Doing business in Canada_2011_Langmichener

Doing Business in Canada

www.langmichener.ca

Toronto Brookfield Place 181 Bay Street, Suite 2500 P.O. Box 747 Toronto ON M5J 2T7 Tel.: 416-360-8600 Fax.: 416-365-1719

Vancouver 1500 Royal Centre 1055 West Georgia Street P.O. Box 11117 Vancouver BC V6E 4N7 Tel.: 604-689-9111 Fax.: 604-685-7084

Ottawa 50 O’Connor Street, Suite 300 Ottawa ON K1P 6L2 Tel.: 613-232-7171 Fax.: 613-231-3191

Hong Kong 1106, Tower 1 Lippo Centre – 89 Queensway Hong Kong , SAR Tel.: (852) 3101 0213 Fax.: (852) 3585 1233

Doing Business in Canada Lang Michener LLP is pleased to present Doing Business in Canada, one of seven Lang Michener produced Reference Guides designed to provide “how to” advice and insights for those currently doing business in Canada or contemplating establishing a business in Canada.

Please visit our website to obtain a PDF version of Doing Business in Canada: langmichener.ca.

Toronto Brookfield Place 181 Bay Street, Suite 2500 P.O. Box 747 Toronto ON M5J 2T7 Tel.: 416-360-8600 Fax.: 416-365-1719

Doing Business in Canada

Vancouver 1500 Royal Centre 1055 West Georgia Street P.O. Box 11117 Vancouver BC V6E 4N7 Tel.: 604-689-9111 Fax.: 604-685-7084

Ottawa 50 O’Connor Street, Suite 300 Ottawa ON K1P 6L2 Tel.: 613-232-7171 Fax.: 613-231-3191

Hong Kong 1106, Tower 1 Lippo Centre – 89 Queensway Hong Kong , SAR Tel.: (852) 3101 0213 Fax.: (852) 3585 1233

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Doing Business in Canada Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 About Our Firm. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 General Information About Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Constitutional Framework. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Division of Powers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 International Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Customs Duties and Customs Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Anti-dumping/Subsidization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Commodity Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 The North American Free Trade Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 The World Trade Organization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Quantitative Import and Export Restrictions and Strategic Trade Controls . . . . . . . . . . . . . . . . . 13 Product Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Canadian Standards Association . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Currency Controls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Investment Canada Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 New National Security Powers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 The U.N. Convention on Contracts for the International Sale of Goods. . . . . . . . . . . . . . . . . . . . . . . . 16 Contracts subject to the CISG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Excluding the CISG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Reducing Uncertainty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Formation of a Contract. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Unanswered Questions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Greater Exposure for Seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Alternative Business Structures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Joint Venture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Unlimited Liability Company (“ULC�) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Income Tax Implications of Alternative Business Structures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Considerations for Selection of Appropriate Business Structure . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Canadian Taxation of a Branch. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Income Tax Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

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Financing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Debt Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Equity Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Multi-Jurisdictional Disclosure System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Insider Trading Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Business Immigration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Business Immigration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Permanent Residents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Citizenship . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Environmental Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Packaging and Labelling Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Consumer Packaging and Labelling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Hazardous Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Food Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Drugs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Cosmetics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Medical Devices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Canadian Competition and Antitrust Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Mergers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Comparison to Foreign Practice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Conspiracy to Fix Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Comparison to United States Practice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Immunity Program. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Bid-rigging . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Misleading Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Promotional Contests. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Telemarketing/Prize Notification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Reviewable Conduct. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Protection of Intellectual Property in Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Trade Marks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Patents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Confidential Information and Trade Secrets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Copyright. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Industrial Design . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Integrated Circuit Topography Act. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Information Technology Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Confidential Information and Trade Secrets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Copyright Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Patent Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Electronic Commerce. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Commercial Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Domain Names . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

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Doing Business in Canada

Bankruptcy and Insolvency Laws. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Receiverships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Bankruptcy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Reorganizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Employment Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 The Common Law of Employment in Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Legislative Standards in Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Real Estate Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Acquiring Property/Entering into a Lease. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Land Development. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Real Property Title . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Residential Income Producing Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Commercial Investment Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Land Transfer Tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Extra Provincial Registrations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Insurance Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Federal Jurisdiction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 The Insurance Companies Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 The Bank Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Financial Consumer Agency of Canada Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 The Winding-Up and Restructuring Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Provincial Jurisdiction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 The Insurance Act (Ontario) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 The Insurance Act (Ontario) – Agents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 The Registered Insurance Brokers Act (Ontario). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 Privacy Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

Š 2009 Lang Michener LLP Updated: November 2009 This publication offers general comments on legal developments of concern to business and individuals. This publication is not intended to provide legal opinions and should not be a substitute for professional advice. Readers should, therefore, seek professional legal advice on the particular issues which concern them.

Additional information about doing business in Canada may be obtained by contacting your local Lang Michener LLP office.

Please note all monetary references are to Canadian dollars.

Doing Business in Canada

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About the Editor

CHRIS GARRAH is a partner in Lang Michener’s Toronto office. He practices in the areas of corporate and commercial law, focusing on mergers and acquisitions, corporate reorganizations and joint ventures.

416-307-4211 cgarrah@langmichener.ca

About Lang Michener Lang Michener is a leader in Canada's legal profession and has been for more than 80 years. Our international firm, with offices in Ottawa, Toronto, Vancouver and Hong Kong, has over 200 dynamic professionals who provide effective, innovative solutions to Canadian and international clients.

We have played a major role in shaping Canada’s economic and political institutions, and understand the competitive

global needs of our country’s leading companies and industries.

Our team of experienced and practical-minded business lawyers understands the types of complexities you face – our corporate lawyers represent local and international corporations in a full range of business issues. We handle all aspects of mergers and acquisitions, business and corporate law, as well as taxation, both income and commodity.

For more information or to obtain copies of this or other Lang Michener Reference Guides, please visit our website at langmichener.ca.

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Doing Business in Canada

Introduction Lang Michener LLP is pleased to present Doing Business in Canada, an informative reference guide that provides an overview of the governmental and legal framework that surrounds the growing Canadian economy. Beginning new operations or bringing an already established business into Canada is a complex endeavor that requires research and professional guidance in order to fully understand the business climate at both the national and local levels.

Doing Business in Canada is written and produced by Lang Michener legal experts with the goal of providing a practical overview of the issues involved in the establishment of a business in Canada.

This guide provides an overview of various business structures, taxation and investment parameters, Canadian anti-trust legislation and laws pertaining to information technology, privacy, insurance and employment that exist in Canada. Although this guide provides readers with a comprehensive overview of the major business and legal issues related to operating a business in Canada, it should not replace the advice provided by proper legal counsel. It is strongly recommended that the services of experienced professionals be retained before any key decisions are made.

Doing Business in Canada, is one of seven reference guides offered by Lang Michener. Other reference guides in the Lang Michener library include: Going Public in Canada, Incorporating a Business in Canada and Ontario Construction Law: Rights and Obligations, The Critical Final Stage of Your Investigation: The Forensic Investigator’s Guide to Using the Litigation Process, The Forensic Accountant's Guide to the Law of Privilege, and Ontario Estate Planning.

For further information and/or to obtain copies of this or any other Lang Michener Reference Guide, please contact you local Lang Michener office or visit our website at www.langmichener.ca.

Doing Business in Canada

ABOUT OUR FIRM Lang Michener assists clients in areas such as corporate and commercial, securities, litigation, insurance, lending services and real estate law, as well as highly-specialized advice on matters involving information technology, competition and marketing, international trade and business, and employment and labour law. We have a prominent intellectual property practice that for over 40 years has helped Canadian and multinational corporate clients protect and secure maximum advantage from their intellectual assets. Our lawyers have particular strength at guidance and advocacy in areas unique to law and government in Canada, including administrative law and tribunals, and Supreme Court advocacy. We also offer unsurpassed counsel on the issues unique to major Canadian industries, from forestry, mining and power generation to emerging companies in information technology and franchising.

GENERAL INFORMATION ABOUT CANADA GEOGRAPHY Size: 10,369,434 square kilometers (3,988,244 square miles) Capital: Ottawa, Ontario Canada has 10 provinces and three territories.

PROVINCES Ontario – Capital: Toronto Quebec – Capital: Quebec City Nova Scotia – Capital: Halifax New Brunswick – Capital: Fredericton Prince Edward Island – Capital: Charlottetown Newfoundland – Capital: St.John’s Saskatchewan – Capital: Regina Alberta – Capital: Edmonton Manitoba – Capital: Winnipeg British Columbia – Capital: Victoria

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TERRITORIES Yukon – Capital: Whitehorse Northwest Territories – Capital: Yellowknife Nunavut – Capital: Iqaluit POPULATION: 32 MILLION+ (Statistics Canada, 2007) Immigration to Canada has resulted in a diverse population that features a mosaic of cultures. The varied population gives added value to global employers as Canada’s unique workforce provides knowledge of various languages and business practices.

Canada’s commitment to higher education has resulted in a population that contains a continuously growing contingent of the workforce completing post-secondary education. For example, the rate of Canadians graduating from university rose 50.2% from 1995 to 2005 according to Statistics Canada, Labour Force Survey 2006.

The majority of Canada’s population is situated along a narrow band that is located on the country’s southern edge.

According to Invest in Canada, 17 of Canada’s largest cities are located within a half-hour drive of the United States border.

62% of Canada’s total population is located in either Ontario or Quebec.

CURRENCY Canada has two governmental bodies that develop currency.

Canada’s sole note-issuing authority is the Bank of Canada.

Canadian coins are produced by the Royal Canadian Mint. It takes 100 Canadian cents to equal one Canadian dollar.

Canada also features one and two-dollar coins. The Canadian/U.S. exchange rate is not fixed, but rather changes on a daily basis based on market prices.

LANGUAGE Canada has Federally adopted two official languages: English and French. Bilingual services are provided by all Federal agencies and some provincial agencies. Chinese is Canada’s largest non-official language group accounting for three percent of the population (Canadian Census, 2001). Over 100 languages have been identified within Canada as mother tongues. (Statistics Canada, 2001)

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Doing Business in Canada

Constitutional Framework DIVISION OF POWERS In order to understand how business is regulated in Canada, it is useful to understand something about the Canadian structure of government.

Canada is a constitutional monarchy.

The Head of State is Her Majesty Queen Elizabeth II who is represented federally by the Governor General and in each Province by a Lieutenant Governor. In theory, the Prime Minister and the provincial premiers as well as other government ministers hold executive office at the pleasure of the Queen and her representatives.

However, through a process of gradual constitutional evolution, Canada became a sovereign state with full international status as a nation following World War I and is a parliamentary democracy, in accordance with the theory and practice of responsible government, which was established in the North American colonies by the 1840s.

Canada was created on July 1, 1867 by the Parliament of the United Kingdom pursuant to the British North America Act. The Act of 1867 was renamed the Constitution Act, 1867, in 1982. This Act, together with the Constitution Act, 1982 which gave Canada an entrenched bill of rights (the Canadian Charter of Rights and Freedoms), gave Canada the ability to amend all parts of the Constitution of Canada without recourse to the United Kingdom Parliament. The Constitution Act, 1867 distributes legislative powers between the federal legislature (the Parliament of Canada) and the provincial legislatures. It also gives a residual power to the Parliament of Canada to make laws on matters not falling within the enumerated classes of either federal or provincial spheres.

Each of the 10 provinces and three territories in Canada is divided into many county or municipal governments.

Municipalities, which vary in geographical size, have a large measure of autonomy to regulate the conduct of business within their jurisdictional borders.

Broadly speaking, the areas of responsibility delegated to the Parliament of Canada under the Constitution Act are

Doing Business in Canada

matters of national concern. They include such matters as the postal service, defence, navigation and shipping, fisheries, currency, banking, bankruptcy and insolvency, patents, copyrights and criminal law. Foreign affairs is an unenumerated matter of exclusive federal executive competence, but is subject to divided legislative competence between Parliament and provincial legislatures with regard to the implementation of treaties and international agreements falling within the enumerated heads of jurisdiction assigned to one level or the other under the Constitution Act, 1867.

The areas of responsibility delegated to the legislatures of the 10 provinces address matters which are of local interest including such things as direct taxation within each province to raise revenue for provincial purposes, hospitals, education, the administration of justice and other matters of a local or private nature.

There is a substantial overlap between the areas of responsibility delegated to the Parliament of Canada and the provincial legislatures which has increased substantially since 1867. This has resulted in broadly concurrent fields of federal and provincial jurisdiction in the Canadian regulatory state with the attendant risk of jurisdictional disputes. Where there is jurisdictional conflict between the two spheres, the Constitution holds that the federal law prevails and the provincial law is either invalid or inoperative to the extent of the inconsistency.

Business regulation typically falls within federal government responsibility for “regulation of trade and commerce” and, at the same time, to provincial jurisdiction over “property and civil rights in the province.” In general, intraprovincial trade and commerce is a matter within provincial power (s. 92(13)) and the federal trade and power is confined to interprovincial or international trade and commerce and federal trade and commerce.

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International Trade GENERAL Canada depends heavily on foreign markets for its economic well-being. Exports account for about 30% of the country’s gross domestic product. More than 75% of Canada’s exports currently are destined for the United States. These and other considerations have made the Canada-United States Free Trade Agreement (the “FTA”), which came into force January 1, 1989, a milestone in relations between the two countries. On January 1, 1994, Canada, the United States of America and the United Mexican States established a continental free trade area as the North American Free Trade Agreement (“NAFTA”) came into force. Canada is also an original member of the General Agreement on Tariffs and Trade (“GATT”) dating from 1947 and a member of the World Trade Organization (“WTO”) created by international agreement which incorporated the GATT in April of 1994.

CUSTOMS DUTIES AND CUSTOMS REPORTING Importers of goods generally pay customs duties unless they qualify for duty-exempt status under one of the general multilateral (WTO), regional (NAFTA) or bilateral FTA’s (Chile, Israel, Costa Rica) to which Canada is party.

Subject to certain adjustments, customs duties are payable on the value of the imported goods calculated on the basis of arm’s length transactions.

Tariff rates vary according to the classification of the imported goods, so determination of the appropriate classification is of critical importance to any importer seeking the lowest possible tariff rate. Canada has adopted the Harmonized System of tariff classification which is used by all of Canada’s major trading partners.

As of October 7, 2002, the Minister of National Revenue fully implemented the new Administrative Monetary Penalty System (“AMPS”), allowing the Canada Border Services Agency (“CBSA”) to monetarily penalize non-compliance with customs laws and regulations. Penalties range from a warning to a maximum fine of $25,000 per instance. Offences range from basic administrative errors (such as typographical errors and late filing) to disputes on appropriate tariff classification, and the interpretation of statues.

New stringent Reporting of Exported Goods Regulations, accompanied with AMPS penalties for non-compliance, prescribe the reporting to the CBSA by Canadian exporters of exports from Lang Michener LLP 10

Canada to all countries except the United States of America. The information to be reported is similar to that sought when goods are imported into Canada: value, classification, destination of the goods etc. Exports of goods to the U.S. do not have to be reported (some exports to the U.S. nevertheless require an export permit) because the Canadian government has access to U.S. import statistics.

ANTI-DUMPING/SUBSIDIZATION The Special Import Measures Act (“SIMA”) protects Canadian industries from “dumped” or subsidized foreign goods. It is consistent with the anti-dumping and countervailing duty agreements developed under the auspices of the WTO. Consequently, the scheme of SIMA is similar to anti-dumping and countervailing duty legislation in the United States and throughout the industrialized world. In broad overview, it provides that upon the complaint of a domestic manufacturer, the CBSA will investigate whether imported goods have been dumped or subsidized. Dumping occurs when a product is imported into Canada at a price lower than the price at which it is sold in its home market, or lower than the cost of production. Generally, a product will be considered subsidized when a manufacturer has received governmental support so that the cost of the product is less than it would be in the absence of such support.

Once the CBSA concludes that dumped or subsidized goods have been imported, it will establish a margin of dumping or subsidization and impose a preliminary duty on the imported goods, so that their price is increased in Canada up to the normal Doing Business in Canada

value in the home market. Then, a hearing is scheduled before the Canadian International Trade Tribunal (“CITT”) where the Canadian industry must show that the import of these goods has caused or threatens to cause material injury to Canadian production of like goods or is materially retarding the establishment of a domestic Canadian industry. Evidence of injury can be demonstrated by: price erosion, price suppression, decreased levels of employment, lost sales, eroded profits, foregone expansion and the like. The domestic industry must demonstrate that the injury suffered is caused by the imported product. In a number of cases, while the domestic industry has suffered injury at the same time that imported dumped/ subsidized products were in the Canadian market, the CITT has found that the cause of the injury to the domestic manufacturer has little or nothing to do with the dumping/ subsidization and hence has refused to make a finding of material injury. If no material injury is found, then the dumping/antisubsidy duties are eliminated and duties that were collected are returned to the importer. If a finding of material injury is made, then the duty will stay in place to protect the domestic manufacturer from the harmful effects of dumped or subsidized imports for a prescribed time (initially five years).

There are many other statutory remedies available to Canadian producers in respect of import competition. These include Chinaspecific and global safeguard provisions (to deal with import surges and to authorize “voluntary” export restraint agreements such as in the steel, footwear and textile industries) found in the trade agreements as well as in statutes implementing Canada’s WTO rights and obligations, “snap back provisions” permitting a return to pre-FTA/NAFTA tariff rates on such things as horticultural products (as between Canada and the United States), tariff rate quotas under NAFTA, and other measures to deal with foreign competition in third-country markets.

COMMODITY TAXATION GOODS AND SERVICES TAX (“GST”) The GST is a 5% value-added tax which applies to each step in the production and distribution chain, including the importation of most goods into Canada. Certain goods and services are exempt from GST and others are zero rated (i.e., taxable, but at a zero rate). In keeping with Canada’s exportoriented economy, exports of most goods and services from Canada are not subject to GST (i.e., are zero rated). In addition to customs duties, most imported goods and certain services are subject to GST on the duty paid value of the imported goods or value of imported services. Each business in the Doing Business in Canada

production cycle which is a registrant for GST purposes is given a credit or refund of tax paid on imports and domestic purchases acquired for use in commercial activities. As final consumers are not eligible for a credit or refund in respect of GST, the full burden of this tax falls on the final consumer.

Every person (including a non-resident) who carries on a business in Canada which involves the making of taxable supplies (unless the level of taxable supplies by such person is less than $30,000 per annum) must register for GST purposes.

PROVINCIAL SALES TAX British Columbia, Manitoba, Ontario, Saskatchewan and Prince Edward Island impose retail sales tax on goods and certain services purchased or imported for consumption and/or use in the particular province. Vendors selling taxable goods and services in such provinces are required to register under the relevant provincial legislation and to collect and remit the tax to the applicable provincial government. The sales tax rates imposed by these provinces vary from 7% to 10%. British Columbia and Ontario have announced plans to harmonize their respective sales tax regimes with the federal GST. Nova Scotia, New Brunswick and Newfoundland “harmonized” their provincial sales tax regimes with the federal GST. As a result, the combined federal and provincial rate charged is 13%.

Furthermore, most of the provinces provide general exemptions for many services and basics such as groceries, medicine and books. They also provide exemptions for certain types of purchases, such as production machinery and equipment purchased by manufacturers. As well, goods purchased for commercial resale are not subject to tax.

