbacks or exemptions may be available where goods are (i) imported and subsequently exported; (ii) used in the manufacture of products that are ultimately exported; (iii) used in the production of goods if an equal amount of a similar domestic or imported material is used to make the product for export; or (iv) used in Canada for prescribed purposes or in specified industries. NAFTA limits the availability of drawbacks for exports to the United States and Mexico. Duty relief may also be available where certain imported machinery is not available in Canada and under free trade agreements between Canada and other countries. Packaging and Labelling Generally, packaging and labelling requirements can be broken down into four broad categories: pre-packaged goods requirements, textile requirements, food and drug requirements and hazardous product requirements. These are discussed in sequence, below. Where precious metal articles are marked for quality, they are subject to the Precious Metals Marking Act and accompanying regulations. In addition to product specific requirements, as a result of Quebec’s Charter of the French Language there may be particular language requirements for labelling and packaging when doing business in Quebec 6. Much of the legislation affecting the importation of goods into Canada relates to product standards or is designed to prevent unfair or misleading marketing practices and address potential health and safety concerns. The Consumer Packaging and Labelling Act and accompanying regulations apply, with some limited exceptions (including drugs), to all pre-packaged consumer products sold in Canada. A prepackaged product is any product that is packaged in a container in such a manner that it is ordinarily sold to, or used or purchased by a consumer without being repackaged. Each product must have a label containing a declaration of net quantity clearly and prominently displayed, and must be easily legible and in distinct contrast to all other information on the label. The label must also identify the person by or for whom the product was manufactured, and its principal place of business, the identity of the product in terms of its generic name or in terms of its function, and any other prescribed information respecting the nature, quality, age, size, material content, 6 B18 See Section H, Canada’s Languages. STIKEMAN ELLIOTT LLP The Consumer Packaging and Labelling Act also contains broad prohibitions against false and misleading representations that may, for example, affect the inclusion of environmental claims on product labels. In addition, the Marking of Imported Goods Order made under the Customs Tariff lists specific goods that must be legibly and conspicuously marked, stamped, branded or labelled to indicate the country of origin. The packaging of each product must be manufactured, constructed and displayed in such a way that the consumer will not be misled about the quality or quantity of product it obtains. The regulations also prescribe standardized container sizes for a limited number of products. The Competition Bureau (Industry Canada) is responsible for the administration and enforcement of the Consumer Packaging and Labelling Act and accompanying regulations as they relate to non-food products. The Canadian Food Inspection Agency is responsible for the administration and enforcement of the Consumer Packaging and Labelling Act and regulations as they relate to food products. Labelling of textiles is governed by the Textile Labelling Act and accompanying regulations. Any consumer textile article imported into Canada to which the Textile Labelling Act applies must have a label affixed to it containing prescribed information, the textile fibre content of the article, and the dealer’s name and postal address. The regulations also prescribe the manner in which trademarks or descriptive terms may be shown, and the use of particular words and expressions. However, dealers may import incompletely or improperly labelled consumer textile articles provided the dealer labels the articles in Canada, notifies an Industry Canada inspector at the time of, or prior to the importation with prescribed details about the articles, and gives an inspector an opportunity to inspect the articles after labelling. FOREIGN TRADE, INVESTMENT AND IMMIGRATION composition, geographic origin, performance, use or method of manufacture or production of the product. Further requirements include bilingual labelling, application of labels, font size and typeface and location of information on the label. Some textile articles are subject to country of origin marking requirements as a result of the Marking of Imported Goods Order. A number of textile articles must also be covered by an import permit issued by the Department of Foreign Affairs and International Trade. The Food and Drugs Act imposes labelling and packaging standards in respect of food, drugs, cosmetics and medical devices as a means of protecting consumers from fraud, injury and other deceptive practices. The regulations stipulate which food and drugs must carry a label when offered for sale and the content of the label including, for example, the name of the manufacturer or distributor and the address of its principal place of business. “Food” includes any article manufactured, sold or represented for use as food or drink, and “drug” includes any substance manufactured, sold or represented for use in the diagnosis, treatment or prevention of disease, the restoration or correction of organic functions or the disinfection of premises in which food is manufactured, prepared or kept. STIKEMAN ELLIOTT LLP B19 FOREIGN TRADE, INVESTMENT AND IMMIGRATION The Food and Drugs Act regulations set out requirements in regards to labelling, food additives, freezing and compulsory ingredients for some foods. For example, the name of the food, the identity of the manufacturer, the durable life of the product, special storage instructions, and the ingredients, energy content, and core nutrients of the product must be shown on the packaged food labels, and in some circumstances security packaging is required. The Canadian Food Inspection Agency is responsible for the administration of the Food and Drugs Act as it relates to food. Narcotics and controlled and restricted drugs may only be imported by a pharmaceutical manufacturer or distributor or other person licensed by the Minister of Health. Package information must include the name of the drug, the identity and location of the manufacturer, a quantitative list of the ingredients, the lot number of the drugs, instructions for use, and the net amount of the drug in the container. Legislative and regulatory responsibility, as it relates to non-food products, resides with Health Canada. As provided in the Hazardous Products Act, many hazardous products cannot be advertised in, sold in, or imported into Canada. Still other hazardous products are subject to restrictions with respect to advertising, sale or importation. The Hazardous Products Act does not apply to materials regulated by the Explosives Act, the Food and Drugs Act, the Pest Control Products Act, the Tobacco Act or the Nuclear Safety and Control Act. The Controlled Products Regulations prescribe the information that must be contained on labels and material safety data sheets by suppliers of specified hazardous controlled products destined for use in the workplace. Included among the labelling requirements are applicable product and supplier identifiers, hazard symbols and appropriate information respecting risk and precautionary and first aid measures. The Minister of Health is responsible for the administration of the Hazardous Products Act. Miscellaneous Products There are also various legislative controls imposed on the importation of agricultural products, specific food products, grain, alcoholic beverages, radiation emitting devices, offensive weapons and oil and gas. Legislation that further touches on, and regulates the importation and labelling of many products includes environmental protection legislation and language legislation. Quantity Limits on Imports The entry of certain goods into Canada may be quantitatively limited if the goods appear on the Import Control List. The majority of the items on the list may be classified as clothing, footwear, textiles, fabrics, yarns or animal and agricultural produce. Implementation of the Uruguay Round Agreement has required Canada to change its import controls for certain products to a system of Tariff Rate Quotas. The Import Control List may be added to, if an inquiry by the Canadian International Trade Tribunal reveals that goods are being imported or are likely to be imported in such quantities and under such conditions so as to pose serious injury to Canadian B20 STIKEMAN ELLIOTT LLP Anti-Dumping Special import measures will apply where imports have adverse effects on the development and expansion of Canadian industry. These measures are designed to protect Canadian producers from competition from foreign goods that are being sold in Canada for artificially low prices. For example, an anti-dumping duty is imposed where the Canadian International Trade Tribunal has determined that the dumping of goods has caused or is threatening to cause material injury to a domestic industry; countervailing duties may otherwise be imposed where findings have been made that imported goods have been subsidized by a foreign government to the detriment of Canadian producers. Export Regulations Except for most exports to the U.S., personal effects, and commercial goods valued at less than $2,000, exporters must submit to a customs office an Export Declaration in prescribed form detailing the product to be exported from Canada. This declaration is mainly for statistical purposes. FOREIGN TRADE, INVESTMENT AND IMMIGRATION producers of like or directly competitive goods. Importers wishing to import goods that have been placed on the Import Control List are required to apply to the Department of Foreign Affairs and International Trade for a permit to import such goods. Although only Canadian residents may apply for import permits, a person is permitted to apply for an import permit on behalf of another person who will actually import the goods. Pursuant to the Export and Import Permits Act, goods and technology subject to export control are placed on an Export Control List. Goods and technology may be listed for a number of reasons, including: to control the export of arms or similar products, the eventual use of which may be detrimental to Canada, to limit or keep under surveillance the export of certain non-agricultural products in circumstances of surplus supply and depressed prices, and to ensure the adequate supply of articles required for Canada’s defence or other needs. The products found on the list generally include animal and agricultural products, wood and wood products, certain industrial machinery and electronic devices, transportation equipment, metals, minerals and other manufactured products, chemicals, metalloid and petroleum products, arms, munitions and military, naval or air stores and atomic energy materials and equipment along with other miscellaneous goods and materials. Exports to certain countries may also be subject to certain restrictions, as set out in the Area Control List. Anyone wishing to export goods and technology named in the Export Control List must first apply to the Department of Foreign Affairs and International Trade for an export permit. Even where a permit is issued, it will likely contain important restrictions relating to the quality or quantity of the goods in question, to the persons or the places to which they may be sent, and so forth. These export permits are available to Canadian residents only. STIKEMAN ELLIOTT LLP B21 FOREIGN TRADE, INVESTMENT AND IMMIGRATION The export of energy products including oil, natural gas, and electricity is controlled by requiring that exporters obtain export licenses or orders from the National Energy Board. The importation and the domestic distribution of energy goods are also regulated by the National Energy Board 7. Government Programs There are a number of programs that have originated with the Canadian government to provide services to Canadian exporters and foreign importers: ■ ■ ■ ■ ■ ■ ■ ■ 7 B22 The Export Development Canada (EDC) was established by the federal Export Development Act to facilitate and develop trade between Canada and other countries by providing financial services to Canadian exporters and foreign buyers. The principal services offered by the EDC are insurance, guarantees and export financing. The Program for Export Market Development is designed to improve Canada’s international trade performance by offering financial assistance to Canadian businesses seeking to participate in various trade promotion and export activities. Trade Commissioners operating out of Canadian Embassies, High Commissions, Consulates and International Trade Centres within Canada assist Canadian companies seeking export markets by collecting and analyzing information on legislation, key contacts, commercial practices and business opportunities abroad and intervening on behalf of exporters with local authorities. The International Business Opportunities Centre works with Canada’s Trade Commissioners abroad to connect Canadian companies with foreign business opportunities. International Trade Centers have been established, regionally, by Industry Canada to assist Canadian business to identify the products and services necessary to meet the business’ export needs, and to provide export-counseling services. The Canadian Companies Capabilities is a computerized database on Canadian companies, their products and the markets they serve, which is available through Industry Canada at http://strategis.ic.gc.ca. Virtual Trade Commissioner (formerly World Information System for Exports) is a computerized database used by the Canadian trade officers to match Canadian sources of supply of goods and services with foreign customers. ExportSource is a comprehensive online federal government resource for export information, which brings together all available federal government trade-related information, plus export-related information from non-federal and private sector sites. See Section R, Energy and Natural Resources, for further information. STIKEMAN ELLIOTT LLP ■ The federal Canadian Commercial Corporation is an export sales agency, which assists in the development of trade between Canada and other nations on a government-to-government basis and generally assists Canadians in the import and export of goods and commodities. In addition, all of the provincial governments have export-related promotion programs, ranging from loans and insurance programs to incentives for participation in trade fairs overseas. STIKEMAN ELLIOTT LLP FOREIGN TRADE, INVESTMENT AND IMMIGRATION ■ B23 DOING BUSINESS IN CANADA C Types of Business Organization Corporation ......................................................................................................................... 2 Business Corporations Acts ........................................................................................... 2 Differences Among The Acts ......................................................................................... 2 Sector Specific Legislation ............................................................................................. 2 Unlimited Companies ..................................................................................................... 2 Partnerships ........................................................................................................................ 3 Joint Ventures ..................................................................................................................... 3 Sole Proprietorships ............................................................................................................ 3 Franchises and Licensing Arrangements............................................................................ 3 © STIKEMAN ELLIOTT LLP AUGUST 2013 TYPES OF BUSINESS ORGANIZATION Types of Business Organization CORPORATION Business Corporations Acts Both the federal and provincial governments have enacted legislation providing for the incorporation and regulation of business corporations (known as “companies” under some statutes). A business corporation incorporated under provincial law may carry on business as of right in the province of its incorporation and also has the capacity to carry on business beyond the limits of that province. A federal business corporation is subject to provincial laws of general application, although it has the basic right to carry on business in any province. Most provinces require corporations incorporated in other jurisdictions to register or be licensed before doing business in that jurisdiction and to file initial and annual returns and notices reporting certain basic corporate changes. Differences Among The Acts Although federal and provincial business corporation statutes are quite similar in most respects, there are some differences that can affect the decision of whether to incorporate federally or provincially. Examples include ease and timeliness of incorporation, flexibility in carrying out corporate proceedings, licensing requirements, fees and taxes and the extent of continuous disclosure requirements. One consideration often relevant to non-resident investors is the requirement, found in many corporation statutes, of having a minimum number or percentage of resident Canadian directors. It is usually easier for a non-resident to incorporate under a statute with a minimal Canadian residency requirement or no requirement at all. Otherwise, everything else being equal, non-residents are often advised to incorporate federally rather than provincially on the theory that a federal corporation will be more readily recognized and accepted – as a practical rather than a legal matter – outside Canada. Sector Specific Legislation Certain types of business corporations (for example, banks, trust and loan companies, credit unions or associations, and insurance companies) are governed by sector-specific legislation rather than the general federal or provincial business corporations statutes. Unlimited Companies An interesting hybrid of corporation and partnership is the “unlimited company” (ULC), unique to Nova Scotia, British Columbia and Alberta law in respect of which, among other things, the “members” or shareholders have unlimited liability in certain circumstances. ULCs gained popularity in the mid-1990s, as a ULC that is a subsidiary of a U.S. parent was able to produce certain tax advantages, as a tax flow-through C2 STIKEMAN ELLIOTT LLP PARTNERSHIPS Partnership law in Canada is a matter of provincial jurisdiction. While a partnership is generally formed under the laws of a particular province, partnerships carrying on business in more than one province will be required to comply with the laws of, and may be required to register in, each such province. In the absence of an agreement to the contrary, the rights and obligations of partners are those found in the governing provincial legislation. Canadian jurisdictions generally recognize two forms of partnership: general and limited. General partnerships have most of the characteristics of sole proprietorships, except that they include more than one person. Like sole proprietorships, general partnerships can be attractive by virtue of their simplicity and informality, but they also share the characteristic of unlimited liability, which in the case of a general partnership attaches jointly and severally to each partner. The only filing normally required with respect to a general partnership is a registration of the business name where the partners are not using their own names. TYPES OF BUSINESS ORGANIZATION vehicle, for its parent. Effective January 1, 2010, the Fifth Protocol to the US-Canada Income Tax Treaty limited many of the tax advantages enjoyed through ULCs. Limited partnerships are creatures of statute and are formed by the filing of a declaration of partnership under the relevant partnership statute. Limited partnerships alleviate liability concerns to some extent by allowing the creation, within a partnership arrangement, of limited partners whose liability is limited to their respective contributions to the partnership. The price of this, however, is a prohibition on participation by a limited partner in the “control” of the business of the partnership. The limited partnership (LP) is distinct from the “limited liability partnership” (LLP), a special form of partnership recognized in most Canadian jurisdictions. The LLP form is designed principally for law firms and other professional services firms. JOINT VENTURES A joint venture may have tax advantages as an alternative to partnership. Because Canadian law does not recognize such an arrangement as a distinct form of business association, a joint venture must take the form of a recognized business organization such as a corporation or partnership, or be carried out through a contractual relationship. In particular, because there is no specific joint venture legislation, parties entering into a joint venture who do not wish to form a partnership must make it clear that they do not intend to be associated in partnership. SOLE PROPRIETORSHIPS Although the sole proprietorship is free from most government regulations that apply to business corporations, certain registration requirements must be complied with in the jurisdiction in which the business is to be carried on. For example, a sole STIKEMAN ELLIOTT LLP C3 TYPES OF BUSINESS ORGANIZATION C4 proprietor who uses as his or her business style a name or designation other than his or her own is required to register the name under applicable provincial legislation. FRANCHISES AND LICENSING ARRANGEMENTS Franchising and licensing arrangements are generally governed by the applicable law of contracts, although Alberta, Ontario and Prince Edward Island have specific franchising statutes. Federally, the Competition Act addresses certain practices with particular relevance to franchises and licence arrangements. In addition to a prohibition on pyramid selling, the Competition Act subjects certain trade practices to review, including pricing practices, refusals to deal, exclusive dealing, tied selling and market restrictions. Also relevant in some cases are the Trade-marks Act and the Patent Act. Alberta, Ontario, Prince Edward Island, New Brunswick and Manitoba have enacted specific disclosure legislation with respect to franchising. These acts mandate fair dealing in the franchise relationship and provide special remedies to franchisees in the event of abusive conduct by a franchisor. Other provinces indirectly regulate certain aspects of franchising through their consumer protection and securities laws, as well as through laws relating to fair trade practices, pyramid selling, referral selling and advertising. STIKEMAN ELLIOTT LLP DOING BUSINESS IN CANADA D Securities Law and Capital Markets Securities Legislation .......................................................................................................... 2 Registration Requirements ............................................................................................ 2 Prospectus Requirement ............................................................................................... 4 Prospectus Disclosure ................................................................................................... 5 Exemption from the Prospectus Requirement ............................................................... 5 Resales of Securities ..................................................................................................... 7 Continuous Disclosure Requirements ........................................................................... 7 Canada’s Version of Sarbanes-Oxley............................................................................ 9 Statutory Liability for Secondary Market Disclosure .................................................... 10 Take-over Bids ............................................................................................................. 10 Insider Trading Issues/Insider Reports ........................................................................ 11 Multi-Jurisdictional Disclosure System ........................................................................ 11 Initial Public Offerings ....................................................................................................... 13 General ........................................................................................................................ 13 Prospectus Clearance.................................................................................................. 13 Take-overs (Back-Door Listings) ................................................................................. 14 Canada’s Stock Exchanges .............................................................................................. 14 Market Regulation ........................................................................................................ 15 TMX Group .................................................................................................................. 15 The Montréal Exchange (Bourse de Montréal) ............................................................ 16 © STIKEMAN ELLIOTT LLP JANUARY 2014 SECURITIES LAW AND CAPITAL MARKETS Securities Law and Capital Markets SECURITIES LEGISLATION Regulatory standards imposed by Canadian securities regulators and stock exchanges are generally comparable to U.S. standards. The most important thing to understand about Canadian securities law, however, is that it is largely the responsibility of the provincial and territorial governments. As a result, Canada has no national securities law and no national securities regulator. Rather, many substantive aspects of securities regulation, such as registration and prospectus requirements and exemptions and continuous disclosure requirements are harmonized through the use of “national instruments” or “national policies”, which are adopted by each of the provincial and territorial regulators. Moreover, initiatives such as the national electronic filing system (SEDAR) and the Passport System encourage regulators to delegate responsibilities to one another, thus creating a system of “one stop shopping” for issuers and registrants. Being the jurisdiction of the TSX and the principal regulator for a majority of Canadian reporting issuers, the Ontario Securities Commission (OSC) has generally taken a more active role in the development of Ontario securities law through the introduction of various regulatory instruments, policies and rules. As such, the OSC tends to exercise a very broad regulatory and disciplinary jurisdiction and is arguably the nearest equivalent in Canada to the American SEC. In recent years, the possibility of replacing the provincial and territorial securities regulators with a single national regulator has gained momentum. While the Supreme Court recently found draft legislation to establish such a regulator to be outside federal jurisdiction, the federal government has stated that it will continue to work towards the goal of a national regulator within the applicable constitutional parameters. Registration Requirements On September 28, 2010, National Instrument 31-103 Registration Requirements and Exemptions (NI 31-103) came into force. NI 31-103 was implemented with the intention of harmonizing, streamlining and modernizing registration requirements and exemptions across all Canadian provinces and territories (jurisdictions). NI 31-103 regulates the registration of firms and individuals and, notably, consolidates firm registrations into three categories: (i) dealers, which includes investment dealers, mutual fund dealers and exempt market dealers; (ii) advisers, which includes portfolio managers and restricted portfolio managers; and (iii) investment fund managers. Further, NI 31-103 consolidates registration requirements, including with respect to proficiency, solvency and insurance requirements, as well as ongoing compliance requirements and exemptions from registration. These include requirements with respect to financial reporting, know your client, suitability, client disclosure, safekeeping of assets, recordkeeping, account D2 STIKEMAN ELLIOTT LLP Ultimately, NI 31-103 represented a major overhaul of the previous registration regime and has had significant implications for Canadian and non-Canadian dealers, advisers and investment fund managers doing business on a registered or exempt basis in any jurisdiction of Canada. The rules also had significant implications for private placements and other capital market activities. Significant changes resulting from the registration regime included: (i) the removal of most trade-based dealer registration exemptions, including for trades with “accredited investors” (tradebased exemptions are now available in some jurisdictions under blanket orders and local rules or on a limited basis under NI 31-103), and the move to a “business trigger” for the dealer registration requirement, which effectively requires that all persons that are in the business of trading in securities in Canada register as dealers; (ii) the requirement that persons who are in the business of trading in the so-called “exempt market”, including those previously registered in Ontario or Newfoundland and Labrador as limited market dealers, be registered as “exempt market dealers” and comply with capital, insurance and proficiency requirements and other ongoing compliance requirements; (iii) the introduction of a new investment fund manager registration requirement; (iv) the introduction of registration exemptions for international dealers and international advisers; (v) the introduction of principles-based rules for managing conflicts of interest; (vi) the regulation of referral arrangements; and (vii) the introduction of new client complaint handling and dispute resolution procedures. SECURITIES LAW AND CAPITAL MARKETS activity reporting, complaint handling and other compliance procedures. In order to create flexible regulation, NI 31-103 combines principles, supported by guidance in its companion policy, with prescriptive elements where considered appropriate. Ontario, Quebec and Newfoundland and Labrador have implemented an exemption from the investment fund manager registration requirement where an IFM does not have a place of business in the local jurisdiction and where either (i) none of the investment funds has security holders resident in the local jurisdiction; or (ii) the IFM and those investment funds have not, at any time after September 27, 2012, actively solicited residents in the local jurisdiction to purchase securities of the fund. Meanwhile, all other jurisdictions in Canada have provided guidance with regards to determining whether registration as an IFM is required. Specifically, these jurisdictions interpret the registration requirements to only require registration as an investment fund manager in a jurisdiction if the investment fund manager directs or manages the business, operations or affairs of an investment fund in that jurisdiction. The Investment Industry Regulatory Organization of Canada (IIROC), which is the self-regulatory organization recognized by securities regulators, also oversees its member investment dealers and advisers, as well as trading activity on Canadian marketplaces. STIKEMAN ELLIOTT LLP D3 SECURITIES LAW AND CAPITAL MARKETS Prospectus Requirement Securities laws generally require the filing of a prospectus to qualify for any “distribution” of securities. In the absence of an exemption (see the section on exemption from prospectus requirements below), no person or company may “trade” in a security where such trade constitutes a “distribution” unless a prospectus has been filed. Securities originally distributed under a prospectus exemption are generally subject to resale restrictions that require that the issuer have been a reporting issuer for a specified period of time and, in some cases, that the securities be held for a specified period of time. All treasury offerings of securities not previously issued are distributions. The objective of the prospectus requirement is to provide investors with complete and accurate information about the affairs of an issuer, thereby enabling them to make informed investment decisions about the securities being offered. Thus, the contents of a prospectus will vary depending on the nature of the security to be issued, the businesses in which the issuer and its subsidiaries are engaged and the particular requirements of the jurisdictions in which the offering will be made. The prospectus must be comprehensible to readers and presented in an “easy-to-read” format. Securities laws contain a number of specific requirements with respect to the required or permitted contents of a prospectus, which have generally been harmonized under National Instrument 41-101 General Prospectus Requirements. Form 41-101F1 Information required in a Prospectus, requires an issuer to disclose extensive information about numerous matters concerning the company in the prospectus, including: ■ its corporate structure; ■ its use of proceeds; ■ its financial statements; ■ risk factors relating to an investment in securities of the issuer; ■ significant acquisitions (including recently completed acquisitions as well as proposed/probable acquisitions); ■ legal proceedings affecting the issuer; ■ its directors and officers and the compensation of its executives; ■ outstanding options to purchase securities; ■ the principal holders of its securities; ■ prior issuances of securities; ■ relationships between the issuer and an underwriter; ■ its auditors; and ■ any other material facts relating to the securities proposed to be issued and not otherwise disclosed. D4 STIKEMAN ELLIOTT LLP Upon filing the final prospectus, the issuer will (if it has not previously filed a prospectus) become a “reporting issuer” in each jurisdiction in which a receipt is issued (or is deemed to be issued under the Passport System). As such, the issuer will be subject to continuous disclosure rules and ongoing reporting requirements. These rules and requirements concern such things as the timely disclosure of material changes, the preparation and filing of quarterly and annual financial information, the solicitation of proxies and the preparation of annual information forms and information circulars. SECURITIES LAW AND CAPITAL MARKETS Prospectus Disclosure The prospectus must contain “full, true and plain disclosure of all material facts relating to the securities issued or proposed to be distributed”. The significance of this standard is reinforced by the certificates, which the issuer, the underwriters and others, as applicable, must sign at the end of the prospectus. In the event that the prospectus contains a misrepresentation, the issuer, its directors and each underwriter that signs it (among others) may be found liable. An issuer is not liable if it can prove that the purchaser purchased the securities with knowledge of the misrepresentation. Directors, underwriters and others can similarly rely on a due diligence defence if they can establish that after conducting a reasonable investigation, they reasonably believed there was no misrepresentation in the prospectus. Exemption from the Prospectus Requirement There are a number of options available for distributing securities on a prospectus exempt basis, generally referred to as exempt distributions or private placements. Private placements have, for the most part, been harmonized across the country in the form of National Instrument 45-106 Prospectus and Registration Exemptions (NI 45-106). The instrument provides a wide range of prospectus exemptions for both private and public issuers of securities. Although it has generally achieved its purpose and allowed market participants to view the landscape of exemptions, it is important to remember that some jurisdictions, including Ontario, continue to retain certain additional local exemptions. The prospectus exemptions available under NI 45-106 are generally divided into the following categories: capital raising; transaction specific; exemptions for investment funds; employee, executive officer, director and consultant exemptions; and miscellaneous. The most frequently used among the capital raising exemptions are the “accredited investor” and “minimum investment amount” exemptions. The “accredited investor” exemption provides a prospectus exemption for trades to a qualified list of entities and individuals. Included among the qualified entities are certain types of banks and other financial institutions, trust companies, pension funds, registered charities, investment funds, domestic and international governmental bodies and entities other than individuals or investment funds with net assets of C$5 million. An individual STIKEMAN ELLIOTT LLP D5 SECURITIES LAW AND CAPITAL MARKETS may also qualify as an “accredited investor” if he or she, alone or with a spouse, owns financial assets having an aggregate net realizable value over C$1 million; has net assets of at least C$5 million; or has net income before taxes in excess of C$200,000 alone, or C$300,000 together with his or her spouse. The “minimum investment amount” exemption is available to any person or entity that purchases as principal securities of a single issuer that have an acquisition cost of a minimum of C$150,000 at the time of the trade. In addition to these two most frequently used exemptions, an additional exemption is also available to private issuers. If an entity is not a reporting issuer or an investment fund, it may rely on the private issuer exemption provided: it has not distributed securities other than to a prescribed list of investors and its securities are subject to restrictions on transfer and beneficially owned by no more than 50 persons. Other capital raising exemptions include exemptions in certain jurisdictions for trades to family, friends and business associates of the issuer (which exemptions are not available in Ontario), for trades to founders control persons and family (which are available only in Ontario), trades to affiliates and trades made under rights offerings or pursuant to dividend or distribution reinvestment plans. Transaction exemptions include exemptions for business combinations and reorganizations, assets