Document 6439779

DOING BUSINESS IN
ONTARIO
October 2012
TABLE OF CONTENTS
A.
INTRODUCTION.............................................................................................................................. 1
B.
GOVERNMENT AND LEGAL SYSTEM ......................................................................................... 1
C.
TYPES OF BUSINESS ORGANIZATION ....................................................................................... 1
1.
5.
Corporations..................................................................................................................................... 2
(a)
Incorporation in Ontario ...................................................................................................... 2
(b)
Incorporation of a Federal Corporation ............................................................................... 3
(c)
Other Considerations Relating to Choosing Whether to Incorporate Federally
or Provincially ...................................................................................................................... 3
(d)
“Foreign Corporations” ........................................................................................................ 4
Partnerships ..................................................................................................................................... 5
(a)
General Partnerships .......................................................................................................... 5
(b)
Limited Partnerships ........................................................................................................... 6
(c)
Limited Liability Partnerships .............................................................................................. 6
Sole Proprietorships ......................................................................................................................... 6
Joint Ventures .................................................................................................................................. 6
(a)
Unincorporated Joint Ventures ........................................................................................... 6
(b)
Incorporated Joint Ventures ................................................................................................ 7
Trusts ............................................................................................................................................... 7
D.
MARKET ENTRY INTO CANADA .................................................................................................. 7
1.
2.
3.
4.
Acquiring a New Business ............................................................................................................... 7
Subsidiary or Branch Office ............................................................................................................. 7
Franchising....................................................................................................................................... 8
Licensing .......................................................................................................................................... 8
E.
FINANCING ..................................................................................................................................... 8
1.
2.
3.
Loans ............................................................................................................................................... 8
Grants .............................................................................................................................................. 9
Capital Markets/Public Offerings and Private Placements .............................................................. 9
F.
LICENCES AND PERMITS ............................................................................................................. 9
G.
REGULATION OF FOREIGN INVESTMENT ............................................................................... 10
1.
2.
Review ........................................................................................................................................... 10
Notification ..................................................................................................................................... 12
H.
TAX CONSIDERATIONS .............................................................................................................. 12
1.
Branch Operation versus Canadian Subsidiary Operation ............................................................ 12
(a)
Branch Tax/Dividend Tax.................................................................................................. 12
(b)
Tax Consolidation in Foreign Jurisdiction ......................................................................... 12
(c)
Extent of Canadian Tax Liability ....................................................................................... 13
(d)
International Tax Treaties ................................................................................................. 13
(e)
Thin Capitalization Rules .................................................................................................. 13
2.
3.
4.
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2.
3.
4.
5.
Applicable Tax Rates - Corporations ............................................................................................. 14
Applicable Tax Rates - Individuals ................................................................................................. 14
Investment From Abroad ............................................................................................................... 14
Sales Tax ....................................................................................................................................... 15
I.
COMPETITION LAW ..................................................................................................................... 15
J.
EMPLOYMENT AND LABOUR LAW ........................................................................................... 17
1.
2.
3.
4.
5.
6.
7.
8.
Employment and Labour Law ........................................................................................................ 17
Sources of Employment and Labour Law ...................................................................................... 17
Employment and Labour Standards Legislation ............................................................................ 18
Termination of Employment ........................................................................................................... 19
Workers’ Compensation................................................................................................................. 21
Human Rights Legislation .............................................................................................................. 21
Occupational Health and Safety Legislation .................................................................................. 21
Labour Relations Legislation.......................................................................................................... 22
K.
ENVIRONMENTAL LAWS ............................................................................................................ 22
L.
BANKRUPTCY, INSOLVENCY AND RESTRUCTURING ........................................................... 23
M.
IMMIGRATION............................................................................................................................... 24
1.
2.
Non-Immigrant Status .................................................................................................................... 24
Immigrant Status ............................................................................................................................ 25
© Davis LLP 2012
A.
INTRODUCTION
Except where otherwise noted, this paper is current as of October, 2012 and provides preliminary
information on Canadian and Ontario legal matters to assist you in establishing a business in Ontario and
provides general guidance only. Please contact a corporate/commercial lawyer with Davis LLP’s Toronto
office for specific advice before proceeding with your investment in Canada.
B.
GOVERNMENT AND LEGAL SYSTEM
Before it became a self-governing nation in 1867, Canada was primarily settled by English and French
settlers and the legacy of those two “founding groups” is still felt today in many areas. For example,
Canada’s two official languages are English and French and Canada has inherited two systems of law,
civil law from the French and common law from the English. The result is a civil law based legal system
in Quebec and a common law system in the rest of the country.
Canada is a constitutional monarchy and a parliamentary democracy with a federal system of
government whereby governmental powers and legislative authority are divided between the national
(federal) level and ten provincial and three territorial governments. The federal government deals with
matters that affect all of Canada, such as criminal law, trade between provinces, telecommunications,
bankruptcy and insolvency, banking and currency, intellectual property, fisheries, immigration and
extradition and national defence. The provinces and territories make laws in such areas as education,
property and health services. Certain aspects of provincial powers are delegated to municipal
governments, which enact their own bylaws.
Generally speaking, compared to the relationship of the states to the federal government in the United
States, the provinces have weaker powers vis-à-vis the Canadian federal government. For example, as
mentioned above, criminal law in Canada is a federal area and, unlike American states, each province
does not make its own criminal law. In Canada, “residual powers” (i.e., all powers not specified in the
Canadian constitution), reside with the federal government. Despite this, in practice many federal powers
have been assigned to provincial jurisdiction, such that Canada today is a highly decentralized federation.
Further decentralization of functions has been implemented to accommodate provincial aspirations,
chiefly those of Quebec. Each of Canada’ two levels of government is supreme within its particular area
of legislative jurisdiction, subject to limits created by the Canadian Charter of Rights and Freedoms.
Canada’s Parliament consists of the monarch (Queen Elizabeth II, as represented by the governor
general) and a bicameral legislature: an elected House of Commons and an appointed Senate. The
governor general appoints Canadians, who are recommended by the prime minister, to the Senate
according to a formula that distributes the seats among the provinces. In practice, legislative power rests
with the party that has the majority of seats in the House of Commons, which elects its members, the
members of Parliament, from 308 constituencies for a period not to exceed five years. Although the
prime minister may ask the governor general to dissolve Parliament and call new elections at virtually any
time, new elections are customarily called after the prime minister has been in power for four years.
Each province has a lieutenant governor (the monarch’s representative in the province), a premier and a
unicameral, elected legislative chamber. Provincial governments operate under a parliamentary system
similar in nature to that of the federal government, with the premier of the province chosen in the same
manner as the Canadian prime minister is chosen federally. Lieutenant governors, like the governor
general, have broad but essentially symbolic powers that are only rarely used.
C.
TYPES OF BUSINESS ORGANIZATION
A wide variety of legal arrangements may be used to carry on business activity in Canada. Commonly
used arrangements are: corporations; partnerships; limited partnerships, trusts, joint ventures, unlimited
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liability corporations and sole proprietorships. The selection of the appropriate form of business
organization will depend in each case upon the nature of the activity to be conducted, the identity and
priority of the investor(s), the method of financing, income tax planning and potential liabilities of the
business and the principals engaged in the business.
As discussed in more detail below in Part D (Market Entry Into Canada), one of the first issues faced by a
foreign entity contemplating carrying on business in Canada is whether to conduct business directly in
Canada as a Canadian branch of its principal ‘foreign’ business or to create a separate Canadian entity to
carry on the business. Canadian and foreign tax treatment, liability and availability of government
incentive programs will generally dictate whether to carry on business through a ‘branch’ or a direct
relationship.
1.
Corporations
The most common method of carrying on business in Ontario is through a corporation. Corporations offer
limited liability to their shareholders and have most of the powers of a natural person. Moreover, the
securities of a corporation are generally more readily marketable than an interest in a partnership, joint
venture or trust.
If an investor decides to use a corporation to carry on its business in Canada, it is necessary to decide on
the jurisdiction of incorporation because corporations can be formed under federal law or the laws of any
of the ten provinces or two territories of Canada. While federal company law and the various provincial
laws are similar in many respects, there are some important differences.
(a)
Incorporation in Ontario
In order to incorporate a company in Ontario under the Business Corporations Act (Ontario) (the
“OBCA”), the following documents and filing fees are required. The documents will be prepared by a
lawyer based upon directions given by the investor:
(i)
to incorporate under a name other than a numbered name, an Ontario NUANS
name search report must first be obtained on the proposed name to ensure it is
not confusing with existing names. (NUANS stands for “Newly Updated
Automated Name Search”.) In Ontario, the responsibility for ensuring that the
proposed name is not confusing with other names rests with the applicant or its
agent, and not with the public registry;
(ii)
articles of incorporation setting out rules relating to operation of the company
must be filed within 90 days after production of a certificate by the NUANS
system;
(iii)
Consent to Act as a First Director must be executed; and
(iv)
paper filing fees of approximately $360 plus legal fees and other disbursements
of approximately $1,200 for a normal incorporation must be paid. The online filing
fee is $300 plus applicable taxes, legal fees and other disbursements of
approximately $1,200 for a normal incorporation must be paid.