Alberta does not impose a retail sales tax, and Quebec imposes a 7.5% value-added sales tax similar to the GST. THE NORTH AMERICAN FREE TRADE AGREEMENT Canada and the United States have the largest two-way trading relationship in the world. Through the FTA, in force since January 1, 1989, both countries have established an expanded and secure market for the goods and services they each produce. By adopting clear and mutually advantageous rules to govern trade, both countries ensure a predictable commercial environment for business planning and investment and a reduction in governmentcreated trade distortions. NAFTA, in force since January 1, 1994, has the effect of extending the provisions of the FTA to trade between and among Canada, the United States and Mexico, while suspending areas of overlap between NAFTA and the FTA. Certain other provisions of the FTA continue to apply to Canada Lang Michener LLP 11

and the United States only; but as a general matter, the FTA is suspended and superseded by NAFTA. Under the FTA and NAFTA, Canada, the United States and Mexico have agreed to eliminate customs duties and other restrictive regulations of commerce on substantially all trade in goods between the countries. The principles which govern the trade agreements are as follows: national treatment, reciprocity and harmonization. Under the principle of national treatment, each country is to treat the other’s goods, services, investments, investors and suppliers as they would treat their own in respect of those matters governed by the trade agreements. The corollary of national treatment is that existing tariffs and border measures in respect of non-parties are preserved so that a free trade area is created.

Both trade agreements deal with tariffs, customs, quantitative restrictions (such as quotas), government procurement standards, financial services, investment, temporary entry for business purposes and contain provisions specific to various industrial sectors.

NAFTA replaces FTA dispute settlement provisions and: i) establishes a Free Trade Commission which replaces the Canada-United States Free Trade Commission and supervises the implementation of NAFTA, resolves disputes, oversees further elaboration of NAFTA and considers any other relevant matter; and ii) provides for review of final anti-dumping and countervailing duty determinations in most circumstances, establishes an extraordinary challenge procedure to review binational panel decisions and allows for review of any changes in countervailing or anti-dumping duty laws and regulations.

Tariffs on the import of goods within the free trade area established under the NAFTA have been eliminated since January 1, 2007 except that some goods will be subject to tariffs until January 1, 2009. NAFTA incorporates the FTA tariffreduction schedule for Canada-United States trade in goods.

NAFTA contains precise rules of origin used to determine which goods qualify for the preferential tariff treatment extended to “originating” goods. Essentially, if the goods are grown, produced or manufactured entirely within a NAFTA party, they will be deemed to be products of that party.

NAFTA also contains complex rules, the most important of which are that a good must undergo a specific change in tariff classification and/or have a minimum regional value content to qualify for preferential tariff treatment. Whether or not foreign components have been transformed sufficiently or whether or not a good contains sufficient “North American Lang Michener LLP 12

content” to qualify for preferential treatment depends first on the classification of the good for customs purposes using the Harmonized System referred to earlier and the rules of origin.

THE WORLD TRADE ORGANIZATION The World Trade Organization (WTO) is the only global international organization dealing with the rules of trade between nations. It came into being on 1 January 1995 as a successor to the 50-year old General Agreement on Tariffs and Trade (GATT). The existing system – known as the multilateral trading system – was developed through a series of trade negotiations, or rounds, held under GATT. The last of them, 1986–94 Uruguay Round, led to the WTO’s creation.

At the heart of the system are the WTO’s agreements, signed by a large majority of the world’s trading nations (more than 140 WTO members account for over 97% of world trade). These agreements are the legal ground rules for international commerce. The GATT, which started as the forum for negotiating lower customs duty rates and other trade barriers, is now the WTO’s principal rulebook for trade in goods. It has annexes dealing with specific sectors such as agriculture and textiles, and with specific issues such as state trading, product standards, subsidies and actions taken against dumping. The General Agreement on Trade in Services (“GATS”) and the Agreement on Trade-Related Aspects of Intellectual Property Rights (“TRIPS”), negotiated during the Uruguay Round, further expanded the scope of organization’s coverage.

The complete set of WTO Agreements runs to some 30,000 pages consisting of about 30 agreements and separate commitments (called schedules) made by individual members in specific areas such as lower customs duty rates and services market-opening. The vital element of the WTO is its dispute resolution system which serves to settle trade controversies between the member states in a binding manner and thus ensures strict enforcement of WTO rules.

The fourth WTO Ministerial Conference in Doha, Qatar, held in November 2001, launched a new round of negotiations which were to have been completed by January 1, 2005, but subsequent negotiations are expected to extend into 2010. The broad agenda encompasses work on agriculture, services, non-agricultural tariffs, trade and environment, WTO rules such as anti-dumping and subsidies, trade facilitation, intellectual property, and other issues.

Doing Business in Canada

QUANTITATIVE IMPORT AND EXPORT RESTRICTIONS AND STRATEGIC TRADE CONTROLS The Export and Import Permits Act (the “EIPA”) allows the federal government to impose import and export controls. The import control list itemizes goods in respect of which an import permit is required. Goods which require such import permits include agricultural or animal produce, some of which arise due to so-called “voluntary” restraint agreements with certain countries which restrict the quantity of goods exported from such countries by the establishment of quotas. Canada’s agricultural supply management schemes are also partly enforced by the EIPA. With the successful conclusion of the Uruguay Round of GATT negotiations, many of these schemes have been converted to tariffs and will be eliminated over time.

There is also legislation in Canada such as the Customs Tariff which regulates or prohibits the importation of goods such as explosives, offensive weapons, oil and gas, alcoholic beverages, radiation emitting devices and certain animal and agricultural products. NAFTA eliminates these prohibitions with respect to agricultural products so that imports of such goods are now permitted from NAFTA countries.

Exports from Canada to countries set out in the area control list require a Canadian export permit. In addition, approvals may be required for exports to any nation embargoed by the United Nations.

The export control list includes goods such as those in the high technology sectors and those with potential military application. This list is designed to protect Canada’s security and natural resource processing interests as well as to

Doing Business in Canada

implement Canada’s international obligations. Most of these goods may be exported to the United States.

In 1992, an order (the “Order”) was issued pursuant to the Foreign Extraterritorial Measures Act (the “FEMA”) that requires persons in Canada to give notice of any communication relating to, and prohibits such persons from complying with, an extraterritorial measure of the United States that adversely affects trade or commerce between Canada and Cuba. The Order has a direct impact on American owned or controlled businesses operating in Canada that conduct, or that may conduct, trade with Cuba. The Order bars compliance in Canada with any United States measure prohibiting trade with Cuba, and requires that businesses in Canada report any such measure to the Attorney General of Canada and refrain from complying with any directions given by any persons in a position to influence their decisions. In 1996, the Order was amended to cover trade in services, including technology, in addition to goods, and its scope was broadened to apply to all extraterritorial U.S. measures taken at any level of government directed at impeding trade between Canada and Cuba.

The Order may place some United States companies operating in Canada in a situation where they cannot comply with United States law. According to the Canadian government, the Order is a necessary measure to protect and safeguard Canadian sovereignty. If any such company is prosecuted in the United States for a violation of United States law in this regard, the existence of the Order under FEMA may be considered by the American courts. Its precise impact, however, will be for those courts to decide.

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Product Standards products) to bear the CSA monogram. Provincial legislatures are endeavouring to amend their legislation to accept certification from any testing and certification facility accredited by the Standards Council of Canada, but the amendments to such legislation are by no means complete.

The Export Act, Cultural Property Export and Import Act, Customs and Excise Offshore Application Act, Importation of Intoxicating Liquors Act and the United Nations Act, among others, also regulate exports to one degree or another.

Under NAFTA, the federal governments of Canada, Mexico and the United States of America have agreed not to maintain or introduce procedures for product testing that create unnecessary obstacles to trade in goods. Pursuant to NAFTA, the Standards Council of Canada is accepting applications from United States testing and certification facilities and certifying those facilities to test products for use in Canada.

Currently, product standards in Canada and the United States frequently differ.

One long established testing and certifying organization in Canada is the Canadian Standards Association (the “CSA�).

Provincial legislation frequently references the standards of the CSA and, in certain cases, requires products (e.g., electrical

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CANADIAN STANDARDS ASSOCIATION The CSA is a not-for-profit membership organization that has developed product standards in a wide variety of areas, including electrical goods, safety equipment, health care, energy, telecommunications and housing construction.

Application for certification of a product by the CSA is made by first submitting general information pertaining to the product to the local CSA office. The CSA responds by sending an application form, cost estimate and product requirements.

The product is then tested to assess its compliance with the applicable standards and a findings letter is issued to the applicant detailing the necessary alterations to the product to meet the CSA standards. Once the product is altered to meet CSA standards, the CSA issues a formal reporting letter stating that the product is CSA certified and can be marked with the CSA monogram.

The timing and cost of certification vary according to the type of product. The certification process takes between two and eight weeks, depending on the nature of the product.

Costs vary greatly depending on the product. To maintain certification, an applicant must pay an annual fee and enter into an agreement with the CSA, permitting the CSA inspectors access to the factory where the certified product is manufactured and requiring the manufacturer to notify the CSA if any changes are made to the product.

Doing Business in Canada

Investment CURRENCY CONTROLS Canada’s economy is one of the most liberal among industrialized countries.

Canada has no exchange controls, no special exchange rates for specific transactions, no specific types of currency accounts required to be kept by foreign investors or traders, no restrictions on the repatriation of capital or earnings of a Canadian business to nonresident investors and, subject to withholding taxes, no exchange or regulatory restrictions on borrowing from abroad, or on the ability to remit dividends, profits, interest, management fees, loan repayments, royalties and similar payments, or on the settlement of trade debts.

INVESTMENT CANADA ACT Canada is a member of the World Trade Organization (“WTO”) and a signatory to the World Trade Agreement (“WTO Agreement”). The WTO Agreement substantially reduces regulatory restrictions on investment in Canada by WTO investors.

Under the Investment Canada Act (the “ICA”), which reflects the requirements of the WTO Agreement, an investment in a new Canadian business and an investment to acquire control of a Canadian business by a non-Canadian require notification of such investment to the Director of Investments and in certain circumstances requires the review and approval of the Minister of Industry (a member of the Cabinet). Investments by WTO investors requiring notification only, are (i) an investment to establish a new Canadian business, and (ii) all acquisitions of an existing Canadian business, unless the investment is reviewable (as described below). A “new Canadian business” means a business that at the time of its establishment (a) is unrelated to any other business being carried on in Canada by that nonCanadian, or (b) is related to another business activity carried on in Canada by that non-Canadian, but falls within a specific activity related to Canada’s cultural heritage or national identity.

The acquisition of control by a WTO investor of an existing Canadian business with assets or enterprise value of $312 million or more (in 2009, subject to annual adjustment for inflation) requires review, rather than a simple notice requirement.

However, an investment to acquire control of a Canadian business that is a cultural business is subject to significantly lower thresholds for review ($5 million Cdn). For this purpose, “cultural business” includes a business which publishes, distributes or sells

Doing Business in Canada

books, magazines or newspapers, produces, distributes, sells or exhibits film or video recordings or audio or video music recordings, or which publishes, distributes or sells music, or radio, television or cable television undertakings, including satellite programming and broadcast network services.

Notification (as opposed to an application for review) may be given before, or within 30 days after, acquisition of control of an existing business or the establishment of a new business.

With respect to most reviewable investments, however, the Investment Canada agency requires that an application for review be filed before the reviewable investment takes place.

With some exceptions, such investments may not be made before obtaining the approval of the Investment Canada agency.

This agency has the authority to seek an order for divestiture.

NEW NATIONAL SECURITY POWERS Beginning in February 2009, the ICA allows the Minister of Industry to review, and if warranted, refer any foreign investment in a new or existing Canadian business, if such investment could be injurious to Canadian national security.

The details of how this review power will be exercised are to be defined by regulation (pending as of September 2009).

Approval for an investor will be granted by the Minister of Industry (or Minister of Canadian Heritage in matters involving a “cultural” business) where an investment is determined to be of net benefit to Canada, based on the factors set out in the ICA. These factors include increased employment, the processing of resources in Canada, the use of parts and services produced in Canada and exports from Canada, the degree and significance of participation by Canadians in the business investment, the effect on productivity, technological development and production innovation and variety in Canada, the effect on competition and the contribution to Canada’s ability to compete in world markets. The investment must also be compatible with the industrial, economic and cultural policies of Canada and its provinces. Such investments, and certain other investments that are not subject to the provisions of the ICA, may also be prohibited or restricted in some fashion by provincial or other federal laws. As a practical matter, most applications for review are concluded in favour of the investor, though the investor is typically asked to agree to written undertakings confirming certain of their plans for the Canadian business.

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The U.N. Convention on Contracts for the International Sale of Goods Every person who sells goods to, or buys goods from, another person outside of Canada should be aware that the United Nations Convention on Contracts for the International Sale of Goods (“CISG”) may govern such sales unless it is expressly excluded.

All of the provinces of Canada have enacted implementing legislation in connection with the CISG. Some 41 countries have adopted the CISG, including the United States, China, France, Germany, Italy and Mexico, but not the United Kingdom, Japan or Korea.

The CISG permits parties in two or more countries with very different legal systems to reach agreement on a common set of reasonable sales rules where each would otherwise insist that the local sales law of its particular country applies. When faced with the selection of the applicable law of the contract, an acceptable option may be to choose the CISG. CONTRACTS SUBJECT TO THE CISG The CISG will generally apply to contracts for the sale of goods between two or more parties whose “places of business” are in two separate countries that have adopted the CISG. It may also apply where only one of the parties to the contract has its place of business in a country which has adopted the CISG. For example, if a Canadian business enters into a contract (and the contract is governed by the law of Canada) for the supply of widgets from a business in Japan, the CISG will apply even though Japan has not adopted the CISG. If the same contract is made between a United States business and a Japanese business the CISG will not apply because the United States’ legislation has a reservation which currently excludes the application of the CISG where one of the businesses is in a country which has not adopted the CISG. EXCLUDING THE CISG Initially, it will be tempting to always exclude the application of the CISG. While a contract for the sale of goods may not be subject to the CISG for a number of reasons, if businesses wish to exclude its application in whole or in part, they should do so expressly. Contracts which are likely to be overlooked are purchase orders and ongoing supply agreements which might be inadvertently subjected to the provisions of the CISG unless the domestic law of a party is specified or the CISG is expressly excluded.

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REDUCING UNCERTAINTY The best reason to exclude the CISG is to reduce uncertainty.

The uncertainty arises because the CISG avoids words and phrases with a technical legal meaning in particular jurisdictions and replaces them with words and phrases which are more neutral, such as “taking over” goods when setting out what a buyer must do to take delivery or “handing over” goods in addressing when risk passes to a buyer. Further, the interpretive provisions of the CISG direct courts not to use domestic jurisprudence unless the CISG cannot resolve the question at hand.

FORMATION OF A CONTRACT An example of uncertainty which may arise if the CISG is not excluded is the legal question of when a contract comes into being. Under the CISG, an agreement may become legally binding at a much earlier stage than under Canadian sale of Doing Business in Canada

goods law. This is because the CISG does not necessarily require legal consideration, acceptance of the exact terms of the offer or that a contract be in writing.

OBLIGATIONS Under Canadian law, the breach of a warranty may give rise to the remedy of damages, while breach of a condition may give rise to the remedy of rescission. There is no such distinction between conditions and warranties under the CISG. Rather, the CISG speaks of the obligation of “conformity” with the contract (i.e., whether the goods delivered to a buyer meet the obligation of quantity and quality described in the contract). In the absence of specific contractual provisions, goods are deemed not to conform with the contract unless four criteria are met. Those criteria resemble, but are not identical to, Canadian legal concepts of merchantability, fitness for purpose and correspondence to sample (as well as an obligation to properly package goods).

UNANSWERED QUESTIONS Some parts of the CISG address issues not dealt with by Canadian law. For example, the CISG obligation to properly package goods is not specifically provided for in many common law statutes. The CISG also obliges the purchaser to examine the goods “within as short a period as is practicable,” and give notice of non-conformity to the seller within a reasonable time, not to exceed two years of delivery. Where the reason for nonconformity is latent defects the purchaser has far more latitude to reject the goods under the CISG than under Canadian law.

Doing Business in Canada

GREATER EXPOSURE FOR SELLER The CISG contains many remedies (and excludes others) which are different from those available in Canada and other common law jurisdictions. For example, a seller is not liable for damages arising from personal injury or death caused by defects in the seller’s products, thus effectively excluding products liability claims. The buyer has expanded access to the remedy of specific performance, but only where the local jurisdiction would traditionally be inclined to order it and the seller has increased documentary obligations which, if not complied with, can lead to the buyer successfully avoiding the contract. Because the CISG is a synthesis of sale of goods principles from civil and common law jurisdictions, many unfamiliar rights and remedies are automatically applicable to the international purchase and sale of goods and it is wise to seek legal input into such transactions.

Further, with respect to remedies for breach of contract, the scope of liability seems to be greater under the CISG than is the case under the common law. For example, recoverable damages are measured by what a person foresaw or ought to have foreseen as a consequence of a breach of contract by that person “in light of the facts and matters of which he then knew or ought to have known, as a possible consequence of the breach of contract.” This is broader than the current scope of liability under the common law of Canada which looks to the probable result of the breach instead of its possible consequence. Thus, sellers may become liable for damages extending beyond that which they might have faced under the common law.

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Alternative Business Structures PARTNERSHIP A partnership consists of two or more individuals or corporations carrying on business in common with a view toward profit. While income is calculated at the partnership level, each partner is taxed on the share of that income allocated to such partner, whether or not distributed. Except in the case of limited partnerships, each partner has unlimited liability to each of the other partners in the partnership and to creditors of the partnership for debts and obligations of the partnership not satisfied by partnership assets.

Business operations in Canada may be carried on through a variety of legal entities, such as a subsidiary corporation, an unincorporated branch, a general or limited partnership, or a joint venture.

CORPORATION A corporation is a legal entity distinct from its shareholders and may be created under either federal or provincial laws. It has the capacity and powers of a natural person and offers an investor limited liability, the ability to easily transfer the investor’s interest, and perpetual existence. The amount of public disclosure of information related to a corporation depends on a number of factors, including the choice of jurisdiction of incorporation. In most Canadian jurisdictions, those investors who prefer to limit the level of public disclosure in connection with a corporation must include in the constating documents of the corporation restrictions on the transfer of shares of the corporation, refrain from issuing securities of the corporation to the public, and impose other restrictions on the corporation such as limiting the maximum number of shareholders.

UNINCORPORATED BRANCH Non-resident corporations may carry on business in Canada through a branch office without incorporating a subsidiary corporation.

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LIMITED PARTNERSHIP A limited partnership is a partnership with special attributes.

It is composed of one or more general partners, who conduct the business of the limited partnership and are liable for all debts of the limited partnership, and limited partners, whose liability is limited to the amount of their respective capital contributions and any commitment to make such a capital contribution to the limited partnership.

JOINT VENTURE In Canada, there is no statute governing joint ventures. A true joint venture is created and governed by contract law and is typically used in situations in which two or more parties get together for a specific project and agree upon their respective obligations and liabilities with respect to the joint venture.

The term “joint venture” is often used to describe a relationship in which two or more parties use a corporation to carry on a particular business venture, although in such a scenario the above comments concerning corporations would be applicable.

UNLIMITED LIABILITY COMPANY (“ULC”) ULCs, which are available under the laws of Nova Scotia, Alberta and, more recently, British Columbia, have often been used by U.S. residents to obtain the benefits of both an unincorporated branch and a subsidiary corporation. However, the Fifth Protocol to the Canada-U.S. Tax Convention (1980), (the “Canada-US Treaty”) signed on September 21, 2007, will, as of January 1, 2010, deny treaty benefits to U.S. residents on amounts received or derived from such entities. Use of such a vehicle would therefore entail negative tax consequences unless additional structuring measures are taken.