acquisitions, takeover bids and issuer bids and securities issued for debt. NI 45-106 also makes available specific exemptions for investment funds as well as for issuances to employees, executive officers, directors and consultants. These may apply to issuances of equity securities themselves or to grants and exercises of securities issued as equity compensation, such as stock options. Documentation used in connection with a private placement may vary depending upon the size and nature of the issuer, the exemption relied upon and the identity and relationship of the purchaser to the issuer. Generally, however, the documentation consists of a subscription agreement, and where applicable, an agency or underwriting agreement. The documentation may also include an offering memorandum but this is not mandatory. The subscription agreement, or similar document, typically contains contractual representations, warranties and covenants between the issuer and the purchaser. It also generally includes or is accompanied by some form certificate whereby the purchaser provides confirmation of the necessary elements of any prospectus exemption being relied upon, if applicable. For example, if the exemption relied upon is the “accredited investor” exemption, the purchaser will usually be asked to complete a certificate that indicates which category of accredited investor applies to the purchaser. While an offering memorandum is not required to be prepared when relying on the accredited investor and other exemptions, if one is delivered, some provinces and territories also provide a statutory right of action for damages or rescission to purchasers where an offering memorandum contains a misrepresentation. D6 STIKEMAN ELLIOTT LLP In addition to issuances from treasury, sales of securities by a “control person” are by definition a distribution, and therefore must be made pursuant to a prospectus or a prospectus exemption (or pursuant to a prescribed procedure where notice is given prior to the trade). A control person is defined under securities law as a holder of sufficient securities of an issuer to materially affect control of the issuer. In the absence of evidence to the contrary, a holder of more than 20% of its outstanding voting securities is generally deemed a control person. SECURITIES LAW AND CAPITAL MARKETS Resales of Securities As discussed above, every trade that is a “distribution” requires the filing of a prospectus or reliance on a prospectus exemption. The resale of securities distributed pursuant to a prospectus exemption requires reliance on a further exemption or, if this is not available, on a prospectus—unless a set of resale conditions is met. Those conditions generally require that the issuer of securities has been a “reporting issuer” for at least four months, that no unusual effort has been made to prepare the market for the securities being sold and, in some cases, that the person proposing to sell the securities has held them for a minimum hold period of four months and the securities in question carry a prescribed legend to that effect. The system is referred to being “closed” because a security never becomes freely tradable unless a prospectus is filed, or—if distributed under a prospectus exemption—until enough time lapses to allow information about the issuer and the security to be disseminated in the marketplace. Continuous Disclosure Requirements The Ontario Securities Commission has stated that, as a general principle, the purpose of disclosure is to promote equality of opportunity for all investors in the market. Disclosure achieves this by helping investors learn, quickly, all of the material facts that might reasonably affect an investment decision. The filing of a prospectus is the first link in the chain of disclosure, but it must be followed up with the continuous reporting of information and developments that might affect investment decisions. Two kinds of reporting are required under Canada’s continuous disclosure regime: “periodic” and “timely”. Periodic reporting requires the reporting issuer to prepare and file continuous disclosure documents such as financial statements, management’s discussion and analysis (MD&A), proxy circulars and annual information forms (AIFs). Timely reporting provisions require the reporting issuer to disclose material changes as they occur, through press releases and material change reports. Reporting issuers are also required to file business acquisition reports (BARs) and material contracts in a timely fashion. “Reporting insiders”, a category that includes members of senior management or the board, key personnel and significant shareholders, must also report trades in the reporting issuer’s securities as well as interests in related financial instruments and changes in economic exposure to the reporting issuer, generally within five days. STIKEMAN ELLIOTT LLP D7 SECURITIES LAW AND CAPITAL MARKETS Continuous Disclosure Obligations National Instrument 51-102 Continuous Disclosure Obligations (NI 51-102) is designed to provide a nationally harmonized set of continuous disclosure requirements for reporting issuers other than investment funds. Broadly speaking, the instrument sets out the obligations of reporting issuers relating to financial statements, AIFs, MD&A, BARs, material change reporting, information circulars, proxies and proxy solicitation and other disclosure matters. For example, the board of each reporting issuer is required to approve both annual financial statements and interim reports and interim and annual MD&A prior to their release. The MD&A must include discussions of off-balance-sheet transactions, more detailed disclosure of critical accounting estimates and additional guidance for resource issuers. Meanwhile, an AIF must include such things as disclosure regarding social and environmental policies of the reporting issuer if they are fundamental to its operations and a reporting issuer must file on SEDAR a copy of any material contract entered into except those entered into “in the ordinary course of business”, subject to certain limited exceptions.NI 51-102 also requires issuers to publicly disclose copies of constating documents and other documents or agreements that affect the rights of securityholders as well as results of voting for securityholder meetings. National Instrument 81-106 Investment Fund Continuous Disclosure imposes a similar disclosure regime for investment funds. NI 51-102 also contains requirements regarding disclosure of forward-looking information, other than forward looking information contained in an oral statement. Material Change Reporting NI 51-102 requires reporting issuers to issue and file with the relevant securities authority: (i) a press release directed to the investing public (to be issued “forthwith”) and (ii) a Material Change Report (to be filed within ten days of the date on which the change occurs). In general, a “material change” is defined to mean, in relation to a reporting issuer, a change in the business, operations, or capital of the 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 or a decision made by the board (or by senior management who believe that confirmation of the board is probable) to implement such a change. National Policy 51-201 Disclosure Standards (NP 51-201) supplements the material change disclosure requirement and provides the marketplace with the view of the CSA on a number of disclosure matters. In particular, NP 51-201 provides that any announcement of material information should be factual and balanced; neither over-emphasizing favourable news nor under-emphasizing unfavourable news. In short, announcements must be clear, accurate and objective. As well, it suggests a number of best practices to assist reporting issuers in complying with continuous disclosure rules, and preventing insider trading and selective disclosure, including that reporting issuers establish a corporate disclosure policy. D8 STIKEMAN ELLIOTT LLP Canada’s Version of Sarbanes-Oxley Canada’s response to Sarbanes-Oxley legislation in the U.S. can be found in National Instrument 52-110 Audit Committees, National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings and National Instrument 52-108 Auditor Oversight. These instruments are comprehensive in scope, but in brief require CEO and CFO certification of disclosure in public companies’ annual and interim filings, regulate the role and composition of audit committees, prescribe disclosure in respect of audit committees and support the work of the Canadian Public Accountability Board in its oversight of auditors of public companies. NI 52-110 Audit Committees governs the function, powers and composition of the audit committee, and requires issuers to provide certain prescribed disclosure regarding its composition and functions. The audit committee rule requires all issuers to which it applies to have an audit committee composed of a minimum of three directors. Generally, all three directors are required to be independent (NI 52110 sets out a definition for independence) and financially literate. The audit committee rule clarifies the role of the external auditor vis-à-vis the audit committee, board and securityholders of an issuer by requiring that the external auditor report directly to the audit committee. The responsibilities that the audit committee must fulfill are also prescribed, and include responsibility to establish procedures for receiving and addressing complaints about auditing and accounting matters (whistleblowing). SECURITIES LAW AND CAPITAL MARKETS National Instrument 71-102 Continuous Disclosure and Other Exemptions Relating to Foreign Issuers, meanwhile, provides relief from many requirements of NI 51-102 for SEC foreign issuers and issuers of certain designated foreign jurisdictions that comply with the continuous disclosure requirements of the SEC or relevant foreign jurisdiction. Corporate Governance Practices Governance disclosure is prescribed by National Instrument 58-101 Disclosure of Corporate Governance Practices, whereas governance “best practices” are prescribed by the associated National Policy 58-201 Corporate Governance Guidelines. The instrument and policy generally apply to all reporting issuers other than investment funds. Broadly speaking, NI 58-101 requires issuers to disclose their corporate governance practices in their information circulars or AIFs, and to file on SEDAR a copy of any code of ethics adopted, as well as any amendments to it. Failure by an issuer to provide adequate disclosure constitutes a breach of securities laws and exposes the issuer and others to enforcement proceedings and sanctions. By mandating corporate governance related disclosure, the goal of NI 58-101 is to provide greater transparency on how issuers apply various corporate governance principles. Recognizing that many corporate governance matters cannot be prescribed in a “one size fits all” manner, neither NI 58-101 nor NP 58-201 are intended to STIKEMAN ELLIOTT LLP D9 SECURITIES LAW AND CAPITAL MARKETS prescribe what an issuer must do. NP 58-201 is designed to reflect “best practices”, which have been formulated with desirable corporate governance principles in mind. The guidelines are not intended to be prescriptive and include, among other things, recommendations relating to board independence, the role of the board and management, selection of board members and compensation. Issuers are encouraged to consider the guidelines in developing their own corporate governance practices, and are required to disclose deviations therefrom together with a description of what the board does to ensure that the objective of the guidelines are met. Meanwhile, National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings (NI 52-109) requires reporting issuers to file interim and annual certificates, certified by the CEO and CFO (or equivalent) of the issuer. The certificates include certifications regarding fair presentation of financial condition, financial performance and cash flow and confirmation that the interim and annual filings do not contain any misrepresentations. The certificates must also include certifications regarding the establishment, maintenance and effectiveness of disclosure controls and procedures (DCP) and internal control over financial reporting (ICFR). In addition, certified corresponding disclosure is required in the issuer’s MD&A regarding the effectiveness of DCP and ICFR and any changes in ICFR during the relevant period that have materially affected, or are reasonably likely to materially affect, the issuer’s ICFR. Statutory Liability for Secondary Market Disclosure Securities laws also impose civil liability for secondary market disclosure. The most significant causes of action for secondary market disclosure pertain to misrepresentations made by, or on behalf of, a responsible issuer in its disclosure documents or in public oral statements, and failures to make timely disclosure of a material change. In addition to the issuer itself, its directors and officers, among others, could be subject to such a cause of action. In contrast to the common law cause of action for negligent misrepresentation, which requires each plaintiff to prove that it relied to its detriment on the alleged misrepresentation, a plaintiff has a statutory right of action without regard to whether the purchaser or seller of securities relied on the alleged misrepresentation. However, a prospective plaintiff will be able to commence a proceeding only with leave of the court, and a number of defences that may preclude liability or limit damages in certain situations are available. Take-over Bids In the past, provincial securities statutes regulated take-over bids occurring in their respective provinces. Effective February 1, 2008, however, the CSA harmonized and streamlined the requirements for take-over bids and issuer bids across Canada. While rules respecting take-over bids in Ontario continue to be part of the Securities Act (Ontario) and the other local Ontario rules, all other provinces and territories have adopted Multilateral Instrument 62-104 Take-Over Bids and Issuer Bids to D10 STIKEMAN ELLIOTT LLP An early warning notification mechanism is imposed once an offeror acquires beneficial ownership or the power to exercise control or direction of 10% of a reporting issuer. Every person reaching this 10% threshold is required to immediately issue a press release containing certain prescribed information and, within two business days, file an “early warning report” in prescribed form. A further press release and early warning report is required whenever an additional 2% of the class of securities is acquired or there is a change in a material fact contained in a previously filed report. Certain institutional investors with a passive investment intent can, however, comply with these early warning requirements under an alternative system that generally only requires reporting after month-end. A take-over bid must be made in compliance with the substantive and procedural requirements of the jurisdiction, in the absence of an exemption from the take-over bid requirements. Compliance with the substantive and procedural requirements generally requires making an offer to all security holders of a given class on identical terms. A formal offer requires preparation of a take-over bid circular satisfying certain statutory line item disclosure requirements that must be sent to shareholders of the target issuer. Many of the procedural requirements are included in MI 62-104 and in corresponding provisions of the Securities Act (Ontario) and OSC Rule 62-504. As well, all Canadian securities regulators have adopted a national policy, NP 62-203 Take-Over Bids and Issuer Bids, which provides guidance on take-over bids and take-over bid exemptions across the country. SECURITIES LAW AND CAPITAL MARKETS govern most substantive and procedural bid requirements. A take-over bid in Canada is defined as an offer to acquire outstanding voting or equity securities that would bring the “offeror’s securities” to 20% or more of the securities of the class. The term “offeror’s securities” for such purposes includes securities beneficially owned, or over which the offeror has the power to exercise control or direction, alone or acting jointly or in concert with other persons. There are various exemptions from the formal take-over bid requirements. These exemptions include: ■ Acquiring at market price within any period of 12 months not more than 5% of the outstanding securities of a class measured at the commencement of the 12 month period; or ■ Purchases in private agreements from not more than five persons where the consideration paid does not exceed 115% of the market price (as defined) of the securities at the date of purchase. Insider Trading Issues/Insider Reports Securities legislation prohibits any person in a “special relationship” with a reporting issuer from purchasing or selling securities of the reporting issuer with knowledge of a material fact or material change with respect to the reporting issuer that has not been generally disclosed. Persons in a special relationship include, among others, any person or company that is an insider, affiliate or associate of the reporting issuer, a person or company that engages or proposes to engage in any STIKEMAN ELLIOTT LLP D11 SECURITIES LAW AND CAPITAL MARKETS business or professional activity with, or on behalf of the reporting issuer, a person who is a director, officer or employee of the reporting issuer or a person who learns of a material fact or material change with respect to the issuer from a person in a special relationship and knew or ought reasonably to have known such person to be in such a relationship. There are also prohibitions and civil liability with respect to tipping, which consists of informing, other than in the necessary course of business, another person or company of a material fact or material change with respect to the reporting issuer before it has been generally disclosed. Many of these terms have specific definitions in Canadian securities law that should be understood by anyone in such a “special relationship” because insider trading and tipping are offences that carry criminal penalties. Civil remedies are also available to a purchaser and seller of securities, and to the issuer, in connection with this kind of activity. For these purposes, the Securities Act (Ontario) provides that a “security” includes (a) a put, call, option or other right or obligation to purchase or sell securities of the reporting issuer; (b) a security, the market price of which varies materially with the market price of the securities of the issuer; or (c) a related derivative. Under National Instrument 55-104 Insider Reporting Requirements and Exemptions, every “reporting insider” of a reporting issuer must file an insider report within five days of a change in the reporting insider’s (a) beneficial ownership of, or control or direction over, whether direct or indirect, securities of the reporting issuer; or (b) interest in, or right or obligation associated with, a related financial instrument involving a security of the reporting issuer. Supplemental insider reporting requirements of NI 55-104 require the filing of insider reports with respect to certain agreements, arrangements or understandings that (i) have the effect of altering the reporting insider's economic exposure to the reporting issuer; (ii) involve, directly or indirectly, a security of the reporting issuer or a related financial instrument involving a security of the reporting issuer and (iii) do not otherwise trigger the obligation to file an insider report. Upon becoming a reporting insider, the reporting insider must file an insider report to disclose any such agreement or arrangement that was entered into prior to the date the person became a reporting insider and that is still in effect. The term “economic exposure” generally refers to the link between a person’s economic or financial interests and the economic or financial interests of the reporting issuer of which the person is an insider. A reporting insider includes the reporting issuer itself, its major subsidiaries, significant shareholders (including those based on post-conversion beneficial ownership) and management companies and each of their directors and prescribed senior officers, as well as a person or company responsible for a principal business unit, division or function of the reporting issuer and insiders who receive or have access to information as to material facts or material changes concerning the reporting issuer in the ordinary course before the material facts or material changes are generally disclosed. Significant shareholders are those generally holding more D12 STIKEMAN ELLIOTT LLP In addition to the insider reporting requirements, the TSX’s Policy Statement on Timely Disclosure sets out procedures with respect to disclosure, confidentiality and employee trading pursuant to which issuers are urged to establish confidentiality and trading policies to govern, among other things, the establishment of “black out periods” and “open windows” for trading in the company’s securities by employees and others. Multi-Jurisdictional Disclosure System Canadian regulators and the U.S. Securities and Exchange Commission permit distributions and rights offerings in Canada to be made by certain U.S. issuers on the basis of disclosure documents prepared in accordance with U.S. Securities Act of 1933 and the Securities Exchange Act of 1934 rather than requiring compliance with Canadian provincial securities legislation. These rules, which are referred to as the Canada-U.S. Multi-Jurisdictional Disclosure System or MJDS, also apply to certain rights and exchange offers, take-over bids, issuer bids and business combinations and extend to recognition of certain home jurisdiction continuous reporting obligations. SECURITIES LAW AND CAPITAL MARKETS than 10% of the voting securities including on a post-conversion basis of convertible or similar securities in some circumstances. Eligible Canadian issuers are also able to use MJDS forms to offer securities publicly in the United States by means of a Canadian prospectus, which is subject to review only by Canadian regulatory authorities. INITIAL PUBLIC OFFERINGS General An initial public offering of securities of an issuer is the conventional way of “going public” in each of the provinces and territories in Canada, and is made by means of a prospectus which must be filed with and receipted by the applicable provincial securities regulator. All prospectuses filed with the Authorité des marchés financiers (the Quebec financial services regulator, which oversees securities regulation in the province of Quebec) (AMF) must be translated into French. Prospectus Clearance Preliminary Prospectus The process of prospectus clearance in Canada is fundamentally the same as that in other advanced economies, although it is closer to that of the Securities and Exchange Commission in the United States than it is to the processes in the United Kingdom, Hong Kong, Singapore and Australia. Once the decision to “go public” has been made, an issuer must file a preliminary prospectus, which will be reviewed and commented on by its principal regulator, and the OSC if the OSC is not the principal regulator. The clearing of the preliminary prospectus is often an urgent matter as generally the issuer is anxious to receive the STIKEMAN ELLIOTT LLP D13 SECURITIES LAW AND CAPITAL MARKETS proceeds of the offering and the underwriters (or agents) have determined that the markets are appropriately receptive to the offering, subject to adverse market changes occurring prior to closing, and are eager to commence the “road shows” with registered representatives (e.g. salespersons) and potential purchasers regarding the issuer and the proposed offering. In jurisdictions that have issued (or are deemed under the Passport System to have issued) receipts for the preliminary prospectus, an issuer may solicit “expressions of interest” from institutions and other prospective purchasers (provided that a copy of the preliminary prospectus is forwarded to them if they indicate an interest in purchasing) or it may distribute the preliminary prospectus to them first. Comment Letter and Response Issuance of a receipt for the preliminary prospectus begins what is known as the “waiting period.” During this time, the principal regulator will review the preliminary prospectus and will issue a comment letter identifying any deficiencies or concerns. If the principal regulator is not the OSC, the OSC will also review the materials and advise the principal regulator of any concerns. After the principal regulator has issued the comment letter, the issuer’s counsel will then (with the help of the issuer, the underwriters, and the auditors) respond to the letter and attempt to negotiate the rectification of the deficiencies. Then, if all goes well, the principal regulator will clear the issuer for filing the final prospectus (receipt for the final prospectus is issued upon filing). If the principal regulator is the OSC, the receipt of the OSC would result in a deemed receipt from each jurisdiction in which the prospectus was filed under the Passport System. If the principal regulator is not the OSC, the receipt of the principal regulator would result in a deemed receipt from all Passport System regulators and, if the OSC cleared the prospectus, of the OSC. Conditional Listing Generally, an original listing application is made to a stock exchange after a receipt is received for the preliminary prospectus upon which a conditional listing is granted to the issuer, subject to the fulfillment of certain standard conditions. These conditions include obtaining a receipt for the final prospectus, the closing of the offering, minimum distribution of securities and delivery of certain documentation to the exchange. Under National Instrument 41-101 General Prospectus Requirements and Related Amendments (NI 41-101), prospectus requirements and policies are now generally harmonized across Canada. Reverse Take-overs (Back-Door Listings) A well-known means of reactivating dormant companies or “public shells” on stock exchanges in Canada is the process of reverse take-overs. A reverse take-over involves a transaction that results in the acquisition of a listed issuer by an unlisted issuer. In such a scenario, the shareholders of the listed company end up owning D14 STIKEMAN ELLIOTT LLP CANADA’S STOCK EXCHANGES Market Regulation The Investment Industry Regulatory Organization of Canada (IIROC) is the national self-regulatory organization that oversees trading activity in debt and equity markets in Canada. IIROC also sets out and enforces rules regarding the proficiency, business and financial conduct of investment dealers in the country. TMX Group Toronto Stock Exchange The TSX is Canada’s stock exchange for large capitalization issuers. It has three wellestablished listing categories—Industrial, Mining, and Oil and Gas. Each listing category has two or more levels of financial and technical requirements, in recognition of the considerable range of maturity among listed companies. The requirements for the general Industrial listing category are applicable to all domestic applicants (except those in the mining or oil and gas sectors), including technology companies and research and development companies. Generally, companies that are established and profitable are listed as senior issuers. Mining companies and oil and gas companies, in addition to being established and profitable, must also be producing in order to be listed as senior issuers. Companies that do not meet the senior criteria are subject to closer regulation under Part V of the TSX Company Manual and must receive advance TSX approval of certain proposed material changes. Senior issuers are exempt from Part V. SECURITIES LAW AND CAPITAL MARKETS less than 50% of the shares of the resulting issuer and a change of control occurs. This is typically achieved by the issuance by the listed company of treasury shares in return for assets (including shares of another company) or through an amalgamation or merger. The TSX Company Manual sets out the approval procedures where the TSX determines that a proposed transaction would constitute a back door listing. In addition to the options described above (initial public offering and reverse takeover), issuers also have the option of listing directly on the TSX if the issuer is already listed on another stock exchange, graduating from the TSX-V or making use of the Special Purpose Acquisition Corporation (SPAC) program. A SPAC is initially a shell company with no previous operational history that goes public through an IPO raising at least $30 million, with the intention of using the proceeds raised to acquire a company/group of companies or assets. Once the SPAC’s IPO distribution has closed and its shares or units are listed, the SPAC has 36 months to complete a qualifying acquisition. The TSX Venture Exchange TSX-V listed companies are active primarily in the mining, oil and gas, manufacturing, technology and financial services sectors. The TSX-V operates on a two-tier system, each with its own listing requirements based on the company’s STIKEMAN ELLIOTT LLP D15 SECURITIES LAW AND CAPITAL MARKETS D16 financial performance, resources and development stage. Within each tier, there are specific minimum listing requirements for particular industry segments. Tier 1 is for senior companies. Issuers wanting to list on the TSX-V have similar options to those described above for the TSX. In place of the SPAC program, however, the TSX-V offers a Capital Pool Company Program (or CPC). Specifically, a CPC raises funds through an initial public offering on TSX-V for the purpose of acquiring a private company or an asset within 24 months of its listing on TSX-V. After a successful qualifying transaction, the capital pool company becomes a regular listed company on TSX-V. The Montréal Exchange (Bourse de Montréal) The MX or Bourse de Montréal traces its roots to 1832 and is Canada’s oldest stock market. MX acts as the sole financial derivatives exchange in Canada and offers such products as equity, interest rate, currency, energy and index derivatives (i.e. options and futures contracts). As of 2008, the MX is part of the TMX Group. STIKEMAN ELLIOTT LLP DOING BUSINESS IN CANADA E Employment Law General ............................................................................................................................... 2 Minimum Standards Legislation .......................................................................................... 2 Labour Relations Legislation ............................................................................................... 3 Human Rights Legislation ................................................................................................... 3 Employment Equity and Pay Equity .................................................................................... 4 General .......................................................................................................................... 4 Employment Equity ........................................................................................................ 4 Pay Equity ...................................................................................................................... 5 Workers’ Compensation ...................................................................................................... 5 Occupational Health and Safety ......................................................................................... 6 Employment Insurance, Pension and Benefits Plans, and Employer Health Tax .............. 7 Employment Insurance .................................................................................................. 7 Canada Pension Plan .................................................................................................... 8 Employer Sponsored Pension and Retirement Plans ................................................... 8 Employer Sponsored Health Benefits ............................................................................ 8 Employee Privacy ............................................................................................................... 8 Termination of Employment ................................................................................................ 9 Notice ............................................................................................................................. 9 Whistleblower Protection................................................................................................... 10 Employment Litigation ....................................................................................................... 