Chapter 16 Methods of carrying on business

1. Sole Proprietorship
 The simplest form of business organization.
 Easy and cheap to set up with few legal requirements.
 Owned and run by one individual.
 Owner receives all profits and is responsible for all losses and debts.
 No limited liability; personal assets can be seized for business debts.
 Sole proprietor can limit liability through contracts or insurance.
Licensing Requirements
 Check municipal, provincial, and federal licensing requirements before
starting a business.
 In Ontario, must register the business name if it differs from the
owner's name.
Legal Considerations
 Can sue or be sued under the business name.
 Must comply with Ontario’s Business Names Act (BNA).
 leave of the court is required if an individual, corporation, or partnership commences or
defends an action under a name other than the registered name of the business
Tax Reporting
 Must report income on a calendar-year basis for tax purposes.
 Can elect to use a different fiscal year with approval from Minister of
National Revenue (MNR).
 Special tax rules ensure income is not deferred when using a non-
calendar fiscal year.
 Business losses can offset the sole proprietor's other income.
 If there's insufficient other income to deduct the loss in the current
year:
 The entire loss can be carried back to reduce income in any of the
three previous taxation years.
  The loss can be carried forward to reduce income in the 20
years following the year the loss is incurred. In section 111(1)(a)
of the Income Tax Act.

Example of Tax Reporting

 If a sole proprietor starts a business May 1, 2024, & chooses a fiscal year
end April 30:
 First fiscal period is from May 1, 2024, to April 30, 2025.
 Must report income from this period plus additional income from
May 1 to December 31, 2025.
 Tax deferral ends; taxes are paid in 2025.
Disadvantages
 No separation between personal and business assets for debts.
 All business risks are the owner's responsibility.
 May pay more taxes due to graduated tax rates when using a non-
calendar fiscal year.
 No limited liability; personal assets can be seized for business debts.

2. Partnership
 A partnership involves two or more people (individuals or corporations)
running a business together for profit.
 Similar to sole proprietorships: inexpensive to set up with few legal
formalities.
 Partnerships are not separate legal entities; partners run the business
directly.
Types of Partnerships
 General Partnerships: All partners have unlimited liability for debts.
 Limited Partnerships: At least one partner has unlimited liability; limited
partners' liability is capped at their investment.
 Partners are liable only for their own negligence or the negligence of employees under
their direct supervision and control
 Limited Liability Partnerships (LLPs): Protect partners from liabilities
except for their own negligence.
 ALTHOUGH, other partners are not personally liable for negligence
judgments against the partnership, a partner's share of partnership
property can still be used to pay partnership debts.

Income and Taxation

 Partnership income/loss is calculated at partnership level & allocated

to partners.
 Income of a partner is calculated like a separate person resident in Canada (ITA, s.96(1)(a)
 Partners report their share of income or loss on their personal tax
returns.
 Limited partners can only deduct losses up to their investment in the
partnership.
  Expenses are deducted from partnership revenue to determine net
income or loss.
 Capital cost allowance (CCA) is deducted to account for depreciation
of capital assets.
 Other allowable deductions are also subtracted from partnership revenue.
These deductions are made at the partnership level, not the
individual partner level.
 The resulting net income or loss is then allocated to partners.

3. Co-ownership

 Co-ownership involves two or more people jointly owning property

but does not create a partnership by itself.
Key Differences from Partnerships
 Co-owners can deal separately with their interests in the property;
partners cannot do this.
 Co-owners are not agents for each other; partners act as agents within
the partnership.
Tax Benefits
 Co-owners can claim Capital Cost Allowance (CCA) separately based
on their interest in the property, allowing for flexibility in tax deductions.

4. Corporations
 A corporation is a common form of business organization that is a
separate legal entity from its owners (shareholders).
Key Features
 Corporations can own property, conduct business, and incur liabilities
independently of shareholders.
 Shareholders own shares but do not own the corporation's property
directly.
Shareholders’ Liability
 Shareholders' liability is limited to the value of what they contributed
to the corporation (money, property, or services).
 If a corporation has debts exceeding its assets, creditors can only claim
against the corporation's assets, not the shareholders' personal
assets.
 If shareholders personally guarantee the corporation's debts, they lose
their limited liability.
 Corporations can sue in their own name and continue to exist even if a
shareholder dies or sells their shares.
Corporate Dissolution
 A corporation can be dissolved in these situations:
 Majority of shareholders vote for dissolution.
 A court orders the dissolution.
 The corporation is deemed inactive or violates statutory
provisions.
Taxation of Corporations
 A corporation’s income is taxed separately from its shareholders.
 Shareholders cannot claim the corporation's income or losses on
their personal tax returns.
 Corporations pay taxes on their net income each year.
 The corporation must pay taxes on its full income before
distributing dividends.
 Dividend payments do not reduce the corporation's tax liability.
 Shareholders receive dividends from after-tax corporate profits.
 Dividends are considered income for individual shareholders & taxed
again.
 Corporate shareholders may receive dividends tax-free under certain
conditions.
5. Joint Ventures
 There is no precise legal definition for joint ventures.
 It can be any of the following:
 A partnership.
 An association for a limited purpose without forming a
partnership.
 A combination of resources to conduct a commercial venture
together.
Written Agreement
 Co-venturers should have a written agreement outlining the rules of
the venture.
 Important matters to include in the agreement:
 Nature of the commercial activity.
 Contributions of each co-venturer.
 Profit and loss sharing.
 Duration of the joint venture.
 Management arrangements.
 Dissolution process.
Ownership and Tax Implications
 Joint venturers retain ownership of property used in the venture.
 Selling property to the joint venture results in recognized gains or losses.
 Joint venturers compute their net income separately, unlike partners
in a partnership.
6. Franchises and Licences
6.1 Relationship Between Parties
 Franchise and licence agreements involve transferring rights or
information for commercial activities.

Franchise Definition
 A franchise allows one party (franchisor) to grant another party
(franchisee) the right to use a trademark or trade name.
 Franchisees must follow specific operating procedures set by the
franchisor.

Advantages and Disadvantages

 Franchisor Advantages: Rapid expansion using franchisee capital &
ongoing fees
  Franchisor Disadvantages: Difficulties in maintaining standards and
managing franchisee relationships; challenges in terminating franchises.
 Franchisee Advantages: Access to established reputation&support from
franchisor.
 Franchisee Disadvantages: Limited control over business operations;
ongoing fees and costs.
Legal Framework
 The Arthur Wishart Act requires franchisors to provide clear and
accurate disclosure documents to potential franchisees before
investment.
 The Act imposes a duty of "fair dealing" on parties, requiring good faith
actions.
Features of Licensees and Franchisees
 Licensees and franchisees are independent contractors.
 A key difference is the level of control exerted by the franchisor over
the franchisee's business, which is greater than that of a licensor over a
licensee.
6.2 Tax Consequences
 Tax consequences depend on the business structure used (e.g., sole
proprietorship)
 Special tax rules apply to franchises, concessions, licenses, and similar
properties.
 These properties are typically granted for a limited time and are classified
as Class 14 property.
 Costs associated with these properties can be expensed under Capital
Cost Allowance (CCA) rules on a straight-line basis over their useful life.
7. Not-for-Profit Organizations and Charities
 Not-for-profit (NFP) organizations and charities are not the same.
 NFPs include social clubs, professional groups, and trade organizations;
their income is usually not taxed under the Income Tax Act (ITA).
 Charities must register under the ITA and meet specific criteria to qualify
as a charity:
 Must have a charitable purpose.
 The purpose must be exclusively charitable.
 Must promote public benefit, not private benefit.
Organizational Structure
 Both NFPs and charities can be unincorporated associations, trusts,
or non-share capital corporations.
 Most are organized as non-share capital corporations, which provide
benefits and liabilities similar to those of corporations.
Considerations for Organization
 Duration: Corporations are more permanent; trusts are for limited
activities.
 Liability: Unincorporated members are personally liable; corporate
members are not.
 Property Ownership:Unincorporated associations cant hold realestate
in their name.
 Procedures: Corporations have more compliance obligations.
  Delegation: Trustees have limited rights to delegate compared to corp.
directors.
Membership and Management
 NFP corporations must operate without monetary gain for members.
 Membership qualifications are outlined in legislation; members may
be admitted by director resolution.
 Membership can have different classes with varying voting rights.
Dissolution of Charities
 Upon dissolution, remaining property must be distributed to similar
charitable organizations.

8. Choosing the Best Method

8.1 What is Legally Possible
 Not all legal arrangements are suitable for every situation; factors like
ownership number and activity type matter.
8.2 Limited Liability
 Sole proprietors and most partners have unlimited liability; shareholders’
liability is limited to their investment.
 A corporation is preferable for limiting liability in high-risk situations.
8.3 Desirability of Perpetual Existence
 Partnerships may dissolve upon death or disagreement among partners;
corporations continue regardless of individual changes.
8.4 Estate Planning
 Using a corporation allows control while providing financial benefits
to family members through share structures.
8.5 Number of Proposed Proprietors
 Incorporation is better for many owners since it limits liability and
provides established rules for business control and financing flexibility.

8.6 Relationship of Proposed Proprietors

 Consider whether each proprietor will actively participate in the business.
 In a partnership, one partner can bind the partnership; typically, one
shareholder cannot bind the corporation.
 If some proprietors want to limit their risk or have different levels of
control, a limited partnership or incorporation with various share
classes may be better.
 A disadvantage of incorporation is that minority shareholders must follow
the majority's decisions, and their shares may not be easily sold without a
buy-sell agreement.
 In a partnership, if one partner wants to withdraw and others won't buy
them out, the partnership can usually be dissolved and assets liquidated.
8.7 Employees
 If owners want employees to benefit from the business's growth without
giving them management rights, incorporation or a limited
partnership is advisable.
 If employees are to be owners, a corporation must be used since they
cannot be general partners.
8.8 Costs
  Setting up and maintaining a corporation usually costs more than a
partnership or limited partnership and is generally more expensive than a
sole proprietorship.
 Preparing or amending a partnership agreement can cost as much as
incorporating a Government fees for creating partnerships are lower than
those for corporations.
 Corporations must keep specific records and comply with formalities that
increase ongoing costs compared to sole proprietorships or partnerships.
8.9 Citizenship Requirements
 The Canada Business Corporations Act (CBCA) requires at least 25% of
directors to be Canadian residents.
 Alternatively, they can appoint nominee directors who meet
citizenship requirements & use a unanimous shareholder agreement (USA)
for decision-making.
 OBCA does not have the resident requirement.
8.10 Flexibility of Structure
 Partnerships Act allows flexibility in structuring partnerships through
agreements.
 Shareholder relationships are governed by mandatory rules, but articles
of incorporation and USA provide some flexibility in structuring
arrangements.
8.11 Income Tax
 Income tax implications are crucial when choosing a business structure.
 In partnerships, income or loss is taxed at the partner level; partners can
offset losses against other income.
 In corporations, income is taxed at the corporate level; dividends paid to
shareholders are taxed again as income.
 Partnerships may be preferable for minimizing taxes if losses are
expected early on, allowing partners to use those losses against other
income.
 Corporations have limitations on how losses can be applied, which may
lead to some losses expiring if not utilized promptly.

Immediate Tax Consequences of Earning Business or Investment Income

 Tax Savings for CCPCs:

 A Canadian-controlled private corporation (CCPC) earning active
business income (ABI) qualifies for the small business deduction
(SBD), leading to less immediate tax compared to
unincorporated businesses.
 In 2023, a CCPC in Ontario with ABI up to $500,000 is taxed at
12.2% (9% federal + 3.2% Ontario).
 CCPCs earning over $500,000 or those not qualifying for the SBD
are taxed at a higher rate of 26.5% (15% federal + 11.5% Ontario).
 This results in a tax savings of 14.3% for CCPCs qualifying for
the SBD compared to the higher corporate tax rate.
 Tax Rate Comparison with Sole Proprietorship:
  Sole proprietors face a top personal marginal tax rate of 53.35% on
income over $235,675.
 A CCPC qualifying for the SBD saves a significant amount in taxes,
with a differential of 41.33% on income above that threshold.
 Even at lower income levels, CCPCs enjoy tax savings; for example,
the personal tax rate on income over $49,231 is 24.15%, leading to
an 11.95% differential.

 Non-SBD Corporations:
 Corporations not eligible for the SBD still benefit from lower
corporate tax rates (26.5%) and can defer personal taxes on
dividends while retaining earnings within the corporation.
 The maximum tax deferral is 27.03%, calculated as the difference
between the corporate tax rate (26.5%) and the top personal tax
rate (53.53%).
 Investment Income Taxation:
 If a corporation earns investment income, there is generally no
tax deferral.
 When after-tax investment income is paid out as dividends to
shareholders, it results in higher overall taxes compared to if the
investment income was earned directly by the shareholder.

Tax Planning Provisions

 Tax on Split Income (TOSI):

 The ITA addresses strategies that reduce personal taxes for high-
income earners through income splitting with family members using
private corporations.
 Changes to Small Business Deduction:
 Effective from 2019, CCPCs face reduced SBD eligibility once their
investment income exceeds certain limits ($50,000 to $150,000).
 The ability of a private corporation to receive refunds on dividend
taxes has also been significantly restricted.
CHAPTER 17 PARTNERSHIPS

1. General Partnerships
 Partnerships involve multiple decision-makers, leading to rules
developed by courts to define partner relationships and third-party rights.
 Most rules are codified in the Partnerships Act, with Section 45 stating
that common law and equity rules continue unless contradicted by the
Act.
1.1 Formation of a Partnership
 A partnership is defined as a relationship between people conducting
business together for profit.
 Three criteria for a partnership:
 Business: Includes any trade, occupation, or profession; can be
ongoing or a single transaction.
 View to Profit: The activity must aim for profit; charitable or
social activities do not qualify.
 Agreement: There must be an agreement to share profits,
which can be written, oral, or implied through conduct.
 Determining partnership existence involves looking at:
 Control over the business.
 Participation in management.
 Sharing of profits and losses.
 The intention of the parties.
1.2 Registration of General Partnerships
  Partnerships must register their name under Ontario’s Business Names
Act (BNA) if they wish to operate under a name other than the
partners' names.
 Failure to register prevents the partnership from pursuing legal
action related to its business unless permitted by the court.
1.3 Characteristics of General Partnerships
 No Separate Legal Existence: A partnership is not a separate legal
entity; partners can sue or be sued in the firm name due to legislative
changes.
 Agency: Each partner acts as an agent for the partnership, binding
all partners when acting within normal business activities.
 Liability: Partners are jointly liable for the partnership's debts. If
one partner dies, their estate remains liable for outstanding debts.
 Duty of Loyalty and Good Faith: Partners must act loyally and in
good faith towards each other, accounting for any benefits derived from
partnership transactions.
 Partnership Property: Property contributed or purchased for the
partnership is considered partnership property and is not divisible
among partners until dissolution.
1.4 Relation of Partners to One Another
 Partnership terms are usually outlined in an agreement; if absent,
default provisions apply and are below:
 Partners share capital&profits equally and must contribute equally
to losses.
 The firm indemnifies partners for liabilities incurred during
business operations.
 Partners do not earn interest on their capital contributions.
 All partners can participate in management; decisions on
ordinary matters can be made by majority vote.
1.5 Dissolution of Partnerships
 A partnership dissolves under several conditions:
 Upon expiration of its term.
 Completion of a specific project.
 Notice given by a partner in an indefinite partnership.
 Death or insolvency of a partner.
2. Limited Partnerships
 Limited partnerships can operate any business that general
partnerships can.
2.1 Formation of Limited Partnerships
 Formed by filing a declaration with the Ministry of Public and
Business Service Delivery, signed by general partners.
 The declaration includes the firm’s name, business nature, general
partners' names and addresses, and principal place of business in
Ontario.
 Declarations expire every 5 years and should be renewed every 5
years;
 Changes require filing new declarations.
 Limited partnerships are governed by both the Limited Partnerships Act
(LPA) and other relevant laws unless stated otherwise.
  A limited partnership must have at least one general partner and one
limited partner; individuals can hold both roles simultaneously.
2.2 Characteristics of a Limited Partnership
 Role of Limited Partners:
 Limited partners are passive investors and dont participate in
management.
 Share profits based on contributions unless specified in
agreement.
 Profit Distribution:
 No profits sharing if it’ll leave partnership unable to pay debts
(s. 11(2)).
 Loans and Transactions:
 Limited partners can loan money to the partnership and rank
equally with general creditors for claims from these loans.
 They cannot use limited partnership property as collateral for loans
(s. 12(1)).
 Return of Contributions:
 Limited partners can get their contributions back under certain
conditions, such as upon dissolution or with consent from all
partners (s. 15(1)).
 There must be enough assets to cover all liabilities before
contributions can be returned (s. 15(2)).
 Rights of Limited Partners:
 Limited partners have the right to inspect partnership records and
receive full disclosure about the partnership's affairs (s. 10).
 They may investigate the business state and advise on
management but cannot take part in daily operations without
losing limited liability (s. 12(2)).
 Loss of Limited Liability:
 A limited partner loses limited liability if they participate in
managing the business or if their name appears in the
partnership name without proper disclosure (s. 6(2)).
 Protection for Limited Partners:
 Section 8 of the LPA protects limited partners by requiring
general partners to obtain consent for certain actions.
 Assignment of Interests:
 A limited partner can assign their interest, and the assignee
may become a substituted limited partner with consent from
other partners (s. 18(1)).
 They have the same rights as the original limited partner but are
not liable for unknown obligations at the time of
becoming a partner (s. 18(6)).
 General Partner Responsibilities:
 General partners manage the business and are fully liable for
debts, needing consent from LPs for specific actions listed in s. 8
of the LPA.
 Dual Role:
 A person can be both a general and limited partner, but their
liability as a general partner remains unlimited (s. 5(2)).
2.3 Dissolution of a Limited Partnership
 A limited partnership dissolves under several conditions:
  Death or retirement of a general partner.
 If agreed upon in the partnership agreement, remaining partners
can continue the business.
 A court may order dissolution if requested by a partner (LPA, s. 10(c)).
 A limited partner can seek dissolution if their contribution is not
returned upon demand or if there are insufficient assets to cover
liabilities (s. 15(4)).
 Declaration of dissolution must be filed with the registrar of partnerships
ORDER OF PAYMENT WHEN LP IS DISSOLVED
 1st- Creditors
 2nd – LPs in proportion to their share in profits and compensation, if any
 3rd - LPs as per their contributions
 4th – General Partners other than capital and profit
 5th – General Partner for Profit
 6th – General Partner for their Capital contribution
This order can vary (from 2nd to 6th) depending upon the partnership
agreement. Creditors, however, get paid first and that cannot change.

2.4 Extra-Provincial Limited Partnerships

 Extra-provincial limited partnerships must file a declaration and power
of attorney to operate in Ontario (s. 25).
 Limited partners maintain their liability protection even when
operating outside their home province, provided they comply with local
laws (s. 27).

2.5 Limited Partnership Agreements

 A written agreement outlines terms not covered by law or modifies
statutory provisions.
 This agreement provides flexibility similar to corporations, allowing for
transferability of interests and admission of new partners.
 If a corporation is the general partner, it offers limited liability protection

3. Limited Liability Partnerships (LLPs)

 An LLP is a mix of a general partnership and a limited partnership.
 The assets of an LLP can be used to pay its debts and claims.
 Partners not liable for another partner's negligent/wrongful acts
during biz ops.
 A partner’s interest in partnership property is not protected from
claims against the partnership (Act, ss. 10(2)–(3.1)).
 A partner in an LLP cannot be sued for damages or obligations arising
from the acts of a negligent partner (s. 10(4)).
Conditions for LLPs in Ontario
 Only lawyers, paralegals, and chartered professional accountants, can use
an LLP.
 The governing body requires a minimum amount of liability
insurance.
 The LLP must register its firm name under the Business Names Act (BNA).
 The firm name must include," LLP"société à responsabilité limitée," LLP,
L.L.P., or s.r.l.
Legal Requirements for Lawyers
  Each partner must have @least $1m in liability insurance(ByLaw7, s.1;
ByLaw 6, s. 12)
 Law firms changing from general partnerships to LLPs must inform
clients about the limited liability of the partners (By-Law 7, s. 2(1)).
 The LLP must register its firm name under the Business Names Act
(BNA).
 The firm name must include: "LLP," "L.L.P.," or "s.r.l." or its full meanings

4. Taxation of Partnerships
 A partnership must report its income on a calendar-year basis if it has
at least one individual or professional corporation as a partner (ITA, s.
249.1(1)(b)(ii)).
 If all partners are corporations, they can have a non-calendar-year
fiscal period.
 To prevent tax deferral, a corporate partner with more than 10%
interest must include "adjusted stub period income" in its income (s.
34.2 of the ITA).
 Partnerships are not considered separate legal entities under the ITA.
 A partner’s income is calculated as if the partnership were a separate
person residing in Canada (ITA, s. 96(1)(a)).
 The partnership claims capital cost allowance (CCA) for its assets.
 Income/losses from the business and capital gains/losses are
determined for the partnership's fiscal period but are not taxed at
the partnership level.
 Instead, income/losses and capital gains/losses are allocated to
partners based on their partnership agreement.
 If there is no agreement, profits and losses are shared equally among
partners.
 Each partner reports their share of income/losses or capital
gains/losses on their tax return and pays tax at their applicable rate.
 Partners can benefit from tax provisions like capital gains deductions
or foreign tax credits.
 Business losses from a partnership can be used by partners to offset
other income.
 For limited partnerships, a limited partner's deduction for losses is limited
to their investment in the partnership (the “at-risk amount,” defined in
s. 96(2.2)).
 Partners can deduct their share of non-capital losses against other income
for three previous years, the current year, and up to 20 years forward (s.
111(1)(a)).
 Similar rules apply to capital losses; however, these can only be used
to offset other capital gains (not business income).
 The carryover period for capital losses is three years back and can
be carried forward indefinitely (s. 111(1)(b)).
 In 2017, the ITA was amended to change how work-in-progress (WIP) is
taxed for certain professionals starting after March 21, 2017.
 Although partnerships do not file an income tax return, they must file
an information return (Form T5013) with (CRA) for each fiscal period.
 While some partnerships may not be required to file a return under CRA
policy, it is advisable for them to do so to avoid indefinite reassessments.
Tax Filing and Partnerships
  Partnerships should file a tax return to start the assessment period and
avoid indefinite reassessment (s. 152(1.4)(b)).
 Partnerships, including limited partnerships, are often used as "tax
shelters."
 They provide income tax deductions to help investors reduce
taxable income.
 Taxation occurs at the individual partner level, allowing losses
and deductions to "flow through" to partners.
 If a corporation is used instead, its losses do not flow through to
shareholders, meaning shareholders cannot shelter their other
income from tax.
 In limited partnerships, the reduction in taxable income is limited to the
partner’s “at-risk amount” (s. 96(2.1)).
 Tax losses reduce the effective cost of the investment until it
reaches zero.
 No further losses can be used without increasing the investment
(e.g., through future profits) (s. 111(1)(e)).
 Recent amendments to Section 96 of the ITA clarify:
 At-risk rules apply to partnerships that are limited partners in
another partnership for tax years ending after February 26, 2018.
 Limited partnership losses cannot be carried forward.
 These losses will affect the adjusted cost base (ACB) of the limited
partner’s interest.
 New rules may convert noncapital losses into capital losses for uppertier
LTD partners
Components of Partnership Agreements
To avoid default provisions of the Act, a good partnership agreement should
cover:
5.1 Scope of the Business
 Clearly define the business activities to limit partner liability and include
all activities.
5.2 The Firm Name
 Name FOR goodwill; will IT change upon a partner's withdrawal, death, or
retirement.
5.3 Restrictions on Competing Business
 Include NON compete. Reasonable IN area and time& not harm public
interest.
5.4 Requirements for Admission of New Partners
 Without an agreement, existing rules (s. 24) govern new partner
admissions.
 New partners require consent from all existing partners.
 Consider setting specific requirements for admission, such as
professional experience or capital contributions, and procedures for
approval (e.g., at least 75% agreement).
5.5 Tax Treatment of Partnership Income
 Partners do not receive employment income; instead, they have access
to more deductions.
 Partners can be treated as partners for tax purposes but may not have
decision-making authority.
 Compensation for junior members can be structured as a base salary
plus a small percentage of profits.
  A partner can be paid a flat salary without being responsible for
losses.
5.6 Management
 The default rule for management is based on the majority of partners (s.
24).
 In large partnerships, management is typically handled by a committee
chosen by the majority.
5.7 Capital Contributions
 New partners usually make capital contributions to increase the firm's
capital or repay existing partners.
 If a partner contributes non-cash assets (like property or equipment), it
may trigger tax consequences as a disposition (ITA, s. 97(1)).
 Partners should consider using rollover provisions in the ITA to avoid
immediate tax when contributing assets.
5.8 Retirement and Dissolution
 Partnership automatically dissolves upon death/insolvency unless stated
otherwise
 If a partner withdraws, there should be a formula for compensating them,
5.9 Splitting of Profits
 In the absence of an agreement, profits are shared equally among
partners (s. 24).
 Partners should address how sharing may change based on
workload&income
5.10 Work-in-Progress (WIP)
 Law firms often have unbilled hours recorded as WIP.
 Agreement should specify if new partners must pay for their share of WIP
based on their profit share.
 If no charge is made for WIP,new partners shouldnt benefit from existing
unbilled hrs
 Changes in accounting rules effective January 1, 2024, will impact how
WIP is handled, but new partners will still benefit from previous elections
regarding WIP.

Chapter 18: Taxation of Corporations and Their Shareholders

1. Taxation of Corporations
1.1 Introduction
 Corporations pay federal and provincial income taxes like individuals
do.
 There are two main differences between how corporations & individuals
are taxed:
 Individuals face progressive tax rates, while corporations face
flat tax rates.
  The flat tax rates for corporations vary based on the type of corp
&income.
1.2 Tax on Corporate Income and Dividends
 Income earned through a corporation may be taxed at two levels:
 First, at the corporate level.
 Second, when after-tax profits are distributed to shareholders as
dividends,
 The federal Income Tax Act (ITA) addresses these two levels of taxation by
integrating corporate and individual tax systems.
2. Integration
2.1 General
 Perfect integration occurs when:
 The tax an individual would pay on direct income equals the tax
paid when that income is first earned by a corporation and then
distributed as dividends.
2.2 Taxation of Dividends
 Integration for active business income (ABI) reduces the tax paid by
individual shareholders on dividends through:
 A dividend gross-up and dividend tax credit (DTC).
 Perfect integration requires:
 A combined federal and provincial corporate tax rate of 20%.
 An individual's provincial tax rate must be half of the federal rate.
2.3.2 Over-Integration and Under-Integration
 Over-Integration:
 Occurs if actual corporate or individual tax rates are lower than
those used in the perfect integration example.
 This means earning income through a corporation results in less
total tax than earning it directly.
 Under-Integration:
 Occurs if the combined corporate tax rate is higher than 20%.
 This means earning income through a corporation results in more
total tax being paid compared to earning it directly.
2.3.3 Deferral where the corporate tax rate is lesser than the individual tax rate
Corporations can offer tax deferral advantages even if their tax rate is
above 20%.
 This advantage exists when the corporate tax rate is lower than the
individual shareholder's marginal tax rate.
 Corporations can keep after-tax profits until they distribute dividends to
shareholders.
 This defers income tax at the shareholder level.
 The deferral can be significant if shareholders don't need the funds for
several years.
4. Taxation of Corporations
4.1 General
 Aims to reduce corporate tax bias and avoid undue tax deferral.
 Tax rates depend on corporation type and income type.
4.2 Federal Income Tax
 Based on general federal rate with adjustments.
 Provincial abatement reduces federal rate by 10%.
 Basic federal rate is 28% after abatement.
 Further reductions apply based on corporation type and activities.
4.2.1 General Federal Corporate Income Tax Rate
 The general federal corporate tax rate is 38%.
 Provincial/territorial corporate tax is added to this rate.
 A 10% provincial abatement reduces the federal rate to 28% (called the
"basic federal rate").
 The abatement only applies to income earned in Canadian
provinces/territories.
 Corporations operating in the U.S. pay the full 38% federal rate.
 The basic 28% rate has been reduced over time.
 Reductions don't apply to income eligible for the small business deduction
(SBD).
 In 2023, there's a 13% rate reduction.
 The net federal corporate tax rate is 15% for most corporations.
 For Canadian-controlled private corporations (CCPCs) eligible for SBD, the
rate is 9%.
4.2.2 Tax on Investment Income
  The 2023 federal rate on corporate investment income is 38.67%.
 This includes a 10.67% additional refundable tax.
 Corporations can recover $1 of refundable tax for every $2.61 in dividends
paid.
4.2.3 Business Losses
 Net operating losses (NOLs) are fully deductible in the year incurred.
 Unused NOLs can be carried back 3 years or forward 20 years.
 NOLs can offset income from any source, including capital gains.
4.3 Ontario Provincial Income Tax
 Ontario's basic corporate tax rate is 11.5%.
 Small business rate is 3.2%.
 Manufacturing and processing rate is 10%.
 Combined federal-Ontario rates:
 12.2% for small businesses
 26.5% for other businesses
 50.17% for investment income
4.4 Corporate Minimum Tax (CMT)
 Applies to larger corporations in Ontario.
 Rate is 2.7% on adjusted accounting income.
 Only payable if it exceeds regular corporate tax.
 Can be credited against regular tax for up to 20 years.
4.5 Ontario Capital Tax
 Eliminated for tax years beginning after June 30, 2010.
5.2.3 Canadian-Controlled Private Corporation (CCPC)
 A CCPC is a private corporation resident in Canada.
 It is not controlled by:
 Non-residents
 Public corporations
 Any combination of the above
 A corporation can be 50% owned by Canadians and 50% by non-
residents/public corps and still qualify as a CCPC.
5.3 Types of Income
5.3.1 Business Income
Two main tax incentives for business income:
1. Small Business Deduction (SBD)
2. Manufacturing and Processing (M&P) profits deduction
These reduce the corporate tax rate.
(a) Small Business Deduction (SBD)
 In 2023, CCPCs get a 19% federal SBD and 3.2% Ontario rate on first
$500,000 of active business income.
 Active business excludes "specified investment business" and "personal
services business".
 SBD phases out for CCPCs with taxable capital between $10-50 million.
 SBD also reduced when adjusted aggregate investment income exceeds
$50,000.
 Ontario has its own phase-out of the 3.2% rate for CCPCs with taxable
capital over $10 million.
 Ontario does not match federal SBD clawback for excess passive
investment income.
(i) Personal Services Business (PSB)
 PSB income excluded from active business income definition.
 Targets incorporated employees.
  PSB income taxed at 44.5% combined federal-Ontario rate in 2023.
 PSB defined as business where:
 Individual performing services is a specified shareholder
 Individual would be considered an employee if not incorporated
 Exclusions:
 Corporation employs more than 5 full-time employees
 Services provided to associated corporation
(ii) Specified Investment Business
 Also excluded from active business income.
 Principal purpose is to derive income from property.
 Taxed at 50.17% combined federal-Ontario rate in 2023.
 Exclusion: More than 5 full-time employees
iii) Associated Corporations
 The $500,000 small business limit must be shared among associated
corporations.
 Complex rules determine if corporations are "associated".
 Associated corporations file an agreement to allocate the $500,000 limit.
 Total allocation cannot exceed $500,000.
Key points about associated corporation rules:
 Prevent individuals from setting up multiple corporations to access lower
tax rate.
 Caution needed when structuring to multiply access to SBD.
 Courts look at both legal (de jure) and factual (de facto) control.
 2017 amendment expanded factors considered for factual control.
(iv) 2016 Restrictions on SBD Access
 New rules prevent inappropriate access to SBD for certain structures.
 Apply to corporate tax years beginning after March 22, 2016.
 Key changes:
 Extended specified partnership income rules
 Limited SBD for CCPCs providing services to private corporations
 Restricted elections not to be associated
 Excluded certain investment income from ABI eligible for SBD
(b) Manufacturing and Processing (M&P) Profits Deduction
 Available to corporations with M&P activities in Canada.
 13% federal rate reduction in 2023.
 Ontario offers 10% rate on M&P income.
 Combined federal-Ontario rate of 25% on M&P income in 2023.
(c) Effect of Tax Reductions on Integration
 Perfect integration requires 20% combined corporate tax rate.
 Slight under-integration (0.58% tax cost) for SBD-eligible income in
Ontario in 2023.
 Larger under-integration ($1.90 tax cost) for income over $500,000.
 Tax deferral advantage exists when corporate rate is below shareholder's
rate.
(d) Part IV Tax
 Dividends from Canadian corporations not included in investment income
for refundable Part I tax.
 These dividends flow through tax-free due to inter-corporate dividend
deduction.
 Part IV tax applies to certain dividends received by private corporations.
 Part IV tax rate is 38.33% on qualifying dividends.
 Part IV tax is added to a CCPC's NERDTOH account.
  CCPCs get a refund of 38.33% when paying taxable non-eligible dividends.
(e) Capital Gains
 Capital gain is proceeds minus adjusted cost base and selling costs.
 Only half of capital gains are taxable (inclusion rate).
 Inclusion rate has changed over time.
 Changes affect stock options, business investment losses, and capital
gains exemptions.
 Capital losses can offset capital gains.
 Private corporations can pay tax-free capital dividends from capital
dividend account.
 Excess capital dividends face 60% penalty tax.
(f) Proposals for Substantive CCPCs
 Address tax planning to avoid CCPC status.
 "Substantive CCPC" regime proposed in 2022 budget.
 Would apply higher investment income tax to certain non-CCPCs.
 Anti-avoidance rules proposed.
 Effective for tax years ending after April 6, 2022 if enacted.
Excluded amount Excluded Applies to
amount (ITA, ss. 120.4(1) Age
ITA Age
definition “e_x_c_l_u_d_e_d_ Age 24
provision Minor 18 to
_a_m_o_u_n_t_” _a_n_d_ 17 and
23
_1_2_0_._4_(_1_._1_)_)_*_ _ older
s. 120.4(1)
definition
“e_x_c_l_u_d_
Amount from property inherited as a e_d_
Yes Yes Yes No
consequence of death from (1) a _a_m_o_u_n_t
parent, or (2) any person, if taxpayer _,_”
in full-time post-secondary studies or _p_a_r_a_._
eligible for disability credit _(_a_)_ _
s. 120.4(1)
definition
“e_x_c_l_u_d_
Amount from property acquired on
e_d_
breakdown of marriage or common- N/A N/A Yes Yes
_a_m_o_u_n_t
law partnership
_,_”
_p_a_r_a_._
_(_b_)_ _
s. 120.4(1)
definition
“e_x_c_l_u_d_
G_a_i_n_ _a_r_i_s_i_n_g_ _o_n_ _t_h_e_ e_d_
Yes Yes Yes Yes
_t_a_x_p_a_y_e_r_’s_ _d_e_a_t_h_ _ _a_m_o_u_n_t
_,_”
_p_a_r_a_._
_(_c_)_ _
Gain from property eligible for the CGE s. 120.4(1) *No *No Yes Yes
(except for d_e_e_m_e_d_ definition
_d_i_v_i_d_e_n_d_s_)_ _*_u_n_l_e_s_s_ “e_x_c_l_u_d_
_a_r_m_’s_ _length disposition e_d_
_a_m_o_u_n_t
_,_”
_p_a_r_a_._
 _(_d_)_ _

s. 120.4(1)
Income that is (1) not from a related definition
business, or (_2_)_ _f_r_o_m_ _a_n_ “e_x_c_l_u_d_
_“e_x_c_l_u_d_e_d_ _b_u_s_i_n_e_s_s_” e_d_
No No Yes Yes
_(_r_e_q_u_i_r_e_s_ _a_m_o_u_n_t
_s_u_f_f_i_c_i_e_n_t_ _labour _,_”
contribution) _p_a_r_a_._
_(_e_)_ _
s. 120.4(1)
definition
“e_x_c_l_u_d_
Amount that is a safe harbour capital e_d_
No Yes Yes No
return _a_m_o_u_n_t
_,_”
_p_a_r_a_._
_(f)(i)
s. 120.4(1)
definition
A_m_o_u_n_t_ _t_h_a_t_ _i_s_ _a_ “e_x_c_l_u_d_
_“r_e_a_s_o_n_a_b_l_e_ _r_e_t_u_r_n_ e_d_
No Yes Yes No
_o_n_ _a_r_m_’s_ _l_e_n_g_t_h_ _a_m_o_u_n_t
_c_a_p_i_t_a_l_” _ _,_”
_p_a_r_a_._
_(f)(ii)
s. 120.4(1)
Amount that is income or capital gain definition
from the d_i_s_p_o_s_i_t_i_o_n_ _o_f_ “e_x_c_l_u_d_
_“e_x_c_l_u_d_e_d_ _s_h_a_r_e_s_” e_d_
No No No Yes
_(_o_w_n_e_r_s_h_i_p_ _o_f_ _1_0_%_ _a_m_o_u_n_t
_or more of shares of a corporation _,_”
carrying on a non-services business) _p_a_r_a_._
_(g)(i)
A_m_o_u_n_t_ _t_h_a_t_ _i_s_ _a_ s. 120.4(1)
_“r_e_a_s_o_n_a_b_l_e_ _r_e_t_u_r_n_” definition
_i_n_ _r_e_s_p_e_c_t_ _o_f_ “e_x_c_l_u_d_
_t_a_x_p_a_y_e_r_ e_d_
No No No Yes
_(_c_o_n_s_i_d_e_r_i_n_g_ _t_h_e_ _a_m_o_u_n_t
_t_a_x_p_a_y_e_r_’s_ _,_”
_c_o_n_t_r_i_b_u_t_i_o_n_ _t_o_ _the _p_a_r_a_._
business of labour, capital, and risk) _(g)(ii)
Amount that is income or taxable
capital gain if the amount would be an
excluded amount in respect of t_h_e_
_t_a_x_p_a_y_e_r_’s_ _s_p_o_u_s_e_ N/A Yes Yes Yes
_o_r_ _c_o_m_m_o_n_-law partner and
the spouse or common-law partner is s. 120.4(1.1)
aged 65 years or older or deceased (c)
 * All ages are determined before the start of the taxation year
6. Advantages and Uses of Incorporating Businesses Earning Active Business
Income (ABI)
6.1 Introduction
  Incorporating a business has non-tax advantages like limited liability and
perpetual existence.
 There are also tax advantages for earning ABI through a corporation.
6.2 Lower Rate of Tax - Tax Savings and Deferral
 CCPCs qualifying for Small Business Deduction (SBD) pay lower tax rates.
 Combined federal and Ontario rate is 12.2% in 2023 on first $500,000 of
ABI.
6.3 Estate Planning and Income Splitting
 Corporations can be used for estate planning and income splitting with
family members.
 Tax on Split Income (TOSI) rules apply to certain payments to family
members.
 TOSI rules expanded in 2018 to include adult children and spouses.
 Exceptions to TOSI rules exist based on age and contribution to the
business.
6.4 Rollovers
 ITA allows tax-deferred transfers of assets in certain situations.
 Key rollover provisions include:
 Section 85: Transfer of property to a corporation
 Sections 86 and 51: Share capital reorganizations
 Sections 87 and 88: Corporate mergers and wind-ups
 Section 85.1: Share-for-share exchanges
 Subsection 55(3): "Butterfly" reorganizations
6.5 Employee Stock Options
 Preferential tax treatment for employee stock options.
 Different rules for CCPCs and non-CCPCs.
 New annual vesting limit for non-CCPCs effective June 30, 2021.
6.6 Allowable Business Investment Losses (ABILs)
 Special tax treatment for losses on investments in small business
corporations.
 ABILs can be deducted against any type of income.
 10-year carryforward limit as a non-capital loss.
6.7 Registered Pension Plans and Deferred Profit Sharing Plans
 Corporations can set up tax-deferred savings plans for employees.
 Registered Pension Plans (RPPs) and Deferred Profit Sharing Plans (DPSPs)
are common.
 Special rules for owner-managers and significant shareholders.
7. Compensating the Owner-Manager
7.1 Bonus Down to $500,000
 Pay bonuses to reduce corporate income to $500,000 SBD limit
 Avoids higher corporate tax rate on income over $500,000
 Salaries, bonuses, and directors' fees are deductible for the corporation
7.2 Accrue Bonus
 Accrue bonus in current year but pay in next year
 Corporation gets current deduction
 Owner-manager pays tax when bonus received next year
7.2.1 Reasonableness
 Bonus amount must be reasonable for services provided
 CRA may deny unreasonable amounts under s. 67
7.2.2 Legal Liability to Pay Bonus
 Corporation must have legal obligation to pay bonus
 Use formula if exact amount unknown at year-end
7.2.3 Timing of Payment
 Bonus must be paid within 180 days of corporate year-end
 Otherwise deduction delayed until actually paid
7.3 Shareholder Loans
7.3.1 General
 Allow tax-free use of corporate funds
 Must be properly documented
7.3.2 Limits
 Loans included in shareholder's income unless exceptions apply
 Exception if repaid within corporation's next tax year
7.3.3 Exceptions
 Loans to employees to buy shares, cars, homes
 Loans to non-specified employees
 Loans in ordinary course of lending business
7.3.4 Interest Benefit
 Taxable benefit if loan is interest-free or low interest
 Based on prescribed rate minus interest paid
7.4 Shareholder Benefits
 Personal use of corporate assets taxed as shareholder benefit
 Included in shareholder's income
 No deduction for corporation
 Results in double taxation

Here is a simplified version of the glossary, maintaining the key points:

Acquisition of control
 Occurs when new shareholder(s) acquire over 50% voting shares
 Triggers deemed year-end for tax purposes
 May affect loss carryovers and other tax attributes
Adjusted cost base (ACB)
 Tax cost of a capital asset
 Used to calculate capital gain/loss on disposition
 Can be adjusted by certain events or transactions
Allowable business investment loss (ABIL)
 Half of a business investment loss
 Fully deductible against any income
 10-year carryforward limit as non-capital loss
Amalgamation
 Combination of two or more corporations
 Assets and liabilities flow to amalgamated corporation
 Triggers year-end for predecessor corporations

Butterfly transaction
 Divisive reorganization distributing assets to shareholders
 Must meet special rules in s. 55 of Income Tax Act
Canada Revenue Agency (CRA)
 Federal agency administering tax matters
 Publishes technical information and rulings
 Replaced Canada Customs and Revenue Agency in 2003
Canadian-controlled private corporation (CCPC)
 Canadian corporation not controlled by non-residents or public
corporations
 Eligible for various tax incentives
Capital cost allowance (CCA)
 Tax depreciation on capital assets
 Based on undepreciated capital cost (UCC) of asset class
 Rates and rules set out in Income Tax Regulations
Capital dividend
 Paid out of a private corporation's capital dividend account
 Received tax-free by Canadian shareholders
 Requires election filed with CRA
Capital gain/loss
 Gain/loss on sale of capital property
 Only half of capital gains are taxable
 Losses can only offset capital gains
Clearance certificate
 Required when non-residents sell taxable Canadian property
 Purchaser must withhold tax unless certificate obtained
 Exceptions for treaty-protected property
Cumulative net investment loss (CNIL)
 Excess of investment expenses over income since 1987
 Reduces access to lifetime capital gains exemption
Dividend tax credit (DTC)
 Provides tax relief for dividends from taxed corporate income
 Different rates for eligible and non-eligible dividends
 Aims to integrate corporate and personal tax
General anti-avoidance rule (GAAR)
 Allows CRA to deny tax benefits from abusive transactions
 Applies when specific anti-avoidance rules do not
 Recent amendments expand its application
Intergenerational rollover
 Allows tax-deferred transfer of farm/fishing property to children
 Must meet specific conditions on property use and residency
 Similar rules for family farm/fishing corporations and partnerships
Merger
 See "Amalgamation" above
Net capital losses
 Aggregate of allowable capital losses minus taxable capital gains
 Includes unused ABILs after 10 years
 Can be carried back 3 years or forward indefinitely
 Only usable against taxable capital gains
Non-capital loss (NOL)
 Loss from carrying on business
 Fully deductible in year incurred
 Can be carried back 3 years or forward 20 years
 Usable against any income source
 ABILs are non-capital losses but have 10 year carryforward limit
Paid-up capital (PUC)
 Tax concept starting from corporate law stated capital
 Often reduced below stated capital by tax rules
  Represents amount returnable to shareholders tax-free
 Used to determine deemed dividends on share redemptions
Preferred shares
 Special tax rules apply to certain preferred shares
 Common shares may be considered preferred for some tax purposes
 Rules generally don't apply to individual shareholders
Private corporation
 More restricted definition for tax purposes than corporate law
 Must be resident in Canada
 Not controlled by public corporations
Public corporation
 Includes public corporations for corporate/securities law
 Canadian resident corporations can elect/be designated public if
conditions met
Qualified farm/fishing property (QFFP)
 Eligible for capital gains exemption
 Includes land, buildings, quotas used in farming/fishing
 Must meet ownership and usage tests
Qualified small business corporation (QSBC) shares
 Eligible for capital gains exemption
 Must be shares of Canadian-controlled private corporation
 Corporation must use assets in active Canadian business
 Ownership and asset usage tests apply


Chapter 19: Income Tax Administration and Enforcement

1. Introduction
 Taxes apply to residents and non-residents. Taxpayers calculate and pay
own taxes
1.1Federal Income Taxes-Taxes worldwide income of Canadian residents.
Taxes Canadian-source income of non-residents
1.2 Provincial Income Taxes
 Ontario has separate acts for individuals/trusts and corporations
2. Assessments and Appeals
 ITA sets rules.
2.1 Taxpayers deadlines for various taxpayers:
 Corporations: 6 months after year-end
  Individuals: Generally April 30
 Deceased individuals/trusts: Special rules apply
2.2 Assessments
 MNR must examine tax returns and assess tax, interest and penalties
 No appeal allowed for nil assessments
 Taxpayers can request determination of certain losses
2.3 Reassessments
 Normal reassessment period is 3yrs (4) Reassessment period extended
sometimes:
 For loss carrybacks, credits, etc.
 Failure to report property dispositions or file returns
 Late filing of certain information returns

2.4 Objections
2.4.1 Generally
 First step in appeal process, Must set out reasons and facts
 Filing deadlines vary by taxpayer type
 Limits on objecting to certain reassessments
 Generally prevents tax collection during objection
 Special rules for large corporations
2.4.2 How and where to File Notice of objection
 Must be in writing with reasons and facts
 Special requirements for large corporations
 Filed with Chief of Appeals at local CRA office
2.4.3 Extension of time - application to the MNR
 Taxpayers can apply for extension within one year of deadline
 MNR may grant if just and equitable
 Application must be:
 Within one year of expiry
 As soon as practicable
 Taxpayer must show inability to act and intention to object
2.4.4 Extension of time - application to Tax Court of Canada
 Taxpayer can apply to TCC if:
 MNR refuses extension
 90 days pass with no MNR decision
 Must apply within 90 days of MNR decision
 Same conditions as MNR application apply

2.4.5 Duties of the MNR

 MNR must reconsider assessment upon objection
 CRA appeals officer typically handles objection
2.5 Appeals
2.5.1 Generally
 Taxpayer can appeal to TCC within 90 days of MNR decision
 Can apply for extension up to 1 year later
 Must show same requirements as objection extension
 Appeal possible if no MNR decision on objection after 90 days
 Appeal usually prevents tax collection
 TCC can dismiss, allow, or refer back appeal
2.5.2 Burden of proof
 Taxpayer must disprove MNR's factual assumptions in assessment
  MNR has burden to prove fraud/misrepresentation for late
reassessments
 MNR has burden for certain penalties
 Burden shifts to Crown for alternative assessment bases
 MNR can make alternative arguments during appeals
 Courts cannot increase assessed tax amount on appeal
General Anti-Avoidance Rule (GAAR)
 CRA can apply GAAR to transactions that avoid tax
 3 requirements for GAAR:
1. Tax benefit results -Taxpayer must disprove
2. Transaction is an avoidance transaction-Taxpayer must disprove
 Transaction is abusive-, MNR must prove 3
 1 and 2- Taxpayers not required to maximize taxes paid
2.5.3 Tax appeals
 Tax Court of Canada (TCC) has jurisdiction over income tax appeals
 2 appeal procedures:
1. Informal procedure- for smaller amounts
2. General procedure- more formal court rules
 Further appeals possible to Federal Court of Appeal and Supreme
Court
2.5.4 References
 TCC can determine questions of law/fact by agreement
 MNR can request determinations on common issues
2.5.5 Recent Developments
 Courts Administration Service Act created single administration
 TCC now a superior court of record

3. Administration and enforcement

 Part XV of ITA covers administration and enforcement
 CRA administers federal and some provincial income taxes
3.1 Collection proceedings
 Unpaid taxes are debts to the Crown
 MNR can require third parties to pay tax debts
 Garnishment allowed after objection/appeal rights expire
 MNR can seize assets of defaulting taxpayers
 Collection delayed during objection/appeal periods
 Special rules for large corporations and donation shelters
 Jeopardy assessments allow earlier collection
3.2 Investigations and demands for information
 MNR has broad investigative powers over taxpayers
 Powers apply directly and through third parties
3.2.1 Inspections
 Authorized persons can examine taxpayer books, records, and property
 Can enter business premises but not dwelling houses without
warrant
 MNR needs judicial authorization to keep seized documents
3.2.2 Demands for information
 MNR can require third parties to provide information and documents
 Judicial authorization needed for unnamed persons
 SCC cases have clarified MNR's information gathering powers
  Charter protections apply once audit becomes criminal
investigation
3.2.3 Legislative amendments
 Clarify and expand MNR's information gathering abilities
 Allow requiring in-person or video attendance to answer questions
 Permit requiring written answers in specified formats
3.2.4 International transfers and rewards
 Financial institutions must report international transfers over $10,000
 Rewards program for information on international tax non-
compliance
 Up to 15% of tax collected for qualifying informants
3.2.5 Mandatory disclosure - reportable tax treatment transactions
 Section 237.3 requires reporting of certain "reportable transactions"
 Only one hallmark now needed to trigger reporting:
1. Contingent fees
2. Confidentiality required
3. Contractual protection obtained
 Ontario has similar disclosure rules
3.2.6 Mandatory disclosure - notifiable tax treatment transactions
 Section 237.4 requires reporting of specific transactions
 CRA publishes list of notifiable transactions
 Significant penalties for failure to report
3.2.7 Mandatory disclosure - uncertain tax treatment transactions
 Section 237.5 requires corporate taxpayers to report uncertain tax
treatments
 Applies when uncertainty if treatment would be accepted
 Both taxpayer and advisor may need to report
3.3 Search and seizure
 Warrant required for searches under ITA
 Judge must be satisfied of specific conditions
3.4 Solicitor-client privilege
 ITA has procedures for claiming privilege
 Privilege belongs to client, not lawyer
 Accounting records not privileged
3.5 Offences
 Various offences under ITA
 Can result in penalties or imprisonment
 Corporate officers may be liable for corporate offences
3.6 Directors' liability
 Directors jointly liable for certain corporate tax arrears
 2-year limitation period after ceasing to be director
 Due diligence defense available
3.7 Civil penalties for third parties
 Penalties for culpable conduct by tax advisors
 Guindon case clarified these are administrative, not criminal penalties

4. COVID-19 Pandemic: CRA and Court Changes (Historical)

CRA Changes
 The CRA extended tax filing and payment deadlines for Canadian
taxpayers.
  Changes were administrative, not legislative.- now passed, September
30, 2020
Tax Court of Canada (TCC) Changes
 The TCC extended all timelines under its rules.March 13 to September 13,
2020 (185 days) was excluded from time calculations.
Federal Court (FC) Changes
 The FC extended timelines for filing documents and procedural steps.-
now passed.
Federal Court of Appeal (FCA) Changes
 The FCA suspended the running of time from March 16 to June 15, 2020.