Doing Business in Canada

Income Tax Implications of Alternative Business Structures CONSIDERATIONS FOR SELECTION OF APPROPRIATE BUSINESS STRUCTURE The choice of business structure for a foreign concern depends on the goals and resources of an investor, the nature of the business and the timing of the anticipated profits of the business. Depending on the circumstances, it may be advisable to use more than one form of business organization or to change the form as the goals of the investor change or as certain events occur.

A subsidiary corporation of a non-resident corporation may be formed under any of the provincial statutes governing corporations and may carry on business throughout Canada; however, in each province other than the jurisdiction of incorporation, it must be licensed or registered if it intends to carry on business in such province.

Though the requirements for extra-provincial corporations vary from province to province, they are generally not onerous. It is noteworthy that all corporations carrying on business in Quebec must have French equivalent names.

A subsidiary corporation of a non-resident corporation may be formed under the federal laws of Canada and may carry on business in any province of Canada, subject to provincial registration and disclosure requirements.

A non-resident corporation carrying on business through an unincorporated branch must be licensed or registered in the province or provinces in which it carries on business.

Under provincial business corporation legislation, a corporation may be deemed to carry on business in a province if it has a resident agent, representative, warehouse, office or place of business from which it operates in that province, or if it holds an interest in real property (other than by way of security) in that province. A corporation may also be considered to carry on business by listing its name in a telephone directory for a part of a province or in an advertisement in which an address in the province is given. A corporation will not usually be considered to be carrying on business in a province merely because it takes orders from or sells to customers in the province. Penalties may be imposed on a corporation that fails to register or obtain a licence where required. This failure may also result in the corporation being prohibited from commencing certain legal actions or proceedings in any court in the province in which it is carrying on business.

Doing Business in Canada

Non-resident corporations are liable for the obligations of their Canadian unincorporated branches but are insulated from the liabilities of their subsidiary corporations.

Most statutes governing corporations incorporated in Canada require that a majority of directors of the corporation be Canadian citizens or certain permanent residents, while no residency requirements apply to unincorporated branches of non-resident businesses. In addition, there are differences between the taxation of an unincorporated branch of a non-resident and the taxation of a corporation which is a subsidiary of a non-resident.

USE OF A CANADIAN SUBSIDIARY A Canadian subsidiary will be taxable under Part I of the Income Tax Act (Canada) (the “ITA�) on its worldwide income from all sources, subject to any available foreign tax credits and any relief available under an applicable income tax treaty. It will be necessary to file both federal and provincial corporate income tax returns and to pay installments of tax throughout the year.

A Canadian subsidiary with its establishment in the province of Ontario will be subject to income tax at a combined federal and provincial rate of 33%,1 with special combined rates which can be as low as 31% for corporations engaged in certain qualifying types of manufacturing and processing.2 1 2

Effective 2009. The rate is scheduled to be reduced to 32% for 2010.

Effective 2009. The rate is scheduled to be reduced to 30% for 2010.

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WITHHOLDING TAXES Under the ITA payment of dividends and royalties by a Canadian subsidiary to its non-resident parent will be subject to Canadian withholding tax at the rate of 25% of the gross amount of such payments. Interest payments between arm’s length parties are not subject to withholding tax whereas interest payments between non-arm’s length parties are subject to withholding tax at a rate of 25%. The rate of withholding tax is usually reduced by an applicable tax treaty.

MANAGEMENT FEES Subject to reasonableness, management fees paid by a Canadian subsidiary to its non-resident parent for reimbursement of a specific expense will not be subject to Canadian withholding tax. The deductibility of management fees paid by a Canadian subsidiary will be evaluated by the Canada Revenue Agency with reference to the nature and quantum of the benefits derived in respect of the management services performed by the parent.

USE OF LOSSES Non-capital (i.e., business) losses for Canadian subsidiaries may be carried back three years and forward 20 years for application against the profits of those years in computing taxable income.

THIN CAPITAL RULES Generally, in computing its income, a corporation resident in Canada may deduct interest paid or payable by it pursuant to a legal obligation to pay interest on borrowed money, provided that the borrowed money is used to gain or produce income from a business or property and the amount of interest is reasonable in the circumstances. However, the “thin capitalization” rules contained in the ITA may restrict this ability to deduct interest.

Generally, when the corporation’s “outstanding debts to specified non residents” exceeds the corporation’s “equity” by a ratio of 2:1, a prorated portion of the interest paid or payable in the year to such non-residents is not allowed as a deduction in computing the income of the Canadian corporation.

ABSENCE OF GROUP CONSOLIDATION Under the ITA there is no provision permitting the filing of consolidated returns by related corporations. Each corporation must report its own income for tax purposes and any loss incurred by one corporation is not available to offset the income of any other corporation. However, certain loss consolidation Lang Michener LLP 20

arrangements among affiliated corporations are permitted.

Non-resident investors who are resident in jurisdictions such as the United States that permit consolidated tax filings have historically used a ULC as a Canadian business entity. A ULC is treated as an ordinary corporation for Canadian income tax purposes but because of certain unlimited liability features may be considered a disregarded entity for U.S. federal income tax purposes. As a result, a ULC may be consolidated with its corporate shareholder for U.S. federal income tax purposes, permitting the flow through of income and losses to the U.S. shareholder. However, recent amendments to the Canada-US Treaty will, as of January 1, 2010, deny benefits under that treaty U.S. residents on amounts received or derived from such entities.

TRANSFER PRICING Transfer pricing is the pricing for goods or services transferred between related parties. Particular areas of concern include management and administration fees, development charges, royalties and interest.

The ITA contains provisions requiring prices charged in related party transactions to conform to prices charged in comparable arm’s length transactions. These provisions are intended to ensure that a reasonable profit is being earned by the entity transferring goods or services and that only reasonable deductions are claimed for tax purposes by the entity paying for the goods or services.

Canadian transfer pricing rules generally apply where a taxpayer and a non-resident person with whom the taxpayer does not deal at arm’s length enter into one or more transactions and either: (i) the terms and conditions in respect of the transaction differ from those that would have been agreed to by persons dealing at arm’s length, in which case the terms and conditions may be adjusted to what arm’s length persons would have agreed to; or (ii) the transaction would not have been entered into by persons dealing at arm’s length and it may reasonably be considered not to have been entered into primarily for bona fide purposes other than to obtain a tax benefit, in which case the transaction may be re-characterized into the transaction that would have been entered into by persons dealing at arm’s length. Transactions involving partnerships may also be subject to these rules. Where a taxpayer or a partnership is subject to a transfer pricing adjustment, a penalty generally applies unless the adjustment relates to a “qualifying cost contribution arrangement” or the taxpayer has made reasonable efforts to determine an arm’s length transfer price.

Doing Business in Canada

A taxpayer is required to prepare contemporaneous documentation to support the transfer pricing methodology relied upon. The documentation must be prepared, at the latest, by the “documentation-due date” of the taxpayer or partnership for the year in which the relevant transaction occurred. The “documentation-due date” generally means the day on or before which the taxpayer would be required to file a return of income under Part I of the ITA if tax were payable under that Part (i.e. within six months after the end of the year in the case of a corporation).

A special annual information return is required to be filed by a Canadian branch or subsidiary that engages in certain transactions with a related non-resident person within six months after the end of the branch or subsidiary’s taxation year. These transactions include the purchase or sale of goods or services, the payment of rents, royalties, dividends and interest, and the lending of money between the related parties.

The return must include, among other things, the name and principal business activity of the non-resident person and the amounts of any consideration paid or received for the relevant transactions.

CANADIAN TAXATION OF A BRANCH If a non-resident corporation (a “ForeignCo”) chooses to carry on business directly in Canada, it will be taxable in Canada on its “taxable income earned in Canada” for the year under Part I of the ITA. For this purpose, the ForeignCo’s “taxable income earned in Canada” will generally include its income from all its businesses carried on in Canada, taxable capital gains from dispositions of “taxable Canadian property” and recaptured depreciation. The combined federal-provincial corporate income tax rate applicable in the province of Ontario is 33%.3 The ForeignCo’s income from sources outside Canada will not be subject to tax in Canada.

Under many of Canada’s income tax treaties with other industrialized countries, the business profits of a ForeignCo would be subject to tax in Canada only if it carries on business through a permanent establishment (“PE”) situated in Canada and only to the extent that the business profits are attributable to that PE. A PE in this context means a fixed place of business in Canada and would generally include a place of management, a branch, an office or a factory. A PE may also include an extended physical presence in Canada by employees of ForeignCo. The relevant tax treaty would generally also provide that any business profits attributable to a PE will be computed as

Doing Business in Canada

though the PE were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a PE. Benefits under a relevant tax treaty would be available provided ForeignCo is a resident of the foreign contracting state for purposes of the treaty (including any “limitation of benefits” provision in the relevant treaty). It should be noted that a limited liability company, or LLC, is not considered to be a resident of the U.S. for purposes of the Canada-U.S. Treaty, although recent amendments thereto extend benefits under the treaty to members of an LLC who are residents of the U.S. for purposes of the treaty. As such, an LLC with members who are not residents of the U.S. may not be an appropriate entity through which to carry on business in Canada.

Depending on the tax laws of ForeignCo’s home jurisdiction, the use of a branch operation may permit the consolidation of income (or loss) of the Canadian operations with that of the home jurisdiction, for purposes of calculating ForeignCo’s income taxes in its home jurisdiction.

BRANCH TAX In additional to corporate income tax under Part I of the ITA, a “branch tax” is imposed under Part XIV of the ITA. The general purpose of the branch tax is to equate the Canadian tax position of a non-resident who carries on business in Canada through a branch operation with that of a non-resident who operates through a Canadian subsidiary corporation.

As noted above, when a Canadian subsidiary pays dividends to its foreign parent, a withholding tax of 25% is payable under Part XIII of the ITA (subject to reduction under an applicable tax treaty), whereas a branch may repatriate earnings to a foreign jurisdiction free of withholding tax. The branch tax is a levy similar to withholding tax on branch profits which are not invested in Canada by the non-resident. The rate of tax imposed under Part XIV is 25%, but may be reduced under a treaty to as little as 5%.

The ForeignCo should consider whether the Part I tax or Part XIV tax will be creditable against taxes of the ForeignCo in its home jurisdiction.

USE OF LOSSES Non-capital (i.e., business) losses for the branch operation may be carried back three years and forward 20 years for 3

Effective 2009. The rate is scheduled to be reduced to 32% for 2010.

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application against the profits of those years in computing taxable income.

TRANSFER PRICING RULES The rules in the ITA regarding non-arm’s length dealings will require reasonable or fair market value transfer prices between the Canadian branch and the home office of the foreign corporation.

REGULATION 105 WITHHOLDING Section 105 of the regulations made under the ITA imposes a 15% withholding obligation on any person that pays an amount to a non-resident person in respect of services rendered in Canada. Accordingly, customers that pay an amount to ForeignCo in respect of services rendered in Canada may be required to withhold 15% of the gross amount of the payment and remit the withheld amount to the Canada Revenue Agency. The withholding requirement applies regardless of whether ForeignCo has a PE in Canada.

The withholding is on account of ForeignCo’s Canadian income tax liability and may be recovered if ForeignCo is determined not to be subject to Canadian income tax.

However, the withholding can impose an undesired administrative burden on customers and may detrimentally impact ForeignCo’s cash flow. A waiver of the withholding may be available in certain circumstances.

INCOME TAX ADMINISTRATION The ITA is administered by the Minister of National Revenue through the Canada Revenue Agency. Provincial taxes are administered separately through the responsible provincial ministries. Both federal and provincial tax returns must be filed

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by a ForeignCo that carries on business in Canada through a branch. Federal and provincial tax returns must be filed by the Canadian subsidiary if the foreign parent is operating in Canada through the subsidiary. The Province of Ontario and the federal government have signed an agreement that transferred administration of Ontario’s corporate income tax to the federal government, effective for taxation years ending after 2008.

Federal income taxes are payable in monthly installments, calculated by reference to the previous taxation year, with the balance payable within two months after the year-end. No installments are due in the first year of operation.

Annual federal income tax returns must be filed within six months after the end of the taxation year. After the return has been received by the Canada Revenue Agency, an assessment is issued to the taxpayer. The ITA and its provincial equivalents provide for objection, reassessment and appeal procedures.

As well, a special annual information return must be filed by any corporation resident or carrying on business in Canada which makes payments to or enters into certain transactions with a non-resident person with which the corporation does not deal at arm’s length (for example, a foreign parent corporation).

A non-resident corporation that claims relief from Canadian income tax pursuant to a tax treaty is required to file a treatybased Canadian income tax return. This return requires the disclosure of detailed information concerning the non-resident corporation’s activities in Canada and must be filed no later than six months after the end of the non-resident corporation’s taxation year. Where a non-resident corporation fails to file such a return, a penalty is payable regardless of whether any tax is payable.

Doing Business in Canada

Financing DEBT FINANCING Canada has a very well developed banking system in which five large domestic banks dominate the banking industry. Most domestic banks have significant operations in all major Canadian cities. In addition, many major foreign banks have established branches in Canada with the intention of establishing corporate banking relations as opposed to retail banking relations. In many cases, these branches serve customers of their parent organizations.

Typically, banks and other financial institutions extend credit to businesses, either on demand or on a term basis, to finance operating lines of credit, acquisitions, letters of credit, expansions, etc. In most cases, the lenders require personal and/or real property security for their loans. Security for loans usually includes: i) a general security agreement which provides security on all of the personal property of the borrower and which is akin to security taken in the United States under Article IX of the Uniform Commercial Code; ii) a debenture, most typically taken where the security of the borrower includes real property; and iii) an assignment of accounts receivable.

involvement of investors in the business operations of the issuer will vary.

In Canada, securities laws are regulated by provincial securities regulatory authorities. Issuers of securities are also regulated by the rules of the various stock exchanges on which their securities may be listed for trading. Rules and regulations of the securities regulatory authorities and stock exchanges are similar across Canada, although there are significant differences in the listing requirements between the Toronto Stock Exchange and the TSX Venture Exchange. The aim of Canadian securities laws is to protect the investing public while at the same time fostering confidence in the capital markets.

This aim is achieved by requiring the registration of those participants in the capital markets who trade in securities, underwrite securities or advise investors with respect to securities and to mandate disclosure by issuers by way of prospectus and thereafter on a continuous basis.

In certain circumstances, a bank may take security under the Bank Act (Canada) which permits a bank to take an assignment of a borrower’s inventory or the produce of mining, farming, fishing or logging without the necessity of delivery to the bank of the property secured.

In other circumstances, banks and other financial institutions may also make loans secured by a guarantee from the borrower’s parent or pledges of shares or equity interests owned by the borrower in established businesses.

The domestic banks and other large financial institutions in Canada are also generally experienced in complex financings, both domestic and foreign. These would include project financings, securitizations of receivables, currency and interest rate hedges, inventory financings, equipment leasing and trade finance. Debt financing is available in all business sectors including, in particular, natural resources.

PROSPECTUS REQUIREMENTS Before securities of an issuer may be distributed to the public, both a preliminary and final prospectus must be prepared and approved by the securities regulatory authority of each province in which the securities are to be offered. For this purpose, a distribution includes: (i) any trade in securities which have not been previously issued;

EQUITY FINANCING Typically, financial institutions such as merchant banks, mezzanine lenders or venture capitalists will arrange for an investment in issuers by way of equity financing. The

(ii) a trade in previously issued securities from the holdings of any person, company or combination of persons or companies holding a sufficient number of any securities of that issuer to affect materially the control of that issuer; and

Doing Business in Canada

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(iii) a trade in issued securities originally issued pursuant to an exemption where a further exemption is not available to the currently-contemplated transaction or where the statutory “hold” period has not lapsed.

On September 14, 2005, the securities regulatory authority of each province repealed their respective instruments regarding prospectus exemptions, and jointly issued National Instrument 45-106 – Prospectus and Registration Exemptions (“NI 45-106”), essentially harmonizing the prospectus exemptions across Canada.

Some of the most common exemptions are listed below: CAPITAL RAISING EXEMPTIONS • Accredited Investor Exemption (section 2.3).

Issuers are permitted to raise any amount of money at anytime from “accredited investors”4 who purchase as principal.

• Private Issuer Exemption (section 2.4).

This exemption replaces the “closely-held issuer” exemption that was previously available. A private issuer is essentially an issuer (a) that is not a reporting issuer or an investment fund, (b) whose securities (other than nonconvertible debt securities) (i) are subject to restrictions on transfer contained in its constating documents or security holders’ agreement, and (ii) whose securities are beneficially owned, directly or indirectly, by not more than 50 persons, exclusive of employees and former employees, and (c) that has distributed its securities only to persons that fit into one of 11 enumerated categories.5 • Family, Friends and Business Associates Exemption (in all provinces other than Saskatchewan and Ontario) (section 2.5).

This exemption is available in respect of a trade in a security to a person who purchases the security as principal and is (a) a director, executive officer or control person6 of the issuer, or of an affiliate of the issuer, (b) a spouse, parent, grandparent, brother, sister or child of a director, executive officer or control person of the issuer, or of an affiliate of the issuer, (c) a parent, grandparent, brother, sister or child of the spouse of a director, executive officer or control person of the issuer or of an affiliate of the issuer, (d) a close personal friend of a director, executive officer or control person of the issuer, or of an affiliate of the issuer, (e) a close business associate of a director, executive officer or control person of the issuer, or of an affiliate of the issuer, (f) a founder Lang Michener LLP 24

of the issuer or a spouse, parent, grandparent, brother, sister, child, close personal friend or close business associate of a founder of the issuer, (g) a parent, grandparent, brother, sister or child of a spouse of a founder of the issuer, (h) a person of which a majority of the voting securities are beneficially owned by, or a majority of the directors are, persons described in (a) to (g), or (i) a trust or estate of which all of the beneficiaries or a majority of the trustees or executors are persons described in (a) to (g).

• Family, Friends and Business Associates Exemption (in Saskatchewan) (section 2.6).

The immediately preceding exemption does not apply in Saskatchewan unless the person making the trade obtains a signed risk acknowledgement from the purchaser in the required form for a trade to (a) a person described in section 2.5(d) or (e), (b) a close personal friend or close business associate of a founder of the issuer, or (c) a person described in section 2.5(h) or (i) if the trade is based in whole or in part on a close personal friendship or close business association.

• Founder, Control Person and Family Exemption (Ontario) (section 2.7).

The purchaser must purchase the security as principal and must be (a) a founder of the issuer, (b) an affiliate7 of a founder of the issuer, (c) a spouse, parent, brother, sister, grandparent or child of an executive officer, director or founder of the issuer, or (d) a person that is a control person of the issuer.

• Affiliates Exemption (section 2.8).

This exemption is available where the issuer issues securities of its own issue to an affiliate of the issuer who is purchasing the securities as principal.

• Offering Memorandum Exemption (in all jurisdictions other than Ontario and the Yukon) (section 2.9).

This exemption permits trades in the securities of an issuer by the issuer to a purchaser who (a) purchases as principal, and (b) at the same time or before the purchaser signs the agreement to purchase the securities, is given an offering memorandum in the required form.

The issuer must, at the same time or before the purchaser signs the agreement to purchase the securities, obtain a signed risk acknowledgement from the purchaser.

• Minimum Amount Investment Exemption (section 2.10) Doing Business in Canada

related entity of the issuer, or (b) a permitted assign of a person referred to in (a), to (i) an employee, executive officer, director or consultant of the issuer or a related entity of the issuer, or (ii) a permitted assign of the employee, executive officer, director or consultant, if (A) participation in the trade is voluntary, (B) the issuer of the security is not a reporting issuer in any Canadian jurisdiction, and (C) the price of the security being traded is established by a generally applicable formula contained in a written agreement among some or all of the security holders of the issuer to which the transferee is or will become a party.

