Top Ten Things to Consider When Doing a Deal in Canada
Nov 10, 2009
Alex MacWilliam, Partner, Fraser Milner Casgrain LLP
Your company has decided to do a deal in Canada. In addition to hoping that you won’t have to attend a closing in February, you immediately ask yourself whether this transaction will be similar to domestic deals you have handled in the past. While it is safe to say that there are many similarities, whether the deal involves shares, assets, mergers or other arrangements, there are significant differences that can come as a surprise if your legal team has not properly prepared your business group.
The Canadian business climate is increasingly more receptive to new investments. Along with being ranked as one of the best countries in the world in terms of overall quality of life, Canada remains a very attractive market for strategic buyers looking for growth, particularly in our resource-rich energy industry.
The following “Top Ten” highlights key matters that are unique to Canadian cross-border transactions, including competition (i.e., antitrust), labor and employment, tax matters, foreign investment restrictions and environmental concerns. This list is not an exhaustive summary of issues but is a companion piece to our more comprehensive guide, Doing Business in Canada.
1. Foreign Investment
There are two key pieces of Canadian federal legislation which may impact foreign investors.
Investment Canada Act
2. Labor and Employment
Labor and employment relations in Canada are, for the most part, governed by both the statutory and common law of the province in which an employee works. While the different Canadian jurisdictions are fairly consistent in overall direction (with the exception of Quebec which is a civil law jurisdiction), the specifics of legislation and the administering agencies vary greatly from province to province.
When acquiring a Canadian business, you should be aware of the successor rights provisions of each province’s labor relations regulations. These provisions may leave the purchaser bound to a current collective agreement, including the obligation to honor the existing terms and, upon expiry, to negotiate a new agreement. You may also be liable for outstanding employee lawsuits, grievances, labor relations board complaints, human rights inquiries, workers’ compensation board claims or health and safety orders that could affect the ongoing business.
Additionally, most agreements require the purchaser to offer employment on similar terms – recognizing the employees service with vendor (which is an obligation pursuant to the statutory laws of many of the provinces as well). For these reasons, a thorough understanding of the statutory and common law regime in each province, in addition to the specific legal contracts and obligations governing the employment relationships of any given corporation, should be obtained prior to acquiring a business in Canada.
3. Immigration Restrictions/NAFTA Benefits
While a foreign company may own or control a Canadian business, it does not have the right to staff that business, even in part, with citizens of the country of its origin. Typically, a Canadian employer wishing to employ a foreign worker must first demonstrate to an officer at Service Canada that there are no Canadians with the necessary training and experience available to fill the job, or that the Canadian labour market will benefit in some way from the employment of the foreign worker. The opinion of the Service Canada officer will in turn be considered by the visa officer issuing the work permit.
Employees of a related business outside Canada who are transferred on a temporary basis to a Canadian branch, parent or subsidiary to work at a senior executive, managerial or specialized knowledge level will be exempt from the requirement to obtain Service Canada job confirmation, but will still require a work permit.
Under the reciprocal provisions of the NAFTA, American and Mexican citizens may be able to bypass the Service Canada job confirmation requirements.
4. Tax Planning
While tax considerations should figure prominently into your business decisions, in general, Canada imposes corporate and personal income tax on its residents, and on non-residents who carry on business in Canada, are employed in Canada or sell property situated in Canada. Corporations and individuals in Canada are also subject to income taxes levied by the provinces in which they are carrying on business.
It is important to have an understanding of Canada’s tax laws and to identify the tax consequences of the form of proposed transaction at the outset of the planning process. Determining the appropriate structure by which to carry on business in Canada, including tax effective repatriation of profits, as well as deciding how the acquisition will be financed, may help to facilitate a successful and timely closing.
5. Financing an Acquisition
Financing a transaction in Canada typically takes the form of either debt or equity financing. While debt financings can take a variety of forms, the most common sources of such financings are banks and other institutional lenders. Debt financing can also be sourced from parent companies or other shareholders.
Generally speaking, there are currently no federal laws of general application governing securities transactions in Canada. Each province has enacted its own securities legislation and compliance is enforced by a securities commission in each province. The provincial bodies coordinate regulatory initiatives through the Canadian Securities Administrators (CSA).