Chapter 20 on the creation of corporations, simplified and maintaining

the structure:
1. Introduction-Note corresponding Canada Business Corporations Act
(CBCA)sections

2. Where to incorporate
2.1 Ability to carry on business in different jurisdictions
 Federal corporations can operate nationwide
 Provincial corporations limited to home province unless licensed
elsewhere
2.2 Filing and other requirements
 All provinces regulate federal corporations
 Federal corporations must file notices in Ontario
 All corporations must register business names
2.3 Prestige of federal incorporation
 May be preferable for international business

3. Incorporation procedure
  Done by filing articles of incorporation
 Corporation exists on date shown on certificate
3.1 Name
 Number names available for quick incorpn. Name search required
avoid conflicts
 Must include words like "Limited" or "Incorporated"
3.2 Address
 Must have registered office location
3.3 Directors
 Minimum number of directors specified
 Director qualifications outlined
3.4 Restrictions
 Business restrictions can be included in articles
3.5 Share capital
 Basic shareholder rights specified
 Can have multiple share classes
3.6 Share transfer restrictions
 Include restrictions if relying on "private issuer" exemption
 Require approval of board or shareholders for transfers
3.7Additional provisions- Can include anything that could be in a by-law
3.8 Approvals
 Some incorporations require approval from other agencies
 Special requirements for professional corporations
3.9 Filing
 Incorporation is a matter of right once articles filed
 Solicitor responsible for correctness of articles

4. Organization of records- . Some record MUST be kept

 New requirements for land ownership register
 New register of individuals with significant control for CBCA
corporations
4.1 By-laws
 Regulate corporation's business and affairs
 Must be approved by directors then shareholders
4.2 Resolutions
 Used to carry out corporate business
 Different approval thresholds for different matters
4.3Written resolution in lieu of meetings
 Can be used instead of holding meetings.Allow majority approval 4 some
resolutions
4.4 Officers and agents
 Act on authority given by statute, articles, by-laws, resolutions
 Some powers cannot be delegated
4.5 Seal
 Optional for OBCA and CBCA corporations
4.6 First meeting - directors
 Organizational proceedings usually done by written resolutions
 Key initial decisions made at this meeting
4.7 Second meeting - shareholders
 Confirms decisions made by directors
  Appoints auditor and directors

5. Post-organization and share certificates

 Complete required records and registers
 File Form 1 if directors change (within 15 days)
 File initial return within 60 days of incorporation
 CBCA corporations must file in Ontario if doing business there
 File banking documents with bank
 Issue share certificates to shareholders
 Notify auditor/accountant of appointment
 Directors meet regularly to manage corporation
 Hold annual shareholder meeting within required timeframes

6. Special situations
6.1 Continuing under another jurisdiction
 Importing is simpler than exporting
 Notice must be given to shareholders for export& can dissent &
demand fair value
6.2Amalgamations
 Two or more OBCA corporations can amalgamate. Corps retains
liabilities & assets
6.3 Special act corporations
 Formed by special acts of Parliament or Legislature
 Governed by combination of special act and general corporate law

7. COVID-19 pandemic: temporary measures

 Allowed virtual shareholder and director meetings
 Extended deadlines for annual meetings
 Most measures expired by May 31, 2021
 Chapter 21: Directors, Officers, and Shareholders of a Corporation
1. Introduction
 This chapter discusses the 3 main parties in a corporation: directors,
officer & shareH
 Both act,s OBCS and CBCA allow some flexibility in how authority is
divided.

2. Directors
2.1 Duties and Responsibilities
 Directors must manage or supervise the corporation's business and
affairs.
 Their management power can only be limited by a USA
 Directors have two main obligations:
 A fiduciary duty to act honestly and in the corporation's best
interests.
 A duty to exercise reasonable care and skill.
2.2 Qualifications
 To be a director, one must be:
 An individual
 At least 18 years old
 Of sound mind
 Not bankrupt
  one-third of directors in an offering corporation must’nt be officers or
employees.
 Distributing corporations min 3 directors, & 2 not officers or employees.
July 5, 2021, the OBCA removed Canadian residency requirements for
directors.
2.3 Election of Directors
 1st, Directors are named in the articles & serve until the corporation
is organized.
 Shareholders elect directors at annual meetings by majority vote.
 Terms can be staggered but cannot exceed 3 years.
 If no directors are elected, current directors remain until successors
are chosen.
2.4 Number of Directors
 The number of directors is specified in the corporation’s articles.
 Non-offering -at least 1 director; offering corporations -at least 3.
 Articles can allow for a fixed number or a range of directors.
2.5 Quorum of Directors
 A majority of directors present constitutes a quorum at meetings.
 If there are only 1 or 2 directors, all must be present for quorum.
 CBCA requires certain residency standards for directors to conduct
business.
2.6 Vacancies in the Board of Directors
 If there is no quorum or not enough directors elected, a special
meeting must be called to fill vacancies.
2.7 Transaction of Business
 Directors pass resolutions@meetings or through written consent
from all directors
 Meetings can be held via telephonic or electronic means if all
participants can communicate simultaneously.
 Notices for meetings should include time and place details as per by-
laws.
2.8 Remuneration
 Section 137 of the OBCA and section 125 of the CBCA allow directors to
set pay for directors, officers, and employees.
 Directors' discretion may be limited by articles, by-laws, or a agreement
USA.

2.9 Ceasing to be a Director

 A person stops being a director if they resign, die, become disqualified,
removed.
 A resignation is effective when received by the corporation or at a
specified time.
 First directors cannot resign until a successor is elected or
appointed.
 Shareholders can remove directors by ordinary resolution at a special
meeting.

3. Officers
3.1 Appointment, Duties, and Responsibilities
 Directors can appoint officers and set their duties under OBCA and
CBCA.
  Officers manage the corporation but cannot make certain important
decisions.
 Officers have the same fiduciary duty and duty of care as directors.
3.2 Qualifications
 Only the managing director needs special qualifications.
 If appointed, the managing director must be a resident Canadian.
3.3 Term of Office
 OBCA and CBCA do not specify terms of office for officers
 Bylaws usually state that officers hold office until they resign or
appoint successor
3.4 Authority of Officers
 The authority of officers is defined in articles, by-laws, or
resolutions.
 Actions taken by officers are valid even if there are defects in their
appointment.
3.5 Indoor Management Rule
 People dealing with a corporation do not need to check all public
documents.
 They can assume actions taken by directors or officers are authorized.
3.6 Indemnification and Insurance for Directors and Officers
 Corporations can indemnify directors or officers under certain
conditions.
 They have the right to be reimbursed for costs if:
 They were successful in their defense.
 They acted honestly and in good faith.
 They believed their actions were lawful in case of penalties.
 Corporations can also buy liability insurance for directors and officers if
they acted honestly and in good faith.

4. Shareholders
4.1 Becoming a Shareholder
 A person becomes a shareholder when shares are issued in exchange
for money, property, or services.
 Directors typically set the price for shares.
 Corporations cannot accept promissory notes as payment for shares.
 Corporations must keep a securities register with details about
shareholders and shares issued.
4.2 Rights, Powers, and Duties
4.2.1 Election and Removal of Directors
 Shareholders are the owners of the corporation.
 Shareholders with voting shares have the right to elect and remove
directors.
4.2.2 Right to Receive Financial Statements
 Financial statements are important for SH to understand their
investment.
 Corporations must present financial statements at each annual
meeting.
 Financial statements must include the auditor's report and other
required info.
4.2.3 Appointment of Auditor
 Voting shareholders have the right to appoint an auditor at each
annual meeting.
  The auditor checks financial statements and reports to shareholders.
 An unqualified report means the auditor believes the financial
statements are fair.
4.2.4 Approval of Fundamental Changes
 Shareholders must approve certain fundamental changes by special
resolution.
 A special resolution requires at least two-thirds of votes cast.
 Shareholders can dissent and require the corporation to buy their shares
in certain situations.
4.2.5 Shareholder Proposals
 Shareholders can propose amendments to the articles at annual
meetings.
 Proposals must be submitted in advance to be considered.
 Proposals may include nominations for director elections if supported
by enough shareholders.
4.3 Meetings of Shareholders
 Sections 93–98 of OBCA (and CBCA, ss. 132–136) cover shareholder
meetings.
 Shareholders exercise their powers at meetings or through written
resolutions.
 Meetings can be held using telephonic or electronic means if
simultaneous.
4.3.1 Nature of Meetings
 There are 2 types of meetings: annual and special.
 The 1st annual meeting must occur within 18 months of
incorporation, with subsequent meetings every 15 months.
 Annual meetings must cover:
 Minutes from the last meeting
 Financial statements
 Auditor's report
 Election of directors
 Appointment of auditors
 Directors can call special meetings at any time for other business
matters.
4.3.2 Place of Meetings
 Directors can choose the location of meetings, unless in the articles or
USA.
 If no location is specified, meetings must be held at the registered
office.
 If a meeting is entirely by phone or electronic means, the location does
not need to be specified in the notice.
 CBCA requires that shareholder meetings be held in Canada unless
otherwise stated in the articles or agreed upon by all voting
shareholders.
4.3.3 Notice Period for Meetings and Record Dates
 OBCA sets minimum and maximum notice periods for shareholder
meetings based on whether the corporation is offering or non-offering.
 Shareholders can waive these notice periods.
 Directors can set a record date to determine which shareholders receive
notice of the meeting.
 If a record date is set, those listed as shareholders on that date are
entitled to notice, even if shares are transferred later.
  Notice of the record date must be published at least seven days
before it occurs and sent to stock exchanges where shares are
listed.
 If there is no fixed record date, the default is the close of business on
the day before notice is given or the day of the meeting if no notice
is given.
4.3.4 Form and Content of Notice of Meetings
 Notices must be in writing and include the time and place of the meeting.
 For special meetings, the notice must explain the nature of special
business in detail and include any special resolutions or by-laws to be
presented.
 No notice is required for adjourned meetings if adjournment is less
than 30 days and announced at the original meeting.
 If adjourned for 30 days or more, a new notice is required.
4.3.5 Other Materials to Be Circulated Prior to Meetings
 For annual meetings, unless shareholders opt out, corporations must
mail:
 Financial statements
 Auditor’s report
 Other required financial information from the last fiscal year
 OBCA offering corporations with 15 or more shareholders and CBCA
corporations with more than 50 shareholders must solicit proxies,
allowing absent shareholders to vote through a proxyholder.
 These corporations must also issue an information circular to each
shareholder detailing matters for discussion at the meeting.
Additional Information about Proxies
 A person who asks shareholders to vote against management
proposals is called a "dissident."
 Dissidents must provide an information circular but do not need to
include a proxy form.
 Shareholders making proposals can require their statement to be
included in management's information circular, along with their name
and address.

4.3.6 Who May Call A SHareHolder’s meeting

Generally, BOD but In certain situations, shareholders have the right to requisition
shareholder’s meeting. S.105 of the OBCA and s. 143 of the CBCA, holders of at least 5% of
the shares entitled to vote at meetings may require the directors to call a meeting. If the directors
do not do so within 21 days following receipt of the shareholders written requisition, any shareholder
who made the original request may call the meeting in the usual way. The right to requisition a
meeting is not absolute.

given notice of it, or if the matters to be discussed at the meeting are of

such a nature that the corporation would not be required to circulate a
shareholder proposal.
It is also possible for a court pursuant to s. 106 of the OBCA and s. 144
of the CBCA to call a meeting of shareholders upon the
application of a director or a shareholder entitled to vote at the
meeting
• if it is impracticable to call a meeting of shareholders;
 • if it is impracticable to conduct the meeting in the manner prescribed by
the by-laws, the articles, or the Act; or
• for any other reason the court thinks fit.

4.3.7 Conduct of meetings

Subject to statutory rules dealing with quorums and voting, elements of
procedure at a meeting of shareholders are governed by provisions in the by-
laws or by rules of parliamentary and municipal practice

4.3.8 Voting by proxy

 Under s. 110 of the OBCA and s. 148 of the CBCA, any
shareholder entitled to vote at a meeting of shareholders has
the right to appoint a person, who need not be a shareholder, to
represent the shareholder and vote by an execution of proxy form.
 Corporate shareholders are represented by proxy.
 A form of proxy may be revoked at any time before the transaction
of the business to which it relates, and attendance in person also
revokes the proxy.

4.3.9 Resolutions in writing

 A resolution in writing signed by all the shareholders entitled
to vote at a meeting of shareholders is as valid as if it had been
passed at a meeting of the shareholders (OBCA, s. 104(1); CBCA s.
142(1)).
 The only occasions when a written resolution may not be used are
when the shareholders deal with the resignation, removal, or
replacement of a director or auditor and the director or auditor
submits to corporation a written representation on the matter.
 s. 104(1) OBCA that will allow non-offering corporations to pass a
written resolution signed by the shareholders holding a majority of the
shares entitled to vote on that resolution

4.4 Principles governing voting rights

The OBCA and the CBCA make it clear that when shareholders vote on a
matter before them, the will of the required majority governs.
The general rule at common law is that shareholders may vote in their own self-interest, as long as
the action taken was not of a fraudulent character or beyond the powers of the corporation.

4.5 Shareholders’ Remedies

4.5.1 Introduction
Shareholders have several ways to protect their rights and interests, including:
 Taking personal legal action if their personal rights are violated, such as not
receiving notice of meetings or being denied the right to vote.
 Applying to wind up the corporation (OBCA, ss. 207–208; CBCA, s. 214).
 Using their right to dissent and seek fair value for their shares (OBCA, s. 185;
CBCA, s. 190).
 Requesting an investigation into the corporation’s affairs (OBCA, s. 161; CBCA, s.
229).
 Seeking a compliance order to enforce the law (OBCA, s. 253; CBCA, s. 247).

The two most common remedies are derivative actions and oppression actions.
4.5.2 Derivative Actions
Wrong to corporation, a SH may suffer indirectly.(OBCA, s246–247; CBCA, s. 239–240).
A "complainant" can bring a derivative action with the court's permission. A complainant
can be:
 A current or former shareholder.
 A current or former director or officer of the corporation or its affiliates.
 Any other person the court considers appropriate (OBCA, s. 245; CBCA, s. 238).
The court will grant permission if:
 The shareholder gives 14 days’ notice to the directors about their intention to sue.
 The directors do not act to address the issue.
 The shareholder is acting in good faith.
 The action is in the corporation’s best interest.
The court can also make other orders, such as:
 Temporary relief while the case is ongoing.
 Giving control of the action to the complainant or another person.
 Providing directions for the case.
 Ordering the corporation to pay legal fees of the complainant (OBCA, s. 247;
CBCA, s. 240).

4.5.3 Oppression
The OBCA (s. 248) and CBCA (s. 241) right to seek court relief if a corporation/Directors
 Oppressive (harsh or unfair).
 Unfairly prejudicial (causing disadvantage).
 Unfairly disregards interests (ignoring rights of stakeholders).
Can include shareholders, creditors, directors, and officers. Defined broadly,
The oppression remedy is broad and can now address issues that previously required personal
or derivative actions.
If directors/majority shareholders act unfairly toward minority SH, the oppression remedy
forces them to act fairly, though they don’t have a legal fiduciary duty under common law.

Key points from the case of Rea v. Wildeboer: OPPRESSION REMEDY

 A shareholder must show they suffered personal harm that is different from the
harm done to the corporation.
 The focus of the oppression remedy is how the conduct affects the complainant
personally, not the corporation.
 If the case benefits the corporation, it should be pursued as a derivative action,
which requires court permission.
 In small, closely-held corporations, claims can sometimes be made under either
remedy if the harm directly affects the complainant differently from other
shareholders.
The court confirmed that while both remedies can apply, they serve different purposes, and
shareholders must choose the right action based on their situation.
Chapter 22 Shareholder agreements
What is a shareholder agreement?
• A Contract that must meet fundamental legal requirements: offer,
acceptance, consideration, capacity, and legitimate purpose.
• These agreements govern relationships between shareholders and
sometimes between shareholders and the corporation.
• (OBCA) addresses some types of shareholder agreements:
Written agreements between two or more shareholders on exercising
voting rights
(USAs) that restrict directors' powers to manage the corporation
• A USA can also be created by a sole shareholder's written declaration
restricting directors' powers.
• When principals own shares through holding companies or trusts, it's advisable
to make them direct parties to the shareholder agreement to ensure their
holding companies fulfill shareholder obligations

2. What shareholder agreements do

• They establish how shareholders will vote their shares, often to elect
specific directors.
• Can restrict share transfers and give existing SH rights of first refusal on
share sales.
• May grant pre-emptive rights to purchase new shares before they're offered
to others.
• They can give major shareholders approval rights over significant
transactions like selling the company.
• Provide for shareholders to receive additional financial information about
the company.
• (USAs) can restrict directors' powers to manage the company.
• USAs may address voting, share transfers, issuing new shares, and dispute
resolution.
• In companies with a USA, shareholders take on the rights, powers, duties and
liabilities of directors to the extent the USA restricts directors' powers.
• New shareholders are typically bound by an existing USA unless they
acquired shares without notice of it.

3. Common provisions of a USA

3.1 The Parties- All shareholders must be part of the agreement for a USA to
work.
It is common to include the corporation as a party to the agreement.
3.2 Affairs of the Corporation- The agreement specifies how the directors can
manage the business..
3.3 Loans and Guarantees- How the corporation will be financed.
3.4 Share Issuances and Transfers- How shares are issued/transferred.
Common methods to control transfers are pre-emptive rights, shotgun clauses,
rights of first refusal, piggy-backs,&drag-alongs.
3.4.1 Pre-emptive Rights
This gives existing shareholders the first chance to buy new shares. Shareholders may also
have the option to buy more than their initial share if others do not take their full rights.
3.4.2 Shotgun Clauses
Allow sell their shares or buy another shareholder's shares. The selling shareholder sets a price in a
notice sent to others. The recipient can choose to buy or sell at that price.
Some agreements include a waiting period or penalty for not completing the sale to ensure fairness.
3.4.3 Rights of first refusal
• Give shareholders the first chance to buy shares from another shareholder who wants to sell
• "Hard right": Selling shareholder must have a firm offer from a third party first
• "Soft right": Selling shareholder can offer shares to other shareholders at a price they think is fair
• Can make it hard for shareholders to sell their shares to outsiders
3.4.4 Piggy-backs
• Protect minority shareholders. Requires selling shareholder to get an offer for all shareholders'
shares. Other shareholders can choose to sell their shares same price. Sometimes called co-sale rights
3.4.5 Drag-alongs
• Opposite of piggy-back rights. If most shareholders agree to sell, all shareholders must sell
• Helps majority shareholders sell the whole company

3.4.6 Disability/death/insolvency of a shareholder

• Agreement may require remaining shareholders or company to buy shares of disabled, dead, or
bankrupt shareholder
• Important to consider:
Where money for purchase will come from
How to determine share value
• Some agreements use insurance to fund share purchase
• "Fair market value" is often used but can lead to debates
• It's better to clearly state the share value or how it will be calculated

3.5 Family Law Act

• (Shares in a corporation generally form part of a spouse's net family
property under 3.5
• A court might order 1 spouse to give shares to the other during divorce.
Its Problematic
• Common-law spouses can't ask for shares under the FLA.
• Some shareholder agreements try to prevent this by:
Getting spouses to sign a waiver giving up rights to the shares. Requires ILA
for the waiver.
• OR make shareholders sell their shares if they get involved in an FLA case.
• If IT happens, the SH must prove within a set time (like 90 days) that the
divorce won't affect their shares.
• If can't prove this or conceal divorce case, the company or other SH can buy
their shares.
• The share price would be set the same way as if the shareholder had died.
Chapter 23 Share capital
• The corporation owns its assets, while shareholders own the shares.
• 1. Legal Nature of shares
Shareholders may have rights to receive meeting notices and financial
statements.
• Shareholders can inspect certain corporate records and meeting
minutes.
• Shares are generally transferable by the shareholder.
• Share transfers may be restricted by the corporation's articles, SH agreements,
or laws.
• Shares may give rights to: Dividends and Voting
• Share transfers may be limited by: corporation's articles, Shareholder
agreements or laws

2. Authorized capital
No of shares a corporation can issue according to its articles. (OBCA) requires
articles 2state
 Classes of shares the corporation can issue
 Maximum number of shares for each class (if any)
 Rights and conditions for each class if there's more than one
Unlimited shares offer more flexibility for future issuances.• Limited shares
require amending articles to issue more.• Reasons for limiting shares include
tax planning, conversion rights, or restricting future issuances.
3. Issued capital- part of authorized capital that has been given to
shareholders
4. Stated capital account- Each class and series of shares needs its own
stated capital account.The account records money received for issuing
shares and any changes
• When shares are issued for property or service, directors must
decide:
 How much money the corporation would have gotten for cash
 The fair value of the property or service
• The lower of these amounts is added to the stated capital
account
5. Paid-up capital (PUC)
• It's the amount a private corporation can return to shareholders
without tax
• PUC per share is the total PUC for a class divided by the No of shares in
that class

5.1 General
• PUC is important for calculating tax on:
 Share redemptions or repurchases
  Corporate dissolutions
 Share capital reorganizations
• Amounts paid above PUC are usually taxed as dividends

5.2 Keeping PUC low

• Directors sometimes add less to stated capital account than what was received
for low tax
5.3 Differences between stated capital account and PUC
• Differences often occur in tax-deferred transfers of property to a corporation
Other important points:
• PUC is "internal" to the corporation, representing average issue price
• ACB is "external", representing what a shareholder paid for shares
• If directors add more to stated capital than the value received, the excess is
taxed as a dividend
• When transferring property for shares, be careful not to overvalue the
property
• Consider using a price adjustment clause in transfer agreements

5.6 Return of PUC

•If corporation redeems or repurchases share, the PUC can be returned to the
SH tax-free.
• If the PUC is greater than the shareholder's ACB, the excess may result in a
capital gain
• The capital gain would be the difference between the PUC and the
shareholder's
Key points:
• Stated capital and PUC are important for shareholders.
• Tax consequences can differ for shareholders who:
 Buy shares of the same class at different times
 Pay different prices for their shares

6. Preference shares (conditions are part of the corporation's articles.)

• Corporations may issue preference shares to raise capital.
• Preference shareholders get priority rights over common shareholders.
6.1 Preferential dividends-Often give holders the right to receive dividends b4
common SH
• These dividends are usually fixed amounts paid on set dates
• They get extra dividends if the company performs well
6.1.1 Cumulative dividends: If unpaid, they add up and must be paid later
• Non-cumulative dividends: If unpaid, they're lost forever
• Share conditions should clearly state which type it is.
6.2 Liquidation preference• Preference shareholders usually get their money
back before common shareholders if the company closes
• This preference must be clearly stated in the share conditions
• It may include unpaid dividends and sometimes extra money
6.3 Conversion• Some preference shares can be changed into other types
of shares, usually common shares. The conversion rate is set in advance.
6.4 Redemption or purchase of shares• Might have the right 2buy back
preference shares
6.5 Voting-Preference shares may or may not include voting rights.might get
extra voting
6.6 Pre-emptive rights-Preference SH buy new shares to keep their % of
ownership
7. Issuing shares in series
•Create different series of shares within same class 4flexibility in pricing &
dividend rates
• Directors can issue new series without shareholder approval
• All series in a class must be equal in dividends & return of capital if the
company closes
8. Changing shareholder rights
• Changes to share structure require articles of amendment
• Special authorizations may be needed for multiple share classes
• Shareholders may have dissent rights to sell shares back at fair value
9. Other convertible securities
• Articles may need amendment to ensure enough shares for
conversion
• Warrants, options, and rights to acquire securities are allowed
10. Share capitalization advantages and disadvantages
10.1 Advantages to corporation:
• No repayment obligation
• No commitment to pay dividends 10.2 Disadvantages to corporation:
• Dividends not tax-deductible
• May need attractive preferences to sell shares
• Possible ownership dilution
10.3 Advantages to shareholders:
• Share in profits
• Potential increase in share value
• Possible capital gains treatment
• Priority for dividend payment (preference shares)
• Possible redemption or repurchase
• Tax benefits on dividends
• Voting rights
• Say, in fundamental changes
• Access to certain remedies
10.4 Disadvantages to shareholders:
• No guarantee of dividends
• No investment security
• Lower priority than creditors
• Possible restrictions on share transfer

11. Corporation acquiring own shares

11.1 Introduction:• Corporations can buy back shares, subject to solvency
tests
Purchase price negotiated, unlike redemption or retraction
11.2 Private contract purchase:
• Governed by OBCA section 30 • Prohibited if corporation can't meet solvency
test
• Some exceptions allowed
11.3 Purchase or redemption per share conditions:
• Allowed under OBCA section 32 • Subject to solvency test
11.4 Tax consequences:• Similar for repurchase, redemption, or retraction
• May result in deemed dividend and capital gain/loss • Different from
selling to 3rd party
key points:•
When a corporation redeems shares, it's treated as both a dividend and a
sale for tax purposes.• The shareholder receives a deemed dividend equal to
the redemption amount minus the paid-up capital (PUC) of the shares.• The
deemed dividend is taxable to the shareholder.• The redemption is also
considered a sale of the shares:
 Proceeds of disposition = Redemption amount - Deemed dividend
 Capital gain/loss = Proceeds of disposition - Adjusted cost base (ACB)
 The deemed dividend is taxed immediately
 The capital loss may only be usable in future years when capital gains
occur
11.Tax consequence. The tax treatment aims to balance dividend taxation
and capital gains/losses recognition.

1. A share redemption is also treated as a sale or disposition of property for tax purposes.
2. The shareholder will realize a capital gain or loss based on the difference between the
proceeds of disposition and the ACB.
3. To prevent double taxation, the ITA adjusts the proceeds of disposition by subtracting the
deemed dividend amount, so it isn't taxed again as a capital gain.

Tax Rules for Capital Losses

1. Taxpayers can only deduct capital losses against capital gains, as per the ITA.
2. This creates a timing issue because the deemed dividend is taxed immediately, but capital
losses can only be used when there are capital gains.

12. Security Certificates, Registers, and Related Matters

12.1 Security Certificates
1. A corporation under the OBCA can issue either certificated or uncertificated securities
(OBCA, s. 54(1)).
2. The board decides this unless the articles specify otherwise (OBCA, s. 54(2)).
3. OBCA private corporations may issue certificates if requested by investors, especially during
financing.
4. For public OBCA corporations, securities are often uncertificated and held electronically
through clearinghouses like the Canadian Depository for Securities.
5. In Ontario, uncertificated securities are governed by the Securities Transfer Act (STA).

12.2 Securities Register

1. OBCA corporations must maintain a securities register and a register of transfers for
securities issued in registered form (OBCA, s. 141; STA, s. 1(1)).

12.3 Register of Individuals with Significant Control (ISC Register)

12.3.1 Definition of Individuals with Significant Control
1. Under OBCA, an individual has significant control if they:
o Own or control 25% or more of voting shares.
o Own or control 25% or more of shares based on fair market value (FMV).
o Have influence that gives them actual control over the corporation.
2. 2 or more individuals can jointly have significant control if they share their interests or act
together (OBCA, s. 1.1(4)).

12.3.2 Contents of the ISC Register

The ISC register must include:
 Name, date of birth, and last known address.
  Jurisdiction of residence for tax purposes.
 The date the individual gained or lost significant control.
 How the individual exercises significant control (e.g., description of shares or rights).
 Any other prescribed information.
 Steps taken by the corporation to identify individuals with significant control.
 Updates at least once per financial year or within 15 days of new information.

12.3.3 Access to the ISC Register

1. The ISC register is not public.
2. It can only be disclosed for law enforcement, tax, or regulatory purposes (OBCA, s. 140.3).

12.3.4 Penalties for Non-Compliance

1. Corps that fail to maintain an ISC register without reasonable cause may face up 2 $5k fine.
2. Directors and officers may be fined up to $200k, imprisoned up to 6 months, or both, if they:
o Authorize or allow non-compliance with ISC rules.
o Record false information in the ISC register.
o Provide false information about the ISC register.
3. Shareholders who fail to provide accurate information may face the same penalties.

Chapter 24: Corporate Changes

This chapter explains corporate changes under (OBCA) and the (CBCA).

1. Articles
1.1 Amending Articles – Process
1. The general rule is that Articles of incorporation can only be amended by a special
resolution (OBCA, s. 168; CBCA, s. 173).
o A special resolution requires approval by at least two-thirds of shareholder votes at
a meeting or written consent from all voting shareholders.
2. Amendments can be proposed by directors or any voting shareholder (OBCA, s. 169(1);
CBCA, s. 175(1)).
o Shareholder proposals do not require approval from the directors.
3. The meeting notice must include the text of the proposed amendment (OBCA, s. 96(6)(b);
CBCA, s. 135(6)(b)).
4. If the amendment allows dissent rights, the notice must inform shareholders they are entitled
to fair value for their shares (OBCA, s. 169(2); CBCA, s. 175(2)).
5. Changes to share restrictions or business restrictions trigger dissent rights for shareholders
(OBCA, s. 185(1)(a)–(b); CBCA, s. 190(1)(a)–(b)).
6. Shareholders who dissent and invoke their appraisal rights must have their shares purchased
by the corporation at fair value (OBCA, s. 185; CBCA, s. 190).
7. Non voting SH cant raise the proposal
8. Reporting issuers must solicit proxies and issue an information circular (OBCA, ss. 111–112;
CBCA, s. 150).
o Small corporations may avoid meetings if all voting shareholders sign a written
resolution (OBCA, s. 104(1); CBCA, s. 142(1)).
9. Shareholders of each class of shares affected by a proposed amendment must vote separately
(OBCA, s. 170(1); CBCA, s. 176(1)).
10. After approval, the articles of amendment must be submitted to the OBCA or BCA
Director, who issues a certificate of amendment.
o OBCA Directors are appointed by the Minister of Public and Business Service
Delivery, while CBCA Directors are appointed by the Minister of Innovation,
Science and Industry.
11. Directors can revoke a resolution to amend articles before it is acted upon, avoiding
unwanted purchases of dissenting shares (OBCA, s. 168(3); CBCA, s. 173(2)).
 12. Under the OBCA, the certificate is endorsed on the articles of amendment. Under the CBCA,
the certificate is a separate page to which the articles of amendment are attached.
13. Some changes, like altering the registered office or first directors, can be made through
simple notices instead of amending articles (OBCA, ss. 14(3)–(4)). Except its outside the
province
14. Directors may independently amend articles to change a corporation’s number name to a
non-number name (OBCA, s. 168(4); CBCA, s. 173(3)).
15. Articles can authorize directors to fix the number of shares in a series and their rights. Once
finalized, the articles must be amended to designate the series (OBCA, s. 25(4); CBCA, s.
27(4)).
16. The gen rule of special resolution can be changed if you have mentioned it in the Articles.
17. Articles can require a higher voting threshold than a special resolution for certain
amendments (OBCA, s. 5(4); CBCA, s. 6(3)).

1.2 Change of Corporate Name

1. Changing a non-number name requires a special resolution from shareholders.
2. An OBCA corporation cannot change its name if it cannot pay its liabilities or its liabilities
exceed its assets (OBCA, s. 171(3)).

1.3 Increase in Authorized Capital

1. Articles must be amended if the corporation wishes to issue shares beyond its authorized
capital or create a new class of shares (OBCA, s. 168(1)(d); CBCA, s. 173(1)(d)).

1.4 Change in Number of Directors

1. Amending the fixed, minimum, or maximum number of directors requires an amendment
to the articles (OBCA, s. 168(1)(m); CBCA, s. 173(1)(m)).

2. By-laws
1. Purpose of By-laws:
o By-laws set rules for corporate operations, including document execution, meeting
procedures, and the roles of officers and committees.
2. Amending By-laws:
o Directors can make, amend, or repeal by-laws, which take effect immediately but
must be approved or rejected at the next shareholder meeting (OBCA, s. 116(1);
CBCA, s. 103(1)).
o Shareholders may also propose changes to by-laws without directors’ approval.
o Shareholders with no voting rights cannot ask for changes
o Is effective on the day it was repealed, made, or amended.
o Ceases to be effective on the day of the mtg if rejected by SH
3. Voting Thresholds:
o By-laws are generally approved by an ordinary resolution (simple majority).
o Articles or unanimous shareholder agreements (USA) can set higher voting
requirements.
4. Confidentiality:
o By-laws and USAs are not public unless required by securities laws for reporting
issuers.

3. Continuance
1. Corporate Continuance
 Corporate laws, such as the OBCA and CBCA, allow a corporation to move from one
jurisdiction (export jurisdiction) to another (import jurisdiction).
 The corporation can only move if the export jurisdiction allows it to leave and the
import jurisdiction agrees to accept it.
  A continuance can also be used to switch from one corporate law to another within
the same jurisdiction.

2. Tax Implications within Canada

 When a corporation moves between jurisdictions within, no income tax issues arise.

3. Tax Implications for Moving Outside Canada

 Moving a corporation from Canada to another country (corporate emigration) has
important tax consequences.
 The Income Tax Act (ITA) has special rules for corporations moving to Canada
(Foreignco) (ITA, s. 128.1), which include:
o The corporation's fiscal period ends and a new one begins.
o The corporation is considered to have sold and repurchased all its property
at fair market value (FMV) before moving.
o If Foreignco owns shares in a Canadian corporation, the Canadian
corporation is considered to have paid a dividend to Foreignco.
o The dividend amount is the difference between the share’s FMV and its paid-
up capital (PUC).
o Dividend is subject to non-resident withholding tax under Part XIII of ITA.

3.1 Import Continuance from Another Jurisdiction

1. To continue under the OBCA or CBCA, a corporation must:
o Prepare articles of continuance with details about the exporting jurisdiction and
obtain authorization from that jurisdiction.
o Align its charter documents with the laws of the new jurisdiction.
2. Articles of continuance must be submitted with supporting documents, including:
o Certified copies of the original incorporation documents.
o Authorization from the export jurisdiction.
o For non-Canadian corporations, a legal opinion confirming the move is allowed.
o Payment of fees.
3. If the corporation changes its name during continuance, it must include a name search
report unless the new name is a number name.
4. After obtaining a certificate of continuance, the corporation must register or license itself in
other provinces where it operates.

3.2 Export Continuance to Another Jurisdiction

1. To continue in another jurisdiction, the export jurisdiction must first give permission.
2. Shareholders must pass a special resolution authorizing:
o The application for a certificate of continuance in the import jurisdiction.
o The request to the OBCA or CBCA Director for permission to continue.
o Changes to the corporation’s Article to meet the requirements of the new jurisdiction.
o Directors and officers to take steps to implement the resolution.
3. The resolution can allow directors to cancel the application if:
o Reasons for continuance change.
o Issues arise in the import jurisdiction.
o Too many shareholders dissent and request their shares to be bought back.
4. Notices sent for shareholder meetings must include information on dissent rights, but
failure to do so doesn’t invalidate the continuance approval.
5. Applications to the OBCA Director must use Form 7 and ensure:
o The corporation’s filings under the Corporations Information Act (CIA) are up to
date.
o A consent letter from the Ontario Ministry of Finance confirms no unpaid taxes.
 o If applicable, a consent letter from the Ontario Securities Commission (OSC)
6. For continuance outside Canada, a legal opinion is needed to confirm:
o The corporation’s assets and liabilities remain intact.
o Ongoing legal actions and enforcement rights are unaffected.
7. The application must include all required documents and the appropriate fee.
8. If the OBCA Director approves, the endorsement expires in 6 months unless the continuance
is completed.
9. Once the import jurisdiction issues a continuance certificate, it must be filed with the OBCA
Director within 60 days.
10. The OBCA ceases to apply once the corporation is continued in the new jurisdiction.

4. Amalgamations
4.1 Corporate Aspects
4.1.1 Long-Form Amalgamations
1. Amalgamation-2 or more corps into 1, called Amalco, &continues as a single legal entity.
2. All assets, liabilities&obligations of amalgamating corporations are transferred to Amalco.
3. If the corporations follow different laws, one must continue under the other’s jurisdiction
before filing for amalgamation.
4. Amalco can use the name of one amalgamating corporation or adopt a new name with
proper approvals.
5. Amalco cant use any of the old numbers
6. An amalgamation agreement is required, specifying:
o The terms of amalgamation.
o Shareholder compensation (money or securities).
o Amalco’s by-laws and management details.
7. Shares held by one amalgamating corporation in another must be cancelled.
8. The agreement must be approved by each corp’s BOD and SH through a special resolution.
9. Dissenting shareholders get fair value for their shares cuz they dissented
10. Once finalized, it must be conditionally approved by the BOD of each amalgamating
corporation and then submitted to SH for special approval with special resolution
(OBCA, ss. 176(1) and (4); CBCA, ss. 183(1) and (4)).
11. Non Voting SH may not dissent. Under CBCA, all SH are entitled to vote on an
amalgamation (CBCA, s. 183(3).
12. Separate class or series votes may be required for certain shareholders.

4.1.2 Short-Form Amalgamations

1. Short-form amalgamations don’t require shareholder approval or an agreement.
2. Types of short-form amalgamations:
o Vertical Amalgamation: Between a parent and subsidiary.
3. All shares of amalgamating subsidiary corporations are cancelled
without capital repayment.
4. Amalco adopts the by-laws of the amalgamating holding
corporation.
5. Articles are same as the holding corporation's, except as prescribed by
regulations.
6. No securities are issued or assets distributed by Amalco during the Almag
process.

o Horizontal Amalgamation: Between two wholly owned subsidiaries.

7. In a horizontal short-form amalgamation, the shares of all but one of

the amalgamating subsidiary corporations are cancelled.
 8. This cancellation occurs without any repayment of capital for those
shares.
9. The shares of one subsidiary corporation are retained, and this
corporation's articles become the articles of the amalgamated
company.
10.The stated capital of the cancelled shares is added to the stated
capital of the surviving corporation.
11. This process simplifies the amalgamation by eliminating
duplicate share structures and consolidating capital into a single
entity.
12.It is designed for non-arm's length entities under common ownership,
allowing for a streamlined merger process without complex share
exchanges or capital reorganizations.
13. Resolutions by the directors must include:
o Cancellation of subsidiary shares without repayment.
o Amalco’s by-laws and articles remain the same as the parent or one subsidiary.
o No new securities or asset distributions occur.

4.1.3 Post-Approval of Amalgamation

1. After approvals, articles of amalgamation must be filed with the OBCA or CBCA Director.
2. A director or officer must certify that:
o The corporation is solvent.
o Creditors are not prejudiced, or creditors were notified, and no valid objections
remain.
3. The Director issues a certificate of amalgamation upon receiving
required information.
Post-amalgamation proceedings follow the certificate's issuance.
New by-laws may need to be adopted.
Directors must pass resolutions to:
a. Appoint officers
b. Approve banking arrangements
c. Adopt share certificate forms
d. Adopt a corporate seal (if any)
Directors must authorize provincial registrations or licensing applications
where Amalco will operate.
4. Once the Director issues a certificate of amalgamation, Amalco must:
o Register the certificate in land registries and intellectual property offices.
o Notify creditors, customers, suppliers, and government agencies.
o Update banking arrangements, appoint officers, and adopt by-laws if needed.

4.2 Income Tax Aspects

4.2.1 Deemed Year-End
1. For Tax, Amalco is treated as new entity starting new tax year on day of amalgamation.
2. Each predecessor corporation’s tax year ends the day before amalgamation, requiring
separate returns for this short period (“stub period”).

4.2.2 Tax Deferral

1. Canadian law allows tax deferral under the rollover rules in the ITA (s. 87) if:
o All assets and liabilities transfer to Amalco.
o Shareholders of the predecessors receive shares in Amalco.
o When corp’s acquiring another corps ppty like Winding up cant enjoy sec 87 rollover
 2. If these conditions aren’t met, shareholders are taxed on gains from their predecessor
shares based on fair market value.
3. Short-form and triangular amalgamations also qualify for the rollover if requirements are
satisfied.
4. Tax deferrals apply only to shares held as capital property. Shares owned by predecessor
corporations in another are excluded
5. As well, the following requirements must be satisfied on the amalgamation:
Transfer of Property and Debts:
o All assets (property) of the old companies become the assets of
Amalco.
o All debts (liabilities) of the old companies become the debts of
Amalco.
o This does not include money owed between to each other, i.e
the old companies or shares one old company holds in
another.
Shareholder Rights:
o All shareholders of the old companies must receive shares in
Amalco.
o The exception is if an old company holds shares in another
old company.
6. The parent shares received by shareholders are deemed to be shares of
the new corporation for certain purposes
7. This structure allows the amalgamation to qualify under subsection 87(1)
of the ITA
8. Triangular amalgamations: In this type, shareholders of the predecessor
corporations receive shares of a parent corporation instead of shares of
the newly formed amalgamated company (Amalco)
Under Section 87 of the ITA: Shareholders and Amalgamations
1. Shareholders of predecessor corporations are treated as if they sold their old shares (Former
Shares) for the same value as their Adjusted Cost Base (ACB).
2. They are considered to have acquired new shares in Amalco (New Shares) at a cost equal to
the ACB of their Former Shares.
3. As a result, there are no deemed dividends, capital gains, or capital losses.
4. If shareholders owned multiple classes or series of shares, the ACB of Former Shares is
divided among the New Shares based on their Fair Market Value (FMV) (ITA, s. 87(4)(b)).
5. The Canada Revenue Agency (CRA), however, states that the ACB allocation rule (s. 87(4)
(b)) does not apply when:
o Preferred and common shares in the predecessor are converted into the same type in
Amalco.
o In short-form amalgamations, the issued shares of one predecessor corporation
become the shares of Amalco.

PUC (Paid-Up Capital) in Amalgamations

1. The PUC of new shares in Amalco is equal to the total PUC of the Former Shares.
2. Shares held between predecessor corporations are excluded from the new PUC.

Example 2: PUC of Shares

1. If Corporation A’s PUC is $50 and Corporation B’s PUC is $100, Amalco’s PUC will equal
$150.
2. If Corporation A is owned by Corporation B, Amalco’s PUC will be $100, as inter-corporate
holdings are eliminated.
Non-Capital and Capital Losses in Amalgamations
1. Non-capital and net capital losses of predecessor corporations can generally be carried
forward by Amalco, subject to carryover periods.
2. Post-amalgamation losses cannot be carried back to offset pre-amalgamation income
unless it’s a vertical short-form amalgamation. Exception: In vertical (Between
parent and subsidiary) short-form amalgamations, Amalco's losses can be
carried back to the parent's income for up to 3 years and 20 yrs forward.
3. Capital losses of a predecessor corporation are canceled if there is a change in control..

Other Tax Rules in Amalgamations

1. Tax accounts, like depreciable property and reserves, transfer to Amalco.
2. Amalco inherits the tax treatment of the predecessor corporation’s assets, such as
undepreciated capital costs (UCC).
3. A vertical amalgamation may allow Amalco to increase the tax cost of certain capital
property for future tax planning.

5. Arrangements and Reorganizations

5.1 Corporate Aspects
1. An arrangement under the OBCA (s. 182(1)) and CBCA (s. 192(1)) includes:
o Reorganizing share capital.
o Changing corporate articles.
o Amalgamations or transferring all property to another corporation.
o Exchanging securities for money, property, or other securities.
o liquidation or dissolution of a corporation;
o any other reorganization or scheme that, at law, is an arrangement; or
o any combination of the foregoing.