A company incorporated in Ontario is required to have a registered office in Ontario at the location
specified in its articles of incorporation. Davis LLP’s Toronto office usually acts as the registered and
records office of companies it incorporates.
At least 25% of the directors of an Ontario company must be “resident Canadians”, except where there
are fewer than four directors, in which case at least one must be a “resident Canadian.” Canadian
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citizenship is not required to be a “resident Canadian” as a permanent resident who is ordinarily resident
in Canada will meet this requirement. If there is an insufficient number of people available to serve as
resident Canadian directors, then we recommend incorporating the company in British Columbia where
there is no residency requirement.
Finally, if a corporation incorporated in Ontario decides to carry on business activities in other provinces,
it must register extra-provincially in each of those other provinces and must obtain approval for the use of
its name from each such province.
(b)
Incorporation of a Federal Corporation
An investor may choose instead to incorporate a federal company under the Business Corporations Act
(Canada) (the “CBCA”). The requirements for incorporation of a federal company are:
(i)
a federal NUANS search report;
(ii)
articles of incorporation;
(iii)
Notice of Directors;
(iv)
Notice of Registered Office; and
(v)
paper filing fees of approximately $350 plus legal fees and disbursements. The
online filing fee is $200 plus legal fees and disbursements.
With regard to the NUANS name search, as mentioned above, in Ontario the responsibility for ensuring
that the name is not confusing rests with the incorporators (or their agent) who make their own judgment
based on the search report and the Ontario regulators will not look beyond such judgment. Federally,
however, the recommendation in a search report as to whether the proposed name is available does not
guarantee that the application will be granted by the Corporations Branch. If the incorporators want to be
certain that a federal application will be approved, a copy of the name search must be submitted to
Canada Corporations prior to filing articles of incorporation requesting incorporation under the proposed
name. Canada Corporations will confirm whether there are names that are similar or identical to the one
proposed. There is no fee for this service.
Under the CBCA, 25% of directors must be resident Canadians, except when there are fewer than four
directors, in which case at least one must be a resident Canadian. A permanent resident who has not
become a Canadian citizen within one year after he or she first becomes eligible for Canadian citizenship
is not considered a resident Canadian for directorship purposes.
A federal company may carry on business in Ontario without applying for a separate licence. However,
the company must file an Initial Return, Form 2, under the Corporations Information Act (Ontario) within
60 days of commencing business in Ontario. This is the method through which the Ontario Companies
Branch learns about extra-provincial companies that commence business in Ontario.
(c)
Other Considerations Relating to Choosing Whether to Incorporate Federally or
Provincially
Some of the matters which should be taken into consideration in deciding where to incorporate or register
a corporation are:
(i)
© Davis LLP 2012
the place in which the corporation intends to do business. If it intends to do
business in more than one province and it wishes to use an established name, it
3
may be desirable to incorporate federally so that the company will be entitled to
carry on business in every province under the same name;
(d)
(ii)
a federal company must comply not only with the CBCA, but also with the
requirements of each province in which it conducts business;
(iii)
the by-laws of a company generally deal with requirements relating to meetings
and to notices of meetings. Most jurisdictions state that, unless the articles of
incorporation or the by-laws otherwise provide, the directors may meet
anywhere. The OBCA requires that unless the corporation is a non-resident
corporation or the articles of incorporation or by-laws otherwise provide, a
majority of the meetings of directors in any financial year must be held in
Canada. However, under either the OBCA or the CBCA, all directors may
consent in writing to a particular resolution as an alternative to holding a meeting.
These resolutions are known as “consent resolutions”;
(iv)
shareholders’ meetings of a federal company must be held somewhere in
Canada unless all shareholders agree otherwise. Under the OBCA, a meeting of
the shareholders of an Ontario company may take place in or outside Ontario as
the directors determine unless otherwise required by the articles of incorporation
of the company or a unanimous shareholders’ agreement. In the absence of
such determination, meetings must be held at the place where the registered
office of the corporation is located. In lieu of holding a physical meeting of the
shareholders, a consent resolution of shareholders is possible whether the
corporation is federally or provincially incorporated; and
(v)
requirements as to financial disclosure for public companies are very similar in
Ontario and federally. Financial information on a private or non-reporting
company is usually available to the directors, the shareholders and their personal
representatives, but not to the general public. CBCA corporations that are
distributing corporations (i.e., they distribute their securities to the public) or that
have gross revenues exceeding $15 million or assets exceeding $10 million must
file their annual financial statements with the Director appointed under the CBCA
or with the Chief Statistician of Canada. For purposes of revenue and asset
tests, the revenues and assets of affiliates are included. For reporting
companies, additional financial information must be disclosed to the public.
These disclosure requirements are governed by separate securities legislation.
“Foreign Corporations”
An existing “foreign corporation” (i.e., a corporation incorporated under the laws of a country other than
Canada, or a state, territory or Canadian province other than Ontario) must obtain an extra-provincial
licence to carry on business in Ontario. In order to become licensed in Ontario, a foreign corporation
must submit:
© Davis LLP 2012
(i)
Form 1 - Application for Extra-Provincial Licence, in duplicate, signed by a
director or officer of the corporation;
(ii)
Form 2 - Appointment of Agent for Service, in duplicate, executed by the
corporation and the person or other corporation that will act as agent;
(iii)
a certificate of status issued by the corporation’s home jurisdiction and signed by
an official of such jurisdiction who is authorized to certify the certificate of status
which must state:
4
A.
the name of the corporation;
B.
the date of the corporation’s incorporation or amalgamation;
C.
the jurisdiction to which the corporation is subject; and
D.
that the corporation is a valid and subsisting corporation;
(iv)
the prescribed fee of approximately $330 to the Minster of Finance of Ontario;
(v)
an original NUANS search report dated not more than 90 days prior to
submission of the application; and
(vi)
a covering letter identifying a contact name, return address and telephone
number.
As mentioned above, a foreign corporation must ensure the continuing appointment of an agent for
service in Ontario. The agent must be an Ontario resident aged 18 or older or a corporation having its
head office or registered office in Ontario. Davis LLP can act as agent if requested.
2.
Partnerships
Partnerships are formed under provincial law and must be registered in each province in which they
intend to carry on business. There are two primary types of partnership in Canada: general partnerships
and limited partnerships. A third form, limited liability partnerships, also exists and is usually adopted by
professional partnerships. In Ontario, partnerships must be registered with the Ontario Ministry of
Government Services under the Business Names Act (Ontario) (the “OBNA”). A partnership formed in
Ontario may, as a rule, carry on business only in Ontario. However, most provinces provide for the
registration of extra-provincial partnerships which entitles them to carry on business in those provinces as
well.
A foreign corporation may wish to enter into a partnership to establish a joint venture arrangement with
another person or corporation. The result of setting up such a partnership is that the income or loss of
the business will be calculated at the partnership level as if the partnership were a separate person but
the resulting net income or loss will then flow through to the partners and be taxable in their hands in
accordance with their capital interests in the partnership. Partnerships themselves are not taxable
entities for the purpose of calculating Canadian tax obligations.
(a)
General Partnerships
A general partnership is a relationship of two or more parties, who may be natural persons or
corporations, jointly engaged in business with a view to a profit. This definition excludes all associations
and organizations which are not carried on for profit, such as social clubs and charitable organizations.
Many business relationships are also not partnerships within the meaning of the law, for example, a
debtor-creditor relationship or the joint ownership of property.
Almost all partnerships with significant assets or operations are run subject to partnership agreements
which govern the relations among the partners, including their capital interests, the operation of the
business and the distribution of profits and losses. In a general partnership, all partners are jointly
responsible for the liabilities of the firm and may actively take part in the management of the business.
The OBNA requires general partnerships operating under a name other than the names of the partners to
register that business name. The OBNA does not prohibit registration of identical names, but if the
partnership decides to use the same name or a name that is confusingly similar to that of an existing
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business, it could result in a lawsuit by the existing business for “passing off”. The person registering the
name assumes full responsibility for any risk of confusion with an existing corporation, business name or
trade-mark.
(b)
Limited Partnerships
A limited partnership must have at least one general partner who runs the business and is liable for its
debts and obligations. The general partner must be a corporation or a natural person. All other partners
may be “limited partners”. A limited partner’s liability is limited to the extent of its investment in the limited
partnership. Limited partnerships are often used for investment purposes where a majority of the
partners do not wish to be involved in running the business. Limited partners are not entitled to
participate in the management of the limited partnership. The partners’ share of profits and other
management and operational matters are governed by a limited partnership agreement.
In order to form a limited partnership, a declaration must be filed with the Registrar appointed by the
Ontario Minister of Consumer and Business Affairs. A business identification number is assigned to all
limited partnerships. As with general partnerships, the limited partnership may register a business name
other than the name of the limited partners.
(c)
Limited Liability Partnerships
Limited liability partnerships permit individual partners to retain liability for their own acts and omissions
and there is no general partner, as there is in a limited partnership. In Ontario, only lawyers, chartered
accountants and certified general accountants may form a limited liability partnership.
3.