10 © STIKEMAN ELLIOTT LLP DECEMBER 2010 EMPLOYMENT LAW Employment Law GENERAL Legislative jurisdiction over labour and employment is shared by the Canadian provincial and federal governments. Most businesses fall under provincial jurisdiction, with the federal government having jurisdiction over specifically designated federal works and undertakings, including inter-provincial transportation, banking, telecommunications and radio broadcasting. For the purposes of labour and employment laws, businesses either fall under federal or provincial legislation, but not both. Generally, the employment relationship is governed by the laws of the jurisdiction in which the services are rendered, although the employer and employee may agree that the laws of a specific jurisdiction will govern the contract of employment. Obligations of the employer include compliance with minimum standards legislation (which, as discussed below, are broad and cannot be contracted out of) and the maintenance of a safe working environment. The obligations on the employee include a duty of loyalty, a responsibility to perform the work in a diligent manner and obligations of confidentiality. With the exception of Quebec, provincially governed employment contracts are governed by applicable provincial legislation and the common law. In Quebec, the Civil Code is the governing legislation. MINIMUM STANDARDS LEGISLATION The federal and provincial governments regulate certain basic terms and conditions of employment. While the legislation varies from jurisdiction to jurisdiction, it is generally of broad application, applying in most workplaces and to most kinds of employment. Generally, employees are guaranteed certain minimum rights with respect to the terms and conditions of their employment. Terms and conditions established by legislation include, but are not limited to. minimum wages, hours of work, overtime pay, daily and weekly rest periods, vacations and vacation pay, statutory holidays, pregnancy and parental leave, equal pay for work of equal value, minimum periods of notice of termination and/or severance pay, and terms that govern the treatment of employees upon the sale of a business (or part of a business). The Canada Labour Code (which governs federal undertakings such as banks and the telecommunications industry) and Quebec legislation have specific unjust dismissal provisions that can result in the reinstatement of a terminated employee. As noted above, employers and employees cannot contract out of, or waive, these legislated terms and conditions. Where the contract of employment provides for terms and conditions of employment exceeding statutory minimum standards, these more favourable terms usually become binding upon the employer and can be enforced as a “minimum standard”. E2 STIKEMAN ELLIOTT LLP Federal and provincial labour laws grant employees the right to form or to join a trade union for the purpose of bargaining collectively with employers. Labour legislation obliges employers to recognize a trade union’s exclusive bargaining rights with respect to the “bargaining unit” that it represents and to bargain in good faith with the union. It also endeavours to protect employees and employers against unfair labour practices on the part of employers and trade unions, respectively. EMPLOYMENT LAW LABOUR RELATIONS LEGISLATION Canadian labour legislation also provides for the certification of trade unions as bargaining agents, compulsory collective bargaining, compulsory postponement of strikes and lockouts during the bargaining process, government intervention by way of a conciliation process in situations where the parties have been unable to negotiate a collective agreement, the right of employees to strike and the right of employers to lock out. Each jurisdiction also provides for the imposition of a collective agreement by way of arbitration. For example, Ontario’s Labour Relations Act, 1995 provides, in certain circumstances, for first contract arbitration where parties have been unable to negotiate an agreement. Some provincial legislation restricts the use of replacement workers during a strike or lockout. When all or part of a unionized business is sold, the union’s bargaining rights will generally be preserved unless the appropriate labour board, or similar body, declares otherwise. In essence, the purchaser will be bound by the vendor’s collective agreement and will be a party to any proceedings that were pending when the transaction was completed. In addition, there exist “related employer” provisions, which seek to prevent the erosion of bargaining rights by employers transferring work to entities under common control or direction. Canada’s most heavily unionized jurisdictions are Quebec, Newfoundland & Labrador and the western provinces (with the exception of Alberta, the least unionized province). Of note is the Labour Relations Statute Law Amendment Act, 2005, which amended the Ontario Labour Relations Act, 1995 in a manner favourable to unions. Included in the amendments is the ability for the Ontario Labour Relations Board to automatically certify a union during a certification drive. The most heavily unionized industries are manufacturing, public administration, transportation and communications. HUMAN RIGHTS LEGISLATION Human rights legislation prohibits discrimination in all aspects of employment, including recruitment and hiring. Although they differ somewhat from province to province, generally speaking, prohibited grounds of discrimination include race, ancestry, place of origin, colour, ethnic origin, citizenship, creed, sex, sexual orientation, age, record of offences, marital status, family status and handicap. Further, human rights legislation in most Canadian jurisdictions includes specific harassment (including sexual harassment) provisions. STIKEMAN ELLIOTT LLP E3 EMPLOYMENT LAW Human rights legislation has sweeping application. For example, it affects the ability of employers to make hiring decisions on the basis of background checks. Quebec legislation has included psychological harassment as a ground. British Columbia, Ontario, New Brunswick, Saskatchewan, Manitoba, NWT, Yukon and Nunavut human rights legislation recognize damages for loss of dignity. A breach of human rights legislation can also form the basis for a claim of constructive dismissal by an employee. The remedial powers contained in the various provincial statutes are broad and may include monetary compensation, reinstatement, and cease-and-desist orders. One area that has caused difficulty to Canadian businesses is the limited ability to do any drug or alcohol testing, particularly, pre-employment testing. Discriminatory standards may be adopted by the employer in certain specified circumstances, but the employer will have to establish that the standard is a bona fide occupational requirement and that the employee cannot otherwise be accommodated (which, given the legal test to justify this, can be quite difficult to achieve). For example, it may be permissible to reject an applicant based on their record of offences if reasonably related to the position. In addition to federal and provincial human rights statutes, the Canadian Charter of Rights and Freedoms, a constitutional bill of rights that applies to both federal and provincial governments, has had a significant effect on labour relations in the public sector. EMPLOYMENT EQUITY AND PAY EQUITY General In the 1980s, Canadian governments began to introduce policies and legislation intended to reduce certain social inequalities and (in some cases) to redress prior discriminatory practices. Two such programs are “employment equity” and “pay equity”. Employment equity is essentially the same in concept as American affirmative action programs insofar as it relates to employment. That is, it is designed to improve the employment prospects of groups that have traditionally not enjoyed equal success in the Canadian labour market. Pay equity, meanwhile, is the policy of equalizing wage rates as between mainly male and mainly female job classifications requiring similar levels of skill. This can include retroactive compensation for past imbalances. Employment Equity Employment equity legislation mandates affirmative action in employment practices with respect to certain designated groups, including women, aboriginal peoples, persons with disabilities and persons who are, because of their race or colour, in a “visible minority” in Canada. Such affirmative action measures typically involve a workforce survey and analysis, a review of employment systems, the development and implementation of an employment equity plan and reporting and monitoring of the plan. E4 STIKEMAN ELLIOTT LLP EMPLOYMENT LAW Federally regulated employers with 100 or more employees are subject to federal employment equity legislation. In addition, employers with 100 or more employees and bidding on federal government goods or services contracts worth $200,000 or more are required to comply with the federal government’s Federal Contractors Program, the requirements of which are similar to those under the federal Employment Equity Act. At the provincial level, all jurisdictions except Alberta, Ontario and Newfoundland have employment equity policies. These apply within the public sector only, although Quebec has instituted a similar program that applies to public or designated employers with more than 100 employees. Pay Equity Pay equity legislation exists at the federal level (with respect to federally regulated industries), as well as in Manitoba, New Brunswick, Nova Scotia, Ontario, Prince Edward Island, Quebec and the Yukon. With the exceptions of Ontario and Quebec, the legislation generally only applies to public sector employers. British Columbia and Newfoundland have introduced administrative pay equity program for their public sector employees. Pay equity legislation creates obligations to address gender discrimination with respect to the payment of female employees. The principle underlying pay equity is that men and women should receive equal pay for performing the same or substantially the same work. The measures aimed at achieving this goal are detailed, technical and vary between jurisdictions. Typical pay equity measures involve the development of a pay equity plan and adjustment of compensation as required, with retroactive application. WORKERS’ COMPENSATION The workers’ compensation system is designed to replace the right of an employee to sue an employer for losses arising out of an accident in the workplace by providing the employee with the right to claim compensation from a statutorily established accident fund. Workers’ compensation legislation establishes entitlement to compensation with respect to injuries occurring in the workplace as a matter of right, no matter who, if anyone, was at fault. Thus the workers’ compensation system replaces the tort system in the context of injuries suffered in employment. An injured worker has no other legal recourse against his or her employer, co-workers or any other person to whom the workers’ compensation legislation applies. Most employers are required to contribute to a government fund, and the contributions are based on the employer’s payroll, the type and nature of business carried on, and the employer’s “experience rating” based on the employer’s particular accident record. Certain types of business are excluded from mandated workers’ compensation coverage. These exclusions vary from province to province and are generally limited in nature. Where an employer falls within such an STIKEMAN ELLIOTT LLP E5 EMPLOYMENT LAW exclusion, provincial workers’ compensation boards are typically empowered to extend coverage to the particular employer, usually at the employer’s request. Compensation and medical expenses for injured workers are based on an injured worker’s lost earnings, awarded by an administrative tribunal and paid out of the fund. No contribution to the fund by employees, either directly or indirectly, is permitted. In Ontario, the Workplace Safety and Insurance Act provides, in certain circumstances, for the mandatory reinstatement of injured workers and penalties if an employer terminates an employee as a result of the injury. OCCUPATIONAL HEALTH AND SAFETY Occupational health and safety laws exist federally and in every province. The legislation – which is generally similar in each jurisdiction – combines an “external” system of legislated minimum standards and duties, enforced by inspections and penalties, with an “internal” system whereby employer and employees co-operate in assuming certain responsibilities for safety in the workplace. Under the external system, an employer’s duties include the duty to make every employee aware of every known or foreseeable safety or health hazard in the work area and to comply with warning and labelling rules for hazardous materials. For their part, employees are required to take all reasonable and necessary precautions to ensure the health of their co-workers. Under the internal system, health and safety legislation requires employers (in companies surpassing a designated minimum size) to establish “joint workplace safety committees” made up of workers and managers. These committees resolve complaints, keep records, and oversee workplace safety programs. Central to the occupational health and safety system is an employee’s right to refuse work that he or she reasonably believes to be unsafe. Occupational health and safety statutes in most jurisdictions prohibit an employer from dismissing or disciplining an employee for exercising this right. Failure to comply with occupational health and safety legislation can result in significant fines against the employer if an employee is injured as a result of such a violation (in fact, in recent years, most provinces have considerably increased the fines). Under the regimes in Ontario and other provinces, health and safety inspectors can ticket employees, supervisors and workers for certain violations of the regulations associated with the legislation. In 2004, the Criminal Code was amended to impose criminal liability for unsafe workplaces. This liability extends to all organizations, including corporations, public bodies, firms, partnerships, trade unions, municipalities and other forms of associations. The amendments created a legal duty for all persons directing work to take reasonable steps to ensure the safety of workers and the public and set out rules attributing criminal liability to organizations for the acts of their representatives. In addition to the penalties that are already in place under health and safety legislation, the amendments imposed significant penalties, providing for a fine ranging between $25,000 and $100,000 in the case of a summary conviction E6 STIKEMAN ELLIOTT LLP Employers should also be aware of the recent enactment in June 2010 of the Occupational Health and Safety Amendment Act (Violence and Harassment in the Workplace), 2009 (Ontario), which imposes significant new obligations on employers in Ontario with respect to violence and harassment in the workplace. The principle of “workplace harassment” extends beyond the prohibited grounds under human rights legislation and, accordingly, includes actions such as bullying in the workplace. Among other things, the Act requires employers to prepare and regularly review policies with respect to workplace violence and harassment. In addition, employers are required to develop and maintain programs to implement these policies in accordance with the requirements of their workplace (for example, employers are required to devise procedures for reporting and investigating incidents of workplace violence and harassment). EMPLOYMENT LAW offence. There is no limit, however, on the fine that can be imposed on more serious, indictable offences. EMPLOYMENT INSURANCE, PENSION AND BENEFITS PLANS, AND EMPLOYER HEALTH TAX Both employers and employees are required to make contributions pursuant to the federal Employment Insurance Act (EIA) and the legislation establishing the Canada Pension Plan (CPP) (or in Quebec, the Quebec Pension Plan). Such contributions may be deducted by the employer for tax purposes. Several jurisdictions in Canada, including Ontario and Quebec, have also established an employer health tax whereby employers who have a permanent establishment in the province generally are required to pay an annual tax at a graduated rate depending on the total annual remuneration paid to employees. Employment Insurance The EIA requires all employers and employees to make contributions to an Employment Insurance Fund administered by the federal government. In 2010, the premium payable by employees was 1.73% of insurable earnings up to $42,300 (resulting in a maximum premium of $747.36). The employer contributes at a rate 1.4 times the employee’s premium and remits the total to the Canada Revenue Agency (CRA) (or in Quebec, Revenue Quebec), Canada’s (or Quebec’s) equivalent of the IRS or HM Revenue & Customs in the U.K. An employer’s contributions to the Employment Insurance Fund are deductible for Canadian income tax purposes as a business expense. In order for employees to be eligible for employment insurance benefits, an employee must be employed for a specified number of weeks in the preceding 52-week period, such number varying between regions. Employees are entitled to insurance benefits in the event of loss of employment due to termination without cause, layoff, maternity, or illness, provided that they meet a number of eligibility criteria. STIKEMAN ELLIOTT LLP E7 EMPLOYMENT LAW Canada Pension Plan The Canada Pension Plan (CPP) is operated by the federal government in the common law provinces. Quebec has a separate, independently operated plan, the Quebec Pension Plain (QPP). The CPP/QPP provide for retirement pensions for contributors, survivor benefits for widows and dependent children of contributors, and certain disability benefits. With a few exceptions, all employers, employees and self-employed individuals are required to contribute. The CPP/QPP require that equal contribution of premiums be made by both the employer and the employee. Under the CPP, an employer is required to withhold an employee’s premiums from wages and remit them, together with the employer’s premium, to the CRA. The employer is required to deduct 4.95% of the employee’s earnings up to the maximum pensionable earning amount of $47,200 for 2010. The maximum annual contribution payable by each of the employee and employer for 2010 is $2,163.15. The employer’s contribution under the CPP is deductible for Canadian income tax purposes as a business expense. Employer Sponsored Pension and Retirement Plans Employers may choose to provide employees with pension or other retirement savings benefits. Plans that provide for pensions for employees must be registered under and administered in accordance with the federal Income Tax Act and Pension Benefits Standards Act, 1985 (PBSA) or a similar provincial statute such as Ontario’s Pension Benefits Act. The legislation provides for certain minimum standards for membership, benefits and funding. The PBSA applies to pension plans for employees employed in a federal undertaking and provincial legislation applies to pension plans for all other employees. Benefits under a registered pension plan cannot exceed certain maximums imposed under the Income Tax Act. Pension benefits in excess of those maximums may be provided under a supplemental plan. Nonpension retirement savings arrangements can be provided through a Registered Retirement Savings Plan (similar to a 401(k) plan in the U.S.) or deferred profit sharing plan. Employer Sponsored Health Benefits Health and welfare benefits vary among employers and no legislation mandates the provision of such benefits. In Ontario, the public health insurance plan (OHIP) is partly funded by an employer health tax which is payable by employers who have a permanent establishment in Ontario and whose Ontario payroll exceeds $400,000. A similar employer health tax is levied in Quebec and certain other provinces including Newfoundland and Manitoba. EMPLOYEE PRIVACY Although privacy legislation is not entirely new, the increased use in our daily lives of email, social networking and the internet generally has created more complex workplace privacy issues. Employers should be aware of the Personal Information Protection and Electronic Documents Act (PIPEDA), which is intended to address E8 STIKEMAN ELLIOTT LLP EMPLOYMENT LAW concerns about the collection of personal information. PIPEDA applies to all information collected in the course of commercial activities, regardless of whether the undertaking is federally regulated. However, PIPEDA does not apply to employee information of a provincially regulated employer. Privacy legislation has been introduced in Alberta and British Columbia and applies to the collection, use and disclosure of personal information (including employee information) for provincially governed employers operating in those provinces. In Quebec, the Civil Code specifically provides for the respect of the right to privacy. Employers wishing to monitor employee e-mail and internet use must bear in mind the existence in some Canadian provinces of a statutory tort of invasion of privacy. In other common law provinces, the possibility remains that a suitably disposed court might be able to fashion a common law remedy for an employee whose privacy had been interfered with, even though there is no common law tort of privacy in Canada. Whatever the formal legal basis of such an action might be, the case would probably turn, at least in part, on whether the employee’s expectation of privacy had been reasonable. Therefore, it is advisable for an employer operating in Canada to adopt and publicize a policy on this issue. TERMINATION OF EMPLOYMENT There is no concept of “at will” employment in Canada, and accordingly, in terminating the employment of an employee without cause, an employer must provide notice of termination or pay in lieu of notice to the employee in accordance with applicable provincial employment standards legislation and in the case of nonunionized employees, at common law. Notice Provincial statutes (for example, in Ontario the Employment Standards Act, 2000) set out minimum standards of employment applicable to all employees (union and nonunion) and, in particular, the length of notice and severance pay required upon termination of employment. It should also be noted that each province has legislation dealing with mass terminations (which require certain governmental filings). Individual notice requirements range from one to eight weeks depending upon the length of service of individual employees, whereas the mass notice requirements range from eight to sixteen weeks. If notice is not provided in accordance with the relevant provincial minimum standards legislation, an employer must make a payment to the employee in lieu of notice of termination and must continue benefits for the relevant notice period. To be effective, the notice must be in writing. Ontario and federal legislation also provide for mandated statutory severance pay. Written employment contracts may provide for notice or pay in lieu of notice so long as the notice is not less than that which is required by minimum standards legislation. Absent a written contract, the common law courts have consistently determined reasonable notice to be within a range from the minimum standards set STIKEMAN ELLIOTT LLP E9 EMPLOYMENT LAW out under the relevant employment standards legislation to a “rough upper limit” of 24 months. The reasonableness of the notice is generally determined based on the individual’s age, length of service, position, compensation and availability of similar employment at the date of termination. The employee is to be made “whole” during the notice period and accordingly, all elements of compensation, including bonuses and stock options must be considered. In Quebec, Nova Scotia, and pursuant to the federal Canada Labour Code, there is a special remedy of possible reinstatement for employees who are dismissed without cause. WHISTLEBLOWER PROTECTION It is a criminal offence for an employer (and certain of their employees) to threaten or retaliate against an employee who blows the whistle on the conduct of an employer that the employee believes is in breach of a provincial or federal law. Some provincial legislation (for example, environmental legislation) also provides for whistleblower protection. EMPLOYMENT LITIGATION Most employment-related litigation in Canada is focused on the entitlements of an employee on termination. These cases are effectively known as wrongful dismissal claims. In addition, claims for breach of human rights legislation are common. Jury trials are rare and as a result of court decisions rendered in the last few years, it is becoming more difficult for employees to succeed in claiming aggravated or punitive damages resulting from termination. Finally, the last few years have seen an increase in class action claims in the employment litigation sphere, particularly relating to claims for overtime pay. E10 STIKEMAN ELLIOTT LLP 1. The U.S. concept of “employment at will” does not apply in Canada where a contractual employer/employee relationship is implied by law, whether or not a formal written agreement has been entered into. EMPLOYMENT LAW Key Differences Between Canadian and U.S. Employment Law 2. Legislative jurisdiction over labour and employment in Canada is shared by the provincial and federal governments. Employers either fall under federal or provincial legislation, but not both. 3. Canadian law requires that minimum notice periods prescribed by statute be observed when terminating an employee. If a notice period has not been provided for in the employment contract, Canadian common law requires an employer to give “reasonable” notice of termination. 4. Canadian courts tend to be cautious about enforcing postemployment non-competition and non-solicitation agreements, and will only uphold them in certain circumstances. In particular, such post-employment covenants must be reasonable in duration and scope, and must not be broader than is necessary to protect the employer’s legitimate business interests. Canadian courts do not recognize the concept of inevitable disclosure. 5. Employees are not classified as exempt or non-exempt for overtime purposes and there are fewer overtime exemptions for employees. STIKEMAN ELLIOTT LLP E11 DOING BUSINESS IN CANADA F Environmental Law Jurisdiction .......................................................................................................................... 2 Environmental Laws ............................................................................................................ 2 Health Issues ...................................................................................................................... 3 Personal Liability ................................................................................................................. 3 © STIKEMAN ELLIOTT LLP JANUARY 2014 ENVIRONMENTAL LAW Environmental Law JURISDICTION Environmental law is another area that falls partly under federal and partly under provincial jurisdiction in Canada. The federal government’s regulatory regime comprises environmental assessment and review procedures, prohibitions on releases into the environment, licence and permit requirements, spill reporting and clean-up requirements, environmental emergency preparedness, ministerial powers to issue orders, and statutory offences. The principal federal environmental statutes are the Canadian Environmental Protection Act, 1999, which regulates, among other things, the manufacture, import, export, use, handling, release and disposal of toxic substances, the Fisheries Act, which regulates discharges into waters under federal jurisdiction, and the Canadian Environmental Assessment Act. The provinces have a somewhat greater share of the authority in this area in virtue of their general right to legislate over real property matters and other matters that lack interprovincial or national significance. Provincial environmental legislation, which includes environmental assessment and environmental protection legislation, is therefore highly important. ENVIRONMENTAL LAWS Canadian environmental protection legislation generally includes the regulation of air, soil and water pollution, transportation and storage of dangerous goods and hazardous wastes, underground storage tanks, pesticides, migration of contaminants, and radioactive substances. The statutes dealing with such matters are generally enforced by any or all of the following: criminal sanctions, abatement, remediation and restraining orders. Environmental protection legislation also provides courts with the power to strip profits, order licence suspensions and issue fines. Environmental assessment legislation, depending on the nature of the project proposed, can require the proponent to produce an environmental impact statement describing the project and why it is needed, analyzing the project’s likely effects on the environment, suggesting mitigating measures where mitigation is possible and describing residual adverse effects where it is not. Small projects that are unlikely to have significant effects on the environment are exempted from the assessment process. Projects that could have significant adverse environmental impacts are usually submitted to an administrative agency for a structured review that may lead to the issuance of guidelines or general or specific directions. Major projects are also generally subject to public review by an independent board or panel, which may produce recommendations or a final decision. F2 STIKEMAN ELLIOTT LLP Health issues are also addressed through occupational health and safety legislation including asbestos control or removal requirements, in addition to the more familiar workplace safety matters. PERSONAL LIABILITY There are also significant considerations with respect to the potential liability of directors, officers and lenders for environmental problems. Directors and officers may be held personally liable for the environmental consequences of a corporation’s activities, particularly where the director is an inside director (that is, an officer or employee of the corporation or a major shareholder). Secured lenders who take no action to control or realize on security are not personally liable. ENVIRONMENTAL LAW HEALTH ISSUES Potential risks of personal liability for receivers, trustees and monitors have been addressed in the federal Bankruptcy and Insolvency Act, Companies’ Creditors Arrangement Act and in a variety of provincial legislation. STIKEMAN ELLIOTT LLP F3 DOING BUSINESS IN CANADA G Consumer Protection Law The federal and provincial governments have enacted a wide variety of legislation designed to protect consumers. Canadian consumers are protected from negligent or erroneous credit reporting and from liability for unsolicited credit cards and goods. Direct sales and misleading advertising are also closely regulated. Further, the cost of credit in consumer transactions must be fully disclosed. 1 Provincial consumer protection legislation, which varies from province to province, covers matters such as the conditions of sale and guarantees. It also requires the licensing of certain kinds of business, including inter alia collection agencies, real estate agents, motor vehicle dealers, and mortgage brokers. All provinces except Quebec have specific Sale of Goods legislation which defines the terms of contractual relations where there is a sale of personal property – in a consumer transaction or otherwise – where the agreement between the parties is silent. Quebec does, however, have its own codified rules covering sale of goods together with a Consumer Protection Act. 1 The Canadian provinces have agreed to enact uniform cost of credit disclosure legislation in the future. Some provinces have passed legislation containing provisions relating to the cost of credit disclosure. © STIKEMAN ELLIOTT LLP JANUARY 2008 DOING BUSINESS IN CANADA H Canada’s Languages General................................................................................................................................ 2 Packaging ........................................................................................................................... 2 Quebec’s Charter of the French Language ........................................................................ 2 General .......................................................................................................................... 2 Packaging ...................................................................................................................... 3 Business Names ............................................................................................................ 3 Language of the Workplace ........................................................................................... 4 Language of Contracts................................................................................................... 4 Language of Software and Certain Other Products ....................................................... 4 Application of the Quebec Charter to Non-Quebec Corporations ................................. 4 © STIKEMAN ELLIOTT LLP AUGUST 2013 CANADA’S LANGUAGES Canada’s Languages GENERAL Canada’s official languages are English and French. The Governments of Canada and New Brunswick are constitutionally bilingual with respect to nearly all of their operations, while the Governments of Quebec, Manitoba and Ontario also provide many of their services in both languages. Approximately 20% of Canadians speak French as a first language, including about 80% of the population of Quebec and nearly 35% of the population of New Brunswick. Anyone doing business in Canada must take into account federal laws aimed at promoting bilingualism and, if doing business that relates to Quebec, must also be aware of Quebec laws that are generally more specifically designed to protect and promote that province’s mainly francophone character. PACKAGING Regulations under the federal Consumer Packaging and Labelling Act require, as a general rule, that product identity and the net quantity identification be in both French and English. The dealer identification declaration may be in either English or French but – again as a general rule – if the product is being sold in Quebec, both languages must appear (subject to limited exceptions). It is, therefore, usually easier to provide all of this information in both languages. Under federal law, optional information, such as a trademark of the product, is not required information and, therefore, does not have to be marked in French (subject, however, to Quebec legislation for products sold in Quebec). The federal requirements apply to all consumer products marketed and sold in Canada, whether locally manufactured or imported, with very limited exceptions (e.g. products that are both manufactured and sold in a limited area). Goods marketed or sold in contravention of such requirements are subject to seizure and potentially to destruction by federal authorities. QUEBEC’S CHARTER OF THE FRENCH LANGUAGE General When doing business in Quebec, it is necessary to consider the requirements of Quebec’s Charter of the French Language (the “Quebec Charter”), which is designed to make French the everyday language of work, instruction, communication, commerce and business in Quebec. The Quebec Charter generally requires that all public signs, posters and commercial advertising in Quebec be in French, although another language is permitted subject to certain requirements respecting the prominence of the French. There are a number of exceptions to this requirement in the regulations, as set out below. The website of a firm that has an address or establishment in Quebec and is offering its goods and/or services to Quebec residents is considered to be commercial advertising subject to the Quebec Charter. Therefore, everything on the website (subject to limited exceptions such as H2 STIKEMAN ELLIOTT LLP Packaging The Quebec Charter also requires that every inscription on a product, container, wrapping and documents or objects supplied with the product, such as a warranty or directions for use, be in French. These may be accompanied by a translation as long as the French version is equally prominent. As a general rule, all catalogues, brochures and similar promotional materials distributed in Quebec must be in French, but may be distributed in English or in another language as long as a French version is equally available and of comparable quality. There are various exceptions to the French labelling, inscription and signage requirements, including: (i) products intended for use exclusively for a market outside Quebec; (ii) recognized Englishonly trademarks; (iii) educational and cultural materials; and (iv) greeting cards, calendars and agenda, if not used for the purposes of advertising. CANADA’S LANGUAGES recognized trademarks) must be presented in French or in French and another language or languages, and the other languages must not be more prominent than the French text. Rather than having a bilingual or trilingual website, a business may also satisfy Quebec language requirements by having a French version of its website and a version or versions in other languages and allowing users to choose their preferred language. The French version, however, must be equal in terms of content and prominence to any version in another language. Business Names When an enterprise registers to do business in Quebec, the Quebec Charter requires that it register a French version of its name for use in Quebec, unless the statute under which it is incorporated does not permit such registration. The requirement may also be met by having a French business name. The general rule is that the French version of the firm name is to be used in Quebec. The French version of the firm name may include certain listed non-French elements and, therefore, it is common to register a business name consisting of an English-only trademark together with a generic French word indicating the type of business. A version of the firm name in another language may also be used following the general rules for advertising and thus, the English version of the name can be used in documents permitted to be in English-only. Federally incorporated companies are likely permitted, as of right, to use the English version of their names anywhere in Canada, including Quebec, although they generally do register a French business name for use in Quebec. Many firms have English business names that are recognized trademarks. Firms typically use these solely English trademarks on signs and in advertising on the basis that trademarks enjoy an exemption from the French requirements under the Quebec Charter. However, there is currently some controversy as to whether a trademark on store signage qualifies as a trademark use, or is simply a trade name use (requiring that a generic French word appear alongside the English name). STIKEMAN ELLIOTT LLP H3 CANADA’S LANGUAGES Language of the Workplace Under the Quebec Charter, it is mandatory for business firms with 50 or more employees in Quebec to obtain a francization certificate in respect of their Quebec operations attesting to the fact that the firm has properly implemented a francization program at each level of the organization (“francization” refers to the process of enhancing the status of French as the everyday language of one’s workplace). In addition, the Quebec Charter provides that, as a general principle, businesses operating in Quebec should communicate with Quebec customers in French unless a customer requests otherwise. Language of Contracts Under the Quebec Charter, Quebec contracts containing printed standard clauses or that are predetermined by one party must be in French unless the parties expressly request that they be in another language. Quebec consumer protection legislation similarly requires that consumer contracts be drawn up in French unless the parties agree to use another language. Parties wishing to contract in English may do so by including a clause expressly stating their consent to do so. Contracts with the Government of Quebec or its agencies must be in French if the contract is concluded in Quebec. Language of Software and Certain Other Products There are special rules in Quebec respecting the sale of certain products such as games, toys and software. In particular, if a French version of a software product exists, the English (or other non-French) version can only be sold in Quebec if the French version is equally available in the Quebec market. Games and toys (other than game software) requiring the use of a non-French vocabulary cannot be sold in Quebec unless a French version of the toy or game is available on the Quebec market on comparable terms as the English version. Application of the Quebec Charter to Non-Quebec Corporations Absent a relevant exemption, all corporations, including non-Quebec corporations that do business in Quebec and offer their products and/or services to Quebec residents must comply with the provisions of the Quebec Charter as set out above. H4 STIKEMAN ELLIOTT LLP DOING BUSINESS IN CANADA I Conflict of Laws General ............................................................................................................................... 2 When the Law of the Forum Applies ................................................................................... 2 “Choice of Law” in Contracts ............................................................................................... 2 Torts and Civil Liability ........................................................................................................ 3 Security Interests in Personal Property............................................................................... 3 Enforcement of Foreign Judgments .................................................................................... 