2. Arrangements must be approved by a special resolution and may require class or series
votes. OBCA requires it, CBCA doesn’t but its recommended
3. The Companies' Creditors Arrangement Act (CCAA) and Bankruptcy and
Insolvency Act (BIA) allow for arrangements when a corporation is
bankrupt or insolvent.
These arrangements may include:
o Delaying repayment dates
o Changing interest rates
o Accepting shares instead of money for interest
o Changing repayment priorities
4. If approved by the required majority of creditors and a court, the
arrangement becomes binding on all creditors.
5. Arrangements may require changes to the corporation's articles,
called a "reorganization."
6. Articles of reorganization are issued under section 186 of the OBCA or
section 191 of the CBCA.
7. Courts can issue articles of reorganization in connection with BIA or CCAA
proposals.
8. Shareholders have no dissent or appraisal rights for
reorganization-related article amendments.
9. Articles of reorganization(changes in articles of incorporation) can also be
issued to remedy oppression or unfair prejudice to shareholders.

5.2 Income Tax Aspects

1. Tax consequences depend on how the arrangement is structured (e.g., as an amalgamation or
share reorganization).
 2. Where an arrangement is carried out as a reorganization of the share capital of a corporation,
the provisions in s. 86 of the ITA may provide rollover treatment
3. Section 86 of the ITA provides rollover rules for share reorganizations where:
o Former Shares are exchanged for New Shares.
o The ACB of Former Shares transfers to New Shares.
4. If New Shares are of different classes, the ACB is divided based on FMV
5. Under s. 86, a shareholder must:
 Dispose of all shares (Former Shares) of a particular class in a corporation that are
capital property to the shareholder.
 Receive consideration from the corporation that includes new shares (New Shares)
of the same corporation.
 Receive other property or non-share consideration in addition to the New Shares.
6. If the requirements of s. 86 are met:
 The cost of any non-share consideration received by the shareholder is deemed to be
its fair market value (FMV).
 The cost of any New Shares is determined by subtracting the FMV of the non-share
consideration from the aggregate adjusted cost base (ACB) of the Former Shares.
 If multiple classes of New Shares are issued or converted, the shareholder's ACB is
divided among the classes based on the FMV of the New Shares received.
 The shareholder is considered to have received proceeds of disposition for the Former
Shares equal to the deemed cost of all New Shares and non-share consideration
received.

6. Going Private Transactions (GPT) and Squeeze-Out Transactions

6.1 Definition and Examples
1. A Going Private Transaction (GPT) is a merger, consolidation, or similar action that ends
a shareholder's interest in participating securities without their consent and without
replacing it with securities of equal value.
2. Participating securities typically refer to common shares or similar securities in
offering/distributing corporations.
Going Private Transactions (GPTs) in points:
3. Amalgamation squeeze-out: .A controlling shareholder eliminates
minority SH
o Uses two companies to create a new merged company
o Minority shareholders get redeemable shares, later exchanged for
cash
4. Share consolidation: .I own a corp, and say 500 shares means 1 share
and other smaller shares become a fraction. .Combines existing shares at
a high ratio
o Only major SH keep whole shares. Minority SH get cash for
fractional shares
5. Shareholder rights: .Can dissent from a GPT .May seek protection under
oppression
6. Regulatory oversight: Multilateral Instrument 61-101 provides rules for
protecting minority shareholders. .Applies to corporations in certain
Canadian provinces
7. Exemptions: . Some corporations may be exempt from certain
requirements
o Specific exemptions can be obtained from securities regulators
6.2 Tax Implications
1. Tax consequences of GPTs depend on the structure of the transaction.
o Amalgamation squeeze-outs may qualify for tax rollovers under ITA rules.
o Redemption or repurchase of shares follows tax rules for share transactions.

6.3 Requirements for GPTs

1. Obtain an independent valuation of the affected securities unless exempt (MI 61-101, s.
4.3(1)).
2. Secure approval from:
o A majority of of the minority votes from affected securities (excluding votes from
controlling shareholders and related parties).
o A special resolution if payment includes non-cash consideration or undervalued cash
consideration.
o An ordinary resolution for other cases.
3. Ensure that only votes from independent holders are counted when determining minority
approval.
4. Send a management information circular to affected security holders at least 40 days
before the meeting. The circular must include:
o A valuation summary and how to access the full valuation.
o Required approval types and affected securities’ details.
o A certificate from a senior officer confirming all material facts were disclosed.
5. Holders of affected securities can dissent and exercise rights for fair compensation or
challenge the transaction under oppression laws.

7. Stated Capital 7.1 Reduction in Stated Capital

7.1.1 Corporate Considerations
1. Stated capital is tracked separately for each class or series of shares and records the full
consideration received for shares.
2. A corporation can reduce stated capital without amending its articles if:
o A special resolution is passed.
o The corporation meets solvency tests.
3. Shareholders of a class affected differently must vote separately on the proposal to reduce
stated capital.
7.1.2 Tax Considerations
1. Reducing stated capital has tax implications under ITA rules:
o Stated capital is the base for calculating Paid-Up Capital (PUC).
o Reducing PUC triggers a deemed dividend if the amount paid exceeds the PUC.
o Any tax-free return of capital reduces the shares' ACB.
o If the reduction makes the ACB negative, a capital gain is realized.

(a) Private Corporation

Tax consequences when a corporation reduces its Paid-Up Capital (PUC):
Anything you pay more than the PUC is deemed dividend and its taxed at
50%
 This applies under Section 84(4) of the Income Tax Act (ITA).
2. For Canadian corporations:The deemed dividend is subject to the
dividend gross-up and Dividend tax credit mechanism,even if no
actual money is distributed.
(b)Public Corporation.
Total amount paid is deemed dividend and tax is paid on the entire
thing, 100%
SH pays taxes on all deemed dividend. No ACB reduction. Exceptions:
Public corps can only distribute tax-free returns of capital in specific
circumstances, such as proceeds from transactions outside the ordinary
course of business.
Purpose: These rules aim to prevent public corporations from distributing funds
to shareholders as tax-free returns of capital instead of taxable dividends

7.2 Redemption, Cancellation, and Purchase of Shares

7.2.1 Corporate Considerations
1. A corporation can redeem or purchase its shares unless prohibited by its articles.
2. Redeemable shares are paid at a price set in the articles or by a formula.
3. Shareholders must surrender redeemed shares in exchange for payment.
4. Share purchases may trigger takeover or issuer bid rules.
5. A corporation cannot redeem or purchase shares if it fails solvency tests.

6. A corporation can redeem, purchase, or acquire its shares without a shareholders'

resolution unless the articles state otherwise; a directors' resolution is enough to
approve the action.

7.2.2 Tax Considerations

1. Redeeming shares may trigger a deemed dividend if the redemption price exceeds the PUC.
2. Share redemption is also treated as a property sale, with gains or losses calculated as:
o Adjusted proceeds of disposition (redemption price minus deemed dividend)
minus ACB. This helps avoid paying double tax
3. To prevent double taxation, deemed dividends reduce proceeds of disposition for calculating
capital gains.

7.3 Increase in Stated Capital

(a) Corporate Considerations
1. A corporation can increase stated capital by issuing a stock dividend:
o New shares are issued as payment for a dividend.
o Under the OBCA: The value of the stock dividend is added to the stated capital
account for the share class issued.
o Under the CBCA: The declared amount of the stock dividend is added to the stated
capital account.
2. Stated capital can also be increased by capitalizing surplus:
o A special resolution is required if:
 The added amount wasn’t received as payment for shares.
 The amount relates to surplus or other accounts.
 There is more than one class of outstanding shares.

(b) Tax Considerations

1. For tax purposes, stock dividends are treated like cash dividends:
o Shareholders include the value of the dividend in income.
o The ACB of the new shares equals the dividend amount.
2. Section 55 of the ITA may apply if the stock dividend:
o Reduces the fair market value (FMV) of other shares.
o Increases the cost of the recipient’s property.
3. When stated capital increases, the ITA considers it a deemed dividend:
o Applies to the shares of the affected class.
o All shareholders in that class are deemed to receive a pro-rata share of the dividend.
4. To prevent double taxation:
o The deemed dividend amount is added to the ACB of the shares.
8. Asset Purchases from Shareholders
1. Common reasons to transfer assets to a corporation include:
o Deferring personal taxes on business earnings.
o Passing future asset growth to family members.
o Preparing for business succession.
o Gaining limited liability protection.
2. This is often done by transferring assets in exchange for preferred shares with a fixed value,
while future growth benefits common shareholders.
3. Estate freeze basics:
o Transfer assets to a corporation in exchange for fixed-value
preferred shares
o Current value is "frozen" in these preferred shares
o Future growth accrues to common shares, often held by family
members
4. Government concerns:
o "Income sprinkling" through private corporations to lower-taxed
family members
o Widened Tax on Split Income (TOSI) rules in 2018 to address this
5. TOSI impact:
o Can apply to dividends and some capital gains received by family
members
o May prevent family members from using the capital gains
exemption
6. Tax-deferred transfers (Section 85 rollover):
o Allows transfer of assets to a corporation without immediate tax
o Transferee corporation assumes the transferor's cost basis
7. Requirements for tax-deferred transfer: Other requirements for a s. 85(1) rollover
include the following:
o File joint election form (T2057) with CRA
o Eligible transferor and transferee corporation
o Only certain assets qualify
o Transferor must receive at least one share in the transferee
corporation amongst other thing like money etc
8. Purpose of rollovers:
o Permit asset transfers and reorganizations without immediate tax
consequences
o Defer, not avoid, income tax to a later date
9. Non-arm's length transfers without election:
o Deemed disposition at fair market value
o Can trigger immediate income tax consequences

8.2 Tax-Deferred Transfers (Section 85 Rollover)

Requirements
1. To qualify for a tax-deferred transfer, the following must occur:
o Both parties must file Form T2057 with the CRA.
o The transferor must receive at least one share of the transferee corporation.
85 rollover is available to taxpayers that are an eligible transferor and an eligible transferee.
-Eligible parties:
o The transferor can be any taxpayer, including individuals, corporations, or trusts.
o The transferee must be a taxable Canadian corporation (incorporated or resident in
Canada and not tax-exempt).
2. Eligible property:
 o Includes capital property (e.g., land, machinery), inventory (excluding real
property), and resource properties used in Canada.
3. Since a partnership is not a taxpayer under the ITA, it is not an eligible transferor for a s.
85(1) rollover of property to a corporation. Instead, a partnership may transfer property to
a corporation on a rollover basis under s. 85(2) of the ITA. (when a partnership dispose
ppty to corp and consideration includes shares of the stock, at least 1 share)

Process and Elected Amount

1. The elected amount:
o Becomes the transferor’s proceeds of disposition.
o Sets the transferee’s cost for the asset.
2. The elected amount must:
o Be no greater than the asset’s FMV.
o Be no less than the asset’s FMV or its tax cost, whichever is lower.
3. If non-share consideration (e.g., cash) exceeds the tax cost, it triggers a taxable event.

8.3 Example: Equipment Transfer

1. Equipment with:
o FMV = $100.
o Tax cost (UCC) = $50.
2. If the transferor receives:
o Non-share consideration = $80 (e.g., a promissory note).
o The elected amount = $80.
3. Tax result:
o $80 elected amount minus $50 UCC = $30 recaptured depreciation, taxed as income.

8.4 Tax Rules for Consideration Received

1. The elected amount is allocated as follows:
o Non-share consideration: ACB equals FMV.
o Special shares: ACB is the lesser of FMV or elected amount minus non-share
consideration.
o Common shares: ACB is the elected amount minus the ACB of non-share
consideration and special shares.
2. The ITA prevents abuse of tax deferrals through additional rules, ensuring tax benefits are
legitimate.

To fully achieve a tax-deferred rollover under section 85(1) of the Income Tax
Act:
 The parties select an "elected amount" equal to the transferor's
cost amount for tax purposes of the transferred asset(s)
 This elected amount becomes the proceeds of disposition for the
transferor and the cost basis for the transferee corporation
 By setting the elected amount at the asset's original cost base,
taxpayers can defer all gains and taxes
 The elected amount cannot be less than the cost amount of the
transferred property to the transferor
 For depreciable property, the cost amount is generally the undepreciated
capital cost of the class to which the property belongs
 For inventory, the cost amount is typically the cost at which the taxpayer
acquired the property
 For eligible capital property, the cost amount is generally 4/3 of the
cumulative eligible capital of the business
  The elected amount cannot exceed the fair market value of the
transferred property at the time of transfer
 If non-share consideration (boot) is received, its fair market value
cannot exceed the tax cost of the property transferred, or it will
trigger a capital gain
 The transfer must include at least some shares of the transferee
corporation as consideration
8.5 Limits on the Elected Amount
The tax rules in Section 85 impose limits on the elected amount chosen by the transferor and
transferee corporation for transferred assets. These rules ensure the parties do not gain extra tax
benefits beyond deferring income tax or capital gains.

8.5.1 Upper Limit- Not more than FMV it has to be less than FMV
1. The elected amount cannot exceed the fair market value (FMV) of the transferred assets or
non share concentration
o If the elected amount is set higher than FMV, it will be reduced to the FMV.
2. If the transferor receives consideration exceeding the FMV of the asset, additional tax
consequences may occur.
8.5.2 Lower Limit
(a) Lesser of FMV or Cost Amount
1. The elected amount cannot be lower than the lesser of:
o The asset’s FMV at the transfer date.
o The transferor’s tax cost (cost amount) for the asset.
2. If the elected amount is below this limit, it will be increased to meet the lower limit.
(b) Non-Share Consideration
1. The elected amount cannot be less than the FMV of non-share consideration (e.g., cash,
promissory notes) received.
Example 1
 If the non-share consideration has an FMV of $80, the elected amount must be at least $80.
 To defer tax, the non-share consideration must not exceed the asset’s tax cost.
Example 2
 A piece of equipment with:
o FMV = $100, UCC = $50.
 If the transferor receives non-share consideration of $80:
o The elected amount will be $80.
o This triggers $30 in recaptured depreciation (calculated as $80 - $50 UCC).

8.6 Transferor’s Cost Base of Consideration Received

1. The elected amount is key for determining the transferor’s cost base in shares or non-share
consideration received.
2. Allocation rules:
o Non-share consideration: Cost base = FMV of the non-share consideration.
o Special shares: Cost base = lesser of:
 FMV of the special shares, or
 Elected amount minus FMV of non-share consideration.
o Common shares: Cost base = Elected amount minus the cost of non-share
consideration and special shares.

8.7 Related Problems

8.7.1 Shareholder Benefit
1. If the FMV of consideration received by the transferor exceeds the FMV of the transferred
asset, a taxable benefit will be assessed under non-arm’s length rules.
8.7.2 Benefit to Non-Arm’s Length Person
1. If the transfer benefits a related shareholder (e.g., spouse or family member), the CRA may
assess the transferor for the shortfall in consideration received.
2. To address this, use a Price Adjustment Clause (PAC) in the transfer agreement or share
provisions:
o A PAC ensures the consideration is adjusted to match the FMV of the transferred
asset if the CRA finds a discrepancy.
o The CRA recognizes a PAC if:
 The FMV was reasonably determined (e.g., through an independent
appraisal).
 The CRA is notified about the PAC when the tax return is filed.

8.7.3 Paid-Up Capital (PUC)

1. Section 85(2.1) limits the PUC of shares issued to the elected amount minus the FMV of non-
share consideration.
2. If directors set the PUC higher, Section 85(2.1) automatically reduces it to the upper limit.

8.7.4 Double Taxation Risk

1. A Section 85(1) rollover can lead to potential double taxation:
o The elected amount becomes both:
 The transferor’s cost for the consideration received.
 The transferee’s cost for the asset.
o Both parties may realize the same income or gain later.
Example
 If the transferor sells the consideration later, they pay tax on deferred gains.
 If the transferee sells the transferred asset, they also pay tax on the deferred gains.
2. To mitigate double taxation:
o Ensure the tax-deferred rollover is beneficial despite the risk.
o Plan transactions carefully to reduce future tax implications.

8.8 Timing
1. The deadline to file Form T2057 is the earliest of the filing deadlines for the transferor’s or
transferee corporation’s tax returns for the year of transfer.
Example
 X (an individual) transfers assets to ACo on July 2, 2024.
o X’s tax return is due April 30, 2025.
o ACo’s return is due December 31, 2025.
o Form T2057 must be filed by April 30, 2025 (the earlier deadline).
2. Late filing is allowed up to three years after the due date, but penalties apply:
o The penalty is the lesser of:
 A fixed dollar amount per month.
 A percentage of the deferred gain.
3. Filing beyond three years requires approval from the Minister of National Revenue, who must
find the delay justifiable.

8 Late Filing of Form T2057

1. Late Filing
o Form T2057 can be filed late, but no later than three years after its due date.
o A late-filing penalty applies, which is the lesser of:
 A dollar amount per month, or
 A percentage of the deferred gain on the transferred asset(s).
2. After the Three-Year Period
o Filing after three years requires consent from the (MNR).
o The MNR will approve late filing only if the parties show:
  They tried to file within the allowed time.
 Circumstances beyond their control prevented timely filing.
3. Valid Late Filing
o If approved, the form is treated as valid but still subject to late-filing penalties.
4. Accuracy and Responsibility
o Tax practitioners or taxpayers must ensure Form T2057 is complete and accurate.
o Advisors must clarify who is responsible for filing the form.
5. Amendments
o The ITA does not allow amendments to Form T2057.
o The CRA may allow amendments in specific cases, such as typographical errors, but
the amended form is treated as a late-filed form and subject to penalties.

9 Share Purchases from Shareholders

9.1 Scenarios for Share Transfers
1. Shares can be transferred to:
o The same corporation (via share buybacks).
o Another corporation (e.g., a holding company).
2. Common reasons for these transactions include:
o Estate freezes.
o Protecting an operating company from creditors.
o Realizing a capital gain to use the Capital Gains Exemption (CGE), e.g., $971,190 for
qualified small business corporation shares (2023).
3. Such transactions can defer taxes using Section 85(1) of the ITA.

9.2 Section 84.1: Non-Arm’s Length Share Transfers

1. Deemed Dividend
o If shares are sold in a non-arm’s length transaction, and the transferee issues too
much non-share consideration (e.g., cash), the seller is deemed to receive a taxable
dividend.
2. Rules to Avoid Deemed Dividend
o Ensure the non-share consideration and the stated capital of issued shares do not
exceed the PUC of the transferred shares.
3. Arm’s Length Relationships
o Relationships are determined based on family ties, control, or factual circumstances
(ITA s. 251).
o Related parties (e.g., family members) are deemed non-arm’s length.
o Unrelated parties may also be deemed non-arm’s length if acting without separate
interests or commercial terms.
4. Examples
o Scenario 1:
 Facts: Erin sells shares of EBCo to BobCo (her brother’s holding company).
 Outcome: Erin receives a taxable dividend (cash paid exceeds PUC). She
cannot use the CGE since the transaction resulted in dividend income.
o Scenario 2:
 Facts: John sells shares of JCo to Cheryl’s company (CCo, owned by his
sister-in-law).
 Outcome: John is taxed on a deemed dividend equal to the FMV of the
promissory note over the PUC of his shares.

9.3 Bill C-208 Amendments to Section 84.1

1. Key Changes
o Effective June 30, 2021, s. 84.1 treats non-arm’s length sales to children’s or
grandchildren’s corporations as arm’s length in specific cases.
 o This allows parents/grandparents to claim the CGE on such sales.
2. Conditions for CGE
o The shares must be qualified small business corporation (QSBC) or family
farm/fishing property (QFFP) shares.
o The buyer corporation must be controlled by children or grandchildren (18+ years).
o The buyer corporation must hold the shares for 60 months (except for death).
3. Example
o Scenario: John sells QSBC shares of JCo to CCo, owned by his daughter Cheryl.
o Outcome: John realizes a capital gain and can claim the CGE. CCo must hold the
shares for 60 months.
4. Future Changes
o Bill C-208 lacked safeguards against abuse.
o The Department of Finance plans to introduce amendments to prevent unintended tax
avoidance.

10 Termination of a Corporation’s Existence

10.1 Methods of Termination
1. A corporation ceases to exist if:
o It is voluntarily dissolved.
o Its certificate of incorporation is canceled.
2. Insolvent corporations must liquidate under the BIA or WURA (not OBCA/CBCA).

10.2 Voluntary Dissolution

1. OBCA Process
o Authorized by a special resolution of shareholders or unanimous written consent.
o If no shares are issued, incorporators may authorize dissolution.
2. CBCA Process
o Requires a special resolution of each share class.
o If no shares are issued, directors must approve unanimously.
3. Pre-Dissolution Steps
o Pay off debts and obligations.
o Settle claims of missing creditors by paying the Public Guardian (OBCA) or Receiver
General (CBCA).
o Distribute remaining assets to shareholders based on rights and interests.
4. Final Filings
o File articles of dissolution.
o Submit final corporate tax returns and request clearance certificates (CRA Form
RC145).
5. Effects of Dissolution
o The corporation ceases to exist upon issuance of the certificate of dissolution.
o Legal proceedings can continue against a dissolved corporation, and shareholders
may be liable for distributed assets.

10.1.2 Liquidation
(a) Voluntary
1. Shareholders can vote by special resolution to voluntarily liquidate a corporation. This is
called a “voluntary liquidation” because it is approved by a super-majority of shareholders.
2. The procedures for liquidation are outlined in sections 193–205 of the OBCA and sections
210–211 of the CBCA.
3. In voluntary liquidation, a liquidator (not the directors) manages the corporation’s debts
and distributes any remaining assets to the shareholders.
4. Shareholders must appoint one or more liquidators, who can be directors, officers, or
employees of the corporation.
 5. Notice of the liquidation resolution must:
o Be filed with the Director within 10 days.
o Be published in the Ontario Gazette within 20 days.
6. After passing the resolution, the corporation must stop regular business operations, except
as necessary for the winding-up.
7. Any transfer of shares after the resolution is void unless approved by the liquidator.
8. The liquidator:
o Takes control of the corporation's assets.
o Sells assets and pays debts.
o Can negotiate with creditors, with shareholder approval.
9. Once the liquidation is complete, the liquidator:
o Calls a final shareholder meeting to present a winding-up report.
o Files report a with the Director and publishes notice in the Ontario Gazette.
10. The corporation is dissolved three months after the final filing, unless delayed or expedited
by a court order.
(b) Involuntary (Court-Ordered)
1. A court can order a corporation to be liquidated, regardless of shareholder approval.
2. Court-ordered liquidations are governed by sections 207–218 of the OBCA and sections 214–
225 of the CBCA.
3. Applications for court-ordered liquidation can be made by:
o A shareholder.
o A liquidator in a voluntary liquidation.
o A creditor owed $2,500 or more (OBCA only).
4. A court may order liquidation for reasons listed in section 207(1) of the OBCA or section
214(1) of the CBCA.
5. In court-ordered liquidations:
o The court oversees all proceedings.
o The corporation is dissolved after winding-up is complete.
6. Court-supervised liquidation is preferred if disputes or legal issues are expected.

10.1.3 Dissolution by Director

1. Under the OBCA, a corporation’s certificate can be canceled by the Director for reasons such
as:
o Failing to meet the minimum director requirement.
o Convictions for criminal or regulatory offenses.
o Oppressive conduct.
2. Under the CBCA, the Director can dissolve a corporation if it:
o Defaults on filings or fees for one year.
o Has no directors.
o Fails to start business within three years of incorporation.
o Ceases operations for three consecutive years.
3. Dissolved corporations can be revived.
4. Any property not disposed of before dissolution becomes property of the Crown.

10.2 Income Tax Aspects

1. A corporation’s winding-up or dissolution triggers two tax events:
o The corporation transfers its assets to shareholders.
o Shareholders dispose of their shares.
2. Tax implications vary depending on whether the dissolving corporation is a taxable Canadian
corporation and a wholly owned subsidiary.
10.2.1 General Winding-Up of a Canadian Corporation
(a) Corporation
1. A winding-up is treated as if the corporation sells all its assets at fair market value (FMV)
immediately before liquidation.
2. This can lead to income or capital gains, and taxes must be paid before asset distribution.
(b) Shareholders
1. Shareholders acquire assets at FMV and are deemed to dispose of their shares.
2. Shareholders may be taxed on deemed dividends if asset distributions exceed the paid-up
capital (PUC) of their shares.
3. Capital losses or gains depend on the adjusted cost base (ACB) of shares.

10.2.2 Winding-Up of a Wholly Owned (90%+) Subsidiary into Parent Corporation

1. A tax-free rollover under section 88(1) of the ITA applies if:
o The parent owns at least 90% of each class of the subsidiary’s shares.
o Any minority shareholders deal at arm’s length with the parent.
2. The rollover provisions only apply to property distributed to the parent.
(a) Subsidiary
1. The subsidiary is deemed to transfer assets to the parent at cost.
2. This avoids income or capital gains unless cost amounts change before distribution.
3. The CRA interprets “immediately before winding-up” as the time just before each asset
transfer.
(b) Parent
1. The rules in s. 88(1) state that when a subsidiary is wound up:
o The shares of the subsidiary owned by the parent are deemed disposed of for
proceeds equal to the higher of:
 The parent's ACB (Adjusted Cost Base) in the shares of the subsidiary before
the winding-up.
 The lower of:
 The PUC (Paid-Up Capital) of the subsidiary’s shares before the
winding-up.
 The value of the subsidiary’s property (cost amounts) plus cash on
hand, minus debts and certain tax reserves.
2. As a result:
o The parent’s proceeds of disposition must at least equal its ACB in the shares of the
subsidiary.
o This prevents d parent from realizing a capital loss on the subsidiary’s windingup.
o However, the parent may realize a capital gain if its ACB in the shares is less than
the PUC of the shares.
Example — PUC greater than ACB
 A parent owns shares in a subsidiary with:
o ACB: $800
o PUC: $1,000
 On winding up:
o The subsidiary has no debts, no cash, and no tax reserves.
o The cost amount of its assets is $1,500.
 The parent’s proceeds of disposition:
o Higher of:
 $800 (ACB of shares).
 Lower of:
 $1,000 (PUC of shares).
 $1,500 (cost amount of assets).
o Proceeds = $1,000, resulting in a capital gain of $200 ($1,000 - $800).
Planning
Advance planning can reduce or defer this gain, but details are beyond this summary.
 3. On winding up:
o The parent usually acquires the subsidiary’s assets at their cost amount.
o If the parent’s ACB in the shares exceeds the total cost of the subsidiary’s assets, the
parent may “bump
o ”
o the cost of certain non-depreciable assets (e.g., land, shares).
Conditions for Bump
 The asset must have been owned by the subsidiary when the parent acquired control.
 The increase cannot exceed the asset’s FMV at the time of the parent’s acquisition of control.
 The total increase for all properties cannot exceed their FMV when the parent last acquired
control.
Example — Bump in ACB
 A parent owns shares with:
o ACB: $800
 The subsidiary owns land with:
o ACB: $500
o FMV: $700 when the parent acquired control.
 On winding up:
o The parent’s ACB ($800) exceeds the land’s ACB ($500) by $300.
o The increase is limited to $200 (difference between FMV of $700 and ACB of $500).

10.3 Loss Carry-Forwards

1. The subsidiary’s losses may transfer to the parent if:
o Control does not change.
o Business continuation requirements are met.
2. The parent can only deduct the subsidiary’s losses in its tax year starting after the winding-up.
3. To avoid delays, the parent can elect to treat the subsidiary’s current-year losses as losses of
its preceding tax year.
Example — s. 88(1.1)(f)
 A parent with a November 30 year-end and a subsidiary with a December 31 year-end winds
up in October 2024.
 Without election:
o The subsidiary’s 2024 losses become available to the parent in November 2026.
 With election:
o The losses are treated as the parent’s 2025 losses.
 If parent and subsidiary have the same year-end, no delay occurs.

10.4 Other Taxes

1. Land Transfer Tax (LTT)
o Payable on the FMV of land transferred from the subsidiary.
o Deferral is possible by applying under s. 3(9) of the Land Transfer Tax Act.
o Certain conditions must be met for deferral.
2. HST
o Payable on goods and services transferred to the parent.
o The parent can claim input tax credits for HST paid if it is an HST registrant.

11. Revival and Forfeiture of Assets

11.1 Revival
1. A corporation dissolved for not filing returns can be revived within 20 years by filing:
o Articles of revival (Form 15) with a fee.
o Required consents from authorities.
2. Once revived, the corporation is deemed never to have been dissolved.
11.2 Forfeiture of Assets
 1. On dissolution:
o CBCA corporations’ assets are forfeited to the federal Crown.
o OBCA corporations’ assets are forfeited to the provincial Crown.
2. Recovery of OBCA assets is only possible if revival occurs within 3 years of dissolutio

Chapter 25: Application of Securities Laws

1. Introduction
1. A business (issuer) distributing securities in Ontario must follow the rules under the Ontario
Securities Act (OSA).
2. Securities must be distributed either through a prospectus or under an exemption from the
prospectus requirement.
3. Smaller issuers often use prospectus exemptions to raise capital before considering an
Initial Public Offering (IPO).

2. Regulatory Framework
2.1 Overview
1. Capital market regulation in Canada is handled provincially. In Ontario, the OSA applies.
 2. The OSA aims to:
o Protect investors from unfair practices.
o Promote fair, efficient, and competitive capital markets.
o Support capital formation and reduce systemic risks.
3. The Ontario Securities Commission (OSC) enforces the OSA and develops rules to maintain
market integrity.
4. The Canadian Securities Administrators (CSA) coordinates securities regulation across
provinces.
2.2 Prospectus Requirement
1. The prospectus requirement, in s. 53(1) of the OSA, prohibits trading in securities without
filing a prospectus unless an exemption applies.
2. Issuers must determine:
o If the transaction involves a security.
o If the transaction is a trade.
o If the trade qualifies as a distribution.
2.2.1 Meaning of “Security”
1. “Security” under the OSA includes:
o Traditional securities like shares and debt instruments.
o Documents showing ownership or interest in assets, capital, or profits.
2.2.2 Meaning of “Trade”
1. A “trade” includes:
o Selling or transferring a security for payment.
o Advertising or soliciting activities to support the trade.
2.2.3 Meaning of “Distribution”
1. A “distribution” includes:
o Issuing securities that have never been distributed.
o Trades involving securities held by a “control person” (holding over 20% of voting
rights).
2. If a transaction meets the definitions of "security," "trade," and "distribution," a
prospectus is required unless an exemption applies.

3. Prospectus Exemptions
3.1 Accredited Investor Exemption
1. Accredited investors can purchase securities without a prospectus under s. 73.3 of the OSA
and s. 2.3 of NI 45-106.
2. Accredited investors include:
o Financial institutions, governments, and pension funds.
o Wealthy individuals with:
 Financial assets over $1 million (excluding real estate).
 Annual income exceeding $200,000 ($300,000 with a spouse).
 Net assets of at least $5 million.
3. Individual accredited investors must sign a risk acknowledgment form before purchasing.
4. Consult the specific provisions of the OSA and NI 45-106 for eligibility details.
3.2 Private Issuer Exemption
1. Under s. 73.4 of the OSA and s. 2.4 of NI 45-106, private issuers may distribute securities
without a prospectus to certain persons, such as:
o Directors, officers, or control persons.
o Close family members, friends, or business associates of the issuer’s principals.
o Accredited investors.
o Existing security holders.
2. Private issuers must:
o Restrict the transfer of securities in their corporate documents.
o Limit ownership to 50 or fewer persons.
3. They cannot pay commissions or finder’s fees unless selling to accredited investors.
 4. Issuers must keep records of all securities sold and the purchasers' connections to the issuer.
Prospectus Offerings
Initial Public Offerings (IPOs)
1. IPOs allow an issuer to raise capital by offering securities to the public.
2. They require preparing a prospectus that discloses:
o Business details.
o Management information.
o Financial data.
3. The prospectus is reviewed by securities regulators to ensure accuracy and protect investors.
Reporting Issuers
1. After an IPO, an issuer becomes a reporting issuer (public company).
2. Reporting issuers must comply with continuous disclosure obligations.
3. Subsequent prospectus offerings are faster and require less documentation
Continuous Disclosure
1. Reporting issuers must regularly update investors about their financial status, business
operations, and other material changes.
2. Insiders and other relevant parties may also need to file reports under securities laws.
Summary
The OSA sets strict rules for securities distribution in Ontario, with the goal of protecting investors
and maintaining fair capital markets. While smaller issuers often use exemptions for initial
fundraising, larger issuers may rely on IPOs and prospectus offerings as they grow. Understanding the
legal framework and requirements is essential for compliance.

3.3 Minimum Amount Exemption

1. The minimum amount exemption (s. 2.10, NI 45-106) allows trades to investors (not
individuals) purchasing securities as principal.
2. The security must cost at least $150,000 in cash at the time of purchase and must come
from a single issuer.
3. This exemption is not available if the investor was created solely to purchase or hold
securities under this rule.
4. The exemption assumes the high investment amount will encourage careful evaluation and
that such investors are financially sophisticated or able to bear potential losses.

3.4 Other Prospectus Exemptions

Various other exemptions may apply depending on the circumstances of a securities distribution,
including:
1. Family, Friends, and Business Associates Exemption:
o Similar to the private issuer exemption.
o Available to issuers other than investment funds in Ontario (NI 45-106, ss. 2.5 and
2.6.1).
2. Rights Offering Exemption:
o Available to reporting issuers except investment funds (NI 45-106, ss. 2.1–2.1.4 and
2.42).
3. Listed Issuer Financing Exemption:
o For listed equity securities and related warrants issued by reporting issuers (NI 45-
106, Part 5A).
4. Existing Security Holders Exemption:
o For distributions to existing shareholders of reporting issuers listed on specific
exchanges (OSC Rule 45-501, s. 2.9).
5. Crowdfunding Exemption:
o For start-ups and early-stage issuers (NI 45-110).
6. Offering Memorandum Exemption:
o Requires an offering memorandum in a prescribed form (NI 45-106, s. 2.9).
Other exemptions include securities issued in:
 1. Statutory transactions like mergers, reorganizations, or arrangements (NI 45-106, s. 2.11).
2. Asset acquisitions valued at $150,000 or more (NI 45-106, s. 2.12).
3. Take-over or issuer bids (NI 45-106, s. 2.16).
4. Employee participation in equity incentive plans (NI 45-106, s. 2.24).
5. Stock dividends (NI 45-106, s. 2.31).

3.5 Use of Offering Memorandums

1. An offering memorandum describes the issuer’s business and affairs to help prospective
purchasers make investment decisions.
2. It is required under certain prospectus exemptions, including the listed issuer financing
exemption (NI 45-106, Part 5A) and crowdfunding exemption (NI 45-110).
3. If the document contains a misrepresentation, the issuer may be liable for damages or
rescission under s. 130.1 of the OSA.
4. Some issuers may avoid providing offering memorandums unless required by law to reduce
liability risks.

3.6 Trade Reports

1. Distributions under certain prospectus exemptions (e.g., accredited investor exemption) must
be reported to the OSC or other securities regulators using Form 45-106F1 within 10 days of
the distribution.
2. This requirement does not apply to distributions under the private issuer exemption.

3.7 Subscription Agreements

1. Issuers may use subscription agreements to document terms between the issuer and investors.
2. These agreements often include representations and acknowledgments to ensure compliance
with the applicable prospectus exemption.

3.8 Resale of Securities Distributed Under Prospectus Exemptions

1. Securities acquired under an exemption cannot be resold unless:
o A prospectus is filed.
o An exemption applies.
o Certain conditions under NI 45-102 are met, including:
 The issuer is a reporting issuer for at least four months before resale.
 The trade is not by a control person.
 No unusual effort is made to prepare the market.
 No extraordinary commissions are paid.
 Insiders ensure the issuer is not in default of securities legislation.
2. Non-reporting issuers operate in a “closed system,” restricting resale to exemptions until the
issuer becomes a reporting issuer.
3. A control person (holding 20% or more of voting securities) can only sell under a
prospectus or through a procedure in NI 45-102.

4. Prospectus Offerings
1. As an issuer grows, it may outgrow prospectus-exempt offerings and consider an IPO.
2. IPOs allow broader marketing of securities and provide:
o Access to capital markets for future financing.
o M&A opportunities using shares as acquisition currency.
o Liquidity for existing shareholders.
o Improved corporate profile and prestige.
3. Challenges of IPOs include:
o Increased costs and ongoing obligations as a public company.
o Greater scrutiny and required disclosures.
o Potential loss of control due to shareholder protections.
o Exposure to market pressures and volatility.
 4. IPOs may involve primary offerings (new securities) or secondary offerings (existing
securities sold by shareholders).
5. Unlike securities acquired under exemptions, securities sold under a prospectus are generally
free from resale restrictions unless held by a control person.
4.1 Initial Public Offering (IPO)
4.1.1 Process
1. Duration: An IPO typically takes four to six months or longer to complete.
2. Stages: The process has 3 main stages:
o Pre-filing period: The working group prepares the preliminary prospectus.
o Waiting period: The issuer files the preliminary prospectus, and securities regulators
review it, providing comments and questions.
o Closing period: The offering is priced, the final prospectus is filed, and the IPO
closes.
3. Working Group: The IPO working group includes:
o The issuer.
o The lead underwriter.
o The issuer’s auditor.
o Legal counsel for the issuer and the underwriters.
4. Role of the Underwriter:
o Underwriters are financial institutions or investment banks that assist with marketing,
pricing, and selling securities.
o The issuer selects a lead underwriter to manage the structure, timing, allocation, and
pricing.
o A syndicate of underwriters may be formed to distribute the securities and share risks.
5. Underwriting Agreement: This agreement outlines the terms of the offering and includes:
o Representations and warranties by the issuer.
o Covenants for IPO conduct and regulatory compliance.
o Termination events.
o Indemnification for underwriters.
6. Role of Auditors:
o Prepare financial statements and management discussion and analysis (MD&A) for
the prospectus.
o Provide a comfort letter to underwriters, assuring the accuracy of financial
information.
7. Role of Legal Counsel:
o Ensure the prospectus complies with disclosure and legal requirements.
o Provide legal opinions to the underwriters.

4.1.2 The IPO Prospectus

1. Purpose: The prospectus provides information for investors to make informed decisions.
2. Requirements:
o It must include full, true, and plain disclosure of all material facts about the securities
(OSA, s. 56(1)).
o A “material fact” is defined as information that could significantly affect the market
price or value of the securities.
3. Content: Form 41-101F1 specifies that the prospectus must include:
o Details about the issuer and its business.
o Information about directors and executive officers.
o The issuer’s share capital.
o Information about the securities and the distribution plan.
o Risk factors related to the issuer and investment.
4. Financial Information:
o Audited financial statements for the past two years.
 o Unaudited interim financial statements if applicable.
o Management discussion and analysis (MD&A) explaining financial performance and
prospects.
5. Certificates:
o The CEO, CFO, and two directors certify that the prospectus contains full, true, and
plain disclosure.
o Underwriters certify the same to the best of their knowledge and belief (OSA, s.
59(1)).

4.1.3 Regulatory Review Process

1. Filing:
o The preliminary prospectus is filed through the System for Electronic Document
Analysis and Retrieval (SEDAR).
o Other documents, such as constating documents, material contracts, and personal
information forms, are also submitted.
2. Review:
o Securities regulators review the documents, typically within 10 business days, and
issue a detailed comment letter.
o The issuer and its working group respond to comments and revise the prospectus.
3. Public Access: Once receipted, the preliminary prospectus becomes a public document on
SEDAR, allowing delivery to potential investors.
4. Final Steps:
o After resolving comments and completing marketing and pricing, the final prospectus
is filed and receipted.
o The regulatory review process usually takes three to five weeks.

4.1.4 Marketing and Selling Restrictions

1. Pre-Filing Period:
o No offers, solicitations, or public disclosures about underwriters are allowed, except
for limited exceptions in NI 41-101.
2. Waiting Period:
o Roadshows and presentations to potential investors are allowed.
o Standard term sheets and marketing materials based on the prospectus can be shared,
provided they comply with NI 41-101 requirements.
o Marketing materials must be filed on SEDAR.
o Sales are prohibited, but expressions of interest can be solicited.
3. Normal Course Advertising:
o Issuers must ensure their regular advertising and marketing comply with IPO
restrictions.

4.1.5 Pricing and Closing the IPO

1. Pricing:
o After marketing, the lead underwriter advises on the pricing based on investor
interest.
o The issuer and underwriters finalize the underwriting agreement and file the final
prospectus.
2. Alternative Pricing:
o National Instrument 44-103 allows for pricing after the final prospectus is filed, with
pricing details added in a supplemented prospectus.
3. Confirmation of Orders:
o Underwriters confirm purchase orders after the final prospectus is delivered.
o Orders are binding two business days after delivery under OSA, s. 71(2).
4. Closing:
 o Closing involves underwriters paying for securities and receiving them for delivery to
investors.
o The underwriting agreement specifies closing conditions and may allow termination
if:
 Trading is suspended or financial markets are disrupted.
 A material adverse change occurs.
 Market conditions make the offering impractical.
o Documents such as comfort letters, legal opinions, and officer certificates are
provided to underwriters at closing in the agreement
4.1.6 Stock Exchange Listing
1. A stock exchange listing is typically obtained alongside the IPO to ensure trading liquidity for
purchasers.
2. Main Exchanges in Canada:
o Toronto Stock Exchange (TSX): For larger issuers.
o TSX Venture Exchange (TSXV): For smaller issuers.
o Other options: NEO Exchange and Canadian Securities Exchange (CSE).
3. Listing Requirements:
o Vary by exchange but often include:
 Minimum public float (distribution of securities).
 Specific financial thresholds.

4.1.7 Investor Protections

1. Liability for Misrepresentation:
o Under the OSA, a misrepresentation in a prospectus can result in liability.
o A “misrepresentation” is:
 An untrue statement of a material fact.
 An omission of a material fact necessary to make a statement not misleading.
2. Who Can Be Liable:
o The issuer or selling security holder.
o Each underwriter signing the prospectus.
o Signatories (e.g., CEO, CFO).
o Directors of the issuer at filing.
o Experts (e.g., lawyers, accountants) who provided reports or opinions.
3. Remedies for Purchasers:
o Purchasers are deemed to have relied on the misrepresentation.
o They can:
 Rescind the purchase.
 Sue for damages up to the purchase price.
4. Joint and Several Liability:
o The issuer, directors, and signing officers share full liability.
o They may seek contribution from others liable for the same payment.
5. Due Diligence Defense:
o Available to directors, officers, underwriters, and experts if they exercised due
diligence.

4.2 Subsequent Prospectus Offerings

1. After an IPO, issuers can use shorter prospectus forms with faster regulatory reviews.
2. Key Prospectus Types:
o Short form prospectus.
o Shelf prospectus.
o Bought deal financings.
4.2.1 Short Form Prospectus
1. Eligibility:
o Reporting issuers in good standing with continuous disclosure filings.
o Listed on TSX, TSXV, NEO Exchange, or CSE.
2. Key Features:
o Contains full, true, and plain disclosure of material facts.
o Incorporates current continuous disclosure documents, reducing length.
3. Process:
o Preliminary prospectus is filed, and regulators issue comments within three business
days.
o Completion time: 3–4 weeks from announcement.

4.2.2 Shelf Prospectus

1. Purpose:
o Allows issuers to qualify securities for future distribution.
o Provides flexibility for issuing various types of securities.
2. Process:
o File a preliminary base shelf prospectus.
o After clearing comments, file a final base shelf prospectus valid for 25 months.
3. Temporary WKSI Exemptions:
o Well-known seasoned issuers can file a final base shelf prospectus directly without a
preliminary filing.
4. Supplements:
o Specific details about the offering are included in supplements filed during the shelf
period.

4.2.3 Bought Deal Prospectus Financings

1. Definition:
o Underwriters commit to purchase securities before filing a preliminary prospectus.
o No market-out clause applies to their commitment.
2. Benefits:
o Provides issuers with certainty of financing.
o Accelerates the timeline due to pre-commitment by underwriters.

5. Continuous Disclosure
1. Requirement:
o Reporting issuers must file regular and event-driven disclosures to maintain
transparency.

5.1 Disclosure Documents

1. Regular Filings:
o Annual audited financial statements and MD&A.
o Interim financial reports.
o Annual information form.
o Proxy circulars for shareholder meetings (including executive compensation and
governance).
2. Event-Driven Filings:
o Material change reports: Required within 10 days of a significant change in business,
operations, or capital.
o News releases for material information under stock exchange rules.
3. Certification:
o CEO and CFO must certify filings.
4. Liability:
 o Misrepresentations or failure to disclose material changes can result in liability under
s. 138.3 of the OSA.

5.2 Third-Party Reporting

1. Insider Reporting:
o Directors, officers, and significant shareholders must report trades.
2. Early Warning Requirements:
o Ownership of 10% or more of voting securities triggers disclosure.
o Subsequent changes (e.g., ±2% ownership) require updates.

6. Additional Matters Regulated by Securities Laws

1. Take-over and Issuer Bids:
o Governed by National Instrument 62-104.
2. Significant Business Transactions:
o Related-party and insider transactions under Multilateral Instrument 61-101.
3. Investment Funds:
o Special rules apply to mutual funds and other investment vehicles.
4. Market Participants:
o Investment advisers, dealers, and fund managers are regulated under National
Instrument 31-103.
5. Regulatory Oversight:
o Activities are monitored by the Canadian Investment Regulatory Organization.
6. OSC Authority:
o The OSA outlines the organization and powers of the Ontario Securities Commission.

Chapter 26: Debt Financing and Secured Transactions

1. Debt Financing
1.1 General
Debt financing occurs when a lender provides funds to a borrower, who must repay the amount. The
repayment can be unsecured or secured by the borrower’s assets. A guarantor may also ensure
repayment, sometimes providing additional security using their assets.
1.2 Commitment Letters and Loan/Credit Agreements
 A loan transaction begins with a lender agreeing to provide funds to a borrower.
 The agreement may be called a commitment letter, offer to finance, or term sheet.
 The letter outlines the main terms, including:
o Types of loans or credit facilities, such as direct loans or letters of credit, with
applicable interest rates.
o Credit terms (e.g., fixed or revolving) and maximum credit limits.
o Repayment terms, including prepayment options and penalties.
o Fees, such as commitment or administration fees.
o Conditions for advances, borrower obligations, and events of default.
 Once signed by both parties, the commitment letter becomes a binding agreement.
 Some loans proceed with only a commitment letter, while others require a formal loan or
credit agreement that replaces the letter.
1.3 Structuring Loan Arrangements
1.3.1 Direct Loans
 Currency: Loans can be issued in Canadian or foreign currencies, but judgments in Canada
must be in Canadian dollars.
 Loan Evidence: Promissory notes may be used but are becoming outdated. Most agreements
rely on lender records.
 Demand or Term Loans: Demand loans can be repaid anytime, while term loans have
fixed repayment dates.
 Repayment: Agreements may require periodic payments, allow prepayments, or specify
repayment on certain conditions.
 Promissory Notes: These are written promises to pay and may be term-based or on-
demand. They require handwritten signatures, as electronic signatures are not valid.

Interest Rates alternatives

 Canadian Dollar Loans
o Fixed Rate- Fixed for a specified term
o Floating or variable rates, often tied to the bank’s prime rate.
o For U.S. dollar loans: Rates like SOFR (Secured Overnight Financing Rate) or a U.S.
base rate.
o Cost of funds: This interest rate is based on a formula based upon
an average of interest rates quoted from time to time by two or
three recognized dealers in the money market.
1.3.2 Bankers’ Acceptances
  This involves a borrower’s bill of exchange accepted by the bank for a fee.
 The bank sells the bill, and the borrower receives the proceeds.
 These may become obsolete after June 2024 due to the discontinuation of CDOR.
1.3.3 Letters of Credit
 A letter of credit is a bank’s promise to pay a specified amount to a beneficiary.
 It secures the borrower’s obligations and is independent of the borrower’s insolvency.
 Borrowers reimburse the bank for payments made under the letter of credit, with fees
charged by the bank.
1.3.4 Bank Guarantees
 Bank guarantees ensure payment of fixed sums.
 They work like letters of credit but require a default before payment can be demanded.
 Borrowers provide indemnity agreements and, sometimes, security.