Sole Proprietorships
Sole proprietorships are generally only used for small investments where an individual desires to carry on
business without using one of the more formal business entities. The owner of such a business has the
sole responsibility for carrying on the business and is personally liable for its debts and obligations. As a
sole proprietor, however, the individual is allowed to claim business losses against his or her personal
income. In the beginning stages of a business, this may be preferable to incorporation, provided the
retention of personal liability is not an undue risk.
4.
Joint Ventures
In Canada, there is no distinct legal entity known as a “joint venture”. The term “joint venture” is generally
used to describe either an unincorporated business association between individuals or corporations or a
jointly owned and controlled corporation. Unincorporated joint ventures are often used for mining and
land development projects.
(a)
Unincorporated Joint Ventures
As mentioned above, the term “joint venture” is often used to refer to a business relationship similar to a
partnership that is treated differently for tax purposes because of specific characteristics of the business
being carried on. A joint venture agreement should be entered into by the co-venturers to show that the
business association is a joint venture rather than a partnership. Each co-venturer retains ownership
over the assets that it contributes to the joint venture so that at the end of the joint venture relationship,
each party may take back its own assets. A significant difference in tax treatment between a partnership
and a joint venture is that co-venturers are taxed as individuals, not jointly as is the case with partners in
a partnership. However, similar to partnerships, the joint venture agreement normally sets out the coventurers’ rights and restrictions and governs the sharing of profits and losses. Because a joint venture is
not a distinct legal entity, it cannot sue or be sued; such rights and liabilities attach to the individuals or
entities involved in the joint venture.
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(b)
Incorporated Joint Ventures
Often a corporation that is jointly owned and controlled is referred to as a “joint venture” with the rights of
shareholders being governed by a shareholders’ agreement that sets out each shareholder’s rights and
obligations. For example, each shareholder may be given the right to veto major transactions by the joint
venture corporation. Other rights, such as the ability to appoint a certain number of directors to the
board, are usually set out in the shareholders’ agreement. This type of joint venture does not permit
individual shareholders to calculate taxes as individuals as in the case with unincorporated joint ventures.
Instead, tax is calculated and paid by the joint venture corporation itself.
5.
Trusts
Some commercial activity is carried on through income trusts and other forms of trust whereby an
investment trust holds assets that are income producing and income is passed on to unit holders.
Income trusts can generate a cash flow for investors and are often used as vehicles for real estate and
natural resource investments. The tax treatment of income trusts has undergone significant change
under Canadian tax law in recent years and a trust structure as a vehicle for investment in Canada
requires knowledgeable tax structuring advice.
D.
MARKET ENTRY INTO CANADA
1.
Acquiring a New Business
Individual circumstances will determine whether a foreign investor should start a new business in Canada
or acquire an existing business. For example, it may be more appropriate in the forestry industry to
acquire an existing operation if the target company owns licences and permits that are otherwise difficult
to obtain. In other circumstances, however, it may be more appropriate to start a new operation.
2.
Subsidiary or Branch Office
A related question is whether it is preferable to start a Canadian operation through a subsidiary or a
branch office of a foreign corporation. There are tax, liability and operational factors which influence the
choice of a ‘branch’ or ‘Canadian subsidiary’ operation. Generally, branch offices are only used by
foreign corporations when their activities in Canada are not extensive and, in practice, most foreign
investors use a subsidiary corporation.
Subsidiaries and branch operations must meet the same regulatory obligations in Canada and,
specifically, all necessary business licences, registrations and consents relating to the business activity
must be obtained from any province or territory in which the subsidiary or branch operation carries on
business.
One of the advantages of using a branch office over a subsidiary, depending on the jurisdiction of the
foreign investor, is that it will be easier for the foreign corporation to claim losses incurred by the branch
office than it would be in the case of a subsidiary. This is one component of the tax treatment of branch
operations as compared to subsidiary corporations which is dealt with in more detail in Part H (“Tax
Considerations”).
Conversely, advantages of using a subsidiary instead of a branch operation include: (i) the limited liability
of a subsidiary, which insulates the parent from the subsidiary’s liabilities; (ii) the potential for greater
market impact; and (iii) the potential for obtaining regulatory approvals and financing faster and with fewer
barriers.
Other advantages of a subsidiary are that a foreign parent corporation using a branch office could be
subject to a variety of Canadian legislation to which it would not be subject if the corporation used a
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subsidiary. Such legislation includes Canadian tax legislation that requires foreign corporations doing
business through a branch to open their books and accounting records to a Canadian tax audit. Other
legislation that governs the business activities of a branch office, such as consumer protection legislation
and employment standards legislation, could also directly or indirectly impact the foreign parent
corporation.
Whether a foreign entity conducts business in Canada through a branch office or by creating a Canadian
subsidiary, the investment may be subject to foreign investment notification or review requirements of the
Investment Canada Act (Canada) (discussed in Part G (“Regulation of Foreign Investment”).
3.
Franchising
One common method of starting a business in Canada is through franchising. Franchising generally
refers to a business-format system under which an investor is permitted to market a specified product or
service in a particular location using a well-known trade-mark. Initial training and ongoing support are
normally provided by the franchisor. There are many advantages for a new investor to purchase a
franchise. For example, the investor will benefit from established goodwill (under trade-mark), a standard
product and broad advertising. There are also many advantages for a franchisor to market and sell
products through franchisees. The parties will enter into a franchise agreement which sets out the
relationship between the franchisor and the franchisee, including matters such as what assistance the
franchisor will provide to the franchisee and where and how the products or services may be marketed.
4.
Licensing
Another popular method of carrying on business is through licensing. Licences are similar to but are
often not as complex as franchises and may include the right to use trade-marks, technology, know-how
and perhaps patents. As is the case with franchises, there may be numerous advantages to both parties
to a licence agreement. The party granting the licence may obtain relatively inexpensive market access
to a geographical area, with the party obtaining the licence gaining access to proven technology and
products.
E.
FINANCING
Whatever type of business is commenced or acquired, the investor will usually require outside financing
in addition to its own equity both to establish the business and to operate it. Tax considerations will often
determine to what extent different types of financing should be used.
1.
Loans
Money may be borrowed from many sources. All of the large Canadian banks have extensive branch
systems in Ontario and many mid-sized, small and foreign banks are represented in Toronto or Ottawa.
There are also many other lending institutions such as credit unions and trust companies. Government
agencies such as the federal Business Development Bank of Canada and programmes such as the
Canada Small Business Financing Program seek to increase the availability of loans and capital leases
for establishing, expanding, modernizing and improving small businesses. The Business Development
Bank offers loans at favourable terms to certain types of businesses. Under the Canada Small Business
Financing Program, a small business must apply for a loan or lease at a financial institution (i.e., a bank,
credit union or caisse populaire) or a participating leasing company of its choice. If the loan or lease is
granted by the financial institution or the leasing company, the federal government guarantees 85% of the
lender’s or lessor’s losses in the event of default.
Short and long-term loans in Canada can be unsecured or secured against the real or personal property
of the borrower. Lenders may insist that unsecured loans be supported by related party guarantees and
personal or corporate covenants. All provinces and territories have established personal property and
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land registry systems for purposes of recording Canadian security and real property interests granted by
borrowers.
There are also asset-based lenders that will provide financing based on the realizable value of the
borrower’s assets including its inventory, equipment and/or accounts receivable.
Loans in Canada are available in multiple currencies but most commonly in Canadian and US dollars.
2.
Grants
Both the federal and provincial governments may offer grants to foreign investors. Generally speaking,
grant programs are aimed at businesses which will locate manufacturing or processing facilities in
Canada which in turn will provide a significant number of jobs, or to businesses which will improve
Canada’s technology or research capabilities.
3.
Capital Markets/Public Offerings and Private Placements
In addition to the sophisticated and well-developed Canadian capital markets system provided by
Canadian chartered banks and other financial institutions, Canada offers public offerings and private
placements through the listing and trading of securities of Canadian and foreign public companies. For
public offerings, the largest stock exchange in Canada is the Toronto Stock Exchange (TSX).
In Canada, securities law is under provincial jurisdiction and each Canadian province and territory
(including Ontario) has its own separate securities regulator and securities legislation. Securities
legislation is significantly harmonized through the national and multilateral instruments adopted by the
Canadian Securities Administrators, which is an umbrella organization comprising all of the provincial
securities regulators.
When debt or equity securities are offered for sale to the public, a prospectus must be filed with the
securities regulatory authorities in the provinces and territories where the securities are offered. Where
securities are offered in Québec, the prospectus must be translated into French.
Issuers filing a prospectus or listing its securities on a Canadian stock exchange will become a ‘reporting
issuer’ and become subject to various ‘continuous and timely disclosure’ obligations. These include the
requirement to prepare and file financial statements and annual information forms and reports regarding
material changes.
Foreign issuers that meet certain conditions have become reporting issuers in Canada by listing on a
Canadian stock exchange or by acquiring a Canadian reporting issuer (through a share exchange
transaction or other mechanism) may generally meet there continuous disclosure obligations in Canada
by filing in their home jurisdiction.
F.