3 © STIKEMAN ELLIOTT LLP JANUARY 2008 CONFLICT OF LAWS Conflict of Laws GENERAL Each province and territory in Canada has its own set of rules for determining when it will apply the laws of another jurisdiction or hear disputes connected with another jurisdiction. The rules are found partly in statutes (or, in Quebec, the Civil Code) and partly in case law. The rules of the common law provinces are similar but not identical. Quebec’s rules differ from those in the common law provinces in some significant respects. WHEN THE LAW OF THE FORUM APPLIES A Canadian court will always apply the laws of its own jurisdiction – the law of the forum – to matters that are procedural in nature. This includes principles of evidence, the rules governing court proceedings (e.g. the proper parties) and principles for the measurement of damages (although not whether any particular type of damage is recoverable). The law of the forum may apply to matters that are not procedural where the parties do not sufficiently plead and prove the relevant foreign law. Foreign law is generally proved through the testimony of a legal expert from the foreign jurisdiction. There are also certain types of foreign laws that a Canadian court will not apply. These include laws that offend the Canadian jurisdiction’s concept of public policy (“public order” in Quebec), that would have anti-competitive effects in Canada or that would involve the direct or indirect enforcement of a foreign tax or criminal law. With respect to the foreign tax law restriction, there is some issue as to whether a tax indemnity agreement that covers foreign taxes would be enforceable. “CHOICE OF LAW” IN CONTRACTS The rule with respect to contracts is that a Canadian court will apply the proper law of the contract. The proper law is the law with which the contract has the most significant connection and in this regard the court will consider all relevant connecting factors. However, if the parties select a law in the contract to govern their relationship, then the court will respect that choice as long as it was made in good faith, in the sense that it was not chosen deliberately to avoid the laws of a more appropriate jurisdiction. If the choice is made in good faith, then the court will determine whether there is an enforceable contract and how it is to be interpreted by applying the chosen foreign laws, even if they have no particular connection with the contractual relationship. In addition, there may be laws in the place where the contract is to be performed that affect enforceability and which the court will apply. For example, if the contract is for the purchase and sale of shares in a province, compliance with the provincial Securities Act may be required and non-compliance might affect enforceability even though the parties have not chosen that province’s laws to govern their contract. I2 STIKEMAN ELLIOTT LLP In cases involving non-contractual obligations (known in the common law as torts and in the civil law as extra-contractual liability), Canadian courts apply the law of the place where the tort was committed. For example, if a person is alleged to have provided negligent advice, the court will look to the place where the negligent advice was received and relied upon. CONFLICT OF LAWS TORTS AND CIVIL LIABILITY SECURITY INTERESTS IN PERSONAL PROPERTY There is a set of rather complex rules in each jurisdiction to cover the means of perfecting security interests in personal property. The governing law of the security agreement will not apply to validity and perfection of security interests. These issues will generally be governed either by the place where the debtor is located or by the place where the collateral is located. ENFORCEMENT OF FOREIGN JUDGMENTS Under certain conditions, a Canadian court will enforce a foreign judgment without re-opening the case on the merits. A key condition is that the foreign court must have had jurisdiction over the defendant. Canadian courts will be satisfied on this point if the defendant appeared and defended on the merits, resided in the foreign jurisdiction, had previously agreed to submit to the jurisdiction (e.g. pursuant to either an exclusive or non-exclusive jurisdiction clause) or if there was a real and substantial connection between the defendant and the foreign jurisdiction in relation to the matter which is the subject of the litigation. It is no longer strictly the case, as it long was under the common law, that the judgment must have been for a “sum certain” of money – where enforcement of another type of order would not overtax the resources of the Canadian court, it may now also be recognized. However, a judgment will not be enforced if the defendant establishes that the foreign court proceedings were not conducted fairly (i.e. in accordance with principles of natural justice), that enforcement is against public policy or public order, or that the judgment is a foreign tax or penal judgment. Another possible defence is fraud. In a recent case that confirmed there are limited grounds to challenge the enforceability of a foreign judgment, the Supreme Court of Canada held that where a judgment is obtained by fraud that was undetectable by the foreign court, it will not be enforced in Canada. There are similar rules for the enforcement of foreign arbitration awards. STIKEMAN ELLIOTT LLP I3 DOING BUSINESS IN CANADA J Competition / Antitrust Background ......................................................................................................................... 2 Enforcement Procedures .................................................................................................... 2 Mergers ............................................................................................................................... 3 Definition ........................................................................................................................ 3 The Principal Substantive Test ...................................................................................... 3 Merger Enforcement Guidelines .................................................................................... 4 Advance Notification of Large Transactions ....................................................................... 4 General .......................................................................................................................... 4 What Counts as a “Large Transaction”? ........................................................................ 4 Filing Obligations and Waiting Periods .......................................................................... 5 Dual Filing for Transportation Undertakings .................................................................. 7 Advance Ruling Certificates (ARC) and “No-Action” Letters ......................................... 6 Other Powers of the Commissioner .................................................................................... 7 © STIKEMAN ELLIOTT LLP JUNE 2013 COMPETITION / ANTITRUST Competition / Antitrust BACKGROUND Competition law is governed by the federal Competition Act which, when it was enacted in 1986, transferred most elements of the regulation of mergers and monopolies to a civil law regime from a cumbersome and ineffective criminal law framework. The history of the Competition Act since its adoption shows an increasing sensitivity on the part of the Canadian government to the anticompetitive effects of mergers and other business practices. The Competition Act contains civil and criminal provisions, as well as provisions governing pre-merger notification. The civil provisions are subject to review by the Competition Bureau headed by the Commissioner of Competition (who oversees the administration of the Competition Act including the investigation of mergers and anti-competitive business practices), but may only be sanctioned by the Competition Tribunal, a quasi-judicial body. Matters such as merger review, anti-competitive behaviour by “dominant” firms, price maintenance, refusals to deal, exclusive dealing, tied selling and market restriction are investigated by the Bureau and may be challenged before the Tribunal on the application of the Commissioner, or private parties in certain circumstances. 1 The pre-notification regime requires notification to the Commissioner of transactions that exceed specified monetary and, where applicable, shareholding thresholds. The criminal provisions of the Competition Act address bid-rigging and cartels, certain forms of misleading advertising, deceptive telemarketing and pyramid schemes, among others. ENFORCEMENT PROCEDURES In Canada, there are four primary enforcement authorities: the Commissioner of Competition (the Commissioner), the Director of Public Prosecutions (DPP) (formerly, the Attorney General), the Competition Tribunal and the courts. The Minister of Industry, whose department is responsible for the Competition Act, has only a marginal role in the process. The criminal and civilly reviewable parts of the Competition Act each have their own enforcement structure, although there is substantial overlap between the two in terms of enforcement authorities. The primary enforcement authority is the Commissioner, who is authorized to investigate both criminal and civilly reviewable matters under the Competition Act. Typically, the investigative process begins with a preliminary examination of potentially unlawful conduct that has come to the Commissioner’s attention. If, after due inquiry, the Commissioner concludes that there are sufficient grounds to believe 1 Private parties are permitted to apply directly to the Competition Tribunal to address matters regarding refusal to deal, price maintenance, tied selling, exclusive dealing and market restrictions (Sections 75, 76 and 77 of the Competition Act). Private parties must, however, seek leave from the Competition Tribunal to make such applications. Conspiracy, bid-rigging and certain other offences continue to be dealt with as criminal matters. Private parties may sue in court for damages suffered as a result of alleged criminal violations of the Competition Act, but not behaviour falling under the civil provisions. The Competition Tribunal can issue civil monetary penalties (fines) in certain cases, but cannot award damages to private parties. J2 STIKEMAN ELLIOTT LLP Unlike for criminal matters, the Commissioner is authorized to prosecute civilly reviewable matters before the Competition Tribunal. The Competition Tribunal is an adjudicative body comprised of no more than six judicial members who are appointed from among the judges of the Federal Court of Canada, and no more than eight lay members. In general, each panel of the Competition Tribunal consists of three to five members of which at least one is a judicial member. Only judicial members may determine questions of law, and issues before the Competition Tribunal are determined according to the civil standard of proof (balance of probabilities). COMPETITION / ANTITRUST that a criminal offence has been committed, the Commissioner may recommend to the DPP that charges be laid. Responsibility for the prosecution of criminal offences lies solely with the DPP. MERGERS Definition The Competition Act defines a “merger” broadly, as the direct or indirect acquisition by one or more persons of control over or a significant interest in all or part of the business of a competitor, supplier, customer or other person. It makes no difference whether this happens by purchase or lease of shares or assets, by amalgamation or combination, or otherwise (e.g., by licence or contract). The Commissioner is entitled to bring an application challenging a merger before the Competition Tribunal at any time within one year of the completion of the merger. Where the Competition Tribunal determines that competition in a market will be prevented or lessened substantially as the result of a merger or proposed merger, it may exercise its broad discretionary authority to make a remedial order. Such an order can consist of the outright prohibition of a proposed merger or part of the proposed merger or, in the case of a completed merger, dissolution of the merger or partial or complete divestiture or, with the consent of the parties, other measures designed to alleviate the anti-competitive effect. Behavioural constraints are also sometimes imposed. The Principal Substantive Test For mergers, the principal substantive test under the Competition Act is whether an actual or proposed transaction “would or would be likely to prevent or lessen competition substantially” in a relevant market. This is the test that the Commissioner uses when deciding whether to initiate an application before the Competition Tribunal and it is also the test used by the Competition Tribunal in its adjudication of the application. In applying the test, the Commissioner and the Competition Tribunal will consider the extent and effectiveness of foreign competition, whether the business of a party to the merger has failed or is likely to fail, the extent and availability of acceptable substitutes for products supplied by the parties, current barriers to entry into the market, whether the transaction would result in the removal of a vigorous and effective competitor, the extent to which STIKEMAN ELLIOTT LLP J3 COMPETITION / ANTITRUST effective competition would remain following the transaction, the nature and extent of change and innovation in the relevant market, and any other relevant factor. An otherwise anti-competitive merger may be defended on the basis of efficiencies if such cost savings outweigh and offset any anticipated anti-competitive harm and if the savings will not likely be achieved if the remedy sought by the Commissioner is ordered. Merger Enforcement Guidelines The analytical framework that has been adopted employs legal and economic criteria similar to those found in American antitrust jurisprudence. The Commissioner has released Merger Enforcement Guidelines, modeled on similar guidelines adopted by the United States Department of Justice, setting out in general terms how the merger review provisions of the Competition Act are to be administered. ADVANCE NOTIFICATION OF LARGE TRANSACTIONS General Certain large transactions involving Canadian businesses trigger advance notice requirements under the Competition Act. Such transactions cannot then be completed until the end of the review period discussed below. Pre-merger notification filings are required in connection with a proposed acquisition of assets or shares or an amalgamation, the formation of a non-corporate business combination or the acquisition of an interest in such a combination where thresholds relating to the “size of the transaction,” the “size of the parties” and the “percent of equity” are exceeded. What Counts as a “Large Transaction”? If, and only if, the parties to a transaction, together with their respective affiliates, exceed $400 million in total assets in Canada or in total gross annual revenues from sales in, from or into Canada (the “size of the parties” threshold), the Commissioner must be notified of transactions that exceed the following “size of target” threshold (which may be indexed annually to GDP – the stated “size of target” threshold is applicable for 2013): ■ an acquisition of assets in Canada with a book value in excess of $80 million or that generate gross revenues from sales in or from Canada of more than $80 million; ■ an acquisition of voting shares of a corporation which, together with all other corporations controlled by it, has assets in Canada, or annual gross revenues from sales in or from Canada from those assets, in excess of $80 million; ■ a proposed corporate amalgamation where at least two of the amalgamating corporations (including their respective affiliates) have assets in Canada with a value exceeding $80 million or have gross annual revenues from sales in, from or into Canada in excess of $80 million and the value of the assets in Canada of J4 STIKEMAN ELLIOTT LLP ■ Notification of an acquisition of an interest in a combination or of voting shares of a corporation will be required only if, consequent to such an acquisition, certain “percent of equity” thresholds would be exceeded. These thresholds differ depending on whether the transaction is a combination or share acquisition. In the case of an interest in a combination, the thresholds are: ■ where as a result of the transaction, the person will have a right to receive more than 35% of the profits or more than 35% of the assets on dissolution; or ■ where this threshold has already been exceeded, the right to receive more than 50% of the profits or assets. COMPETITION / ANTITRUST ■ the continuing corporation or the gross revenues from sales in or from Canada generated from those assets exceeds $80 million; 2 the formation of an unincorporated business combination (such as a partnership or trust) where the value of the assets in Canada contributed, or the gross revenue from sales in or from Canada from those assets, exceeds $80 million (please note: a potential “joint venture” exemption may apply); or an acquisition of an interest in an unincorporated business combination (such as a partnership or trust) that carries on an operating business with assets in Canada, or gross revenues from sales in or from Canada generated from those assets, in excess of $80 million. In the case of the acquisition of the voting shares of a corporation, the thresholds are: ■ 20%, in the case of an acquisition of a company’s voting shares any of which are publicly traded; ■ 35%, in the case of an acquisition of voting shares of a private company; or ■ 50%, in the case of a subsequent acquisition of voting shares of either kind of company by a person that has previously surpassed the thresholds set out above with respect to that company. It is possible for the target entity to exceed both the size of the parties and the size of target thresholds on its own. Filing Obligations and Waiting Periods Where a transaction is notifiable, the parties must file a pre-merger notification pursuant to the Competition Act and the Notifiable Transactions Regulations (unless such a requirement has been waived by the Bureau or the transaction exempted by the issuance of an advance ruling certificate (ARC – see below). Generally, a notification would require: (i) information such as a description of the proposed transaction and business objectives intended to be achieved by it; (ii) a list of foreign authorities that have been notified of the proposed transaction and the dates While the Competition Act does not provide a definition of amalgamation, the Competition Bureau has stated that the union of two or more corporations, whereby they become one corporation, pursuant to valid legislation is considered an amalgamation for purposes of the Competition Act, whether the amalgamation occurs under federal or provincial legislation or under the laws of a foreign jurisdiction. A so-called “Delaware merger”, for example, is treated as an amalgamation. 2 STIKEMAN ELLIOTT LLP J5 COMPETITION / ANTITRUST on which they were notified; and (iii) information in respect of each party and its affiliates, including a description of its principal business and principal categories of products, and detailed customer and supplier information. Pre-merger notification filings are subject to a filing fee of C$50,000. An initial 30-day waiting period will apply following the submission of a pre-merger notification filing, during which time the proposed transaction cannot be completed (unless earlier termination has been granted by issuance of an ARC or a “no-action” letter – see below). If, during this 30-day period, the Commissioner issues a formal request for additional information (referred to as a “supplementary information request” or “SIR”), it will effectively reset the clock and a new 30-day waiting period will commence following compliance with the request (which can take several weeks or months). Where a party has completed a proposed transaction before expiry of the waiting period, either a court or the Competition Tribunal, on application by the Commissioner, may impose a fine of up to $10,000 per day of non-compliance with the waiting period, among other things. Failure “without good and sufficient cause” to notify prior to closing is a criminal offence punishable by a fine up to a maximum of C$50,000. Advance Ruling Certificates (ARC) and “No-Action” Letters The Competition Act establishes an advance ruling process through which parties to a proposed merger transaction may seek an ARC from the Commissioner confirming that, on the basis of a review of the facts they have presented in their application, the Commissioner will not challenge the proposed merger. An ARC has two advantages. First, it exempts the parties from the statutory requirement to notify the transaction or, if notification materials have been filed, it terminates the statutory waiting period. Second, an ARC prevents the Commissioner from challenging the proposed transaction following its completion, unless material new information comes to light. All requests for an ARC are subject to a filing fee of $50,000. When both a premerger notification and an ARC request are filed for the same transaction, only one fee is payable. An ARC will be issued only in the clearest of circumstances where the Commissioner is of the view that a transaction will not or will not be likely to substantially lessen or prevent competition in any relevant market. However, if the request for an ARC is denied, the Commissioner may still issue a letter stating that he has no current intention to challenge the transaction (a so-called “no-action” letter). Parties will regularly close their transactions on the basis of a “no-action” letter. The principal distinction between the issuance of an ARC and a “no-action” letter is that in the case of a “no-action” letter, the Competition Bureau retains its right to challenge the transaction within one year of closing. Having said that, we are not aware of any instance where a post-closing merger challenge occurred following the issuance by J6 STIKEMAN ELLIOTT LLP Dual Filing for Transportation Undertakings Under the Canada Transportation Act, when a pre-merger notification is required to be filed under the Competition Act, parties to a proposed merger transaction involving a federal “transportation undertaking” must also give notice to the Minister of Transport, Infrastructure and Communities and, in the case of air transportation undertakings, to the Canadian Transportation Agency. 3 There is no filing fee in respect of a Canada Transportation Act notification. Failure to notify the Minister when required is a criminal offence punishable by fine up to a maximum of $50,000. COMPETITION / ANTITRUST the Competition Bureau of an unqualified “no-action” letter. The other notable distinction between an ARC and a “no-action” letter from a procedural perspective is that the issuance of a “no-action” letter does not automatically exempt parties from the pre-merger notification obligation. However, the Commissioner may (and routinely will) waive the obligation to notify a transaction pursuant to s. 113(c) of the Competition Act on the basis that substantially similar information as that required in a notification filing was provided in the ARC request. Where required, notice to the Minister is to contain the same information as that provided to the Commissioner under the Competition Act (i.e., the information prescribed under the Notifiable Transactions Regulations), as well as information on the public interest as it relates to national transportation, as required by nonstatutory guidelines to be issued by the Minister. 4 Once a filing has been made to the Minister, the Minister has 42 days to decide whether the proposed merger raises any public interest issues. If the Minister is of the opinion that public interest issues are raised, the parties will not be permitted to close the transaction without the approval of the Governor in Council (i.e., the federal Cabinet). The final decision will ultimately depend on the Minister’s recommendation and undertakings agreed to by the parties. If the parties implement a transaction without such approval, the Minister may apply to a superior court to make any appropriate remedial order, including a divestiture of assets. Note that the Minister of Transport Canada and the Canadian Transportation Agency are of the view that the issuance of an advance ruling certificate or s. 113(c) waiver (either of which exempts parties from the Competition Act notification obligation, as discussed above) does not exempt parties from the Canada Transportation Act notification obligation (this view has not been tested in court). Prior to amendments made in 2007, notice was limited to transactions involving air transportation undertakings. Foreign ownership restrictions applicable to the air transportation sector continue to apply, but they have not been extended to non-air transportation undertakings. On July 28, 2008, Transport Canada released draft Guidelines for Mergers and Acquisitions involving Transportation Undertakings. As of June 2013, final guidelines had yet to be published. 3 4 STIKEMAN ELLIOTT LLP J7 COMPETITION / ANTITRUST J8 OTHER POWERS OF THE COMMISSIONER In addition to the administration of the merger review process under the Competition Act, the Commissioner has the power to: ■ inquire into reviewable trade practices including refusal to deal, price maintenance, some forms of misleading advertising, exclusive dealing, tied selling, market restrictions and delivered pricing and initiate civil proceedings before the Competition Tribunal in relation thereto; and ■ investigate and then recommend that the DPP prosecute certain criminal offences including bid-rigging, conspiracy in restraint of trade (cartels), some forms of misleading advertising and telemarketing, pyramid schemes and some multi-level marketing plans. STIKEMAN ELLIOTT LLP DOING BUSINESS IN CANADA K Intellectual Property Patent Law .......................................................................................................................... 2 Compared to Other Countries ........................................................................................ 2 Term of Patent and Damages on Infringement ............................................................. 2 What Makes an Invention Patentable? .......................................................................... 2 Drug Patents .................................................................................................................. 3 Copyright ............................................................................................................................. 4 General .......................................................................................................................... 4 Requirements for Copyright Protection.......................................................................... 4 What is Not Protected by Copyright ............................................................................... 4 Duration of Copyright ..................................................................................................... 4 Registration of Copyright ............................................................................................... 5 What Kind of Activities Infringe Copyright?.................................................................... 5 What Constitutes a “Substantial” Portion of a Work for Infringement Purposes?.......... 5 Moral Rights ................................................................................................................... 6 Copyright in Works Created by Employees and Contractors ........................................ 6 Copyright Reform ........................................................................................................... 7 Trademarks ......................................................................................................................... 7 General .......................................................................................................................... 7 Requirements ................................................................................................................. 7 Registration and Invalidation ......................................................................................... 7 Infringement ................................................................................................................... 8 Industrial Designs ................................................................................................................ 8 General .......................................................................................................................... 8 Registration Requirements ............................................................................................ 8 Duration of Protection .................................................................................................... 8 Semiconductor Chips/ Integrated Circuit Topographies ..................................................... 9 © STIKEMAN ELLIOTT LLP AUGUST 2014 INTELLECTUAL PROPERTY Intellectual Property PATENT LAW Compared to Other Countries Patent law in Canada has been greatly influenced by the legal systems of Great Britain and the United States. A 1989 amendment brought the Patent Act into substantial conformity with the equivalent legislation of the other members of the Patent Co-operation Treaty of 1970. Under the Patent Act, an inventor is granted the exclusive right to make, construct, use and sell an invention, which is defined as “any new and useful art, process, machine, manufacture or composition of matter”, and any new and useful improvement thereof. The exclusive rights conferred under the Patent Act are limited to Canada. A person who makes and sells the invention exclusively outside of Canada does not infringe the Canadian patent. Term of Patent and Damages on Infringement Post October 1, 1989, an “invention”, as defined, may be patented by the inventor who is first to file an application under the Patent Act (not the first to invent). Once granted, the patent is valid for twenty years from the date of filing. For applications filed prior to October 1, 1989, the patent term is seventeen years from the date on which the patent was granted. Where a patent that was based on an application that was filed prior to October 1, 1989 was still in force on July 12, 2001, the patent term is seventeen years from the date on which the patent was granted or twenty years from the date of filing, whichever is longer. Damages or an accounting of profits and injunctive relief are available where a patent has been infringed. Infringement includes the unauthorized manufacture, use, sale, import or export of the patented invention. In addition, liability may arise for damages sustained after the application for the patent became open to public inspection and before the grant of the patent for any activity that would have constituted an infringement of the patent if the patent had been granted on the day the application became open to public inspection. Such liability is generally in the nature of a reasonable royalty. What Makes an Invention Patentable? The requirement of “novelty” must be met for a patent to be granted. Therefore, in certain circumstances, any invention that is disclosed or made available to the public anywhere in the world before a patent application is filed in Canada, or that is described in any patent application previously filed in Canada or elsewhere will not be patentable. If the invention is disclosed to the public by the applicant or a person who gained knowledge of the invention through the applicant, a patent may still be granted provided such disclosure occurs less than one year before the filing of the application. In addition to being novel, an invention must also be non-obvious. That is, the subject matter of the invention must not be obvious, as of the application’s claim date, to a person skilled in the art or science to which the invention pertains. Further, the invention must relate to patentable subject matter. Mere scientific K2 STIKEMAN ELLIOTT LLP Drug Patents The Patent Act Amendment Act came into force in 1993, effectively abolishing compulsory licensing of drugs, while at the same time the Patented Medicines (Notice of Compliance) Regulations (NOC Regulations) were implemented. The NOC Regulations allow an innovative drug company to submit a list of patents in respect of a drug to the Minister of Health to be listed on a register. If a generic drug company would like to manufacture a generic version of a drug prior to the expiry of the relevant patents of the innovative drug company, it must put the innovative drug company on notice of their application for regulatory approval by serving a notice of allegations (NOA). The NOA may allege that the innovative drug company’s patents on the register: (i) are invalid, (ii) were improperly included on the register, and/or (iii) would not be infringed by the proposed activities of the generic drug company The innovative drug company will then have 45 days to bring an application to the Federal Court for an order prohibiting the Minister of Health from issuing a NOC to the generic drug company until after the expiration of the patents on the register. It should be noted that even if the innovative drug company is not successful in obtaining a prohibition order, this does not preclude them from suing the generic drug company for patent infringement. INTELLECTUAL PROPERTY principles and abstract theorems, methods of medical treatment or surgery, higher life forms, forms of energy, features of solely intellectual or aesthetic significance, and schemes, plans, rules and mental processes are, in general, not patentable under Canadian law. Although the case law is currently in a state of flux in Canada, computer-implemented inventions are not excluded subject matter per se and may be patentable, so long as the invention is something with physical existence, or something that manifests a discernible effect or change. The Patent Act Amendment Act also modified the scheme for the pricing of patented inventions relating to medicine, which are defined as inventions intended or capable of being used for medicines, the delivery of medicine or for the preparation or production of medicine. Patentees of such inventions are required to disclose to the Patented Medicine Prices Review Board (PMPRB) prescribed information including the price at which the medicine is being or has been sold in Canada or elsewhere, and the costs of making and marketing the medicine as well as, where requested, information as to the prices at which medicines of the same class are being or have been sold in Canada or elsewhere. Where the PMPRB determines that prices are or have been excessive, it can order the reduction of the price of the medicine or of other medicines being sold by the patentee, or order payment to the Crown to offset the amount of the excess revenue derived from the sale of the medicine at an excessive price. Where the PMPRB finds that there was a policy of excessive pricing, it can order any of the foregoing remedies, to offset up to double the amount of the excess revenues. In determining whether a price is excessive, the PMPRB considers, among other things, the prices at which the medicine and similar medicines have sold in the relevant market and STIKEMAN ELLIOTT LLP K3 INTELLECTUAL PROPERTY abroad, the cost of making and marketing the medicine, the distribution of the medicine as a free good and the extent to which price increases might be attributable to inflation. COPYRIGHT General Copyright in Canada derives solely from the federal Copyright Act. There is no common law copyright in Canada. The federal Copyright Act grants the owner of copyright the right to prevent the copying or commercial exploitation of original literary, dramatic, musical and artistic works and performances. Amendments to the Act in 1988 provided explicit protection for computer programs and established a system for the determination and collection of cable retransmissions royalties. The Copyright Act also includes provisions designed primarily to protect performer’s rights (also known as neighbouring rights) and a scheme to levy blank audio recording media. Requirements for Copyright Protection Copyright subsists in every original literary, dramatic, musical and artistic work subject to citizenship or residency requirements. Broadly speaking, copyright may be claimed by an author who was, at the date of making of a work, (i) a Canadian citizen or a person ordinarily resident in Canada, (ii) a citizen of, or a person ordinarily resident in a “treaty country” (being a country that adheres to the Berne Convention, the Universal Copyright Convention, the Rome Convention or a member of the World Trade Organization), or (iii) a citizen, or a person ordinarily resident in a country to which the federal government has extended copyright protection having regard to reciprocity extended to citizens of Canada in that country. In some cases, copyright protection is also extended if the work was first published in a treaty country, even if the author is not a citizen or subject of Canada or a treaty country. What is Not Protected by Copyright Copyright does not protect ideas: it protects only the concrete form of expression of ideas (i.e. in the form of a “work”). Furthermore, works are only protected by copyright to the extent that they are original, which, in the context of copyright, means that the work was created by the author rather than imitated from another or taken from the public domain. Duration of Copyright Subject to exceptions set out in the Copyright Act, the term of protection of a copyrighted work is the life of the author plus an additional 50 years from the end of the calendar year of his or her death. In the case of jointly authored works, copyright subsists for the same period based on the life of the last surviving author. K4 STIKEMAN ELLIOTT LLP Registration of Copyright The Copyright Act allows for (but not does require) registration of the copyright in a work (or interests in such a copyright) with the Copyright Office for a nominal fee (currently $65, or $50 for on-line registrations). Registration is effected by completing and submitting a registration form and a certificate is usually issued within four weeks following receipt of an application by the Copyright Office. There is no requirement to file a copy of the claimed work with the application. INTELLECTUAL PROPERTY While this so-called “life plus fifty years” term applies to most copyrighted works in Canada, there are exceptions to this general rule, including unpublished works, posthumous works, some joint works and Crown works. While registration is optional (as copyright arises at the moment of creation alone), it does confer certain evidentiary benefits. Certain remedies provided for by the Copyright Act may only be available in the absence of registration if the author can prove actual knowledge of the existence of the copyright on the part of the infringing party. Actual knowledge is deemed to exist by statute if registration has been effected. What Kind of Activities Infringe Copyright? A copyright owner has the sole right to reproduce or publish a work or any substantial part of a work, or to authorize others to do so. In the case of reproduction, the form of reproduction varies according to the type of work in question and may include, by way of example, photocopying, translation, recording and public performance. A copyright owner also has the right to publish a work by making it available to the public by publication. Generally, once a copyright owner has made a work available to the public, the owner loses control over those physical published copies (e.g. the copyright owner cannot prevent a published copy from being written on, torn up or resold). It is an infringement of copyright for any person to do anything that is the sole right of the copyright owner without the owner’s consent. Infringement includes the production or reproduction of a copyrighted work or any substantial part thereof and the knowing distribution or offering of same to the public. Remedies for infringement are cumulative and include actual damages, statutory damages, an accounting of profits, delivery up of any infringing material and injunctive relief. Criminal sanctions are also available in limited circumstances. What Constitutes a “Substantial” Portion of a Work for Infringement Purposes? It is impossible to extract any simple rule or formula for determining whether a part of a work is “substantial” beyond the fact that it is the “quality” rather than the “quantity” of the appropriated material that is determinative. Thus, the unauthorized taking of a small portion of a work may constitute a substantial taking STIKEMAN ELLIOTT LLP K5 INTELLECTUAL PROPERTY of the work if, viewed qualitatively, what was taken amounted to a substantial taking of the author’s creative skill, time and talent. Moral Rights In addition to copyright rights, the Copyright Act grants the author of a copyrighted work rights of “integrity” and “paternity” in the work. An author’s right of integrity is infringed if the work is “distorted, mutilated or otherwise modified” to the “prejudice of the honour or reputation of the author”. In addition to physical distortion, mutilation or modification of a work, use of a work in association with a product, service or cause may be capable of infringing an author’s right of integrity. An author’s right of paternity is the right, “where reasonable in the circumstances”, to be associated with the work as its author, by name or pseudonym, or to be anonymous. There is little guidance respecting the scope of an author’s right of paternity beyond the language of the Copyright Act, which restricts the right to what is “reasonable in the circumstances”. Accordingly, the scope of an author’s right of paternity must be assessed on a case-by-case basis. Moral rights may not be assigned or licensed, but they may be expressly waived. This being the case, an assignee of copyright in a work should try to obtain a waiver of moral rights from the author if he or she wishes to have complete freedom with respect to the work. There is no requirement that such a waiver be in writing, but it is highly advisable. Copyright in Works Created by Employees and Contractors Under Canadian copyright law, if a person creates a work while in the employment of some other person “under a contract of service or apprenticeship”, and creates that work in the course of his/her employment by that person, the employer shall be the first owner of the copyright in that work. It is important to note, however, that the employer is not considered the author of the work. As the employee remains the author of the work, the employee arguably maintains his or her moral rights in the work. Furthermore, certain rights are reserved to the author in relation to articles or “other contributions to a newspaper, magazine or similar periodical.” An agreement between the employee and employer can vary these statutory defaults. It is often difficult to distinguish between a “contract of service”, which creates an employment relationship that would permit invocation of these provisions of the Copyright Act, and a “contract for service”, which does not. The Canadian Copyright Act does not contain any provision explicitly addressing works made by independent contractors (i.e. under a contract for service). Thus, in the absence of a written assignment of copyright, the independent contractor will own copyright in the work. K6 STIKEMAN ELLIOTT LLP TRADEMARKS INTELLECTUAL PROPERTY Copyright Reform On November 7, 2012, most of the provisions of the Copyright Modernization Act came into force. As its name implied, this act made number of changes to the Copyright Act, including the addition of provisions addressing certain indirect infringement through internet services; prohibitions on the circumvention of digital locks; extension of the fair dealing exception to infringement; and the expansion of certain other user rights, particularly with regard to educational institutions. In addition, moral rights were extended to apply to a performer’s performance. General A trademark is a word, symbol or design, or a combination of these, used to distinguish the source of a particular product or service. While registration of a trademark under the federal Trade-marks Act is not mandatory, the extent of protection available to the owner of an unregistered trademark may be limited geographically to the area in which the trademark enjoys some reputation. In respect of a registered trademark, there is protection throughout Canada, regardless of where the trademark is actually used. In addition, broader remedies may be available where there has been an improper use of a registered trademark as opposed to an unregistered one. Requirements In order to be registrable, a trademark must be neither clearly descriptive nor deceptively misdescriptive of the character or quality of the goods or services, the persons employed in their production, or their place of origin. Furthermore, a trademark must not be simply the name of the ware or service in another language, primarily merely the name or surname of an individual who is living or who has died within the past 30 years, nor likely to cause confusion with a trademark previously used or put forward for registration by someone else. Registration and Invalidation Currently, a trademark registration lasts for fifteen years, and may be renewed for further fifteen-year periods upon payment of a fee. However, legislation has been passed (but is not yet in force) which would reduce both the initial term and any renewal terms to ten years. A trademark registration will be invalid if at the time proceedings questioning the validity of the trademark are commenced, the mark has lost its distinctiveness and therefore cannot be said to identify in the minds of the public the particular source of the goods or service. Formerly, the most common means of losing distinctiveness was the licensing of the trademark without registering such licence. However, the requirement for the registration of licensed users of marks has been abolished in Canada. Trademark licensing in Canada now requires the licensor/owner of the mark to maintain direct or indirect STIKEMAN ELLIOTT LLP K7 INTELLECTUAL PROPERTY control over the character or quality of the wares or services in respect of which the mark is licensed. Infringement Infringement of a trademark, which may lead to both civil and criminal liability, occurs when there is a sale, offering for sale, distribution or advertisement of wares or services in association with a confusing trademark or trade name. Infringement also occurs where a person uses a registered mark in a manner likely to have the effect of depreciating the goodwill attached to it. Use of a trademark in a competing business may also give rise to an action either at common law or pursuant to statute for passing off or unfair competition. Criminal sanctions are available, but rarely used. However, legislation is currently pending that would add new criminal law and civil law remedies to fight commercial counterfeiting and piracy activities. INDUSTRIAL DESIGNS General The federal Industrial Design Act grants exclusive rights with respect to a registered industrial design within Canada for the duration of its registration. Industrial design is defined as “features of shape, configuration, pattern or ornament and any combination of those features that, in a finished article, appeal to and are judged solely by the eye.” Registration Requirements Registration requires the filing of a drawing or photograph, a description of the design, and a declaration that the design was not being used and had not been used, to the applicant’s knowledge, by any other person at the time that the applicant adopted it. A valid registration requires “novelty”, which means that the design should neither be identical to some other design already registered, nor so closely resemble some other design as to be confused with it. Initial application must be made within one year of the publication of the design in Canada or elsewhere. Duration of Protection The registration of an industrial design is valid for five years and may be renewed for a further period of five years, to a limit of ten years in total. The infringement of a registered industrial design may give rise to civil remedies. In the absence of the marking of the object with the notice provided by statute, only injunctive relief is available. Infringement includes making, importing for the purposes of trade or business, selling or renting, and offering or exposing for sale or rent any article in respect of which the design is registered and to which the design or a design not differing substantially therefrom has been applied. However, it is not an infringement to apply a design similar or identical to that which has been registered to a substantially different article or in a new or novel manner. K8 STIKEMAN ELLIOTT LLP The federal Integrated Circuit Topography Act, 1993, gives registrants up to a tenyear exclusive term of protection for the design or topography of integrated circuits (that is, semiconductor chips). Registration is available to creators of topographies who are nationals of Canada, legal entities who create topographies or manufacture circuit products in Canada, and nationals and residents of foreign countries who offer sufficient protection to Canadian topographies or who are parties to treaties or conventions respecting the protection of topographies to which Canada is also a party. The application for registration must be filed in Canada within two years of the first commercial exploitation of the topography anywhere in the world. Registration gives the exclusive right to reproduce, manufacture, import or commercially exploit the topography and any integrated circuit that incorporates the topography or a substantial part thereof. Reverse engineering is lawful for the purposes of evaluation, research or teaching, but not for commercial purposes. STIKEMAN ELLIOTT LLP INTELLECTUAL PROPERTY SEMICONDUCTOR CHIPS/ INTEGRATED CIRCUIT TOPOGRAPHIES K9 DOING BUSINESS IN CANADA L Real Estate General ............................................................................................................................... 2 Restrictions on Ownership of Real Estate .......................................................................... 2 Types of Real Property Rights ............................................................................................ 2 Title Registration ................................................................................................................. 3 Government Guarantee of Title .......................................................................................... 3 Taxes on Real Property ...................................................................................................... 3 Commercial Leasing ........................................................................................................... 4 Buying and Selling Real Estate in Canada ......................................................................... 5 Financing Matters................................................................................................................ 5 Land Use Planning .............................................................................................................. 5 © STIKEMAN ELLIOTT LLP MAY 2011 REAL ESTATE Real Estate GENERAL The sale and development of real estate is essentially a matter of provincial jurisdiction. With the exception of Quebec, each of the provinces and territories has enacted statutes that govern the acquisition, ownership, use and development of real estate (all of which are similar in content and scope). In Quebec, the law relating to real estate is based on civil law and is for the most part enshrined in the Civil Code of Quebec. RESTRICTIONS ON OWNERSHIP OF REAL ESTATE As a general principle, natural persons other than those under a legal disability are capable of acquiring, holding and disposing of real estate in Canada, and a Canadian non-resident can generally acquire, hold and dispose of real estate in the same manner as a Canadian resident or citizen. That notwithstanding, the federal Citizenship Act permits each province to enact laws restricting ownership of real property within the province by non-residents. These restrictions on ownership vary from province to province: Prince Edward Island, for example, has enacted legislation which significantly restricts the amount of land that may be held by persons (whether corporations or individuals) not resident in the province. Alberta and Quebec have legislation prohibiting the acquisition of interests in certain types of real property by non-residents without the prior consent of the province (both restrict ownership of agricultural land and Quebec also restricts ownership of classified cultural objects). Further, some provinces have provincial licensing or registration requirements that must be complied with if a corporation is to hold land in that province. There is also federal legislation on foreign ownership that provides for notification to, or review by, the federal government in certain circumstances involving acquisitions by non-resident purchasers. TYPES OF REAL PROPERTY RIGHTS There are various rights over land recognised under Canadian real estate law in the common law jurisdictions. An “estate” indicates an interest in real property of a particular type or duration, and is either “freehold” (which is one of indefinite duration), or “leasehold” (which is one the maximum duration of which is fixed or capable of being fixed in time). Among the various types of freehold estate, the fee simple is by far the most common and is, for all but the most theoretical of purposes, equivalent to ownership. Some other types of rights frequently encountered in the common law jurisdictions include easements, profits-a-prendre and restrictive covenants (all of which constitute rights in land), and licences (which are purely contractual). Quebec law distinguishes between personal rights (rights enforceable against a person) and real rights (rights in property). Real rights include rights of ownership, L2 STIKEMAN ELLIOTT LLP REAL ESTATE rights in a thing belonging to someone else, and rights in the form of a claim over another’s property. Some are perpetual (e.g. the right of ownership and servitudes), and others are temporary (e.g. emphyteusis). TITLE REGISTRATION All privately owned (as opposed to crown owned) real property in Canada is registered. Each province administers its own system for the registration of interests in land, both with respect to title to land and encumbrances thereon. The two major systems in use in Canada are the registry system and the land titles (or “Torrens”) system. Each province uses a modified system of either one or both of these systems. The older, more traditional registry system is a “registration of deeds” system which provides only for the public recording of instruments affecting land and does not itself make any qualitative statement concerning the status of title. The land titles system, by contrast, is operated by the government pursuant to detailed legislation, and title to land within the system is, subject to certain statutory limits, effectively guaranteed by the government (see below). GOVERNMENT GUARANTEE OF TITLE The register or certificate of title produced for properties registered under the land titles system may be relied upon implicitly by all persons as constituting the true and accurate status of title. In those relatively rare cases in which a person is wrongfully deprived of an interest in property by virtue of an error on the register or certificate, access may be had to a government-administered assurance fund for compensation. There is no government guarantee of title in provinces and territories using the registry system of recording title (for example, Quebec). Under the registry system, quality of title is determined by the individual searching the file and is based on priority in time of registration. TAXES ON REAL PROPERTY Transfers of real estate in most Canadian jurisdictions are subject to a land transfer tax, which is imposed at both the provincial and municipal levels. In some municipalities, such as the City of Toronto, in Ontario, the municipality levies a land transfer tax in addition to the tax levied by the Province. The rate of such taxes varies across the country, from a high of 4% of the value of the consideration for certain residential properties in Toronto (the combined municipal and provincial tax rates) to no tax at all in Alberta, Newfoundland & Labrador and parts of Nova Scotia. In Ontario, unregistered transfers of beneficial interests in real property are also taxed, subject to some exceptions. In most jurisdictions, the buyer is liable for the payment of land transfer tax, although in Quebec, the seller may also be liable in certain circumstances. STIKEMAN ELLIOTT LLP L3 REAL ESTATE In addition, the transfer of commercial and new residential buildings is subject to the Goods and Services Tax (GST) (or the Harmonized Sales Tax (HST) in Nova Scotia, Newfoundland & Labrador, New Brunswick, Ontario and British Columbia), in addition to Quebec Provincial Sales Tax (PST) if the property is located in Quebec. The seller is responsible for collecting the GST/HST and PST (as applicable) from the buyer, other than for buyers who are entitled to self-assess under the appropriate tax legislation. Income taxes are normally payable on profits or gains from the disposition of land. If real estate constituting capital property is sold at a capital gain, 50% of the gain is treated as taxable income. To the extent that the property was used in carrying on a business and is subject to capital cost allowances and these capital costs are also recovered through the sale, the amount of such recovery will be fully taxable. Disposal of a real estate property included in the inventory of the seller is treated as business income, 100% of which is subject to tax. In addition, if the seller of a property is a non-resident of Canada, the buyer must withhold a percentage of the sale proceeds on behalf of the Canadian tax authorities unless the seller can produce a clearance certificate issued by the tax authorities. COMMERCIAL LEASING Leasing of business premises in Canada is governed by provincial statute. For example, Ontario’s Commercial Tenancies Act regulates most aspects of the landlordtenant relationship in a commercial context. In addition to specific legislation, there is an abundance of common law that has developed in this area, which is relied upon by both landlords and tenants in the common law jurisdictions when enforcing their respective rights and/or remedies under commercial leases. Although generally not prescribed by statute, different forms of leases specific to the nature of the use of the property (for example, retail, industrial and warehousing or office property) have evolved. In general, commercial leases may be classified as (i) “net leases” (where the tenant pays a fixed rent as well as its proportionate share of all expenses relating to the ownership, operation and maintenance of the property); (ii) leases where, in addition to the costs associated with the net lease, the tenant also pays for structural repairs; (iii) “semi-gross leases” (where the landlord assumes certain expenses out of the base rental that it receives); and (iv) “gross leases” (where the tenant only pays a fixed amount). GST is imposed on rent payable by tenants under a commercial lease. If the tenant is registered for GST purposes and exclusively engaged in commercial activity, it is subsequently recoverable by the tenant, but the landlord is responsible for collecting it on behalf of the tax authorities. In some provinces, provincial sales tax may also apply. Rent received by the landlord is subject to income tax. L4 STIKEMAN ELLIOTT LLP Generally, real estate is listed for sale and marketed through a real estate broker. The agent acting for the buyer will often prepare the offer and submit it to the listing agent, although sophisticated buyers (particularly with respect to commercial real estate transactions) will typically negotiate the offer to purchase directly with the seller, often with assistance from their lawyers. REAL ESTATE BUYING AND SELLING REAL ESTATE IN CANADA When acting for buyers, lawyers will perform the task of examining title to the subject property as well as conduct various “off-title” enquiries regarding issues ranging from the status of realty taxes to environmental matters. A buyer’s lawyer will then negotiate resolutions to the issues raised and prepare closing documents. FINANCING MATTERS A mortgage must generally be in writing, duly executed and registered against title to the property in order to protect the lender’s priority. Registration will result in the lender being a secured creditor. The lender will often take additional security such as a general assignment of rents, and/or a registration against the borrower pursuant to a general security agreement under the personal property security legislation of the applicable province. Lenders may also require recourse to the borrower personally, and/or require an indemnifier or guarantor of the mortgage. A lender is obliged to give “reasonable notice” before making demand for payment and, in most circumstances, will be required to send notices under federal bankruptcy legislation before seeking to enforce its security over the interest in land. In some provinces (e.g. Ontario, New Brunswick, Prince Edward Island and Quebec), the lender will be free to sell the property privately by following a process prescribed by statute, while reserving the right to sue the borrower for any deficiency in the sale proceeds. In some provinces (e.g. British Columbia, Ontario and Quebec) the lender will be able to sue for foreclosure, a court order that results in title to the property passing to the lender in full satisfaction of the debt. Most provinces also permit a lender to apply to court for a judicial sale of the property, with the borrower remaining liable for any deficiency that may result. In many provinces, the lender will have multiple remedies available to it. LAND USE PLANNING Each province has planning legislation which governs the use and occupation of land and buildings. Although provincial governments are responsible for land use planning, many planning functions are delegated to municipalities. In Ontario, Quebec, British Columbia and New Brunswick, municipal powers are extensive and provincial supervision is minimal (although becoming more extensive in Ontario), while the degree of control exercised by the other provincial governments over municipal action is considerably tighter. Much of the regulation of real property is in the form of zoning by-laws and building by-laws. Zoning by-laws regulate virtually all aspects of the use of land, the nature of buildings and structures thereon, the size of parcels of land and the permissible development of land among other things. STIKEMAN ELLIOTT LLP L5 REAL ESTATE Building permits are required for the construction of, additions or alterations to buildings. Permit fees vary widely from municipality to municipality, but are generally calculated by how many square metres of building are proposed, and depend on the type or use of the building (residential or non-residential). Building by-laws, including building permit requirements and building code standards, govern such matters as building materials, heating and ventilation systems, electrical systems, sewage and water systems, fire safety, access and inspection. The National Building Code of Canada has been adopted in whole or in part by the municipalities of most provinces, resulting in a trend toward national uniformity in building regulation. Other provincial legislation to be considered in appropriate circumstances includes environmental legislation (particularly with respect to properties that might be environmentally sensitive or contaminated, or for environmental assessment of infrastructure, permits for water or air emissions, water taking and noise control), residential rent control legislation, and floodplain control and heritage protection. L6 STIKEMAN ELLIOTT LLP DOING BUSINESS IN CANADA M Bankruptcy and Insolvency Legislative Framework ........................................................................................................ 2 Liquidation Regimes............................................................................................................ 2 Bankruptcy and Insolvency Act ...................................................................................... 2 Receiverships ................................................................................................................ 3 Winding2up and Restructuring Act ................................................................................. 3 Reorganization Regimes ..................................................................................................... 3 Bankruptcy and Insolvency Act ...................................................................................... 3 Companies’ Creditors Arrangement Act ........................................................................ 4 Cross2border Insolvencies .................................................................................................. 5 © STIKEMAN ELLIOTT LLP JULY 2013 BANKRUPTCY AND INSOLVENCY Bankruptcy and Insolvency LEGISLATIVE FRAMEWORK The majority of Canada’s insolvency rules are enshrined in two principal federal statutes – the Bankruptcy and Insolvency Act (BIA), and the Companies’ Creditors Arrangement Act (CCAA). A third statute, the Winding-up and Restructuring Act (WURA) specifically governs the liquidation and restructuring of certain types of companies including banks, insurance companies and trust companies. Also, several provincial statutes deal with creditors’ rights. Both the CCAA and the BIA can be used for reorganization proceedings and liquidations. The practice has developed to utilize the CCAA for medium to large cases and the BIA for small to medium cases, since the relative flexibility of the CCAA affords greater latitude of action to the reorganizing debtor. LIQUIDATION REGIMES Bankruptcy and Insolvency Act The liquidation and bankruptcy scheme under the BIA may be applied in insolvencies of almost any type of entity including individuals, partnerships, associations and corporations. The BIA defines “corporation” to include not only any company incorporated and authorized to do business by or under a federal or provincial act, but also any incorporated company that has an office or property in, or carries on business in Canada. The definition does not include certain entities in the financial services sector such as banks, savings banks, insurance companies, trust companies, loan companies or railway companies (which are subject to the WURA), although holding companies of such entities are subject to the BIA. Income trusts are eligible for protection under the BIA pursuant to amendments enacted in 2009. Among other things, the BIA allows the trustee in bankruptcy to realize on the assets of the bankrupt, determine the propriety of claims against the estate, and distribute the proceeds. Secured creditors are generally not affected by this proceeding and can, therefore, exercise their rights subject to certain limitations contained in the BIA. Generally, a trustee takes the property of the bankrupt, subject to rights of third parties, which may be pre-existing or created by the BIA. These third parties include secured creditors, unpaid suppliers and the Crown, and vary depending on the right being claimed and the party claiming that right. Certain rights of set-off are also permitted in bankruptcy proceedings. Preferences and Transfers at Undervalue - The trustee is able to challenge payments or transfers of property at undervalue that have taken place within defined periods prior to the bankruptcy if they have had the effect of defeating or prejudicing the claims of creditors. These types of transactions are called “preferences” or “transfers at undervalue”. For preferences, look back periods range M2 STIKEMAN ELLIOTT LLP For transfers at undervalue (the disposition of property or provision of services for which inadequate or no consideration was received by the debtor), look back periods range from twelve months (for arm’s length creditors) to five years (for non-arm’s length creditors). Transactions with non-arm’s length creditors can be defended as non-preferential where there is no intention to prefer that creditor. Receiverships Liquidation under a court-administered receivership can be commenced under the BIA or a specific provincial statute (e.g. Courts of Justice Act (Ontario)) to appoint a receiver to realize on the assets of a business corporation for the benefit of its creditors. Receiverships are often used where continuing the operations of the debtor to maintain value is important and creditors wish to exercise greater control over such operations. Secured creditors may also privately appoint receivers under their security documents to realize on the assets subject to their security interests. Unpaid suppliers are given the right, in certain circumstances, to reclaim goods delivered within thirty days of the debtor in receivership. BANKRUPTCY AND INSOLVENCY from three months (for arm’s length creditors) to twelve months (for non-arm’s length creditors). Transactions with non-arm’s length creditors can be defended as non-preferential where there is no intention to prefer that creditor. Winding'up and Restructuring Act As mentioned above, liquidation provisions under the federal WURA apply to federal or foreign banks, federal or provincial loan or trust companies, and federal, provincial or foreign insurance corporations carrying on operations in Canada. Although WURA can apply to “trading companies” (except for corporations incorporated under the CBCA), non-financial institution corporations are generally liquidated under the BIA. Although it is framed in different terms, WURA operates in a similar way to the liquidation provisions of the BIA, with some important distinctions. REORGANIZATION REGIMES Bankruptcy and Insolvency Act: Proposals The reorganization of creditor claims under the proposal provisions of the BIA applies to the same types of corporations to which the BIA liquidation provisions apply. Under the BIA, a company may deliver a proposal to its creditors or give notice of its intention to file a proposal. Provided the requisite statements are filed, the delivery of a proposal or a notice of intention to file a proposal effects a thirtyday stay period (which may, at the discretion of the court, be extended for up to six months) against the government and against other secured and unsecured creditors, other than any secured creditors who have taken possession of their security or given notice of their intention to enforce their security at least ten days before the first filing of the notice or proposal. During the stay period, the business is monitored by a proposal trustee while the debtor attempts to negotiate an STIKEMAN ELLIOTT LLP M3 BANKRUPTCY AND INSOLVENCY acceptable proposal with its creditors. If a proposal is not filed within the allowed time, the debtor is deemed to have made an assignment in bankruptcy. The proposal may be made to unsecured creditors only, or to both secured and unsecured creditors. Creditors with proven claims are entitled to vote on the proposal and are divided into classes based on commonality of interest, with all of the unsecured creditors normally comprising one class. The approval of a proposal by a particular class requires a favourable vote by creditors representing a majority in number and two-thirds in value of those voting. If the creditors accept the proposal, it is submitted to the court for approval. Subject to certain exceptions for eligible financial contracts, the BIA provides that contractual terms providing for the termination, amendment or acceleration of payment under a contract simply by reason that a person is insolvent or has filed a notice of intention or a proposal will be unenforceable. Similar clauses in leases of real property or licensing agreements that are triggered by the non-payment of rent or royalties will also be unenforceable. Any further supply of goods and services may, however, be on an immediate payment basis. Companies’ Creditors Arrangement Act Reorganization of creditor claims under the CCAA permits an insolvent company to continue its business while attempting to reorganize its affairs by providing for a stay of proceedings during the reorganization period. Banks, insurance companies, railways and federal loan and trust corporations are not subject to the CCAA, although income trusts are now eligible pursuant to amendments enacted in 2009. In order to take advantage of the CCAA, aggregate claims against the corporation must exceed $5 million. In response to an application by any eligible CCAA debtor company, creditor, trustee in bankruptcy or liquidator, a court may grant an order directing the filing of a plan of compromise or arrangement, and the meeting of the creditors of the debtor company to consider and vote on the terms of the plan. Unlike the BIA, where the process is automatic, the decision to grant relief in CCAA proceedings is discretionary. In particular, a court may deny an initial CCAA application where support by the creditors is slim and there appears to be no chance that a plan will be successful. In order to succeed, the debtor company’s plan of compromise or arrangement must be approved by a majority in number representing two-thirds in value of the creditors in each class. The CCAA requires that secured and unsecured creditors must be in separate classes; other classes may be created based on “commonality of interest.” The court is given complete discretion as to whether to grant a stay, the scope of the stay, and the time period in which the stay is in effect (except that the original stay period cannot exceed 30 days). In particular, the court must be satisfied that a stay is in the best interests of the debtor and creditors. Once a stay is granted, it applies to both secured and unsecured creditors and usually prevents the termination of M4 STIKEMAN ELLIOTT LLP Interim (DIP) financing – Where a debtor company has insufficient cash to operate during its CCAA proceedings, the CCAA permits courts to authorize interim financing. The provider of the interim financing has priority over other creditors to the debtor’s assets. Disclaimer of agreements – A debtor company may disclaim an agreement to which it is a party as of the day it enters into CCAA proceedings, on notice to the counterparties to the agreement and the monitor. Eligible financial contracts, collective agreements, financing agreements where the debtor is the borrower and leases of real property and/or an immovable if the debtor is the lessor are not eligible for disclaimer. Eligible financial contracts are defined in the regulations to the CCAA and include, for example, derivatives contracts. BANKRUPTCY AND INSOLVENCY contracts between the debtor and other parties, although eligible financial contracts are exempted. Suppliers can refuse to extend further credit, in effect, moving to a cash-on-delivery system during the CCAA proceedings. Some major elements of the CCAA include: Critical suppliers – A debtor can apply to court to have a person declared a critical supplier, upon which the court may order the person to supply goods and services on terms and conditions that are consistent with the supply relationship or that the court considers appropriate. Where such an order is made, the critical supplier will be entitled to a charge on the debtor’s assets in its favour. Assignment of agreements – A debtor can apply to court to have contracts with third parties assigned without the consent of such third parties. Courts will balance the interests of all parties affected by the assignment in exercising its discretion to assign. Cure costs (other than those arising by virtue of the debtor’s insolvency, commencement of CCAA proceedings or the failure to perform a non-monetary obligation) must be paid for the court to approve the assignment. These assignment provisions do not apply to agreements that are not assignable by their nature, collective agreements, eligible financial agreements or agreements entered into during the CCAA proceedings. Preferences and Transfers at Undervalue – the preferences and transfers at undervalue provisions discussed above apply in CCAA proceedings, with the necessary modifications required by the different statute. CROSS'BORDER INSOLVENCIES Both the CCAA and the BIA operate on the assumption of universal jurisdiction, extending authority and duty to control the assets of a debtor corporation wherever located (in Canada or abroad) for the benefit of creditors, wherever located. That notwithstanding, Canadian courts have traditionally been open to the concept of comity and the recognition of properly constituted foreign insolvency proceedings wherever this is consistent with public policy, and have generally encouraged STIKEMAN ELLIOTT LLP M5 BANKRUPTCY AND INSOLVENCY M6 coordination among various proceedings in all jurisdictions so that the restructuring or liquidation can proceed in a fair and orderly manner. In exercising a wide discretion to recognize and enforce a foreign bankruptcy order, Canadian courts have taken a variety of factors into consideration including the compatibility of the foreign jurisdiction’s insolvency rules with the Canadian regime. They have authority to tailor the terms and conditions of the orders that can be granted in the course of proceedings, and have formally recognized foreign orders and given assistance to foreign representatives in foreign restructuring proceedings (provided that such recognition is not inconsistent with Canadian laws or public policy). Part IV of the CCAA and Part XIII of the BIA, which came into force in September 2009, largely harmonize the Canadian insolvency regime with the standards of the United Nations Commission on International Trade Law. Procedural harmonization has been implemented between courts in the US and Canada through the use of Guidelines Applicable to Court-to-Court Communications in Cross-Border Cases and cross-border protocols, the primary purpose of which is to set out guidelines to coordinate and to promote the efficient administration of cross-border restructuring proceedings. STIKEMAN ELLIOTT LLP DOING BUSINESS IN CANADA N Electronic Commerce General ............................................................................................................................... 2 Jurisdiction .......................................................................................................................... 