3. Taking PPSA Security-( Personal Property Security Act)

2.1 General
 Loans can be unsecured or secured.
 Security depends on the borrower’s assets, which can include tangible or intangible property.
 A security agreement defines the collateral, the borrower’s obligations, and the creditor’s
rights.
2.2 General Security Agreement (GSA)
2.21 General
 A GSA covers all of the borrower’s present and future assets.
 It cannot create a valid legal charge over real property but may create an equitable
charge.
 Real property security requires additional registration, especially for rent assignments or
leases.
.
2.2.2 Real Property Interests
1. A GSA (General Security Agreement) cant create a valid legal charge over real property.
o In Ontario, a GSA that charges a borrower’s real property can create an equitable
charge, which may take priority over unsecured creditors but is subordinate to:
 Holders of a specific charge or mortgage.
 Bona fide purchasers without notice of the equitable interest.
2. To secure both real and personal property, a lender can:
o Use a GSA and a separate charge/mortgage for real property.
o Use a debenture with fixed and floating charges for both types of property.
3. If a GSA includes an assignment of rents by a landlord-borrower:
o The security interest must be registered against the title of the relevant property.
4. Assignment of rents is generally considered personal property security but requires
registration in the land registry under Section 36 of the PPSA.
 oTo gain priority over others, an assignment of rents must be registered in the
prescribed form.
o Assignments of rents often include an assignment of leases, which are registered
separately.
5. The PPSA does not apply to assignments of leases.
o Assignments of leases or leasehold charges must be registered against the property
title.
o If registering a leasehold charge, the lease itself must first be registered.

2.2.3 Representations, Warranties, and Covenants

1. A GSA typically includes:
o Representations and warranties about the borrower’s collateral (e.g., existence,
location, or specifics of assets).
o Covenants (positive and negative) regarding the borrower’s actions affecting the
collateral.
2. Common covenants include:
o The borrower must ensure the collateral is free of liens or encumbrances, except for
permitted ones.
o The borrower must not create further encumbrances, except for certain exceptions
like purchase-money security interests (PMSIs).
3. Lenders may also require supplemental security agreements for specific assets, such as:
o Accounts receivable.
o Securities.
o Intellectual property.

2.3 General Assignment of Accounts Receivable

1. A lender may secure only specific borrower assets, such as accounts receivable.
o This is common for service- or IP-based businesses where tangible assets have less
value.
2. A general assignment of accounts receivable covers:
o All present and future cash, debts, and claims.
o Related books and records.
3. Lenders can notify account debtors of the assignment and collect payments.
o This usually happens only after a default event.
o Until then, borrowers manage receivables as usual but hold them in trust if a default
occurs.
4. Lenders may require an account control agreement with the borrower’s bank, allowing the
lender to control deposit accounts after a default.

2.4 Certificated Securities and the Direct Holding System

1. Certificated securities (e.g., share certificates) represent ownership directly between the
issuer and the holder.
2. Lenders may require borrowers to pledge such shares or securities as collateral.
o The lender gains rights to dividends or voting powers only after a default.
3. To perfect security, share certificates must be delivered to the lender, endorsed for transfer, or
accompanied by a power of attorney.
4. Restrictions on share transfers may require approvals (e.g., from shareholders or boards)
before enforcement.

2.5 Uncertificated Securities and the Indirect Holding System

1. In the indirect holding system, intermediaries (e.g., clearing agencies) hold securities for
investors.
o Investors are listed as entitlement holders in the intermediary’s records.
 2. Secured creditors can gain control of uncertificated securities by:
o Being recorded as the entitlement holder.
o Using a control agreement with the intermediary.
3. A control agreement allows the intermediary to follow the secured creditor’s instructions
without further borrower consent.

2.6 Debenture Security

1. Debentures provide a promise to pay and secure it with a charge over certain property.
o The debenture amount typically includes interest, fees, and other costs.
2. Key features of a debenture:
o It can cover all property of the borrower, like a GSA.
o It creates a legal charge over real property (not just equitable).
o Allows borrowers to deal with assets under a floating charge until a default occurs.
3. Floating charges crystallize into fixed charges upon default, restricting the borrower’s
ability to deal with assets.

2.7 Other Security Agreements

1. Lenders may request additional security over specific borrower assets, such as:
o Inventory or equipment.
o Intellectual property (registered with the Canadian Intellectual Property Office).
2. Registration of intellectual property security agreements is not required but is commonly done
for third-party notice.
3. Perfecting PPSA Security
3.1 Attachment, Financing Statement, Possession, and Control
1. To perfect a security interest under the PPSA, the secured creditor must meet two main
requirements:
o Attachment under Section 11(2) of the PPSA.
o Filing a financing statement or perfecting by possession (Section 22) or control
(Sections 22.1 or 22.2).
2. Attachment happens when:
o The debtor signs a security agreement describing the collateral.
o The secured party gets possession or control of the collateral.
o Value has been given.
o The debtor has rights in the collateral or can transfer those rights.
3. The parties can agree to delay attachment, but this must be explicitly stated.
4. A financing statement can be registered before or after the security agreement is signed.
5. The financing statement:
o Gets a reference file number and a registration number upon filing.
o Must have the debtor’s correct name and classify the collateral in appropriate
categories.
6. Perfecting by possession is most common for certificated securities, but registration is
preferred for most personal property since it allows debtor to continue using the collateral.

3.2 Jurisdictional Considerations for Registering Financing Statements

1. The jurisdiction for registering a financing statement depends on:
o The location of the collateral (e.g., goods) at the time the security interest attaches
(Section 5(1)).
o The location of the debtor for certain types of collateral, like intangibles or electronic
chattel paper (Section 7(1)).
2. If the debtor owns goods in multiple provinces, registration should occur in each province
where the goods are located.
3. The debtor’s location is determined by:
o Individual debtors: The jurisdiction of their principal residence.
 o Non-individual debtors: Rules based on their form of organization (e.g.,
incorporation in a specific province).
4. Special rules apply for certain collateral, like motor vehicles and consumer goods. The
PPSA must be carefully reviewed to ensure compliance.

3.3 Registering a PPSA Financing Statement

3.3.1 General
1. The PPSA allows lenders to register notice of their security interests.
o Proper registration perfects the security interest once attachment is complete.
2. In Ontario, the financing statement is filed under the borrower’s legal name, with collateral
classified into categories such as Accounts, Equipment, Inventory, or Motor Vehicles.
o Consumer Goods must be explicitly noted if applicable.
3. Registration of debentures requires filing under the PPSA and, if real property is involved,
registering on the property title.

3.3.2 Debtor Name

1. Rules for entering the debtor’s name in the financing statement are strict (Sections 16–17 of
the Minister’s Order):
o Corporations: Use the full legal name as per incorporation or amalgamation
documents. If the name exists in English and French, include both forms.
o Individuals: Include first name, last name, middle initial, and date of birth. Register
under all legal name variations if multiple versions exist.
2. Mistakes in debtor names can sometimes be corrected under Section 46(4) of the PPSA, but
not all errors are fixable.

3.3.3 Collateral Classification and Descriptions

1. Collateral must be properly classified in the financing statement.
o Example: Leased equipment should be classified as Inventory, not Equipment.
2. Secured creditors may choose to register all collateral classes to avoid classification errors,
unless the borrower requests changes.
3. Adding collateral descriptions can limit the scope of a security interest. For general security
interests, collateral descriptions are typically avoided.

3.3.4 Registration Periods

1. Financing statements can be registered for 1–25 years or perpetually.
o Fees: $8 per year or $500 for perpetual registration (excluding service provider fees).

3.3.5 Application to One or More Security Agreements

1. A single financing statement can perfect security interests under multiple security
agreements (Section 45(4)):
o Agreements can be from the same or different transactions.
o Agreements can be signed before or after the financing statement is filed.
2. Ensure no limitations in the financing statement’s collateral description that could prevent it
from covering future security agreements.

3.3.5 Application to One or More Security Agreements

1. The PPSA allows a single financing statement to perfect multiple security interests under one
or more security agreements, except for consumer goods.
2. Under subsection 45(4) of the PPSA, a single financing statement can perfect security
interests regardless of:
o Whether the security interests or agreements are related transactions.
o Whether the debtor signed the security agreements before the financing statement
was registered.
 3. To use a previously filed financing statement for subsequent agreements, ensure the collateral
description does not limit its applicability.

3.4 Perfection of Security Interest in Investment Property

1. Investment Property Defined: Includes securities (certificated or uncertificated), security
entitlements, securities accounts, futures contracts, or futures accounts.
2. Methods of Perfection:
o Registration:
 Security interests can be perfected by registration under s. 23 of the PPSA.
 Special priority is obtained through “control,” which is recommended.
o Control:
 Control allows the creditor to transfer securities without borrower action
(PPSA, s. 22.1).
 Control provides priority over other methods.
 Examples of control:
 Certificated Security: Possession.
 Uncertificated Security: Control agreement.
o Priority Rules:
 Control > Non-Control: Security perfected by control takes priority (s.
30.1(2)–(3)).
 Priority between security interests perfected by control depends on the time
of control (s. 30.1(4)).
 Securities intermediaries with security have priority over other secured
parties (s. 30.1(5)).
3. Cut-off Rules:
o Protected Purchasers:
 Take securities free of adverse claims if they:
1. Give value.
2. Have no notice of adverse claims.
3. Obtain control (STA, s. 70).
o Non-Creditor Purchasers:
 Take securities free if they:
1. Give value.
2. Have no knowledge of security breaches.
3. Obtain control (PPSA, s. 28(6)).
4. Conflict of Laws:
o Review conflict of laws and priority rules to confirm the creditor’s rights over
investment property.

3.5 Perfection by Control of Security Interest in Electronic Chattel Paper

1. Electronic Chattel Paper:
o Digital records of chattel paper created and stored electronically (PPSA, s. 1(1)).
2. Control:
o A secured creditor has control when:
 A unique, identifiable, and unalterable authoritative record exists.
 The authoritative record identifies the secured party as the transferee.
 Copies or amendments require secured party consent.
 Authorized or unauthorized changes are easily identifiable.
3. Priority Rules:
o A purchaser with control has priority over other security interests (ss. 28(3) & (3.1)).
o Review the PPSA to confirm applicability in specific situations.

3.6 Registration Errors

1. Impact of Errors:
 o Errors in financing statements can make security interests unperfected and
subordinate to others.
2. Subsection 46(4):
o Financing statements remain valid unless errors materially mislead a reasonable
person.
3. Steps to Correct Errors:
o Register a financing change statement or new financing statement promptly.
o Corrections may retain or restore some priority.

3.7 Maintaining Perfection

1. File a financing change statement in specific cases, such as:
o Borrower transfers collateral.
o Borrower changes name.
2. Time Limits:
o Failure to file within prescribed times results in loss of perfection until the
statement is filed (s. 48 of the PPSA).
o Re-perfection will be subject to new priorities.

4. Taking Security Under Section 427 of the Bank Act

4.1 General
1. Eligibility:
o Available only to chartered banks.
o Borrowers include:
 Retailers, wholesalers, manufacturers, aquaculturists, farmers, fishers, and
forestry producers.
2. Assets Covered:
o Includes inventory and, for farmers and fishers, implements, vessels, and production
materials.
o Section 426 covers mines, minerals, oil, and gas.
3. Borrower Restriction:
o Security can only be provided by the borrower, not third parties.
4. Elements of Section 427 Security:
o Application for credit.
o Notice of intention.
o Grant of security or assignment of inventory.
o Agreement concerning loans and advances.

4.2 Application for Credit

1. Form:
o Contains a written promise to provide security.

4.3 Notice of Intention

1. Filing:
o File notice within 3 years before granting security.
o File with the Bank of Canada agency in the borrower’s business location.
2. Effectiveness:
o Valid for 5 years.
o Renew annually via registered mail to avoid removal from the register.

4.4 Grant of Security/Assignment of Inventory

1. Execution:
o Borrower assigns property using a prescribed form.
o The form describes the property and its location.
4.5 Agreement Concerning Loans and Advances
1. Content:
o The agreement outlines terms of the loan and bank remedies on borrower default.
o May permit the bank to use the borrower’s premises and equipment to realize
inventory.
4.6 Transfer of Title
1. Under subsection 427(2) of the Bank Act, taking security under this section transfers the
title of assets to the bank.
2. Benefits of Title Transfer:
o If a borrower occupies leased premises, the landlord cannot use distress rights on
assets covered by s. 427 security since distress rights only apply to assets owned by
the tenant.
o Once title is transferred to the bank, the borrower no longer owns the assets, so they
are not subject to the landlord’s claims.
3. Limitations of Title Transfer:
o Security under s. 427 is subordinate to security interests created under conditional
sale arrangements, even without PMSI priority.
o Title is not transferred to the borrower in conditional sales, so the borrower has no
title to transfer to the bank.
4. Impact of Pre-Existing Encumbrances:
o Pre-existing PPSA security, even if unperfected and unknown to the bank, takes
priority over Bank Act security.
o A bank cannot acquire greater rights in the collateral than the debtor holds at the time
the Bank Act security is granted.
5. Best Practices for Banks:
o Take and perfect security under both the Bank Act and the PPSA.
o If Bank Act security is subordinate to pre-existing PPSA security, the perfected
PPSA security will maintain priority.

5. Guarantees
5.1 General
1. A guarantee is a promise by a guarantor to pay the borrower’s debt if the borrower defaults.
2. Guarantees are a simple way to secure payment, provided the guarantor is solvent.

5.2 Types of Guarantees

5.2.1 Unlimited and Limited Guarantees
1. Unlimited Guarantees: Cover all present and future liabilities of the borrower to the lender.
2. Limited Guarantees: Restrict the guarantor’s liability to a set amount or type of debt.
5.2.2 Secured and Unsecured Guarantees
1. Secured Guarantees: Backed by collateral.
2. Unsecured Guarantees: Not backed by collateral.

5.3 Types of Guarantors

1. Guarantors can be individuals or corporations.
2. Individual guarantors are often shareholders or related persons.
3. Corporate guarantors are typically affiliates, subsidiaries, or parent companies.

5.4 Guarantor Defenses

1. Guarantors may use defenses such as:
o Forgery.
o Fraud.
o Duress or undue influence.
 o Material misrepresentation.
2. Precautions:
o Guarantees must be in writing and signed (Statute of Frauds).

5.5 Special Considerations for Individual Guarantors

1. Individual guarantors should have their signatures witnessed.
2. Independent Legal Advice:
o Recommended, especially for guarantors with limited business knowledge, elderly
individuals, or non-English speakers.
o The guarantor must understand the nature & extent of liability under the guarantee.
3. Waiver of Subrogation:
o Many guarantees restrict guarantors from seeking repayment from the borrower
until the lender is fully paid.

5.6 Confirmations of Guarantees

1. Obtain confirmations of guarantees whenever there are material changes to loan
agreements, such as:
o Extensions of loan terms.
o Increases in loan amounts or interest rates.
2. Regularly update confirmations (e.g., every two years for demand loans) to ensure
enforceability.

5.7 Registration of Guarantees under the PPSA

1. Guarantees do not require PPSA registration unless they include an assignment of claims.
2. If required, register a financing statement against the guarantor's accounts and collateral.
3. Obtain the guarantor’s consent for filing personal information under privacy laws.

6. Real Property Security

1. Mortgages:
o Mortgages may be taken over real property from the borrower or guarantor.
o Section 418 of the Bank Act limits bank loans secured by real property to 80% of its
value unless insured.
2. Leasehold Mortgages:
o If leasehold interests are valuable, they can be mortgaged.
o Landlord consent is usually required due to lease restrictions.
3. Registration:
o Governed by the Land Registration Reform Act.

7. Miscellaneous Security Mechanisms

7.1 Subordination of Indebtedness
1. A lender may require other debts to be subordinated to its loan.
2. Example: A shareholder loan to a corporation may be subordinated until the lender is repaid.

7.2 Negative Pledge

1. A borrower may promise not to encumber assets further.
2. Remedies for breaches include:
o Injunctions to prevent breaches.
o Claims against 3rd parties inducing breaches.

7.3 Insurance
1. Lenders may take assignments of insurance or require being named as “loss payees” on
policies.
2. This ensures financial compensation for losses that affect the borrower’s business.
8. Impact of the Limitations Act, 2002 (LA, 2002)
8.1 General
limitation period is the time within which a person or entity must start legal action to
enforce their rights. If a claim is not made within this time, the right to sue may be lost.

Under the Limitations Act, 2002 (LA, 2002) of Ontario, which took effect on January 1,
2004, lenders and creditors must follow specific time limits when trying to recover unpaid
debts. This law applies to most claims, including debt collection.
1. Applicability:
o Applies to debt recovery and related claims.
o Real Property Limitations Act may apply for land recovery claims.

8.1.1 Basic Limitation Period

1. 2 years from the date a claim is discovered or should have been discovered.

8.1.2 Ultimate Limitation Period

1. 15 years from the act or omission, regardless of when it is discovered.
2. Exceptions:
o Claims against good-faith purchasers for value must be commenced within 2 years.
o No limitation period for debt enforcement claims involving possession of collateral.

8.1.3 Transitional Provisions

1. Applies to claims arising after December 31, 2003, or earlier claims discovered after
January 1, 2004, unless already time-barred under prior laws.

8.2 Demand Obligations

1. The 2-year limitation period for demand obligations begins upon failure to perform after a
demand is made.
2. Applies to obligations created on or after January 1, 2004.
8.3 Term Loans
1. For loans payable at the end of a specific term (known as term loans), the limitation period
does not typically begin with an event of default unless the default is a failure to pay on the
due date.
2. This is because an event of default alone does not usually cause the lender an “injury, loss,
or damage.”
3. Instead, the event of default gives the lender the right to accelerate the loan and demand
immediate payment. The limitation period begins only when the borrower fails to pay after
this demand.
4. Automatic Acceleration Clauses:
o These clauses make the full loan amount due immediately upon a specific default,
without requiring any action or notice by the lender.
o Such clauses may trigger the limitation period as soon as the default occurs, even
without a formal demand for payment.
5. To avoid this risk, lenders should use automatic acceleration clauses cautiously.

8.4 Acknowledgments and Renewals of Limitation Periods

8.4.1 General
1. The Limitations Act, 2002 allows for renewal of limitation periods through specific acts or
written acknowledgments of liability by the borrower or their agent.
2. When an acknowledgment is made, the limitation periods restart from the date of
acknowledgment.
 3. An acknowledgment must occur before the limitation period expires and be made to the
claimant, their agent, or a bankruptcy trustee.

8.4.2 Automatic Acknowledgments

1. Limitation periods renew automatically through:
o Part payment of the debt (e.g., interest or principal).
o Performance of obligations under a security agreement.
(a) Part Payment of Debt
1. Any payment by the borrower renews the limitation period for the entire debt, including
principal and interest, from the payment date.
(b) Performance of Obligations
1. A borrower’s compliance with a lender’s request under a security agreement renews the
limitation period from the date of performance.
2. Routine actions like adhering to negative covenants may not always renew limitation
periods.
3. It is recommended to rely on written acknowledgments instead of routine performance to
ensure the limitation period is renewed.

8.4.3 Written Acknowledgments

1. Written acknowledgments restart limitation periods for claims such as:
o Payment of liquidated sums.
o Recovery of personal property.
o Enforcement or relief from a charge against personal property.
2. Rules for Acknowledgments:
o An acknowledgment restarts the limitation period even if no promise to pay is made.
o If collateral under a security agreement is acknowledged, future holders of the
collateral are bound by the acknowledgment.
o Trustees’ acknowledgments bind successor trustees of the same trust.
3. Lenders should obtain written acknowledgments:
o At regular intervals.
o Whenever a loan is renewed, extended, or amended.

8.4.4 Guarantees
1. Guarantees should include terms allowing lenders and borrowers to renew limitation periods
without requiring the guarantor’s consent.
2. Lenders should obtain confirmations and acknowledgments from guarantors alongside those
obtained from borrowers.

8.5 No Contracting Out of Limitation Periods

1. Initially, section 22(1) of the Limitations Act, 2002 prohibited varying limitation periods by
agreement.
2. Amended rules allow:
o Agreements made before January 1, 2004, to vary or exclude limitation periods.
o Agreements made on or after October 19, 2006, to extend or suspend the two-year
limitation period.
o In business agreements, the 2-year and 15-year limitation periods can be
shortened or extended.
3. Business Agreements: Defined as agreements where none of the parties are consumers under
the Consumer Protection Act, 2002.

8.6 Limitation Periods and COVID-19 Emergency Order

1. On March 20, 2020, the Ontario government paused most limitation periods and procedural
timelines due to COVID-19.
 2. The suspension applied retroactively to March 16, 2020, and ended on September 14, 2020,
effectively extending limitation periods by six months.

Chapter 27: Searches and Opinions

1. Introduction
1.1 Purchase and Sale Transactions
1. In asset acquisitions, searches are conducted against the vendor to identify liens or
encumbrances.
2. In share acquisitions, searches cover:
o The vendor of the shares.
o The corporation whose shares are being purchased.
o Subsidiaries of the target corporation.
1.2 Financing Transactions
1. Lenders or their counsel conduct searches to find liens or encumbrances on borrower assets
offered as security.
1.3 Types of Searches
1. Searches depend on the transaction and collateral type.
2. Conduct searches using full legal names of parties, including:
o English and French versions of names.
o Prior names and predecessor corporations.
o Business names and vehicle identification numbers (if applicable).
1.4 Timing of Searches
1. Conduct searches early in the transaction to:
o Address third-party liens or litigation.
o Gather corporate history and due diligence data.
2. Update searches before closing, especially for legal opinions.

2. Standard Corporate Searches

2.1 Corporate Searches
1. Searches confirm:
o Legal name and status of the corporation.
o No restrictions in charter documents preventing proposed actions.
o Corporate history, including prior names and predecessor corporations.
2. A Profile Report provides basic information about the corporation, including directors and
officers, registered office, and history.
3. Obtain a Certificate of Status to verify the corporation is active and not dissolved.
2.2 Business Name Searches
1. Corporations using names other than their legal name must register those names under the
Business Names Act.
2. Conduct searches against registered business names in addition to the corporation’s legal
name.
2.3 Partnership Name Search
1. The Business Names Act (BNA) and Partnerships Act require general and limited liability
partnerships to register with the Registrar under the BNA.
2. Limited partnerships must register under the Limited Partnerships Act (LPA).
3. A single Registrar oversees registrations for all partnerships in Ontario, including general,
limited, and limited liability partnerships, under the same registry.
4. In transaction involving a vendor or borrower in a partnership, searches should be conducted:
o Against the partnership name.
o Against the names of individual partners disclosed by the search.
5. Partnership name searches are conducted online through third-party service providers.
6. A Personal Property Security Act (PPSA) financing statement against a registered
partnership must include the partnership’s registered name.
 7. If the partnership is unregistered, the financing statement must include:
o The partnership name as listed in the security agreement.
o The name of at least one partner.

2.4 Corporations Information Act and Annual Returns

1. The Corporations Information Act (CIA) requires Ontario Business Corporations Act
(OBCA) corporations to:
o File an initial return within 60 days of incorporation, amalgamation, or
continuation.
o This return must list the corporation's name, registered office address, and the names
and addresses of directors and officers.
2. Extra-provincial corporations must also file an initial return within 60 days of starting
business in Ontario.
3. The CIA mandates filing a notice of change within 15 days of any changes to:
o The registered office address.
o Other information in a previously filed return.
4. Corporations must file an annual return electronically via the Ontario Business Registry
within 6 months of their fiscal year-end. No filing fee is required.
5. Non-compliance with filing requirements may result in:
o Fees, penalties, and personal liability for directors/officers.
o Inability to maintain legal proceedings in Ontario courts without court permission.
6. For CBCA-incorporated corporations, annual returns must be filed with Innovation,
Science and Economic Development Canada (ISED):
o Within 60 days of the corporation’s incorporation, amalgamation, or continuation
anniversary.
o Filing fees: $12 online or $40 offline

3. Standard Security Searches

1. Standard searches reveal liens or encumbrances on personal property located in Ontario.
2. Additional searches may be required for:
o Assets outside Ontario.
o Intangible personal property subject to out-of-province rules.
3. Special requirements apply to collateral located in Quebec.

3.1 Personal Property Security Act (PPSA)

3.1.1 Introduction
1. The PPSA governs the rights of creditors and debtors over personal property.
2. A PPSA search determines if a secured party has perfected a security interest over the
debtor’s personal property in Ontario.
3. Perfection by possession or temporary perfection may not appear in PPSA searches.
4. The PPSA registration system is province-wide and includes registrations under the repealed
Corporation Securities Registration Act.

3.1.2 Application of the PPSA

1. The PPSA applies to all transactions creating a security interest in personal property.
2. It also applies to transfers of accounts or chattel paper, even if they do not secure debt
repayment.
3. Instead of filing security agreements, creditors file financing statements listing collateral
classes such as:
o Accounts, Equipment, Inventory, Other, Motor Vehicles, and Consumer Goods.

3.1.3 No Presumption of Validity

1. Filing a financing statement:
 o Does not guarantee the PPSA applies to the transaction.
o Does not confirm a security interest exists.
2. A debtor can seek a discharge if a financing statement is wrongly filed against their assets.

3.1.4 Obtaining Security Agreement Copies

1. The secured party can be compelled under PPSA section 18 to provide copies of security
agreements and details, including the debt amount.

3.1.5 Fixtures and Real Property Interests

1. For security interests in fixtures or real-property-related assets (e.g., timber, crops),
creditors must register in the appropriate land registry.

3.1.6 Search Criteria

1. Corporations: Conduct searches using:
o The full legal name (and any prior names or predecessor corporations).
o Business names and English/French variations.
2. Sole Proprietorships and Partnerships: Search against:
o The partnership name.
o Individual partner names.
3. Individuals:
o Financing statements must include the first and last name, middle initial, and date of
birth.
o Obtain multiple forms of identification to ensure accuracy.
o Conduct searches against all possible name variations.
4. Motor Vehicles:
o Perform searches using the vehicle identification number (VIN).

3.1.7 Types of Searches

1. Verbal/Uncertified Searches:
o Available online.
o Do not provide statutory protections under the Personal Property Security
Assurance Fund.
o Use only for immediate needs; confirm later with a certified search.
2. Certified Searches:
o Include a Registrar-certified certificate.
o Provide recourse through the Assurance Fund for errors.
o Recommended for transactions requiring legal opinions.

3.1.8 Currency Date of Searches

1. PPSA search results are current as of 4:30 p.m. the previous day.
2. Best practice: File financing statements before document execution and funds advancement.

3.1.9 Unregistered Rights and Interests

1. Certain rights (e.g., landlord’s distress rights, common-law liens) can exist without public
registration.
2. A clear PPSA search does not guarantee the absence of other claims.

3.1.10 No Title Searches for Personal Property

1. The PPSA does not record ownership.
2. Except for assets like motor vehicles or intellectual property, Ontario lacks a title registry
for personal property.
3.2 Repair and Storage Liens Act (RSLA)
1. The RSLA governs liens for repairing or storing personal property.
2. Non-possessory liens must be registered under the PPSA for perfection.
3. Possessory liens are perfected by possession and do not require registration for priority.

3.3 Section 427 of the Bank Act

1. Chartered Bank Security:
o Section 427 of the Bank Act allows chartered banks to secure specific inventory and
assets of certain borrowers.
o This type of security is registered in Ontario and can be checked through a Section
427 search.
2. Conducting a Search:
o The search is done online through a third-party service provider in the relevant
jurisdiction:
 The province where the debtor’s business is located.
 If the debtor has businesses in multiple provinces, the province where the
principal business is located.
 If the debtor has no business location, the province where they reside.
3. Outstanding Notices:
o If the search reveals outstanding notices, contact the involved bank(s) to confirm:
 Whether the borrower has secured their inventory.
 If the assets secured under Section 427 overlap with assets involved in a
purchase or financing transaction.

3.4 Bankruptcy Searches

3.4.1 General
1. Bankruptcy searches determine if a person or corporation is bankrupt or undergoing
formal insolvency (e.g., receivership or reorganization under the BIA or CCAA).
2. These searches reveal restrictions on disposing of or encumbering assets, covering all types
of formal insolvency, not just bankruptcy.
3.4.2 Court Searches
1. Registrar in Bankruptcy Searches:
o Conducted at the Toronto Office of the Registrar of the Superior Court of Justice,
which covers all of Ontario.
o Involves two systems:
 FRANK system (records after April 2008 or earlier files transferred to it).
 Sustain system (pre-2008 files not transferred to FRANK).
2. Search Limitations:
o FRANK searches do not show a complete history of court proceedings.
o Files named in search results must be reviewed for details.
3. Additional Court Searches:
o For court receiverships under the Courts of Justice Act, searches should include the
Superior Court of Justice in the region of the debtor’s business.

3.4.3 Superintendent of Bankruptcy Searches

1. Conducted at the National Office of the Superintendent of Bankruptcy in Ottawa, covering
all proceedings in Canada.
2. Discloses filings by corporations, individuals, or officials like trustees or monitors.
3. A certificate with the search results is provided, but some duplication may occur with court
searches.

3.4.4 Search Limitations

1. Bankruptcy searches may not be fully accurate or up-to-date due to:
o Delayed currency of results.
 o Long statutory deadlines for filings (e.g., 10 days for a receiver).
o Filing requirements not strictly enforced.
2. Absence of a filing in the search results does not guarantee that no insolvency has occurred.

3.5 Execution Act Searches

1. Purpose:
o To check for writs of execution filed against a debtor, which bind their personal or
real property.
2. Process:
o Search against the debtor’s full legal name, including previous names, predecessor
corporations, and registered business or partnership names.
o Conduct an Ontario-wide search to identify regions where executions are filed, then
obtain details from those regions.

3.6 Intellectual Property and Other Searches

1. Intellectual Property Searches:
o Conduct searches in copyright, patent, or trademark registries if the assets are of
material value.
o While these registries are not designed for security interests, filings of security
agreements are allowed.
2. Search Challenges:
o Registry backlogs and outdated results.
o Cumbersome search processes.
3. Additional Searches:
o May be required for unique assets, such as those governed by the Mining Act or
Canada Shipping Act, 2001.

4. Real Property Searches

1. If a transaction involves real property, conduct a full or partial property title search.
2. Obtain an opinion to confirm title, liens, or encumbrances on the property.

5. Introduction to Legal Opinions

1. Legal opinions are standard in financing transactions and, less frequently, in acquisitions.
2. Purchasers may request legal opinions when justified.

6. Scope and Structure of Legal Opinions

1. The scope depends on the transaction’s complexity and the requirements of the purchaser or
lender.
2. Typical content includes:
o Description of the transaction and agreements.
o Documents, certificates, or searches relied on.
o Assumptions and qualifications.
o Jurisdiction of the opinion.
o Security registration details.
3. Common legal opinions address:
o The corporation’s subsistence under its jurisdiction.
o Corporate capacity to enter into agreements.
o Proper authorization, execution, and delivery of agreements.
o No breach of laws or corporate documents.
o Legality and enforceability of agreements.
o Valid creation and perfection of security interests.
7. Standard Assumptions and Qualifications
7.1 Authenticity of Documents
 Assumes all signatures and documents are genuine and conform to originals.
7.2 Currency of Searches
 Assumes searches and certificates remain current as of the opinion date.
7.3 Enforceability Subject to Creditors’ Rights
 Agreements are limited by laws affecting creditors’ rights (e.g., bankruptcy laws).
 Enforceability is also subject to equity principles (e.g., discretion in granting specific
remedies).
7.4 Judgment Currency
 Canadian courts only award judgments in Canadian dollars, per the Currency Act (Canada).
7.5 Agreements Binding on Others
 Assumes agreements are binding on all other parties involved.

7.6 Title to Personal Property and Priority of Security Interests

1. There is no title registry for personal property in Ontario.
o Legal opinions should not state ownership (title) of personal property.
2. In financing transactions involving personal property security, opinions should clarify:
o No opinion is given on the priority of the security interests created by the agreements.
3. A standard qualification is:
o "No opinion is given as to the title of the Corporation to any property, or the priority
of any mortgage, assignment, pledge, charge, or security interest provided for in any
of the [Documents]."

7.7 Other Laws

1. Lawyers licensed in Ontario can only give opinions on Ontario and applicable Canadian
federal laws.
o Transactions involving other jurisdictions require opinions from local counsel in
those jurisdictions.
2. A typical qualification is:
o "The opinions expressed herein relate only to the laws of the Province of Ontario and
the laws of Canada applicable therein, and no opinions are expressed herein with
respect to the laws of any other jurisdiction."

8. Standard Opinions
8.1Incorporation
1. Opinion: The corporation is incorporated and existing under its governing laws (e.g., Ontario
Business Corporations Act). And It is not dissolved.
2. This opinion is supported by a current certificate of status or compliance.
o Note: Terms like “good standing” or “duly incorporated” are not used unless the
opinion giver incorporated the entity.

8.2 Corporate Capacity and Power

1. Opinion: The corporation has the power to:
o Own its property and operate its business.
o Enter into agreements and fulfill obligations.
2. Counsel should review the corporation’s articles and by-laws to confirm there are no
restrictions on these activities.

8.3 Authorization, Execution, and Delivery

1. Opinion: The corporation has authorized the agreements, and the documents have been
executed and delivered properly.
2. Counsel should review:
o Relevant statutes, articles, by-laws, shareholder agreements, and board resolutions.
 o Shareholder consent if required (e.g., for transferring major assets).

8.4 Valid and Binding Obligation Enforceable in Accordance with Its Terms
1. Opinion: The agreements are valid, binding, and enforceable under Ontario law.
2. Restrictions:
o Agreements governed by non-Ontario laws are excluded unless local counsel
provides an opinion.
o Equity remedies (e.g., specific performance) and bankruptcy laws may limit
enforceability.

8.5 Registration
1. Opinion: Necessary registrations have been completed to protect the security interests.
2. A standard provision is:
o "Registrations have been made in all public offices under Ontario law to preserve
and protect the security interests created by the [Documents]."

8.6 Rank of Security

1. Opinions on the priority of personal property security are not usually given due to PPSA
complexities.
2. Real property opinions typically address the priority of charges based on property registries.

8.7 Authorized Share Capital

1. In share purchase or financing transactions, opinions may address the corporation’s share
capital.
o This includes authorized, issued, and outstanding shares.
2. Caution: Corporate records may be outdated or incomplete.
o An officer’s certificate is often required, and the opinion giver relies on its accuracy
with limited independent investigation.
Chapter 28: Unsecured Creditors’ Rights and Remedies

Part I: Bankruptcy and Other Unsecured Creditors’ Remedies

1. Introduction
1. An unsecured creditor is someone owed a debt by a debtor, but the debt is not secured by
the debtor’s assets.
2. Unsecured debts can arise from:
o Trade debts (e.g., supply of goods/services).
o Claims for damages, breach of contract, or employee obligations (with limited
statutory protections).
o Unsecured loans or guarantees.
3. This chapter explains the rights and remedies of unsecured creditors for recovering debts.

2. Judgments, Executions, and Garnishments

2.1 Judgments and Executions
1. 1st step for unsecured creditors: Get a court judgment proving the debt and its amount.
2. After obtaining the judgment, creditors can enforce it by:
o Filing a writ of seizure and sale with the sheriff’s office.
o This writ allows the sheriff to seize and sell the debtor’s personal and real property
in that jurisdiction.
3. Funds collected by the sheriff are distributed to creditors under the Creditors’ Relief Act,
2010.
4. The writ only attaches to the debtor’s interest in their assets, making unsecured creditors
subordinate to secured creditors.
2.2 Garnishments
1. A judgment creditor can intercept third-party payments to the debtor using a notice of
garnishment.
o This notice is issued by the court and served to the debtor and the third party
(garnishee).
2. Garnishees must either:
o Pay the amounts owed to the debtor (up to the judgment amount) to the sheriff.
o File a garnishee’s statement within 10 days if they dispute the garnishment or pay
less than the stated amount.
3. Failure to comply may lead to a court order requiring the garnishee to pay directly.
2.3 Priority in Bankruptcy
1. Under the Bankruptcy and Insolvency Act (BIA), a trustee-in-bankruptcy has priority
over all:
o Executions and garnishments unless fully paid before the bankruptcy.
o Secured creditors’ rights remain unaffected.
2.4 Distinction from Secured Creditors
1. Secured creditors have rights to seize & sell assets directly under their security agreements.
o They don’t need a court order or sheriff’s intervention.
2. Their claims typically take precedence over unsecured creditors’ claims.

3. Unpaid Suppliers
3.1 General
1. Section 81.1 of the BIA gives unpaid suppliers special rights to recover goods supplied to a
bankrupt or insolvent purchaser within 30 days.
3.2 Limitations
1. Rights under Section 81.1 apply only if:
o The purchaser is bankrupt or in receivership.
 o All requirements under Section 81.1 are met.
2. These rights do not provide priority over proceeds.
3.3 Requirements and Procedures
1. Written demand: The supplier must deliver a written demand in the prescribed form within
15 days of bankruptcy or receivership.
2. The goods must meet these conditions:
o Be in the purchaser’s possession.
o Be identifiable, unpaid for, and in the same state as delivered.
o Not resold or under a sale agreement at arm’s length.
3. If requirements are met, the trustee or receiver must:
o Return the goods.
o Pay the unpaid amount for the goods.
3.4 Priority
1. Section 81.1(6) gives suppliers repossession rights that override secured creditors but not
bona fide purchasers.
2. If goods are partially paid for, the supplier can:
o Repossess only the unpaid portion.
o Repossess all goods upon refunding partial payments.

4. Landlords and Rights of Distress

1. Unsecured Landlord Claims: Landlords can claim rent arrears, damages, or lease breaches.
2. Distress Rights:
o Landlords may seize and sell tenant assets on the premises for unpaid rent under the
Commercial Tenancies Act or lease terms.
3. Preferred Claim in Bankruptcy:
o Landlords can claim 3 months’ arrears and 3 months’ accelerated rent, limited to
the value of tenant assets on the premises.

5. Bankruptcy
5.1 Status of a Bankrupt
1. Bankruptcy is a legal process under the BIA. A debtor can become bankrupt by:
o Voluntarily assigning for the benefit of creditors (Section 49).
o Failing a proposal (Sections 50.4(8), 57, or 61(2)).
o A court order on a creditor’s application (Section 43).
5.2 Who Can Become Bankrupt
1. A bankrupt must be an insolvent person, defined as someone who:
o Owes at least $1,000 in provable claims.
o Cannot meet obligations when due (cash flow test).
o Has insufficient assets to cover debts (balance sheet test).
2. The BIA applies to individuals, partnerships, and corporations but excludes banks and
insurance companies.
5.3 Involuntary Bankruptcy and Creditor Applications
1. Creditors can apply to court for a bankruptcy order against an insolvent debtor.
2. Requirements for a bankruptcy order:
o The debtor is insolvent.
o The debtor has committed an act of bankruptcy within six months of the application.
5.3.2 Acts of Bankruptcy
1. Acts of bankruptcy are listed in Section 42(1) of the Bankruptcy and Insolvency Act (BIA).
2. The most common act cited in bankruptcy applications is when a debtor fails to meet
liabilities as they become due (Section 42(1)(j)).
3. Other common acts include:
o Fraudulent transfer or preference of property (Sections 42(1)(b)-(c)).
 o Showing creditors a statement of insolvency or admitting inability to pay debts in
writing (Section 42(1)(f)).

5.3.3 Procedure
1. In Ontario, a bankruptcy application is filed in the Ontario Superior Court of Justice.
o The application is issued by a registrar, an officer under the BIA.
o There is no separate bankruptcy court, but a section of the Toronto Superior Court
focuses on bankruptcy matters.
2. The applicant creditor must prove:
o The debtor is insolvent.
o At least $1,000 is owed to the applicant creditor(s).
o The debtor committed an act of bankruptcy within six months before filing.
3. Proof is provided through an affidavit of truth sworn by the applicant or its representative
(Section 43(3)).
4. After issuing the application, the registrar sets a time and place for a hearing.
o The debtor must receive notice at least 10 days before the hearing unless the court
orders a shorter period (BIA Rules, Section 70(1)).

5.3.4 Disputed Applications

1. If the debtor disputes the application, the registrar refers the case to a judge in the Superior
Court of Justice.
2. The debtor must file a notice of dispute at least 2 days before the hearing and serve it on the
applicant (BIA Rules, Section 74).
o The notice must specify the allegations being contested and the grounds for dispute.
3. If a notice of dispute is filed, the debtor can cross-examine the applicant’s representative on
the affidavit of truth (BIA Rules, Section 14(2)).
o The applicant cannot obtain discovery of the debtor.

5.3.5 Remedies
1. After hearing submissions, the court can:
o Issue a bankruptcy order, declaring the debtor bankrupt and appointing a trustee-in-
bankruptcy (Sections 43(6) and (9)).
o Dismiss the application (Section 43(7)).
o Stay the application indefinitely (Section 43(11)).
o Stay the application for a limited time (Sections 43(10)-(11)).
2. Even if an act of bankruptcy is proven, the court can dismiss the application if:
o The debtor can pay their debts.
o There is another valid reason to deny the order (Section 43(7)).
3. The court may stay the application if:
o The debtor disputes the facts, and the court deems it necessary to resolve the dispute
through trial (Section 43(10)).
o Other sufficient reasons justify delaying the application (Section 43(11)).

5.3.6 Deemed Assignment in Bankruptcy

1. A debtor is deemed bankrupt in specific cases under Division I, Part III of the BIA:
o Failing to file required documents after submitting a notice of intention to make a
proposal (Section 50.4(8)).
o Creditors rejecting a proposal during voting (Section 57).
o The court refusing to approve a proposal (Section 61(2)).

5.4 Trustees-in-Bankruptcy
5.4.1 General
1. When a debtor becomes bankrupt, they lose the legal ability to deal with their property.
 o Section 71 of the BIA: All of the debtor's property vests in the trustee, except for:
 Property held in trust for others.
 Retirement funds deposited over 12 months before bankruptcy.
 Property exempt from seizure under provincial law.
2. Trustees are typically licensed accountants or firms authorized by the Superintendent of
Bankruptcy.
o They are officers of the court and must act impartially in the interest of all creditors.
o Trustees’ fees & expenses have priority over most claims (Section 136(1)(b) BIA).

5.4.2 Duties and Powers of the Trustee

1. Notices and Reporting:
o Notify all known creditors of the bankruptcy.
o Convene creditors’ meetings.
o Periodically report on the bankruptcy estate’s administration (Sections 27(1) and
102(1) of the BIA).
2. Asset Liquidation:
o Take possession of and inventory the bankrupt’s assets quickly after the bankruptcy
order (Section 16(3)).
o Recover assets from others, unless legally held by secured creditors or other
entitled parties (Section 17(1)).
o Access premises holding the bankrupt’s assets, with warrants if needed (Sections
16(3) and 16(3.1)).
3. Administration:
o Inspect the bankrupt's actions before bankruptcy.
o Report transactions that might involve fraudulent preferences (Section 95) or
undervalued transfers (Section 96).
o Challenge improper transactions if necessary.

4. Approval for Key Actions:

o If inspectors are appointed, their permission is required for certain trustee actions,
like selling major assets or defending lawsuits (Section 30 of the BIA).
o Without inspectors, the trustee can act independently except for selling assets to
related parties, which requires court approval.

5.4.3 Treatment of Secured Creditors

1. Trustees must respect the rights of secured creditors, who can enforce their security
despite bankruptcy.
o Secured creditors are “strangers to the bankruptcy” & can seize & sell secured
assets.
2. Secured creditors must prove their claims if requested (Section 128(1)).
3. Trustees can redeem secured assets by paying the amount owed to the creditor (Section
128(3)).
o Redemption can benefit the estate if the secured assets’ value exceeds the debt.

5.5 Duty of Good Faith

1. Section 4.2 of the BIA: All parties in BIA proceedings must act in good faith.
o If someone fails to act in good faith, the court can issue appropriate orders.
2. The BIA does not define “good faith,” so guidance comes from case law.

6. Stay of Proceedings
6.1 General
1. Bankruptcy stays all unsecured creditor actions to collect debts (Section 69.3 of the BIA).
 o Stays also apply when a debtor files a proposal or notice of intention to make a
proposal (Sections 69, 69.1, and 69.2).
2. Secured creditors can still enforce their security.
3. Unsecured creditors must file a proof of claim with the trustee to recover debts (Section
124(1)).
4. Claims provable in bankruptcy include:
o Debts/liabilities incurred before bankruptcy.
o Contingent or future debts (Sections 121–122).
5. Purpose: The stay allows the trustee and court to control creditor claims efficiently.

6.2 Leave to Lift Stay

1. A court can allow a person to continue legal action despite the stay (Section 69.4):
o If the person will face significant harm without it.
o If it is fair to do so.
2. Courts may grant leave when:
o Co-defendants who are not bankrupt are involved.
o Claims are too complex for summary procedures.
o Insurance coverage issues are involved.
o The claim will not be discharged in bankruptcy.
3. Existing legal proceedings can continue if it is more efficient than restarting under the claims
process.

7. Administration of Bankrupt’s Estate

7.1 First Meeting of Creditors
1. The trustee must notify creditors of the bankruptcy and the 1st meeting within 5 days of
appointment (Section 102(1)).
2. The meeting must occur within 21 days of the trustee’s appointment and at least 10 days
after notice is sent.
3. The official receiver or their nominee chairs the meeting.
4. The meeting covers:
o Affirming the trustee’s appointment.
o Reviewing the bankrupt’s affairs.
o Electing inspectors.

7.2 Affirmation of Trustee

1. Creditors vote to affirm the trustee’s appointment (Section 115 of the BIA):
o Approval requires a simple majority of votes by dollar value of claims.
o If not affirmed, a new trustee can be appointed by special resolution or court order.
2. Creditors may object if they believe the trustee is biased or unsuitable.

7.3 Review of Bankrupt’s Affairs

1. Creditors review the bankrupt’s statement of affairs (a sworn list of assets and liabilities).
2. The trustee provides a preliminary report on the administration.
3. Statements and reports may not be accurate as they are prepared without full review.
o Asset values are often listed as book values, which may exceed realizable values.
o Liabilities might not include all claims or bankruptcy-related debts.
4. The official receiver examines the bankrupt before the meeting and reports findings to
creditors.
o The examination identifies shareholders, directors, and any unusual asset transfers.
5. Creditors can question the trustee and the bankrupt at the meeting.
7.4 Inspectors
7.4.1 General
1. Inspectors act like a board of directors for the estate, supervising and advising the trustee.
2. Creditors elect up to five inspectors by ordinary resolution.
o Inspectors do not need to be creditors but cannot be involved in legal disputes with
the estate.
3. Inspectors may the trustee to hire counsel, conduct examinations, or investigate fraudulent
preferences.

7.4.2 Trustee Powers Requiring Inspector Approval

1. The trustee needs inspector approval to:
o Sell or lease property.
o Operate the bankrupt’s business.
o Borrow money or settle claims.
o Start or defend lawsuits.
2. Without inspectors, the trustee can act independently, except for selling assets to related
parties, which requires court approval.
7.4.3 Conflicts with Inspectors
1. If inspectors and creditors give conflicting directions to the trustee, the creditors’ directions
prevail (Section 119(1)).
2. If the trustee disagrees with the inspectors’ directions, the trustee can ask the court to review
them (Section 119(2)).