LICENCES AND PERMITS
Most businesses must obtain licences from various levels of government. The federal government has
extensive licensing powers within certain areas such as foreign trade. The Export and Import Permits Act
(Canada) regulates a wide range of materials which cannot be exported without a permit. The Canadian
Competition Bureau administers the Consumer Packaging and Labelling Act (Canada) and Measurement
Canada administers the Weights and Measures Act (Canada) which require, among other things, the use
of metric measurements and of both English and French labelling. Various provincial government
agencies have jurisdiction over different types of business. Most municipalities require that business
premises be licensed. Municipal building and zoning regulations impose controls over buildings.
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G.
REGULATION OF FOREIGN INVESTMENT
Canada, like most developed countries, has legislation pertaining to foreign investors. Compared to most
other developed countries, however, Canada’s regulations are quite limited. In Canada, the foreign
investor must comply with the provisions of the Investment Canada Act (Canada) (the “ICA”). The ICA’s
stated purpose is to “encourage investment in Canada by Canadians and non-Canadians that contributes
to economic growth and economic opportunities”. “Non-Canadian” is defined in the ICA to include both
individuals as well as corporations owned or controlled by non-Canadians.
Generally speaking, under the ICA only large acquisitions in Canada by non-Canadians are subject to
review by the Investment Review Division of Industry Canada, the federal body which administers this
legislation. For small acquisitions and the establishment of new businesses, non-Canadians need only
notify Industry Canada. There are also some transactions which are exempt from notification or review.
1.
Review
An investment is reviewable if it results in an acquisition of control of a Canadian business whose asset
value equals or exceeds the following thresholds:
(i)
for non-World Trade Organization (“WTO”) investors (i.e., investors not from a
WTO member state), a threshold of $5 million for a direct acquisition and over
$50 million for an indirect acquisition; the $5 million threshold will apply however
to an indirect acquisition if the asset value of the Canadian business being
acquired exceeds 50% of the asset value of the global transaction;
(ii)
except as specified in paragraph (iv) below, a threshold is calculated annually for
reviewable direct acquisitions by or from WTO investors. The threshold for 2012
is $330. There is, however, a new amendment, which, when it comes into force
(yet to be determined), will increase the threshold to $600 million for investments
made within 2 years after the amendment comes into force, $800 million for the 2
years subsequent, and $1 billion for the year after that. Investments occurring 5
years after the amendment comes into force will be determined by reference to
the GDP at market prices. In addition, the measurement standard will be
changed from gross assets (book value) to the enterprise value of the assets.
Enterprise value will be prescribed by regulations.
(iii)
Pursuant to Canada’s international commitments, indirect acquisitions by or from
WTO investors are not reviewable but are still subject to the notification
requirement; and
(iv)
Acquisitions of cultural businesses are governed by the $5 million and $50
thresholds set out in paragraph (i).
Notwithstanding the foregoing, any investment which is usually only notifiable, including the
establishment of a new Canadian business, and which falls within certain specific business activities, may
be reviewed if an Order-in-Council of the federal government directing a review is made and a notice is
sent to the investor within 21 days following receipt of a certified complete notification.
When submitting an application for review, a prospective investor must demonstrate that the investment
will likely result in a “net benefit” to Canada. In determining whether the proposed investment will be of
“net benefit” to Canada, the Minister of Industry (the “Minister”) will consider the following factors:
(i)
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the effect of the investment on the level and nature of economic activity;
10
(ii)
the extent to which Canadians will participate in the business;
(iii)
the effect of the investment on productivity and technological development;
(iv)
the effect of the investment on competition;
(v)
the compatibility of the investment with national industrial, economic and cultural
policies; and
(vi)
the contribution of the investment to Canada’s ability to compete in world
markets.
The prospective investor must address each of these factors and provide supporting documentation and
financial data when submitting an application for review. Depending upon the nature of and the
circumstances surrounding the investment, some of the above factors will be given more weight than the
others. The more specific the investor’s plans regarding the above factors, the greater the likelihood that
a speedy approval will be obtained.
If the Minister advises that he is not satisfied that the investment represents a “net benefit” to Canada, the
ICA provides an opportunity for the investor to make additional representations and undertakings to
demonstrate the net benefit of the investment. Ultimately, if the Minister remains unsatisfied, a notice will
be sent to the investor advising of the Minister’s decision and the investor will be prohibited from
implementing the investment or, if the investment has already been made, the investor will be required to
divest itself of the investment.
Under the ICA, the Minister has 45 days to determine whether to allow the investment. The Minister can
unilaterally extend the 45 day period by an additional 30 days by sending a notice to the investor prior to
the expiration of the initial 45 day period. A further extension is permitted only if the investor and the
Minister agree. If no approval or notice of extension is received within the applicable time, the investment
is deemed approved. It is not unusual for the Minister to extend the initial 45 day review period by an
additional 30 days to permit full consideration of the investment. In the case of a proposed investment in
a cultural business, the review will usually require at least 75 days to complete.
Under the ICA, the Minister may also initiate a review of an investment by a non-Canadian where the
Minister has reasonable grounds to believe the investment could be injurious to national security. Such a
review is possible for foreign investments constituting less than an acquisition of control and regardless of
financial thresholds. These provisions apply to a non-Canadian that acquires an interest in or establishes
a Canadian business or, in certain circumstances, an entity carrying on all or part of its operations in
Canada. Corporate reorganizations, following which ultimate control remains unchanged, are not exempt
(except those involving financial institutions that are otherwise subject to governmental approval).
The Minister must send a notice to the investor that a national security review may be ordered within the
prescribed time periods, and, in the event the notice is given prior to completion of the proposed
transaction, the investor may not implement the investment until it has received (i) notice that no order for
review will be made, (ii) notice indicating no further action will be taken, or (iii) a copy of an order
authorizing the investment to be implemented.
In the event a review is ordered, the Governor in Council (i.e. the Federal Cabinet) may (i) direct the nonCanadian investor not to implement the investment, (ii) authorize the investment (with such undertakings
and on such terms and conditions as may be ordered), or (iii) in the event the investment has been
implemented prior to receiving notice from the Minister, order the non-Canadian to divest itself of control
of the Canadian business or of its investment in the entity.
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The ICA does not contain a definition of "national security", which injects Ministerial discretion and
corresponding uncertainty into this aspect of the investment review process. Nor does the ICA provide
guidance as to the business sectors in which foreign investments are likely to trigger a national security
review. Similarly, the legislation does not identify factors to be considered by the government in
assessing whether an investment may be injurious to national security. That said, senior Government
officials have stated that it does not intend to target any specific industry sector or specific country of
origin of a proposed investment.
2.
Notification
If the investment is not subject to review as set out above, the ICA simply requires that the foreign
investor notify Industry Canada. This notification requirement applies to a non-Canadian each and every
time it commences a new business activity in Canada and each time it acquires control of an existing
Canadian business where the establishment or acquisition of control is not reviewable. The notification
must be made at any time before the implementation of the investment or within 30 days thereafter. This
notification procedure is usually a formality as it is intended by Industry Canada that these investments
proceed without government intervention.
H.
TAX CONSIDERATIONS
1.
Branch Operation versus Canadian Subsidiary Operation
The two primary business structures under which the activities of a foreign entity may be carried on in
Ontario (or any other province in Canada) are either a Canadian branch operation of the foreign entity or
a wholly-owned subsidiary corporation which has been incorporated in a Canadian jurisdiction.
(a)
Branch Tax/Dividend Tax
A branch is not a separate legal entity, so there are no immediate tax consequences when it is created.
A branch will normally be subject to tax at the ordinary Canadian corporate rates for profits obtained by
the branch. The calculation of income subject to tax and the tax rates for branch operations are the same
as for Canadian subsidiaries. In addition to normal Canadian corporate tax, the net after-tax income
applicable to the branch operation after a reduction for amounts invested in Canadian property would be
subject to a “branch tax” payable in each taxation year. The branch tax is designed to equate
approximately to the withholding tax that would be payable in the case of dividends paid out to a foreign
parent corporation by a Canadian subsidiary. The branch tax is, however, payable in the year in which
profits are earned, whether the profits are retained in Canada or remitted to the foreign country. The
withholding tax on dividends paid by a Canadian subsidiary to its foreign parent is, on the other hand,
payable only when dividends are in fact remitted to the foreign parent. The withholding rate on dividends
and branch tax under the Income Tax Act (Canada) is 25% but this rate may be reduced by tax treaties
between Canada and certain foreign countries. Generally speaking, treaties reduce the branch
tax/dividend rate to 10% or 15%. Please see section (d) below for further discussion of tax treaties.
The potential disadvantages of using a branch are that a branch permits the Canada Revenue Agency
(the Canadian taxing authority) to investigate the affairs of the parent company, the allocation of income
and expenses between a branch and its parent may be difficult, and the allocation itself may become the
basis of an investigation.