2 General .......................................................................................................................... 2 Dealing with the Uncertainty .......................................................................................... 4 Electronic Commerce Legislation ....................................................................................... 4 General .......................................................................................................................... 4 Content of the Legislation .............................................................................................. 4 On-line Contract Issues....................................................................................................... 4 Electronic Contracts ....................................................................................................... 4 Electronic Signatures .......................................................................................................... 5 General .......................................................................................................................... 5 Definition of “Electronic Signature” ................................................................................ 5 On-line Consumer Protection Legislation ........................................................................... 6 General .......................................................................................................................... 6 On-Line Consumer Protection Legislation ..................................................................... 6 “Cooling-off” Periods in Electronic Commerce .............................................................. 6 Competition Law and On-line Advertising...................................................................... 7 Language Issues in Quebec ............................................................................................... 8 Domain Name Registration ................................................................................................. 8 © STIKEMAN ELLIOTT LLP OCTOBER 2007 ELECTRONIC COMMERCE Electronic Commerce GENERAL Canadians have readily embraced the Internet as an instrument to exchange and disseminate information and conduct business transactions. In response to the increasing use of electronic transactions in commerce and government, new laws focusing on electronic commerce issues and expanding the application of general commercial laws to electronic commerce activities have been introduced in Canada. JURISDICTION General The ability to regulate Internet activities is shared by both the federal and provincial legislatures. Regulation of the Internet itself is a federal responsibility, but the Canadian Radio-television and Telecommunications Commission (CRTC), the relevant federal agency, announced in 1999 that it did not intend to regulate Internet content. Nonetheless, Internet activities are regulated by federal and provincial legislation as well as various common law principles. Canadian courts will generally assert jurisdiction over a proceeding where a real and substantial connection can be made between the forum and either the proceeding or the defendant. However, due to the “borderless” nature of the Internet, Canadian courts have struggled to develop a consistent formula for determining when Internet activities are sufficient to establish a real and substantial connection. As a result, several alternative jurisdictional tests have emerged, including the “passive vs. active” test, the “purposeful direction” test and the “foreseeability” test described below. While the passive vs. active and purposeful direction tests initially found favour in Canada in determining Internet-related jurisdictional issues, recent case law suggests a shift towards the foreseeability test as the leading test on the issue of jurisdiction. “Passive vs. Active” Test In applying this test, Canadian courts examine the level of interaction available to individuals in their jurisdiction to determine whether to assert jurisdiction. The web presence is examined to determine whether it was accessible in the jurisdiction in a passive sense only (e.g. content oriented websites), or whether interaction with the website was possible. Where interaction with an Internet presence was possible from their jurisdiction, courts would generally find sufficient connection to assert their jurisdiction. While the “passive vs. active” analysis initially provided a cohesive framework for addressing Internet activities, the growth of interactive commercial websites and the increasing sophistication of content-only sites to allow interaction with users has made this test practically obsolete. N2 STIKEMAN ELLIOTT LLP “Foreseeability” Test The foreseeability test is based on the premise that a party should only be answerable to a foreign court if that eventuality is reasonably foreseeable in the circumstances. The reach of Canadian jurisdiction on the basis of this foreseeability test was extended by the Ontario Superior Court in Bangoura v. Washington Post where the plaintiff had brought a suit against The Washington Post for defamation in an Ontario court based on several articles featured in the newspaper in 1997, at which time he was living outside Canada. He had since become a resident of Ontario and claimed that the continued availability of the articles through the Post’s website had damaged his reputation in Ontario. The Washington Post brought a motion to stay the action on the basis that there was no real and substantial connection with Ontario. In dismissing the motion, the trial court held that damage to the plaintiff’s reputation had occurred in Ontario due to the availability of the articles on the Internet. The court held that, by posting the stories on the Internet, the newspaper “should have reasonably foreseen that the story would follow the plaintiff wherever he resided”. This decision was subsequently reversed by the Ontario Court of Appeal on the basis of a shift in emphasis to the question of foreseeability: as the connection between the plaintiff and Ontario was not foreseeable at the time of publication, the courts of Ontario could not assume jurisdiction. In November 2006, the Supreme Court of Canada dismissed an application for leave to appeal from the judgment of the Court of Appeal. ELECTRONIC COMMERCE “Purposeful Direction” Test More recently, Canadian courts have examined whether an Internet presence is “purposefully directed” towards individuals in a jurisdiction as a factor in establishing a real and substantial connection. In asserting jurisdiction in Pro-C Ltd. v. Computer City, Inc., an Ontario court noted that, although the defendant’s website was passive, when viewed in connection with the defendant’s overall strategy, it was part of a “purposeful commercial activity directed to target Canadian consumers”. The test was again applied (with a differing result) in the British Columbia case of Burke v. NYP Holdings Inc. That case involved a defamation lawsuit launched against the New York Post by Burke, a well-known public figure in British Columbia, who objected to a column published in the Post and featured on its website. After Burke sued in the British Columbia courts, the New York Post moved to dismiss the case on the basis of jurisdiction. The British Columbia judge denied the motion, noting that it was foreseeable at the time of publication that damage might be suffered by Burke in the province and that the British Columbia courts could therefore assert jurisdiction. While different outcomes were reached on the facts of Burke and Banguora, the courts’ reasoning based on foreseeability is consistent. STIKEMAN ELLIOTT LLP N3 ELECTRONIC COMMERCE Dealing with the Uncertainty A choice of law and exclusive jurisdiction clause is often used in connection with Internet activities to limit jurisdictional uncertainties involved in Internet operations. However, the effect and enforceability of such clauses is subject to applicable consumer protection legislation and in Quebec, to the Civil Code. Consumer protection legislation in some jurisdictions provide that a consumer may not waive his or her rights, including the consumer’s right to bring proceedings in his or her home jurisdiction. Under the Civil Code, a choice of law clause may not be enforceable if it deprives the consumer of protection under the law of the country where he or she resides and the formation of the contract is in some way connected to that country. ELECTRONIC COMMERCE LEGISLATION General The federal and provincial legislation relating to the electronic transactions and electronic commerce is by and large consistent in its treatment of the enforceability and formation of on-line contracts. Legislation governing electronic transactions and electronic commerce has been enacted in most provinces and territories of Canada. Except for Quebec, the provincial electronic commerce legislation is largely modelled on the Uniform Electronic Commerce Act (the “Uniform Act”) adopted by the Uniform Law Conference of Canada. The Uniform Act was designed to provide provinces with consistent legislation that implemented the principles of the United Nations Model Law on Electronic Commerce, adopted by the General Assembly of the United Nations in November 1996. Content of the Legislation The provincial electronic commerce legislation provides for the legal recognition of information and documents, including contracts, which are communicated electronically. The legislation imposes a “media neutral” approach, recognizing electronic communications, documents, contracts and signatures as functionally equivalent to their written or printed counterparts. ON-LINE CONTRACT ISSUES Electronic Contracts While the provincial electronic commerce legislation provides for the legal enforceability of electronic contracts, it is necessary to ensure that the electronic offer and acceptance process results in an enforceable contract. Case law has established that both “click-wrap” agreements and “web-wrap” agreements may create binding contracts in Canada. In Rudder v. Microsoft, the court found that where an offer clearly indicates that a certain action will constitute acceptance, acceptance can be communicated through the indicated action, such as clicking on an “I Agree” icon. In Kanitz v. Rogers Cable Inc., the Ontario Superior Court recognized a party’s ability to unilaterally change the terms of a paper agreement by N4 STIKEMAN ELLIOTT LLP Therefore, while both the legislative and judicial approach tend to enforce the terms of electronic contracts in general, it should be noted that the actual enforcement of any given electronic contract is ultimately a question of fact that requires careful consideration. ELECTRONIC COMMERCE posting the changes on a website in accordance with the terms of the original agreement. However, a different result was reached in a recent Quebec decision with similar facts: in Aspenser1.com Inc v. Paysystems Corporation, the Cour du Québec (the Quebec trial court), held that modifying the terms of an agreement by posting them on a website was not enforceable because there was no proof that the subscriber had clearly and unequivocally agreed to the modification. ELECTRONIC SIGNATURES General A signature indicates intent to be bound by the terms of an agreement. Although a signature is not necessary to create a binding agreement enforceable against the parties, legislative signature requirements exist for certain prescribed types of agreements. The provincial electronic commerce legislation provides that electronic signatures can have the functional equivalence of their paper counterparts. Definition of “Electronic Signature” The federal Personal Information Protection and Electronic Documents Act (PIPEDA) defines “electronic signature” as a signature that consists of one or more letters, characters or other symbols in digital form incorporated in, attached to or associated with an electronic document. Likewise, provincial electronic commerce legislation generally defines an electronic signature as electronic information that a person creates or adopts in order to sign a document and that is in, attached to, or associated with the document. This legislation generally provides that electronic signatures will satisfy statutory signature requirements. 1 Clicking an icon may also meet the definition of an electronic signature, though no Canadian court has yet considered that point. Generally, the provincial electronic commerce legislation provides that an electronic signature can satisfy the signature requirement of any particular law but it does not go so far as to require any particular test of reliability for such a signature. Most of the provincial electronic commerce legislation provides that regulations can be made to impose some degree of reliability should it be necessary. This approach accords with the current state of the common law, under which the method of signature of a document generally does not have to meet any standard of reliability. 1 The federal Personal Information Protection and Electronic Documents Act (PIPEDA) also provides for the functional equivalence of electronic signatures in connection with certain prescribed federal statutes, provided that the technology used to create the signature satisfies the regulations. Several sections of PIPEDA contemplate the use of a “secure electronic signature”, although the legislation contains no specific definition. STIKEMAN ELLIOTT LLP N5 ELECTRONIC COMMERCE ON-LINE CONSUMER PROTECTION LEGISLATION General Consumer protection in Canada is governed by an array of federal and provincial laws regulating a wide range of commercial activity. Many industries have specific provincial consumer protection legislation mandating registration or licensing. Many provinces also have consumer practices and trade practices legislation regulating marketing and commercial sales. In addition, provincial sale of goods legislation (except in Quebec) implies certain warranties and conditions in commercial agreements such as the implied conditions that a sold good is fit for its intended purpose and that the good is of merchantable quality. Parties may expressly contract out of these implied warranties and conditions. On-Line Consumer Protection Legislation Manitoba and Alberta were the first provinces to enact legislation specifically to provide protections to consumers transacting online. The Internet Agreements Regulation under Manitoba’s Consumer Protection Act and the Internet Sales Contract Regulation under Alberta’s Fair Trading Act provided consumers with substantial rights and remedies in respect of retail sale or retail conditional sales agreements formed through Internet communications. Several other provinces have followed suit and have also extended consumer protection laws to online consumer contracts. These provinces include Ontario, British Columbia, Nova Scotia, and, most recently, Quebec (with amendments to come into force no later than December 15, 2007). Ontario, for example, passed the Consumer Protection Statute Law Amendment Act, 2002 which amended the Ontario Consumer Protection Act to extend consumer protections to consumers participating in online transactions. Each of the provincial regulations follow the Internet Sales Contract Harmonization Template, which sets out significant new disclosure requirements for “Internet agreements” in which the consumer’s total potential payment obligation exceeds $50. Under these regulations, on-line retailers entering into Internet agreements are now required to disclose their names, contact information, a fair and accurate description of the goods and services provided, an itemized list of prices (including taxes and shipping charges), a description of each additional charge that applies or may apply, the total amount payable by the consumer, the terms and methods of payment, the details of delivery or performance (including date, place and manner of execution) and any specific rights or obligations with respect to cancellations, returns, exchanges and refunds. The online retailer must also provide the consumer with an express opportunity to accept, decline, or make corrections to the agreement, and must provide a written copy of the agreement within 15 days depending on the province. “Cooling-off” Periods in Electronic Commerce The consumer protection legislation of most provinces permits consumers to repudiate executory contracts for an established “cooling-off” period. Many of the N6 STIKEMAN ELLIOTT LLP Competition Law and On-line Advertising General The Competition Act, a federal statute governing business conduct in Canada, aims to promote competition in the marketplace and to prevent anti-competitive practices. It contains both criminal and civil provisions prohibiting false or misleading representations and deceptive marketing practices. ELECTRONIC COMMERCE provincial acts also contain provisions for the “functional equivalence” of writing and signatures to satisfy requirements in the context of electronic commerce. Ontario’s Consumer Protection Act 2002, for example, gives a consumer the right to cancel an Internet agreement at any time within seven days from receipt of a copy of the Internet agreement in certain circumstances. British Columbia has a similar “cooling-off” regime. The Bureau’s View In 2003, the Competition Bureau published a guide describing its regulatory practices in the context of the Internet (“Guide”). Entitled Application of the Competition Act to Representations on the Internet, the Guide expresses the Competition Bureau’s view that the Competition Act will apply equally to all on-line representations, whether relating to on-line or off-line sales. Misleading Representations Under the Competition Act To contravene the Competition Act, either the general impression or literal meaning of a representation must be false or misleading in a material respect. Materiality is determined on the basis of whether the representation could influence a consumer to buy a product or service. The Competition Bureau will consider whether the representation could induce a person to act in a certain manner. The Competition Bureau is of the view that materiality extends beyond representations that influence buyers when making purchase decisions to those that influence buyers conduct, such as representations that lead consumers to visit one website over another. On-line Disclaimers Generally, the Guide requires on-line disclaimers to be presented in a manner where it is highly probable consumers will see it and, if a disclaimer is used to qualify or contradict a representation, it must meet a number of additional criteria. In particular, the Guide requires the supplier to disclose certain product information to avoid making misleading representations in connection with the sale of a product, including: (i) price information; (ii) other applicable charges; (iii) terms or conditions of payment; (iv) any limitations or conditions applicable to warrants or guarantees; (v) any geographic or time limitations on the sale of the product; (vi) delivery terms; (vii) any material standards regarding the sale of services and (viii) details concerning returns, exchanges, cancellations and refunds. STIKEMAN ELLIOTT LLP N7 ELECTRONIC COMMERCE In addition, the Guide sets out the Competition Bureau’s view that individuals outside of Canada who make on-line representations that might reasonably be expected to materially influence the Canadian public should assume that they may be subject to examinations under the Competition Act. Steps that can be taken to reduce the likelihood that representations not intended to reach Canada might be viewed by the Competition Bureau as materially influencing purchasers in Canada include: indicating that the representations are intended for an area other than Canada, requiring purchasers to supply a country of origin and supplying a site for the purchaser’s use (or barring such purchasers) and avoiding representations that create the impression that the site is intended for use in Canada. LANGUAGE ISSUES IN QUEBEC Two Quebec courts have held that the province’s language laws apply to Internet activities. In Procureur Général du Québec v. Hyperinfo Canada Inc., the court found that the Quebec language laws apply to a website originating in Quebec despite attempts to block Quebec residents from accessing the site. A similar conclusion was reached by the court in Procureur Général du Québec v. Reid in connection with another Quebec based website. Accordingly, Quebec-based businesses or businesses conducting activities in Quebec should ensure that their operations, including their on-line operations, comply with Quebec’s language laws. DOMAIN NAME REGISTRATION The “.ca” country code top level domain is administered by the Canadian Internet Registration Agency (CIRA). CIRA has established several rules for the registration of .ca top level domains, including “Canadian Presence Requirements” (CPR) which currently restrict registration to individuals and organizations (including corporations) with a real connection to Canada (e.g. Canadian citizenship or permanent resident status (in the case of individuals), Canadian territorial registration (in the case of corporations, registered trusts, and other similar organizations), or ownership of a trade-mark registered in Canada. A non-resident may gain access to the .ca domain by incorporating a Canadian corporation or though a partnership or trust, provided that the body used meets the CPR requirements. N8 STIKEMAN ELLIOTT LLP DOING BUSINESS IN CANADA O Privacy General ............................................................................................................................... 2 PIPEDA ............................................................................................................................... 2 Background .................................................................................................................... 2 General .......................................................................................................................... 3 Application ..................................................................................................................... 3 Obligations under PIPEDA ............................................................................................ 4 Remedies ....................................................................................................................... 5 Provincial Legislation .......................................................................................................... 6 Quebec .......................................................................................................................... 6 Common Law Provinces ................................................................................................ 6 Comparing PIPEDA and the Provincial Privacy Laws ................................................... 6 Health Privacy Legislation ................................................................................................... 7 © STIKEMAN ELLIOTT LLP MAY 2012 PRIVACY Privacy GENERAL Privacy laws regulating the collection, use and disclosure of personal information in the public sector have been in place since 1977 when the federal government passed the Canadian Human Rights Act (CHRA). Certain sections of the CHRA that dealt with the protection of personal information were repealed in 1983 and replaced by the federal Privacy Act, which today continues to apply to the collection, use and disclosure of personal information by federal government institutions. In addition, there are a variety of statutes that regulate the protection and access of personal information held by provincial and territorial government departments and agencies. In Ontario, for example, the Freedom of Information and Protection of Privacy Act and Municipal Freedom of Information and Protection of Privacy Act together legislate on the collection, use, retention and disclosure of personal information by government bodies. The regulation of personal information in the private sector context, on the other hand, was a much later development in Canada. The impetus for the introduction of legislation regulating personal information in Canada is partially attributable to the growth of the Internet and the introduction of other technological advances which greatly facilitate the collection, retention, organization and dissemination of personal information, and partially attributable to the introduction of the European Union’s “Privacy Directive” in 1995. At the provincial level, three provinces – Quebec, British Columbia and Alberta – have now passed legislation dealing generally with the protection of personal information in the private sector. Further, four provinces – Ontario, Manitoba, Saskatchewan and Alberta – have statutes that specifically address the privacy of personal health information in the private sector. At the federal level, Parliament has enacted the Personal Information Protection and Electronic Documents Act (PIPEDA), which took effect on January 1, 2004 and is discussed below. PIPEDA Background The Canadian government looked largely to the private sector for assistance in the creation of privacy legislation. The Canadian Standards Association had previously engaged industry, consumers, and government in a collaborative effort to create the Model Code for the Protection of Personal Information, which was designed to afford consumers some protection in their dealings with the private sector. The code was strictly voluntary, however, and there was no ability to enforce its provisions, or to encourage appropriate data management within Canada. To create the appropriate regulatory environment, the government essentially took the voluntary code that had been in place, and formalized the measures into Part I of PIPEDA. O2 STIKEMAN ELLIOTT LLP PRIVACY General PIPEDA was brought into effect in three phases. The first implementation phase came into force on January 1, 2001, at which point the statute applied to the federally regulated private sector and to information disclosed for consideration across national or provincial borders. Federally regulated sectors include industries such as banking, airlines, broadcasters, shippers and telecommunications companies. On January 1, 2002, PIPEDA was extended to apply to “personal health information” which includes any information concerning the physical or mental health of an individual (living or deceased), any health services provided to an individual, information about donations of body parts or substances, or any information collected in the course of, or incidentally to, the provision of health services to the individual. The third and final implementation phase took place on January 1, 2004. Effective that date, PIPEDA applied to all personal information collected, used or disclosed in whole or in part within Canada in the course of “commercial activities” – defined as “any particular transaction, act or conduct or any regular course of conduct that is of a commercial character, including the selling, bartering, or leasing of donor membership or fundraising lists”. This final phase expanded the application of PIPEDA’s privacy protections to all commercial transactions in Canada. The Supreme Court of Canada has defined information privacy as being the right of the individual to determine when, how, and to what extent he or she will release personal information. Part I of PIPEDA provides legislative recognition of this right by giving individuals the ability to determine how an organization may use their personal information in the course of commercial activities. PIPEDA regulates the collection, use or disclosure of personal information, such as an individual’s addresses, telephone numbers, email addresses, credit card information, social insurance numbers, financial information, health information, as well as consumerspecific spending history or personal habits. The legislation applies irrespective of whether the personal information was obtained directly from a consumer or indirectly from a third party. Application Canada has a federal structure with constitutionally defined areas of jurisdiction for the federal government and for the respective provincial governments across the country. Section 92 of the Constitution Act, 1867 gives the provincial governments in Canada exclusive jurisdiction over local trade, property and civil rights. Recognizing this division of powers, PIPEDA allows the federal cabinet to exempt businesses from the application of PIPEDA in a province that enacts privacy legislation found to be “substantially similar” to Part I of PIPEDA. Any such exemption applies only to collection, use, or disclosure of personal information that occurs within the province. Extra-provincial or international aspects of data collection or usage continue to be subject to PIPEDA notwithstanding such an exemption order. STIKEMAN ELLIOTT LLP O3 PRIVACY PIPEDA therefore applies in respect of personal information which is collected, used or disclosed in the course of commercial activities by federally regulated private sector organizations, and personal information which is collected, used or disclosed by other private sector organizations in the course of their commercial activities when it is transferred across Canadian or provincial borders or when it is collected, used or disclosed within a Canadian province that has not enacted legislation which is “substantially similar” to PIPEDA. To date, the federal government has recognized each of the Alberta Personal Information Protection Act (APIPA), British Columbia Personal Information Protection Act (BCPIPA) and Quebec’s Act respecting the protection of personal information in the private sector (Quebec Private Sector Act) to be “substantially similar” to PIPEDA. The Personal Health Information Protection Act (PHIPA) in Ontario has been found to be “substantially similar” only in regards to personal health information and so PIPEDA continues to apply in Ontario with respect to all other personal information. PIPEDA regulates the collection, disclosure and use of personal information in the private sector in all other provinces. With respect to personal information of employees, PIPEDA only governs the collection, use, and disclosure of those persons employed by federal works or undertakings (i.e. employers in areas such as aviation, telecommunications, broadcasting and banking). Consequently, even if employee information is transferred across provincial borders, PIPEDA will not apply unless the business is federally regulated. APIPA, BCPIPA and the Quebec Private Sector Act regulate personal information of employees in the private sector (including volunteers in some cases) in those provinces. Obligations under PIPEDA Under PIPEDA, individuals must be provided with the ability to exercise informed consent to the collection, use, or disclosure of their personal information. PIPEDA establishes rules governing the collection, use, and disclosure of personal information, and requires organizations to establish and enforce formal policies regarding the handling of personal data. Policies must strive to respect an individual’s privacy rights, while permitting the valid gathering and use of personal information by organizations. Generally, PIPEDA requires organizations to comply with the following ten privacy principles set out in Schedule I of PIPEDA, originally set out in the Canadian Standards Association’s Model Code for the Protection of Personal Information: ■ Accountability: Each organization is responsible for the personal information it collects and is required to appoint an individual who is accountable for the organization’s compliance with the ten PIPEDA principles. Each organization must protect personal information it provides to third party service providers using contractual and other protections (such as encrypting personal information or providing anonymous information where possible), and must implement internal privacy policies and practices with respect to personal information in its control. Audit and compliance mechanisms should be implemented and regularly reviewed to ensure that they reflect the organization’s evolving requirements. O4 STIKEMAN ELLIOTT LLP ■ ■ ■ ■ ■ ■ ■ ■ Identifying Purpose: The purpose for which personal information is collected must be identified at or before the time it is collected. Consent: Knowledge and consent are required for the collection, use and disclosure of personal information. Consent may be express or implied. Each organization must ensure that the individuals whose personal information is collected know of the purpose for which it is being collected, used or disclosed. Limiting Collection: The collection of personal information shall be limited to what is necessary in accordance with the identified purposes. There must be a clear link between the personal information collected and the identified purposes. Procedures must be developed to ensure that personal information which has already been collected is not used or disclosed for a purpose that has not been identified to the subject individual without first obtaining consent to use it for the new purpose. Limiting Use, Disclosure and Retention: Personal information shall not be used or disclosed for purposes other than those for which it was collected, except with the consent of the individual and shall be retained only as long as necessary for the identified purposes. Accuracy: Personal information must be accurate, complete and current as is necessary for the identified purpose. Safeguards: Personal information must be securely protected from unauthorized access. Employees must be advised of the need to maintain the confidentiality of the personal information. Openness: Organizations must be transparent and open about their management of personal information. Individual Access: On request, individuals must be provided with access to and the ability to correct their personal information, and a list of third parties to whom such information has been disclosed must be made available on request. Challenging Compliance: Individuals should be able to challenge an organization’s compliance with privacy principles. Each organization must implement procedures to receive and respond to complaints or inquiries about its policies and practices with respect to personal information. PRIVACY ■ Remedies Individuals have the right to complain to the Privacy Commissioner of Canada or, in certain circumstances, to the courts. PIPEDA gives the Privacy Commissioner of Canada broad investigative and audit powers to resolve disputes and establish effective systems of compliance. In addition, the Privacy Commissioner has the ability to publicly disclose all information relating to the personal information management practices of an organization if it considers such disclosure in the public’s interest. The legislation also provides “whistle blowing” protections for employees who report violations, provided the reports are made in good faith or upon reasonable belief. STIKEMAN ELLIOTT LLP O5 PRIVACY If an organization fails to comply with PIPEDA, it may be ordered to correct its practices and to publish a notice of such action. Damages may be awarded to the complainant, including damages for humiliation. In addition, failure to comply with certain provisions of PIPEDA may result in an organization, director, officer or employee being fined up to $100,000. PROVINCIAL LEGISLATION As mentioned above, currently only Quebec, British Columbia and Alberta have enacted general private sector privacy legislation and each these provincial enactments has been recognized as being “substantially similar” to PIPEDA. Privacy protection legislation varies significantly from province to province, and despite the requirement that the provincial legislation be “substantially similar” to PIPEDA, certain protections are nonetheless available in some provinces while not in others. Quebec The Quebec Private Sector Act regulates the collection, storage, and communication of personal information about individuals by private enterprises operating in the province. The rules established by the Quebec Private Sector Act serve to supplement the privacy provisions contained in Quebec’s Civil Code, and also address issues respecting the transfer of personal information outside of the province. In 2003, the federal government recognized the Quebec Private Sector Act to be “substantially similar” to Part I of PIPEDA and therefore most non-federally regulated businesses operating in Quebec are exempt from that part of the federal legislation dealing with personal information. Accordingly, the Quebec legislation will apply within the province of Quebec to the exclusion of PIPEDA, as long as all of the actions of the commercial enterprise occur within the province. Where the collection, use or disclosure of personal information occurs across Quebec’s borders, conceivably both PIPEDA and the Quebec Private Sector Act could apply. Common Law Provinces Currently, only PIPEDA regulates personal information practices in the Ontario private sector. In February 2002, the provincial Ministry of Consumer and Business Services released draft legislation entitled the Privacy of Personal Information Act, 2002, which was to serve as the foundation for Ontario’s private sector privacy legislation, but in the end no bill based on the draft legislation emerged. In October 2003, British Columbia passed the BCPIPA governing the collection, use and disclosure of personal information by organizations in the province. Alberta followed suite, passing its APIPA in December 2003. Both the British Columbia and Alberta PIPAs came into force on January 1, 2004 and were declared substantially similar on October 12, 2004. Comparing PIPEDA and the Provincial Privacy Laws When comparing PIPEDA and the provincial privacy legislation, one matter that needs to be highlighted is the issue of consent. PIPEDA requires express (“opt-in”) O6 STIKEMAN ELLIOTT LLP PRIVACY consent when the personal information collected, used or disclosed is sensitive (such as in the case of a person’s health or financial information). Implied (“optout”) consent is permissible under PIPEDA where the personal information is not sensitive (e.g. a person’s mailing address in the case of a mainstream magazine subscription). Both the BCPIPA and APIPA, on the other hand, allow for implied consent for all types of personal information provided certain reasonableness criteria are met. In Quebec, consent must be manifest, free and enlightened, and must be given for a specific purpose. Another issue that is of importance when comparing federal and provincial private sector privacy law has to do with the purchase or sale of a business. Both the BCPIPA and APIPA have an exemption from the consent requirement for the collection, use and disclosure of personal information by an organization in the course of a “business transaction” which by definition includes a purchase, sale or lease, merger or amalgamation involving that organization. In Quebec, on the sale or purchase of a business, the consent of the relevant customers as well as employees will be required before any personal information may be disclosed to potential purchasers. In contrast, there is no equivalent “business transaction” exemption under PIPEDA (although the issue was raised in the recent five-year review of PIPEDA and is slated to change). Accordingly, it would be prudent to obtain consent of the relevant individuals prior to transferring any personal information in a business transaction context if the federal legislation is applicable. HEALTH PRIVACY LEGISLATION There are a multitude of laws that apply to the privacy of personal health information in the private sector. PIPEDA applies to the collection, use and disclosure of personal health information generally, and four provinces – Ontario, Alberta, Saskatchewan and Manitoba – have enacted specific legislation concerning personal health information. Since Ontario’s Personal Health Information Protection Act, 2004 has been deemed to be “substantially similar” to PIPEDA with respect to personal health information, PIPEDA does not apply in Ontario to that extent. Persons dealing with personal health information in Saskatchewan and Manitoba, the PHIPAs of which have not yet been declared “substantially similar” with PIPEDA, must comply both with their respective provincial statute, and with PIPEDA. The situation in Alberta is unclear: while the general provincial private sector privacy legislation has been deemed to be substantially similar to PIPEDA, the health sector specific statute has not and so PIPEDA could still possibly apply to certain personal health information issues. In B.C. and Quebec, the legislation governing personal information in the private sector also covers personal health information; therefore PIPEDA presumably does not apply in those two provinces. PIPEDA continues to govern in all provinces where personal health information crosses provincial or national borders. STIKEMAN ELLIOTT LLP O7 DOING BUSINESS IN CANADA P Taxation Income Tax ......................................................................................................................... 