7.5 Proof of Claims and Voting at First Creditors’ Meeting

7.5.1 Proof of Claim
1. Creditors must file a proof of claim with the trustee before the first meeting of creditors to
vote (Section 109(1)).
2. The proof of claim must use the prescribed form and be verified by the claimant’s certificate.
o It includes the claim amount, whether it is secured, and whether preferred creditor
status is claimed.
o Preferred creditors are unsecured creditors with claims listed under Sections 136(1)
(a)–(j) of the BIA.

7.5.2 Secured Creditors

1. The bankruptcy process does not affect the rights of secured creditors.
2. Secured creditors can file a proof of claim for any unsecured deficiency if their security is
insufficient to cover the debt.
3. Secured creditors can participate in the bankruptcy process as unsecured creditors for the
unsecured portion of their claim.
o This includes voting and receiving distributions for the unsecured portion (Section
112).

7.5.3 Rights to Share in Distribution

1. Creditors who do not file a proof of claim cannot share in any distribution (Section 124(1)).
2. If a creditor does not file a claim before the 1st meeting, they lose the right to vote but can
still file a claim later for distribution purposes.

7.5.4 Restricted Parties

1. Certain related parties cannot vote on trustee or inspector appointments without court
approval (Section 113(3)):
o Family members of an individual bankrupt.
o Officers, directors, employees, or wholly-owned subsidiaries of a corporate bankrupt.
8. Personal Liability of Trustee
8.1 Labour/Employee-Related Liabilities
1. Trustees are not personally liable for pre-existing employee-related liabilities, including
pension plan obligations (Section 14.06(1.2)).
2. Definition of Trustee: Includes interim receivers and others lawfully in possession of an
insolvent person’s property (Section 14.06(1.1)).
3. However, trustees may still face legal issues such as being considered a successor employer.
4. Trustees remain liable for any new liabilities created after their appointment.

8.2 Environmental Liabilities

8.2.1 General
1. Trustees may encounter environmental issues tied to real property owned by the bankrupt.
2. The Environmental Protection Act (EPA) imposes liability for pollution control on those in
possession of contaminated property.
3. Trustees may be responsible for cleanup costs even if they exceed the property’s value.

8.2.2 Protections from Personal Liability

1. Trustees are not personally liable for environmental issues that occurred before or after their
appointment, unless caused by gross negligence or willful misconduct (Section 14.06(2)).
2. Trustees must comply with reporting and disclosure obligations under environmental laws
(Section 14.06(3)).

8.2.3 Compliance with Environmental Orders

1. If an environmental order requires remediation( correcting the issue), trustees have 4 options
(Section 14.06(4)):
o Comply within 10 days of the order or their appointment.
o Abandon or release their interest in the property within 10 days.
o Apply for a stay of the order to contest it.
o Apply for a stay to assess the order’s economic viability.
2. If trustees comply, abandon the property, or secure a stay, they are not personally liable for
remediation costs.
3. Supreme Court Ruling: Trustees cannot ignore environmental liabilities of the estate.
The estate’s value must be used for compliance.

8.2.4 Priority Charge for Remediation Costs

1. If the government remedies environmental damage, remediation costs take priority as a 1st
charge on the property and contiguous properties (Section 14.06(7)).

9. Liquidation of Bankrupt’s Assets

9.1 General
1. Trustees may sell unencumbered assets via tender, auction, or private contract, with
inspector approval if applicable (Section 30(1)(a)).
2. Trustees need court approval to sell assets to related parties, such as directors, officers, or
their relatives (Sections 30(4)–(5)).
3. Sales are typically done on an “as is, where is” basis.

9.2 Sale of Real Property

9.2.1 General
1. Bankruptcy orders or assignments must be registered against real property titles before a
trustee can transfer the property.
2. Transfers exclude implied covenants under the Land Registration Reform Act.
9.2.2 Matrimonial Home Considerations
1. A trustee cannot override a non-titled spouse’s right to possess a matrimonial home under
the Family Law Act (FLA).
2. Purchasers must ensure the non-titled spouse agrees to give up possession rights.

10. Rights of Occupation of Leased Premises and Assignment of Leases

10.1 Occupation Rights
1. Trustees can occupy leased premises for up to 3months under the Commercial Tenancies
Act.
o During this time, trustees must pay occupation rent equivalent to pre-bankruptcy
rent.
2. Trustees must elect to keep or disclaim the lease within 3 months.

10.2 Assignment of Leases

1. Trustees can assign leases with landlord consent after paying arrears.
2. If landlords refuse, trustees may assign leases by court order if the assignee agrees to the lease
terms (Commercial Tenancies Act, Section 38(2)).

10.3 Disclaimer of Leases

1. If a trustee disclaims a lease, landlords can claim:
o Up to three months’ arrears.
o Up to three months’ accelerated rent.
2. If a lease is disclaimed in a proposal, landlords can only claim actual losses.

11. Distribution of the Estate’s Assets

1. Section 136 of the BIA outlines the order of payment:
o Funeral costs of the bankrupt.
o Costs to conserve the estate.
o Trustee fees and legal expenses.
o Superintendent’s levy.
o Unpaid employee wages (up to $2,000).
o Secured creditors’ adjustments.
o Preferred creditors, such as support payments and municipal taxes.
o Unsecured creditors on a pro rata basis.

12. Interim Receivers

1. Interim receivers may be appointed to preserve a debtor’s assets during disputes.
2. Their powers are limited to preventing misuse or depletion of assets.

13. Discharge of Bankrupt

13.1 Corporate Bankrupts
1. Corporate bankrupts cannot obtain a discharge unless all debts are paid. (Section 169(4)).
13.2 Individual Bankrupts
13.2.1 Individual bankrupts may be discharged even if debts are not fully
repaid. 13.2.2 Automatic Discharge
1. If an individual bankrupt has never been bankrupt before and is not a "has no tax debt," they
can receive an automatic discharge:
o After 9 months, unless the Superintendent of Bankruptcy, trustee, or a creditor
objects, or payments under Section 68 are required (Section 168.1(1)(a)).
o After 21 months, if payments under Section 68 are required and there are no
objections (Section 168.1(1)(a)).
2. If the individual has been bankrupt once before and is not a personal income tax debtor:
 o Automatic discharge occurs 24 months after bankruptcy if no payments are required
under Section 68, and there are no objections.
o If payments under Section 68 are required, the discharge occurs 36 months after
bankruptcy.
3. Once the time passes and no objections are filed, the discharge happens automatically without
a hearing.
4. A bankrupt can also apply for a discharge hearing before the automatic discharge date
(Section 168.1(2)).

13.2.3 Non-Automatic Discharge

1. Individuals who have been bankrupt more than twice or are personal income tax debtors
cannot get an automatic discharge.
2. The trustee can apply for a discharge hearing:
o Between 3 months and 1 year after the bankruptcy starts (Section 169(2)).
3. The bankrupt can also request a hearing at any time.
4. The trustee must prepare a report on the bankrupt’s conduct and estate administration for the
hearing (Section 170(1)).

13.2.4 Discharge of Personal Income Tax Debtors

1. A "personal income tax debtor" owes $200,000 or more in personal income tax debt, which is
75% or more of their total proven unsecured debt (Section 172.1(1)).
2. Personal income tax debtors cannot be automatically discharged.
3. They can apply for a discharge hearing:
o After 9 months, if no payments under Section 68 are required.
o After 21 months, if payments under Section 68 are required.
o After 24 months, if they have been bankrupt once before and no payments are
required.
o After 36 months, in any other case.

13.2.5 Notice to Creditors

1. The trustee must notify creditors of the discharge date or hearing details (Sections 168.1(4)
and 169(6)).
2. If a creditor objects in writing and files it with the court, the court will hear the discharge
application.
3. Registrars and judges can grant discharge orders even if opposed (Section 192).

13.2.6 Mandatory Mediation

1. The trustee must apply for mediation if the discharge is opposed due to failure to make
payments under Section 68 or because the bankrupt chose bankruptcy over a viable proposal
(Section 170.1(1)).
2. If mediation resolves the issue, the trustee issues a certificate of discharge (Section 170.1(4)).
3. If mediation fails or conditions are unmet, the trustee must take the matter to court (Section
170.1(3)).

13.2.7 Reasons for Refused, Suspended, or Conditional Discharge

1. The court may refuse, suspend, or impose conditions on discharge for reasons under Section
173 of the BIA, including:
o Assets were worth less than 50 cents per dollar of unsecured liabilities (Section
173(1)(a)).
o The bankrupt traded while insolvent (Section 173(1)(c)).
o The bankrupt caused the bankruptcy through reckless spending, gambling, or neglect
(Section 173(1)(e)).
o The bankrupt gave an undue preference to creditors before bankruptcy (Section
173(1)(h)).
 o The bankrupt has been previously bankrupt or proposed to creditors (Section 173(1)
(j)).
o Bankruptcy was chosen over a proposal (Section 173(1)(n)).
2. If no Section 173 factors exist and the bankrupt is not a personal income tax debtor, the court
may:
o Grant an absolute discharge.
o Suspend the discharge for a set time.
o Impose conditions on future income or assets.
o Refuse the discharge (Section 172(1)).
3. If Section 173 factors exist or the bankrupt is a personal income tax debtor, the court may:
o Suspend the discharge.
o Impose conditions.
o Refuse the discharge (Section 172(2)).
4. For personal income tax debtors, the court also considers:
o Circumstances of the tax debt.
o Efforts to repay the debt.
o Payment of other debts over the tax debt.
o Future financial prospects (Section 172.1(4)).

13.2.8 Conditional Discharges

1. Conditional discharges often require the bankrupt to make regular payments to the trustee.
2. Payment amounts depend on the bankrupt’s income, expenses, and family responsibilities.

13.2.9 Suspension of Discharges

1. If the bankrupt has no funds to pay creditors after considering living expenses, the court may
suspend the discharge.
2. The discharge takes effect only after the suspension ends.

13.2.10 Debts Not Released by Discharge

1. After discharge, certain debts remain unpaid (Section 178 of the BIA), including:
o Damage awards for bodily harm, sexual assault, or wrongful death (Section 178(1)
(a.1)).
o Support or maintenance payments for a spouse or child (Section 178(1)(c)).
o Student loans incurred within seven years before bankruptcy (Section 178(1)(g)).
o Debts from fraud or misrepresentation (Section 178(1)(e)).

14. Discharge of Trustee

1. When the estate is fully administered, the trustee must apply to the court for discharge
(Section 41(1)).
2. Creditors are notified and can object if they believe unresolved matters remain.
3. At the hearing, the trustee submits:
o A final statement of receipts and disbursements.
o A final bill of costs for court approval

Part II: Fraudulent Conveyances, Preferences, and Transfers at Undervalue

1. Overview of Pre-Bankruptcy Transactions
o Transactions made before bankruptcy, especially with related parties, are reviewed by
trustees or creditors.
o This review ensures these transactions didn’t unfairly prefer some creditors or reduce
assets available to all creditors.
o Trustees scrutinize actions before bankruptcy to identify and address prejudicial
transactions.
2. Legal Remedies
 o Trustees and creditors can use remedies under the Bankruptcy and Insolvency Act
(BIA), corporate law, and provincial laws.
o These remedies can be applied together, depending on the facts of the case.
o Only trustees or creditors assigned the trustee’s rights (under Section 38 of the BIA)
can use BIA remedies.
3. BIA vs. Provincial Laws
o The BIA makes it easier to challenge transactions than provincial laws because
proving fraudulent intent is not required.
o The BIA addresses transfers at undervalue and preferences (Sections 95–101).
4. Application in Other Proceedings
o BIA provisions also apply in BIA proposals unless otherwise stated (Section 101.1).
o Similar provisions exist under the Companies’ Creditors Arrangement Act
(CCAA), allowing review of transactions unless the plan provides otherwise (Section
36.1 of the CCAA).
5. Fair Consideration
o Transactions supported by “good,” “valuable,” or “fair and reasonable” consideration
typically survive legal challenges.

15. The Fraudulent Conveyances Act (FCA)

15.1 Elements of a Fraudulent Conveyance
 Under Section 2 of the FCA, a fraudulent conveyance occurs when:
1. There is a conveyance of real or personal property.
2. It is made with intent to defeat, hinder, delay, or defraud creditors.
15.2 Meaning of "Conveyance"
 Includes gifts, grants, charges, or encumbrances of property.
 Broadly interpreted by courts to include any property transfer.
15.3 Meaning of Property
 Covers all types of real and personal property.
 Excludes property held in trust, exempt property under the Execution Act, or assets
unavailable to unsecured creditors in bankruptcy.
15.4 Intent and "Badges of Fraud"
 Fraudulent intent is key and determined by reviewing circumstances.
 Indicators of fraud ("badges of fraud"):
o Secret or hasty transfers.
o Inadequate consideration.
o Retention of benefits by the transferor.
o Close relationships between parties.
 Courts examine multiple badges to assess intent.
15.5 Exemptions
 A conveyance can be valid under Section 3 if:
1. Made for good consideration (not nominal or inadequate).
2. Made in good faith, without knowledge of fraudulent intent.
15.6 Remedies
 Fraudulent conveyances are void and subject to seizure by creditors.
 Courts may order transferees to release property for creditor claims.
15.7 Proper Parties
 Applies to "creditors or others," including judgment creditors, secured creditors, and
claimants with contingent or unliquidated claims.
15.8 Limitation Period
 Challenges are subject to limitation periods under the Limitations Act, 2002.

16. The Assignments and Preferences Act (APA)

16.1 Fraudulent Conveyances Under the APA
 Similar to the FCA, but includes specific requirements.
16.1.1 Elements of a Fraudulent Conveyance
 Under Section 4(1):
1. There is a gift, conveyance, or transfer of property.
2. Made when the debtor was insolvent or on the verge of insolvency.
3. Done with intent to defeat, hinder, or delay creditors.
16.1.2 Exemptions
 Certain transfers are exempt under Section 5(1), including:
o Sales or payments in good faith during ordinary trade.
o Payments to creditors.
o Conveyances for reasonable value or as security for a loan.
16.2 Unjust Preferences Under the APA
16.2.1 Elements of an Unjust Preference
 Under Section 4(2):
1. There is a transfer of property by the debtor.
2. Made when the debtor was insolvent or on the verge of insolvency.
3. Intended to give one creditor an advantage over others.
16.2.2 The 60-Day Presumption
 Section 4(3) of the APA presumes a transfer is fraudulent and an unjust preference if
challenged within 60 days of the transfer, unless proven otherwise.
 This applies regardless of whether the transfer was voluntary or made under pressure.
 The short 60-day window makes it hard to benefit from this presumption.
 Pressure cannot be used to rebut the presumption.
16.2.3 Intent and Concurrent Intent
 The same rules for intent and concurrent intent under the FCA and APA for fraudulent
conveyances apply to unjust preferences.
16.2.4 Exemptions
 Exemptions under Section 5(1) of the APA for fraudulent conveyances also protect certain
transactions from being attacked as unjust preferences.
 Payments to creditors: Courts broadly interpret this exemption, so any payment to a creditor
for past debt—even if the debtor is insolvent—is usually protected.
 Secured creditor protection: If a payment to a secured creditor is voided, the creditor is
entitled to have the security restored or its value compensated (Sections 5(4) and 5(5)(b)).
 Exchange of security: Good-faith exchanges of one security for another are exempt if the
debtor's estate value isn’t reduced (Section 5(5)(c)).
 Pre-existing debt security: Security given for an old debt is valid if the creditor:
o Advances new money to the debtor.
o Believes the new money will help the debtor stay in business and pay debts in full
(Section 5(5)(d)).
16.3 Proper Parties
 To bring a claim under the APA, the plaintiff must have been a creditor at the time of the
transfer.
 Unlike the FCA, new creditors after the transfer cannot make claims under the APA.
16.4 Remedy
 Remedies for fraudulent conveyances and unjust preferences under the APA are the same as
those under the FCA.
16.5 Limitation Periods
 Like the FCA, APA actions are subject to the Limitations Act, 2002.

17. Remedies Under the BIA

17.1 Introduction
 The BIA lets trustees challenge transactions that reduce property available to creditors or
unfairly favor one creditor.
 Key areas include unjust preferences, transfers at undervalue, improper dividends, and
share redemptions.
  If a trustee refuses to act, creditors can ask the court for permission to take legal action
themselves under Section 38 of the BIA.
17.2 Preferences Under the BIA
17.2.1 Required Elements of a Preference
To prove a preference under Section 95 of the BIA, the following must be shown:
 A transaction occurred, such as:
o A property transfer, service, payment, obligation, or legal proceeding.
 The parties had a debtor-creditor relationship.
 The debtor was insolvent at the time.
17.2.2 Intent to Prefer
 Arm’s length transactions: The trustee must prove the debtor intended to prefer the
creditor. Intent is judged objectively based on conduct and circumstances.
 Non-arm’s length transactions: No intent needs to be proven; the existence of preference is
enough.
17.2.3 Timing for Transactions
 Arm’s length parties: Transactions within 3 months of the bankruptcy event are reviewed.
 Non-arm’s length parties: Transactions within 12 months of the bankruptcy event are
reviewed.
17.2.4 Insolvent Person
 Defined under Section 2 of the BIA, as someone unable to meet debts as they come due or
whose liabilities exceed their assets.
17.2.5 Section 95(2) Presumption
 If a transaction gives one creditor a preference and meets timing rules, there’s a
presumption of intent to prefer.
 The presumption can be rebutted by showing the transaction was made in good faith to help
the debtor’s business continue.
 Pressure from creditors doesn’t rebut the presumption.
17.2.6 Remedies
 Preferences are void against the trustee.
 Trustees can recover money paid, goods returned, or security given through legal action.
17.2.7 Limitation Periods
 Actions under Section 95 must be started within two years of the trustee discovering the
claim, as per the Limitations Act, 2002.
17.3 Transfers at Undervalue
17.3.1 General
 Section 96 of the BIA addresses transactions where the debtor received no value or
significantly less than fair market value.
17.3.2 Required Elements
 A disposition of property or service provision occurred.
 The debtor received no or conspicuously low consideration.
17.3.3 Arm’s Length vs. Non-Arm’s Length
 Arm’s length transactions: Must prove the transfer occurred within one year, the debtor was
insolvent, and the intent was to defraud, defeat or delay creditors.
 Non-arm’s length transactions:
o Transfers within one year are automatically void.
o Transfers within five years are void if the debtor was insolvent or intended to defraud
creditors.
Transferee as Non-Creditor
 The recipient of a transfer at undervalue does not need to be a creditor to have the
transaction challenged.
7.3.3 "Arm's Length"
 Under Section 4(5) of the BIA, related persons are presumed not to deal at arm's length. This
presumption can be rebutted.
 "Related persons" is explained earlier in the context of preferences.
  Even if not related, people can still be found to not deal at arm’s length.
 Section 4(4) of the BIA states that determining whether unrelated people deal at arm’s length
is a matter of fact.
17.3.4 Fraudulent Intent
 For transfers to arm's length parties or to non-arm’s length parties made more than one year
before the bankruptcy, the trustee must prove the debtor intended to defraud, defeat, or
delay a creditor.
 The BIA does not presume fraudulent intent based on transfers below market value,
unlike preferences.
 Since courts haven’t tested this provision, trustees likely need to rely on common law to
prove intent, as discussed earlier under the FCA.
17.3.5 Consideration Conspicuously Less Than Fair Market Value
 "Fair market value" means the highest price available in an open market between informed
and willing parties acting freely.
 Determining fair market value is complex and often requires expert reports.
 Section 96(2) of the BIA simplifies this by requiring trustees to include their valuation in
applications under Section 96. The court will accept this unless there’s contrary evidence.
 If challenged, the complexity of proving fair market value returns.
 Courts define "conspicuously" as notable, striking, or flagrant. For example, a $1 million gap
between market value and consideration is conspicuous.
17.3.6 The Remedy
 If a transfer meets Section 96 requirements for undervalue, the court can:
o Declare the transfer void as against the trustee.
o Order the involved parties or anyone privy to the transaction to pay the estate the
difference between the value of the given and received considerations.
 Section 96(3) defines "person privy" as someone not at arm’s length who benefits directly or
indirectly from the transaction.

17.4 Payment of Dividends, Redemption of Shares, or Compensation

17.4.1 General
 Section 101 of the BIA allows trustees to recover amounts paid by a bankrupt corporation as:
o Dividends or share redemptions within one year before bankruptcy.
o Termination pay, severance pay, or incentive benefits paid to directors, officers, or
management during the reviewable period.
17.4.2 Required Elements
For dividends or share redemptions:
 The corporation was insolvent or became insolvent due to the transaction.
 Directors lacked reasonable grounds to believe the corporation was solvent or that the
transaction would not cause insolvency.
For compensation:
 The payment:
o Happened when the corporation was insolvent or caused insolvency.
o Was conspicuously above fair market value.
o Was outside the ordinary course of business.
 Directors lacked reasonable grounds to believe the payment met the above criteria.
Onus of Proof:
 Directors must prove the corporation was solvent and the transaction was proper (Section
101(5)).
 Shareholders must show the corporation was solvent or not made insolvent by the
transaction if they are held liable (Section 101(6)).
Court Considerations:
 The court will assess if directors acted prudently and relied in good faith on professional
reports or financial statements.
17.4.3 The Remedy
 The court may order directors to pay the trustee for the transaction amounts plus interest.
 Shareholders may also be liable for amounts received if they are related to the corporation or
directors (Section 101(2.2)).
17.4.4 Exemptions
 Directors who protested the transaction are not liable (Sections 101(3)–(3.1)).

18. The Oppression Remedy

18.1 Required Elements
 Under Section 248(2) of the OBCA, the court may act if:
o A corporation's actions or omissions harm a security holder, creditor, director, or
officer.
o The corporation’s business is conducted in an unfair or oppressive way.
o Directors exercise powers unfairly.
 The conduct must breach the "reasonable expectations" of the applicant.
18.2 Proper Parties
 A "complainant" can bring an application.
 Complainants include current or former shareholders, directors, officers, or any person
deemed proper by the court.
 Unsecured creditors may qualify, especially if the corporation is near insolvency.
18.3 Remedies
 Courts can grant any remedy they see fit, including:
o Restraining harmful conduct.
o Appointing a receiver or receiver-manager.
o Canceling or modifying contracts.
o Awarding compensation to aggrieved parties.
18.4 Oppression Remedy Under the CBCA
 The oppression remedy in the CBCA is similar to the OBCA provision.

19. COVID-19 Pandemic: Changes

19.1 Benefits Not Subject to Bankruptcy
 Emergency benefits like the Canada Recovery Benefit (CRB), Canada Recovery Sickness
Benefit (CRSB), and Canada Recovery Caregiving Benefit (CRCB) are excluded from
bankruptcy estates under Section 27 of the Canada Recovery Benefits Act.
19.2 Limitation Periods
 During the pandemic, the Ontario government paused most provincial limitation and
procedural periods between March 16, 2020, and September 13, 2020, under the Reopening
Ontario Act, 2020.
CHAPETR 29- Secured Creditors’ Rights and Remedies
Part I: Priorities

1. Why Priorities Matter

 Gen Rule: Under the Bankruptcy & Insolvency Act (BIA), unsecured creditors share the
proceeds of the bankrupt’s assets proportionately based on the size of their claims (s. 141).
 Priority for Secured Creditors: Creditors with secured claims get priority over unsecured
creditors by obtaining security over the debtor’s assets.
 Special Rights for Other Creditors: Some creditors, such as landlords, government
agencies, and employees, have special priority rights (e.g., landlord’s distress for rent,
statutory liens, or deemed trusts). These rights may take priority over secured creditors in
specific circumstances.

2. Personal Property Security Act (PPSA) Security

2.1 Obtaining Priority
 Creditors can secure their claims against a debtor’s assets through security agreements.
 Security can cover specific assets or all of a debtor’s personal and real property.
 A secured creditor’s rights take priority only if the security interest is perfected.
2.2 Perfecting Security
 Steps to Perfect:
1. Attachment: This occurs when:
 The debtor signs a written security agreement describing the collateral.
 The creditor gives value.
 The debtor has rights in the collateral.
2. Perfection: Achieved by:
 Registering a financing statement.
 Taking possession or control of the collateral (e.g., for securities).
2.3 Title/Ownership
 Title retention by a seller or lessor does not prevent a secured creditor’s claim if the PPSA
applies.
 Conditional Sale Contracts and Leases: If these transactions effectively create a security
interest, PPSA rules will apply to determine priority.

3. Non-PPSA Security
3.1 Requirements
 Security under statutes other than the PPSA (e.g., real estate mortgages) must meet specific
formalities and registration requirements.
 For example, a real estate mortgage must be registered under the Land Registration
Reform Act to have priority over subsequent claims.
3.2 Title/Ownership
 Title is crucial for non-PPSA security, such as:
o Security under s. 427 of the Bank Act.
o Landlord’s distress rights.
4. Secured Creditor Priorities
4.1 PPSA Priorities
4.1.1 First-to-Register Rule
 Rule: Priority between two security interests perfected by registration is determined by the
order of registration, not the timing of perfection.
 Advance Filing: Creditors can file financing statements before executing security
agreements, which gives an advantage.
4.1.2 First-to-Perfect Rule
 Rule: If two security interests are perfected without registration, priority is determined by
which was perfected first.
4.1.3 First-to-Attach Rule
 Rule: Between unperfected security interests, priority is determined by the order of
attachment.
4.1.4 Deemed Trusts
 Certain deemed trusts (e.g., for unpaid wages under the Employment Standards Act) take
priority over security interests in accounts or inventory.
4.1.5 Consequences of Unperfected Security
 Unperfected security interests:
o Are subordinate to perfected security interests.
o Cannot stand against a trustee-in-bankruptcy or certain transferees.

Key Points for Secured Creditors

1. Perfection is Essential: Without perfection, a security interest may lose priority to other
creditors or a trustee-in-bankruptcy.
2. Registration Matters: Filing a financing statement early can ensure priority.
3. Understand Deemed Trusts: Certain statutory rights can take priority even over secured
creditors.
4.1.6 Purchase-Money Security Interests (PMSIs)- This is an EXCEPTION to
First to Register Rule
 Priority Exception: A PMSI gives a creditor priority over preexisting security interests in
the same collateral if certain steps are followed (PPSA, s. 33).
 Definition: A PMSI secures the payment of the collateral's price or value advanced to acquire
it (s. 1(1)).
 Perfection Requirements for Non-Inventory Collateral:
o Security interest must be registered before or within 15 days of the debtor
obtaining possession of the collateral (PPSA, s. 33(2)(a)).
o For intangibles, registration must occur within 15 days of attachment (PPSA, s.
33(2)(b)).
 Perfection Requirements for Inventory:
1. Register the security interest.
2. Notify prior secured parties in writing before registration.
3. Complete these steps before the debtor takes possession of the collateral.
 Multiple PMSIs: If more than one PMSI is granted for the same collateral, the seller’s
PMSI has priority (PPSA, s. 33(3)).
 Proof of Compliance: PMSI holders often secure evidence of possession dates, such as
signed acknowledgments.
 Unperfected PMSIs: If not perfected, a PMSI has no priority over preexisting security
interests or trustees in bankruptcy.
 Exception for Timing: Section 20(3) allows retroactive perfection if done within 15 days of
the debtor obtaining possession of the collateral.
 Sale-Leaseback Exception: PMSI rules exclude sale-leaseback transactions (PPSA, s. 1(1)).
4.1.7 Special Priority Rules for Fixtures and Accessions
(a) Fixtures
 Definition: A "fixture" is determined based on common law and includes goods annexed to
land as improvements.
 Registration: Secured creditors must file a "fixture filing" against d land title (PPSA, s.34).
 Priority Rules:
o If the security interest attaches before the good becomes a fixture, the secured
party has priority over subsequent interests in the land.
o If the security interest attaches after the good becomes a fixture, priority is limited
to interests acquired after the security interest is registered unless written consent is
obtained.
 Exceptions: Purchasers or prior encumbrancers without knowledge of the fixture filing have
priority if their interest arises before registration.
(b) Accessions
 Definition: Accessions are goods installed in or affixed to other goods (PPSA, s. 1(1)).
 Priority Rules:
o A security interest attaching before the good becomes an accession has priority
over interests in the combined goods.
o If attachment occurs after the good becomes an accession, the security interest ranks
below interests existing at that time unless written consent is provided.
 Subordination: Priority is subordinated to subsequent purchasers and creditors who perfect
their interests before the PMSI is perfected.

4.1.8 Special Priority Rules for Investment Property

 Definition: "Investment property" includes securities, security entitlements, accounts, and
futures contracts (PPSA, s. 1(1)).
 Control Priority:
o Security interests perfected by control have priority over those perfected by other
methods (PPSA, s. 30.1(2)).
o Among control interests, priority is determined by time (PPSA, s. 30.1(4)).
 Cut-Off Rules:
o A "protected purchaser" obtains interest free of adverse claims by giving value,
lacking notice of claims, and obtaining control (STA, s. 70).
o Purchasers not acting as secured creditors take free of security interests if they lack
notice and give value (PPSA, s. 28(6)).

4.1.9 Bank Act Security Priority

 PPSA vs. Bank Act: PPSA priority rules do not apply to disputes involving Bank Act
security (s. 427).
 Conditional Sales: Bank Act security is subordinate to conditional sale vendors because the
vendor retains title until full payment.
 Timing Matters:
o If PPSA security is obtained before Bank Act security, the PPSA creditor has
priority over the bank.
o If Bank Act security is obtained 1st, the PPSA interest cannot attach because the
debtor no longer has title.
4.2 Equipment Leases
Distinction Between True Leases and Financing Leases
 A true lease is a rental agreement, while a financing lease is considered a security interest.
 PPSA Applicability:
o The PPSA applies to leases longer than 1 year, even if they do not secure payment
or performance of obligations (PPSA, s. 2(c)).
o However, Part V of the PPSA, which governs rights and remedies, applies only to
leases that secure payment or performance of an obligation (s. 57.1).
Key Provisions for True Leases
 PPSA Coverage:
o True leases with terms of one year or more are subject to PPSA provisions on
conflicts, registration, perfection, and priority.
o However, Part V’s enforcement rules, like notices of disposition and surplus
accounting, do not apply.
 Definition of “Lease for a Term of More Than One Year” (s. 1(1)):
o Includes leases with potential terms exceeding one year, such as:
 Indefinite terms.
 Renewable leases that could exceed one year in total.
 Overholding lessees with uninterrupted possession beyond one year.
Exceptions to PPSA Applicability
 PPSA does not apply if:
1. The lessor is not in the business of leasing goods.
2. The leased goods are household furnishings or appliances incidental to a land lease.
Relevance of True vs. Financing Leases
 Under PPSA:
o Determines whether Part V rights and remedies apply.
o True leases follow common law remedies, allowing lessors to keep surplus proceeds
unless otherwise stated in the lease.
 Outside PPSA:
o Only lessors under true leases are entitled to ongoing payment protections under
statutes like the BIA and CCAA during insolvency proceedings.

4.3 Execution Creditors

Rights of Execution Creditors
 Execution creditors’ claims are subordinate to perfected secured creditors.
 Priority by Execution Completion:
o Execution creditors obtain priority only if the process is fully completed, including
seizure, sale, and distribution of proceeds, before secured creditors enforce their
security.
o If incomplete, execution creditors rank equally with unsecured creditors.
PPSA Rules on Execution Creditors
 Unperfected Security Interests:
o Execution creditors have priority over unperfected security interests if the sheriff has
seized the collateral (PPSA, s. 20(1)(a)(ii)).

5. Statutory Liens and Deemed Trusts for Crown Claims

5.1 General
 Statutory Liens: Automatically imposed by law on the debtor’s assets without needing a
security agreement.
 Deemed Trusts: Create a legal trust over certain debtor assets to secure amounts owed under
specific laws.

5.2 PST Clearance Certificates

 Some tax laws, like the Retail Sales Tax Act, require secured creditors, receivers, or trustees
to pay amounts subject to deemed trusts to the government before distributing proceeds.
 Upon payment, the creditor receives a clearance certificate confirming the debt has been
settled.

5.3 Types of Statutory Liens and Deemed Trusts

 Common Categories:
1. Amounts owed to government authorities (e.g., property taxes).
 2. Amounts collected or withheld on behalf of the government (e.g., HST, GST,
employee deductions).
3. Amounts owed to third parties, like employees for vacation pay.
 Key Features:
o Some liens require PPSA registration; others do not.
o Super-priority liens must be explicitly stated in enabling legislation.

5.4 Effect of Bankruptcy on Crown Claims

5.4.1 Reversal of Priorities for Crown Claims
 Section 86 of the BIA:
o Ranks most Crown claims as unsecured in bankruptcy unless they are registered.
o Invalidates statutory deemed trusts unless they meet common law trust principles.
 Strategic Bankruptcy: Secured creditors may encourage bankruptcy to reverse priorities.
5.4.2 Exemptions for Employee Source Deductions
 Sections 67(3) and 86(3) of the BIA: Protect CRA claims for unremitted employee
deductions.
5.4.3 Securing Crown Claims
 Crown claims can be secured through:
1. Regular security (like PPSA creditors).
2. Special statutory security (registered under the BIA, s. 87).
 Registration ensures priority over later claims but does not affect PMSI priority.

6. Wage Priority Claims

Overview of Wage Priorities
 Scope of Priority:
o Protects unpaid wages, salaries, commissions, and vacation pay for services
rendered in the six months before bankruptcy or receivership.
o Limited to $2,000 per employee and $1,000 in disbursements for salespeople.
Priority Rules
 Wages Have Priority Over:
o Unsecured and secured claims (including PPSA claims).
o Most statutory liens and deemed trusts.
 Exceptions:
o Subordinate to supplier claims under s. 81.1 of the BIA.
o In bankruptcy, subordinate to CRA claims for unremitted source deductions.
Application in Insolvency Proceedings
 CCAA Proceedings: Wage claims must be paid or resolved before court approval of plans
or asset sales.
7. Pension Contribution Claims
Unpaid Pension Plan Amounts
 When an employer is bankrupt or in receivership, unpaid pension contributions have a
statutory priority charge under ss. 81.5–81.6 of the BIA.
 These charges cover:
o Employee deductions.
o Employer contributions to pension plans.
o Amounts payable to pension plan administrators.
 The charge applies to all of the employer's assets, not just current assets.
Changes Under the Pension Protection Act (PPA)
 Before April 27, 2023, only regular contributions had priority.
 The PPA expanded priority to include:
o Special payments required to cover unfunded liabilities.
o Payments needed to address solvency deficiencies in defined benefit plans.
 A four-year transition period applies to pre-PPA pension plans.
In CCAA and BIA Proposal Proceedings
 Pension amounts must be paid or arrangements made before:
o Approval of a CCAA plan.
o Approval of a BIA proposal or asset sale.

7.1 Priority
 The statutory charge has priority over:
o All unsecured claims.
o All secured claims, even if perfected before the liability arose.
o Most statutory liens and deemed trusts.
 Exceptions (claims with higher priority):
o Unpaid suppliers’ claims (s. 81.1 of the BIA).
o Unpaid wages (ss. 81.3–81.4 of the BIA).
o CRA claims for unremitted source deductions (in bankruptcy).

7.2 Underfunded Pension Deficiency Claims

 Prior to April 27, 2023, these claims were not covered by ss. 81.5–81.6 of the BIA.
 PPA Amendments:
o Now include special payments and amounts required to cover unfunded liabilities
or solvency deficiencies.
 These claims have special priority status, subordinate to only a few statutory charges.

8. Landlord Priorities
8.1 Landlord’s Right of Distress
 A landlord can seize and sell a tenant’s assets on leased premises for unpaid rent.
 The right of distress applies only to assets owned by the tenant and located on the premises.
 Exceptions:
o Conditional sale contracts: The landlord can only claim the tenant’s equity in the
goods, not the goods themselves.
o Bank Act Security: If a bank holds s. 427 Bank Act security, it has title to the
goods, and its priority depends on the timing of the landlord's distress rights and the
bank’s security.
Protecting Secured Creditors
 Secured creditors can protect themselves by:
1. Obtaining a waiver of distress rights from the landlord.
2. Seeking a stay of distress rights through a court receivership.
3. Triggering bankruptcy, which prevents the landlord from exercising distress rights.

8.2 Termination of Leases

 Landlords can terminate a lease for non-payment of rent.
 Distress and termination are alternative remedies:
o If the lease is terminated, the landlord cannot seize tenant assets.
o Landlords often distress for rent arrears first and terminate later for other defaults.

8.3 Effect of Bankruptcy

8.3.1 Reversal of Landlord Priority
 Upon bankruptcy, the landlord’s right of distress is replaced by a preferred claim under s.
136(1)(f) of the BIA:
o Covers three months’ arrears of rent.
o Covers three months’ accelerated rent, if allowed under the lease.
o Limited to the value of the tenant’s goods on the premises at bankruptcy.
 If distress is completed before bankruptcy, the landlord can keep the proceeds.
8.3.2 Right to Terminate Leases
 Commercial Tenancies Act (s. 38(2)):
o A trustee in bankruptcy can possess the leased premises for up to three months.
o During this time, the trustee can decide to retain or disclaim the lease.
o If retained, the trustee must pay arrears and can assign the lease, even without
landlord consent.

9. Changing Priorities
9.1 Agreements Between Creditors
 Creditors can adjust priorities through:
1. Priority agreements: One creditor’s security has priority over another’s.
2. Subordination agreements: A creditor agrees its claim will rank below another’s.
3. Inter-creditor agreements: Complex arrangements dividing priority among
creditors, often for specific asset categories.

9.2 Implied Subordination

 Permitted encumbrances in loan agreements may imply subordination if not explicitly
excluded.
 To avoid this, agreements should state that permitted encumbrances do not affect the lender’s
priority.

9.3 Correcting Errors and Re-perfecting Security

 Timely corrections: Creditors should fix errors in registrations immediately by filing a
financing change statement or new financing statement.
 Continuous perfection: If corrected properly, the security interest can retain its original
priority, except against intervening claims that arose during unperfection.
 Material errors: Errors that mislead reasonable searchers can void priority unless cured
under s. 46(4) of the PPSA.
9.4 Perfection by Repossession
 For certain types of collateral, a creditor can perfect a security interest by possession instead
of filing a financing statement (PPSA, s. 22).
 If a security interest originally perfected by registration becomes unperfected, repossession
can re-perfect it, but this does not restore the original priority.

9.5 The Strategic Bankruptcy

 A secured creditor can apply for a bankruptcy order to reverse priorities that exist outside of
bankruptcy.
 Reason: Most Crown liens and deemed trusts are eliminated in bankruptcy.
 Before applying for bankruptcy:
o Confirm that security is properly executed and perfected under the PPSA or
registered under the Bank Act.
o Ensure the security is not vulnerable to claims of fraudulent conveyance, preference,
or undervalue transfers.
 Bankruptcy considerations:
o Workers have a priority charge over current assets for unpaid wages (up to $2,000
per claimant).
o Pension beneficiaries have priority for unpaid contributions & unfunded liabilities.
o Statutory charges for unpaid wages and pension contributions rank ahead of all
secured claims except for CRA liens and unpaid suppliers’ claims.

10. Enforcing Priority

10.1 Determination of Priorities
 Review of priorities:
 o Other creditors, trustees-in-bankruptcy, or receivers may review the secured creditor's
claim.
o Secured creditors must provide:
 Security documents.
 Evidence of registration.
 Details of the debt owed.
 If claiming a PMSI, provide proof of:
o Delivery dates for collateral.
o PMSI notices sent and received.
 If disputes arise, assets may be sold, and the proceeds held in trust or escrow until the priority
issues are resolved.

10.2 Judicial Determination of Priority

 If disputes remain unresolved, the court may adjudicate.
 For PPSA disputes, parties can apply under s. 67(1)(c) of the PPSA.
 If the dispute involves non-PPSA security, the court's jurisdiction may not apply.

Part II: Repair and Storage Liens Act (RSLA)

11. Introduction
 The RSLA creates liens for unpaid repairers and storers, giving them priority over other
security interests, including those perfected under the PPSA.

12. Repairers and Repairs

 Repairer: Someone who performs repairs expecting payment (RSLA, s. 1(1)).
 Repair: Involves labor, materials, or money to improve, restore, or maintain an item.
o Includes transportation, towing, and salvage costs.
o Whether an action qualifies as a "repair" depends on the case.

13. Storers
 Storer: Someone who stores an item for payment (RSLA, s. 1(1)).

14. Articles
 The RSLA applies to articles (tangible personal property) but not fixtures.
 Fixtures may fall under the Construction Act.

15. Overlap with Towing and Storage Safety and Enforcement Act, 2021
 For vehicle repairs or storage, compliance with the Towing and Storage Safety and
Enforcement Act, 2021 is required to maintain a valid RSLA claim.

16. RSLA Liens

16.1 Possessory Liens
 Definition: Repairers or storers can hold the article until the debt is paid.
 Priority:
o A possessory lien has priority over all other claims, including perfected PPSA
security interests (RSLA, s. 6; PPSA, s. 31).

16.2 Non-Possessory Liens

16.2.1 Requirements
 If possession is relinquished, a non-possessory lien can be obtained if the repairer or storer:
o Gets a signed acknowledgment of debt (s. 7(5)).
o Registers the lien claim under the PPSA (s. 10(1)).
 Registration involves filing a Form 1C Financing Statement/Claim for Lien with the
Ontario Ministry of Public and Business Service Delivery.
16.2.2 Priority
 A non-possessory lien has priority over other claims except for valid possessory liens.
 It ranks ahead of PPSA security interests unless the third party acquired rights before
registration of the lien (RSLA, s. 10(1)).

16.3 Amount of Lien

 Repairers and storers can claim:
o Agreed amounts or fair value for repairs/storage.
o Partial payment for incomplete work.
 Fair value is determined under General O. Reg. 427/15.
 Limits:
o Repairers can claim only unpaid amounts, plus costs for seizure and sale.
o Storers may also include interest on amounts advanced (General, s. 1(2)(a)(ii)).

16.4 Bankruptcy
 RSLA liens are treated as secured claims in bankruptcy.
 Their priority is unaffected by bankruptcy.
Part III: Enforcement of Security
17. Introduction
 The common law, PPSA, BIA, and other statutes govern secured creditors’ and debtors’
rights.
 All enforcement actions must follow rules of commercial reasonableness and provide
reasonable notice.
 Failure to meet these duties may result in damages against the secured creditor.

6 steps in security enforcement:

1. Review loan and security documents to confirm proper registration and perfection of
security interests.
2. Demand repayment of loans, even if the security agreement waives need for demand.
3. If the debtor is insolvent and the collateral includes substantially all assets, issue a
10-day notice under s. 244 of the BIA.
4. Evaluate remedies to take possession or control of the collateral (e.g., direct seizure,
receivership).
5. Provide others an opportunity to redeem the debt before selling or foreclosing the
collateral.
6. Dispose of assets in good faith and in a commercially reasonable manner.
18. Making Demand for Repayment
18.1 The Demand and Section 244 Notice
18.1.1 Common Law Requirement for Reasonable Notice
 Secured creditors must demand payment before enforcement.
 Reasonable notice allows the debtor to:
o Fix the default.
o Repay the loan.
o Initiate debt restructuring.
18.1.2 Section 244 BIA Notice
 If collateral covers most of the debtor’s assets and the debtor is insolvent, creditors must give
10 days’ notice before enforcing security.
 A s. 244 notice is mandatory to avoid improper enforcement consequences.
 During the 10-day period, creditors must refrain from further enforcement actions.
18.1.3 Exemptions from Section 244 Notice
 Exemptions include:
o Debtor filed a proposal under the BIA.
o Class of creditors rejected the proposal.
o A court-appointed receiver is in place.
o The debtor consented after receiving the notice.
o The debtor is bankrupt.
18.1.4 Additional Contractual Requirements
 Loan agreements may include additional notice or default-curing rights.
 Creditors must honor these provisions.
 Secured creditors should clearly state they reserve all rights during negotiations to avoid
implied waivers.

18.2 Reasonable Notice

 10-day notice under s. 244 often satisfies the common-law reasonable notice requirement.
 However, longer notice periods may be required based on the facts.
18.3 Interim Receivers
18.3.1 General
 Creditors can abridge the 10-day period by appointing an interim receiver s. 47(1) of BIA.
18.3.2 Pre-conditions for Appointment
 The debtor must be insolvent.
 A s. 244 notice must be issued or is about to be issued.
 Appointment is necessary to protect:
o The debtor’s estate.
o The creditor’s interests.
18.3.3 Powers of Interim Receivers
 Interim receivers can:
o Take possession of the debtor’s assets.
o Investigate, locate, and protect assets.
o Exercise control over the debtor’s business for up to 30 days.

18.4 Section 243 Receivers

 Courts can appoint a s. 243 receiver for insolvent persons or bankrupts if it is just and
convenient.
 Powers include taking control of all or substantially all business assets and managing them.

19. Taking Possession

19.1 Self-Help Remedies
 Creditors can directly seize collateral without court intervention.
 This method works best for specific assets and cooperative debtors.
 Creditors must act commercially reasonably when seizing and selling collateral.
19.2 Bailiff or Agent
 Creditors can appoint agents like bailiffs to seize and sell collateral.
19.3 Interim Order for Possession
 If the debtor resists seizure, creditors can seek a court order under the CJA.
 In emergencies (e.g., perishable goods), orders may be obtained ex parte.
 Courts may require creditors to post a bond or pay into court.
19.4 Receivership
 For large-scale assets, creditors can appoint:
o A private receiver under the security agreement.
o A court-appointed receiver or receiver-manager.
 Receivers manage asset recovery; receiver-managers can run the business during recovery.

20. Foreclosure
 Creditors may foreclose to take full ownership of assets as repayment.
 Section 65 of the PPSA governs foreclosure procedures:
o Provide 15 days’ notice to affected parties.
o If no objections are raised, the creditor accepts the collateral as full repayment.
 Once foreclosure occurs, creditors cannot sue the debtor for remaining debts.
 If a person objects to the retention of collateral within the 15-day notice period and provides
proof of interest under s. 65(4), the secured creditor cannot retain the collateral.
 In such cases, the secured party must sell the collateral following s. 63 of the PPSA.

Foreclosure and Consumer Goods

 Consumer goods (used for personal, family, or household purposes) are treated differently:
o If the debtor has paid 60% or more of the secured debt and has not waived their
rights, the creditor cannot foreclose.
o Instead, the creditor must dispose of the goods under s. 63 of the PPSA.
21. Receivership
21.1 Private Receiverships
21.1.1 Powers
 A secured creditor can appoint a private receiver or receiver-manager only if the security
agreement allows it.
 A private receiver’s rights come from the appointment letter and are based on the secured
creditor’s rights in the security agreement.
 The receiver works under the instructions of the secured creditor.
21.1.2 Appointment Letter
 The secured creditor appoints the receiver using an appointment letter, which typically
includes:
1. A statement of default under the security agreement.
2. Details of the rights the receiver can exercise under the agreement.
3. Identification of the debtor’s assets to which the receiver applies.
4. Instructions on whether the receiver will run the business or take control of certain
assets.
5. The receiver’s signed acceptance of the appointment.
21.1.3 Receiver’s Indemnity
 Receivers often require an indemnity from the secured creditor.
 The indemnity covers costs and liabilities, excluding negligence or misconduct.
 It is typically a separate document to maintain confidentiality.