(b)
Tax Consolidation in Foreign Jurisdiction
One aspect to be considered in determining whether to use a branch or a subsidiary operation in Canada
is the tax law of the jurisdiction of the foreign corporation and the availability there for consolidated
reporting for tax purposes. If losses are expected in the early years of the Canadian operation and profits
are being earned and taxed in the foreign jurisdiction, it will be important that Canadian losses be
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available to offset against profits otherwise taxable in the foreign jurisdiction. If the foreign jurisdiction
does not require the consolidation of losses and income, a branch will represent a significant advantage
because the branch is not a separate legal entity and any losses incurred, such as initial operating
losses, can be used to offset profits of the foreign corporation. In later years when the branch operation
becomes profitable, it can be transferred to a Canadian subsidiary.
However, if the foreign jurisdiction does permit the consolidation of losses or income for tax purposes,
then there is no advantage to setting up a Canadian branch operation as compared to a Canadian
subsidiary.
(c)
Extent of Canadian Tax Liability
A branch is subject to Canadian tax only on the income attributable to its Canadian operations. A
Canadian subsidiary is subject to Canadian tax on its worldwide income.
(d)
International Tax Treaties
As discussed above, tax treaties may influence the decision to select a branch versus a subsidiary.
Under both the United States-Canada tax convention and the Japan-Canada tax convention the first
$500,000 of branch profits will not be subject to branch tax which would provide a tax saving if a foreign
branch is used. In addition, many tax treaties provide that the income of a non-resident individual or nonresident corporation obtained from a business carried on in Canada will not be subject to Canadian
income tax except to the extent it is attributable to a permanent establishment located in Canada (such as
a fixed place of business in Canada, a dependent agent in Canada, or the provision of services in
Canada).
(e)
Thin Capitalization Rules
Certain income tax provisions are referred to as the “thin capitalization rules”. These rules provide for a
proportionate disallowance to a Canadian corporation of any deductions for interest paid or payable by
the corporation on outstanding debts to specified non-residents (i.e., foreign shareholders of the
Canadian corporation or people related to them) whenever the debt/equity ratio of the Canadian
corporation exceeds 2:1. The most recent Federal Budget proposed an amendment to the debt/equity
ratio, reducing it from 2:1 to 1.5:1 for taxation years beginning after 2012. Notwithstanding the denial of
an interest deduction, such payments will attract Canadian withholding tax.
These rules are designed to prevent non-residents from financing Canadian operations through debt as
opposed to investment in equity (i.e., share capital), and then claiming the interest as a deduction in the
calculation of the tax payable by the corporation. Thus, care must to be taken to ensure that large
interest-bearing amounts do not become owing unintentionally, even for short periods, by the Canadian
corporation to any non-residents. In order to avoid the consequences of the thin capitalization rules, it is
important at the time of creation of the subsidiary corporation in Canada to ensure that the investment by
way of share capital in the corporation is sufficiently large to enable the corporation to deduct all interest
paid on loans made to it by non-resident shareholders. This can, in part, be done through the use of
redeemable preferred shares. These shares can provide the vehicle for the investment of equity which
can subsequently be redeemed if the retained earnings of the corporation become large enough to
reduce the requirement for share capital without adversely affecting the debt/equity ratio. It may also be
desirable, in the case of borrowings by a company incorporated in Canada and owned by non-residents,
to consider having the Canadian corporation borrow from an arm’s length foreign lender with the debt
guaranteed by the shareholders.
An investor may also wish to give some consideration to special share structuring of the corporation for
the purpose of permitting appropriate investment and receipt of income from its operations by members
of the investor’s family if the corporation is one whose shares are closely held by family members.
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The thin capitalization rules do not apply to non-resident corporations. Interest expenses reasonably
attributable to Canadian business operations will still be deductible in calculating net income of the
branch for Canadian tax purposes.
2.
Applicable Tax Rates - Corporations
The rate of Canadian tax payable by a subsidiary corporation will depend on whether its shares are
controlled by Canadian residents and the type of activity or investment carried on by the corporation.
Provincial income taxes are levied by each province on income derived by a corporation from business
activities in that province. The following are the approximate combined federal-Ontario corporate income
tax rates for 2012:
Income Non-CCPC (Canadian Controlled Private
Corporation)
Income CCPC
Income
Manufacturing
and Processing
General
Business
Income
Investment
Income
With Small
Business
Deduction
General
Business
Income
Investment
Income
25.0%
26.5/26.0%
26.5/26.0%
15.5%
26.5/26.0%
46.2/45.7%
The small business deduction applies only to CCPCs (i.e., corporations not controlled by non-residents,
public companies or a combination) and only to the first $500,000 of active business income in any year.
3.
Applicable Tax Rates - Individuals
Individuals resident in Canada are taxed on a calendar-year basis on their net worldwide income from all
sources. Federal and provincial income tax is levied on a progressive rate basis depending on the
amount of taxable income for that year. Income from different sources (i.e., interest and employment
income, capital gains or dividends) is effectively taxed at different rates. One-half of a capital gain is
included in income for tax purposes. Dividends received by an individual from taxable Canadian
corporations give rise to a tax credit (to recognize tax already paid on the income by the corporation)
which may reduce the rate at which they are taxed to less than the rate for interest or employment
income.
Generally speaking, the provinces tax only those individuals who are resident in the
province on December 31 of the taxation year (except with respect to source income)
and impose income tax on income earned by individuals within the province by applying
the appropriate provincial rate to the federal tax payable.
A province has jurisdiction to tax business income if there is a “permanent establishment” within that
province. For Ontario purposes, a “permanent establishment” includes a fixed place of business such as
an office, a branch, a mine, an oil well, a farm, a timberland, a factory, a workshop or a warehouse. A
“permanent establishment” also includes an employee or agent either of whom has general authority to
conclude a contract.
4.
Investment From Abroad
Investment into Canada by a foreign individual who does not take up residence in Canada or does not
carry on business in Canada him/herself or through a corporation not incorporated or otherwise resident
in Canada and not carrying on business in Canada is subject to only the following Canadian tax
consequences:
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(i)
Canadian withholding tax on certain types of investment income earned in
Canada, such as dividends, non-arm’s length interest, rents and royalties. The
withholding rate of 25% is subject to treaty; treaty rates are generally 15% but
the rate may differ depending on the type of income. In most cases where the
non-resident shareholder is a company which owns at least 10% of the voting
power of the payor corporation, the rate is further reduced to 10%;
(ii)
non-participating interest paid by a Canadian resident to an arm’s length nonresident is not subject to withholding tax; and
(iii)
Canadian income tax on gains derived from the sale of “taxable Canadian
property” such as real estate, mining properties or timber resource properties.
In the case of rents received from real property in Canada, the foreign investor has the right to elect to be
taxed at the withholding rate of 25% on the gross amount of the rent or to be taxed at the usual applicable
Canadian tax rates on the profits earned from such rents in much the same manner as a resident of
Canada, provided a Canadian income tax return is filed with respect to such rents.
5.
Sales Tax
The Canadian federal government has a European-style value added tax regime and some of the
provinces have U.S.-style sales tax regimes. Some provinces have harmonized their provincial tax with
the federal tax, including Ontario. The harmonized sales tax (HST) in Ontario is 13%.
6.
The Japan-Canada Tax Convention
As discussed above, many of Canada’s international tax conventions reduce the rate at which income
earned in Canada by a non-resident is taxed.
The Japan-Canada tax convention provides for the following tax rates on income earned in Canada by a
resident of Japan:
I.
(i)
dividends from Canadian resident corporations are subject to a 5% rate of tax
provided that the Japanese resident owns at least 25% of the voting shares (the
rate is increased to 15% if less than 25% of the voting shares are owned);
(ii)
the branch tax is also 5%;
(iii)
interest paid by a Canadian resident to a Japanese resident where the parties do
not deal at arm’s length is taxed at 10%. As noted above, if the parties deal at
arm’s length the interest is exempt from tax; and
(iv)
royalties paid to a resident of Japan are taxed at 10%.
COMPETITION LAW
The Competition Act (Canada) (the “CA”) is Canada’s federal antitrust and trade practices legislation and
governs most businesses and business conduct in or affecting Canada. The purpose of the CA is to
maintain and encourage competition in Canada.
The CA regulates trade and commerce activities and monitors trade practices. The CA is generally
divided into three principal parts: criminal offences, civilly reviewable matters and merger regulation.
Many of the criminal offences have similar corresponding civil provisions for less egregious or potentially
pro-competitive conduct. The Commissioner of Competition (“Commissioner”), head of the Competition
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Bureau, Canada is charged with the administration and enforcement of the CA. The Commissioner may
challenge a merger or non-criminal anti-competitive conduct that violates the CA by making an
application for an order to the Competition Tribunal, an adjudicative (quasi-judicial) body. Criminal
offences are prosecuted by the Public Prosecution Service of Canada before a superior court with
criminal jurisdiction in Canada.
The CA establishes a number of criminal offences, the most serious of which is the anti-cartel provision.
Specifically, the CA contains a per se prohibition against agreements between competitors to, among
other things, fix prices, allocate markets or limit the supply of a product (which includes a service). In
addition, the CA contains a criminal prohibition against bid-rigging, making false or misleading
representations, deceptive telemarketing, deceptive notice of winning a prize and pyramid selling
schemes, among others. Upon conviction, a corporation or individual may be fined and, in the case of an
individual, sentenced to imprisonment for a term up to 14 years, depending on the offence. Further, the
CA establishes a private right of action for breach of the criminal provisions of the CA.