The purchaser must purchase the securities as principal, and the acquisition cost of the securities to the purchaser must be not less than $150,000 paid in cash at the time of the trade.

TRANSACTION EXEMPTIONS • Business Combination and Reorganization Exemption (section 2.11).

This exemption is available in respect of a trade in connection with (a) an amalgamation, merger, reorganization or arrangement that is under a statutory procedure, (b) an amalgamation, merger, reorganization or arrangement that (i) is described in an information circular or similar disclosure record and delivered to each security holder whose approval is required, and (ii) is approved by such security holders, or (c) a dissolution or windingup of the issuer.

• Asset Acquisition Exemption (section 2.12).

This exemption permits the issuer to trade in a security of its own issue as consideration for assets, as long as those assets have a fair value of not less than $150,000.

It is important to note that most securities issued pursuant to an exemption cannot be further sold without a prospectus or a further exemption under the applicable provincial securities statute. Finally, an exempt distribution report must be made within 10 days of the distribution in respect of some

4

The definition of accredited investor is set out in NI 45-106 and includes: • an individual who, either alone or together with a spouse, beneficially owns financial assets with a realizable value (before taxes but net of related liabilities) exceeding $1,000,000; • an individual whose net income before taxes exceeded $200,000 (or combined with a spouse exceeded $300,000) in each of the two most recent calendar years and who has a reasonable expectation of exceeding the same income level in the current year; • a person or company registered under the securities legislation of a jurisdiction of Canada as an adviser or dealer (other than a limited market dealer registered under one or both the Securities Act (Ontario) and the Securities Act (Newfoundland and Labrador); • a person or company, other than an individual or investment fund, that had net assets of at least $5 million as reflected in its most recently prepared financial statements; • a person or company in respect of which all of the owners of interest are persons or companies that are accredited investors; • certain financial institutions, government entities, mutual funds and pension funds; and • registered charities.

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The enumerated categories of persons to whom an issuer can distribute securities under this exemption are: (a) a director, officer, employee, founder or control person of the issuer, (b) a spouse, parent, grandparent, brother, sister or child of a director, executive officer, founder or control person of the issuer, (c) a parent, grandparent, brother, sister or child of the spouse of a director, executive officer, founder or control person of the issuer, (d) a close personal friend of a director, executive officer, founder or control person of the issuer, (e) a close business associate of a director, executive officer, founder or control person of the issuer, (f) a spouse, parent, grandparent, brother, sister or child of the selling security holder or the selling security holder’s spouse, (g) a security holder of the issuer, (h) an accredited investor, (i) a person of which a majority of the voting securities are beneficially owned by, or a majority of the directors are, persons described in (a) to (h), (j) a trust or estate of which all of the beneficiaries or a majority of the trustees or executors are persons described (a) to (h), or (k) a person that is not the public

6

The definition of control person varies between jurisdiction and legal advice should be obtained. In Ontario, control person means any person that holds or is one of a combination of persons that holds (a) a sufficient number of any of the securities of an issuer so as to affect materially the control of the issuer, or (b) more than 20% of the outstanding voting securities of an issuer except where there is evidence showing that the holding of those securities does not affect materially the control of the issuer.

• Issuer Acquisition or Redemption Exemption (section 2.15).

No prospectus is required in connection with the acquisition or redemption by the issuer of securities of its own issue.

EMPLOYEE, EXECUTIVE OFFICER, DIRECTOR AND CONSULTANT EXEMPTIONS • Employee, Executive Officer, Director and Consultant Exemption (section 2.24).

No prospectus is required in respect of a trade by an issuer in securities of its own issuer, or by a control person of an issuer, with (a) an employee, executive officer, director or consultant of the issuer, (b) an employee, executive officer, director or consultant of a related entity of the issuer, or (c) a permitted assign of a person referred to in (a) or (b), if participation in the trade is voluntary.

• Trades Among Current or Former Employees, Executive Officers, Directors, or Consultants of Non-Reporting Issuer Exemption (section 2.26).

This exemption is available in respect of a trade in a security of an issuer by (a) a current or former employee, executive officer, director or consultant of the issuer or Doing Business in Canada

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exemptions, including the following: (a) accredited investor, (b) family, friends and business associates – section 2.5), (c) offering memorandum, (d) minimum amount investment, and (e) asset acquisition.

MULTI-JURISDICTIONAL DISCLOSURE SYSTEM Effective July 1991, all Canadian securities commissions adopted the multi-jurisdictional disclosure system which permits United States issuers which meet certain eligibility criteria to complete public offerings, business combinations, rights offerings and takeover and issuer bids by using the same disclosure documents as are required in the United States. The United States Securities and Exchange Commission adopted reciprocal rules for Canadian issuers. This reciprocal disclosure system also provides for uniform compliance with requirements as to insider reporting, proxy solicitation and continuous disclosure.

INSIDER TRADING REPORTS Insiders of a public company such as directors, senior officers and significant shareholders must report their acquisitions and dispositions of the company’s securities and may not trade in the securities of the company when they have knowledge of material undisclosed information concerning the company.

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There are two types of insider trading. The first includes legitimate trades in securities of a reporting issuer by insiders that are reported to the respective provincial securities regulators using Insider Trading Reports (“ITRs”). The second includes illegal trades or tips by an entity in a “special relationship” with a reporting issuer which trades or tips while in possession of material undisclosed information, generally being information that is material to the reporting issuer and which will affect, or can be reasonably expected to affect, its share price.

The entities required to file ITRs are the reporting issuer’s directors, senior officers and the reporting issuer’s five highest paid employees, if different from the above. In addition, any person or company with a direct or indirect beneficial ownership of voting securities with more than 10% of all voting rights of the reporting issuer attached thereto or a person who has control or direction over more than 10% of the voting securities of a reporting issuer is required to file ITRs. ITRs are published by the various securities regulators and are reported in certain publications of general circulation. Where there is a change in the securities holdings of an insider, ITRs must be filed in within 10 days of that change. In June, 2003 a new online system was implemented so that all insider reports now have to be filed electronically via the internet at sedi.ca.

An issuer is an affiliate of another issuer if (a) one of them is the subsidiary of the other, or (b) each of them is controlled by the same person.

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Doing Business in Canada

Business Immigration BUSINESS IMMIGRATION With some exceptions, persons who are not Canadian citizens or permanent residents may not work in Canada without first obtaining a work permit from Citizenship and Immigration Canada (“CIC”). The process of obtaining a work permit is normally initiated by an employer in Canada seeking to employ a foreign worker.

Before applying to CIC for a work permit, a person to be employed in Canada must, subject to certain exceptions under the Immigration and Refugee Protection Act and its Regulations (“IRPA”), the North American Free Trade Agreement (“NAFTA”) or numerous other programs, secure a favourable labour market confirmation from Human Resources and Skills Development Canada (“HRSDC”). The labour market opinion process may take months to conclude and will be approved only after the employer establishes that qualified Canadians or permanent residents are not available and will not be adversely affected by the admission of the foreign worker to the Canadian labour market. If a favourable labour market opinion is issued by HRSDC based on the facts of a particular case, a work permit may, depending on the facts, be granted by CIC on the spot by an immigration officer at a Canadian port of entry.

Businesses relocating qualified senior executives and senior managers to Canada for temporary periods may be entitled to use intra-company transfer procedures to obtain a work permit without securing a favourable labour market opinion through HRSDC. Permanent employees of a corporation carrying on business or operating outside Canada who are coming to Canada for the purpose of consulting and meeting with employees of that corporation, or inspecting a Canadian branch office or headquarters on behalf of that corporation, may be exempt from the requirement to obtain a work permit.

An appropriate letter of introduction setting out the circumstances of entry into Canada should be provided by the employer and carried by the employee in each of these cases.

The temporary entry of citizens of the United States and Mexico into Canada is permitted under NAFTA for certain professionals, traders and investors who have a valid employment offer and meet prescribed licensing and education

Doing Business in Canada

requirements. Reciprocal benefits are available for Canadian citizens who are professionals, traders and investors doing business in the United States and Mexico.

PERMANENT RESIDENTS Normally, an application for permanent resident status must be made at a consular office outside of Canada.

Immigrants are admitted under various classes and while all applicants are expected to meet certain common health and security standards, each class has unique criteria. The more significant classes are described below.

BUSINESS CLASS The Business Class is used frequently by business people who are relocating family and assets to Canada. Such persons should seek legal advice concerning commitments to specific investments as well as in areas such as immigration, tax, customs, corporate and estate planning, financing, international trade and investment.

Business immigrants include entrepreneurs, investors and self-employed persons.

• An entrepreneur must have the intention and the ability to control 1⁄ 3 of the equity of a qualifying Canadian business. Entrepreneurs must have legally accumulated a personal net worth in excess of a prescribed amount.

The entrepreneur must provide active and ongoing management of a qualifying Canadian business that results in the creation or maintenance of employment opportunities for one or more Canadian citizens or permanent residents other than the entrepreneur and his or her family members. The entrepreneur must satisfy these requirements within three years of becoming a permanent resident. Experience in business management and control of corresponding equity is a pre-condition to this application. An entrepreneur must usually prepare and submit a detailed business proposal outlining the business venture to be undertaken.

• An investor must have operated, controlled or directed a financially successful business or commercial undertaking and have legally accumulated a personal net

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worth in excess of a prescribed amount. Investors are not required to start a business in Canada. They are, however, required to make a prescribed investment of $400,000 which is allocated to participating provinces and territories for use in job creation and economic development. Investors pay their investment directly to the Receiver General of Canada. A promissory note, fully guaranteed by participating provinces, will be issued for subsequent repayment, without interest, approximately five years from the date of the investment. The provinces and territories have full control of the funds during the five-year period. • A self-employed person must have the experience, intention and ability to establish a business in Canada that will create, at minimum, an employment opportunity for the applicant and which will make a significant contribution to cultural activities or athletics or which will involve the purchase and management of a farm in Canada.

FAMILY CLASS The Family Class assists persons having a closely related sponsor in Canada who is capable of supporting them. A Canadian citizen or permanent resident living in Canada, 18 years of age or older, may sponsor a relative or family member from abroad if they are: spouses, common-law or conjugal partners 16 years of age or older; dependent children; parents and grandparents; brothers, sisters, nephews, nieces or grandchildren who are orphans, not married or in a common-law relationship and under 18; children under 18 that the sponsor wishes to adopt or, subject to certain other restrictions, any other family member. Sponsorship of a family member requires the sponsor

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to agree to provide financial support to the sponsored relative and his or her family for three to 10 years.

SKILLED WORKER CLASS The Skilled Worker Class includes persons seeking entry to Canada based on their skills and work experience. Skilled Worker applicants are subject to assessment under a complex point system pursuant to the IRPA. The focus of the point system is on education, knowledge of Canada’s official languages, work experience, age, arranged employment in Canada and adaptability.

CITIZENSHIP Permanent residents over 18 years of age may apply for Canadian citizenship upon demonstrating sufficient knowledge of Canada and of one of the official languages and upon accumulating at least three years residence in Canada within the four years immediately preceding an application for citizenship. Because of the nature of the governing regulations, it is sometimes difficult to ascertain whether a permanent resident has accumulated sufficient years of residence in Canada to qualify for citizenship. Permanent residents who are uncertain whether they have accumulated sufficient years of residence to successfully apply for citizenship should obtain legal advice concerning their eligibility prior to submitting their application documents. Unlike permanent residents whose status may be affected by departures from Canada, there are no restrictions on Canadian citizens residing abroad or leaving or entering Canada.

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Environmental Law powers to issue orders requiring a wide range of pollution prevention, abatement and remediation activities at significant expense against: i) the owner, occupant and previous owners and occupants of a source of contaminant or a site not approved for disposal of waste; and ii) a person who has or had the charge, management or control of the source of contaminant or a site which has not been approved.

Environmental law in Canada is regulated by federal and provincial legislation and municipal bylaws. Provincial legislation and levels of enforcement vary significantly from province to province, although all provinces have legislation which establishes a preventative and remedial framework for pollution control and provides for both civil and criminal liabilities for non-compliance. The summary which follows is specific to the Province of Ontario.

Provincial environmental statutes contain broad prohibitions against discharging contaminants into the environment and the unauthorized deposit of waste, non-compliance with which is punishable, for corporations, by substantial monetary fines on first and subsequent offences and for individuals, by less substantial monetary fines and possible imprisonment. Ontario environmental statutes also regulate the use and operation of waste hauling and management systems, waste treatment and disposal sites.

Ontario regulatory authorities have broad discretionary powers to issue approvals, permits and licences with respect to activities that may have an impact on the environment (i.e., water, sewage, waste management and air emissions).

Undertakings may be subject to environmental assessment and other public notification and hearing processes under environmental legislation or under land use planning procedures.

Approval requirements have been reformed to provide for a standardized approvals for activities that are well understood.

Applications in respect of complex activities will be individually assessed. The costs of assessment can be substantial.

Ontario regulatory authorities also have broad discretionary Doing Business in Canada

The legislation provides broad discretionary powers for the issuance of orders. These are orders that can be issued on the spot by environmental officers to address a wide variety of noncompliant circumstances.

The scope of regulatory orders makes it advisable to conduct appropriate due diligence inquiries and investigations before financing, purchasing, leasing or otherwise assuming control or management of a potentially polluting operation or contaminated site.

Legislation now provides for the imposition of environmental penalties. Officers and directors are personally liable to the imposition of environmental penalties if they fail to take all reasonable care to prevent the corporation from causing or permitting unlawful discharges. The maximum penalty is $10,000 per day. Bill 133, the Environmental Enforcement Statute Law Amendment, 2005, was passed in 2005. The new regime provides for increased potential liability for directors and officers, increased penalties for individuals and corporations including the option of jail time for corporate officers and directors, and provides a reverse onus provision that will require officers and directors of a corporation charged with a spill to prove that they took “all reasonable steps to prevent” the spill.

In 2001 Ontario enacted the Brownfields Statute Law Amendment Act (the “Brownfields Act”) which provided a method by which contaminated lands could be cleaned up and developed. The Brownfields Act introduced amendments to seven provincial statutes, including the Environmental Protection Act, the Municipal Act, 2001, the Planning Act, and the Ontario Water Resources Act. Certain protection from historical environmental liability was given to municipalities, secured creditors, bankruptcy trustees, and certain others dealing with contaminated land. As of October, 2004 certain protection is extended to property owners after they have appropriately remediated a site and filed a Record of Site Condition on a public registry. The standards Lang Michener LLP 29

for appropriate site remediation are found in Soil, Ground Water and Sediment Standards for Use under Part XV.1 of the Environmental Protection Act, dated March 9, 2004, which is incorporated by reference in the Record of Site Condition Regulation (O.Reg. 153/04), filed June 1, 2005. The phase-in of the Brownfields Act was completed on October 1, 2005.

To further encourage the revitalization of contaminated land, Ontario passed Bill 187, the Budget and Interim Appropriation Act in May 2007. Bill 187 amended the Environmental Protection Act, the Ontario Water Resources Act and other legislation. Since that time, the government has proclaimed into force many of the amendments clarifying and extending the scope of protection to property owners and others following the appropriate clean up of a site and filing of a Record of Site Condition.

The common law of negligence, nuisance and other torts on which claims for environmental damage can be based is similar to that in other common law jurisdictions. In addition, civil liability will exist for economic loss and other damage resulting from a spill (the escape of a pollutant from a structure, vehicle or other container of abnormal quantity or quality).

Directors and officers of a corporation which engage in an activity that may result in the unlawful discharge of a

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contaminant into the environment have a duty to take all reasonable care to prevent the corporation from causing or permitting such discharge. The breach of this duty is an offence punishable by a substantial fine with the possibility of imprisonment. There is a similar statutory duty on officers and directors of corporations to ensure compliance with provincial health and safety legislation. In early 2004 the Canadian Criminal Code was amended to establish the criminal liability of organizations in Canada. Accordingly breaches of provincial health and safety legislation can now result in criminal charges.

Many companies have implemented environmental and work place safety compliance policies and programs. If properly implemented, such policies and programs should provide the basis for a due diligence defence for a company and its officers and directors if they are prosecuted for breach of obligations imposed by statute. With few exceptions, most offences under environmental and health and safety legislation are offences of strict liability. No conviction will result if it is proved that all due diligence had been taken to prevent the occurrence of the offence. In Canada, federal legislation governs the transportation of dangerous goods, the import, export and sale of hazardous substances and the pollution of certain waters and ocean dumping.

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Packaging and Labelling Law Regulation of packaging and labelling in Canada exists primarily at the federal level and applies primarily to consumer products.

In Quebec, bilingual requirements apply to all products.

The Consumer Packaging and Labelling Act (the “CPLA”) is the main statute governing packaging and labelling of consumer products in Canada. The Food and Drugs Act (the “FDA”) governs packaging and labelling of food, drugs, cosmetics and medical devices. Other federal legislation governs specific products such as tobacco products and textiles. At the provincial level, packaging and labelling requirements relate primarily to the regulation of individual products, some of which may be sold at wholesale as well as at retail, including certain agricultural products, edible oil products and alcoholic beverages, among others. In addition to these packaging and labelling requirements of general application, the federal Hazardous Products Act (the “HPA”) specifies the requirements for a wide range of potentially hazardous consumer products, the most important of which include bleaches, household cleansers, solvents and other petroleum distillates as well as labelling for industrial products that may be dangerous to users in the workplace. The HPA also regulates the safety of certain children’s toys.

CONSUMER PACKAGING AND LABELLING The CPLA stipulates minimum packaging and labelling requirements for all prepackaged products sold to consumers in Canada, except for drugs and medical devices.

1) Net Quantity The label of every prepackaged product must contain a declaration of the net quantity of the product, in both English and French. The net quantity must be stated in terms of numerical count, or in terms of metric units, as applicable. The net quantity may also be stated in non-metric units of measurement provided that both units are grouped together. An ancillary rule requires that any food product bearing a label stating the number of servings contained in the package must also disclose the net quantity of each serving, in terms of numerical count or by a prescribed unit of measurement.

2) Product Identity In simple terms, the CPLA requires that a prepackaged product be identified by its common or generic name or in terms of its function, in both English and French, on that part of the label which is normally displayed at the point of sale. Both the net quantity and product identity must appear on the “principal display area” of a product’s label.

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3) Manufacturer’s Name and Place of Business The third minimum requirement concerns the name and principal place of business of the person by or for whom the product was manufactured or packaged for resale.

In contrast to the declarations of net quantity and identity of the product, this declaration may appear in either English or French and need not appear on the principal display area of the label.

4) Imported Products Prepackaged products that have been imported, whether they were imported in final packaged form or were imported in bulk and then packaged in Canada for consumer sale, require a special labelling disclosure. The label of such products must bear one of three alternative declarations, as follows: i) a statement of the name and address (in other words, place of business) of the Canadian seller of the product, preceded by the phrase “imported by” or “imported for”; or ii) the name and address of the Canadian seller together with a statement, immediately adjacent, of the country of origin of the product; or iii) the name and address of the manufacturer or dealer outside Canada who either originally manufactured the product or exported it into Canada.

Apart from these specific requirements, there is no general requirement for imported products to disclose the fact that they have been manufactured outside of Canada. However, pursuant to the Customs Tariff, a statement of the country of origin must appear on certain products imported into Canada.