21.1.4 Duties of Secured Creditors and Receivers Under the PPSA

(a) Reasonable Care
 Creditors or receivers must exercise reasonable care in preserving collateral under s. 17(1) of
the PPSA.
 Reasonable expenses of realization can be deducted.
 Failure to meet this obligation can lead to liability for damages.
(b) No Waiver or Contracting Out
 Section 59(5) prohibits debtors from waiving protections under ss. 17, 63–66 of the PPSA.
(c) Commercially Reasonable Manner
 The creditor must dispose of collateral in a commercially reasonable manner under s. 63 of
the PPSA.
 Courts consider:
o Good faith (subjective standard).
o Reasonable care (objective standard).
o Whether the sale price is close to fair market value (based on appraisals).
 To meet this standard, creditors should:
o Obtain two independent appraisals (or three if values differ).
o Market and advertise the collateral effectively.
(d) Repairs to Enhance Value
 Creditors may need to make reasonable repairs to collateral if it increases sale value.
 Failing to do so may result in the sale being deemed commercially unreasonable.
(e) Notice of Disposition
 Creditors must give 15 days’ notice before selling collateral.
o Recipients of notice:
 Debtor.
 Collateral owner.
 Guarantors or other obligors.
 Other secured creditors or those with registered interests.
o Notice can be sent via mail, courier, fax, or electronically.
o If mailed, notice is deemed received 10 days after mailing, extending the notice
period to 25 days.
 Exemptions: No notice is required if:
 o Collateral is perishable or declining rapidly in value.
o A receiver is managing the sale.
o All entitled parties waive notice in writing.
(f) Fixtures and Accessions
 Special notices are needed for fixtures or accessions being removed before sale.
 A 10-day notice is required, and removal costs must be reimbursed to property owners.
(g) Failure to Give Notice
 Non-compliance allows affected parties to claim damages, but buyers still get clear title if
they act in good faith.
(h) Timing of Sale
 Creditors are not obligated to wait for better market conditions before selling.
(i) Purchases by Creditors
 Creditors can only buy collateral at public sales, unless the court permits otherwise.
(j) Operating the Business
 Creditors are not required to continue running the debtor’s business.

21.1.5 Duties Under the BIA

(a) Definition of “Receiver”
 Section 243(2) of the BIA defines a receiver broadly, including court-appointed and privately
appointed receivers.
 Only licensed trustees can act as receivers under s. 243(4).
(b) Good Faith and Commercial Reasonableness
 Receivers must act honestly, in good faith, and in a commercially reasonable manner as
per s. 247(a)–(b) of the BIA.
(c) Reporting Obligations Under the BIA
(i) General Obligation to Give Notice
 Receivers must notify stakeholders about their appointment and provide updates on the
receivership.
 Within 10 days of appointment: Notify the Superintendent of Bankruptcy and:
o If the debtor is bankrupt: Notify the trustee-in-bankruptcy.
o If the debtor is not bankrupt: Notify the debtor and all identified creditors.
 Ongoing obligation: Notify new creditors discovered during the receivership.
 Debtor’s duty: Debtor must provide the receiver with names and addresses of creditors upon
receiving notice of the receiver’s appointment.
(ii) Receiver Reports
 Initial report: Immediately after taking control of assets, prepare a statement that includes:
1. Names and amounts owed to creditors.
2. List of assets under the receiver’s control and their book value.
3. Plan of action for the receivership.
o Provide copies to the Superintendent of Bankruptcy, the debtor (or trustee), and any
creditor requesting it (within 6 months after the receivership ends).
 Interim report: Prepare every 6 months, detailing:
o Receipts and disbursements.
o Remaining property under the receiver’s control.
o Estimated time for completing the receivership.
 Final report: At the end of the receivership, prepare a final statement showing:
o Receipts and disbursements.
o Distribution of proceeds.
o Provide copies to the same stakeholders as the initial report.
 Court review: Stakeholders can apply for a court review of the receiver’s final statement
within six months. The court can adjust the receiver’s fees or charges.
21.1.6 Court Directions
 Court-appointed receivers can easily request court directions for controversial actions since
they are court officers.
 Private receivers can also seek court advice under s. 67 of the PPSA or s. 248(1) of the
BIA.

21.1.7 Review Powers of the Court

 The court can review the actions of secured creditors, receivers, or insolvent persons upon
application by stakeholders, including the Superintendent of Bankruptcy, trustees, or creditors
(BIA, s. 248(1)).
 If non-compliance with duties is found, the court may:
o Order the duty to be carried out.
o Restrain secured creditors or receivers from further actions until compliance.

21.2 Court Receiverships

21.2.1 When Court-Appointed Receivers Are Appropriate
Court-appointed receivers are useful in the following situations:
1. Assets outside Canada: Foreign courts are more likely to recognize court-appointed
receivers than private ones.
2. Stay of proceedings: Prevents landlords, creditors, or other parties from enforcing remedies
without court approval.
3. Resolving disputes: Court oversight helps resolve priority or value disputes.
4. Liabilities: Court appointments may shield receivers from liabilities, such as environmental
or labor-related issues.
5. Quick sale: Court receiverships avoid statutory notice delays.
6. Disputes over default: Helps settle disputes about whether a secured creditor can appoint a
receiver.
21.2.2 Appointment and Types of Receivers
 Under s. 101 of the CJA: A court can appoint a receiver if it is "just or convenient."
 Under s. 243 of the BIA: Appoints a receiver with broader national authority.
 A court-appointed receiver derives power solely from the court and must act under court
supervision.

21.3 Personal Liabilities of Receivers

21.3.1 General
 A court-ordered receiver’s charge secures fees, expenses, and liabilities incurred during the
receivership.
 The receiver may require indemnity from the secured creditor to cover liabilities beyond
the receiver’s charge.
21.3.2 Labour Issues and Successor Employer Liabilities
(a) General
 Receivers carrying on the debtor’s business may be seen as successor employers under
employment laws.
(b) Non-Unionized Businesses
 In Ontario, the ESA (Employment Standard Act) covers non-unionized employees.
 Receivers who operate a debtor’s business for a short period are generally not seen as
successor employers if no sale occurs.
 Employees are often hired under term-and-task contracts to limit liability.
(c) Unionized Businesses
 Under the Labour Relations Act (LRA), business transfers can bind receivers to collective
agreements.
 Historically, private receivers were seen as agents of the debtor, insulating them from
liabilities.
 Court-appointed receivers were protected by court orders, but recent rulings challenge this.
  The Ontario Labour Relations Board (OLRB) has ruled that both private and court-
appointed receivers can be found as successor employers.
(d) Statutory Protections
 BIA s. 14.06(1.2) protects receivers from liabilities related to employment, including
pensions.
 This protection does not prevent findings of successor-employer status but limits personal
liability.
21.3.3 Environmental Issues
(a) General
 Receivers and trustees may face environmental issues involving contaminated property
owned by the debtor or bankrupt.
 Under the Environmental Protection Act (EPA), they may be liable for pollution, spills, or
other environmental problems.
 Liability can arise even if the pollution occurred before the receiver or trustee took
possession.
 Receivers or trustees may be responsible for cleanup costs, even if these exceed the property’s
value.
 The Bankruptcy and Insolvency Act (BIA) offers protections for receivers and trustees in
environmental matters (s. 14.06(1)–(6)).
(b) Protections from Personal Liability
 Under s. 14.06(2) of the BIA, trustees are not personally liable for:
1. Environmental conditions or damage that occurred before their appointment.
2. Conditions or damage that arose after their appointment, unless caused by gross
negligence or willful misconduct.
 Trustees must still meet reporting or disclosure requirements under environmental laws (s.
14.06(3)).
(c) Compliance with Environmental Remediation Orders
 Under s. 14.06(4) of the BIA, trustees have four options when faced with an order to address
environmental issues:
1. Comply with the order within 10 days.
2. Abandon or release their interest in the property within 10 days.
3. Apply for a stay of the order to contest it.
4. Apply for a stay to assess the economic viability of compliance.
 Trustees are protected from personal liability if they comply, abandon the property, or operate
under a stay.
 If the trustee abandoned the property before the order, they incur no liability for the cleanup
costs.
 The Supreme Court of Canada ruled in Orphan Well Association v. Grant Thornton Ltd.
that s. 14.06(4) only protects trustees personally but does not absolve the estate from
compliance.
(d) Priority Charge for Remediation Costs
 If the government remedies environmental damage, the BIA s. 14.06(7) gives the remediation
costs priority over the debtor’s real property and related properties.

21.3.4 Standard Template Receivership Order – Protections for Receivers

 The Standard Receivership Order shields court-appointed receivers from certain liabilities:
o No legal actions can proceed against the receiver without court approval.
o Receivers are not liable for employee-related claims (e.g., wages, severance, vacation
pay) unless they specifically agree or are ordered by the court.
o Receivers are not required to manage environmentally contaminated property unless
they take possession.
o Receivers are only liable for gross negligence or willful misconduct.
 These protections align with s. 14.06 of the BIA and other laws.
21.4 Obligations and Duties of Court-Appointed Receivers
 Both privately appointed and court-appointed receivers share duties under s. 247 of the BIA.
 Court-appointed receivers act as officers of the court and have a fiduciary duty to:
o The creditor who sought their appointment.
o All creditors of the debtor.
o The debtor.
 Their duty is to act in the best interests of all creditors.

22. Enforcement of Other Types of Security

22.1 Enforcement of Bank Act Security
(a) Power to Sell
 Under s. 428(7) of the Bank Act, banks can sell collateral through public auction to recover
unpaid debts.
(b) Notice Requirements
 s. 428(8) requires banks to provide:
o At least 10 days’ notice to the debtor.
o Advertisements in 2 newspapers (30 days for forest products).
(c) Standard of Care
 Banks must act honestly and in good faith (s. 428(10)).
 They must handle collateral appropriately to maximize recovery but are not required to realize
the “true market value.”
(d) Right to Appoint Receivers
 Under s. 427(3), banks may appoint monitors, receivers, or receiver-managers for
enforcement.

22.2 Enforcement of Mortgages Act Security

 Mortgage enforcement is subject to commercial reasonableness and reasonable notice, like
PPSA security.
 Six-step process:
1. Review security to ensure it is valid and registered.
2. Demand payment.
3. Provide a s. 244 notice if required.
4. Choose a remedy.
5. Provide notice of sale.
6. Complete a commercially reasonable disposition.
(a) Demands
 Demands are usually required by loan agreements or common law.
(b) Section 244 Notice
 If the property constitutes all or most of the mortgagor’s assets, a s. 244 notice must be
provided before enforcement.
(c) Realization Remedies
1. Possession: Mortgagees can take possession privately, by court order, or through a receiver.
2. Sale or Foreclosure: Mortgagees may:
o Sell the property through power of sale or judicial sale.
o Acquire the property through foreclosure or a quitclaim deed.
3. Comparison of Remedies:
o Power of sale is governed by contract and Mortgages Act provisions.
o Judicial sale and foreclosure follow procedures in Rule 64 of the Rules of Civil
Procedure.
The COVID-19 pandemic led to the introduction of several emergency benefits by
the Government of Canada, including:
 Canada Recovery Benefit (CRB)
 Canada Recovery Sickness Benefit (CRSB)
 Canada Recovery Caregiving Benefit (CRCB)
According to Section 27 of the Canada Recovery Benefits Act, these benefits
have special protections:
1. They are not subject to bankruptcy or insolvency laws
2. They cannot be assigned, charged, attached, or used as security
3. They cannot be retained through deduction, set-off, or compensation
under any Act of Parliament
As a result, these benefits:
 Would not form part of a bankrupt's estate
 Could not be subject to any security interests under statute or
common law
This provides important protection for recipients of these emergency benefits
during insolvency proceedings.

Chapter 30: Employees

Part I: Employment Law

1. The Employment Relationship

The employment relationship is based on a contract of employment. While statutes may influence
terms, the contract remains subject to general contract law. Courts recognize employment contracts
are unique due to power imbalances between employers and employees. Employees are often
considered vulnerable because employment status changes can significantly affect their lives.

1.1 Employee vs. Independent Contractor

There is no single test to decide if someone is an independent contractor or an employee.
The key question: Is the worker in business for themselves?
Factors include:
 The employer’s control over the worker.
 Whether the worker uses their own equipment.
 Whether the worker hires their own helpers.
 The worker’s financial risk.
 The worker’s role in investment and management.
  The worker’s opportunity to make a profit.
No formula exists; courts focus on the actual conduct, not just the contract’s wording.

1.2 Indefinite vs. Fixed-Term Employment Contracts

 Indefinite-term contracts have no set end date.
 Fixed-term contracts end after a specific period or task.
 The type affects the employer’s legal obligations at termination.

1.3 Distinguishing Other Relationships

1.3.1 Director
 A director is different from an employee.
 Common-law rules on employment (e.g., termination notice) don’t apply to directors.
 Directors’ rights depend on statutes and company rules.
 Sometimes, directors also act as employees, which may entitle them to reasonable notice of
termination.
1.3.2 Partner
 Partners generally cannot be employees of the partnership.
 Exception: If the partnership exercises significant control and the partner is dependent,
they may be considered an employee under human rights laws.

1.4 Special Cases of Employer Status

1.4.1 Successor Employer
 Employment contracts cannot be transferred without termination and renewal.
 If a business is sold and employees continue with the new owner, their prior service is
usually recognized unless stated otherwise.
 Laws ensure benefits tied to service, like vacation and severance, carry over.
1.4.2 Common Employer
 Related businesses can be considered a “common employer” if they control the employee
together.
 Related companies may share liability even without direct employment contracts.
 Laws prevent businesses from using shell companies to avoid employee obligations.

1.5 Special Cases of Employee Status

1.5.1 Probationary Employees
 Employers may set a probationary period to assess suitability.
 Employers can dismiss probationary employees without notice if done in good faith.
 Statutory notice applies if employment exceeds three months.
1.5.2 Public Employees and Public Office Holders
 Public employees with an “office” (e.g., judges or ministers) have more procedural
protections on dismissal.
 Most public employees are under contracts, making general contract law apply.

2. Employee Obligations

2.1 Common-Law Implied Obligations

2.1.1 Obedience, Attendance, and Competence
Employees must:
 Follow reasonable and lawful orders.
 Show up on time.
 Perform their duties competently.
2.1.2 Duty of Good Faith and Fidelity
Employees must:
 Keep trade secrets and confidential information private.
 Act honestly and prioritize the employer’s interests.
  Avoid conflicts of interest and not take secret profits.
Confidentiality
 Employees must protect confidential information during and after employment.
 Confidential information includes customer lists and trade secrets but not general skills or
knowledge gained on the job.
No Competition
 Employees cannot compete with their employer during employment.
 Employees may plan a competing business but cannot act on it until after employment ends.
No Secret Profits
 Employees cannot gain unauthorized benefits from the employment relationship.
2.1.3 Notice of Resignation
 Employees must give reasonable notice before leaving.
 Notice depends on factors like the employee’s role, salary, and how long it will take to
replace them.
2.1.4 Post-Employment
 Non-fiduciary employees must not misuse confidential information.
 Fiduciary employees have additional post-employment duties.

2.2 Fiduciary Employees

Key employees or senior managers may have fiduciary obligations, including:
 Avoiding conflicts of interest.
 Acting only in the employer’s best interests.
 Not profiting personally from their position.
Fiduciary employees must disclose plans for competing businesses and cannot take business
opportunities belonging to the employer.
2.2 Fiduciary Employees
2.2.1 Determining Fiduciary Status
Courts may classify certain employees, like key staff or senior managers, as fiduciaries. This depends
on their actual authority and control over the business, not just their job title. A "key employee" is
someone who:
1. Plays an essential role in managing the employer’s business.
2. Is involved in important decision-making.
3. Has wide access to confidential information that, if disclosed, could harm the employer’s
competitive advantage.
2.2.2 Post-Employment Duties
Fiduciary employees have extra obligations after leaving their job, usually for a reasonable time.
They cannot:
 Take business opportunities that the employer could have pursued.
 Persuade the employer’s clients or customers to work with them instead.
 Convince the employer’s staff to leave and join them.
The length of these obligations depends on the case. Courts may use the notice period as a guide. If
the employer wrongfully dismisses the fiduciary, these obligations may not apply.

2.3 Contractual Restrictions on Competition or Solicitation

2.3.1 Overview of Restrictions
Employment contracts often include clauses to prevent employees from competing with the employer
or contacting their clients after leaving. Courts balance two interests:
 The public’s right to prevent trade restrictions.
 The right of parties to create fair agreements.
To be valid, a restrictive covenant must be reasonable and:
1. Protect a legitimate business interest, like goodwill or trade secrets.
2. Have reasonable limits on time and geographic scope.
3. Focus on preventing unfair competition or solicitation, not general competition.
Courts do not enforce vague clauses or those that follow wrongful termination. Restrictions may be
more flexible when part of a broader business agreement.
Ontario’s Non-Compete Prohibition
Since October 25, 2021, Ontario law prohibits non-compete clauses in most employment contracts,
except:
 For executives, like CEOs or CFOs.
 When part of a business sale agreement where the seller becomes the buyer’s employee.

3. Employer Obligations
3.1 Common-Law Obligations
3.1.1 Duty to Provide Work and Pay for Work
Employers must provide work and pay for it. They cannot suspend or lay off employees without
clear contractual rights. Unpaid layoffs may be seen as constructive dismissal unless justified.
3.1.2 Duty to Provide a Safe Workplace
Employers must take reasonable steps to protect employees from hazards, including unsafe
environments or tools. They must also hire qualified supervisors.
3.1.3 Duty to Provide Notice of Termination
Employers must give notice of termination for indefinite-term employees unless there is just cause
for dismissal. Reasonable notice depends on:
 Length of service.
 Nature of the job.
 Availability of similar work.
Notice must be clear and properly communicated.
3.1.4 Duty of Good Faith and Honest Performance
Employers must act honestly and fairly during and when ending employment. They should not be
dishonest, misleading, or overly harsh in dismissal procedures.

3.2 Statutory Obligations

3.2.1 Employment Standards (ESA)
Ontario’s ESA provides minimum standards for:
 Wages, hours, overtime, and leave.
 Disconnecting from work (for employers with 25+ employees).
 Non-compete clauses (prohibited except for executives or business sale cases).
 Termination notice and severance.
3.2.2 Human Rights
Employers cannot discriminate or harass employees based on protected characteristics (e.g., race,
gender, disability). These protections are part of Ontario’s Human Rights Code and similar federal
laws.
COVID-19 Emergency Leave
The ESA includes unpaid, job-protected leave for employees affected by designated infectious
diseases like COVID-19.

(a) The Meaning of Discrimination

To prove discrimination, the complainant must show:
1. They have a characteristic protected under the law.
2. They faced adverse treatment.
3. The protected characteristic was a factor in the treatment.
Once this is shown, the employer must prove a defense or justification.

(b) Bona Fide Occupational Requirement (BFOR)

Employers can justify discriminatory practices if they meet the criteria of a BFOR. They must
prove:
1. The rule or practice is connected to job performance.
 2. The rule was made in good faith for a legitimate purpose.
3. The rule is necessary and cannot accommodate individuals without undue hardship.
Undue hardship may include excessive costs, significant disruption, or safety concerns.

(c) Duty to Accommodate

Employers must accommodate employees to the point of undue hardship.
Procedural Requirements
Employers must:
 Gather relevant information, such as medical reports for disabled employees.
 Explore accommodation options without unreasonable delays.
Substantive Requirements
Employers must adjust or modify working conditions unless doing so would cause undue
hardship.
Factors to determine undue hardship include:
 Financial costs.
 Workplace disruption.
 Safety concerns.
The duty to accommodate is ongoing, and employees (and unions) must cooperate in the process.

(d) Duty to Investigate

Employers must address discrimination and harassment complaints seriously and promptly.
Failing to act may result in liability, even if allegations are unfounded.
Reasonable actions include:
 Having anti-discrimination policies and complaint processes.
 Training managers and employees on these policies.
 Conducting proper investigations and acting on results.
 Resolving complaints fairly and communicating decisions to the complainant.

3.2.3 Occupational Health and Safety

Employer and Employee Responsibilities
 Employers must provide a safe workplace and inform workers of hazards.
 Employees must report hazards and take care to protect themselves and coworkers.
Health and Safety Committees
 Workplaces with 6–19 employees need a health and safety representative.
 Workplaces with 20+ employees must have a joint health and safety committee.
The committee’s role includes identifying hazards, recommending improvements, and
investigating workplace incidents.
Right to Refuse Unsafe Work
Workers can refuse work if they reasonably believe:
 Equipment or conditions pose a danger.
 Workplace violence may harm them.
Certain workers, like police or firefighters, may not have this right due to the nature of their jobs.

(b) Workplace Harassment and Violence

Employer Responsibilities in Ontario
Employers must:
 Create and regularly review harassment and violence policies.
 Assess workplace risks related to violence and harassment.
 Provide training for employees and supervisors.
 Investigate complaints appropriately.
 Act if they become aware of domestic violence risks that could affect the workplace.
Federal Requirements
As of January 1, 2021, federally regulated employers must:
 Assess risks of harassment and violence with input from health and safety committees.
  Develop prevention policies.
 Train employees to address harassment and violence.
 Offer resolution processes, such as mediation or investigations, for complaints.

3.2.4 Accessibility Standards for Employees with Disabilities

Under the Accessibility for Ontarians with Disabilities Act (AODA) and its Integrated
Accessibility Standards (IAS), employers in Ontario must remove barriers for employees with
disabilities.
Key Standards
Employers must:
 Provide emergency response plans tailored to employees with disabilities.
 Accommodate job applicants with disabilities during hiring.
 Inform employees about available disability supports.
 Offer accessible formats or communication tools if requested.
 Consider accessibility needs during performance reviews, career development, and
redeployment.
 Train staff on accessibility and disability-related human rights.
Additional Requirements for Large Employers
Employers with 50+ employees must also:
 Create individual accommodation plans for employees with disabilities.
 Develop a return-to-work process for employees returning after a disability leave.

4. Termination of the Employment Relationship

At common law, employers or employees can end the relationship without cause by giving notice.
The notice must meet the terms of the contract or the minimum standards set by the Employment
Standards Act (ESA).

4.1 Dismissal Without Cause

Employers can terminate employment by:
 Giving working notice, where the employee continues working during the notice period.
 Paying compensation in lieu of notice, equal to what the employee would have earned
during the notice period.
Emotional distress from dismissal is not compensable unless the employer acted in bad faith.

4.1.1 Reasonable Notice

Courts assess reasonable notice based on:
1. The employee’s role.
2. Length of service.
3. Age.
4. Availability of similar jobs given the employee’s skills and experience.
Other factors include:
 If the employee left secure employment for the job.
 Whether the employer has notice policies or if there is an industry standard.
 If the employee had forewarning of dismissal.
Courts generally cap reasonable notice at 24 months, except in exceptional cases.

4.1.2 ESA Notice and Severance

Notice Requirements:
Employees with 3+ months of service are entitled to:
 1 week of notice for less than 1 year of service.
 2 weeks for 1–3 years.
 1 extra week for each additional year, up to a maximum of 8 weeks.
Employers can give termination pay instead of notice.
Severance Pay:
Severance is required if the employee:
 Has 5+ years of service.
 The employer’s payroll exceeds $2.5 million, or 50+ employees are terminated due to
business closure.
Remote workers are included in mass termination rules.

4.1.3 Notice Agreed in the Contract

If the contract specifies a notice period, courts will enforce it if it:
 Meets ESA minimums.
 Is fair and not imposed through undue pressure.
If the notice term is below ESA standards, it is void, and the employee is entitled to reasonable notice
under common law.

4.1.4 Probationary and Fixed-Term Employment

 Probationary Employees: Employers can dismiss probationary employees without notice
if the employer acted in good faith and gave a fair chance to prove suitability.
 Fixed-Term Contracts: These end when the term expires. If terminated early, the employer
must pay the remaining contract amount unless there is a valid termination clause.

4.2 Dismissal for Cause

Employers can dismiss employees without notice if there is "just cause."
Examples of Just Cause:
 Serious misconduct.
 Repeated neglect of duties.
 Incompetence.
 Harmful behavior violating the employment contract or trust.
The misconduct must damage the employment relationship or break trust.

4.2.1 Proportionality
Dismissal for incompetence requires:
 Clear, reasonable performance standards.
 Warnings about poor performance.
 An opportunity for the employee to improve.
No warning is required for serious misconduct like theft, fraud, or harassment.

4.2.3 Condonation
If an employer is aware of misconduct but continues employment, they may not later dismiss
employee for it. If new misconduct occurs, past actions may be reconsidered to justify dismissal.

4.2.4 Summary Dismissal Under ESA

The ESA allows dismissal without notice if misconduct is willful and serious. The behavior must be
intentional, not accidental or negligent.
This standard is stricter than the common law “just cause” standard. Misconduct might justify
dismissal under common law but not meet the ESA’s stricter standard.

4.3 Constructive Dismissal

Constructive dismissal occurs when an employer:
1. Unilaterally changes essential terms of the job (e.g., salary, duties, location) in a way that a
reasonable person would view as significant.
2. Acts in a way that shows they no longer intend to honor the employment contract.
Employees must act within a reasonable time to reject changes or they may be seen to accept them.
4.4 Resignation or Abandonment
For resignation to be valid, the employee’s intent must be clear and unequivocal. If resignation is
given under pressure or coercion, it is treated as dismissal.
For abandonment, the employee’s actions or words must clearly show they no longer want the job.

5. Employee Remedies
5.1 Civil Action for Wrongful Dismissal
1. An employee can sue the employer if they are dismissed without proper notice.
2. The claim can be for breach of reasonable notice or specific notice terms.
3. Damages include salary, commissions, bonuses, benefits, and other entitlements
during the notice period.
4. Courts do not award damages for job loss feelings or reputation damage.
5. Employers may be liable for mental distress if dismissal was handled in bad faith.
6. Employers can also be liable for dishonesty during employment.
7. If proper notice was not given, additional economic losses may be compensated.
8. Punitive damages are awarded only in extreme cases of misconduct.
5.2 Reinstatement at Common Law
1. Reinstatement is rarely granted outside unionized settings.
2. Courts may grant it if trust and confidence exist between employer and employee.
5.3 “Unjust Dismissal” Under the CLC
1. Non-union, non-management employees in federally regulated workplaces can file
an unjust dismissal complaint.
2. Employees must have worked for at least 12 months.
3. Complaints must be filed within 90 days of dismissal.
4. Adjudicators can reinstate employees or award full compensation.
5. Employers cannot dismiss without cause by only providing notice and severance.
5.4 Remedies Under the ESA
1. Non-union employees can file complaints with Ministry of Labour for violations.
2. Employment standards officers (ESOs) investigate complaints.
3. ESOs can order wage payments, compliance actions, and reinstatement.
4. Directors can be held personally liable for unpaid wages.
5. Employees cannot file an ESA complaint if they have already sued in court.
6. Unionized employees must seek remedies through grievance arbitration.

5.5 Remedies Under the Human Rights Code

1. Anyone facing discrimination can file a complaint with the Human Rights Tribunal.
2. Remedies include financial compensation and actions to prevent future
discrimination.
3. The Tribunal aims to educate the public and eliminate discrimination.
5.6 Duty to Mitigate
1. Employees must try to find new work to reduce their losses.
2. Employers must prove the employee did not try to mitigate.
3. Employees are allowed time to recover before job searching.
4. Employees do not have to accept jobs with lower pay or status.
5. If a contract specifies a termination amount, no duty to mitigate applies.

6. Employer Remedies
6.1 Summary Dismissal
1. Employers can fire employees without notice if they breach the employment
contract seriously.
 2. Just cause at common law does not always exempt employers from giving statutory
notice. They should always give notice.
6.2 Disciplinary Sanctions
1. For minor misconduct, employers can impose reasonable penalties instead of firing.
2. Unpaid suspensions need to be stated in the contract to be enforceable.
6.3 Civil Action for Damages
1. Employers can sue employees for breaching the employment contract.
2. Damages aim to put the employer in the position they would have been if the
contract was fulfilled.
3. Courts may grant damages based on the employer's loss or the employee’s unjust
gain.
4. Agreed damages in contracts must not be excessive penalties.
6.4 Injunctive Relief
1. Employers can seek a court order to stop employees from violating contract terms.
2. Injunctions are granted if there is a serious issue and potential irreparable harm.
3. Irreparable harm includes loss of customers, reputation, or market share.

7. Labour Law Background

1. Non-union workplaces allow direct negotiation between employees and employers.
2. In unionized workplaces, unions negotiate on behalf of employees.
3. Strikes are only allowed in specific circumstances under the Ontario Labour
Relations Act (OLRA).
8. The OLRA
1. The OLRA governs relationships between unions, employers, and employees.
2. It covers union certification, unfair labour practices, and collective agreements.
3. The Ontario Labour Relations Board (OLRB) enforces the OLRA.
9. Union Certification
1. A union can represent employees after obtaining legal bargaining rights.
2. Certification can happen voluntarily or through a formal process.
3. Applications can only be made at specific times if a union already represents
employees.
4. The proposed bargaining unit must be appropriate and share common interests.
5. The OLRB ensures that bargaining units can function effectively.
6. Certain employees, such as managers, are excluded from union representation.

9.1 The Proposed Bargaining Unit

1. When applying for certification, the union can suggest the group of employees
it wants to represent.
2. The union has flexibility in deciding the group, which can include all
employees or specific job roles.

3. The group must be considered "appropriate" by the Ontario Labour Relations Board
(OLRB).
4. The OLRB ensures the proposed group can work together effectively and negotiate
as a unit.
5. The group must share common interests to be considered appropriate.
6. The union does not have to propose the best possible group, only one that meets
the criteria.
7. There are legal cases that help determine what the OLRB sees as an appropriate
group.
 8. Employers can challenge the union’s proposed group if they believe it is not
appropriate.
9. Employers must prove that the proposed group would create serious labour issues
or that the employees do not share common interests.
10. OLRB has guidelines and past decisions on what counts as serious labour issues.
11. Only employees, as defined by the OLRA, can be part of a bargaining unit.
12. Managers & those in confidential labour relations roles cannot be part of the unit.

9.2 The Application, Response, and Vote

Support for Certification
 A union must show at least 40% employee support in the proposed bargaining unit to hold
a representation vote.
 Support is usually proven through signed union membership cards.
 The employer learns how many employees signed but not their identities.

Employer’s Response
 Employers have two business days to respond to a certification application.
 The response includes:
o The employer’s position on legal issues (e.g., bargaining unit description).
o A list of employees in the proposed bargaining unit on the application date, even if
they were not actively working.
 If the employer opposes the union’s bargaining unit, it must suggest an alternative and
provide a corresponding employee list.

Timeliness of Response
 Employers who miss the deadline lose the right to contest key issues, like the bargaining
unit’s appropriateness or voter eligibility.
 The Ontario Labour Relations Board (OLRB) rarely accepts late filings, even for reasons
like vacations or misunderstanding the rules.

Representation Vote
 If the OLRB approves a vote, it occurs five business days after the application.
 Votes are conducted in person or electronically.
 Employees vote "yes" or "no" on union representation. Markings revealing voter identity
spoil paper ballots.

Challenged Ballots
 A union or employer may challenge a voter’s eligibility (e.g., if the voter does not meet the
definition of “employee”).
 Challenged ballots are set aside for later review if needed.

Vote Outcome
 If more than 50% of counted ballots support the union, the application succeeds.
 If fewer than 50% support the union, the application is dismissed unless the union claims the
employer committed an unfair labour practice.

Certification in the Construction Industry

 Card-Based Certification: In the construction industry, if over 55% of employees in the
bargaining unit sign union cards, the unit may be certified without a vote.
 If 40–55% support is shown, a vote is held.
 This process reflects the temporary nature of employment in construction.
10. Unfair Labour Practices
Prohibited Actions
The Ontario Labour Relations Act (OLRA) prohibits unions, employers, or their representatives
from:
 Discriminating against employees for union support or OLRA rights.
 Threatening, intimidating, or coercing employees exercising these rights.

OLRB Hearings and Remedies

 The OLRB holds hearings for unfair labour practice allegations.
 Remedies may include:
o Declaring a violation of the OLRA.
o Reinstating wrongfully terminated employees with back pay.
o Rescinding unlawful disciplinary actions.

Reverse Onus on Employers

 If an employer is accused of violating the OLRA, it must prove it did not act unlawfully.

10.1 Remedies in Certification Applications

If a union fails to gain sufficient support, it may still succeed if it proves the employer committed an
unfair labour practice, such as:
 Preventing the union from reaching 40% support.
 Influencing the vote through prohibited actions.
Remedial Certification
 The OLRB may certify a union without a vote if other remedies would not ensure a fair
process.
 This often occurs when employees face threats, intimidation, or job terminations for
supporting the union.

11. Collective Bargaining

Good Faith Bargaining

Once certified, unions and employers must bargain in good faith to create a collective agreement.
Requirements for Good Faith Bargaining:
 Be available to meet and negotiate.
 Respond honestly to reasonable questions.
 Consider proposals with an open mind.
 Ensure representatives have authority to finalize agreements.
Employers must also provide unions with necessary information, such as employee contact details or
policy documents.

Hard vs. Surface Bargaining

 Hard Bargaining: Maintaining a strong position with justification is allowed.
 Surface Bargaining: Pretending to negotiate without intending to agree is prohibited.
The OLRB can order parties to resume bargaining or finalize an agreement if bad faith is proven.

11.1 First Contract Arbitration

For first collective agreements, the OLRB may send unresolved issues to binding arbitration if
bargaining fails due to:
 The employer refusing to recognize union authority.
 Unreasonable bargaining positions.
 Failing to make efforts to reach an agreement.
Binding arbitration replaces further negotiations.
11.2 Strikes and Lockouts

Process for Legal Strikes/Lockouts

 Before striking or locking out, parties must request a conciliation officer to assist with
negotiations.
 If unsuccessful, a no-board report is issued, starting a 17-day countdown to lawful strike or
lockout action.

Additional Requirements
 Unions must hold a strike vote, and over 50% of voting members must support the strike.
 Employers can hire replacement workers during a strike or lockout.
 Striking workers can unconditionally apply to return to work.
12. Contents of a Collective Agreement
Under the OLRA, all collective agreements must address specific matters. If an agreement is silent on
these, the law assumes certain terms apply.
Required Terms:
1. Recognition of the Union: The union is deemed to be the exclusive bargaining agent for
employees in the bargaining unit (s. 45(1)).
2. No Strikes or Lockouts: Strikes and lockouts are prohibited while the agreement is in effect
(s. 46).
3. Arbitration of Disputes: All disputes about the agreement’s interpretation or violations must
be resolved through final and binding arbitration (s. 48(1)).
4. Minimum Term: Agreements must last at least one year unless stated otherwise (s. 58(1)).

13. Powers of an Arbitrator

Every collective agreement includes a clause for final arbitration of disputes. Parties can agree on
how arbitration is conducted, including selecting arbitrators and setting timelines.
Arbitrator Selection:
 Parties may suggest or rotate through agreed-upon arbitrators.
 If no agreement is reached, the Minister of Labour appoints an arbitrator (s. 49(1)).
Arbitrator’s Powers:
 Arbitrators can issue binding decisions for unions, employers, and employees.
 They control the arbitration process and may:
o Summon witnesses (s. 48(12)(d)).
o Make interim orders (s. 48(12)(i)).
o Decide what evidence is admissible (s. 48(12)(f)).
Arbitrators can also interpret and apply human rights and employment laws (s. 48(12)(j)), giving them
shared authority with other tribunals. Lawyers must decide whether arbitration or another venue is
best for their client.

14. Termination of a Union’s Bargaining Rights

Employees in a bargaining unit can apply to terminate a union’s bargaining rights.
When to Apply:
Applications are allowed during specific timeframes:
1. If no collective agreement is reached within one year of union certification (s. 63(1)).
2. During the last 3 months of the agreement (s. 63(2)(a)).
3. For agreements longer than 3 years, during the last 3 months of the initial term and each year
after (s. 63(2)(b)).
Support Required:
 At least 40% of employees in the bargaining unit must support the application.
 Support is usually shown through a signed petition (s. 63(5)).
The Voting Process:
 If support is proven, the OLRB orders a vote.
 Ballots are cast in the same way as certification votes, with representatives from the union,
employer, and applicant present.
 If more than 50% of votes favor termination, the union’s bargaining rights and the collective
agreement are voided.
Employer Restrictions:
 Employers cannot initiate or influence termination applications through threats, coercion,
or intimidation (s. 63(16)).

15. Business Immigration Overview

Business immigration laws are complex and constantly changing. Lawyers must stay updated to
advise clients on hiring foreign workers, transferring employees, or facilitating entry for business
activities.
Key Considerations:
 Immigration and Refugee Protection Act (IRPA) and Regulations (IRPR) set the
framework for immigration.
 Ministerial instructions and directions shape policies and requirements.
 Multiple government departments, such as IRCC, CBSA, and ESDC, oversee business
immigration matters.
Helpful Resources:
 Canada Immigration and Citizenship
 Operational Bulletins and Manuals
 Temporary Foreign Worker Program
 Ontario Immigrant Nominee Program (OINP)

16. Hiring Foreign Workers: Temporary vs. Permanent

Foreign workers can come to Canada temporarily or permanently. Employers should choose based on:
 Processing times.
 Company needs.
Temporary Workers:
 Applications are faster, meeting immediate needs.
 Permits are often tied to a specific employer or job.
Permanent Residents:
 Applications take longer but allow workers to work anywhere in Canada.
Choosing the right path depends on company goals and the worker’s circumstances.

16.1 Temporary Residence Options

16.1.1 Business Visitors vs. Temporary Foreign Workers

Most foreign nationals need work permits, but business visitors are exempt if they:
 Attend meetings or conferences without entering the Canadian labour market.
 Receive training or provide after-sales services without physical labor.
 Represent foreign governments or businesses.
Business visitors must show their:
 Pay and profits come from outside Canada.
 Purpose is business-related, such as attending meetings or training.
Requirements for Entry:
 Visa-Exempt Nationals: Require an eTA if traveling by air.
 Visa-Required Nationals: Must apply for a Temporary Resident Visa (TRV), supported by
an invitation letter.
Global Skills Strategy (GSS):
Certain workers can use short-term work permit exemptions, such as:
 Managers or professionals entering for less than 30 days annually.
 Researchers entering for less than 120 days annually.
If a business need doesn’t fall under exemptions, a work permit is required.

16.1.2 Temporary Foreign Workers (TFWs)

Work Permits
 Open Work Permits: Allow TFWs to work for any employer or in any occupation (unless
restricted).
 Closed Work Permits: Tied to a specific employer, location, and occupation.

Steps for Work Authorization

1. Employer Applies for Labour Market Impact Assessment (LMIA):
o Determines if hiring a TFW has a neutral or positive impact on the Canadian labour
market.
o Factors considered: wages, working conditions, labour shortages, employer
recruitment efforts, and compliance with prior LMIAs.
2. TFW Applies for a Work Permit:
o Application submitted through IRCC based on the positive LMIA.
o Requirements include meeting job qualifications and general admissibility standards.

Employer Compliance Obligations

 Employers must meet wages, conditions, and terms stated in the job offer.
 Compliance reviews may check:
o Federal/provincial employment law adherence.
o Efforts to provide a workplace free of abuse.
o Progress toward transitioning to a Canadian workforce.
 Non-compliance can lead to penalties, revoked LMIAs, or ineligibility to hire TFWs.

LMIA Exemptions
 Some work permits do not require an LMIA under the International Mobility Program
(IMP):
o Covered by international free trade agreements (e.g., CUSMA, CETA).
o Categories like spouses of workers, post-graduation work permits, intra-company
transferees, and others.
o Employers hiring under IMP must submit job offers to IRCC and comply with
monitoring systems.

Corporate Restructuring Considerations

 LMIA/Work Permit Updates: Required if there is no "successor in interest" or qualifying
relationship post-restructuring.
 Maintaining Valid Permits: Depends on continuing the relationship between the foreign and
Canadian entities.

16.1.3 Practice Considerations

 LMIA-based work permits have maximum durations (e.g., 3 years for high-wage jobs).
 IMP work permits for intra-company transferees:
o Specialized knowledge stream: max 5 years.
o Executive/manager stream: max 7 years.
 Encourage TFWs to apply for permanent residence (PR) before permit expiry.

16.2 Permanent Residence (PR) Options

Overview
 Businesses can help TFWs qualify for PR.
 PR options are based on language skills, education, and work experience.
Express Entry System
 Manages applications for federal and some provincial PR programs.
 Applicants complete an online profile and are ranked in a pool based on age, education, work
experience, and other factors.
 Top-ranked candidates are invited to apply for PR through regular draws.

Economic Immigration Programs

1. Federal Skilled Worker (FSW) Program:
o Eligibility: 1 year of full-time work in a TEER 0–3 occupation, language proficiency,
and education credentials.
o Must score 67 points or higher under selection criteria.
2. Canadian Experience Class (CEC): For workers with Canadian work experience.
3. Provincial Nominee Programs (PNPs): Some managed through Express Entry.

Key Notes
 Program requirements and criteria may change.
 Competitive pool: meeting minimum requirements does not guarantee an Invitation to Apply
(ITA).
 Candidates with Canadian work experience or job offers have better chances
16.2.2 Canadian Experience Class (CEC)
 The CEC program allows foreign nationals working in Canada to apply for permanent
residence based on their Canadian work experience.
 Eligibility Requirements:
o Applicants must plan to live in Canada (excluding Quebec).
o Must meet specific language proficiency criteria.
o Require 1 year of full-time skilled work experience (or equivalent) in Canada
within 3 years before applying.
o Work experience must be:
 As a paid employee (on payroll).
 Under valid legal status in Canada.
 Not while pursuing full-time studies.
 Educational Credentials:
o Not mandatory, but having Canadian or equivalent foreign credentials can increase
points in the Express Entry system.
 ITA Requirements:
o To receive an Invitation to Apply (ITA) for permanent residence, candidates must
rank among the top in the Express Entry pool when IRCC conducts draws.

16.2.3 Provincial/Territorial Nominee Programs (PNPs)

 Provinces and territories can create their own immigration programs under agreements with
the federal government (IRPA, s. 8).
 Key Features of PNPs:
o Criteria vary by province/territory but often require:
 A job offer from an employer within the province/territory.
 An intention to live in the nominating province/territory.
o Subject to IRCC approval for permanent residence.
 Ontario Example:
o The Ontario Immigrant Nominee Program (OINP) includes categories such as:
 In-demand skills with a job offer.
 International students and foreign workers with job offers.
 Graduates (Ph.D. and Master’s streams).
 French-speaking skilled workers.
 Human capital priorities (via Express Entry).
  Skilled trades (via Express Entry).
 Entrepreneur stream (currently paused).
 PNPs are increasingly popular due to the competitive nature of federal programs like Express
Entry.

17. Admissibility Issues

 Foreign nationals must meet Canada’s admissibility requirements for both temporary and
permanent residence.
 Common Admissibility Issues:
1. Medical inadmissibility:
 Risk to public health or excessive demand on health/social services.
2. Criminal inadmissibility:
 Criminal convictions or acts (inside or outside Canada).
3. Misrepresentation:
 Withholding or falsifying material facts in applications.
4. Non-compliance:
 Violations of IRPA provisions.
5. National security and human rights:
 Threats to national security or involvement in rights violations.
6. Financial inadmissibility:
 Inability or unwillingness to support oneself or dependents.
 Recommendation: Businesses should collect complete applicant histories to identify
potential issues early.

18. Conclusion
 Immigration matters can raise numerous legal and practical challenges for businesses.
 Lawyers should consider additional factors like:
o Tax implications of working in or moving to Canada.
o Timing of eligibility for provincial health coverage.
o Immigration documents for family members of applicants.
 As laws and programs frequently change, lawyers must stay informed on the most recent
regulations to effectively assist clients.

Chapter 31 Domestic and international sale of

goods
1. Introduction
1. Lawyers assist clients with contracts for buying and selling goods.
o On the buy side: They help create purchase orders or negotiate specific asset
acquisitions.
o On the sell side: They develop standard terms of sale or assist with specific
transactions.
2. Lawyers often "Canadianize" sale or purchase forms for clients, especially subsidiaries of
foreign companies.
o This involves adapting contracts to comply with Canadian law.
3. When disputes arise, lawyers interpret contracts and enforce rights through self-help,
litigation, or arbitration.

2. Overview of Ontario Sale of Goods Legislation

1. Essential Elements of a Sale of Goods Contract
o The buyer acquires title to goods (e.g., widgets).
o The seller receives payment ($Y).
o Both parties agree to a contract (written or oral).
 2. Variety in Sales
o Sales involve different parties, types of goods, and delivery terms.
3. Governing Laws
o Sale of Goods Act (SGA): Applies to all sales of goods in Ontario.
o International Sales Conventions Act (ISCA): Applies to international commercial
sales under the CISG.

2.1 International Sales Conventions Act (ISCA)

1. When ISCA Applies
o Both parties must be in countries that follow the CISG.
o Applies only to commercial sales, not consumer sales.
2. Opt-Out Option
o Parties can exclude any part of the CISG or the entire CISG.
o Exclusion is common in Ontario.

2.2 Sale of Goods Act (SGA)

1. Scope of SGA
o Covers both commercial and consumer sales.
o Acts as a default framework unless parties override its provisions.
2. Types of Contracts Under SGA
o Sale: Title to goods passes immediately.
o Agreement to Sell: Title passes in the future when conditions are met.
3. Existing vs. Future Goods
o Existing Goods: Owned by the seller at the time of the contract.
o Future Goods: To be made or acquired by the seller after the contract.

3. Key Provisions in Sale of Goods Contracts

1. SGA as a Default Framework
o Common law and principles like fraud, misrepresentation, and duress still apply
unless inconsistent with the SGA.
o Chattel security is governed by the Personal Property Security Act (PPSA), not the
SGA.
2. Application to Leases
o SGA does not apply to leases except as specified under the Consumer Protection
Act (CPA).

3.1 Buy-Side Terms

3.1.1 Title to Goods
1. Ownership
o The seller transfers ownership of goods to the buyer for payment.
o Goods include physical items like crops, timber, and minerals.
o Ownership rules do not apply to real estate, money, or intangibles like intellectual
property.
2. Transfer of Title
o Title may transfer conditionally (e.g., after payment) or absolutely.
o Sale of goods differs from leases or service contracts, which do not transfer
ownership.
3. Good Faith Buyers
o Buyers acting in good faith without knowledge of earlier sales or liens are
protected under certain conditions.
4. Security Interests
o Security interests in goods are governed by the PPSA, not the SGA.
(b) Liens and Encumbrances
1. Buyers expect goods to be free of liens or encumbrances.
2. PPSA Protections
o Goods sold in the ordinary course of business are free from seller’s security interests.
o Exceptions:
 The buyer knows the sale violates the security agreement.
 The goods are not identified in the sale contract.
3. Motor Vehicles
o Buyers take motor vehicles free of security interests unless specific conditions apply
(e.g., VIN listed in financing statement).
4. Unperfected Security Interests
o Buyers without knowledge of unperfected security interests take priority.

3.1.2 Seller’s Conditions and Warranties

1. Conditions vs. Warranties
o Breach of a condition: Buyer can cancel the contract or seek damages.
o Breach of a warranty: Buyer can only seek damages.
2. Express Terms
o Sellers provide specific guarantees when required by market norms or buyer
demands.
o Examples: Warranties on machinery or software performance.
(b) Implied Terms
1. General Provisions
o The SGA includes implied conditions and warranties in all sale contracts unless
excluded by the parties.
o The seller must have the right to sell the goods at the time the property is transferred
to the buyer.
2. Implied Warranties
o The buyer is entitled to quiet possession of the goods.
o The goods must be free of unknown charges or encumbrances.
3. Sale by Description or Sample
o By Description: Goods must match the description.
o By Sample:
 Goods must match the sample in quality.
 Buyers must have the chance to compare the goods with the sample.
 Goods must not have hidden defects that make them unmerchantable.