The CA further provides that certain business practices may constitute civilly reviewable conduct,
meaning that the conduct is not considered criminal but instead may be challenged by the Commissioner.
The principal civil provision is the abuse of dominant position which prohibits a dominant firm or firms
(acting jointly) from engaging in a practice of anti-competitive acts that results in, or is likely to result in, a
substantial lessening or prevention of competition (meaning the conduct has an exclusionary, predatory
or disciplinary effect on competitors or potential competitors). Further, the CA provides for civil review of
agreements among competitors that are not otherwise criminal and that prevent or lessen, or are likely to
prevent or lessen, competition substantially. Other civilly reviewable conduct includes resale price
maintenance, exclusive dealing, tied selling, market restriction and deceptive marketing practices (such
as making misrepresentations to the public). If the Commissioner can establish a person or persons
have engaged in civilly reviewable conduct, the Competition Tribunal may make corrective orders, such
as ordering a person to do or refrain from doing a particular act in the future or otherwise take action
necessary to correct the impugned conduct, and, in some cases, order payment of an administrative
monetary penalty (which, in certain circumstances, may be as high as $10 million or $15 million for
subsequent orders). If the Tribunal issues an order, a private right of action is available under the CA
where a person has failed to comply with the order. For certain civilly reviewable matters, a private
person may apply directly to the Competition Tribunal for relief.
Mergers under the CA are treated as a special type of civilly reviewable conduct. The Commissioner may
challenge any merger that is, or is likely to, lessen or prevent competition substantially. If established, the
Competition Tribunal may make an order prohibiting the parties from completing the merger or, in the
case of a completed merger, ordering the merger to be dissolved or the divestiture of some or all of the
assets to a third party. The Commissioner must bring an application within one year after the merger is
substantially completed.
In addition, the CA sets out certain financial thresholds which, if exceeded, require a merger to be prenotified to the Commissioner before the merger can be completed. If a merger is notifiable, the parties
must supply the Commissioner with the required information and a 30 day waiting period applies. In
certain circumstances, the Commissioner may issue a supplementary information request to one or more
of the parties thereby extending the waiting period to 30 days after the information has been received by
the Commissioner. A merger that is subject to the notification requirements must not be completed until
the applicable statutory waiting period has lapsed or the merger has been cleared in advance by the
Commissioner.
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J.
EMPLOYMENT AND LABOUR LAW
1.
Employment and Labour Law
Businesses operating in Ontario may be regulated by either federal or provincial labour and employment
laws. The nature of the employer’s business will determine whether federal or provincial labour and
employment laws apply. The majority of employers are regulated by provincial labour and employment
laws. The federal government generally regulates businesses which operate on an inter-provincial,
national or international basis, such as banking or television broadcasting.
2.
Sources of Employment and Labour Law
Employment and labour law in Canada has two sources: the common law and various statutes. The
statutes enacted by government regulate the employment relationship. The most important of these
statutes, from an employer’s perspective, are:
(a)
Employment standards legislation (sometimes referred to as “labour standards”
legislation). This legislation establishes the basic terms and conditions of employment
including rules regarding hours of work, minimum wages, mandatory vacation, public
holidays and overtime;
(b)
Workers’ compensation legislation. This legislation creates a no-fault insurance system
for workplace injuries. Under such legislation, employers generally pay premiums into a
fund and injured workers receive compensation from the same fund to replace their
wages while absent from work due to an injury. Covered workers are usually prohibited
from suing their employers for injuries covered by the legislation;
(c)
Human rights legislation. This legislation prohibits employers from discriminating against
their employees or potential employees on a number of grounds including, but not limited
to, sex, race, age, disability and sexual orientation;
(d)
Occupational health and safety legislation. These laws regulate workplace safety by
imposing obligations upon a variety of parties in the workplace;
(e)
Labour relations legislation. This legislation regulates the status of labour unions and
their relationships with employees and employers; and
(f)
Pay equity legislation. Pay equity means “equal pay for work of equal value” and is
covered by the Pay Equity Act (Ontario) which may require employers to adjust wages
between male and female employees who perform substantially the same work in order
to address systemic discrimination.
(g)
Benefits-related legislation.
Most jurisdictions in Canada have legislation which
regulates private pension plans. In Ontario, this legislation is the Pension Benefits Act.
In addition, the federal government has created an unemployment insurance plan under
the Employment Insurance Act and a pension plan (similar to Social Security in the
United States) under the Canada Pension Plan. All Canadian provinces provide
comprehensive, government-funded health insurance schemes for residents. In Ontario,
eligible employers are required to pay an employer health tax in respect of their
employees. Many employers provide supplemental medical, dental, life insurance,
disability and other benefits to employees, although these are not required by law.
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(h)
3.
Privacy legislation. The collection, use, retention, storage and disclosure of personal
information, which may include personal information of or about employees, is regulated
in Canada by both federal and provincial law.
Employment and Labour Standards Legislation
Employment and labour standards legislation establishes minimum standards that must be adhered to
regarding employees in Canada. Although this legislation varies from province to province, some basic
principles apply in all Canadian jurisdictions. First, employers and employees generally cannot contract
out of the provisions of applicable employment and labour standards legislation. Second, employers are
free to provide additional benefits or better employment conditions which then prevail over the provisions
of the applicable legislation.
The following are some of the basic entitlements frequently established by employment standards
legislation:
(a)
Minimum wage. All provinces have a minimum wage. In Ontario, the current general
minimum wage rate is $10.25 per hour.
(b)
Hours of work. Most employment standards statutes in Canada establish a maximum
number of hours of work which an employee is permitted to work on a daily or weekly
basis. In Ontario, the maximum number of hours of work for an employee is 8 hours a
day (unless the employer has established regular working hours in excess of that) and 48
hours in a week. The maximum weekly hours may be extended if the employer and
employee agree in writing and if the agreement is approved by the Director of
Employment Standards. In Ontario, there are also rules with respect to breaks, generally
requiring an unpaid break after a certain number of hours of work. In addition, Ontario
employment standards legislation requires employers to ensure that employees are free
from performing work for specified periods of time each day.
(c)
Overtime pay. Most employment standards statutes establish a threshold beyond which
an overtime rate is payable. In Ontario, overtime must be at least 1.5 times an
employee’s regular rate per hour of work. The threshold for overtime is 44 hours per
week. Some provinces allow for time off in lieu of overtime pay. Exemptions may exist
for managerial and some categories of sales employees, but the managerial exemption is
much narrower than it tends to be in the United States. Employers may in some cases
enter into averaging agreements with employees whereby the number of hours worked
per week will be determined by averaging hours worked over 2 or more weeks. This
allows for work schedules to be more flexible when employees are required to work more
one week and less the next, while still averaging 44 hours per week or less.
(d)
Statutory holidays. Eight to 11 statutory holidays are commonly designated in each
province. Employees generally receive these days off with pay and are frequently
entitled to additional compensation and/or time off if they are required to work. The
following are the most common statutory holidays:
•
•
•
•
•
•
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New Year’s Day (January 1);
Second Monday in February (BC), Third Monday in February (Alberta, Manitoba,
Ontario, Prince Edward Island and Saskatchewan;);
Good Friday (Friday before Easter);
Victoria Day (Monday on or preceding May 24);
Sainte-Jean-Baptiste Day (Quebec; June 24);
Canada Day (July 1);
18
•
•
•
•
•
•
1st Monday in August (British Columbia, New Brunswick, Saskatchewan;
Northwest Territories and Nunavut);
Labour Day (1st Monday in September);
Thanksgiving Day (2nd Monday in October);
Remembrance Day (November 11);
Christmas Day (December 25); and
Boxing Day (December 26).
Although it is not a statutory holiday, most Ontario employers also give employees a paid
holiday on the first Monday in August, which is commonly known as a “Civic Holiday”.
4.
(e)
Vacation. The employment standards legislation of every Canadian jurisdiction requires
employers to provide employees with a minimum of two weeks of vacation time per year.
With the exception of Ontario and Yukon Territory, all other Canadian jurisdictions
increase an employee’s vacation entitlement in accordance with the employee’s service.
Employees in most Canadian jurisdictions, including Ontario, provide employees with a
separate entitlement to vacation pay. In the remaining jurisdictions, employees are
simply entitled to vacation “with pay”. In Ontario, employees are entitled to vacation pay
at a minimum of 4% of wages earned (which generally includes commissions). This
entitlement begins to accrue when employment starts. While applicable employment
standards legislation in each jurisdiction sets out when vacation pay is to be paid, in
practice most employers pay employees their vacation pay when an employee actually
takes vacation. Employment standards legislation in most jurisdictions, including Ontario,
restricts an employer’s ability to establish “use it or lose it” or “carry over” rules in relation
to vacation time and pay.
(f)
Leaves of absence. Employment and labour standards legislation establishes rights to
various job-protected leaves, including maternal/pregnancy and parental leave, sick or
emergency leave, family medical/compassionate care leave and reservist leave.