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HAZARDOUS PRODUCTS Labelling of most commonly used hazardous or potentially dangerous products sold in Canada is regulated by the HPA. The thrust of the HPA regime is to prescribe information disclosure, cautionary language and hazard symbols for a wide range of products that, under normal conditions, can result in injury to consumers or workers using a product. For potentially dangerous consumer chemicals and other consumer products, the statute addresses six primary causes of injury: corrosiveness, toxicity, flammability, explosiveness (of a pressurized container), oxidization and reactivity.

For those products for which the HPA has its broadest and most common application (i.e., chemicals and petroleum distillates), the HPA contains two distinct schemes: one for consumeruse products and one for industrial/commercial-use products.

The HPA also stipulates labelling and design criteria for certain other specifically identified products which, through normal use, may cause injury by one of the six primary causes (charcoal, science education sets, flammable carpets, cigarette lighters, glass soft-drink containers, children’s sleep wear and tents) or that for other reasons, may result in injury to a user, including children’s toys, baby cribs, carriages and strollers.

FOOD PRODUCTS The FDA contains certain additional specific labelling requirements for food products. With certain exceptions, the information which must be shown on labels for food products includes the following: i) the common name of the food; ii) the net quantity declaration; iii) the identity and principal place of business of the manufacturer; iv) for certain products, information regarding the durable life of the food; v) where the product consists of more than one ingredient, a list of all ingredients; and vi) for all prepackaged products, certain key nutrition information presented within a standardized “Nutrition Facts Table” similar to that required for food products in the United States.

As a general rule, all of the information other than the identity and principal place of business of the manufacturer must be shown on the product label in both official languages.

DRUGS Under the FDA, the following information must be shown on both the inner and outer labels of all drug products: Lang Michener LLP 32

i) the proper or common name of the drug and its drug identification number; ii) the information regarding any standard prescribed for the drug; iii) quantities of all medicinal ingredients using proper metric measurement (net contents must be declared on the outer label only); iv) name and address of the manufacturer and Canadian importer; v) lot number; vi) directions for use; and vii) expiration dates, if required.

Prescription drugs have additional labelling requirements, as do narcotics and controlled drugs.

COSMETICS The following information must appear on the label of every cosmetic sold in Canada, pursuant to the FDA and the CPLA: i) the identity of the cosmetic by its common or generic name; ii) the net quantity; iii) the name and address of the manufacturer or distributor; and iv) as applicable, warnings or cautionary statements for certain hair dye products and deodorants, cosmetics in pressurized containers and certain flammable products.

MEDICAL DEVICES Under the FDA, medical devices must show on their label the following information: i) the name of the device; ii) the name and address of the manufacturer; iii) the identifier of the device; iv) the control number (for Class III or IV devices); v) a description including quantity of package contents (unless evident); vi) the word “sterile” if intended to be sold in a sterile condition; vii) the expiry date, if applicable; viii) the medical conditions, purposes and use for which the device is intended, unless evident; ix) directions for use unless not required; and x) any special storage conditions.

Doing Business in Canada

Canadian Competition and Antitrust Legislation Canada’s antitrust or competition law is found principally in the Competition Act (the “Act�). The Act was substantially amended and updated in 1986, and again updated in 1999, 2002 and 2009.

Its concepts will not be unfamiliar to American and European business people, as it conforms with the broad thrusts of U.S. and European antitrust and competition policy.

The Act deals with merger regulation, various vertical distribution practices, resale price maintenance, price fixing, bid rigging, price discrimination, predatory pricing, misleading advertising and promotional contests, among many other provisions.

MERGERS All mergers (defined as the acquisition of control over or a significant interest in the business of another person) which are likely to substantially lessen competition are subject to control, and, in extreme cases, prohibition, under the Act. The Commissioner of Competition under the Act makes a preliminary determination as to whether or not the merger is likely to substantially lessen competition. If the Commissioner believes it will, and the parties decline to abandon or restructure the merger to address his or her concerns, then the Commissioner may apply to the Competition Tribunal to seek an order to prohibit the merger or to seek another remedy which is appropriate in the circumstances. The Commissioner may apply to the Tribunal to enjoin a pending transaction, or may apply to dissolve a completed transaction for up to one year post closing. The Tribunal is an independent quasi-judicial body, which will hear the case and determine whether or not a remedy (up to and including prohibition of the merger before it closes, or dissolution after closing) is required to preserve competition. This is not a criminal or penal regime, but rather an administrative order which seeks to maintain competition in the marketplace.

PRE-NOTIFICATION REQUIREMENTS FOR PROPOSED MERGERS While transactions of any size are subject to merger control,

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only transactions in excess of prescribed monetary thresholds are subject to prenotification prior to closing. All transactions, whether pre-notifiable or not, are subject to review by the Competition Tribunal for up to three years after completion. There is a filing fee of $50,000 with respect to prenotification. The test is somewhat complex and each situation should be reviewed on its own merits. Broadly speaking, however, transactions will be pre-notifiable if the firm or assets being purchased has or have gross assets in Canada of more than $70 million, or gross annual revenue of more than $70 million in or from Canada; and if all of the parties to the transaction, together with all of their affiliates, have combined assets or revenues to, from or in Canada which exceed $400 million. If both of those criteria are met, then prior to closing the transaction, the purchaser must give the Commissioner notice of the transaction in the prescribed form. There is then a 30 day waiting period during which the transaction may not be completed. If the Commissioner does not challenge the transaction before the Competition Tribunal prior to the expiry of the waiting period, and does not make a Supplementary Information Request (SIR), the transaction may close at the end of 30 days. If the Commissioner does require additional information by way of SIR, then the parties must provide such information, and once they do so must wait an additional 30 days before closing. The process is similar to, and modeled after, the U.S. Second Request process.

As an alternative to filing a full pre-notification, it is possible to apply to the Commissioner for an Advance Ruling Certificate in respect of the proposed transaction. There is also a $50,000 filing fee (plus an additional $2,500 in tax) for an Advance Ruling Certificate, but only a single fee is payable in connection with a merger that also involves pre-notification. If the Commissioner concludes upon review of the information provided in the request for the Advance Ruling Certificate that the transaction is not likely to substantially lessen competition, then he may issue the Advance Ruling Certificate. This eliminates the need to give formal pre-notification of the transaction and prevents the transaction from being subsequently

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challenged by the Commissioner. A typical waiting period between the time an Advance Ruling Certificate is applied for and the time it is granted is four to six weeks. However, the time periods are not prescribed and may be longer in more complex cases, and shorter in straightforward circumstances.

The Competition Bureau has announced “service standards” with respect to mergers. In “non complex” cases it will complete its review of matters within two weeks of receiving the necessary information; in “complex” cases it will complete its review within 10 weeks; and in “very complex” cases it will complete its review within five months of receiving the necessary information. However, these timetables, while useful guidelines, are not binding and are sometimes exceeded.

COMPARISON TO FOREIGN PRACTICE The criteria applied by the Commissioner to determine whether or not a transaction is likely to prevent or lessen competition substantially are, broadly speaking, similar to those applied by the Department of Justice and the Federal Trade Commission in the United States and the Commission in Europe. However there are local variations. Canada is tolerant of greater concentration than is the U.S., as Canada has is a much smaller economy. Canada merger review has to date focused more on single firm market power than has the U.S. regime, although there is increasing focus on interdependent effects in the context of mergers in concentrated markets. Canada also enjoys an explicit “defence” for transactions generating efficiencies which outweigh any lessening of competition.

In any proposed transaction in which there is a competitive overlap, it is important to be able to properly define both the product and geographic markets in question (North American and worldwide markets are frequently found to exist), identify alternate sources of competition or potential competition, state with some degree of precision the market share of the parties to the transaction as well as the market shares of other major participants in the industry, provide a reasonably detailed outline of the efficiencies which the transaction seeks to create, and explain in practical terms why the merger will not give the new merged entity the power to raise prices or restrict output.

There are no statutorily prescribed safe havens for mergers, but as a rule of thumb a merger is unlikely to be challenged if the merged entity would command less than a 35% market share, and the top four firms in the market would command less than a 65% market share; or, regardless of the concentration of the top four firms, the merged entity will command less than a 10% market share.

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CONSPIRACY TO FIX PRICES Agreements between competitors to fix prices, allocate markets or restrict output are serious offences, punishable by a fine of up to $25 million (as of March 2010) and incarceration for up to fourteen years. Indeed, due to the possibility of charging firms with multiple “counts” or offences, fines in practice may be higher than this – the largest single fine to date in Canada is $48 million. As well, any corporation carrying on business in Canada which implements a directive from a parent corporation outside Canada to give effect to a conspiracy entered into outside Canada, which would have been illegal if it had been entered into in Canada, is also liable to conviction.

In addition to constituting an offence, illegal conspiracies give rise to a civil cause of action by any person injured. Class action proceedings now almost inevitably follow criminal prosecutions on the announcement of investigation.

COMPARISON TO UNITED STATES PRACTICE Unlike United States law, in Canadian law the injured party in a conspiracy is not entitled to treble damages, but only to single damages. As noted above, however, class action litigation, often coordinated with parallel U.S. proceedings, is becoming common.

IMMUNITY PROGRAM The Canadian Competition Bureau has an immunity program for criminal Act offences. It is similar to the U.S. program.

Immunity is available for the “first in” and leniency for subsequent applicants. This leads to a race to the authorities, much as occurs in other jurisdictions. When immunity is being considered internationally, Canadian immunity should be one of the jurisdictions considered.

BID-RIGGING Like conspiracy, bid-rigging is a serious criminal offence under the Act. It gives rise not only to substantial criminal penalties but also to civil (single) damages. Bid-rigging is a per se offence – the conduct is illegal even if it has no affect on competition.

It does not matter that only two small bidders on a large project have agreed on the bids to be submitted. They are still guilty unless they have advised the person calling for the bids that they are submitting bids in a joint fashion prior to submission of those bids. Bid-rigging is also aggressively prosecuted in Canada.

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MISLEADING ADVERTISING The Act contains a variety of prohibitions on misleading or deceptive consumer or customer representations. They deal with a broad variety of topics such as false or misleading warranties, product performance claims, representations as to tests and testimonials, double ticketing of products, deceptive telemarketing, deceptive bargain price advertising, bait-andswitch selling schemes, and selling products above their advertised price. The provisions were amended in 1999, so that there remains a criminal offence in relation to false or misleading representations which are made knowingly or recklessly. Other misleading advertising is now addressed under a “reviewable conduct” regime, which provides for cease and desist remedies as well as “administrative monetary penalties” of up to $10 million for misleading advertising.

Without examining all misleading advertising law in detail, the fundamental prohibition underlying all of the specific provisions is the making of a representation that is false or misleading in a material respect. The provisions are prosecuted reasonably aggressively and fines of up to $1,000,000 have been levied for contravention of the provisions. The representation need not be made in what is typically considered to be an advertisement. The chairman of a company was fined $500,000 in respect of a misleading representation in the chairman’s message contained in the firm’s annual report.

Prosecutions will also be sought in respect of misleading claims with regard to the environmental “friendliness” of the product and to advertisements placed by United States–based firms in Canada seeking to attract cross-border shoppers. The Commissioner has announced that these cross-border advertisements may be misleading if, for instance, they advertise products which are not properly approved for use in Canada or state price comparisons with available Canadian products without taking into consideration the appropriate duties which would have to be paid upon importing the products into Canada. Misleading advertising, and particularly comparative advertising claims, are also the subject of private litigation, primarily seeking injunctive relief.

PROMOTIONAL CONTESTS Persons running promotional contests must, pursuant to the Act, make adequate and fair disclosure of the number and value of the prizes that they offer, and the areas in which the prizes will be awarded. The distribution of prizes must be on a fair, random basis or on the basis of skill, and must occur promptly. In 2002, the Act was amended to add a new criminal Doing Business in Canada

offence of sending a deceptive prize notice. As well, the Criminal Code and some provincial legislation contain strict requirements with regard to the operation of contests or lotteries, and any such promotion should be carefully reviewed with counsel before being implemented.

TELEMARKETING/PRIZE NOTIFICATION The 1999 amendments to the Act introduced a criminal offence of misleading telemarketing. The law prohibits materially false or misleading statements in telemarketing “pitches,” and also requires disclosure of certain basic information during telemarketing solicitations. In 2002 the Act was amended to add a specific offence related to misleading prize notifications.

REVIEWABLE CONDUCT In addition to the principal criminal and merger control provisions, the Act also defines a number of types of conduct which are neither criminally nor civilly actionable.

Nevertheless, in certain circumstances, particularly in circumstances in which there is a danger of substantially lessening competition, conduct may be enjoined by the Competition Tribunal. As well, the Competition Tribunal has the power to make other remedial orders to correct the perceived negative impact on competition as a result of the reviewable conduct. Individuals and parties allegedly affected by this conduct cannot sue for damages. Recent changes to the Act allow private parties to seek leave from the Competition Tribunal to pursue Refusal to Deal, Exclusive Dealing, Tied Selling, Price Maintenance or Market Restriction matters. Damages may not be awarded in these private proceedings. Otherwise, only the Commissioner may commence a proceeding before the Competition Tribunal.

ABUSE OF DOMINANT MARKET POSITION Conduct by a person or persons substantially controlling a class or species of business which involves the practice of anticompetitive acts having or likely to have the effect of substantially lessening competition, may constitute an abuse of dominance. The logic of the analysis of an abuse of dominance case is, broadly speaking, similar to a United States monopolization case or a European abuse of dominance case, although of course there are some differences in the law. It is difficult to say in advance which conduct by a large competitor will be considered abusive and which is simply hard, aggressive competition on the merits. All firms which enjoy a large Lang Michener LLP 35

market share, however, must be aware that their conduct may be reviewed pursuant to the abuse of dominance provisions.

Only the Commissioner may commence an abuse of dominance proceeding.

AGREEMENTS AMONGST COMPETITORS In 2009 the Act was amended to provide for a possible civil challenge before the Competition Tribunal for agreements between competitors which result in a substantial lessening or prevention of competition. Agreements between competitors with respect to price, market allocation or output restriction may constitute criminal conduct. Other sorts of agreements amongst competitors are subject to review and possible prohibition if they lead to a substantial lessening of competition, and are not saved by an efficiency defence which will protect the agreement if its efficiencies outweigh the anticompetitive effects.

PRICE MAINTENANCE The Act previously criminally prohibited price maintenance – being conduct which by agreement, threat, promises or other like means of attempts to influence upward or discourage the reduction of the price at which some other person offers to supply a product. As well, it prohibited a supplier from terminating a customer because of the customer’s low pricing policy. The law has now been changed so that the same conduct is no longer criminal but is subject to review and prohibition before the Competition Tribunal if it has an adverse effect on competition.

REFUSAL TO DEAL Firms which refuse to supply their product to others, with the result that the second firm is substantially affected in its business and cannot obtain supplies of the product elsewhere, may be ordered to accept the second firm as a customer or resume supply to that firm. Private parties may now seek leave from the Competition Tribunal to bring such a case. It is not necessary to show that this conduct has a substantial negative effect on competition – it is sufficient if a firm is materially injured.

EXCLUSIVE DEALING AND TIED SELLING Where a firm engages in a practice of refusing to supply a product except on condition that the purchaser take another

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product as well, or only buy from the one supplier, or where a firm induces the purchaser to do so by offering preferential terms, resulting in a substantial lessening of competition, the practice may be enjoined by the Competition Tribunal. Private parties may now seek leave from the Competition Tribunal to bring such a case.

MARKET RESTRICTION The practice whereby a supplier, as a condition of supplying a product to a customer, limits the markets (whether geographically or otherwise) into which the customer may resell the product, may be enjoined if it is likely to lessen competition substantially. Private parties may now seek leave from the Competition Tribunal to bring such a case.

FOREIGN SUPPLIERS The Act permits the Competition Tribunal to order a Canadian firm to supply a second Canadian firm with product which the first firm originally obtained from a foreign source, or to cease dealing in the product entirely, if the first Canadian firm required that a foreign supplier not supply the second Canadian firm with the product in question. In this way, the Act seeks to prevent a domestic distributor from “cornering” an entire market for an important imported product, by refusing to permit others in Canada to get access to that product.

FOREIGN DIRECTIVES, JUDGMENTS AND LAWS The Competition Tribunal may order that no measure be taken in Canada to implement a judgment, decree or order of a foreign court or government if the implementation would adversely affect competition in Canada, adversely affect the foreign trade of Canada, or otherwise restrain or injure competition in Canada. This section has never been employed by the Competition Tribunal but it envisages primarily the situation of a Canadian subsidiary being ordered by its parent, often as a result of a foreign governmental direction to the parent company, not to ship goods to Cuba. This provision is designed to permit a subsidiary to engage in that trade regardless of the directive from head office. Reference should also be made to the Foreign Extraterritorial Measures Act (“FEMA”) which gives powers of a similar effect.

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Protection of Intellectual Property in Canada TRADE MARKS A trade mark indicates the source of goods or services by distinguishing those manufactured, sold, leased, hired or performed by one person from those of another person. Any word, symbol, design, slogan, get up or distinguishing guise, or combination of the same, which is adopted or used by a person for the purpose of distinguishing his goods or services from those of others is a trade mark.

goods or services for which it is registered, may be enforced to the whole of Canada. Without registration, protection is afforded normally only in the specific geographic area within which the mark has actually been used and has developed reputation or goodwill; iii) registration of a trade mark provides additional protection against a person using the owner’s trade mark in a manner that would likely cause depreciation of the trade mark’s goodwill; iv) applications can be made, and priority rights obtained, for trade marks not yet in use in Canada. In order to obtain a priority right based on an application filed outside of Canada, the Canadian application must be filed within six months of the first filing date for the mark in any other WTO member country. The effective filing date of the Canadian application is deemed to be the date of filing in that other country; and,

PURPOSES OF TRADE MARK REGISTRATION A trade mark owner will wish to ensure that others do not use trade marks that might lead to confusion on the part of the public with respect to the source of the owner’s goods or services. Although rights in a trade mark arise and may be enforced once a trade mark is in use, in order to protect the exclusive right to a trade mark throughout Canada, the trade mark owner may register it pursuant to the Trade-marks Act (the “TMA”). While registration is not essential to protect a trade mark, it makes good business sense to register a trade mark for the following reasons: i) in an action to prevent such use, the owner has the burden of proving that its trade mark has a reputation or goodwill in the marketplace and that such trade mark actually distinguishes the owner’s wares or services from those of others. On the other hand, if the trade mark is registered, it is presumed to be in use and distinctive of the owner and the owner is relieved of this burden; ii) registration of a trade mark extends the geographical area within which exclusive use of the mark, in respect of the Doing Business in Canada

v) it is recommended that a trade mark which is licensed to a third party be registered. By registering the licensed trade mark, it becomes more difficult for the licensee to claim that its use of the trade mark has resulted in the licensee acquiring ownership rights to the trade mark. As of June 1993, it is no longer necessary to register licences in the Canadian Trade-marks Office; however, such licences should be in writing and expressly indicate that the owner of the mark has control of the character or quality of the licensee’s goods or services. Notices on the product or packaging should preferably indicate that the licensee is licensed by the trade mark owner to use the trade mark.

TRADE MARK REGISTRATION AND MAINTENANCE To obtain the benefits of a registered trade mark in Canada, an application must be filed with the Canadian Trade-marks Office. Registered trade mark agents are entitled to sign the application on behalf of the applicant and no power of attorney forms are necessary. The TMA contains provisions which limit or prohibit the registration of certain marks. In addition, marks which are confusing with those already in use or registered may be refused registration. A trade mark application which is examined and approved by the Trade-Marks Office is then advertised for public scrutiny and may be opposed.

Consultation with a specialist in this area is essential to avoid Lang Michener LLP 37

expensive and futile attempts to register a trade mark which an appropriate search and registerability opinion would have shown to be unregistrable in Canada.