2 General .......................................................................................................................... 2 Taxation of Canadian Residents (Basic Principles) ....................................................... 2 Taxation of Non-Residents of Canada (Basic Principles).............................................. 3 Types of Income ............................................................................................................ 6 Other Income Tax Issues ............................................................................................... 8 Goods and Services Tax and Harmonized Sales Tax ........................................................ 9 Provincial Sales Tax.......................................................................................................... 10 Provincial Payroll Tax........................................................................................................ 10 Taxes on Real Property .................................................................................................... 10 Methods of Carrying on Business in Canada.................................................................... 11 Canadian Subsidiary .................................................................................................... 11 Canadian Branch ......................................................................................................... 11 Branch or Subsidiary.................................................................................................... 11 Acquiring a Canadian Resident Corporation .................................................................... 13 © STIKEMAN ELLIOTT LLP JUNE 2014 TAXATION Taxation INCOME TAX General Residents of Canada are subject to tax on their worldwide income (including capital gains) under the Income Tax Act (Canada) (the “ITA”) and the relevant provincial tax legislation. Non-residents of Canada are generally subject to tax only on their Canadian source income, including income from a business or employment carried on or performed in Canada, and taxable capital gain from the disposition of “taxable Canadian property” (as defined). Although each province has also enacted provincial income tax legislation, only Alberta and Quebec administer their own corporate income taxes, and only Quebec administers its own individual income taxes. Other provinces rely upon the federal government to collect taxes on their behalf. Taxation of Canadian Residents (Basic Principles) Individuals An individual who is resident in Canada is subject to tax on his/her worldwide income (including capital gains). Whether an individual is resident in Canada is a question of fact to be determined on a case-by-case basis. However, as a general rule, an individual is considered to be resident in the country in which he or she “ordinarily resides”, being generally the place where he or she maintains a home to which he or she regularly returns, or the place where he or she maintains significant social, economic or family ties. Further, an individual is deemed to be resident in Canada throughout the year if he or she “sojourns” (is physically present) in Canada for an aggregate of 183 days or more during the calendar year. An applicable tax treaty might resolve questions as to which of two countries an individual is resident. Federal individual tax rates are progressive, and tax brackets are indexed annually for inflation. Generally, the provinces utilize a “tax-on-income” system, in which they levy provincial income tax as a percentage of the federal calculation of taxable income. The 2014 marginal federal income tax rates for individuals range from 15% to 29%, with the highest marginal rate applicable to taxable income in excess of $136,270. The top marginal federal and provincial combined rates vary by province from 39% in Alberta to 50% in Nova Scotia. Corporations Like individuals, corporations resident in Canada are taxed on their worldwide income. Whether a corporation is resident in Canada is also a question of fact to be determined on a case-by-case basis. A corporation is generally considered to be resident in Canada for income tax purposes if its central management and control is exercised in Canada. Further, a corporation is deemed by the ITA to be resident in Canada if it was incorporated or continued into Canada. An applicable tax treaty might resolve questions as to which of two countries a corporation is resident. P2 STIKEMAN ELLIOTT LLP TAXATION In general, the federal income tax rate for corporations for the 2014 taxation year is 15%. Provincial corporate income tax rates for 2014 range from 10% to 16%. Partnerships Partnerships are not themselves subject to Canadian income tax, as partnerships are treated as flow-through entities for Canadian income tax purposes. However, partnerships are treated as separate entities solely for purposes of computing the income or loss of the partners thereof. Once income is computed at the partnership level, such income is allocated among the partners of the partnership in accordance with their respective interests in the partnership. Partnership losses also flowthrough to the partners, although special rules may apply to limit the amount of losses that may be claimed by limited partners in certain circumstances. Trusts In general, trusts resident in Canada are taxed as separate legal entities in a similar manner to the taxation of individuals. However, inter vivos trusts (trusts arising other than on the death of the settlor) do not benefit from graduated tax rates, but rather are taxed only at the highest marginal rate. For 2016 and subsequent taxation years, trusts arising on the death of the settlor will benefit from graduated tax rates only for the first 36 months after the death of the settlor and, then after, will be subject to the highest marginal rate. Amounts distributed to beneficiaries are generally deductible in computing the trust’s income such that, to the extent all income of the trust is paid or payable to the beneficiaries each year, the trust would have no liability for income tax. In general, trusts are deemed to realize any accrued gains and losses on the property of the trust every 21 years. Certain foreign trusts (generally those that receive assets contributed by Canadian residents) are deemed resident in Canada. Specified Investment Flow-Through Entities Publicly traded trusts and limited partnerships were popular tax planning vehicles to minimize corporate level tax because of their flow-through nature. However, as a result of certain amendments to the ITA, certain publicly-traded trusts (and limited partnerships), referred to as “specified investment flow-through” entities or “SIFTs”, and their unitholders are taxed in a manner similar to corporations and their shareholders. An important exemption from the SIFT rules applies to certain real estate investment trusts (REITs), oil and gas trusts and royalty trusts. Taxation of Non-Residents of Canada (Basic Principles) Non-residents of Canada are subject to Canadian tax on employment income performed in Canada, income from a business carried on in Canada, and taxable capital gains from the disposition of “taxable Canadian property” except, in all cases, STIKEMAN ELLIOTT LLP P3 TAXATION to the extent exempted by an applicable tax treaty. In general, taxable Canadian property includes: ■ real property situated in Canada; ■ property used in carrying on business in Canada; ■ unlisted shares of corporations or interests in partnerships or trusts, if more than 50% of the value of which was derived from real properties situated in Canada, Canadian resource properties or timber resource properties at any time during the 60 months that ends at the date of disposition; and ■ listed shares of a corporation if at any time during the 60 month period that ends at the date of disposition both: (A) more than 50% of the value of such shares was derived from real properties situated in Canada, Canadian resource properties or timber resource properties; and (B) the taxpayer, persons with whom the taxpayer did not deal at arm's length and partnerships in which the taxpayer or a person with whom the taxpayer is not dealing at arm’s length holds a membership interest, owned 25% or more of the issued shares of any class of shares of the corporation. Provincial income taxes will generally be payable by a non-resident of Canada on taxable income earned in a province where the non-resident carries on business through a permanent establishment situated in that province (or is otherwise deemed to have a permanent establishment in a province) and on employment income reasonably attributable to duties performed in that province. Carrying on Business in Canada The ITA provides that a non-resident of Canada is subject to Canadian income tax if the non-resident is carrying on business in Canada, but only to the extent of the income earned from that business. Under the common law principles, generally a person is considered to carry on business in Canada if the person concludes contracts in Canada or if the operations from which the profits arise are located in Canada. The ITA otherwise extends the common law principles in this respect by deeming a person to be carrying on business in Canada if the person: ■ produces, grows, mines, creates, manufactures, fabricates, improves, packs, preserves or constructs, in whole or in part, anything in Canada whether or not the person exports that thing without selling it before exportation; or ■ solicits orders or offers anything for sale in Canada through an agent or servant, whether the contract or transaction is to be completed inside or outside Canada or partly in and partly outside Canada. Treaty Relief from Canadian Taxation of Business Profits Canada’s tax treaties generally follow the OECD Model Tax Convention on Income and Capital. Under Canada’s tax treaties, business profits are generally only taxable in Canada to the extent that the non-resident has a “permanent establishment” in Canada. A permanent establishment generally means a fixed place of business in Canada through which the business of the entity is wholly or partly carried on. Under the Canada-U.S. Income Tax Convention, for example, the term “permanent P4 STIKEMAN ELLIOTT LLP TAXATION establishment” includes a place of management, branch, office, factory, workshop, and a mine, oil or gas well, a quarry, or any other place of extraction of natural resources. Generally, tax treaties also provide that if a non-resident person carries on business in Canada through an agent, the non-resident has a permanent establishment in Canada if the agent habitually exercises authority in Canada to conclude contracts in the name of the non-resident. Withholding Taxes Amounts paid or credited by a resident of Canada to a non-resident person with respect to most forms of passive income (including dividends, interest, rents and royalties) are generally subject to Canadian non-resident withholding tax on the gross amount of such payments. The rate of Canadian non-resident withholding tax under the ITA is 25%, subject to reduction under an applicable tax treaty. For example, the Canada-U.S. Income Tax Convention limits the Canadian withholding tax on dividends paid by a corporation resident in Canada to a resident of the U.S. to 15% (or 5% where the recipient is a corporation that owns at least 10% of the voting shares of the payor). Under the ITA, there is no Canadian non-resident withholding tax on interest paid or deemed to be paid by a Canadian resident person to a non-resident person with which the payor deals at arm’s length and where the interest is not considered to be “participating debt interest”. Under the Canada-US Income Tax Convention, Canadian withholding tax on arm’s length and non-arm’s length payments of nonparticipating debt interest to U.S. persons is generally eliminated. Disposition of Property by Non-Residents Subject to certain exceptions, Section 116 of the ITA requires a non-resident vendor of “taxable Canadian property” (defined above) to apply to the Canada Revenue Agency (CRA) for a clearance certificate with respect to the disposition or proposed disposition of such property either before the disposition or within 10 days after the disposition. A clearance certificate will be issued if the non-resident either pays 25% of the (estimated) capital gain on the (proposed) disposition as a pre-payment of the non-resident’s Canadian tax payable, or furnishes security acceptable to the CRA in lieu thereof. The above requirement does not apply to certain types of excluded property, which includes listed shares, units of a mutual fund trust, bonds, debentures and property any gain from the disposition of which would, because of a tax treaty with another country, be exempt from Canadian tax (provided, in certain cases, notification is given to the CRA). In an arm’s length sale of such property, the purchaser will generally require the section 116 certificate on the closing date, absent which they will generally withhold 25% of the purchase price until such a certificate is provided (as the failure to obtain a section 116 certificate or, in the alternative to make the required 25% STIKEMAN ELLIOTT LLP P5 TAXATION withholding and remittance, will make the purchaser liable for the amounts that should have been withheld and remitted). Similar rules also apply at the Quebec level if the non resident disposes of “taxable Quebec property”. Types of Income Capital Gains and Capital Losses One of the most important Canadian income tax incentives is the effective reduction in the rate of tax on capital gains. Only one-half of any realized capital gains are included in the calculation of a taxpayer’s taxable income. Correspondingly, one-half of any capital loss is deducted from any taxable capital gains of the taxpayer in the year the capital loss arose, and any excess net capital losses may be carried back to any of the three previous taxation years or carried forward to any subsequent taxation year. Dividends Generally, dividends received by Canadian resident individuals from corporations resident in Canada are subject to a “gross-up and credit” mechanism designed to compensate for the fact that the dividend has effectively already been taxed in the hands of the corporation. The gross-up and tax credit mechanisms help to provide a rough level of parity between income earned directly by the individuals (or through a partnership) and income earned through a corporation (referred to as “integration”). The dividend tax credit for “eligible dividends” more fully compensates Canadian individual shareholders for the underlying corporate tax paid. Eligible dividends are, generally, any taxable dividends designated by the corporation and paid from a pool of income that was not subject to a reduced or preferential corporate tax rate. The effect of this gross-up and credit is an effective reduction in the tax rate for dividends. If the dividend is paid by a non-resident corporation, the gross-up and credit mechanism is not available. Generally, dividends received by a corporation resident in Canada from another corporation resident in Canada are included in, and then fully deductible from, the recipient’s income. Consequently, dividends paid between two Canadian resident corporations generally flow tax free. However, private corporations and certain other corporations must pay a refundable tax of 33 1/3 % of the dividends received, which taxes can be recovered once they will pay dividends to their shareholders. Dividends received by corporations resident in Canada from corporations not resident in Canada are fully included in the recipient’s income without a corresponding deduction, unless such dividends are paid out of the active business income of a non-resident corporation that is a “foreign affiliate” of the Canadian resident corporation resident in a specified treaty jurisdiction. P6 STIKEMAN ELLIOTT LLP TAXATION Foreign Source Income Canadian residents are taxed on their worldwide income, including foreign source income. Where another country also taxes that foreign source income, an applicable tax treaty may resolve which country has jurisdiction to tax that foreign source income. Where tax is imposed by both countries, Canada has a foreign tax credit system that provides relief, where certain conditions are satisfied, with respect to such foreign taxes. Certain types of passive income, defined in the ITA as foreign accrual property income (FAPI), are included in the income of a Canadian taxpayer when earned by a “controlled foreign affiliate” of the taxpayer. The ITA also contains a set of rules that deal with investments in offshore investment fund property. Employment Income Employment income is subject to deductions at source. All employers that have employees carrying out their duties of employment in Canada, regardless of their residency status, are required to register with the CRA and must withhold and remit tax to the Canadian taxing authority with respect to salaries, wages and taxable benefits paid to such employees. Employers are also required to pay and remit certain payroll taxes with respect to the Canada Pension Plan (or Quebec Pension Plan), Employment Insurance, a workers’ compensation program and, in certain provinces, health and training taxes. The Canada Pension Plan (CPP) contribution rate for 2014 applicable to both employers and employees is 4.95%. The maximum pensionable earnings for 2014 is $52,500 with a maximum contribution by each of the employer and the employee of $2,425.50. The Employment Insurance contribution rate for 2014 applicable to employers is 2.63%, and the contribution rate applicable to employees is 1.88%. The maximum insurable earnings for 2014 is $48,600, resulting in a maximum contribution by employers of $1,279.15 and a maximum contribution by employees of $913.68. The grant of employee stock options is generally not considered a taxable benefit to employees resident in Canada. However, once the option is exercised (and assuming the issuer is not a “Canadian-controlled private corporation” (“CCPC”), as a further deferral may be available), the employee is deemed to have received a taxable employment benefit equal to the difference between the exercise price and the fair market value (FMV) of the shares on the date of exercise. Provided that certain conditions are satisfied, only one-half of the employment benefit is included in the employee’s income (with the consequence that the employment benefit is effectively taxed at the same rate as a capital gain). These conditions include a requirement that the exercise price must be at least equal to the FMV of the underlying shares on the date of grant of the option. STIKEMAN ELLIOTT LLP P7 TAXATION Other Income Tax Issues Non-Capital (or Operating) Losses Non-capital losses (business losses) are deductible against business income in the year such losses arise. In addition, excess non-capital losses can be carried back three years or forward twenty years to reduce taxable income in those years. There are no consolidated returns in Canada, such that the profits of one corporation in a related group cannot simply be offset by losses in another, absent the use of certain loss-utilization transactions. Anti-Avoidance The ITA and most provincial income tax legislation contain a general anti-avoidance rule known as the “GAAR”. The GAAR can allow the recharacterization of the tax consequences of a particular transaction where (1) a tax benefit results, directly or indirectly, from the transaction or a series of transactions; (2) the transaction or series of transactions cannot reasonably be considered to have been undertaken or arranged primarily for a bona fide purpose other than obtaining a tax benefit; and (3) the transaction or series of transactions has resulted in a misuse or abuse of the provisions of the relevant acts, regulations and treaties, read as a whole. A tax benefit is defined as a reduction, avoidance, or deferral of tax or other amount payable under the ITA or an increase in a refund or other amount under the ITA. Transfer Pricing Transactions between a corporation resident in Canada and a non-resident corporation with which it does not deal at arm’s length (essentially, any nonresident entity within a related group) are subject to Canadian income tax as if such transactions had taken place between arm’s length persons. In this regard, Canada generally follows the OECD transfer pricing guidelines. The terms and conditions of transactions may be adjusted under the ITA so that prices charged on the transfer of property or provision of services between non-arm's length parties reflect the prices that would have been adopted had those parties been dealing at arm's length. The ITA provides for certain contemporaneous documentation reporting requirements with respect to non-arm’s length transactions. Furthermore, a penalty may be applicable at a rate of 10% of any net adjustment made by the CRA to the transfer prices of a Canadian affiliate. This penalty may be avoided if the taxpayer demonstrates that it has made reasonable efforts to meet the transfer pricing rules in its determination of the transfer prices. Governmental Tax Incentives The Canadian tax system provides for preferential tax treatment in certain situations based on the nature of the taxpayer and the nature of the income being earned. In particular, the ITA contains a number of fiscal incentive regimes designed to encourage investment in particular sectors of the Canadian economy, including P8 STIKEMAN ELLIOTT LLP TAXATION manufacturing and processing, capital investment, small business, oil and gas exploration, and certain scientific and experimental developments. The Canadian federal government and, in particular, the government of each of the provinces provide generous tax incentives for the performance of scientific research and experimental development (SR&ED) in a particular province. Where a corporation incurs expenditures that qualify as SR&ED for the purposes of the ITA, such expenditures (including capital expenditures) may generally be deducted in the current year in computing taxable income. In addition, a federal investment tax credit equal to 15% (or 35% in respect of CCPCs, subject to certain limitations) of qualifying SR&ED expenditures may be available. The determination of whether certain activities constitute SR&ED is very technical and fact specific. Most provinces provide similar tax incentives with respect to expenditures relating to SR&ED. GOODS AND SERVICES TAX AND HARMONIZED SALES TAX The comprehensive federal Goods and Services Tax (GST) generally applies to the supply of goods and services made in, or imported into, Canada. The rate of the tax is currently 5%. The GST applies at each stage of production. However, if the purchaser is involved in a commercial activity and is a qualified GST registrant, it will generally be entitled to claim a refund, called an “input tax credit”, for GST paid. GST on taxable imported goods and services is payable by the importer of record, while exported goods and services are generally “zero-rated” (GST technically applies, but at a rate of 0%). A business that provides zero-rated supplies will generally still be entitled to an input tax credit for the GST expenses that it has paid, whereas a business that makes exempt supplies will generally not be entitled to an input tax credit. Pursuant to the federal Excise Tax Act, a business, whether resident or non-resident, will normally be required to charge and collect GST from its customers on taxable goods and services supplied by it in Canada in the course of a business carried on in Canada. Businesses that make taxable supplies in the course of a business carried on in Canada must also become GST registrants unless they are “small suppliers” (generally very small businesses making less than $30,000 in taxable supplies in a 12 month period). GST registrants are required to file yearly, quarterly or monthly returns depending on the registrants’ annual sales. The provinces of Nova Scotia, New Brunswick, Newfoundland, Ontario and Prince Edward Island have harmonized their provincial sales taxes with the GST to form a single Harmonized Sales Tax (HST). The HST is also imposed under the Excise Tax Act, and has essentially the same rules as the GST. Further, the HST uses the same registration number as the GST (no separate registration is required), and is reported on the registrant’s GST return. The HST includes both a provincial component and the federal GST for a combined rate of 13% in Ontario, New STIKEMAN ELLIOTT LLP P9 TAXATION Brunswick and Newfoundland, 15% in Nova Scotia, and 14% in Prince Edward Island (depending on where the supply is made). PROVINCIAL SALES TAX Each province in Canada other than Alberta also levies a sales tax on most sales of tangible personal property and certain specified enumerated services within the particular province (the territories do not levy sales taxes). There are three types of such taxes. As mentioned above, Newfoundland, Nova Scotia, New Brunswick, Prince Edward Island and Ontario have harmonized their provincial sales taxes with the GST to form the HST. While British Columbia harmonized its sales tax effective July 1, 2010, it ceased being a harmonized province and reintroduced its provincial sales tax, effective March 31, 2013. The rules pertaining to the HST are essentially the same as those for the GST and are discussed under the GST/HST section above. Quebec levies the Quebec Sales Tax (QST), which is applied and administered separate from, but is now harmonized with the GST regime (although there are some differences). The QST of 9.975% is a tax on the consumption of goods and services in Quebec. Vendors require a separate vendor number for QST. Saskatchewan, British Columbia and Manitoba each impose a provincial sales tax or retail sales tax (each a PST). Each separate PST has distinct but similar rules. The rates for these taxes are 5% in Saskatchewan, 7% in British Columbia and 8% in Manitoba. These taxes must generally be collected and remitted by the vendor of the property or services. However, each province has a number of exemptions for certain goods (production machinery, inventory for resale, etc.). PROVINCIAL PAYROLL TAX Manitoba, Newfoundland, the Northwest Territories, Nunavut and Ontario levy a payroll tax on employers that is calculated as a percentage of total remuneration paid in the province, above a certain threshold. In Ontario, for example, the rate of Employer Health Tax is generally 1.95% of remuneration in excess of $400,000, although a basic exemption of $450,000 of remuneration is available to associated groups of businesses whose total remuneration is less than $5 million. Quebec levies similar taxes calculated on the amount of remuneration paid in Quebec. These taxes take the form of employer contributions to a provincial health services fund, to a workplace training fund (if a minimum amount is not spent on training in the company), to a parental insurance plan and to fund a labour relations commission. TAXES ON REAL PROPERTY Property taxes on real property are an important source of revenue in Canada, particularly for municipalities. Many provinces also levy transfer taxes on the purchase of land and impose various other taxes on mines, timber property and similar properties. P10 STIKEMAN ELLIOTT LLP There are three basic options for a non-resident corporation to carry on business in Canada. The first is to operate the business in Canada through a wholly-owned Canadian subsidiary of the non-resident corporation (the “Canadian Subsidiary”). The second is for the non-resident corporation to carry on the business in Canada directly as an unincorporated branch (the “Canadian Branch”). Finally, assuming that the non-resident corporation is resident in a country with which Canada has an international tax treaty, the third option involves the non-resident corporation carrying on the business in Canada but restricting its Canadian presence such that it does not have a permanent establishment in Canada. TAXATION METHODS OF CARRYING ON BUSINESS IN CANADA Canadian Subsidiary A Canadian Subsidiary of a non-resident corporation will be a resident of Canada for the purposes of the ITA and will be subject to Canadian income tax on its worldwide income. Dividends paid by a Canadian Subsidiary to any non-resident corporation will be subject to Canadian withholding tax at 25%. This rate may be reduced by an applicable tax treaty (it is generally reduced to 5% under the Canada-U.S. Income Tax Convention if the shareholder owns at least 10% of the voting stock of the payor). As noted earlier, under Canada’s domestic rules, there is no withholding tax on non-participating interest paid to arm’s length persons, and under the Canada-US Income Tax Convention, withholding tax on arm’s length or non-arm’s length nonparticipating interest paid to U.S. persons is generally nil. Canadian Branch A non-resident corporation carrying on business in Canada through a Canadian Branch is liable for income tax on its Canadian-source business income at the same rates that apply to Canadian residents. Such a corporation is also subject to an additional “branch tax” of 25% on (generally) the after-tax branch profits that are not reinvested in the Canadian business. The branch tax approximates the rate of withholding tax on dividends that would apply if a Canadian Subsidiary had been used to carry on the business instead of a Canadian Branch. The rate of branch tax may be reduced by an applicable tax treaty. For example, under the Canada-U.S. Income Tax Convention, the branch tax is limited to 5% and is not applicable to the first $500,000 of branch profits. Branch or Subsidiary There are a number of important considerations to be weighed by a non-resident corporation in deciding whether to carry on business in Canada through a Canadian Branch or through a Canadian Subsidiary. In both cases, the profits of the Canadian operation will be subject to Canadian income tax. If the business is carried on through a Canadian Branch, there will be branch tax to consider. If a Canadian Subsidiary is used, withholding taxes on dividends and interest may be imposed. An important difference between the branch tax and the withholding tax on dividends is that withholding tax applies only STIKEMAN ELLIOTT LLP P11 TAXATION if and when a dividend is paid or credited to the non-resident shareholder, while the branch tax may be applicable, regardless of whether profits are remitted to the nonresident corporation. In general, a non-resident holder of shares of a Canadian Subsidiary will not be subject to tax under the ITA in respect of the disposition of such shares, provided that the shares are not “taxable Canadian property” to such non-resident holder at the time of disposition. In the event that the shares are taxable Canadian property, the non-resident holder will generally be subject to Canadian tax on the capital gain realized upon their disposition. There are also circumstances where an applicable tax treaty may exempt any such gain from taxation in Canada even if the shares are taxable Canadian property. However, shares of a Canadian corporation that derive their value principally from Canadian real property, including resource property, do not generally benefit from such treaty exemptions. In comparison, a sale of a branch operation to an arm’s length party would likely be subject to Canadian tax. However, it may be possible to transfer the assets and liabilities of a Canadian Branch to a Canadian corporation in exchange for shares of the corporation on a taxfree basis, thus “converting” a Canadian Branch into a Canadian Subsidiary. Thin-Capitalization Rules The “thin-capitalization” rules in the ITA must also be considered. These rules are designed to discourage non-residents from investing in Canada in a form such that virtually all of the investment is by way of loan and as little as possible by way of equity, thereby maximizing the amount of profits that can be returned to the nonresident in the form of tax deductible interest payments. A Canadian Subsidiary generally may not deduct interest paid by it to “specified non-resident shareholders” to the extent that the relevant debt-to-equity exceeds a ratio of 1.5:1 (the same concept applies to a Canadian Branch but the debt-to-ratio is effectively replaced with a 3:5 debt-to-net asset ratio). A specified non-resident shareholder is defined as any non-resident who alone or in combination with other persons with whom it does not deal at arm’s length owns 25% or more of the voting shares or of the fair market value of all issued shares of the subsidiary. Unlimited Companies There are a number of other matters to be considered when deciding whether a Canadian Branch or a Canadian Subsidiary should be used. For example, if a new Canadian venture is expected to operate at a loss in its initial stage, it may be preferable to establish a branch of the non-resident enterprise so as to permit the latter to deduct the loss in computing its tax liability in its home jurisdiction, assuming the tax rules in that jurisdiction permit it to do so. However, the use of an Alberta, British Columbia or Nova Scotia unlimited company (ULC) as the Canadian subsidiary may provide the same result for certain jurisdictions if they treat such an entity as a pass-through (for example, by using the check-the-box rules in the U.S.). ULCs are treated no differently than any other corporation resident in Canada for Canadian P12 STIKEMAN ELLIOTT LLP TAXATION income tax purposes. However, the Canada-US Income Tax Convention may limit the treaty benefits that are available to unlimited liability companies in certain situations. There are some minor differences between the unlimited liability regimes in Alberta, British Columbia and Nova Scotia. For example, while the liability of each shareholder (or member, in the case of an Nova Scotia ULC) for Alberta, British Columbia and Nova Scotia ULCs is unlimited, the liability is joint and several in nature for shareholders of Alberta ULCs from the time of incorporation, while joint and several liability of the members or shareholders of Nova Scotia and British Columbia ULCs only applies upon a winding up of the company. As well, the liability of shareholders of Alberta ULCs is broader than that of members or shareholders of Nova Scotia ULCs and British Columbia. Accounting and Reporting A possible perceived disadvantage of using a Canadian Branch is that the CRA may insist on auditing all of the books and records of the non-resident corporation for the purpose of assessing the taxpayer’s allocation of various items of income and expense to the Canadian Branch. Another practical difficulty is preparing annual statements for the Canadian Branch that are satisfactory to both the authorities in Canada and the country of residence of the non-resident corporation. ACQUIRING A CANADIAN RESIDENT CORPORATION Canadian Acquisition Company In acquiring the shares of a Canadian resident corporation (the “Target Corporation”), non-resident purchasers should generally consider using a Canadian acquisition corporation (CAC) in order to maximize the cross-border paid-up capital available to the purchaser. This is advantageous since a Canadian resident corporation can generally return profits to its foreign parent corporation, up to the amount of the paid-up capital of the shares, without Canadian non-resident withholding taxes. Distributions of profits in excess of the paid-up capital would be subject to Canadian withholding tax. Typically, the amount of the paid-up capital of the shares of the Target Corporation would be less than their acquisition cost to the non-resident purchaser (the fair market value). To ensure that the non-resident purchaser has shares with paid-up capital equal to the investment made by the non-resident, the non-resident purchaser may subscribe for shares in a CAC that will have a cost and paid-up capital equal to the purchase price of the Target Corporation’s shares. The CAC would then use the proceeds of this share subscription to acquire the shares of the Target Corporation. As profits are earned by the Target Corporation, tax-free intercompany dividends may generally be paid by the Target Corporation to the CAC. These amounts can subsequently be paid by the CAC to the non-resident parent as a tax free return of capital, thus permitting the investment cost to be returned to the non-resident parent free of Canadian withholding tax. A CAC can also be used STIKEMAN ELLIOTT LLP P13 TAXATION (through different means) to push any acquisition debt and corresponding interest expense into the operations of Target Corporation. It should be noted that the above analysis regarding the utilization of a CAC may not necessarily apply in the case of a Target Corporation that derives more than 75% of its value from foreign subsidiaries (as Canada’s “foreign affiliate dumping” rules (the “FAD Rules”) may apply). In general, the FAD Rules apply to investments in foreign subsidiaries (which, for these purposes, includes Canadian corporations that derive more than 75% of their value from foreign subsidiaries) made by Canadian corporations that are controlled by a non-resident corporation. Under these rules, the investment may result in the Canadian corporation being deemed to have paid a dividend to its non-resident parent in the amount of the investment made in the foreign subsidiary. The deemed dividend is subject to Canadian dividend withholding tax. Alternatively, the rules may apply to reduce the paid-up capital of the shares of the Canadian corporation which, in turn, reduces the amount of internal debt that may be used to fund the Canadian corporation under Canada’s thin capitalization rules. In the context of a Target Corporation that derives more than 75% of its value from foreign subsidiaries, it may still be beneficial to utilize a CAC (despite that the FAD Rules may apply). However, this determination is not automatic as it will depend upon a number of factors, including the Target Corporation’s historical paidup capital and the acquiror’s intentions to keep the foreign subsidiaries in Canada (or, more precisely, underneath the Canadian Target Corporation) in the future. Exchangeable Shares An exchangeable share structure should also be considered in circumstances where the shares of a non-resident purchaser are to be offered as consideration for shares of a Target Corporation, and the shares of the Target Corporation have significant capital gains accrued to the holders thereof. Under the ITA, a share-for-share exchange can occur on a rollover basis (no immediate taxation) if the exchange is of shares of two Canadian resident corporations or the exchange is of shares of two foreign corporations. However, the ITA does not currently provide a rollover when shares of a Canadian corporation are exchanged for shares of a foreign corporation. Accordingly, a non-resident corporation acquiring a Target Corporation may wish to employ an exchangeable share structure in order to provide Canadian resident shareholders of the Target Corporation with rollover relief. Very generally speaking, an exchangeable share structure involves the creation of two new Canadian subsidiary corporations of the non-resident purchaser, “Callco” and “Exchangeco”. As consideration for selling the Target Corporation shares, the Target Corporation shareholders are issued exchangeable shares of Exchangeco, which, due to various support agreements, have the same economic attributes as the shares of the non-resident purchaser. As Exchangeco is Canadian, the Target P14 STIKEMAN ELLIOTT LLP STIKEMAN ELLIOTT LLP TAXATION Corporation shareholders are entitled to a rollover of their shares, which defers their tax liability until they dispose of the exchangeable shares. The holders of the exchangeable shares usually have up to ten years or more in which to exchange their exchangeable shares for shares of the non-resident purchaser, which exchange occurs through Callco. However, the use and consequences of employing an exchangeable share structure must be carefully considered, as it will add complexity and expense to the transaction. P15 DOING BUSINESS IN CANADA Q Broadcasting and Telecommunications General................................................................................................................................ 