Termination of Employment
Employees not represented by a Union
In Canada, an non-unionized employee can generally be terminated only with just cause or, if no just
cause exists, when the employer provides the employee with reasonable notice of the termination of their
employment or pay in lieu thereof. There is no legal concept of “at will” employment in Canada.
The amount of notice required on termination is established by applicable employment standards
legislation and according to the common law. A Canadian employer can provide pay in lieu of notice in
most circumstances. The amount of notice required at common law is generally significantly more than
that required under applicable employment or labour standards legislation and generally subsumes the
minimum statutory entitlement for notice of termination. Thus, where an employer pays an employee an
amount equivalent to the monetary value of the compensation the employee would have received during
the common law notice period, the employer will not need to pay any additional statutory entitlement.
Such monetary compensation generally includes compensation not only for salary or wages, but also for
benefits, commissions, bonuses and other perquisites the employee would have received if he or she had
continued to work through the reasonable notice period.
The Ontario employment standards legislation provides for two types of notice of termination of
employment: individual notice and mass notice. An employee who has been continuously employed for
three months or more is entitled to statutory notice of termination or pay in lieu of such notice. Individual
notice requirements are based on length of service and range from 1 to 8 weeks. Ontario’s mass notice
requirements range from eight to 16 weeks of notice per employee and are based on the number of
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employees terminated. Generally, termination of 50 or more employees in a specified time period will
trigger the mass notice provisions.
Ontario is unique among the Canadian provinces in also providing longer service employees of larger
employers with an entitlement to severance pay. An employee is entitled to severance pay if the
employee has five or more years of service at the time of “severance” and the employer’s annual payroll
is $2.5 million or more at the Ontario establishment where the employee works. Severance pay seeks to
compensate employees for loss of seniority and job-related benefits, and is intended to recognize an
employee’s long service.
Ontario is also unique among the provinces in requiring an employer to continue to provide benefits for an
employee for the period of statutory termination notice, even where the employer terminates the
employee’s employment and provides pay in lieu of notice.
In addition to the minimum requirements established by employment and labour standards legislation,
every employment relationship in Canada is governed by contract under the common law. This applies
whether or not a written contract exists. The common law implies basic terms into every employment
contract. The most significant of these is that the contract, and hence the employment relationship,
cannot be terminated without just cause, reasonable notice of termination, or pay in lieu of such
reasonable notice. The length of common law reasonable notice is determined in accordance with
factors relating to the individual employee, such as the employee’s age, length of service, type of
position, level of compensation and the availability of replacement employment. The key issue
considered by a Canadian court is how long it will take the employee, acting reasonably, to secure
alternate employment of a similar compensation level.
While a Canadian employer cannot “contract out” of statutory termination and severance pay entitlements
owing to an employee, the employer is free to contract with the employee in regards to the employee’s
common law reasonable notice entitlements on termination. Canadian employers are generally free to
agree, before the employee begins employment, what the maximum compensation or notice period will
be if the employee’s employment is terminated without cause. Such a contract or agreement limit the
employee’s entitlement to just the statutory minimum employment standards established in the province,
although clear evidence of such an agreement is required and it cannot be unduly harsh for the
employee. It is preferable to have a statement in writing, signed by the employee, before he commences
employment, agreeing to minimize liability in termination cases without cause. Employers should include
an express term to this effect in each employee’s employment contract or offer letter. Written contracts
are advisable for all non-union employees. The employee must have accepted this term of employment
prior to commencing employment, or must receive new consideration (such as a pay increase or bonus)
in exchange for agreeing to such a term of employment during the course of employment.
Any agreement with respect to termination entitlements will be void and unenforceable if the agreement
does not meet the minimum requirements of applicable employment standards legislation. Therefore,
employers should include notice requirements which are, at a minimum, consistent with applicable
employment standards notice on termination in employment agreements. As a practical matter,
employees who occupy managerial or executive positions, or who have specialized skills, may require
longer to locate alternate employment and may therefore be entitled to increased common law
reasonable notice. Advice should be sought with respect to these individuals’ employment contracts on a
case-by-case basis.
Unionized Employees
Termination of employment differs significantly for unionized employees. Unionized employees can only
be terminated for just cause and/or pursuant to the terms of their collective agreement. While nonunionized employees can be terminated at the option of the employer (provided reasonable notice or pay
in lieu of notice is provided and as long as the employer does not violate another statute with respect to
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the termination), union employees have recourse to the arbitration provisions of their collective
agreement and will often be reinstated by arbitrators if just cause for termination has not been found to
exist. Most collective agreements provide for lay-off and recall of employees and even unionized
employers can usually terminate employees if the employers permanently reduce the size of their
operations.
5.
Workers’ Compensation
Ontario, like most provinces, has enacted workers’ compensation legislation which provides specific
compensation to employees for work-related injuries and restricts the ability of injured workers to sue
their employers for work-related injuries. These are essentially “no fault” insurance plans. Workers
cannot agree to waive or forego benefits under these statutes and employers are often required to
register regardless of the number of employees. Employers may also have an obligation to reinstate
workers once they recover from their injuries.
The cost of workers’ compensation insurance depends upon the industry category of the specific
business because it is assumed that businesses with similar operations share similar risks. Rates may
also vary based on an employer’s accident/injury rates. In Ontario, the rates for workers’ compensation
insurance are calculated per $100 of insurable earnings. The average premium rate for 2011 is $2.35 per
$100 of insurable earnings, which will increase in 2012 to $2.40 per $100 of insurable earnings.
6.
Human Rights Legislation
Although the specific prohibited grounds of discrimination vary somewhat from jurisdiction to jurisdiction
in Canada, human rights legislation generally provides that employees must be free from discrimination
or harassment on the grounds of race, ancestry, place of origin, colour, ethnic origin, citizenship, creed,
religion, sex, sexual orientation, age, record of offences, marital status (including common-law and samesex marriages), family status or disability. Under the human rights legislation of every jurisdiction in
Canada, an employer must accommodate an employee to the point of undue hardship in respect of any
of these prohibited grounds of discrimination. “Undue hardship” represents a very high standard in
Canada. In Ontario, the only factors which may be taken into account when determining if the standard
has been met are: (i) the cost of the accommodation; (ii) whether outside sources of funding are available
to defray the costs; and (iii) health and safety requirements, if any. Employers are also permitted to
establish bona fide occupational requirements for a position, even if those requirements result in
discrimination on their face.
Human rights legislation often establishes an administrative body to investigate and/or hear complaints
against employers and to provide penalties and fines for violations of the legislation. Even in the nonunionized context, employees terminated contrary to human rights legislation may be eligible for
reinstatement and/or compensation.
7.
Occupational Health and Safety Legislation
Occupational health and safety legislation regulates workplace safety and imposes various duties on a
variety of parties in the workplace. Employers can be subject to conviction resulting in imprisonment
and/or significant fines for breaching their obligations under this legislation. Occupational health and
safety inspectors or officers generally have broad powers to inspect workplaces and workplace records.
Workers who believe that their work is unsafe are entitled to refuse to work pending review of their work
conditions, which may require the involvement of an occupational health and safety officer or inspector.
Occupational health and safety legislation also imposes direct duties on officers and directors of
employers by requiring them to ensure that the employer company complies with the legislation.
Penalties are prescribed for both individual and corporate violations.
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In Ontario, as in many Canadian jurisdictions, occupational health and safety legislation also mandates
the selection of representatives and the establishment of committees to monitor health and safety in the
workplace.
8.
Labour Relations Legislation
Labour relations legislation governs the unions and unionized employees. Employees who exercise
managerial functions with respect to labour relations matters are generally not considered employees and
therefore, are often not unionized employees. Labour relations legislation generally deals with:
•
Certification/de-certification. The processes by which a union becomes certified to
represent a group of employees or loses the right to represent a group of employees;
•
Collective bargaining. The process by which a union and an employer agree on terms
of employment for all employees covered by a collective agreement;
•
Work stoppages. Rules regarding when a union can legally strike and when an
employer can legally lock out its employees;
•
Grievance arbitration. Process for settlement of disputes between the parties during the
lifetime of a collective agreement and without resort to a work stoppage; and
•
Unfair labour practices. Various rules regarding what employers can and cannot do,
both during certification and de-certification drives and generally.
In general, the labour relations legislation of all Canadian jurisdictions favours “speedy” certification
processes, which differ significantly from those applicable in the United States.
K.
ENVIRONMENTAL LAWS
Canadian lawmakers regulate the environment at three different government levels: federal, provincial
and municipal. The federal and provincial governments have enacted legislation, regulations, policies
and guidelines, and municipalities have passed by-laws, all geared to the protection of air, land, surface
and groundwater. These laws regulate hazardous and/or toxic substances, pollution, waste, the import,
export and transportation of dangerous goods, brownfields development, spills and clean-ups, among
many other things.
In addition, approval of various government agencies with responsibility for the environment is required to
carry out many activities and formal environmental assessment is often a precursor to many public and
private developments. Both of these require varying degrees of public participation in their processes.