Renewal of a registration under the TMA must occur every 15 years from the day of registration or last renewal; if such renewal does not occur, then the trade mark registration will be cancelled. Trade mark rights can also be lost by non-use or abandonment, by allowing others to use confusingly similar trade marks or through improper licensing.

REMEDIES OF TRADE MARK OWNERS Once registered, the owner of the trade mark has the exclusive right to use that mark throughout Canada for the goods or services for which it is registered. The owner may institute court proceedings against anyone who infringes this right or uses a confusingly similar trade mark and may obtain the following relief: i) an injunction to prevent further infringement; ii) damages for any loss caused by the infringement or an accounting of the infringer’s profits; and iii) the delivery up or destruction of the infringing articles.

An unregistered mark may be enforced by an action for passing off or by an action under section 7 of the TMA for causing confusion and similar remedies are available.

PATENTS A patent will be granted in respect of any new, useful and unobvious invention, comprising any art, process, machine, manufacture or composition of matter, or any new and useful improvement thereof. It is not possible to obtain a patent for an aggregation of known elements unless they work together in a new and unobvious way. A patent will not be granted for any bare scientific principle or abstract theorem. A patent grants to the patentee the exclusive right, throughout Canada, to manufacture, use or sell the invention for 20 years from the date of filing of the patent application PATENTING AN INVENTION The first person to fully disclose an invention in a patent application has the right to obtain a patent. A patent agent drafts the patent application which is then filed in the Canadian Patent Office and is examined by patent examiners.

The application is published 18 months after filing, and examination must be requested within five years of filing. The examination period is typically between two and three years.

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It is essential that the invention be properly disclosed and specifically claimed. A patent is viewed as a bargain between the inventor and the Crown: in return for the full disclosure of the invention, a time-limited exclusive right is granted.

A separate patent must be obtained in each country in which protection from infringement is sought. If a patent application is filed in Canada within one year of filing an application for the same invention in a country adhering to the Paris Convention, the filing date in the Convention country is deemed to be the filing date in Canada. It is also possible to obtain a patent in Canada under the Patent Cooperation Treaty. If the subject matter of the invention is disclosed by the inventor or someone who obtained knowledge of the invention from the inventor in a manner that makes the subject matter available to the public more than a year before the Canadian filing date, a Canadian patent cannot be obtained.

REASONS TO PATENT AN INVENTION A patent is often the natural alternative to a trade secret. It allows (in fact, requires) an inventor to disclose his invention to the public in exchange for a 20 year monopoly. While a trade secret can protect a technology that cannot be reverseengineered, only a patent can protect technology that can be imitated. Patents are the most easily commercialized form of intellectual property and provide a powerful mechanism for isolating new technology from use by competitors. In addition, by granting a licence permitting another individual to use, manufacture or sell the invention, a patentee may gain market access more readily while earning royalties from the licensee.

REMEDIES OF PATENT OWNERS If any act that interferes with the full enjoyment of the monopoly granted to the patentee occurs without the consent of the patentee during the term of the patent, the patentee may bring a court action against the infringer and may obtain relief comparable to that discussed earlier concerning trademarks. Furthermore, reasonable compensation is available for acts which would constitute infringement had the patent been issued at the date of publication.

CONFIDENTIAL INFORMATION AND TRADE SECRETS A trade secret (a particular kind of “confidential information”) may relate to a product (e.g., the formula that makes up a soft drink), a process (e.g., a unique method for making a product), technology (e.g., the “know-how” that makes the production Doing Business in Canada

aspect of a certain business more efficient) or a collection of strategic business information (e.g., customer lists and internal marketing strategies). All trade secrets are the product of work and involve the expenditure of time and money. Trade secret protection arises upon creation and, as long as the trade secret is kept confidential, there is no limit to its duration. Unlike a patent, no system for registration of trade secrets exists in Canada and an owner’s remedies are restricted to those available at common law (or in Quebec, the similar right under the Quebec Civil Code). The characteristic of “secrecy” is essential to an owner’s continued rights in the secret.

In recent years, the protection of trade secrets has become more important because of the short-lived nature of new technology and because of the increasing mobility of employees. Canadian common law has developed strong protections for confidential information.

PROTECTING TRADE SECRETS IN CANADA Trade secrets are protected by an action for misuse of confidential information or breach of confidence. To establish such a claim, it must be shown: i) the information was confidential; ii) the information was communicated in confidence; and iii) the information was misused to the detriment of the confiding party.

Canadian courts have implied an obligation of good faith in the employer-employee relationship and have prevented former employees from using their employers’ trade secrets after the employment relationship has terminated. Persons who occupy positions of trust (e.g., directors of a corporation) owe even higher duties of allegiance to the companies they represent. These duties, called fiduciary duties, include the obligation not to utilize corporate opportunities or other confidential information gained in a fiduciary capacity.

Protection of a company’s trade secrets and confidential information occurs through a combination of effective internal policies to preserve the confidential aspect of information and contracts with employees and third parties which characterize certain information as trade secrets and specify the obligations which bind them.

The necessary contractual terms and internal policies should be developed with the assistance of a lawyer in order to ensure that trade secrets will be adequately protected and to ensure that contracts entered into with employees and third parties will be enforceable by the courts.

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REMEDIES Once a trade secret is made public, its value is significantly diminished or eliminated. Therefore, the usual remedy is an injunction restraining another party from using or speaking about the trade secret, combined with damages. If loss of secrecy is threatened, effective steps to protect the asset must be taken promptly.

COPYRIGHT Copyright arises automatically upon creation of a work by a subject or resident of Canada or a convention country (and in other cases, by publication in Canada or a convention country), and affords to the owner of the copyright the sole right to produce, reproduce, or publish the work or any substantial part of it in any form. Copyright attaches to any original literary, dramatic, musical or artistic work, including books, manuals, brochures, paintings, drawings, maps and computer programs. Copyright does not protect the ideas in these works but it does protect the form in which the ideas are expressed.

PURPOSES OF COPYRIGHT REGISTRATION In Canada, registration of copyright is optional as copyright arises automatically on the creation of a qualifying work as described above. If, however, a copyright is registered with the Canadian Copyright Office in the prescribed form, enforcement in court is facilitated. If a dispute over the validity of a copyright arises, registration provides presumptions that the copyright is valid and that the person who registered it is the owner. It also broadens the available remedies and facilitates assignments and licences. If the work has commercial importance, it is worth consulting an experienced practitioner.

In particular, some works which may be considered as protectable by copyright in other jurisdictions may only be protectable by registration under the Industrial Design Act in Canada. If such a work is published more than a year before an industrial design application is filed, no protection can be obtained in Canada.

MORAL RIGHTS The author of a work has statutory “moral rights” – the right to the integrity of the work and the right, where reasonable, to be associated with the work as author. Moral rights cannot be sold or assigned but may be waived.

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REMEDIES OF COPYRIGHT OWNERS Copyright gives the owner the sole right to produce, reproduce, perform or publish the work or any substantial part of it. The owner may institute court proceedings against anyone who infringes these rights and may obtain relief comparable to that discussed above for trademarks. There are also provisions in the Copyright Act (the “CA”) declaring certain acts of copyright infringement to be quasi-criminal in nature.

The duration of protection varies with the type of work.

For written works, copyright protection lasts for 50 years following the death of the author. For sound recordings and photographs, the protection lasts for 50 years after the time the original recording, plate or negative was made.

OWNERSHIP In most cases, the author of a work is the first owner of the copyright in it. There are many exceptions, however, including works created by employees in the course of their employment, certain commissioned works, engraving, portraits and photographs. The owner of a copyright may assign or license the copyright in whole or in part.

INDUSTRIAL DESIGN A registered industrial design (called a “design patent” in the United States) provides protection for the ornamentation of any article of manufacture. It relates to matters of appearance, not function. That is, the feature must exist because of design considerations, not functional considerations.

INDUSTRIAL DESIGN REGISTRATION The proprietor of any design who is applying for registration must deposit with the Industrial Design Section of the Patent Office a drawing of the design and a declaration that the design is not in use by any other person. The Commissioner of Patents will then register the design, if, after examination, a previously registered design is not revealed. A certificate of registration will then be sent to the applicant. Subsequently, it is recommended that each article on which the design is applied, or the labelling or packaging for such articles, be marked with the symbol (a capital D within a circle) together with the name of the owner of the design. Without such marking, the owner’s remedies for infringement may be restricted to an injunction. Marking also enables anyone wishing to negotiate a licence to know with whom to deal.

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An application for registration of the design must be filed within one year of the first publication of the design in Canada or elsewhere. If the design is not registered, there is no protection available for it.

PURPOSES OF INDUSTRIAL DESIGN REGISTRATION Any manufacturer who has an eye-catching design for a product that is easily replicated should consider registering the design. In addition, any company thinking of spending a large sum on tooling for a new product should check to make sure there are no registered designs which are likely to force them off the market.

Industrial designs cannot be protected under the CA, and therefore the only protection available results from industrial design registration. Consultation with a specialist in this area is essential to ensure the protection of your property by registration under the proper act and to avoid infringement of the industrial designs of others.

REMEDIES OF INDUSTRIAL DESIGN PROPRIETORS Registration of an industrial design provides the registered proprietor with the exclusive right to apply that design to an article for the purpose of sale for a 10-year period, subject to the payment of maintenance fees. The proprietor of a registered industrial design may bring an action against anyone who applies or imitates the design without the consent of the proprietor. In such an action against an infringer, the proprietor may obtain relief comparable to that discussed above concerning patents and trademarks.

INTEGRATED CIRCUIT TOPOGRAPHY ACT The Integrated Circuit Topography Act (the “ICTA”) provides exclusive rights in the design or topography of integrated circuits (e.g., semiconductor chips). This legislation represents several significant departures from United States law in this area. For example, despite certain exceptions to exclusivity rights under United States law, it is clear that, in Canada, a person may not “reverse engineer” a registered topography for commercial purposes. Integrated circuits must be registered under the ICTA within two years of their first commercial exploitation and give the owner the exclusive right to the topography for 10 years from the application date, or first commercialization date, whichever occurs first. There has been very little activity under the ICTA and it has received almost no judicial consideration.

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Information Technology Law Information and communications technologies contributed over $59.2 billion to Canada’s GDP in 2008. Approximately 600,000 Canadians work in this sector, and Canada exported over $22.2 billion of information and communication technology products in 2008. Canada’s international competitive advantage in various components of this industry (e.g., telecommunications) is rooted in a sophisticated scientific education system, a network of technology enterprises that export know-how and technology throughout the world, and a legal system that supports and encourages entrepreneurial investment in intellectual property through a rigorous regime of legislation and common law.

CONFIDENTIAL INFORMATION AND TRADE SECRETS As a result of various court cases, Canada has developed an aggressive common law protection for confidential information and trade secrets. The protection of confidential information and trade secrets may impact, for example, employer-employee relationships, contractor-consultant retainers, technology development arrangements, and all commercial transactions concerning computer technology. However, where it is necessary to take full and efficient advantage of those common law rights, it is a customary trade practice in Canada for parties to enter into a confidentiality or non-disclosure agreement.

In Canada, neither confidential information nor trade secret is addressed by statute. Therefore, in the common law provinces, the definition of these terms is to be found in the applicable case law. In contrast, many U.S. states have enacted statutes protecting trade secrets as a form of property. The Supreme Court of Canada has viewed treating confidential information as property as “controversial” and the preferred approach has been to characterize a cause of action for breach of confidence as a unique hybrid, the objective of which is to put the confider in as good a position as it would have been but for the breach. To that end a wide variety of remedies exist, comparable to those available in other intellectual property disputes.

As indicated above, in order to succeed in an action for breach of confidence, the following is required: the information imparted was confidential; it was communicated in confidence; and, it was misused to the detriment of the confiding party.

Even though confidential information may not technically be treated as “property” in Canada, it is widely considered to be a form of intellectual property because rights in confidential Doing Business in Canada

information are an integral part of other intellectual property rights, such as patents and copyrights. Confidential information is licensable, so long as the licence provides that the information is maintained in confidence by the licensee.

COPYRIGHT LAW Unlike United States copyright law, copyright protection in Canada extends to the creative expressions of certain works regardless of whether or not such works have been registered with the Canadian Intellectual Property Office. However, registration of a copyrightable work may afford a creator additional protection and should be considered depending upon the particular commercial and legal circumstances of each case. Registration is a simple, fast and inexpensive procedure and should be considered for all important works.

Subject to a few exceptions, copyright in Canada usually exists for the life of the author, the remainder of the calendar year in which the author dies, and for 50 years following the end of that calendar year.

Computer software is a literary work for the purposes of the CA. However, the issue of whether or not the creative elements or expressions of any particular software (e.g., “look and feel”) is subject to copyright law is a matter that remains the subject of developing case law in Canada.

Canadian law recognizes the moral rights of creators of literary works, including computer software. Moral rights are the right to the integrity of the work and the right to attribution.

Those dealing with computer software must ensure that their proprietary interests and commercial objectives will not be Lang Michener LLP 41

encumbered by a creator’s moral rights. The creator cannot sell or assign his moral rights to anyone else, but can waive them.

Generally, the creator of a work owns the copyright in that work. As in other countries, one may deal with one’s copyright vis-à-vis a third party via either an assignment or a licence. In the case of an outright assignment, the third party will own the copyright, whereas in the case of a licence, lesser interests are granted. If a work is created in the course of employment the employer owns the copyright unless there is an agreement to the contrary. However, if the person who creates the work is a contractor rather than an employee, the employer must obtain a transfer of the contractor’s copyright, otherwise the contractor retains ownership of the copyright.

Canadian courts have relatively recently followed the lead of their United States counterparts in determining that a command process embedded in a computer chip or microprocessor will, in most cases, be considered to be computer software. Therefore, one must ensure that the use of any microprocessors that are used in computer hardware does not infringe the software proprietary rights of anyone else.

PATENT LAW As noted above, Canada’s patent rights are based on a “first to file” system in contrast to the United States “first to invent” system. With regard to information technology, it is important to divide information technology into the separate categories of computer hardware and computer software. The patentability of computer hardware is based on the same criteria that are common to all other technology under the Patent Act (“PA”).

In this regard, there is great commonality between United States and Canadian patent law.

Initially, protection for software in Canada was based in copyright law. However, as copyright does not protect function, only expression, software developers sought and have succeeded in obtaining a measure of protection for programming code under patent law. The patentability of computer software in Canada is governed by a provision of the PA which states that a bare scientific principle or abstract theorem is not patentable. A computer program is basically an algorithm, or a set of instructions to operate a computer and is, therefore, not patentable. However, where the nature of the program goes beyond a mere algorithm, or mathematical formula, to constitute a methodology or process or control system, the program has been found to be patentable.

In 1995, the Canadian Intellectual Property Office adopted guidelines for assessing the patentability of software inventions.

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While these guidelines have not yet been validated by the court, they specify that although direct claims for computer programs, like those for unapplied mathematical formulae, are not patentable, a new and useful process incorporating a computer program, or an apparatus incorporating a programmed computer, is patentable if the computer-related matter has been integrated with another practical system that falls within an area which is traditionally patentable. This distinction has allowed software developers to avoid the practical effect of limitations on patentable subject matter by drafting claims that meet formal requirements but protect, indirectly, prohibited subject matter. Given that even skillful patent agents cannot completely avoid the prohibitions against patenting software, the federal government has been lobbied to adopt the reasoning of recent United States decisions which eliminates any problems regarding software patents.

At common law, only inventions created in the course of employment by employees hired to invent are owned by the employer. However, this is usually expanded by implied contractual terms to include any inventions created in the course of employment. In addition, one may legally transfer one’s patent rights to a third party via either an assignment or a licence.

ELECTRONIC COMMERCE There are many aspects of international electronic commerce that must be considered under Canadian law, including evidence admissibility tests for electronic records, tax and customs laws concerning electronic records, regulatory requirements for electronic transactions under various statutes and issues related to the formation of contracts via electronic communications. Several of the provinces have enacted or will enact e-commerce legislation. Furthermore, Canada has recently enacted the Personal Information Protection and Electronic Documents Act (“PIPEDA”) which regulates the collection, use and distribution of personal information.

A jurisdiction clause contained in a “click-wrap” agreement has been considered by a Canadian court and the enforceability of the clause regarding the exclusive attornment to the courts in King County, Washington was upheld. However, jurisdictional issues relating to e-commerce abound and the law in this area is in its infancy.

COMMERCIAL TRANSACTIONS There is a wide range of legal issues related to information technology that presents unique challenges under Canadian law.

For example, the enforceability of “shrink-wrap” software licences Doing Business in Canada

has not yet been settled by the courts; software escrow arrangements must be considered in the context of Canada’s unique bankruptcy and trade-creditor protection laws as there is no equivalent to the United States Bankruptcy Code protection for licensees in the event of a bankruptcy or insolvency in Canada; differences in provincial laws may affect national distribution transactions or information networks; Canadian competition law should be considered when structuring distribution and marketing arrangements (e.g., “outsourcing” and reseller transactions); and Canada’s technology export restrictions have tended to be more liberal than those of the United States (e.g., Cuba does not appear on Canada’s export control list).

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DOMAIN NAMES The acquisition and maintenance of domain names in Canada is similar to that in the United States, and the same Generic Top Level Domains (“gTLDs”), with their associated dispute resolution mechanisms, are available to Canadians. In addition, “.ca” Country Code Top Level Domains (“ccTLDs”) are available through registrars who are accredited by the Canadian Internet Registration Authority (“CIRA”), subject to certain Canadian presence requirements. In general, the registration and transfer processes for “.ca” domain names is not as sophisticated as for the more common gTLDs and the dispute resolution mechanism for it has only recently been implemented.

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Bankruptcy and Insolvency Laws Historically, Canadian insolvency law has been significantly more creditor-oriented than that of the United States.

However, through the evolution of the law relating to the Companies’ Creditors Arrangement Act (the “CCAA”) over the last few years and the implementation of significant amendments to the Bankruptcy and Insolvency Act (the “BIA”) in 1992, Canadian insolvency law has moved closer to the United States model.

RECEIVERSHIPS Where reorganization of a company in financial difficulty is not attempted or fails, the company will usually be liquidated in a receivership initiated by one of the company’s secured creditors.

The receiver may be appointed privately on a non-judicial basis under the terms of a debenture or general security agreement which grants a secured creditor a charge over all of the company’s assets, or by the court as an adjunct to enforcement proceedings by a secured creditor. In recent years, there has been an increasing trend toward court-supervised receiverships. Once the debtor is notified of the appointment of the receiver, the officers and directors of the debtor cease to have control over the debtor’s assets which are subject to the charge.

Although obligated to act in a commercially reasonable fashion, the duties of the privately appointed receiver are primarily to the secured creditor appointing it. A court-appointed receiver is an officer of the court and therefore is not an agent of the secured creditor or the debtor and, as such, has duties to all parties who have interests in the property of the debtor.

The receiver has a duty to take possession of the property of the debtor to recover the debt and to account to the debtor and other interested parties for the assets and their realization.

The receiver is usually a corporation which employs chartered accountants who are also licensed trustees in bankruptcy and members of the insolvency practice of an accounting firm. The receiver may sell assets either as an operating business or on a piecemeal basis so long as every aspect of the sale is done in a commercially reasonable fashion. Prior notice of the sale must usually be given to other secured creditors and the debtor. Any interested party may apply to the court to seek resolution of a dispute which arises in the administration of the receivership.

Before appointing a receiver over substantially all of the assets of an insolvent person, the BIA requires that the debtor be given at least 10 days notice in a prescribed form. Once the Lang Michener LLP 44

receiver is appointed, it is required to give notice of its appointment to creditors and to the Superintendent of Bankruptcy, and will ultimately be obligated to give an accounting with respect to the sale of the assets of the debtor and disposition of the proceeds thereof.