The CSA has implemented a multijurisdictional disclosure system that permits American issuers who meet certain eligibility criteria to distribute securities in Canada using disclosure documents prepared according to the requirements of U.S. regulatory authorities. In turn, the U.S. Securities and Exchange Commission has implemented reciprocal measures for Canadian issuers in the United States. The multijurisdictional disclosure system also facilitates compliance with proxy, insider reporting, third party, issuer, exchange and cash take-over bid/tender offer requirements, by generally recognizing the documentation of the “home” jurisdiction.
6. Formation of Canadian Entities
A business may be carried on in Canada in various forms. Most commonly, a foreign corporation operating in Canada would use a corporate vehicle, either a Canadian incorporated subsidiary or a branch operation of the foreign corporation. Depending on the nature and scope of the activity, the degree of limited liability required and certain tax and other considerations, the business activity could also be conducted through a sole proprietorship (for an individual), a partnership or a joint venture. It is also possible, in some circumstances, to supply goods and services in Canada through various contractual arrangements, such as distributorship agreements, without actually setting up business in Canada. The legal implications of these vehicles vary, and full consideration should be given to these options.
In recent years, the unlimited liability company (ULC) has become popular as a hybrid entity that can offer United States investors certain tax advantages. As a company, a ULC will be treated as a taxable Canadian corporation under the Income Tax Act (and must therefore file Canadian income tax returns) yet be eligible for partnership tax treatment in the U.S. (thereby affording U.S. shareholders the same U.S. tax treatment as U.S. limited liability companies).
7. Import/Export Considerations (NAFTA)
Companies importing products into Canada are required to pay customs duties, as well as abide by a number of federal regulatory laws, which regulate customs procedures, quotas, product standards and labelling requirements within Canada.
A business locating its operations in Canada for manufacturing/exporting purposes is also subject to certain regulations, including reporting requirements. All goods imported from the U.S. that are not substantially transformed in Canada are subject to export controls. There are even quasi-criminal offences for failure to comply with these obligations.
8. Privacy Legislation
The federal Personal Information Protection and Electronic Documents Act (PIPEDA) regulates how an individual’s personal information is collected, used and disclosed by private organizations in the course of commercial activity.
A key principle of PIPEDA is consent. An individual’s informed consent is required for the collection, use and disclosure of his or her personal information. There is currently no exception in PIPEDA for the collection, use or disclosure of personal information in relation to a business transaction. Currently, a business may not disclose personal information (such as client lists) to prospective purchasers or business partners without the consent of the individual affected. Prospective purchasers or partners may need to review this information as part of their due diligence and it may not be feasible to obtain the consent of the affected individuals. As of this date, no amendments have been made to PIPEDA, however there is continuing consultation and discussion regarding this issue.
9. Environmental Liability
When considering an acquisition in Canada, corporations should be made aware that it is not possible to contract out of regulatory liability. Canada applies a “polluter pays” principle, under which the original landowner who caused the pollution retains potential regulatory liability even after a property is transferred. Where the polluter cannot be found or otherwise held responsible, the “deep pockets” approach may result in responsibility being imposed on an innocent purchaser.
Since it is not possible to contract out of regulatory liability, special environmental considerations apply in the context of corporate acquisitions. In a share transaction, both civil and regulatory liabilities of the corporation survive closing and remain with the company. This includes the risk of prosecution for past environmental violation (for example, a spill resulting in contamination) as well as any latent or known contamination.
In an asset transaction, on the other hand, liability of the corporation will not flow to the purchaser unless tied to the specific asset(s) acquired. Risk is allocated between the parties in the contract.
10. Corporate Insolvency
Particularly in today’s fluctuating economy, it is important to understand the nuances in Canadian insolvency legislation. Canadian bankruptcy law is under the jurisdiction of the federal government and results in a uniform legislative scheme. The two primary pieces of bankruptcy legislation in Canada are the Bankruptcy and Insolvency Act (the “BIA”) and the Companies' Creditors Arrangement Act (the “CCAA”).
Provincial legislative jurisdiction covers property and civil rights, and therefore can impact on various insolvency-related matters (e.g., the rights of secured creditors, landlords, and personal exemptions).
The BIA is the principal federal legislation in Canada applicable to insolvencies. It governs both voluntary and involuntary bankruptcy liquidations as well as debtor reorganizations. The CCAA is specialized companion legislation designed to assist larger corporations to reorganize their affairs and is similar to Chapter 11 of the United States Bankruptcy Code. The reorganization provisions found in the BIA are far more structured and comprehensive than those found in the CCAA. Consequently, the CCAA provides a restructuring corporation with greater flexibility and greater creativity in conducting its reorganization.