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Dealing With Canada – A Financing Roadmap

By Martin Fingerhut
Posted: 12th January 2016 09:18
The world continues to shrink, making it easier for capital to seek its own level.  At the same time, Canada’s domestic financing resources are limited and frequently conservative.  While Canada’s legislative and regulatory environment differs from that of many other countries, the variances are often non-substantive, and provide few roadblocks to U.S., U.K., European and other international lenders and factors wishing to establish financing facilities with Canadian businesses.  Whether the funder deals with clients solely on a cross-border basis, or decides that sufficient Canadian business warrants a domestic presence, understanding Canadian legal, tax and regulatory issues will save both cost and time and avoid unpleasant surprises.  This paper will attempt to shed some light on a few of those issues. 
Cross-Border Activities
It often comes as a surprise to many non-Canadian lenders and factors that they can deal with Canadians on a purely cross-border basis without becoming subject to Canadian taxation or regulation.  By not utilizing Canadian-based employees or agents (except in compliance with applicable tax treaties) or establishing a Canadian presence, and dealing with Canadians by mail, telephone or email, a foreign business can structure its affairs so as not to carry on business in Canada (while clearly carrying on business with Canadians) and avoid becoming subject to Canadian tax or regulation.  However, emails and other electronic communications must comply with Canada’s recent anti-spam legislation. 
Permitted Canadian Connections

While staying off Canadian soil may be the most conservative policy, it may become useful, as Canadian transactions increase in number and size, to expand various points of contact with Canada.  If carefully planned, these activities need not subject the non-Canadian business to Canadian taxation or regulation.  For example, it may be possible for a foreign lender, depending on its other Canadian-related activities, to establish a Canadian bank account, visit its Canadian customers or engage a Canadian-based business development officer.  If these initiatives are taken carefully, they should not entangle the non-Canadian business in the Canadian tax or regulatory net. 
Business Entities
A non-Canadian firm that decides to establish a presence in Canada has a number of vehicles to choose from.  Standard business corporations exist but do not offer the flow-through benefits of U.S limited liability companies (although partnerships do exist); every Canadian corporation is a separate taxpayer, and each entity’s revenues and expenses should be analyzed in order to minimize tax.  A unique Canadian business enterprise is the unlimited liability company, or ULC, available in Nova Scotia, Alberta and British Columbia.  Many U.S. companies have established Canadian ULCs since their shareholders are able to “check the box” on their U.S. tax returns and treat the Canadian subsidiary as a branch for U.S. tax purposes, although the use of ULCs diminished after an amendment to the Canada-U.S. Tax Treaty reduced their potential benefits.  One notable feature of a ULC is that its parent is fully liable for the ULC’s debts and obligations.  Accordingly, a financier taking a pledge of a ULC’s shares should ensure the pledge is drafted to avoid the pledgee being viewed as the “owner” of the shares and thereby personally liable for the ULC’s liabilities. 
One aspect of Canadian law that particularly concerns non-Canadian businesses is the absence of an “at will” employment regime.  Unless an employment contract specifies how and when the employer may terminate the employee, and adequately reflects the statutory minimum to be paid on termination, a terminated employee may be entitled to a significant period of notice (or a significant payment instead of notice).  Although employees may be dismissed “for cause” without notice, courts have set a high “for cause” bar, and care must be taken when preparing an employment contract or terminating an employee.  Agents may receive similar treatment depending on the circumstances. 
Agents vs. Contractors
As in many countries, there is a significant difference in Canada between agents, employees and dependent or independent contractors.  If a non-Canadian firm wishes to engage a Canadian business development officer, without establishing a Canadian subsidiary or becoming subject to Canadian tax or regulation, it may be beneficial to avoid structuring the relationship as one of principal/agent or employer/employee, so that any Canadian activities are not attributed to the employer/principal and cause it to be treated as carrying on business in Canada.  A preferable arrangement may be to engage the individual as an independent contractor who controls his day-to-day activities.  Applicable tax treaties may offer more flexibility in having Canadian employees or agents. 

Outside of Quebec, Canadian personal property security legislation is generally similar to Article 9 of the U.S.’s Uniform Commercial Code, and creates a flexible regime for taking and enforcing security.  One difference relates to where searches and registrations are made since the various Canadian jurisdictions have not yet adopted certain changes to Article 9.  As well, it is particularly important to properly record a Canadian debtor’s legal name on a financing statement as Canada has also not adopted revised Article 9’s safe harbour protections for the names of individual debtors.  There is also a bilingual trap regarding debtors that have both French and English corporate names: a financing statement must set out both names to perfect a security interest.
Usury and Interest
International lenders are often surprised to learn that Canada’s federal usury legislation is set at the relatively high rate of 60% (computed in accordance with generally accepted actuarial practices and principles).  In determining whether a particular rate is usurious, all related charges and expenses relating to an extension of credit are taken into account, including interest, fees, penalties, costs and, in some cases, royalties and “equity kickers”.  A financing agreement will usually provide that any contravention is unintended and that excess payments will be reimbursed or applied to other outstanding obligations.  Other Canadian legislation requires interest to be expressed as an “annual” rate (e.g. 12% per annum rather than 1% per month).  If interest is to be calculated on another basis – such as using a 360 day year – a formula is commonly added to permit calculation of the equivalent annual rate. 