BANKRUPTCY The debtor may become bankrupt either in conjunction with or separate from a receivership. There are three ways an insolvent person can become bankrupt under the BIA. An insolvent person may do so voluntarily by making an assignment in bankruptcy and assigning its property to a trustee for the general benefit of creditors. Such an assignment is effective immediately upon filing the assignment with the office of the Official Receiver and is done with the assistance of a trustee in bankruptcy. Alternatively, the insolvent person may go bankrupt at the demand of creditors. In such a situation, the insolvent person is said to have been petitioned into bankruptcy. In that instance, one or more creditors to whom the insolvent person owes at least $1,000 may file a petition with the court. When an insolvent person becomes bankrupt, their property vests in the trustee. The trustee’s obligation is to administer the bankrupt’s estate for the general benefit of creditors. Lastly, a debtor may be deemed bankrupt upon the failure of a proposal under the BIA, as discussed below.

The trustee verifies creditors claims, values the bankrupt’s property, realizes on that value and eventually pays out the property as a dividend to the creditors. The BIA only deals with unsecured creditors. Secured creditors can realize on their security despite the stay of proceedings and may prove a claim for any deficiency that might exist after so doing. Unsecured Doing Business in Canada

creditors, on the other hand, must prove their claim for the full amount of their indebtedness in order to receive a dividend from the trustee’s administration of the bankrupt’s estate.

The BIA provides rights to suppliers to obtain the return of their goods in the event of either a receivership or bankruptcy, provided that the supplier files a claim in a prescribed form with the receiver or trustee within 30 days of the delivery of the goods, and the goods remain identifiable and have not been resold. Please note that this remedy is not available in the context of interim receiverships and that recent jurisprudence has proven this remedy problematic in many regards.

An individual bankrupt is automatically discharged from bankruptcy nine months after making an assignment or being petitioned, unless he or she has been bankrupt before or a creditor opposes the discharge. Where discharge is not automatic, a hearing will be held before the Bankruptcy Court.

Whether a bankrupt is a first-time bankrupt or not, the discharge may be absolute, conditional, or suspended for a period of time.

REORGANIZATIONS Canadian law with respect to commercial reorganizations has been subject to dramatic change over the last few years.

Aside from negotiated reorganizations or “work-outs,” which are very common, particularly in major insolvencies, more formal court-sanctioned reorganizations can be accomplished either under the CCAA or the BIA. The CCAA is intended for larger insolvencies and is only available where the total claims of a debtor company exceed $5 million. The provisions of the CCAA allow a debtor company more flexibility in reorganizing itself than the provisions of the BIA. Both the CCAA and the BIA go part way toward implementing the United States Chapter 11 model. Nevertheless, the Canadian rules continue to give the debtor fewer rights than in the United States, impose elements of court and professional supervision on the debtor in possession and give substantially less time to propose and seek approval of the reorganization.

While both the CCAA and the BIA provide a broad-based automatic stay of proceedings against all potentially adverse parties, the stay period is substantially shorter in Canada than in the United States. Under the BIA, the initial stay period is only 30 days, but may be extended in 45 day increments with

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court approval but shall not exceed a total stay of six months.

The CCAA stay is usually more generous as it is assumed that larger commercial entities take longer to reorganize. The debtor, while remaining in possession, is almost always subjected to some form of outside professional supervision in the form of a court-appointed monitor or trustee who reports on the debtor’s affairs to the court and creditor body, guards against dissipation of assets and sometimes becomes engaged in the negotiation of the reorganization.

An example of this outside supervision is the requirement under the BIA that, within 10 days of the commencement of the reorganization, the trustee appointed under the proposal is required to sign a cash flow statement produced by the debtor indicating that the trustee believes such cash flow statement to be reasonable.

The ability of debtors in Canada to repudiate executory obligations such as leases or supply contracts is much more limited than under Chapter 11 in the United States. Currently, the extent of this right under CCAA proceedings is uncertain.

Under the BIA, the only executory contracts which can be repudiated are real property leases, and this may be done only if it is essential to the reorganization and upon the payment of six months rent.

Reorganization plans must be accepted by the creditors and confirmed by the court. The level of approval required under both the CCAA and the BIA is a majority in number of the creditors and 66% of the value of the claims in each class of creditors present or voting at a meeting. Dissenting creditors are bound by the proposed compromise, provided that the required majority is attained and the plan is approved by the court. Under the BIA if the reorganization is not approved, the debtor is immediately deemed bankrupt.

Finally, while the jurisprudence has been rapidly developing in this area under the CCAA, there are no clear-cut rules allowing priority to those granting credit after the commencement of a reorganization. Accordingly, where a debtor is unable to obtain the consent of the secured creditors to allow funding secured by a charge ahead of existing secured creditors and/or make arrangements with key creditors for the grant of additional credit, the reorganization will often collapse despite the stay of proceedings because of insufficient cash flow to sustain operations.

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Employment Law GENERAL Doing business in Canada will frequently require the establishment of employment relationships. Obligations and liabilities of employers in Canada are often significant and, to the unsuspecting foreign investor, may be surprising. For that reason, we recommend that any investor contemplating entering into an employment relationship with Canadian employees consider its obligations and potential liabilities first, since with preplanning there may be opportunities to limit one’s potential liability in this area of Canadian law.

Labour and employment relations are, broadly speaking, matters of provincial jurisdiction in Canada. The federal government, however, has jurisdiction in areas relating to federal works and undertakings, which include certain areas of activity governed by federal legislation such as banking, interprovincial transportation and communication. Although there are similarities in labour and employment legislation generally throughout the country, with 10 different provinces, three territories and one federal government, employers with multiple locations throughout the country may be subject to the employment laws of several different political jurisdictions.

THE COMMON LAW OF EMPLOYMENT IN CANADA Most non-unionized employees in Canada are employed pursuant to a “common law” contract of employment. Also known as “judge-made law,” where no written contract of employment has been entered into between an employer and its employee, the common law courts will imply certain terms and conditions of employment. Of most significance is the implied term of every common law employment contract requiring that the employer provide sufficient notice of termination in the event that an employee is discharged, where such discharge is “without cause.” Sometimes, Canadian courts have issued damage awards equivalent to 24 months’ pay for senior executives terminated after lengthy periods of employment. Where an investor is purchasing a company as a going concern, the purchaser may acquire obligations for all past service and seniority of employees, resulting in significant severance pay obligations upon termination of that employee’s employment. One method of

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limiting liability frequently used by employers is entering a written employment contract with the employee concerned. Such written employment contracts may limit the amount of liability by stipulating in advance the amount of severance required to be paid by the employer to the employee upon termination of employment.

LEGISLATIVE STANDARDS IN EMPLOYMENT In addition to the common law of employment, employers are frequently confronted with a broad spectrum of legislation requiring employers to follow minimum standards. In Ontario, for example, employers need to consider the minimum obligations imposed by such statutes as the Employment Standards Act, Labour Relations Act, Occupational Health and Safety Act, Human Rights Code, Pay Equity Act and the Workplace Safety and Insurance Act. EMPLOYMENT STANDARDS ACT This legislation imposes minimum requirements for such employment matters as pregnancy leave, parental leave, minimum wages, maximum hours of work permitted, overtime pay, paid public holidays, minimum vacation entitlement, individual termination requirements and mass termination requirements (for example, in cases of a plant closure).

If you are interested in purchasing an ongoing business in Ontario you may be obliged to recognize the seniority and service of all employees in the company that you purchase under Section 9 of the Employment Standards Act. This may have significant ramifications in the event of a subsequent closure.

LABOUR RELATIONS ACT It is estimated that approximately 1⁄ 3 of all employees in Canada are unionized. Each province has a Labour Relations Act which establishes minimum rules for the creation, administration and termination of trade unions and their relationship with employers. Specialized labour relations tribunals oversee the process by which trade unions may

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organize employees and obtain the right to bargain collectively with the employer. The labour laws as enforced by the Labour Relations Board will ensure that both employers and trade unions act properly in bargaining collective agreements in good faith and ensuring that any strikes and/or lockouts are conducted within the legislated rules.

The express aim of labour legislation in Ontario is to facilitate the practice of collective bargaining between employers and unions, as representatives of non-management employees. Bargaining units are organized based on a community of interest among workers and there is some ability to determine whether a bargaining unit is appropriate.

Generally speaking, legislation gives unions considerable freedom to organize workers and permit an employer limited rights of interference or opposition. Once an organizing campaign is started and memberships from a threshold number of employees (usually 40%) are obtained, an application for certification is filed with the provincial Labour Relations Board. The union is then entitled to a certification vote to be conducted by the Board. A hearing may be required to determine the appropriate bargaining unit.

Once the certificate is obtained, the union becomes the bargaining union for the employees and has the right to bargain and to bind all employees in the unit. If the bargaining process is obstructed by the employer, or if the bargaining process does not ultimately result in a negotiated collective agreement, the provincial Boards may impose a first collective agreement. There is provision for a conciliation process if a collective agreement is not reached after private negotiations. If conciliation is unsuccessful, there is usually a waiting period of approximately 14 days before the union can strike or the employer can “lock out.” Strikes and lock outs are generally prohibited except after the conciliation process. Generally, the required method for settling disputes during the existence of a collective agreement is arbitration if disputes cannot be settled by an agreed grievance procedure. Typically, there is no appeal from the arbitration decision except on narrow technical legal grounds.

Any investor contemplating the purchase of a unionized or partially unionized workforce would be wise to review the relevant collective agreements and consider any obligations that the purchaser may have under provincial labour legislation. In Ontario, for instance, any purchaser of a unionized workplace will normally inherit the collective agreement at the workplace and will be required to honour all of the terms and conditions of the collective agreement until renegotiated with the trade union.

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OCCUPATIONAL HEALTH AND SAFETY ACT All of the province, the territories and the federal government have legislation that requires employers to satisfy minimum obligations in the area of occupational health and safety. Under such legislation, workers have the right to refuse unsafe work and employers have a duty to provide safe workplaces.

Moreover, the legislation provides for joint worker and management participation in health and safety matters through a joint workplace committee. Generally administered by the provincial labour relations ministries, health and safety legislation provides broad rights of entry and inspection to officers responsible for enforcement. Where an unsafe workplace or work condition is found to exist, inspectors may have the right to lock out equipment or shut down an entire facility until remedial action is taken. In the event of injury or death to a worker as a result of a violation of the Occupational Health and Safety Act, employers can face prosecution and significant fines, sometimes ranging as high as several hundred thousand dollars.

HUMAN RIGHTS CODE Each of the provinces as well as the federal government has Human Rights legislation which prohibits discrimination on the basis of such grounds as race, colour, religion, creed, sex, sexual orientation, record of offences, marital status and handicap. Care must be taken when running advertisements for positions or conducting job interviews in Canada to ensure that the relevant Code of Human Rights is not violated.

Moreover, when dealing with employees of different religious observances, the employer is required to “reasonably accommodate” such religious observances (and/or handicaps) provided that such accommodations do not constitute an “undue hardship” to the employer. Human rights complaints by employees are currently filed with and investigated by a provincial commission, the Ontario Human Rights Commission (“OHRC”). Through its Board of Inquiry, significant monetary damages could be awarded against employers. The OHRC also has the discretion where appropriate to refer complaints for a hearing before the Human Rights Tribunal of Ontario (“HRTO”). On June 30, 2008, the Human Rights Code Amendment Act came into effect, and all human rights complaints are to be filed with and processed directly by the HRTO. Human rights–related legal and support services are offered to complainants through a newly created body, the Human Rights Legal Support Centre. It is expected that this new process, which also includes the Lang Michener LLP 47

possibility of mediation, will more closely resemble court proceedings. As with the current process, appearances before the HRTO are also expected to generate adverse publicity for employers. There is a transitional period of six months during which complaints files prior to June 30, 2008 will continue to be processed under the former regime.

PAY EQUITY ACT In Ontario, Pay Equity legislation requires “equal pay for work of equal value” for women who perform work typically performed by men but equivalent in “value” to male-dominated job functions. Employers are obliged to use “gender neutral” job evaluation systems to qualify job values and to advance pay schedules until pay equity is achieved, if pay inequity in fact exists. Generally speaking, employers with more than 10 employees are bound by such pay equity legislation.

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WORKPLACE SAFETY AND INSURANCE ACT Most employers pay money into an accident fund administered by each provincial workers’ compensation authority. In Ontario, the Workplace Safety and Insurance Board collects millions of dollars from the employers of Ontario through a mandatory payroll deduction scheme, and pays benefits to employees who are injured or who suffer occupational diseases arising out of and/or in the course of their employment. Since the amount of premiums paid by employers into the fund is often related to the number of accidents and compensation paid by the Workplace Safety and Insurance Board, any investor contemplating the purchase of a Canadian, or Ontario company in particular, will want to ensure that the workers’ compensation “experience rating” is low in order to maintain the investor’s potential costs as low as possible. Places of employment with a high accident and high workers’ compensation payment rate are usually reflective of poor health and safety practices generally as well as poor management.

Doing Business in Canada

Real Estate Law

GENERAL Carrying on any business in Canada will normally require the use of real property. While such property may be owned or leased, in almost all cases it will be essential to the operation of the business.

Property law in Canada is within the jurisdiction of the provinces. Provincial statutes and the common law govern property rights and the registration system. Much of the administration of property rights (such as zoning and planning matters) has been delegated by provincial legislation to the municipalities. The summary in this section is specific to the Province of Ontario, though there are strong similarities with the other common law provinces.

There are no significant restrictions on non-residents acquiring or disposing of real property in Canada. However, the federal Income Tax Act does provide for certain withholding tax requirements on payments to non-residents. Also, some provinces (though not Ontario) may impose a higher rate of land transfer (transaction) tax on non-resident purchasers.

ACQUIRING PROPERTY/ENTERING INTO A LEASE Typically a new business acquiring its initial property or lease, or an existing business which is relocating, will retain a licensed real estate broker to assist it. There are a number of national commercial real estate brokerage firms as well as various regional and other specialized firms. Even if retained by the acquiring business, the vendor or landlord will normally be responsible for the real estate commission.

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Where ownership of real property is being acquired, the initial stage includes the negotiation and execution of a purchase agreement. This is the operative document until closing. Normally a conditional period in favour of the purchaser will be negotiated which will provide for the return of the deposit if the transaction does not proceed as a result of such conditions not being satisfied or waived. This conditional period allows the purchaser to conduct its due diligence, including matters such as the examination of the physical condition of the property, the environmental state of the property and the zoning and other governmental controls on the property. The conditional period might also deal with items such as the purchaser obtaining satisfactory financing and/or obtaining board of directors or senior management approval.

Once the conditions are satisfied or waived, the parties proceed to a closing on the scheduled closing date. Title is transferred and funds are exchanged on such closing.

In the case of a lease, the initial document is the agreement to lease. This is a preliminary, though binding, document so it is important that all material matters be dealt with in this agreement. The lease itself may be negotiated at the same time or there may be a period provided for in the agreement to lease for the parties to settle the form of lease.

In many lease situations it is also necessary to conduct due diligence similar to that conducted for a purchase. For example, while the permitted use may be fairly obvious in leases of established office space in downtown cores, it may not be obvious in the case of other uses. Accordingly, a condition should be negotiated into any agreement to lease for the zoning and other due diligence matters to be investigated prior to the agreement being fully binding.

In the case of an acquisition of an ongoing business (whether by acquiring the shares or the assets) where such business owns or leases real property, the initial investigations referred to above should form part of the due diligence process.

In fact, the real property concerns are often greater in a share purchase transaction due to potential ongoing environmental liability. Also, in the case of leased property, it is typical that a landlord consent will be required to an assignment of the lease and perhaps to a change of control of the tenant.

For the most part, there are very limited statutory and implied warranties in dealing with real property. It is necessary to specifically negotiate and document any warranties or conditions required by a purchaser or tenant.

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LAND DEVELOPMENT Some special considerations apply where land is being acquired for development. Land use is subject to the terms of an Official Plan (a policy document that guides growth within a municipality) as well as applicable zoning bylaws which more particularly address building and construction within the land use. Amendments to the Official Plan and/or the zoning bylaw may be required to accommodate a proposed development.

As part of the development process, municipalities may require that a site plan agreement or development agreement be entered into. These documents will impose specific terms and conditions in connection with the development. It is also common for a municipality to require an Environmental Assessment from an environmental consultant and the filing of a Record of Site Condition under the Environmental Protection Act in order to approve a development.

In the event the development involves the division of land into a number of separate legal parcels, whether residential, commercial or industrial, a part-lot control bylaw (in the event there is an underlying plan of subdivision), a Committee of Adjustments application for severance or a plan of subdivision will be required. These applications will usually request conditions of approval imposed by the Municipality.

Various fees are associated with any development including development charges imposed by the Municipality in order to assist in financing new growth, municipal, engineering, planning and legal fees; Education Development charges, Conservation Authority fees and building permit fees. In general, these charges are collected at the time of the issuance of the building permit but may be payable upon entering into the site plan or development agreement.

REAL PROPERTY TITLE A property in Ontario may be recorded under one of two registration systems operated by the Provincial government.

The “Registry” system is a notice system requiring the investigation of the documents filed against the registered title for a period of 40 years. The “Land Titles” system is a Torrens type of system under which the government Registry Office states or certifies the state of title. The Province of Ontario is currently undergoing an automation process that will eventually result in all of the properties being registered under the “Land Titles” system and in all documents being registered electronically. Most of the Province is now governed by electronic registration requirements.

The general rule is that a real property interest (whether Lang Michener LLP 50

ownership, a lease, a mortgage or other interest) must be registered in order to protect the interest and its priority. There are certain exceptions for short term leases, but the usual length of a commercial lease exceeds the length of the permitted exceptions. Accordingly, in most commercial lease situations the registration of a notice of lease is recommended.

In a typical real property transaction, there are only limited title warranties in the purchase agreement and the purchaser is given a title search period in which to review the title and satisfy itself that it is good and marketable. Most agreements of purchase and sale will provide the purchaser with a right to make title requisitions to the vendor. If the vendor is unable to satisfy any concerns and the purchaser does not waive such, the transaction becomes null and void, with the deposit returned and with the parties having no other rights and obligations between them.

In addition to the matters governed by the registered title, there are a number of unregistered liens and rights that can have priority over a registered interest. These include municipal realty taxes, certain public utility liens, work orders and the requirements of certain governmental regulatory bodies. These matters are typically investigated as part of an acquisition of real property.

In most commercial transactions, the traditional approach was for the purchaser’s solicitor to issue a title opinion based on the title search and the off-title inquiries. Title insurance has made inroads into the real estate market since 1990 and a full range of coverage and endorsements are now generally available. Title insurance is very common for residential properties. However, most commercial properties in Canada are not and have not been subject to a title insurance policy.

Where title insurance is obtained, it is normally at the instigation of a purchaser or its lender and is the purchaser’s responsibility and at the purchaser’s cost.

A number of title insurance companies are licensed in Ontario.

Lang Michener LLP, the leading law firm in Canada with respect to title insurance, has written a book, Title Insurance, Regulations, Coverage and Claims Proven in Ontario, and acts for many insurers, financial institutions and insureds in respect of policies, licensing, claims and regulatory coverage.

RESIDENTIAL INCOME PRODUCING PROPERTY Ontario, and most other provinces, have a number of legislative provisions applicable to residential tenancies. Many of these provisions provide protection to tenants and cannot be contracted out of. Ontario has a rent control scheme in place that is tenant specific, as opposed to unit specific (i.e.