4. Fitness for Purpose and Merchantability

o Goods must be fit for the buyer's purpose if:
1. The buyer informs the seller of the purpose and relies on the seller’s
expertise.
2. The seller normally supplies goods of this type.
o Goods must be of merchantable quality if bought by description from a seller who
deals in such goods.
5. Exceptions
o Fitness and merchantability do not apply if:
 The buyer examined the goods before purchase.
 The goods were sold under a specific patent or trade name, as the buyer is
not relying on the seller’s expertise.
6. Canadian vs. U.S. Terms
o In Canada, fitness and merchantability are considered implied conditions, while in
the U.S., they are implied warranties.
o Excluding implied conditions in Canada requires clear and specific language. U.S.
contracts often fail to exclude these conditions in Canada.
 7. Consumer Agreements under the CPA
o The CPA applies SGA conditions and warranties to consumer agreements.
o Any attempt to exclude or change these conditions in a consumer agreement is void.
o A consumer agreement involves a supplier providing goods to an individual for
personal, family, or household use.
8. Courts’ Authority to Imply Terms
o Courts may imply terms based on:
 Custom or Usage: Established practices in similar contracts.
 Presumed Intention: Terms necessary for the contract to work effectively.
 Necessary Implication: Legal requirements for certain types of contracts.
9. Caution on Implied Terms
o Courts avoid implying terms if they conflict with the parties’ expressed intentions
or language.

3.1.3 Delivery
1. Default Delivery Terms
o Contracts must specify delivery place and time.
o If not specified, reasonable terms are implied.
o The seller pays for preparing goods for delivery.
2. Place of Delivery
o Default delivery is at the seller’s business location unless the contract specifies
otherwise.
o For specific goods located elsewhere, delivery is at that location.
o Delivery to a carrier for transport to the buyer is considered delivery to the buyer
unless stated otherwise.
3. Seller’s Authority
o The seller can make a reasonable contract with a carrier on the buyer’s behalf.
4. Standardized Trade Terms
o Parties often use Incoterms 2020 to define delivery obligations and locations.
o Incoterms are standardized delivery terms published by the International Chamber of
Commerce (ICC).
5. Incoterms Hierarchy
o Incoterms define seller obligations, from least to most burdensome, based on specific
terms.

Extended Summary of rights and

Group Incoterm
meaning obligations
E— EXW Ex Works Imposes the minimum obligation
Departure on seller. S_e_l_l_e_r_ _p_l_a_c_e_s_
_t_h_e_ _g_o_o_d_s_ _a_t_
_b_u_y_e_r_’s_ _d_i_s_p_o_s_a_l_
_a_t_ _s_e_l_l_e_r_’s_
_p_r_e_m_i_s_e_s_ _o_r_
_a_n_o_t_h_e_r_ _n_a_m_e_d_
_place. Seller is not responsible
for loading of goods or
insurance. Applies to any mode of
transportation.
F — _Main FCA Free Carrier Seller delivers goods cleared for
Carriage export to the carrier designated by
Unpaid buyer at a named place. Buyer
 must arrange for carriage from the
d_e_l_i_v_e_r_y_ _p_o_i_n_t_
_(_e_._g_._,_ _s_e_l_l_e_r_’s_
_p_l_a_n_t_)_ _t_o_ _t_h_e_
_b_u_y_e_r_’s_
_d_e_s_t_i_n_a_t_i_o_n_ _p_o_i_n_t_
_(_e_._g_._,_ _b_u_y_e_r_’s_
_s_i_t_e_)_._ _Applies to any mode
of transportation.
FOB Free On Board Technically, only applicable to water transport (but
often misapplied to other modes of transport).
Otherwise similar to FCA.
C — Main CIP Carriage and Seller pays cost of carriage
Carriage Paid Insurance Paid To required to bring t_h_e_
_g_o_o_d_s_ _t_o_ _t_h_e_
_b_u_y_e_r_’s_
_d_e_s_t_i_n_a_t_i_o_n_
_p_o_i_n_t_._ _Seller bears
associated risks and costs and
pays for cargo insurance to the
destination point. Applies to any
mode of transportation.
CIF Cost, Insurance Technically, only applicable to water
and Freight transportation (but often misapplied to other
modes of transport). Otherwise similar to CIP.
D — Arrival DDP Delivered Duty Imposes the maximum obligation
Paid on seller. Seller delivers goods to
buyer cleared for i_m_p_o_r_t_
_a_t_ _t_h_e_ _b_u_y_e_r_’s_
_n_a_m_e_d_
_d_e_s_t_i_n_a_t_i_o_n_
_p_o_i_n_t_._ _Seller bears all costs
and risks involved in bringing the
goods to the destination point,
including payment of carriage,
insurance, and customs duties in
the country of destination. Applies
to any mode of transportation.
DDU is a variant where the buyer
directly or indirectly bears such
customs duties and the associated
risks and costs caused by the
failure to clear the goods for
import.

(b) Time of Delivery

1. Delivery Timing
o Buyers usually specify a delivery deadline & may make time critical to the contract.
o If no time is specified, the seller must deliver within a reasonable time.
2. Time is of the Essence
o If time is essential and delivery is late, the buyer can:
 Reject the delivery and cancel the contract.
 Accept the delivery and claim damages for the delay.
 o A late delivery claim can lead to payment delays or deductions.
3. Seller’s Protections
o Sellers often disclaim warranties on delivery timing & exclude damages for delays.
o If late-delivery penalties apply, sellers should:
 Exclude delays caused by the buyer.
 Cap penalties as a percentage of the sale price.
4. Force Majeure Clauses
o These protect sellers from delays caused by events beyond their control, such as:
 Labour disruptions, supply chain failures, or mechanical breakdowns.
 Major events like war, terrorism, or natural disasters.
 COVID-19 led to specific terms for pandemics and public health
emergencies.
5. Installment Deliveries
o Buyers are not obligated to accept installment deliveries unless agreed in contract.
6. Quantity Delivered
o If the seller delivers fewer goods than agreed:
 The buyer can reject the delivery or accept it & pay forgoods delivered only.
o If the seller delivers more goods:
 The buyer can reject the excess, accept all, or accept only the agreed quantity.
o If delivery includes goods not in the contract:
 The buyer can reject all or accept only the goods in the contract.

(c) Passage of Risk and Title

1. General Rules
o Title and risk often pass to the buyer at different times.
o Sellers prefer title to pass after full payment and risk to pass earlier.
o Buyers prefer title to pass early but risk to pass after delivery.
2. Default Rules under SGA
o Title does not pass for unascertained goods until they are identified.
o If specific goods perish before title or risk passes, the contract is void.
3. Contractual Terms
o The contract usually specifies when title passes.
o Risk typically passes when title passes unless the contract states otherwise.
4. Rules for Specific Situations
o If the seller must prepare goods for delivery, title passes after preparation and
notification to the buyer.
o For unascertained or future goods, title passes when goods are appropriated to the
contract with the buyer’s consent.
5. Special Risk Rules
o The defaulting party bears the risk if delivery is delayed due to their fault.
o A party’s liability as a bailee can also determine risk.

(d) Bills of Lading (B/L)

1. Definition and Purpose
o A bill of lading (B/L) is a transport document acknowledging receipt and delivery
terms.
o A straight B/L only serves as a transport document.
o A negotiable B/L also acts as a document of title, allowing transfer of ownership.
2. Use in Trade Finance
o Negotiable B/Ls are common in trade finance and linked to letters of credit (L/C).
o A clean B/L (goods received in good condition) is required to draw on an L/C.
3. Mode of Transportation
o B/Ls are used for marine, rail, truck, and multimodal transport.
 o For air transport, an air waybill is used instead.
4. Key Features of B/Ls
o Carriers often limit liability in B/Ls, e.g., capping it by weight or mass.
o B/Ls include cargo details, destination, and date.
o Sellers must deliver clean B/Ls to ensure payment under an L/C.

3.1.4 Acceptance
1. Buyer’s Right to Examine Goods
o Buyers can inspect goods to ensure they meet contract terms before acceptance.
2. When Goods Are Accepted
o A buyer is deemed to accept goods if:
 They inform the seller of acceptance.
 They use the goods in a way inconsistent with the seller’s ownership.
 They keep the goods without notifying rejection within a reasonable time.
3. Rejection of Goods
o Buyers can reject goods by notifying the seller. They are not required to return them.
o If the buyer wrongfully refuses delivery, the seller can claim damages.

3.1.5 Liquidated Damages

1. Definition
o Liquidated damages are pre-agreed amounts for contract breaches, avoiding proof
of actual damages.
2. Criteria for Validity
o Liquidated damages must reflect genuine estimates of potential loss.
o Penalties are invalid if they:
 Exceed probable damages.
 Apply the same amount for minor and major breaches.
 Penalize mere delays in payment.
3. Recent Legal Trends
o Courts increasingly allow parties to define breach remedies in contracts.
4. Best Practices
o Use liquidated damages selectively and ensure they are reasonable.
o Sellers can propose penalties for late delivery or unmet performance.
3.2.2 Payment
(a) Deposit
1. A deposit is money paid upfront to secure future performance.
2. Sellers often require a deposit to reduce the risk of buyer default.
3. If the buyer defaults, a reasonable deposit can be forfeited, even if the seller suffers no loss.
4. Excessive deposits might be challenged as unenforceable penalties, but such challenges are
rare.
(b) Irrevocable Documentary Letter of Credit (L/C)
1. Purpose
o L/Cs are commonly used in international transactions to ensure payment.
o Sellers are assured payment upon presenting shipping documents to the issuing bank.

2. Documents Required
o Commercial invoice matching the L/C description.
o Clean bill of lading (B/L) confirming goods are in good condition.
o Transit insurance and other specified documents (e.g., origin certificates).
3. Process
o Buyer’s bank issues the L/C to the seller.
o Seller submits required documents to the bank for payment before the L/C expires.
4. Key Principles
 o Autonomy Principle: L/Cs are separate from the underlying sales contract.
o Strict Compliance: Documents must exactly match the L/C terms; no substantial
compliance is allowed.
5. Fraud Exception
o Payment can be stopped if the seller engages in fraud.
o Evidence of fraud must be strong and directly linked to the seller.
6. Risks
o Sellers face risks of fraudulent or invalid claims under L/Cs.
o Courts generally require strong evidence to stop payments under an L/C.

(c) Interest on Overdue Payments

1. The SGA default rule requires payment upon delivery unless the contract specifies
otherwise.
2. Many contracts split payments into deposits, pre-shipment payments, and post-delivery
balances.
3. Interest Rates
o Sellers can charge interest on overdue payments.
o If no rate is specified, the default is 5% per year under the Interest Act.
o Monthly interest must also state an equivalent annual rate to be enforceable.
4. Best Practices
o Use interest rates high enough to encourage payment but below the legal limit of
60% per year.
o Rates between 10% and 24% per year are common.
(d) Acceleration of Deferred Payments
1. Contracts often allow sellers to accelerate all payments if the buyer:
o Misses a payment deadline.
o Declares bankruptcy or becomes insolvent.
2. If a buyer files for bankruptcy protection, the seller may need court permission to
terminate the contract.

3.2.3 Exculpatory and Disclaimer Clauses

1. Purpose
o These clauses limit a seller’s liability for defects, delays, or other issues.
2. Types of Clauses
o Disclaimer of Warranties: Seller disclaims all warranties except those explicitly
in the contract.
o Exclusion of Damages: Seller limits liability for indirect, special, or punitive
damages.
o Liability Caps: Seller caps damages at the contract price or a specified amount.
o Time-Limited Warranties: Warranties may only cover a set period, such as 12 or
24 months.
3. Enforceability
o Courts enforce these clauses unless they are unconscionable or overridden by
consumer protection laws.

3.3 Other Provisions

3.3.1 Set-Off
1. Purpose
o Allows a party to offset crossclaims against payments owed.
2. Types of Set-Off
o Legal Set-Off: Requires mutual debts and liquidated amounts.
o Equitable Set-Off: Requires closely related claims.
3. Express Provisions
 o Including a set-off clause avoids disputes.
o Sellers may waive the buyer’s set-off rights to improve receivables management.

3.3.2 Insurance
1. Parties with risk of loss often obtain insurance for goods during transit.
2. Buyers may require sellers to provide product liability and property insurance.

3.3.3 Performance and Other Bonds

1. Sellers may need to post performance bonds, bid bonds, or bonds for labour/materials.
2. Alternative security includes standby L/Cs or bank guarantees.

3.3.4 Intellectual Property (IP) Rights

1. Buyers seek assurance that goods do not infringe third-party IP rights.
2. Sellers often include indemnification clauses and require prompt notice of infringement
claims.

3.3.5 Integration Clause

1. States that the written agreement is the complete agreement between parties.
2. Prevents introduction of outside evidence that contradicts the contract.

3.3.6 Time of the Essence

1. The SGA default rule does not make payment deadlines critical unless specified.
2. Contracts may state that time for delivery or payment is critical.
3. Liquidated damages for late delivery may limit the buyer’s right to terminate the contract.

3.3.7 Choice of Language

1. English is commonly used in international contracts.
2. For use in Quebec, contracts should include a provision confirming English as the chosen
language.

3.3.8 Choice of Law

1. Sellers often prefer the contract to be governed by their home jurisdiction’s laws.
2. Buyers may insist on the law where the goods will be used.

3.3.9 Forum Selection

1. Sellers prefer disputes to be resolved in their home jurisdiction.
2. A forum selection clause ensures enforcement of judgments across jurisdictions.

3.3.10 Waiver of Jury Trial

1. Jury trials in commercial cases are rare in Canada but more common in the U.S.
2. Waiving a jury trial avoids unpredictable outcomes, especially in high-stakes disputes.
3.3.11 Arbitration
1. Parties in commercial contracts can choose arbitration for resolving disputes.
2. Arbitration decisions are final and binding, with no appeal or court review.
3. Canadian courts strongly support arbitration and party autonomy, especially in international
cases.
Factors to Consider for Arbitration
1. Arbitration may not always be cheaper or faster than court litigation.
o Parties must cover arbitration costs, including arbitrator fees, venue rental, and
stenographers.
2. Arbitration allows parties to choose the decision-maker, but the arbitrator must be selected
at the outset.
3. Disputes may arise about whether arbitration or litigation applies.
Advantages of Arbitration
1. Cross-border Disputes: Useful when parties are in different jurisdictions and prefer neutral
ground.
2. Enforcement: Awards under the New York Convention (1958) can be enforced in 172
countries, including most of Canada’s major trade partners.
Choosing Arbitration Rules
1. For domestic disputes, parties can adopt the Arbitration Act, 1991.
2. For international disputes, the International Commercial Arbitration Act, 2017 applies,
implementing the UNCITRAL Model Law.
3. Parties can use rules from recognized arbitral institutions, such as:
o International Center for Dispute Resolution (AAA).
o ICC Court of Arbitration.
o London Court of International Arbitration.
4. Canada has a strong global reputation for arbitration expertise.

4. Seller’s Security for Payment and In Rem Rights

4.1 Unpaid Seller’s Lien

1. An unpaid seller’s lien arises when the seller has not received full payment for goods.
2. It applies even without registration and under these conditions:
o Payment is incomplete.
o Payment via cheque or negotiable instrument is dishonored.
Enforcing the Lien
1. The seller can:
o Withhold delivery.
o Reclaim possession.
o Notify the carrier or bailee of the claim.
2. Losing the Lien
o The lien is lost if the buyer or buyer’s agent takes possession.
o It is also lost if the goods are delivered to a buyer’s carrier or bailee without
reserving disposal rights.
3. Retention of Rights
o The lien survives even after the buyer’s bankruptcy or title transfer to the buyer.
o The lien includes the right to resell goods if the contract reserves this right.
Limitations of the Lien
1. The lien ends when the goods are out of the seller’s control.
2. Sellers should consider alternatives, such as:
o Letters of credit (L/C).
o Purchase-money security interests (PMSI).

4.2 Right of Repossession

1. Under Section 81.1 of the BIA, sellers can reclaim goods for business use if:
o The buyer is bankrupt or in receivership.
o Goods were delivered within 30 days and remain unpaid.
2. Limitations
o The demand must be made within 15 days.
o Repossession does not apply to goods no longer on hand, altered, or sold to a third
party.

4.3 Purchase-Money Security Interest (PMSI)

1. PMSI gives the seller priority over other creditors, including lenders, landlords, and
employees.
2. To secure a PMSI, sellers must:
 o Create and perfect the security interest.
o Register the financing statement under the PPSA.
o Notify prior secured creditors for inventory sales.

4.3.1 Equipment
1. Steps for PMSI in Equipment
o Obtain a written agreement with a title-retention clause signed by the buyer.
o Register a financing statement within 15 days after the buyer takes possession.
2. Benefits of PMSI
o Priority over landlords and other creditors, including prior-registered lenders.
3. Best Practices
o Use a specific written agreement with title-retention provisions.
o Avoid relying on invoice language or unsigned documents.

4.3.2 Inventory
1. Definition
o Inventory includes goods for resale, manufacturing, or use in a business.
2. Steps for PMSI in Inventory
o Register a financing statement before delivering inventory.
o Notify prior secured creditors with claims on the same inventory or accounts.
3. Practical Challenges
o Inventory often sells quickly, making it hard to enforce security.
o Registering and notifying creditors can be labor-intensive.
o Notification may cause issues with buyers’ lenders.
4. Upside of PMSI in Inventory
o If properly registered, it offers priority over other claims if inventory is still on hand
or sale proceeds remain uncollected.
4.3.3 Consumer Goods
1. PMSI rules for consumer goods are similar to those for equipment but have key differences:
o Definition: Consumer goods are not inventory or its proceeds. Vehicles are the most
common category.
o After-acquired property: A PMSI cannot attach to consumer goods acquired after
the agreement unless the buyer obtains rights in them within 10 days of the seller
giving value.
o Registration timing: Registration under the PPSA cannot occur before the buyer
signs the sales agreement.
o Details required: The financing statement must include the secured amount and
credit maturity date.
Steps to Secure PMSI in Consumer Goods
1. Have the buyer sign the sales agreement.
2. Register the financing statement after the buyer signs the agreement but within 15 days of the
buyer taking possession.
3. Deliver the goods to the buyer.

5. Contractual Remedies Under the SGA

5.1 Seller’s Remedies

1. Action for Price: The seller can sue the buyer for refusing to take delivery or pay for the
goods.
2. Damages:
o Measure of damages is the loss directly caused by the buyer’s breach.
 o If there is a market for the goods, damages are the difference between the contract
price and the market price at the time of refusal or non-acceptance.
o Example: If the contract price is $60, and the goods can be resold for $40, the seller
can claim $20 in damages.
3. Custody Charges: The seller can claim reasonable costs for storing the goods if the buyer
refuses delivery.

5.2 Buyer’s Remedies

1. Non-delivery Action: The buyer can sue for non-delivery of goods.
o Damages are the loss directly caused by the seller’s breach.
o If there is a market for the goods, damages are the difference between the market
price at the time of non-delivery and the contract price.
o Example: If the contract price is $60 and replacement goods cost $70, the buyer can
claim $10 in damages.
2. Breach of Warranty:
o The buyer can reduce or extinguish the price or sue for damages.
o Damages are typically the difference between the value of conforming goods and the
actual delivered goods.
3. Refunds: If payment consideration fails, the buyer can recover payments made.

6. The United Nations Convention on Contracts for the International

Sale of Goods (CISG)

6.1 Scope and Application

1. The CISG applies to sales of goods between parties in treaty countries unless excluded by
contract.
o Example: It applies by default to sales between Canada and the U.S.
2. Failure to exclude the CISG often leads to unintended application.
o CISG rules may differ from Canadian common law, such as requiring reasonable
notice before contract termination or allowing price reductions for deficient goods.
3. The CISG has been adopted in Canada (except Quebec) and applies to federal, provincial, and
territorial transactions.

6.2 Exclusions from the CISG

1. The CISG does not apply to:
o Consumer goods purchased for personal, family, or household use (if the seller was
unaware of such use).
o Sales by auction, legal process, or involving securities, money, ships, aircraft, or
electricity.
o Seller liability for death or personal injury caused by goods.

6.3 Contracting Out of the CISG

1. Parties can exclude the CISG by expressly stating so in the contract.
o A clause choosing Ontario law is insufficient unless it explicitly excludes the CISG
and ISCA.

6.4 Key Differences from Ontario Law

1. Irrevocable Offers: Offers can be irrevocable without consideration.
2. Offer Acceptance: Acceptance occurs when it reaches the offeror, not when sent.

6.5 Seller Obligations Under the CISG

1. Goods must:
o Match the contract’s quantity, quality, and description.
 o Be fit for ordinary or specific purposes made known to the seller (if reliance on the
seller’s skill was reasonable).
o Match samples or models provided.
o Be adequately packaged to preserve and protect them.
2. Inspection and Notification:
o Buyers must examine goods promptly and notify the seller of defects within a
reasonable time.
o Claims are barred if notice is not given within two years of delivery, unless otherwise
stated in the contract.
6.3 Remedies for Breach
1. The CISG provides buyers with several remedies for breach of contract. These include:
o Declaring the contract avoided.
o Seeking specific performance.
o Requesting substitute goods.
o Reducing the price.
o Extending the time for performance.
2. Contract Avoidance:
o Under Article 49, a buyer can void the contract if the seller commits a fundamental
breach (as defined in Article 25).
o The buyer can also avoid the contract if the seller fails to deliver the goods within a
reasonable extension of time set by the buyer or if the seller states they will not
deliver on time.
3. Buyer’s Obligations:
o The buyer must pay the price and take delivery as stated in the contract.
o If the price or specifications are not set in the contract, the default price is the market
price at the time.
o The seller can specify the goods' characteristics, and the buyer has a reasonable time
to adjust these specifications or accept the seller’s choice.
4. Passing of Risk:
o Risk typically passes to the buyer upon delivery or constructive delivery.
o For carriage contracts, the risk transfers when the goods are handed to the first
carrier.
o For goods sold in transit, risk usually passes at the time of the contract or earlier as
agreed.
o Risk also passes when the buyer takes possession or fails to take delivery on time.
5. Damages:
o Damages include loss of profit and are capped at losses foreseeable at the time of the
contract (Article 74).
o If replacement goods are purchased or goods are resold, damages equal the difference
between the substitute price and the contract price (Article 75).
o If no substitute transaction occurs, damages are based on the difference between the
contract price and the current price at the time of avoidance.
6. Mitigation of Loss:
o Article 77 requires the non-breaching party to mitigate losses.
o Damages may be reduced if the loss could have been avoided.

6.4 When to Opt Out of the CISG

1. Many parties in Canada exclude the CISG to avoid ambiguity.
o Excluding the CISG ensures the contract is governed solely by its terms.
2. If the CISG applies, its terms override inconsistent provisions in the contract unless expressly
excluded.
3. Exclusion is common in contracts between parties in common-law jurisdictions like Canada
and the U.S.
 o The CISG includes civil law concepts like irrevocable offers and relaxed performance
rules, which are not standard in Canadian common law.
4. The CISG can be useful for contracts between parties in Canada and civil law countries (e.g.,
China, Germany, France, Japan).
o It can serve as neutral ground and reduce the importance of choosing a jurisdiction's
law.

7. Franchise Legislation

7.1 Scope of a “Franchise”

1. The Arthur Wishart Act defines a franchise broadly, potentially including seller-buyer
relationships.
2. Key elements of a franchise:
o The franchisor grants the right to operate a business.
o The franchisee pays the franchisor.
o The franchisee uses the franchisor's trademark.
o The franchisor controls or assists the franchisee's operations (e.g., via training).
3. If the buyer operates in Ontario or the agreement is governed by Ontario law, the Wishart
Act may apply.
4. If no exemption applies, the franchisor must provide a franchise disclosure document at
least 14 days before payment or signing.

7.2 Exemptions
1. Certain agreements are exempt from disclosure requirements, including:
o Contracts lasting 1 year or less with no non-refundable fees.
o Agreements where the total initial investment is below $15,000 or above $3,000,000.
o Fractional franchises, where 1st-year sales of franchise goods/services do not
exceed 20% of the total business revenue.
2. The seller must prove the exemption applies (e.g., by verifying buyer revenues for
fractional franchises).

7.3 Consequences of Non-compliance

1. A franchisee can rescind the agreement within 2 years if disclosure requirements are not
met.
2. On rescission, the franchisor must:
o Refund payments, excluding amounts for inventory, supplies, or equipment.
o Repurchase remaining inventory, supplies, and equipment at the original price.
o Compensate the franchisee for losses from acquiring, setting up, and operating the
franchise.

8. Conclusion
1. Assisting clients with sales of goods is a critical aspect of commercial law practice.
2. These transactions significantly impact revenues and generate disputes for litigation or
arbitration.
3. As a leading trading nation, Canada’s economy heavily relies on domestic and international
sales of goods.
4. Legal professionals play a key role in supporting businesses in this area.

Chapter 32 Privacy law 1. Introduction

1. Privacy laws balance an individual's right to privacy with an organization's need to
collect, use, or disclose personal information for its operations.
2. Organizations handling personal information during commercial activities must comply with
the Personal Information Protection and Electronic Documents Act (PIPEDA).
 3. Business clients must follow privacy rules under PIPEDA.
4. PIPEDA has 10 key principles (Sched. 1):
o Accountability
o Identifying purposes
o Consent
o Limiting collection
o Limiting use, disclosure, and retention
o Accuracy
o Safeguards
o Openness
o Individual access
o Challenging compliance
5. The Privacy Commissioner oversees PIPEDA, advises organizations, and addresses
complaints about personal information practices.

2. Application and Definitions

2.1 Application (Section 4)

1. PIPEDA applies to:
o Organizations collecting, using, or disclosing personal information in commercial
activities.
o Federal works, undertakings, or businesses (e.g., banks, airlines,
telecommunications).
o Complaints related to organizations outside Canada or involving trans-border data
flow.
2. PIPEDA does not apply to:
o Federal or provincial governments and Crown agents.
o Personal or domestic activities.
o Journalistic, artistic, or literary activities.
3. Non-profits like charities are typically exempt unless they engage in commercial activities
(e.g., golf clubs or athletic clubs).
4. Business contact information is exempt if used solely for workplace communication.
5. Provinces with privacy laws deemed “substantially similar” to PIPEDA can be exempt
(e.g., BC, Alberta, and Newfoundland).
o Even in these provinces, PIPEDA applies to fed businesses & cross-border data.

2.2 Definitions
1. Personal Information (Section 2(1)):
o Defined as information about an identifiable individual.
o Includes any data that could identify someone when combined with other
information.
o Applies to all forms of information (e.g., written, audio, video, or spoken words).
2. Organization:
o Defined broadly to include associations, partnerships, corporations, and trade unions.
3. Commercial Activity:
o Any transaction or conduct with a commercial character.
o Includes selling, bartering, or leasing donor or membership lists.

3. Enforcement and Administration

1. The Privacy Commissioner’s Powers:
o Investigate complaints and audits.
o Issue reports and recommend compliance steps.
o Cannot issue orders directly but can apply to the Federal Court for rulings.
 2. Penalties:
o Non-compliance can lead to investigations, public reports, litigation, fines, or
sanctions.
o Maximum fines: $10,000 (summary conviction) or $100,000 (indictable offence).
3. Federal Court Authority:
o Hear applications, issue rulings, and award damages.
o Cases are heard afresh (de novo).
4. Compliance Agreements:
o The Commissioner can create agreements to ensure organizations follow PIPEDA.

4. Principles of Personal Information Protection (Sched. 1)

4.1 Accountability
1. Organizations must:
o Designate a person responsible for compliance.
o Ensure external processors protect information.
o Create policies to protect personal information.
2. Actions to comply include:
o Implementing procedures.
o Handling complaints and inquiries.
o Educating staff and sharing policies externally.

4.2 Identifying Purposes

1. Organizations must state the purpose for collecting information before or during collection.
2. If a new purpose arises, they must inform individuals and seek consent unless authorized
by law.

4.3 Consent
1. Individuals must know and consent to the collection, use, or disclosure of their personal
information, except where inappropriate.
2. Valid Consent (Section 6.1):
o Individuals must reasonably understand the purpose, nature, and consequences of
providing their information.
3. Forms of Consent:
o Express consent for sensitive data (e.g., medical information).
o Implied consent for less sensitive data.
4. Exceptions to Consent:
o In emergencies or when consent is impractical.
o For law enforcement or security investigations.
o For journalistic, artistic, or literary purposes.
5. Individuals can withdraw consent, but organizations must explain the implications.

4.4 Limiting Collection

1. Organizations must:
o Collect only the information needed to fulfill their stated purposes.
o Use fair and lawful means to collect information.
4.5 Limiting Use, Disclosure, and Retention
1. Personal information cannot be used or disclosed for purposes other than those originally
stated unless:
o The individual consents.
o PIPEDA permits it in specific circumstances.
o It is required by law.
2. Personal information must only be kept as long as necessary to fulfill its purpose.
 3. Once no longer needed, personal information should be destroyed or anonymized.
4. Organizations should create clear guidelines for retention and destruction, including
minimum and maximum retention periods.

4.6 Accuracy
1. Organizations must ensure personal information is accurate, complete, and up to date for its
intended use.
2. This reduces the risk of making incorrect decisions based on inaccurate data.

4.7 Safeguards
1. Organizations must protect personal information using appropriate security measures.
2. Safeguards should protect against loss, theft, unauthorized access, disclosure, copying, or
modification.
3. Security measures should include:
o Physical safeguards: Locked file storage or secure office spaces.
o Organizational safeguards: Clear privacy policies and staff training.
o Technological safeguards: Encryption and secure access controls.

4.8 Openness
1. Organizations must provide individuals with information about their personal information
management policies and procedures.

4.9 Individual Access

1. Organizations must inform individuals, upon request, about:
o The existence of their personal information.
o How it is being used.
o Who it has been disclosed to.
2. Individuals must have the ability to challenge and correct any inaccuracies in their personal
information.
3. Exceptions to access should be:
o Limited and specific.
o Explained with reasons when access is denied.
4. Common exceptions include:
o Excessive cost to provide the information.
o References to other individuals.
o Legal, security, or proprietary restrictions.
o Solicitor-client privilege.

4.10 Challenging Compliance

1. Individuals must be able to challenge an organization’s compliance with PIPEDA.
2. Organizations must establish procedures to handle complaints or inquiries about their
privacy practices.
3. Complaints must be investigated, and justified complaints must result in appropriate action,
including changes to practices.

5. Breaches of Security Safeguards

1. Reporting Requirements (since November 1, 2018):
o Breaches must be reported to the Commissioner, affected individuals, and
sometimes third parties.

2. Notification Triggers:
o Notify the Commissioner if the breach poses a real risk of significant harm.
o Notify affected individuals if there is a real risk of significant harm to them.
 o Notify other organizations or government institutions if they can help reduce or
mitigate harm.
3. Definition of Breach:
o Loss, unauthorized access, or disclosure of personal information due to failed
security safeguards.
4. Definition of Significant Harm:
o Includes bodily harm, humiliation, reputation damage, financial loss, identity theft,
credit issues, or property damage.
5. Risk Assessment Factors:
o Sensitivity of the breached information.
o Likelihood the information will be misused.
6. Organizations must keep records of all breaches and provide them to the Commissioner
upon request.

6. First Nations and Privacy

1. Application of PIPEDA:
o 1st Nation councils or administrations are considered federal works or undertakings.
o PIPEDA applies to:
 Commercial activities by First Nations.
 Employee records.
2. Exclusions:
o The federal Privacy Act and Access to Information Act do not apply to First Nation
councils.
o Some provincial laws, like Ontario’s Personal Health Information Protection Act,
may apply depending on the records managed.
3. Traditional Privacy Practices:
o First Nations often have their own privacy values and laws, covering personal and
community privacy.
4. OCAP Principles:
o OCAP stands for Ownership, Control, Access, and Possession.
o It governs the use and protection of 1st Nations information to benefit communities.
5. Agreements to Enforce OCAP:
o OCAP is primarily enforced through agreements like data-sharing, service, or
research agreements.
o OCAP is not recognized in Canadian law but is critical for 1st Nations governance.
6. OCAP Trademark and Certification:
o The term “OCAP” was trademarked in 2013 by the First Nations Information
Governance Centre (FNIGC).
o The FNIGC manages certification processes and further guidance.
7. Broader Indigenous Privacy Respect:
o Métis and Inuit privacy principles, though not labeled as OCAP, also require respect.
8. Advising Clients:
o Practitioners should familiarize themselves with OCAP and other community-specific
privacy practices when working with Indigenous information.

Chapter 33 Aboriginal business law

1. Terminology
1. The term "Indian" is outdated and considered offensive by many.
o Preferred terms: "First Nations person" or "Indigenous" (referring to First Nations,
Métis, and Inuit).
o "Indian" is still used in legal contexts under the Constitution, Indian Act, and some
other laws.
2. Status Indians: Indians registered under the Indian Act.
Non-Status Indians: Not recognized under the Act.
3. Term "Indian" remains necessary in legal discussions until removed from Canadian laws.

2. Introduction
1. General business law principles apply to Indigenous peoples, but there are significant
differences.
2. The most notable difference is the Indian exemption from taxation and seizure under the
Indian Act.
3. This chapter focuses on taxation and seizure exemptions for registered Indians under the
Indian Act.
o It does not apply to Inuit, Métis, or non-status Indians unless otherwise stated.

3. Indian Taxation Issues

1. Indians are not entirely tax-exempt in Canada.
2. Section 87 of the Indian Act provides specific tax exemptions for:
o Reserve lands or surrendered lands.
o Personal property situated on a reserve.
3. These exemptions also appear in the Income Tax Act (ITA).

3.1 Elements of the Indian Act Exemption

The Section 87 exemption applies if:
1. The claimant is an Indian or band (not a corporation).
2. The issue involves a "tax."
3. The taxed property is:
o An interest in reserve lands or surrendered lands.
o Personal property situated on a reserve.

3.2 Income Tax – Employment Income

1. Section 81(1)(a) of the ITA confirms the Section 87 exemption.
2. Courts use "connecting factors" to determine if income is located on a reserve.
3. Factors include:
o Residence of the employer and employee.
o Location of employment.
o Purpose of the employment (e.g., benefit to the reserve).
4. Employers should refer to CRA Form TD1-IN to determine tax exemptions for employees.

3.3 Section 90 – Deeming Provision

1. Section 90 allows property located off-reserve to be deemed "on-reserve" if:
o It was given under a treaty or an agreement between a band and the Crown.
2. This does not apply to commercial contracts with provinces or private parties.

3.4 Income Tax – Business Income

1. Business income from unincorporated proprietorships is evaluated using the same
"connecting factors" as employment income.
2. Factors include:
o Location of customers, income, business decisions, and records.
 oWhether the business is part of the commercial mainstream.
oThe extent to which the business is integral to reserve life.
3. The more a business operates outside the reserve, the more likely its income will be taxed.

3.5 Income Tax – Investment and Interest Income

1. Interest income earned at a financial institution on-reserve is tax-exempt under Section 87.
2. Supreme Court of Canada decisions (Bastien Estate and Dubé):
o Connecting factors must focus on the contract's location and not the financial
institution's operations.

3.6 Federal Goods and Services Tax (GST) and Harmonized Sales Tax (HST)
1. Section 87 provides a limited HST exemption for Indians for personal property on a
reserve.
2. CRA Policy Bulletin B-039R3:
o Details HST exemptions for status Indians, bands, and "band-empowered entities."
o Extends exemptions to tribal councils and organizations controlled by bands.
3. Ontario provides point-of-sale relief for the provincial portion of HST on certain off-reserve
purchases.

3.7 First Nations Goods and Services Tax (FNGST)

1. Introduced in 2003, this allows First Nations to impose a tax equivalent to GST within
their territories.
2. Participating First Nations collect and share the tax revenue with the federal government.
3. Status Indians are exempt from GST but must pay FNGST in participating communities.

4. Exemption from Seizure

1. Provincial and federal laws on seizure and garnishment generally apply to Indigenous
persons.
2. Section 89 of the Indian Act protects on-reserve property owned by registered Indians or
bands.

Key Provisions of Section 89

1. Property located on-reserve cannot be seized, pledged, or mortgaged by non-Indians.
2. Exceptions:
o Creditors who are Indians or bands.
o Conditional sale agreements favoring the creditor.
o Leasehold interests on designated reserve lands.

Case Law on Section 89

1. Tribal Wi-Chi-Way-Win Capital Corp. v. Stevenson:
o Indians can waive Section 89 protection through a promissory note.
2. Bogue v. Miracle:
o Section 89 applies to receivers appointed under provincial law.
Chapter 34 Corporate reorganizations under the Bankruptcy and
Insolvency Act and The Companies Creditors Arrangement Act

stakeholders when a corporation decides to restructure due to financial distress

Factors that a corporation needs to consider b4 restructuring

a Time
b Expenses
c Debtor-in-possession financing
d Viability of the proposal
e Feasible
f. Frequency in communication among various stakeholders.

Difference Between BIA & CCAA

1. Legislation Governing Insolvency and Bankruptcy in Canada
o The two main laws for insolvency and bankruptcy in Canada are the
Bankruptcy and Insolvency Act (BIA) and the Companies' Creditors
Arrangement Act (CCAA).
o Both laws allow companies that cannot pay their debts to make arrangements
to settle them differently.
2. BIA Proposal Process
o Under the BIA, a company in trouble makes a formal proposal to creditors.
o This proposal suggests how the company will settle its debts.
3. CCAA Proceedings
o Under CCAA, a company files a plan with the court to restructure its debts.
o The CCAA applies to companies that owe at least $5 million.

1. The Case for Restructuring

1.1 General Overview
 Purpose: Restructuring helps preserve the company’s value, jobs, and goodwill. It often
offers better recovery for stakeholders than liquidation.
 Public Interest: Avoiding business failure reduces unemployment and social disruption.
 Key Restructuring Methods:
o Negotiate debt agreements with creditors.
o Downsize operations and workforce.
o Sell or close non-core or unprofitable parts of the business.
o Seek new debt or equity financing.
o Use formal insolvency proceedings under the BIA or CCAA.

1.2 Impact on Stakeholders

1.2.1 Secured Creditors
 Secured creditors often prefer liquidation for better recovery.
 However, if restructuring offers better returns, they may support it.
1.2.2 Trade Creditors
  Future business with a restructured company often outweighs limited recovery from
liquidation.
1.2.3 Landlords
 Landlords may prefer continuing leases with restructured tenants over bankruptcy claims and
finding new tenants.
1.2.4 Regulatory Agencies
 Businesses with regulatory oversight (e.g., airlines, telecoms) need regulatory cooperation for
successful restructuring.
1.2.5 Shareholders
 Shareholders generally lose everything in liquidation and prefer restructuring to retain some
equity.
1.2.6 Employees/Unions
 Restructuring preserves jobs.
 In unionized settings, unions play a critical role, often negotiating significant concessions.
1.2.7 Duty of Good Faith
 Since 2019, all participants in BIA/CCAA proceedings must act in good faith.

1.3 Key Pre-Restructuring Considerations

1. Timing: Restructuring can take months or years. Speed is crucial to minimize disruption.
2. Costs: Formal restructuring is costly, especially under the CCAA.
3. DIP Financing: Debtor-in-possession financing gives lenders first priority over assets.
Approval requires notice to secured creditors and court approval.
4. Viability: The company must assess if creditors will support the plan and if the
restructured business can succeed.
5. Communications Plan: Clear, timely updates to stakeholders are essential to maintain
goodwill and minimize disruptions.

2. Typical Compromises under BIA Proposals or CCAA Plans

 BIA Proposals: Debtors propose compromises to creditors.
 CCAA Plans: Debtors submit a “plan of compromise or arrangement” to the court.
Common Forms of Compromise:
1. Cents-on-the-Dollar: Creditors receive a percentage of their claims, paid immediately or
over time.
2. Basket Payment: Lump-sum payments divided equally among unsecured creditors.
3. Debt Conversion: Creditor claims are converted into equity in the restructured company.

 Default Consequences:
o BIA: Proposal failure leads to automatic bankruptcy.
o CCAA: No automatic bankruptcy, but failure often results in receivership or a new
plan.

3. Private Compromises and Informal Restructurings

3.1 Benefits
 Confidentiality: Keeps financial issues private and preserves goodwill.
 Lower Costs: Less expensive than formal proceedings.
3.2 Weaknesses
1. No mechanism to force stakeholder participation.
2. Stakeholders may not understand the urgency.
3. No legal stay to stop creditors from terminating contracts or enforcing rights.
4. Non-consenting creditors are not bound by the compromise.

4. Proposals under the BIA

4.1 Overview
 Part III of the BIA governs proposals.
  Divided into:
o Division I: General proposals (non-consumer).
o Division II: Consumer proposals (for individuals with debts under $250,000,
excluding mortgages).
 Focus here is on general proposals under Division I.

4.2 Who May Make a Proposal

 Eligibility: Proposals can be made by insolvent persons, bankrupts, or receivers, liquidators,
or trustees-in-bankruptcy (as per s. 243(2) of the BIA).
 Definition of Insolvent Person:
o Resides, operates a business, or owns property in Canada.
o Owes at least $1,000 in provable claims.
o Meets one of these conditions:
 Cannot pay obligations as they become due.
 Has stopped paying current obligations.
 Owns insufficient assets to pay obligations, even if sold.
 "Proximity to Insolvency" Test: Applied in some CCAA cases; unclear if it applies under
the BIA.
 Who Is Excluded: Banks, insurance companies, trust companies, and loan companies, as
their insolvency is governed by other laws (e.g., Winding-Up and Restructuring Act).

4.3 Equal Treatment of Creditors and Secret Deals

 Equal Treatment: All creditors in the same class must receive the same proposal terms (ss.
50(1.2)–(1.3)).
 Prohibited: Secret agreements with specific creditors within the same class are not allowed.

4.4 Commencing the Proposal Process

 Initiation: The debtor can start the process by filing either:
1. A Notice of Intention (NOI) to make a proposal (s. 50.4(1)).
2. A Proposal to creditors (s. 62(1)).
 Most cases begin with an NOI because filing a proposal immediately is rare.

4.4.1 Requirements for an NOI

An NOI must include:
 Statement of intent to make a proposal.
 Name and address of a licensed trustee (proposal trustee).
 List of creditors owed $250 or more and the amounts owed.
4.4.2 Notice to Creditors
 The trustee must notify all known creditors within 5 days of filing the NOI (s. 50.4(6)).
4.4.3 Filing Cash Flow Statements and Reports
 Deadline: Within 10 days of filing the NOI, the debtor must:
1. File a projected cash flow statement signed by both the debtor and the trustee (s.
50.4(2)(a)).
2. File a trustee-prepared report on the cash flow statement's reasonableness (s. 50.4(2)
(b)).
 Creditors may request the cash flow statement, but courts can restrict access if disclosure
would harm the debtor (ss. 50.4(3)–(4)).
 Trustees are not liable for losses caused by reliance on cash flow statements if they acted in
good faith (s. 50.4(5)).
 Material adverse changes must be reported immediately by the trustee to creditors and the
official receiver (ss. 50.4(7)(b)–(c)).
4.4.4 Consequences of Non-Compliance
 If the debtor does not file the required documents within 10 days, they are deemed to have
filed for bankruptcy (s. 50.4(8)).
  Courts may extend the deadline in limited cases.

4.5 Role and Obligations of the Proposal Trustee

 Duties:
o Provide a reasonableness report on the cash flow statement.
o Advise and assist the debtor in preparing and negotiating the proposal (s. 50.5).
o Monitor the debtor’s financial affairs and access financial records (s. 50.4(7)(a)).
o Report to the court on:
 The debtor’s liabilities and asset value.
 Conduct of the debtor.
 Causes of insolvency.
 Whether the proposal is advantageous for creditors.
 Protections: Proposal trustees are protected from liability for labour and environmental
issues under certain conditions (s. 14.06).
 Inspectors: Creditors may appoint up to 5 inspectors to oversee the trustee’s work (s. 56).

4.6 Timelines for Filing Proposals

4.6.1 Initial 30-Day Period
 Debtors must file a proposal within 30 days of filing the NOI.
 Courts can grant extensions if the debtor applies.
4.6.2 Extensions
 Conditions:
o No extension exceeds 45 days at a time.
o Total extensions, including the initial period, cannot exceed 6 months.
o Courts grant extensions only if:
 The debtor acts in good faith and with due diligence.
 A viable proposal is likely.
 No creditor would be materially prejudiced.
4.6.3 Termination of Time Period
 Creditors, trustees, or interim receivers may apply to terminate the proposal period if:
o The debtor is not acting in good faith or with due diligence.
o A viable proposal is unlikely.
o Creditors would be materially prejudiced by continuation.

4.7 Automatic Stay of Proceedings

4.7.1 General Application
 Filing an NOI or proposal automatically stays proceedings against the debtor (ss. 69(1), 69.1).
 Creditors cannot enforce claims or initiate actions against the debtor during the stay.
4.7.2 Application to Secured Creditors
 Secured creditors are generally stayed unless:
o They gave 10 days’ notice to enforce security before the NOI/proposal was filed.
o They already seized assets before the filing.
o The debtor consented to enforcement.
 Secured creditors not addressed in the proposal are not bound by the stay.
4.7.3 Lifting the Stay
 Creditors may apply to lift the stay if they show:
o They are materially prejudiced.
o It is equitable to lift the stay.
4.7.4 Application to the Crown
 Federal and provincial governments are stayed from collecting taxes or seizing assets related
to tax obligations, with some exceptions (ss. 69(1)(c)–(d), 69.1(1)(c)–(d)).
4.7.5 Application to Regulatory Bodies
 Regulatory investigations or proceedings can continue, except enforcement of payment
orders (s. 69.6).
4.7.6 Application to Claims Against Directors
 The stay protects directors from claims related to their role as directors, except:
o Claims based on personal guarantees.
o Injunctions against directors.
4.7.7 Stay Against Termination of Agreements with the Debtor
(a) General Rules
 During the proposal process, the debtor must be allowed to continue operations without
losing access to critical goods, services, or licenses.
 Filing a Notice of Intention (NOI) or proposal prevents termination or amendment of
agreements (e.g., supply, franchise, or lease agreements) based solely on:
o The debtor’s insolvency.
o Filing of the NOI or proposal.
 The protections under s. 65.1 of the BIA are automatic and cannot be waived.
(b) Payment for Goods and Services
 Suppliers must continue providing goods or services but can demand immediate payment
or other forms of valuable consideration for post-filing goods or services (s. 65.1(4)(a)).
 Creditors are not obligated to extend further credit or loans to the debtor post-filing (s.
65.1(4)(b)).
 Payment options may include:
o Cash on delivery.
o Prepayments, letters of credit, or trust arrangements supervised by the proposal
trustee.
(c) Exceptions for Eligible Financial Contracts (EFCs)
 EFCs, such as derivatives, are exempt from the stay.
 These contracts can be terminated, and obligations under them may be set off as allowed by s.
65.1(9).
 Secured financial collateral tied to EFCs can be realized upon despite the stay.
(d) Aircraft Objects
 Aircraft objects (airframes, engines, helicopters) are governed by the Cape Town
Convention, which overrides the BIA stay.
 Creditors can take possession of aircraft objects within 60 days unless the debtor cures all
defaults and agrees to future performance under the agreement.

4.8 Claims Against Directors

 Certain pre-filing claims against directors can be compromised under a proposal (s. 50(13)).
 Claims for misrepresentation, wrongful conduct, or breaches of contract cannot be
compromised (s. 50(14)).
 Courts can refuse to include specific claims in a proposal if doing so is not just and equitable
(s. 50(15)).

4.9 Disclaimer of Commercial Leases

 Debtors can disclaim (terminate) commercial property leases by giving the landlord 30 days’
notice (s. 65.2).
 Landlords can challenge the disclaimer by applying to the court within 15 days.
 To uphold the disclaimer, the debtor must show the lease termination is necessary for a
viable proposal.
 Landlord claims for disclaimed leases cannot include accelerated rent but may include actual
losses.