It is relatively straightforward in Canada to obtain enforceable guarantees from an obligor’s corporate affiliates – the guarantor’s incorporating statute and articles should be reviewed but will rarely raise an issue.  A guarantee taken from an individual who resides in Alberta will be valid only if a statutory form is completed in the presence of a lawyer.  Revised language for the prescribed form came into effect on 30 April 2015. 
The Canadian Federal government has a super-priority lien for (i) certain amounts taxpayers withhold from their employees’ income but fail to remit to taxing authorities and (ii) certain types of unremitted sales tax.  This lien is not required to be registered.  Financing firms should monitor compliance with these tax obligations - either with the client or the tax authorities - since the lien will generally rank ahead of most current and future security interests covering the taxpayer’s assets.  However, this lien should not defeat a factor’s interest in receivables purchased by way of a “true sale” without notice of the lien.
While the Canadian and U.S. dollars have at times flirted with parity, they have also varied by as much as 40% or more.  Given such volatility, a number of currency-related legal and business issues should be considered when making advances to Canadians.  For one, a Canadian court is required by law to render judgments solely in Canadian currency, and a non-Canadian dollar financing agreement should therefore indemnify the financing party against the risk involved in obtaining a Canadian dollar judgment for a foreign currency debt but receiving payment in Canadian dollars days or months later when the Canadian dollar may have fallen in value.  As well, a foreign lender or factor takes on currency risk when it “purchases” Canadian dollars from its bank to make Canadian dollar advances to its Canadian customers.  If the relevant exchange rate is less favourable when the advances are repaid in Canadian dollars, the financier may suffer a currency loss even though its customer has fully satisfied its obligations.  It is possible to deal with this issue by purchasing a currency hedge or having the customer contractually assume the currency risk.  Another approach would be to establish a Canadian bank account into which customers pay Canadian dollar amounts, and to readvance such payments to the same or other customers, thus avoiding a possible exchange loss if the Canadian dollar receipts were to be immediately converted into a foreign currency, and also saving transaction fees.  Of course, the day of reckoning will arrive when the program is wound up or funds are repatriated.

The prospect of lending to Quebec borrowers, or factoring Quebec receivables, has concerned many non-Canadian funders, even those comfortable with cross-border transactions involving counterparties in other Canadian provinces.  This concern may stem from a lack of knowledge, or the discomfort of dealing with a different legal system or language.  Some myths can be quickly addressed:
(i) there is no greater tax or regulatory risk in dealing with residents in the Province of Quebec; and
(ii) a number of foreign finance companies are successfully transacting business with Quebec customers and clients. 
Nevertheless, there are a number of issues that are unique to Quebec.  Documentation that has been “Canadianized” for use in the other provinces would need additional tweaking to accommodate Quebec language and legal issues, but these changes are rarely significant from a business standpoint and can be accomplished without great expense.  The Quebec requirement that certain documents be drafted in French can be avoided through use of a clause, in both languages, which records the parties’ desire for a document to be in English only.  As well, actual notice to an account debtor, rather than registration, is required to perfect the pledge or purchase of a single Quebec receivable or certain groups of such receivables. 
Canadian Courts
Canadian courts are viewed as relatively creditor-friendly for a number of reasons: (i) court costs are determined on the “loser-pay” model, with the unsuccessful party paying a portion of the prevailing party’s legal costs, (ii) commercial matters are almost always decided by a judge without a jury, (iii) punitive damages are unusual, and generally much lower than in the U.S. and (iv) foreign judgments are generally enforceable in a Canadian court so long as the defendant received proper notice of the action and an opportunity to defend. 
Financing transactions involving Canadians should take into account Canada’s unique legal and business environment.  However, careful planning will help avoid surprises as non-Canadian financing firms continue to expand business with or in Canada. 

Martin Fingerhutis the Managing Counsel of Fingerhut Law Canada, a Canadian law firm based in Toronto, which he established following 35 years as a partner with Blake, Cassels & Graydon LLP and Cassels Brock and Blackwell LLP.
A significant part of Martin’s practice focuses on providing advice to Canadian, U.S., U.K., European and other non-Canadian businesses and law firms regarding secured and unsecured commercial and consumer finance products, as well as credit facilities and programs, including “Canadianizing” the forms of international lenders for use with Canadian borrowers.  Martin also regularly provides advice on personal property financing, securitization and factoring transactions, Canada’s new anti-spam legislation, and corporate and commercial matters generally.
Martin has represented U.S., U.K., European and Asian companies and their Canadian subsidiaries with respect to acquiring, establishing and carrying on Canadian businesses and their cross-border activities, including banks, credit unions, finance companies, factors, trust companies, insurers, retailers, manufacturers, distributors, loyalty programs, pharmaceutical companies, airlines, satellite operators, equity funds and a wide array of other businesses. 
Martin is an executive director of the Association of Commercial Finance Attorneys and a member of the governing committee of the Conference on Consumer Finance Law.  He is a Fellow and past President of the American College of Commercial Finance Lawyers, and a past Chair of the American Bar Association’s Business Financing Committee and of its Securitization and Structured Finance Committee.  Martin was a member of the Expert Advisory Group to UNCITRAL with respect to the Convention on the Assignment of Receivables in International Trade.
Martin’s financing practice has been recognized by Chambers Global, The Lexpert/American Lawyer Guide to the Leading 500 Lawyers in Canada, The Best Lawyers in Canada, The Canadian Legal Lexpert Directory, Legal Media Group’s Guides to the World’s Leading Banking and Capital Markets Lawyers, Law Business Research’s The International Who’s Who of Business Lawyers, and IFLR1000: The Guide to the World’s Leading Financial Law Firms. 

Martin can be contacted on +416-486-1836 or by email at

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