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the maximum rent can be adjusted when the unit turns over).

A party wishing to acquire an apartment building or other residential income producing property should be aware of these various provisions.

COMMERCIAL INVESTMENT PROPERTIES The considerations applicable to a property to be used for the operation of the owner’s business are also applicable where a property is being acquired as an investment to be leased to a third party or parties. There are also additional considerations to be examined in an investment scenario, such as investigating the quality of the existing tenants and obtaining statements from the tenants confirming the lease terms and stating that the lease is in full force and effect.

A property investor will also want to consider the appropriate structure to hold the property. The selection of the structure will often be driven by tax and liability issues. Where there are multiple investors, there are a number of alternate structures such as co-ownerships, joint venture corporations and partnerships.

LAND TRANSFER TAX The transfer of commercial real estate attracts provincial land transfer tax in Ontario and other provinces based, for the most

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part, on the purchase price attributable to the land, building and fixtures. The land transfer tax rate in Ontario for commercial properties is one-half of 1% on the first $55,000 of such purchase price, 1% on the portion between $55,000 and $250,000 and 11â „ 2% on the portion over $250,000. Leases of less than 50 years do not attract land transfer tax. Mortgages are also not subject to land transfer tax. The City of Toronto also has its own land transfer tax that is applied in addition to the provincial tax.

Land transfer tax is payable on conveyances, whether registered or unregistered. Certain special rules, providing for a deferral which can result in a cancellation, are available for unregistered conveyances amongst affiliated corporations. It is a tax on the conveyance of real property, not the conveyance of shares so, for the most part, a sale of shares of a corporation will not attract this tax.

EXTRA PROVINCIAL REGISTRATIONS Under the Extra-Provincial Corporations Act of Ontario, all corporations incorporated outside of Canada must have an extra-provincial licence to do business in Ontario. A corporation is deemed to be carrying on business if it holds an interest in land, otherwise then by way of security.

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Insurance Law FEDERAL JURISDICTION Federal jurisdiction over insurance in Canada includes, among other things: • qualifying foreign companies to do business in Canada; • incorporation of federal insurance companies; • incorporation of insurance holding companies in respect of life insurance companies; • corporate governance of federal insurance companies; • solvency regulation of foreign insurers doing business in Canada and federally incorporated insurance companies; and • the liquidation of insolvent insurance companies whether incorporated provincially or federally.

The Office of the Superintendent of Financial Institutions, Canada (“OSFI”) is the primary federal insurance regulator. A number of decisions, approvals and consents under the Insurance Companies Act (“ICA”) are the responsibility of the Minister of Finance including incorporation, continuance, amalgamation, mutualization, de-mutualization and the acquisition of a 10% interest in a federal insurer.

OSFI regulates all federal financial institutions including banks, insurance companies, loan companies, trust companies, and co-operatives. Generally speaking, the federal legislation governing federal financial institutions has been harmonized since 1992.

THE INSURANCE COMPANIES ACT The ICA applies to all federally incorporated insurance companies and to all foreign insurance companies that transact business in Canada on a branch basis. It also applies to federally incorporated fraternal benefit societies and to foreign fraternal benefit societies operating in Canada. For both federal and foreign insurance companies, the Act requires each company to maintain adequate reserves for policy liabilities, to maintain a minimum level of capital or assets, to provide financial reporting to OSFI and to submit to periodic examinations by OSFI. OSFI is empowered to take remedial action against a company or society if its ability to satisfy its policy obligations is threatened.

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For federally incorporated insurance companies, the ICA sets forth business and investment powers, corporate matters including governance, requirements relative to “self dealing” and the circumstances in which the Minister’s or the Superintendent’s pre-approval is required. The ICA also deals with the solvency regulation of such companies.

Most domestic insurance companies operating in Canada are incorporated federally rather than provincially.

Because international trade falls within exclusive federal jurisdiction, all branches of foreign insurance companies operating in Canada must first be qualified under the ICA. The corporate provisions of the ICA applicable to federally incorporated insurance companies are modeled closely on those of the Canada Business Corporations Act and, as mentioned earlier, there is wide similarity among the provisions for federally incorporated insurance companies under the ICA, banks under the Bank Act, trust and loan companies under the Trust and Loan Companies Act, and co-operatives under the Cooperative Credit Associations Act. Some of the important differences from the Canada Business Corporations Act include: i) incorporation is by letters patent rather than articles; ii) the share provisions are contained in bylaws; iii) although companies are given the powers of a natural person, these are severely circumscribed in Part VIII (Business and Powers) and therefore some analysis still needs to be undertaken if the company wishes to carry on businesses that vary from the normal business of insurance; iv) companies can be pure share (stock) companies, can have shareholders and voting policyholders or can be mutual companies with no common shareholders and only policyholders some of whom may be participating (i.e. voting and entitled to the residual value of the company) and others who may be non-participating; v) the ICA contains prescribed roles for the auditors, the Audit Committee and the actuary; vi) the ICA contains extensive restrictions on self-dealing (related party transactions) in Part XI and prescribes the role of the Conduct Review Committee; and

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vii) although the investment standard of companies includes the “reasonable and prudent person test,” Part IX (Investments) still contains a number of restrictions on the investments that companies may make.

Federal insurance companies and foreign insurance companies seeking to do business in Canada must become qualified for the type and class(es) of insurance they propose to undertake.

This involves obtaining licences in the individual provinces and territories of Canada in which they intend to carry on business. They must also choose whether or not to restrict themselves to reinsurance. Reinsurers have broader latitude under the Regulations to the ICA to obtain reinsurance (retrocessions) on their own business. Insurers not restricted to reinsurance (direct writers) may, subject to these Regulations, cede their risks and reinsure the risks of other insurers. While there are some companies and branches that have historically been qualified to underwrite or reinsure both life and property and casualty insurance (composites), the ICA expressly prohibits the qualification of new composites. Both life, and property and casualty companies and branches may be qualified for “accident and sickness” insurance.

Amendments incorporated into the ICA in 2007 as part of the recurring five-year review cycle of the federal financial institutions’ governing legislation provide that, among other things, i) complaint handling procedures are revised to require that each insurance company makes information available on its website and in a written format to be sent to each person who requests the information; ii) the provisions regarding transfer of business and reinsurance are amended so that only reinsurance on an assumption basis and the sale of all or substantially all of an insurance company’s assets will require approval by either the Minister or the Superintendent; iii) the requirement to maintain and process specified information in Canada, subject to the Superintendent’s approval to do otherwise, has been deleted and replaced with a new provision that sets out when the Superintendent may prohibit an insurance company from maintaining this information outside of Canada; and, iv) the Superintendent’s approval is not required if a reduction in capital is solely the result of changes to the generally accepted accounting principles and there is no return of capital to shareholders or policyholders.

Accompanying the five-year review of the ICA, it was proposed Doing Business in Canada

that significant amendments be made to Part XIII of the ICA, the part dealing with foreign insurance companies. The amendments are to clarify what it means to “insure in Canada risks.” OSFI issued an Advisory setting out a revised position on what form of activities undertaken by foreign insurance companies constitute “insuring in Canada risks.” This Advisory enables such companies to determine whether they are “insuring in Canada risks”and thus whether they must comply with the Canadian regulatory regime, including the requirement to maintain assets vested in trust in Canada to cover all policy liabilities. The development and publication of regulations related to Part XIII of the ICA is proceeding in 2008; however, OSFI has postponed implementation of these amendments to Part XIII of the ICA to January 1 2010. At that point, foreign insurance companies who are found to be “insuring in Canada risks” will be expected to comply with the new requirements.

The consumer provisions also include a requirement that federal insurance companies with equity of $1 billion or more, publish annually a statement describing the contribution of such a company and its prescribed affiliates “to the Canadian economy and society.”

THE BANK ACT While the Bank Act is primarily focused on regulating Canadian banks, Part XII (including Part XII.1) imposes restrictions on “foreign banks” and “authorized foreign banks” doing financial services business in Canada, including business in the area of insurance. A foreign entity that is a bank according to the laws of any country in which it does business, an entity that does what in Canada would be considered banking, a financial institution whose name contains the word “bank” (in any language), an entity that takes deposits and lends money, an entity that engages in the business of providing financial services and is affiliated with another foreign bank, or an entity which controls another foreign bank is considered to be a foreign bank. A foreign bank may become an “authorized foreign bank” if the Minister of Finance makes an order permitting the foreign bank to establish branches in Canada with deposit-taking and other powers.

When a foreign bank (including an authorized foreign bank) or an “entity associated with a foreign bank” wishes to acquire control of an insurance company in Canada, whether federally or provincially incorporated, the foreign bank or the entity associated with it must obtain the approval of the Minister of Finance. An entity is associated with a foreign bank if the entity controls, or is controlled by, the foreign bank, or if the entity and the foreign bank are under common control.

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In addition, both foreign banks and entities associated with them are prohibited from carrying on business in Canada in premises that are adjacent to an office of an insurance company, agent or broker unless the authorized foreign bank clearly indicates to its customers that the authorized foreign bank and its premises are separate and distinct from the office of the insurance company, agent or broker.

FINANCIAL CONSUMER AGENCY OF CANADA ACT In 2001, the Financial Consumer Agency of Canada (“FCAC”) was established by the Financial Consumer Agency of Canada Act. Its mandate includes, among other things, a duty to supervise certain federally regulated financial institutions, including federally incorporated insurance companies and foreign companies, to determine whether they are in compliance with the “consumer provisions” of the relevant statute (as it applies here, the ICA), and to monitor the implementation of voluntary and publicly available codes of conduct that have been adopted by such institutions and that are designed to protect the interests of their customers. The Commissioner appointed under the statute has the power to issue a notice of violation in respect of a contravention of any “consumer provision,” to adjudicate that violation and impose a monetary penalty. Due diligence is a defence in a proceeding in relation to a violation, and an appeal is available to the Federal Court of Canada.

THE WINDING-UP AND RESTRUCTURING ACT The Winding-Up and Restructuring Act (Canada) governs the liquidation of all insurance companies that are insolvent, whether provincially or federally incorporated, as the Bankruptcy And Insolvency Act is specifically precluded from application to insurance companies and other financial institutions. In contrast, the liquidation of insurance holding companies, as incorporated under the Insurance Companies Act, is governed by the Bankruptcy and Insolvency Act. Insurance companies are only allowed to grant security in conformance with policies established by their boards of directors and OSFI guidelines. Therefore, as a practical matter, secured creditors of an insurance company that is being liquidated are usually relatively few in number and/or narrow in scope. The priority of distribution under the Winding-Up and Restructuring Act is: i) costs of liquidation and the mortgage insurance and special insurance portions of the expenses described in paragraph 686(1)(a) of the ICA; ii) claims of preferred creditors; Lang Michener LLP 54

iii) claims of policyholders of the company in a specified ranking; iv) certain expenses incurred by the Superintendent in respect of the company and assessed against and paid by other companies pursuant to the ICA and interest in respect thereof at such rate as is specified by the Superintendent; v) claims by creditors of the company other than claims by holders of certain subordinated indebtedness, and claims for a deficiency by policyholders of the company claiming a minimum amount that the company has agreed to pay under a policy for which a segregated fund is maintained under the ICA; v) claims by holders of certain subordinated indebtedness and other indebtedness that by their terms rank equally or are subordinate to such indebtedness.

One exception is that a claim under a policy against a segregated fund maintained under the ICA has priority over any other claim against the assets of that fund, including the claims referred to above under the Winding-Up and Restructuring Act, except to the extent that the payment of that other claim is secured by a security interest on a specific identifiable asset of the segregated fund. In addition, with the court’s consent, the liquidator may pay out money notwithstanding this scheme to preserve the goodwill and enhance the value of an insurance company if it carries on business during the winding up process. In essence, except for a claim for a deficiency under a guarantee offered under a “segregated fund policy” (that gets ranked as noted above), the claim of such a policyholder is dealt with outside the priority provisions of the Winding-Up and Restructuring Act. As of the amendments in 1997, the federal Superintendent can no longer be the liquidator, and thus, the insurance industry in general will no longer be burdened by the costs of liquidation.

PROVINCIAL JURISDICTION Each of the Canadian provinces has the power to incorporate insurance companies and to regulate the companies that they have incorporated. The provinces also have the exclusive jurisdiction to regulate marketplace activities involving the distribution of insurance in the province under the “Property and Civil Rights” provisions of the Canadian Constitution.

Each provincial insurance act establishes an office to oversee all provincial insurance activities. The name of this office is often called the Superintendent in the common law provinces. In Ontario this office is called the Financial Services Commission Doing Business in Canada

of Ontario (“FSCO”). In Québec, the Autorité des marchés financiers was set up on February 1, 2004 and combined the operations and personnel of the Bureau des services financiers, the Commission des valeurs mobilières du Québec, the Fonds d’indemnisation des services financier, the Inspecteur général des institutions financiers, and the Régie de l’assurance – dépôts du Québec. It is the regulatory body that administers the regulatory framework governing Québec’s financial sector.

In order to transact the business of insurance in a province, each insurer must become licensed and comply with the appropriate laws of the particular province in which it intends to operate. This is so even if the insurer is federally incorporated or qualified.

THE INSURANCE ACT (ONTARIO) The Insurance Act (Ontario) (the “Act”) regulates the licensing and conduct of insurance business within the Province of Ontario.

Insurance companies carrying on business in Ontario, regardless of where they were incorporated, must be licensed for the class(es) of insurance which they intend to write. By order, the Superintendent determines and defines the classes of insurance for the purposes of the Act and of licences granted to insurers under the Act. On June 23, 2006, OSFI reduced the number of classes of insurance from 43 to 19, the first step in creating harmonized classes across the country. Ontario has subsequently harmonized its classes of insurance to those of OSFI, with the remaining provinces and territories to follow suit. Subject to specific provisions of the Act, an insurer is permitted to become licensed in any one or more classes of insurance. While there are no express legislative prohibitions, regulators will not license a company for both life and for property and casualty insurance.

In order to hold a particular class of licence to write insurance in the Province, the insurer must establish to the regulator that it has sufficient capital and surplus for that purpose, will maintain adequate reserves for policy liabilities and have a suitable margin of assets over liabilities. In order to ensure compliance with the Act, FSCO actively monitors the financial statements and operational practices of provincially incorporated insurers by routine examinations. Once a federally incorporated insurer is licensed in the province, FSCO does not perform an active role in monitoring the financial solvency of such insurers due to FSCO’s reliance on the parallel regime of regulation at the federal level by OSFI. While the annual returns required to be filed by insurers are broadly similar to the federal jurisdiction, there are differences from province to province.

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THE INSURANCE ACT (ONTARIO) – AGENTS The licensing of insurance agents is stringently regulated by the provinces. Provincial licensing regulation involves the supervision of the qualification and business practices of agents.

It is an offence under the Insurance Act (Ontario) for an individual, partnership or corporation to act as an agent unless it is licensed for the class of insurance within which it intends to transact business. The definition of “agent” is very broad under section 1 of the Act: “agent” means a person who, for compensation, commission or any other thing of value, (a) solicits insurance on behalf of an insurer who has appointed the person to act as the agent of such insurer or on behalf of the Facility Association under the Compulsory Automobile Insurance Act; or (b) solicits insurance on behalf of an insurer or transmits, for a person other than himself, herself or itself an application for, or a policy of insurance to or from such insurer, or offers or assumes to act in the negotiation of such insurance or in negotiating its continuance or renewal with such insurer; and who is not a member of the Registered Insurance Brokers of Ontario.

The three classes of insurance in which an insurance agent can be licensed are: (a) licences for life insurance, or life insurance and accident and sickness insurance; or (b) licences for accident and sickness insurance; or (c) licences for all classes of insurance other than life insurance (general insurance).

An agent who holds a life insurance licence must maintain either errors and omissions insurance in a form approved by the Superintendent in an amount of at least $1,000,000 in respect of any one occurrence with extended coverage for loss resulting from fraudulent acts or a similar form of financial guarantee acceptable to the Superintendent, also to be in an amount of at least $1,000,000. Insurers are required by regulation to maintain a system that is reasonably designed to ensure that each of its agents complies with the Act and its regulations. Additionally, an insurer is required to report to the Superintendent if it has reasonable grounds to believe that an agent who acts on behalf of the insurer is not suitable to carry on business as an agent.

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THE REGISTERED INSURANCE BROKERS ACT (ONTARIO) The Registered Insurance Brokers Act (Ontario) governs the registration and regulation of brokers. In Ontario, general insurance brokers are authorized to act for more than one insurer and, without being separately licensed as a life insurance agent, may only deal with property and casualty, and accident and sickness products.

General insurance brokers are supervised by the Registered Insurance Brokers of Ontario (“RIBO�) which is a selfregulatory organization. RIBO has several regulatory responsibilities over brokers such as overseeing their licensing requirements, professional and ethical competence and financial obligations. Each year, RIBO must provide the Minister of Financial Institutions and each RIBO registrant with a copy of its Annual Report which includes current financial statements, plans and policy matters as well as information concerning qualification decisions, complaints and discipline proceedings.

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Privacy Law January 1, 2004 became applicable to all organizations across Canada, except those in provinces having substantially similar legislation.

The CSA Code is a schedule to the Act. The Act requires compliance with this CSA standard.

The principles established in the Code for Privacy Protection are: • accountability • identification of purpose of collection, use or disclosure • consent to collection, use or disclosure • limits on collection Privacy became an issue in Canada in the 1970s. Following the lead of the United States, the federal government passed the Access to Information Act which provided for public access to information including personal information pertaining to a citizen subject to certain privacy provisions. Other provinces followed suit with acts designed to balance the need for open government with the need for protection of privacy.

The electronic revolution made private sector privacy an issue in the 1990s. The first Canadian jurisdiction to pass a private sector privacy legislation was Quebec, in 1993.

In 1995, the European Union passed a directive regulating privacy protection in the private sector. This directive requires member countries to adopt national data protection laws and prohibits them from transferring personal information to nonmember countries or to businesses located in non-member countries if the laws of the non-member country do not provide adequate protection for personal privacy.

In 1996, the Canadian Standards Association (“CSA”) published a Private Sector Privacy Code. Since the Code was voluntary, it did not satisfy the European Union’s directive which prohibits the transfer of personal information to nonmember countries or businesses situated therein which do not have adequate protection for personal privacy. Consequently, Parliament enacted Bill C-6, the Personal Information Protection and Electronic Documents Act, which came into force on January 1, 2001. The Act applies to organizations that collect, use or disclose personal information in the course of commercial activities. Initially, it applied only to federally regulated entities and to organizations that disclose personal information outside of a province for consideration but as of

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• limits on use, retention and disclosure • accuracy • safeguards • openness • individual access • procedures for challenging compliance The Act requires each organization to create an administrative unit responsible for complying with these principles.

The Privacy Commissioner enforces the Act. The Commissioner may undertake a privacy audit on his own initiative or may act in response to a written complaint. Non-compliance may be sanctioned by the publication of information relating to non-compliance practices, orders for correction of practices and damages to a complainant including damages for humiliation.

Three provinces (Quebec, Alberta and British Columbia) have adopted substantially similar privacy legislation, which will govern the protection of personal information within those provinces.

However, the federal legislation will continue to apply to extraprovincial transfers of information. Provincial legislation will also contain provisions specific to personal health information. To date, four provinces, Alberta, Saskatchewan, Manitoba, and Ontario have enacted health information privacy laws.

The new privacy laws will require organizations to adopt policies and procedures to address the consented to collection, use and disclosure of information from individuals. Businesses need to have compliance programs in place and must audit their compliance on a regular basis.

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Notes

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Notes

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