4.10 Classification of Creditors

 Proposals must include unsecured creditors and may include secured creditors, organized into
classes (s. 50(1.2)).
 Secured creditors can be grouped based on a commonality of interest (e.g., debt nature,
security type, priority, and remedies) (s. 50(1.4)).
  Secured creditors in a class are bound by the proposal if it is approved by a double majority:
o Numerical majority of creditors in the class.
o Two-thirds majority in value of the claims in the class.
 Landlords may be classified separately or included with other unsecured creditors.

4.11 Creditors’ Meetings

4.11.1 Duties of the Proposal Trustee
 Within 21 days of filing the proposal, the trustee must organize a creditors’ meeting.
 The trustee sends creditors:
o The proposal.
o A list of creditors and amounts owed (over $250).
o A statement of assets and liabilities.
o Meeting details and voting materials.
4.11.2 Meeting Administration
 Proof of Claims: Creditors must file proof of claims to vote.
 Review: The trustee explains the proposal and provides a report on the debtor’s financial
affairs.
 Adjournment: Meetings can be postponed by a creditor vote to allow further investigation.

4.12 Creditor Approval Requirements

 A proposal is accepted if:
o A numerical majority of creditors vote in favor.
o Those creditors represent two-thirds of the claim value.
 Related parties can only vote against the proposal.
 If the proposal is rejected by unsecured creditors, the debtor is deemed bankrupt.
 If secured creditors reject the proposal, they can enforce their security, but there is no
automatic bankruptcy.

4.13 Proposal Revisions

 Proposals can be amended during creditors’ meetings before votes are cast (s. 54(1)).
 This allows adjustments if creditors are dissatisfied with the original terms.

4.14 Court Approval of Proposals

 After creditor approval, the proposal must be approved by the court.
 The trustee arranges a court hearing and notifies creditors at least 15 days before the hearing
(s. 58(b)).
 The trustee submits a report detailing:
o Debtor’s liabilities and assets.
o Conduct of the debtor.
o Causes of insolvency.
o Whether the proposal benefits creditors.
 The court may refuse the proposal if it:
o Is deemed unreasonable or not beneficial to creditors.
o Involves fraudulent conduct or other bankruptcy offences.
 If the court rejects the proposal, the debtor is automatically deemed bankrupt.

4.15 Statutory Terms Required in a Proposal

A proposal under the Bankruptcy and Insolvency Act (BIA) must include specific terms to be
approved by the court. These mandatory terms include:
 Priority Payments:
Payment of preferred claims under s. 136 of the BIA before paying ordinary unsecured
creditors (s. 60(1)).
  CRA and Provincial Obligations:
Full payment within six months of approval for amounts owed to the Canada Revenue
Agency (CRA) or a province for employee source deductions (s. 60(1.1)).
 Employee Wages and Commissions:
Payment to employees for:
o Wages and commissions (up to $2,000).
o Travelling salesperson disbursements (up to $1,000) incurred before filing the NOI
or proposal.
o Wages and related payments incurred after filing but before court approval (s.
60(1.3)).
 Pension Contributions:
Payment of unpaid pension contributions unless an agreement is made with the pension
regulator (s. 60(1.5)–(1.6)).
 Post-Filing Obligations:
No arrears in source deduction remittances for periods after filing (s. 60(1.2)).
 Equity Claims:
Non-equity claims must be fully paid before any payment to equity claims (s. 60(1.7)).
 Pension Plans:
Payment for unfunded pension liabilities, solvency deficiencies, and related amounts as
required under the Pension Protection Act and Pooled Registered Pension Plans Act.

4.16 Effects of an Approved Proposal

4.16.1 Binding on All Creditors in the Class
 An approved proposal binds all creditors in each approving class, even those who did not vote
or opposed the proposal.
 This includes unknown or undisclosed creditors.
 Federal and provincial governments are also bound by the BIA provisions (s. 62(2)).
4.16.2 Release of Pre-Filing Claims
 Pre-filing claims by creditors in approving classes are generally released once the proposal is
approved.
 The release is in exchange for the compromise terms offered in the proposal.
4.16.3 Exceptions to Release
 Certain claims cannot be released unless explicitly included in the proposal and agreed upon
by the creditor.
 These claims include:
o Fraud or misrepresentation claims.
o Liability from obtaining property through false pretenses (s. 62(2.1)).
4.16.4 Undisclosed Creditors
 Creditors with provable claims who were not notified can recover the amount they would
have received under the proposal.

4.17 Annulment of an Approved Proposal

A court can annul an approved proposal if:
 The debtor fails to comply with its terms.
 Continuing the proposal would cause injustice or undue delay.
 Court approval was obtained through fraud (s. 63(1)).
Creditors or the trustee can also seek annulment if the debtor is convicted of a BIA offence.
 Upon annulment, the debtor is immediately deemed bankrupt (s. 63(4)).

4.18 Advantages and Disadvantages of a BIA Proposal

4.18.1 Advantages
 Binding Effect:
The proposal binds all creditors in approving classes, unlike informal compromises.
  Simplicity and Cost:
Filing a Notice of Intention (NOI) is straightforward and less expensive than a formal
restructuring under the CCAA.
 Lower Costs:
Implementation costs are generally lower than under the CCAA.
4.18.2 Disadvantages
 Equal Treatment of Creditors:
All creditors in a class must be treated equally. No special arrangements can be made to
secure support from vetoing creditors.
 Strict Timeline:
The proposal must be filed within six months of filing the NOI, or the debtor is deemed
bankrupt.
 Automatic Bankruptcy:
Failure to secure approval from creditors or the court results in automatic bankruptcy.
 Less Flexibility:
BIA proposals are generally less flexible than restructurings under the CCAA.
5.1 General
 The Companies' Creditors Arrangement Act (CCAA) was originally brief, with only 22
sections, and much of its interpretation was based on case law.
 Significant amendments in 2009 and 2019 codified existing practices.
 Courts interpret the CCAA liberally to achieve its purpose, relying on broad discretion under
s. 11 to support restructurings.
 The CCAA is commonly used for complex restructurings due to its flexibility.
 Recent changes to the CCAA have limited some of the flexibility previously available.

5.2 Who May Use the CCAA

5.2.1 Eligibility Criteria
 The CCAA applies to debtor companies or affiliated debtor companies with claims
exceeding $5 million (s. 3(1)).
 Applicants who can seek to restructure under the CCAA include:
o The debtor company itself.
o A creditor.
o A trustee-in-bankruptcy or liquidator.
5.2.2 Definitions
 Debtor Company:
Defined in s. 2 of the CCAA. Includes bankrupt or insolvent companies or those undergoing
restructuring or winding-up processes.
 Company:
Refers only to:
o Companies incorporated under federal or provincial legislation.
o Companies with assets or operations in Canada.
o Income trusts.
Excludes banks, insurance companies, and loan companies, which are governed by
separate laws.
 Insolvency Test:
o Broader under the CCAA compared to the BIA.
o Includes companies in proximity to insolvency, where a liquidity crisis is reasonably
foreseeable (e.g., Stelco Inc., Re).
 Debt Threshold:
o Total claims against the debtor and affiliates must exceed $5 million, meaning the
CCAA is used for companies with significant creditor claims.
Affiliated Debtors
 Defined in s. 3(2) of the CCAA. Includes subsidiaries and companies under common
control.
5.3 Starting the CCAA Process
5.3.1 Jurisdiction
 The CCAA process begins in the province where the debtor’s head office or chief place of
business is located (s. 9(1)).
 If assets are spread across provinces, the process can start in the province with the most
substantial connection.
5.3.2 Initial Application
 The debtor files an initial application with the court (s. 11).
 The application includes:
o A notice of application.
o A supporting affidavit detailing the company's history, financial situation, and
reasons for insolvency.
o A cash flow statement and recent financial statements (s. 10(2)).
5.3.3 Initial Order
 The court issues an initial order, often based on a Standard CCAA Order template.
 The order includes a stay of proceedings and other relief necessary to keep the debtor
operating.
 Significant changes to the Standard Order must be justified.
 The order includes a comeback clause allowing creditors or other parties to challenge or
amend it.
 Notice Requirements:
o Notice must be given to secured creditors if the order seeks charges for DIP
financing, administrative expenses, or director indemnification.
o Notice must also be provided to pension beneficiaries if their rights may be affected
(e.g., Indalex Limited (Re)).

5.3.4 The Role of the Monitor

 The court appoints a monitor to oversee the debtor’s business and financial affairs (s.
11.7(1)).
 The monitor is typically an accounting firm and must:
o Post the initial order online.
o Notify creditors owed more than $1,000.
o Provide access to financial records.
o Submit reports on the debtor’s financial status and changes in circumstances.
 Monitors are protected from liability if they act in good faith and with reasonable care (s.
23(2)).
 Similar protections exist for environmental and labour liabilities.

5.4 Court-Ordered Stay of Proceedings

5.4.1 General
 A stay of proceedings prevents creditors from enforcing claims or terminating agreements
with the debtor (s. 11.02(1)).
 Unlike the automatic stay under the BIA, the CCAA stay is discretionary & tailored by the
court.
 The stay also prohibits accelerated payments or amendments to agreements due to
insolvency (s. 34(1)).
5.4.2 Duration
 The initial stay lasts 10 days. Extensions can be granted with no fixed limit, provided certain
conditions are met (s. 11.02(2)).
5.4.3 Test for Stay Extensions
 The court must be satisfied that:
o The stay is appropriate.
o The debtor is acting in good faith.
 o The debtor is acting with due diligence.
 The applicant must prove these conditions.
5.4.4 Stay Against Director Claims
 Directors can benefit from a stay of certain claims to encourage their participation during
restructuring (s. 11.03).
5.4.5 Government Claims
 A stay can prevent the government from collecting amounts under the Income Tax Act or
similar laws (s. 11.09(1)).
 The stay ends if:
o The stay period expires.
o Payments due to the government are not made.
o The plan fails or is rejected.
5.4.6 Immediate Payment for Goods and Services
 Creditors cannot be forced to supply goods/services without immediate payment (s. 11.01).
 Creditors are not required to advance new funds or credit.

5.4.7 Eligible Financial Contracts (EFCs)

 The definition of EFCs in the CCAA Regulations matches the definition in the BIA General
Rules.
 Section 34(7)(a) of the CCAA excludes EFCs from stay provisions, similar to the BIA.
 Sections 34(8)–(9) allow setting off obligations and dealing with financial collateral under an
EFC.
 Section 34(11) prevents any order that would subordinate financial collateral.

5.4.8 Guarantees and Letters of Credit

 Section 11.04 ensures stay orders under the CCAA do not affect proceedings against third
parties liable under guarantees or letters of credit issued for the debtor company.

5.4.9 Regulatory Matters

 Government regulators can continue investigations or proceedings related to life, health, and
safety, even under a CCAA stay (s. 11.1(2)).
 However, payment enforcement by regulatory bodies can be stayed.
 A "regulatory body" includes entities enforcing federal or provincial laws (s. 11.1(1)).
 The court can override this exception if a compromise cannot be reached without it and doing
so is not against public interest (s. 11.1(3)).

5.4.10 Aircraft Objects

 The Cape Town Convention and Aircraft Protocol override conflicting CCAA provisions
for "aircraft objects" (e.g., airframes, engines).
 Stay orders under the CCAA do not apply to these objects.

5.4.11 Lifting a Stay by Creditors

 Creditors can apply to lift or vary a CCAA stay.
 The CCAA does not specify criteria for lifting a stay, but courts assess factors such as:
o Balance of convenience.
o Prejudice to parties.
o Relevance and merits of the creditor’s proposed action.

5.5 Court-Ordered Charges

 Priority Charges:
o DIP financing charge (s. 11.2).
o Administrative charge for fees of monitors, their counsel, and the debtor’s counsel
(s. 11.52).
o Directors’ charge for liabilities incurred post-filing (s. 11.51).
  Critical Suppliers:
o The court may declare a supplier "critical" if their goods or services are essential to
the business (s. 11.4).
o Critical suppliers must be paid and are granted a charge over the debtor’s property,
which may have priority over secured creditors.

5.6 Compromises Against Directors

 A CCAA plan may include compromises of creditor claims against directors for pre-filing
actions (s. 5.1(1)).
 Claims based on contracts, misrepresentation, or oppressive conduct cannot be compromised
(s. 5.1(2)).
 The court may refuse to allow a compromise if it is unfair or unreasonable (s. 5.1(3)).

5.7 Compromises Against Third Parties

 Courts may approve third-party releases in a CCAA plan if they are reasonably connected to
the restructuring.
 Factors considered include:
o Necessity of the release for the restructuring.
o Relationship between the claim and the plan's purpose.
o Whether released parties contribute meaningfully to the plan.
 Notable cases include Metcalfe, Sino-Forest Corporation, and Target Canada Co..

5.8 Classification of Creditors

 Plans can include unsecured or secured creditors or their classes (ss. 4–5).
 Creditors are grouped into classes based on common interests.
 More classes increase the chances of creditors gaining veto power, so debtors prefer fewer
classes.
 Federal and provincial claims often rank as unsecured claims unless specified otherwise.

5.9 Creditors’ Meetings

 The debtor applies to the court to hold meetings for creditors to vote on the plan (ss. 4–5).
 The court may refuse to allow meetings if the plan is not in creditors’ best interests.

5.10 Creditor Approval

 Plans require approval by a double majority:
o Majority in number of voting creditors in each class.
o Two-thirds majority in value of claims in each class.
 All creditor classes must approve the plan; otherwise, it fails.
 If the plan fails, there is no automatic bankruptcy, but creditors can pursue remedies,
including bankruptcy.

5.11 Court Approval

 After creditor approval, the court must sanction the plan (s. 6(1)).
 Tests for Approval:
o Compliance with statutory requirements.
o Authorization of plan terms under the CCAA.
o Fairness and reasonableness.
Mandatory Terms
 Full payment to CRA or provinces for source deductions within six months.
 Payment of unpaid wages, commissions, and pension contributions.
 Equity claims can only be paid after all other claims are satisfied.
Fairness Factors
 Comparison of creditor recovery under the plan versus liquidation.
 Impact on creditors, shareholders, and public interest.
5.12 Plan Amendments
 Plans can be altered before voting at creditor meetings.
 After voting, amendments are allowed if no class is adversely affected.

5.13 Effect of a Plan

 Once approved, the plan binds all creditors with compromised claims.
 Claims that are not disclosed may still be included unless explicitly excluded.

5.14 Binding on the Crown

 The CCAA applies to both federal and provincial Crowns.

5.15 Recognition of International Insolvency Proceedings

 Part IV of the CCAA deals with cross-border insolvencies, based on the UNCITRAL Model
Law.
 Foreign representatives can apply for recognition of foreign proceedings.
 The court decides if the foreign proceeding is "main" (automatic stay applies) or "non-main"
(discretionary relief).
 Cooperation between Canadian and foreign courts is emphasized.
Advantages of CCAA restructuring:
1. More flexible stay of proceedings than BIA
2. Court can extend stays beyond BIA's 6-month limit
3. May have less stigma than BIA filing
4. Rejection of plan doesn't automatically lead to bankruptcy
Disadvantages of CCAA restructuring:
1. Higher legal and professional costs
2. Longer delays due to court supervision
3. More uncertainty because of court discretion
4. Potentially more publicity
5. $5 million claim threshold excludes smaller debtors

Converting between BIA and CCAA:

1. BIA proceedings can switch to CCAA if no proposal filed
2. CCAA proceedings cannot switch to BIA
3. Possible to have concurrent BIA and CCAA proceedings
 The purchase an d sale of a private
Chaptern35
business
Methods of Purchasing a Business
1. Ways to Buy a Business
o Buying a business can be done in two main ways:
a) Share Purchase
b) Asset Purchase
2. Difference Between Share Sale and Asset Sale
o In an asset sale, the buyer purchases business's physical or intangible assets.
o In a share sale, buyer purchases shares of the company that owns the busines.
3. Choosing Between Share Sale and Asset Sale
o The choice depends on factors such as taxes and liability risks.

Searches Required in Business Transactions

1.Important Searches a Lawyer Should Conduct
o Corporate searches
o PPSA (Personal Property Security Act) searches
o Bank Act searches
o Land registry searches
o Intellectual property searches
o Execution Act searches
o Bankruptcy searches

Share Transaction
1. Share Purchase Agreement (SPA)
o An SPA is a legal document used when buying shares of a company.
2. Main Terms in a Share Purchase Agreement
o Share price and calculation formula
o Due diligence
o Timelines
o Representations and warranties
o Closing and post-closing obligations
o Indemnity and applicable law

Difference Between Representation and Warranty

1. A representation is a statement of fact made to encourage a contract.
2. A warranty is a promise to compensate if the statement turns out to be false.
3. Purpose of Representations and Warranties
 These provide guarantees to the buyer about the business’s condition.
Indemnification in Share Purchase Agreements
1. This clause protects parties if there are issues after closing.
2. Limits on indemnification can include caps, thresholds, and time limits.
Legal Opinion in Share Purchases
 The seller's lawyer may provide a legal opinion on the company’s status.
Forms of Purchase Price
(a) Cash
(b) Cash + Promissory Note
(c) Cash + Vendor Take-Back mortgage' + Payment obligation
 Asset Transaction- Considerations in an Asset Purchase
 There are important factors to consider when buying business assets.
1. Letter of Intent (LOI)
 The LOI outlines the key terms of the transaction.
 Some parts of the LOI, like confidentiality & exclusivity, may be legally binding.
2. Due Diligence in an Asset Purchase
 Buyers will review financial, legal, and operational records.
3. Contracts and Third-Party Consents
 Some contracts may need approval from third parties before they can be transferred.
4. Vendor Take-Back Mortgage
 In this case, the seller loans part of the purchase price to the buyer.
5. Public Record Searches
 Searches can reveal legal claims or debts related to the business.
6. Tax Planning in an Asset Purchase
 Taxes such as GST/HST may apply unless special elections are made.
 Land transfer tax may also apply if real estate is involved.
7. Employee Considerations in an Asset Sale
 Buyers are not required to keep existing employees.
 New employment agreements may be needed.
8. Unionized Employees in Asset Sales
 If the business is unionized, the buyer must follow the existing collective agreements.
9. Remedies for Shareholders Who Disagree with an Asset Sale
 Shareholders may have rights such as:
a) Dissent rights
b) Appraisal rights
c) Oppression remedies

Post-Closing Obligations
Common Post-Closing Obligations
 Non-solicitation agreements (to prevent hiring former employees)
 Non-compete agreements (to prevent competition)
 Payments from these agreements may be taxable.
 The seller may be retained as a consultant after the sale.
Consideration Share Asset
Tax Vendor/Seller Prefers to sell shares and aims at Buyer/Purchaser prefers to buy assets.
keeping max amount of sale proceeds & in the Purchaser wants to shield against tax
future, wants to min its tax liability arising
1. Introduction
 This chapter discusses buying or selling a private business between unrelated parties.
 Two common methods to structure the transaction:
o Asset Purchase: Buyer acquires specific business assets.
o Share Purchase: Buyer acquires shares of the corporation that owns the business.
 Tax considerations often determine the choice between the two methods.
 Lawyers advise clients on legal, tax, and contractual implications of the transaction.

2. Confidentiality Agreements and Letters of Intent

 Confidentiality/Non-Disclosure Agreements (NDA): Protect sensitive information during
negotiations.
 Letters of Intent (LOI):
o Typically non-binding except for specific clauses (e.g., confidentiality, exclusivity).
o Clarifies intentions & outlines preliminary terms b4 drafting formal agreements.
o Saves time and costs by confirming agreement on major terms before due diligence
and formal negotiations.

3. Share vs. Asset Deals

3.1 Tax Considerations
1. General Preferences:
o Vendors prefer selling shares due to immediate tax benefits.
o Buyers prefer purchasing assets to claim future tax deductions.
 2. Vendor’s Preference – Share Sale:
o Capital Gains Tax:
 Selling shares results in capital gains, taxed at a lower rate (50% of the gain
is taxable).
 Individual vendors may qualify for the Capital Gains Exemption (CGE) on
qualifying small business corporation shares.
o Single Level of Taxation:
 Proceeds go directly to the vendor, avoiding corporate tax.
o Share purchases don’t allow tax deductions until the shares are sold.

3. Buyer’s Preference – Asset Purchase:

o Tax Deductions: Buyers benefit from tax deductions on:
 Depreciable property through Capital Cost Allowance (CCA).
 Cost of inventory and other allocated assets.
Asset sales incur two levels of tax: first at the corporate level, then at the
shareholder level when proceeds are distributed

4. Exceptions to General Preferences:

o When Vendors Prefer Asset Sales:
 Losses: Vendors can offset gains with carryforward losses.
 Low Tax Rates: Small businesses enjoy lower corporate tax rates.
o When Buyers Prefer Share Purchases:
 Losses: The corporation’s unused losses can reduce future taxable income.
 Preserved Tax Benefits: Pre-existing tax attributes (e.g., higher CCA rates)
are retained.

3.2 Commercial Considerations

1. Asset Transactions:
o Buyers can select specific assets and liabilities.
o Unwanted liabilities remain with the vendor.
2. Share Transactions:
o Buyers acquire all assets and liabilities, including unknown ones ("warts and all").
o Simpler documentation, as ownership transfers automatically.
o However, buyers must review:
 Corporate records.
 Key contracts for change-in-control (CIC) clauses.
3. Situational Considerations:
o Some assets (e.g., government licenses or contracts) may only transfer through a
share purchase.
o If the business operates as multiple divisions, an asset transaction might be preferred
to acquire only specific parts.
o CIC clauses in agreements may still require third-party consent, even in share
transactions.

4. Share Transactions
 Vendors usually prefer share sales for tax reasons.
 Buyers may prefer share purchases when:
o No HST, land transfer tax (LTT), or provincial sales tax applies.
o Asset transactions are more complex.
o Non-assignable contracts or permits are essential to the business.
o There is no tax benefit to buying assets.
4.1 Commercial Considerations
4.1.1 Purchase Agreement
A share purchase agreement (SPA) typically includes:
 Purchase and Sale Provisions: Commitments from both vendor and purchaser to sell and
buy the corporation's shares.
 Purchase Price: This can be a fixed amount or calculated using a formula, such as comparing
working capital at closing to a target figure.
 Transaction Mechanics: Details on closing procedures, due diligence, and confidentiality.
 Representations and Warranties: Statements about the parties, the corporation, and its
business at signing and closing.
 Closing Conditions: Requirements that must be met for the transaction to complete.
 Indemnification: Terms for addressing post-closing liabilities.
 Termination: Provisions for ending the agreement before closing.
 Legal Provisions: Rules on assignability and governing law.
Typically, the purchaser’s lawyer drafts the SPA. They ensure the vendor provides all necessary
details to justify the purchase price.
4.1.2 Representations and Warranties
The SPA often requires the vendor to confirm:
 The target corporation is properly incorporated and active.
 Capital structure is accurately stated, and the vendor owns shares free of claims.
 Financial statements are prepared according to GAAP or IFRS, depending on the type of
corporation.
 Inventory and accounts receivable are properly valued.
 Employee benefits, taxes, and other obligations are compliant and disclosed.
 The company holds valid contracts, titles, and assets without hidden liabilities.
 The company follows environmental laws and has no undisclosed risks.
Legal opinions from the vendor’s lawyer on corporate matters may be requested but are less common
now.
4.1.3 Risk of Loss
The SPA must specify whether the vendor or purchaser bears the risk of loss or damage to assets
before closing. Usually, the vendor retains the risk, and the purchaser can either withdraw from the
deal or proceed with adjustments to the price or insurance claims.
4.1.4 Third-Party Contracts and Approvals
Some contracts and leases need third-party approval if control of the corporation changes. If the
business is regulated, a regulatory authority may also need to approve the change.
4.1.5 Restrictive Covenants
Non-competition and non-solicitation agreements are essential to prevent the vendor from becoming a
competitor.
4.1.6 Releases
At closing, it is wise for the purchaser to get releases from the corporation’s shareholders, directors,
and officers to avoid future claims.
4.1.7 Conditions
SPAs often include conditions that must be met before closing. If these conditions are not met, either
party can cancel the transaction.
4.1.8 Securities Act Considerations
The sale of shares must comply with the Securities Act. Some transactions are exempt from takeover
bid rules if the corporation is private and has fewer than 50 shareholders.
4.1.9 Effective Date and Locked-Box Transactions
Sometimes, the purchase price is set before closing, with profits or losses during the interim period
attributed to the purchaser. The SPA should include terms for managing the business during this time.
4.1.10 Payment of Purchase Price
The purchase price can be paid:
1. Fully in cash at closing.
2. Partly in cash, with a promissory note for the balance (vendor take-back).
3. Using a mix of cash, deferred payments, or performance-based earn-outs.
Security measures, such as pledges or guarantees, ensure future payments.
4.1.11 Post-Closing Filings
Post-closing, the purchaser may need to update corporate records, amend business registrations, or file
reports with regulators.
4.2.2 Payment of Purchase Price
Deferring all or part of the purchase price in a transaction raises several tax considerations.
(a) Reserves
 The ITA allows limited tax deferral when sale proceeds are received after the year of sale.
 Vendors can claim a reserve for capital gains under s. 40(1) of the ITA if the purchase price
is paid over time.
 The maximum deferral period is five years, including the year of sale. Taxes must be paid
within this period, regardless of whether the proceeds have been fully received.
The reserve is the lesser of:
o The gain multiplied by proceeds due after the year divided by total proceeds.
o 4/5 of the gain in the year of disposition, 3/5 in Year 2, 2/5 in Year 3, 1/5 in Year 4,
and nil after that.
 A 10-year reserve can apply for sales to a resident child for specific property types, like
QSBC shares or farming property.
 Taxpayers can defer gains from selling ESBC shares if sale proceeds are reinvested in another
ESBC within the allowed time frame.
(b) Interest
 If payment is deferred, interest may accrue on the unpaid balance.
 Purchasers can deduct interest for tax purposes, while vendors include it as income.
 For non-resident vendors, withholding tax on interest may not apply in some cases.
 If no interest is charged or it is below market rates, the vendor may still have to report a
portion of the proceeds as interest.
(c) Uncollected Purchase Price
 If the purchaser cannot pay, the vendor can claim a capital loss in the year the debt becomes
uncollectible.
 For depreciable property, the vendor may deduct previously included recaptured CCA.
(d) Earn-out Provisions
 Earn-out clauses adjust the purchase price based on future revenues or profits.
 They can serve as a compromise between the vendor’s price expectations and the purchaser’s
willingness to pay.
 Payments tied to future revenues are taxed as income, not as capital gains.
 A reverse earn-out fixes the purchase price with reductions if revenues fall short.

4.2.3 Change of Control

(a) Deemed Year-End
 A change of control (CIC) occurs when a purchaser owns more than 50% of a corporation's
voting shares.
 The taxation year ends just before control is acquired, and a new year begins at that
moment.
 This creates two tax years, requiring separate financial statements and returns.
Example: If shares are sold on June 1 for a corporation with a December 31 fiscal year, there
would be two tax years:
o January 1 to May 31.
o June 1 to December 31.
 Tax deductions, such as CCA, are pro-rated for the short year.
 Deadlines for tax filings and other obligations are accelerated.
 A short year counts as a full year for carryover purposes, like loss carryforwards.
(b) Loss Carryforwards
 Non-capital losses can be carried back three years or forward 20 years to offset income.
  Capital losses can only offset capital gains and have a three-year carryback and indefinite
carryforward period.
An acquisition of control affects losses:
1. Short years count as full years for carryover periods.
2. Some losses, like net capital losses, expire on a CIC if unused.
3. Non-capital losses can be carried forward or backward across the CIC, depending on timing.

Non-Capital Losses Deduction

Non-capital losses are deductible against the corporation's income in later years only if:
 The business generating the loss is operated with a reasonable expectation of profit.
 The loss is used to reduce income from the same or a similar business (as per s. 111(5)(a) of
the ITA).
Accrued Losses on Acquisition of Control
Accrued but unrealized losses are deemed realized during an acquisition of control and follow specific
rules (s. 37(6.1), 111(5.1)–(5.3) of the ITA and ITR, s. 1801).
This provides an opportunity for the purchaser to use the target corporation's unrealized losses to
offset future income and reduce taxes.

Tax Liabilities of Target Corporation

Before purchasing a corporation, the buyer should review its tax position and liabilities.
 Examine federal and provincial tax returns, assessments, and reassessments.
 Seek vendor assurances through representations, warranties, and indemnities in the SPA.

Tax Planning for Vendors

1. Pre-Sale Dividend
A vendor may reduce taxes on the sale of shares by paying a dividend before the sale, which lowers
the share price.
 The dividend must be tax-free for this strategy to work.
 For individuals, transferring shares to a holding corporation may allow tax-free dividend
payments under the inter-corporate dividend deduction.
Caution: Section 55(2) limits tax-free inter-corporate dividends. Consult a tax professional to avoid
adverse consequences.
2. Post-Sale Consulting Agreements
See details in the "Consulting Agreements" section.
3. Retiring Allowances
A target corporation can pay a retiring allowance to an individual vendor before the sale.
 This reduces the share sale price.
 Vendors can defer tax on the allowance by contributing it to an RRSP if eligible under s.
60(j.1) of the ITA.
Example:
 A and B worked for a company from 1980–2024 and received $45,500 each as retiring
allowances.
 They sheltered the full amounts by contributing $32,000 (for 1980–1995) and $13,500 (for
1980–1988) to RRSPs.
 Together, they sheltered $91,000 tax-free.

Asset Transactions
1. Commercial Considerations
In asset transactions, buyers choose which assets and liabilities to acquire.
 Registration, consents, and notifications may be required.
 Buyers often exclude cash, inter-company debts, and life insurance policies.
2. Tax Considerations
a. Purchase Price Allocation
Vendors prefer to allocate prices to:
 1. Non-depreciable capital property (e.g., land).
2. Depreciable property with little or no CCA recapture.
3. Class 14.1 property acquired before 2017.
4. Depreciable property with CCA recapture.
5. Inventory, which is fully taxable.
Purchasers prefer the reverse order to maximize deductions.
b. HST Considerations
 HST applies to taxable supplies in Ontario at 13%.
 Share purchases are exempt as financial instruments, but asset purchases may trigger
HST.
 Parties should reflect HST implications in the asset purchase agreement.
(b) Input Tax Credits for HST
 If the purchaser is registered for HST and makes taxable supplies, HST paid on purchases
usually qualifies for input tax credits (ITCs) under Section 169(1) of the ETA.
(c) HST Elections
 When buying a business as an asset sale, HST usually applies because assets sold are a mix of
taxable and exempt supplies.
o Taxable supplies: TPP (inventory, equipment), real property, goodwill, and intangible
property.
o Exempt supplies: Financial instruments like accounts receivable and securities.
 HST elections under Sections 167 and 167.1 of the ETA can reduce or eliminate HST.
o Conditions for these elections:
 Purchaser must be registered for HST at the time of sale.
 The transaction must involve all or most of the business assets.
 Purchaser must acquire at least 90% of the assets needed to continue the
business.
o Goodwill sold with other business assets is generally excluded from HST.
 Key Benefits of HST Elections:
o Significant cash flow advantages.
o Without an election, HST must be collected and remitted by the vendor.
 Other HST Considerations:
o HST rules are complex and differ from income tax and land transfer tax (LTT)
implications.
o Neglecting HST issues can lead to significant risks.
5.2.4 Land Transfer Tax
 Refer to "Real Property" for details.

5.3 Specific Assets

5.3.1 Accounts Receivable
(a) Commercial Considerations
 Vendors prefer purchasers to pay full value for receivables, less bad debt provisions, and take
responsibility for collection.
 Purchasers may resist paying full value due to uncertainty about collection.
 Common Approaches:
o Purchaser assumes collection responsibility but buys receivables at a discount.
o Purchaser collects for a time, then turns uncollected accounts back to the vendor.
 Assignments of accounts receivable require PPSA registration, listing the purchaser as the
secured party.
(b) Tax Considerations
 Vendor:
o Doubtful debt reserves from the prior year must be included in income.
o Sale of receivables often results in a capital loss.
 Purchaser:
o Cannot claim doubtful debt reserves as deductions.
 o Any loss on uncollected accounts is a capital loss.
o
 Section 22 Election:
o Improves tax consequences for both vendor and purchaser.
o Allows for income inclusions and deductions related to doubtful debts.
o Requires filing Form T2022.
(c) Other Taxes
 Selling receivables is treated as an exempt supply for HST purposes.
 HST on bad debts may create complications, especially if receivables are sold with recourse.

5.3.2 Inventory
(a) Commercial Considerations
 Inventory includes products for sale, materials for production, and consumables.
 Agreements often define methods for valuing inventory before or after closing.
 Purchasers should avoid paying for obsolete inventory and confirm its condition.
(b) Tax Considerations
 Vendor:
o Inventory is typically sold at book value, with minimal tax impact.
 Purchaser:
o Cost of inventory is deductible for tax purposes.
(c) Other Taxes
 Inventory sales are taxable supplies under HST.
 HST paid by a purchaser can be claimed as an ITC.
 Joint HST elections can defer HST obligations in some cases.

5.3.3 Prepaid Expenses

 Vendors seek reimbursement for prepaid expenses like rent and insurance for post-sale
periods.
 Purchasers must ensure contracts (e.g., insurance) are properly assigned to them.
5.3.4 Equipment, Machinery, and Other Depreciable Property
(a) Commercial Considerations
 Businesses often use various machinery and equipment, especially in manufacturing, where
thousands of items like tools, vehicles, and office equipment are involved.
 In an asset purchase, the buyer's lawyer ensures all items are effectively transferred.
 Ideally, each item, including its serial number, is listed in the agreement.
 In large transactions, a combination of serial numbers for key items and general descriptions
for others is used.
(b) Tax Considerations
 Depreciable assets are categorized into classes in Schedule II of the ITR.
 Businesses can deduct asset costs using CCA at rates specified for each class.
 Machinery used in manufacturing often qualifies for a 30% CCA rate on a declining-balance
basis.
 When sold, any recaptured CCA is included in income, and excess sale price over cost is
treated as a capital gain.
 If the sale price is less than the undepreciated cost, the seller can claim the difference as a
terminal loss.
 Recent tax changes allow increased CCA deductions for assets acquired between November
20, 2018, and 2028.
(c) Other Taxes
 Selling depreciable property is a taxable supply under the ETA.
 If a joint election isn’t available, the purchaser pays HST.

5.3.5 Real Property (Owned or Leased)

(a) Commercial Considerations
  Land is often a key asset in transactions. Buyers’ lawyers conduct title searches to confirm
ownership and ensure good title transfer.
 Environmental assessments (Phase I or II) are often required to check for compliance with
environmental laws.
 Transfer documents must be registered in the relevant land titles office, and lease assignments
must be filed.
(b) Tax Considerations
 Buildings are depreciable; land is not.
 Sellers deduct CCA on buildings or include recapture as income if sold for more than UCC.
 Purchasers claim CCA on building costs but cannot claim deductions for land.
(c) Other Taxes
 Land transfer tax is payable in Ontario.
 HST applies but may be self-assessed by buyers if they are registrants.

5.3.6 Intellectual Property

(a) Commercial Considerations
 Buyers must identify and properly transfer IP like trademarks, patents, and business names.
 Licenses may be needed if the vendor retains ownership but grants use.
 Assignments of registered IP must be filed with the Canadian Intellectual Property Office.
(b) Tax Considerations
 IP with a limited life (e.g., patents) is depreciable and expensed over its useful life.
 IP with indefinite life (e.g., goodwill) is depreciated at 5% annually on a declining-balance
basis.

5.3.7 Goodwill
(a) Commercial Considerations
 Goodwill includes intangible assets like business reputation and customer lists.
 It reflects the value above tangible asset costs.
(b) Tax Considerations
 After 2016, goodwill is treated as depreciable property under Class 14.1, depreciated at 5%
annually.
 Sellers include recapture and capital gains in income if sold above cost.
(c) Other Taxes
 Goodwill is a taxable supply under the ETA, but joint elections can prevent HST being
charged.

5.4 Assumed Obligations

 Buyers in asset purchases can choose which liabilities to assume.
 Assumed liabilities increase the purchase price allocation.
 Vendors remain liable if obligations are not released by creditors unless a novation occurs.
 Vendors should ensure buyers can fulfill assumed obligations or negotiate releases,
indemnities, or additional security.
 Contracts involving unique services (e.g., employment) usually require consent for obligation
transfer.

Example
Suppose that a purchaser has agreed to buy the assets of a business for
$100,000 and assume liabilities worth $20,000. The purchaser agrees to pay
$80,000 cash for the net assets. In this case, the total consideration of $100,000
must be allocated to the assets acquired
Asset Purchase Obligations
1. Accounts Payable
 Purchasers often want to assume accounts payable.
 This lets them use the vendor’s trade terms and defer payments.
  If payables aren’t assumed, it affects the purchase price.
 Assuming payables helps maintain goodwill with landlords and suppliers.

2. Sales Orders
 Vendors going out of business want the purchaser to take over unfilled orders.
 Profitable orders are beneficial to the purchaser.
 Unprofitable orders should be reflected in the purchase price.
3. Indebtedness for Borrowed Money
 Purchasers typically avoid assuming loans since they arrange their own financing.
 Some financing may be beneficial if lenders approve the transfer.
 Vendors may face penalties for loan prepayment.
4. Warranty Claims
 Vendors prefer purchasers to handle warranty claims after closing.
 Warranty disputes can arise, especially with defective products.
 Negotiations often focus on responsibility for warranty costs.
5. Other Obligations
 Purchasers usually avoid insurance or non-arm’s length transaction obligations.
 Long-term contracts with landlords or suppliers may need third-party approvals.
 Purchasers must ensure required licenses or permits can be transferred.

5.5 Employee Considerations

1. Employment Status
 Asset purchases change the employer, unlike share purchases.
 Employment contracts cannot be automatically transferred.
 Unionized employees are subject to the Ontario Labour Relations Act (LRA).
 Employment continuity under the ESA affects severance and notice periods.
2. Employee-Related Costs
 Workforce reduction costs must be resolved before closing.
 Purchasers may offer employment to most employees.
 If unwanted employees are terminated post-closing, costs may span their entire employment
history.
 Agreements should specify who bears termination costs.
3. Labour and Pension Implications
 Purchasers are considered new employers under the CPP and may face double payment risks.
 Vendors’ workplace safety records impact the purchaser’s WSIA obligations.
 Pension and benefit plans often require new arrangements.

5.5.1 Common Law

 When a business sells its assets, the vendor is considered to have dismissed all employees and
is liable for dismissal claims. Employees must try to find other jobs to reduce their damages.
 In most asset sales, the purchaser usually offers employment to the vendor’s employees on
terms similar to their previous employment.
 If an employee accepts the purchaser's offer and continues working for a reasonable period,
they cannot claim damages for dismissal.
 Employees who refuse the purchaser’s job offer may lose their right to claim significant
damages from the vendor.
 Purchasers usually review the vendor’s employees before closing and decide which
employees to hire. Those not hired are terminated by the vendor, who bears the termination
costs.
 Some agreements allow the purchaser to hire all employees initially and assess their needs
post-closing. If employees are later terminated, the purchaser is responsible for dismissal
claims.
 The purchaser may seek reimbursement for termination costs from the vendor but remains
legally obligated to pay the employees.
5.5.2 Employment Standards Act, 2000 (ESA)
 If a purchaser hires employees after buying a business, their prior employment with the
vendor counts as employment with the purchaser under the ESA.
 If the purchaser does not hire an employee, the vendor must follow ESA rules for termination,
including providing notice or pay based on length of service.
 Individual Terminations: Employees with three months or more service must receive notice
ranging from 1 to 8 weeks. Employees with less than three months of service do not require
notice.
 Mass Terminations: When 50 or more employees are terminated within four weeks, notice
periods range from 8 to 16 weeks, depending on the number of affected employees.
 Vendors with Ontario payrolls of $2.5 million or more must also pay severance for employees
with five or more years of service, calculated as:
o Regular weekly wages × (completed years + completed months ÷ 12).
o Maximum severance is 26 weeks of regular wages.
 Severance pay is additional to notice under the ESA. Employees are entitled to the higher
amount between ESA and common law claims.

5.5.3 Labour Relations Act, 1995 (LRA)

 A purchaser of a unionized business is bound by the vendor's collective agreement until
declared otherwise by the Ontario Labour Relations Board.
 These rules apply even if the purchaser does not employ the vendor’s employees.

5.5.4 Canada Pension Plan (CPP)

 In asset sales, the purchaser is treated as a new employer for CPP purposes.
 The purchaser must withhold and match CPP contributions, even if the vendor has already
made contributions earlier in the year.
 Employees can recover overpaid CPP contributions through their tax returns, but employers
cannot get refunds.
 Timing transactions involving many employees can help avoid duplicate CPP payments.

5.5.5 Workplace Safety and Insurance Act, 1997 (WSIA)

 A purchaser inherits the vendor's safety and insurance records and payment obligations under
the WSIA.
 Vendors are not released from financial obligations until all amounts owed under the WSIA
are paid by the vendor, purchaser, or both.

5.5.6 Pension and Benefit Plans

 In share transactions, existing plans remain unchanged.
 In asset sales, new plans are often required for employees offered continued employment.
5.6 Payment of Purchase Price
 Payment methods include cash, installments, or earn-outs.
 Similar considerations apply to share and asset transactions.

6. Non-Resident Vendors
1. Tax Obligations
 Purchasers must withhold 25%–50% of the purchase price unless the vendor provides a
clearance certificate from the CRA.
 This applies to inventory, real estate, and certain other properties in Canada.
2. Treaty Protection
 Purchasers may avoid withholding if the vendor is from a treaty country and the property is
treaty-protected.
 Vendors should obtain clearance certificates or meet notification requirements to avoid
delays.
3. Exclusions
 Certain shares are excluded from taxable Canadian property, reducing the need for
certificates.
 Agreements should include representations about these exclusions.
6. Non-resident Vendors
Purchasers of property from non-residents of Canada must comply with obligations under section 116
of the Income Tax Act (ITA). These rules ensure non-resident vendors pay applicable Canadian taxes
on income or capital gains from property sales. Section 116 applies to the sale of:
 Inventory or depreciable property used in a Canadian business.
 Real estate located in Canada.
 Specific resource or timber properties.
Key aspects of section 116:
1. Withholding Requirements:
o Purchasers must withhold and remit 25% (or 50% for certain assets) of the
purchase price to the CRA unless the vendor provides a section 116 clearance
certificate.
2. Relieving Provisions:
o For treaty-protected property (Treaty-PP), a purchaser may avoid withholding if:
 The vendor resides in a country with a Canadian tax treaty.
 The property is exempt under the treaty.
 The purchaser notifies the CRA within 30 days of acquisition.
o Example: Notification using Form T2062C applies when a non-resident sells shares
in a private Canadian corporation.
Purchasers often prefer obtaining a clearance certificate to avoid liability for errors. Non-resident
vendors should apply for the certificate well in advance of the sale using Form T2062 (non-
depreciable property) or Form T2062A (depreciable property).
The definition of taxable Canadian property (TCP) excludes shares in corporations whose value is not
primarily derived from Canadian real estate, resource properties, or related options. This exemption
removes the need for a clearance certificate for such shares. If relying on this exemption, the purchase
agreement should include vendor representations.

7. Vendor’s Post-Closing Obligations

7.1 Non-Competition, Non-Solicitation, and Confidentiality Covenants
(a) Commercial Considerations
To retain the vendor’s customers and goodwill, the purchaser often requires covenants ensuring the
vendor will:
 Protect trade secrets and confidential information.
 Avoid competing with the business.
 Avoid soliciting customers, employees, or suppliers.
Courts enforce these covenants if they are reasonable in:
 Duration.
 Geographic scope.
 Scope of restricted activities.
These covenants are enforceable without additional payment beyond the purchase price.
(b) Tax Considerations
Payments under these covenants are taxable as ordinary income unless classified as:
1. Employment income.
2. Proceeds of Class 14.1 property (if jointly elected).
3. Capital associated with share or partnership interest sales (if jointly elected).
A non-competition agreement may not be taxable for HST purposes when made by an individual.

7.2 Consulting Agreements

(a) Commercial Considerations
Purchasers may request vendors to remain involved post-closing as employees or consultants. A
consulting agreement may:
 Defer part of the purchase price as consulting fees.
 Specify duties and reasonable fees.
 Extend non-competition covenants tied to consulting terms.
For enforceability, restrictive covenants should relate to the sale of the business, not consulting
services. Ontario law prohibits non-competition covenants in employment contracts except in
business sales or for executives.
(b) Tax Considerations
Consulting payments are fully taxable to vendors but deductible to purchasers if reasonable.
Excessive payments may be reclassified as disguised sale proceeds, affecting tax treatment.
Consulting agreements should remain separate from purchase agreements and consider HST rules for
independent contractors.

8. Regulatory Matters
8.1 Investment Canada Act (ICA)
The ICA applies to foreign acquisition or establishment of Canadian businesses by "non-Canadians."
The Act ensures significant acquisitions meet Canada’s net benefit criteria. Thresholds for review in
2024 include:
 $1.989 billion for trade agreement investors (e.g., U.S., Mexico).
 $1.326 billion for WTO member investors.
 $5 million for direct investments in cultural businesses.
 $50 million for indirect cultural business acquisitions when Canadian assets exceed 50% of
total assets.
Notifications for non-reviewable transactions must be filed before or within 30 days of closing.
The ICA also includes a national security review process with no financial thresholds. Investments
deemed harmful to national security may face rejection, conditions, or divestiture, even post-closing.

8.2 Competition Act

The Competition Act regulates business conduct in Canada. It addresses anti-competitive behavior
through investigation, legal action, and penalties. Certain business activities, like mergers, are
reviewed by the Commissioner of Competition.
8.2.1 General Merger Provisions
 A “merger” includes any acquisition of shares, assets, or business interests.
 Mergers that harm competition significantly (“substantial prevention or lessening of
competition” or SPLC) can be challenged by the Commissioner at the Competition Tribunal.
 Remedies for harmful mergers:
o Completed mergers: dissolution, asset/share disposal, or other agreed actions.
o Proposed mergers: prohibition, partial prohibition, or other agreed actions.
 The Commissioner must challenge mergers within one year of completion.
Additional mechanisms:
 Advance Ruling Certificate (ARC): A binding decision that protects a merger from
challenge if based on the same information.
 No-Action Letter (NAL): States the Commissioner will not challenge the merger but is not
binding.
8.2.2 Notifiable Transactions
 Large transactions require pre-notification if:
o Combined assets or revenues of parties exceed $400 million (size-of-party threshold).
o Transaction value exceeds $93 million (size-of-transaction threshold).
Notification process:
 Parties submit short-form or long-form details.
 Waiting periods apply:
o Initial: 30 days after submission.
o If additional information is requested: 30 days after compliance.
The Commissioner may extend reviews or issue an ARC/NAL to waive the waiting period.

8.3 PIPEDA (Personal Information Protection and Electronic Documents Act)

PIPEDA governs how businesses handle personal information.
 Personal information includes details about identifiable individuals, excluding basic employee
contact information.
 During transactions, due diligence ensures:
o Compliance with privacy laws.
o Proper handling of personal information, especially during transfers or across
borders.
o Consent for transferring personal data in asset sales.
Key considerations:
 Share sales typically don’t involve personal data transfer.
 Asset sales may include personal information, requiring prior consent.

8.4 Money Laundering Legislation

The Proceeds of Crime (Money Laundering) and Terrorist Financing Act regulates financial
transactions by legal counsel.
Requirements:
 Keep records of transactions over $3,000 unless from a financial entity or public body.
 Maintain corporate records showing authority for transactions.
 Record funds received from law firm trust accounts.
Large payments (over $25 million) must use wire transfers within Canada.