2 Broadcasting and the CRTC ............................................................................................... 2 General .......................................................................................................................... 2 Range of Regulatory Power ........................................................................................... 2 Exemption Orders .......................................................................................................... 2 Restrictions on Foreign Ownership ................................................................................ 3 Canadian Content .......................................................................................................... 4 Radio Frequency Spectrum Allocation .......................................................................... 5 Telecommunications ........................................................................................................... 6 General .......................................................................................................................... 6 Ownership ...................................................................................................................... 6 Tariffs ............................................................................................................................. 7 Unsolicited Telecommunications ................................................................................... 8 Effect of Free Trade Agreements .................................................................................. 8 General Agreement on Trade in Services (GATS) ........................................................ 9 Radio Spectrum Management .......................................................................................... 10 © STIKEMAN ELLIOTT LLP MAY 2013 BROADCASTING AND TELECOMMUNICATIONS Broadcasting and Telecommunications GENERAL The federal government has exclusive jurisdiction over broadcasting (radio, television and their distribution, including some Internet activity) and telecommunications. The Canadian Radio-television and Telecommunications Act establishes the Canadian Radio-television and Telecommunications Commission (CRTC) as Canada’s broadcasting (pursuant to the Broadcasting Act) and telecommunications (pursuant to the Telecommunications Act) regulator. The federal Department of Industry and its Minister have certain regulatory powers over spectrum management and radio apparatus pursuant to the Radiocommunication Act. BROADCASTING AND THE CRTC General The CRTC is charged under the Broadcasting Act with regulating and supervising all aspects of the Canadian broadcasting system with a view to implementing the policy enunciated in the legislation. Specifically, section 3(1) of the statute requires that the Canadian broadcasting system be effectively owned and controlled by Canadians, and states that it should safeguard, enrich and strengthen the cultural, political, social and economic fabric of Canada. Subject to directions from the Governor in Council and the Radiocommunication Act, the CRTC is empowered under the Broadcasting Act to issue, attach conditions to, amend, renew, suspend and revoke broadcasting and broadcasting distribution licences, establish rules of procedure, make regulations and carry out and support research. The CRTC has rarely failed to renew a broadcasting licence. Range of Regulatory Power The CRTC has responsibility for radio, television, pay television, specialty services and broadcasting distribution undertakings, such as cable television, direct-to-home (DTH) satellite and wireless distributors. The Commission has enacted regulations applicable to each of these sectors, in addition to regulations prescribing the filing of information returns and the payment of licence fees. Much of the CRTC’s activity focuses on the issuance and renewal of licences, as well as the approval of changes in ownership of broadcasting undertakings. However, the Commission also conducts various policy hearings to consider revisions to the regulatory frameworks for the various undertaking and services it regulates. Exemption Orders The CRTC also has the power to issue exemption orders, thereby exempting persons from any or all of the requirements of Part II of the Broadcasting Act where compliance will not contribute in a material way to the implementation of broadcasting policy. A number of exemption orders have been issued, with certain Q2 STIKEMAN ELLIOTT LLP Perhaps the most discussed exemption order is that pertaining to digital media broadcasting undertakings, which provide broadcasting services that are delivered and accessed over the internet or delivered using point-to-point technology received by way of mobile devices. Such services, which were originally referred to as “new media broadcasting services”, have been exempted from licensing since 1999, and repeatedly renewed, although the conditions were revised in 2012 to introduce new conditions on the offering of digital media services to align with the CRTC’s regulatory framework for vertically integrated broadcasters, including, for example a prohibition on the offering of programming on exclusive or otherwise preferential basis where access to the programming is dependent on the subscription to a specific mobile or retail Internet access service. Restrictions on Foreign Ownership Pursuant to section 26(1) of the Broadcasting Act, the Governor in Council has the discretionary power to issue binding directions to the CRTC. A Cabinet direction has been issued prohibiting the issuance and the granting of broadcasting licence renewals to governments other than the Government of Canada and to persons who are not Canadian citizens or “eligible Canadian corporations”. BROADCASTING AND TELECOMMUNICATIONS conditions, with respect to a variety of broadcasting undertakings, including, for example, third-language television services, low power radio services and small cable systems. Undertakings that meet the conditions set out in the applicable order are authorized to operate, without further assessment or approval of the CRTC. For corporate licensees, the Direction provides that in order to be eligible for a licence: • • • • the corporation must be incorporated or continued under Canadian law; the CEO or equivalent and not less than 80 per cent of the Directors must be Canadian; and at least 80 per cent of the voting shares, and 80 per cent of the votes must be owned and controlled by Canadians. the corporation must not otherwise be controlled by non-Canadians (i.e., “control in fact"). In the case of a company that is a subsidiary of another, the parent must also be incorporated in Canada or a province and Canadians must own at least two-thirds of the parent company’s voting shares and at least two-thirds of the votes. Neither the parent company nor its directors or similar officers may exercise control or influence over any programming decisions of the subsidiary. There are no specific restrictions on the number of non-voting shares that may be owned by non-Canadians. There is an overriding control in fact test, however, whereby an applicant seeking to acquire, amend, or renew a broadcasting licence STIKEMAN ELLIOTT LLP Q3 BROADCASTING AND TELECOMMUNICATIONS must not otherwise be controlled in fact by non-Canadians. This is a question of fact determined by the CRTC in its discretion. The Broadcasting Act does not contemplate licences being issued to partnerships. As a result, when licensing partnerships, the CRTC takes the view that it must license each of the individual partners, which means that each such partner must meet the Canadian ownership requirements, regardless of the size or nature of the partnership interest. Canadian Content Another key element of the broadcasting policy set out in section 3(1) of the Broadcasting Act is the “creation and presentation of Canadian programming” and the “maximum use and in no case less than predominant use, of Canadian creative and other resources”. This has led to CRTC regulations requiring that all radio and television broadcasters must exhibit prescribed minimum percentages of Canadian content. A certification system is used to determine which programmes or musical selections will be considered to be ‘Canadian’. Generally, private radio stations must ensure that 35 per cent of the musical selections they play are Canadian. Conventional television stations must air at least 55 per cent Canadian programming overall, with further requirements between 6am and 12am. Canadian content requirements for pay-TV and specialty services vary depending on the nature of the service. Conventional television stations typically have requirements to provide a designated amount of local content. In addition to requirements respecting the exhibition of Canadian programming, the CRTC also requires a variety of licences to make expenditures directed at supporting the production of Canadian programming, either through a direct spending requirement or through the required contribution to funds used to subsidize the production of Canadian programming. As the result of a new group-based licensing framework announced in March 2010, private English-language television services that are part of large ownership groups (groups with over $100 million in annual broadcasting revenues, owning conventional television stations and at least one pay or specialty service) are able to flexibly allocate the aggregate of their required expenditure spending to any services within the ownership group. Overall Canadian programming expenditures for eligible ownership groups are required to amount to at least 30 per cent of the group’s gross broadcasting revenues. Provided that the various minimum exhibition requirements for Canadian content are met, foreign programming may be carried on Canadian services. In addition, foreign services may be authorized for distribution in Canada through Canadian distribution undertakings if approved by the CRTC and placed on the Eligible Satellite Services List. Such services may generally not be competitive with a licensed Canadian pay-TV or specialty service. Q4 STIKEMAN ELLIOTT LLP All licensed broadcast distribution undertakings (BDUs), such as cable companies, must carry certain Canadian services specified by the CRTC. These rules are both detailed and complex, with the obligations varying according to the type of distribution undertaking (ie, cable or direct-to-home (DTH)), whether the undertaking serves a predominantly French-language or predominantly Englishlanguage market, and whether the services are distributed using analogue or digital technology. As the scarcity upon which traditional regulation has been based erodes, the CRTC increasingly favours competition among programming services. Accordingly, many recently authorized services do not enjoy the genre protection afforded to older licensees, nor do they benefit from must-carry obligations. While ‘over-the-top’ (OTT) internet-based programming and distribution undertakings are exempt from regulation, IP-based distribution undertakings using proprietary networks or leased local facilities continue to be subject to the rules applicable to conventional cable systems. As OTT programming services that offer on-demand programming become more popular, there is increasing pressure on the CRTC and the government to regulate such services – or to decrease or eliminate the regulatory obligations on the traditional licensees with which such services increasingly compete. The Commission, however, has so far resisted such reforms. The CRTC found in October 2011 that there was insufficient evidence to demonstrate that either the presence of OTT programme providers or the greater consumption of OTT content by consumers is having a negative impact on the ability of the Canadian broadcasting system to achieve the objectives of the Broadcasting Act, or that there are structural impediments to a competitive response by licensed undertakings to the activities of OTT providers. BROADCASTING AND TELECOMMUNICATIONS There are currently no Canadian content requirements for online and mobile platforms, which are governed by an exemption order for new media broadcasting undertakings. Radio Frequency Spectrum Allocation In addition to CRTC licensing, legislative provisions governing the allocation of the radio frequency spectrum and technical or “hardware” issues are prescribed in the Radiocommunication Act. The Minister of Industry is granted discretionary power under the Radiocommunication Act to regulate these technical aspects of broadcasting undertakings. The CRTC requires applicants for broadcast licences to confirm they have filed technical documents with Industry Canada concerning transmitter/antenna and related information. Radio and spectrum licences may be amended at any time upon approval of the Minister of Industry. Licences are generally not transferable without the Minister’s approval. STIKEMAN ELLIOTT LLP Q5 BROADCASTING AND TELECOMMUNICATIONS TELECOMMUNICATIONS General The Telecommunications Act responds in part to the Supreme Court of Canada’s determination that jurisdiction over telecommunications common carriers rests exclusively with the federal government. For many years the question of jurisdiction had been unsettled, leading to an awkward mix of federal, provincial and even municipal regulation. In 2000, Saskatchewan Telecommunications (SaskTel), owned by the Saskatchewan Government, became the last of Canada’s telephone companies to be brought under CRTC jurisdiction. The Telecommunications Act is administered by the CRTC and requires the Commission to promote certain policy objectives, including the maintenance of Canada’s identity and sovereignty, Canadian ownership and control of telecommunications carriers operating or providing services in Canada, the efficiency and competitiveness of Canadian telecommunications, the stimulation of Canadian research and development, and the provision of services at reasonable rates in light of market forces. Ownership The Telecommunications Act and its associated regulations were amended in 2012 to require that only telecommunications common carriers (i.e. the entities that own or operate facilities) with greater than a 10% share of national telecommunications revenues must be Canadian owned and controlled. This requirement is satisfied if: ■ a carrier is incorporated in Canada (either federally or provincially); ■ 80% or more of the members of the carrier’s board of directors are Canadian; ■ not less than 80% of the carrier’s voting shares are beneficially owned by Canadians; and ■ the carrier corporation is not otherwise controlled by non-Canadians (i.e., “control in fact"). Regulations enacted under the Telecommunications Act have established a holding company arrangement with the effect of permitting foreign investment up to a level of 46.7% based upon 20% direct investment plus 33 1/3% indirect investment. Since the focus of the Canadian ownership requirements is on voting shares, foreign investors often seek to maximize ownership through non-voting securities, debt and other arrangements. In such cases, regulators reviewing a carrier’s proposed ownership structure will consider ownership compliance with regard to a ‘control in fact’ test, which considers whether minority or non-voting interests might nevertheless have significant influence over the strategic decision-making activities of a carrier, amounting to control. There can be 100% foreign ownership of telecommunications entities that do not own facilities (e.g. resellers of telecommunications services), as well as of Q6 STIKEMAN ELLIOTT LLP Compliance with Canadian ownership rules is assessed by the CRTC, with respect to telecommunications carriers, and the Minister of Industry, with respect to radiocommunication carriers, although both apply the same regulations and approach. Tariffs Unless otherwise exempted or forborne, the provision of telecommunications services by a carrier will be subject to conditions included in a tariff approved by the CRTC. Such tariffs will specify the terms and conditions for the service as well as the rates to be charged. The CRTC will approve rates if it determines that they are just, reasonable and non-discriminatory. The Telecommunications Act allows the CRTC to refrain from exercising its normal regulatory powers (forbearance) where it is of the view that the forces of competition will suffice to ensure reasonable rates and prevent discriminatory practices with respect to a class of telecommunications services. Traditionally, forbearance was treated as only one policy option of many available to the CRTC, though in recent years, the CRTC has forborne substantially from the regulation of wireless, long distance, satellite, international and retail Internet services, as well as many local telephone services in larger markets. BROADCASTING AND TELECOMMUNICATIONS telecommunications carriers whose revenues account for less than 10% of total Canadian telecommunications revenues. In December 2006, forbearance became the CRTC’s default option, when the Government of Canada issued a policy directive stating that the CRTC should use market forces instead of regulation whenever possible. In April 2007, an Order-inCouncil was passed establishing a presence-based test to be used by the CRTC to determine whether certain markets should be deregulated. The CRTC also has the power to exempt a class of carrier from the application of the Telecommunications Act if it is satisfied that the exemption is consistent with Canadian telecommunications policy objectives. The CRTC preference has been to issue conditional forbearance orders rather than exemption orders and to maintain a power to review alleged discriminatory practices. Tariffs remain for many wholesale services offered by incumbent carriers to competing telephone and internet service providers. The Commission is also increasingly exploring the addition of additional conditions on some previously forborne services: for example, it began consideration in 2012 of the imposition on wireless service providers of a condition requiring compliance with a new uniform national consumer code respecting a range of terms and conditions of wireless service, other than price. The CRTC is also given broad inspection, investigation and enforcement powers. Contravention of the Telecommunications Act can result in civil and criminal liability carrying fines of up to $1 million. However, the CRTC itself does not have the power to fine telecommunications carriers or service providers for a breach of the Telecommunications Act or of the Commission’s decisions or orders, although it does STIKEMAN ELLIOTT LLP Q7 BROADCASTING AND TELECOMMUNICATIONS have the power to levy administrative monetary penalties on those that violate the Unsolicited Telecommunications Rules, and will have similar powers under Canada’s Anti-Spam Law. Unsolicited Telecommunications The CRTC has created unsolicited telecommunications rules respecting unsolicited voice, fax and automatic dialling-announcing device (ADAD) communications. Only the use of ADADs for commercial solicitation is prohibited; other methods of telemarketing are regulated, and subject to restrictions relating to such matters as permitted calling hours, caller identification and contact requirements and the maintenance of telemarketer-specific do-not-call lists. Telemarketers are also subject to a national do-not-call list, and are prohibited from making calls to consumers included on the list. Exemptions exist for calls made to a consumer with which the telemarketer has an existing business relationship, as well as to calls made by registered charities, newspapers, political parties and market research and survey organizations. The rules do not apply to business-to-business calling. A number of provinces have also enacted legislation respecting collection agencies that place restrictions on unsolicited calls made for debt collection purposes, as well as consumer protection legislation and regulations imposing restrictions on the activities of telemarketers, including, in some jurisdictions, the requirement that telemarketers be licensed in order to be eligible to operate. With respect to other types of electronic messages, Canada enacted anti-spam legislation at the end of 2010, which is expected to come into force in 2014, following the finalization of regulations enacted under that law. The new law generally prohibits the sending of commercial electronic messages (broadly defined to include SMS, e-mail and social networking messages) without the explicit consent of the recipient. Permitted messages must be in a prescribed form, including sender identification and contact details and a no cost, easy unsubscribe mechanism. A number of exemptions exist, including, for example, exemptions for certain existing business relationships, conspicuous publication of an electronic address and responses to requests for estimates or quotations. Effect of Free Trade Agreements The primary effect of the FTA and NAFTA on the communications industry has been in the area of “enhanced” or “value-added” telecommunications. Neither the FTA nor NAFTA applies generally to basic point-to-point telecommunications or to broadcasting, although NAFTA does restrict certain activities of national basic telecommunications service monopolies as a means of ensuring that they do not engage in anti-competitive behaviour. Unlike the FTA, which left the issue of what qualifies as an “enhanced” service to be determined by the regulatory body of each country, NAFTA specifically defines Q8 STIKEMAN ELLIOTT LLP Thus, enhanced services include most services beyond basic and long-distance telephone services — for example, electronic mail, on-line information and data retrieval or processing, and even alarm systems. Each NAFTA country is required to give other NAFTA countries’ carriers and providers of “enhanced or value-added services” the better of national treatment (no less favourable than treatment granted carriers of its own country) and mostfavoured-nation treatment (no less favourable than treatment granted carriers of any other country). However, NAFTA countries may nonetheless maintain licensing schemes in respect of such services on reasonable and non-discriminatory terms. NAFTA also requires equal access to public telecommunications networks. Notably, NAFTA countries are not allowed to restrain trade by imposing discriminatory rules regarding the attachment of terminal equipment (or any other equipment) to public telecommunications transport networks. BROADCASTING AND TELECOMMUNICATIONS “enhanced or value-added services” as telecommunications services that use computer processing applications that: ■ act upon the format, content, code, protocol or similar aspect of a customer’s transmitted information; ■ provide a customer with additional, different or restructured information; or ■ involve customer interaction with stored information. Telecommunications covered by NAFTA are also subject to the general NAFTA rules respecting investment. Canada, like Mexico and the United States, has taken reservations that permit the retention and application of the Canadian ownership and control requirements described above. General Agreement on Trade in Services (GATS) Canada has signed the GATS agreement that brought basic telecommunications services under the authority of the World Trade Organization (WTO). This agreement establishes multilateral rules for trade and investment in basic telecommunications services and makes any breach of the agreement subject to the WTO dispute settlement process. Under its GATS commitments, Canada maintained its existing open regulatory regime as well as its foreign ownership rules for common carriers. Canada also adopted a reference paper on regulatory principles that was consistent with its existing regulatory system. While broadcasting services and the transport of DTH and DBS satellite signals were excluded, Canada liberalized regulation relating to the provision of international services and domestic satellite services. Canada has progressively removed traffic-routing rules for all international services and all satellite services. The last such rule ceased to apply as of March 1, 2000. The Telecommunications Act and the Teleglobe Canada Reorganization and Divestiture Act were amended in 1998 to provide for the licensing of submarine cables as well STIKEMAN ELLIOTT LLP Q9 BROADCASTING AND TELECOMMUNICATIONS as to authorize the CRTC to put in place, for the first time, a licensing regime for international services. The Telecommunications Act empowers the CRTC to require those falling into specified classes of basic telecommunications service providers to obtain licences to provide international telecommunications services. The new licensing power extends to resellers. The CRTC’s licensing regime for Basic International Telecommunications Service (BITS) providers came into force on January 1, 1999. BITS licensees are not subject to foreign ownership restrictions. RADIO SPECTRUM MANAGEMENT Through powers conferred on the Minister of Industry (that can be and are delegated) pursuant to the Radiocommunication Act, Industry Canada is responsible for managing and allocating radio frequencies used in broadcasting and telecommunications as well as licensing and regulating radio apparatus. Relative to spectrum management, Industry Canada had historically employed a traditional first-come, first-served (FCFS) licensing practice, complimented by a comparative selection and licensing process, auctions in appropriate circumstances as well as international and domestic frequency allocation processes. The FCFS approach is generally used where there is sufficient spectrum to meet the demand in a given frequency band, while a competitive licensing process has been used in the cases of radio frequencies for which demand is likely to exceed supply (as well as occasionally for policy reasons). Increasingly, Industry Canada has assigned spectrum licences through public auctions. In some of these processes, such as the 2008 auction of advance wireless services spectrum in the 2GHz range, some blocks of the spectrum to be auctioned were allocated exclusively to new entrants. The new entrants were required to bid against each other for these blocks, but incumbent operators were not permitted to bid. For the 700 MHz auction, to be held late in 2013, there will be no set-aside of designated blocks solely for new entrants. There will be caps, however, on the maximum amount of spectrum any single operator can acquire within certain spectrum blocks. Moreover, large incumbents will be subject to more restrictive caps with respect to the most desired spectrum blocks in each licence area. Licences generally restrict the use of licensed spectrum to a particular service or application, in line with government spectrum utilization policy. In line with standard conditions of licence, spectrum licences can generally be transferred in whole or in part, in both bandwidth and geographic dimensions; however, in all cases, transfers of spectrum licences require the approval of the Minister of Industry. In approving transfers, the Minister will ensure that potential transferees meet Canadian ownership requirements, and may be influenced by other policy considerations, such as market concentration. Some licences, such as the licence blocks made available to new entrants in the 2008 AWS auction, are prohibited by condition of licence from being transferred to an incumbent licensee Q10 STIKEMAN ELLIOTT LLP STIKEMAN ELLIOTT LLP BROADCASTING AND TELECOMMUNICATIONS for five years after licensing. Similarly, transfers of the 700 MHz spectrum that will be auctioned in 2013 will not be permitted during the first five years of the licence term, if such a transfer would allow the licensee in question to exceed the spectrum caps that are to govern the auction process. Q11 DOING BUSINESS IN CANADA R Energy and Natural Resources Jurisdiction .......................................................................................................................... 2 The National Energy Board ................................................................................................. 2 Effect of Free Trade Agreements........................................................................................ 3 © STIKEMAN ELLIOTT LLP JULY 2009 ENERGY AND NATURAL RESOURCES Energy and Natural Resources JURISDICTION Responsibility for the regulation of energy and natural resources in Canada is shared by the federal and provincial governments. The principal federal regulatory body is the National Energy Board (NEB). In addition, there are numerous provincial bodies whose statutory mandates relate to energy and natural resources. The determination of which level of government has jurisdiction over a particular matter depends on a number of factors including the scope of the undertaking, the nature of the energy development and the national importance of the energy resource. The federal government will normally be the relevant authority regarding energy issues of interprovincial or international significance. The Canadian Nuclear Safety Commission (CNSC) controls the development, application and use of atomic energy in Canada. With federal cabinet approval, the CNSC may make regulations relating to nuclear research, controlling and licensing the production, application and use of atomic energy, and controlling the import, export, use and sale of uranium, thorium, plutonium, neptunium, deuterium and their derivatives. Provincial governments have basic responsibility for energy and natural resources within their own boundaries and, in most cases, are the owners of the resources. The role of the provincial governments in energy and natural resources is, therefore, fundamental. In addition, the provinces regulate energy transportation and marketing within their borders. The provinces also have limited jurisdiction to regulate interprovincial exports of certain energy and other natural resources, subject to the paramountcy of any applicable federal laws. THE NATIONAL ENERGY BOARD The general responsibility of the NEB is to regulate defined aspects of the interprovincial and international movement of oil and gas and the import/export of electricity in the public interest. The NEB grants certificates of public convenience and necessity for the construction of interprovincial and international pipelines and international power lines, issues licences for exports of oil, gas or electricity and for imports of gas and approves tolls and tariffs for interprovincial and international pipelines. The NEB also has the authority to hold inquiries into any aspect of energy matters under its jurisdiction and to issue reports for the information of the government and the general public. The NEB generally does not regulate any of the following: ■ hydrocarbon exploration, drilling or exploitation (except in the territories and some offshore areas); ■ the generation of electric power; or ■ the construction or operation of pipelines that do not cross provincial or national boundaries. R2 STIKEMAN ELLIOTT LLP NEB approval is required for the construction of interprovincial and international pipelines and international power lines. The approval process normally includes a public hearing and will involve consideration of the technical and financial feasibility and the environmental and socioeconomic impacts of the proposed project. The long or short term export of oil, gas or power will also require NEB approval. The Board will generally have to be satisfied that there will be an adequate supply of energy for Canadian requirements following the export of the proposed quantity, among other things. The market-based procedure used in the approval of long term gas export proposals involves a complaints procedure that gives Canadian users an opportunity to object on the grounds that they are not able to obtain supplies on similar terms and conditions. The required filing of an Export Impact Assessment is required to allow the NEB to determine whether the proposed export is likely to cause Canadians difficulty in meeting their energy requirements at fair prices. The NEB is also allowed to consider virtually any other relevant factors that will allow it to make a “public interest determination”. ENERGY AND NATURAL RESOURCES Many of the decisions of the NEB require federal cabinet approval. Such decisions include the issuance of certificates for interprovincial and international pipelines and for international power lines and of licences for the long-term export of oil, gas or electricity. EFFECT OF FREE TRADE AGREEMENTS NAFTA, like the FTA before it, has reduced the scope of regulatory intervention in the trade in energy, particularly between Canada and the United States. As a starting point, the FTA and NAFTA confirm that trade in electricity and other energy goods will be subject to GATT rights and obligations as well as to the provisions of the FTA and NAFTA agreements. The tariff elimination provisions of the agreements eliminate existing duties on energy imports and exports and ensure that no new tariffs will be instituted. Canada is also exempt from U.S. oil import fees. The parties agreed to lift most restrictions on energy imports and exports, subject to the conditions under which GATT allows restrictions (these include short supply, conservation of an exhaustible resource, national security or the imposition of price controls). No taxes, duties or charges on the export of any energy good from the U.S. to Canada or vice versa will be imposed unless such taxes, duties or charges are also imposed on such energy goods when destined for domestic consumption. The National Energy Board Act requires the NEB to give effect to the FTA and NAFTA when exercising its functions. A further discussion of the FTA and NAFTA is included in our section on free trade agreements. STIKEMAN ELLIOTT LLP R3