Corporations in management or control of a property (or formerly in management or control of a property)
are subject to a broad range of potential statutory and civil liability arising out of non-compliance with
environmental laws or contamination at the property. Similar liability can rest with current or former
directors and officers. There are two principal sources of statutory liability imposed by environmental
laws in Canada, "offence liability" and "remediation liability". Offence liability generally arises from
provisions in environmental laws that create offences for causing or permitting unlawful pollution or failing
to report it. Remediation liability generally arises from provisions in environmental laws authorizing a
regulatory agency to order corporations to conduct remediation of their current or former properties
(whether or not the corporation caused such contamination).
In order to enforce these two types of statutory liability, government officials have broad powers of
investigation and inspection, and have access to a number of investigative techniques, including certain
search and seizure powers.
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Corporations also have potential civil liability for any contamination at the property that causes harm to
third parties. This liability is enforced through the civil courts by private lawsuit.
Secured creditors can also be held liable for environmental matters, though the circumstances in which
secured creditors can be held responsible for environmental matters are significantly narrower than the
liability faced by corporations and their directors and officers, unless secured creditors step into the shoes
of the debtor. Generally speaking, the liability does not arise by virtue of the making of a loan but, rather,
it arises due to the involvement the secured creditor may have with the property of the debtor as a result
of the debtor’s default and/or insolvency.
Given the Canadian regulatory regime, and its emphasis on corporate responsibility for environmental
issues associated with a property, regardless of who caused the contamination, and the extension of this
liability to directors and officers, thorough due diligence is important prior to any transaction that may
result in the acquisition of property or a business that may be subject to environmental regulation at any
one of the three government levels.
L.
BANKRUPTCY, INSOLVENCY AND RESTRUCTURING
In Canada there are two major federal statutes governing commercial liquidation and restructuring, the
Bankruptcy and Insolvency Act (the “BIA”) and the Companies’ Creditors Arrangement Act (the “CCAA”).
The BIA can be used as both a liquidation and restructuring mechanism. There are two distinct
processes available to insolvent companies under the BIA. There is ‘bankruptcy’ which is a liquidation
process involving the appointment of a ‘Trustee’ who supervises the liquidation of the assets of the
company and the distribution of the resulting proceeds in accordance with a statutory priority scheme. . A
bankruptcy process can be initiated by the debtor or a creditor and involves the appointment of a “Trustee
in Bankruptcy”, a licensed professional.
There is also a ‘proposal’ process under the BIA, in which the debtor can, in a court supervised process,
stay any proceeding against it for a period of time and ultimately put forward an offer, called a “proposal”,
to its creditors for some form of compromise which is ultimately voted upon by the creditors. The
proposal process involves the appointment of a licensed professional to serve as “Proposal Trustee”.
The nature and content of the proposal is somewhat limited by statutory requirements but otherwise is
limited only by what is necessary to get the support of more than half of the voting creditors that must
also represent more than two-thirds of the dollar value of the claims held by the voting creditors. In the
event, the proposal is not accepted by the requisite number of creditors, the debtor is deemed to be
bankrupt. If the proposal is accepted by the requisite number of creditors and approved by the court, the
debtor needs only to comply with all of the terms of its proposal to have all of its liabilities existing at the
time it filed deemed fully and finally satisfied.
The CCAA provides for a process very similar to the BIA proposal process but with additional flexibility
The CCAA process is only available to companies that have total liabilities exceeding five million dollars.
The CCAA process is typically initiated by the debtor and is generally used in the larger and more
complex restructurings as it allows the court a great deal of discretion in determining the process,
procedure and impact of a CCAA proceeding. The CCAA process involves the appointment of a licensed
professional to serve as “Monitor”. Ultimately, the goal of a CCAA proceeding, like the proposal process,
is for the debtor to put forward an offer to its creditors for some form of compromise which is ultimately
voted upon by the creditors. Under the CCAA the debtor’s offer is called a “plan of arrangement”. Again
for the plan of arrangement to be considered effective, the plan must get the support of more than half of
the voting creditors that must also represent more than two-thirds of the dollar value of the claims held by
the voting creditors. Like a proposal, if the plan is accepted by the requisite number of creditors and
approved by the court, the debtor needs only to comply with all of the terms of the plan to have all of its
liabilities existing at the time it filed for protection deemed fully and finally satisfied. Unlike the proposal
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process, if the plan is voted down the debtor does not automatically become bankrupt but is, practically
speaking, left with very few alternatives.
In some circumstances, a process known as a “receivership” is used to liquidate or realize upon the
assets of an insolvent debtor, sometimes in conjunction with bankruptcy and sometimes as a standalone
process. A receivership can be initiated by a party such as a secured creditor that has a contractual right
to appoint a receiver with the involvement of the courts or a receivership can be initiated by a court order.
In either instance, an individual or firm is appointed for a specific purpose or purposes from as broad as
running the business of the debtor to as narrow as selling a specific assets of the debtor. If the receiver
is running the business of the debtor it is usual referred to as a receiver manager.
There are also alternative procedures under the Canada Business Corporations Act, the Ontario
Business Corporations Act and the Winding-Up and Restructuring Act that may be used to restructure
companies in certain atypical circumstances.
M.
IMMIGRATION
Canada’s immigration laws and polices are designed to attract experienced businesspeople and skilled
workers to Canada. Canada’s comprehensive business immigration program includes both nonimmigrant and immigrant status.
1.
Non-Immigrant Status
It is usually unnecessary to be a citizen or resident of Canada to invest in Canada, and of course not all
investors or businesspeople wish to immigrate to Canada. People who do not wish to immigrate to
Canada may enter and stay in the country from time to time as temporary residents. Categories of
temporary residents include business visitors and temporary foreign workers.
Business Visitors are persons who wish to conduct business activities in Canada but will not be
competing against the Canadian labour force. These are persons who wish to conduct business
activities on behalf of a foreign business, not a Canadian business, and will not be earning any personal
income in Canada from their activities.
An individual who wishes to enter Canada to work must apply for a work permit. “Work” is defined under
the Immigration and Refugee Protection Regulations as “an activity for which wages are paid or
commission is earned, or that is in direct competition with the activities of Canadian citizens or permanent
residents in the Canadian labour market”. Those wishing to apply for a work permit are generally
required to have a job offer from a Canadian employer. A work permit is usually only issued for a
specified job, employer and time period.
Generally, obtaining a work permit is a two step process, consisting of:
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the employer obtaining a Labour Market Opinion (“LMO”) from Service Canada.
Service Canada will assess the economic effect of the job offer on the Canadian
labour market and provide a confirmation either for an individual job or for a
group of jobs. Generally speaking, before applying for an LMO, an employer
must have tested the local labour market to ensure that no qualified Canadians
are available to fill the particular position; and
•
the foreign national obtaining a work permit from a Canadian Embassy, High
Commission or Consulate abroad, or at the port of entry (i.e. Canadian
international airport or land border crossing). Individuals from certain designated
countries who require a Temporary Resident Visa (“TRV”) in order to enter
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Canada, must apply for their work permits abroad, while individuals who are TRV
exempt may apply abroad or at a port of entry.
There are many exceptions to the need for obtaining an LMO from Service Canada before applying for a
work permit, including:
2.
•
intra-company transferees - senior executives and managers or specialists
coming to work for a subsidiary, affiliate or branch;
•
professionals under NAFTA (including management consultants, engineers,
accountants, computer systems analysts, lawyers, graphic designers); and
•
workers whose employment will bring “significant economic benefit” to Canada.
Immigrant Status
Some investors may wish to immigrate to Canada (i.e. become Canadian permanent residents).
Permanent residents of Canada are not required to leave the country by a specified date and can remain
in Canada indefinitely. Unlike temporary workers whose work permits are usually tied to a specific
employer, occupation and province/territory, permanent residents have full working rights, meaning they
can work for any employer in any occupation in any province/territory. For the most part, permanent
residents have the same rights and responsibilities as citizens. The key difference is that permanent
residents have to meet a continuing residency obligation in order to maintain their status: they must be
physically present in Canada for a total of two years out of every five year period.
There are numerous ways to apply for permanent residence in Canada. Here are the most common
permanent residence categories for Skilled Workers (i.e. individuals who will take up employment with a
Canadian employer):
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Federal Skilled Worker Program: Individuals are eligible to apply for permanent
residence under this program if they have an offer of arranged employment
(approved job offer) with a Canadian employer or have a valid work permit, for a
skilled occupation, with a Canadian employer. Once eligibility to apply for the
program is confirmed, an individual must pass a point assessment based on six
factors (specifically, education, work experience, language ability, age, arranged
employment and adaptability) to be approved;
•
Provincial Nominee Programs: Most provinces in Canada administer programs
designed to attract Skilled Workers who will yield local economic benefits. Once
a Skilled Worker is nominated by a province, Citizenship and Immigration
Canada will expedite the processing of the individual’s permanent residence
application. The Ontario Provincial Nominee Program called “Opportunities
Ontario” accelerates the permanent resident application process for skilled
and/or experienced workers, experienced business persons and their family
members who want to settle in Ontario permanently; and
•
Canada Experience Class: Foreign workers who have at least two years of
skilled work experience in Canada, and foreign graduates who received a
qualifying diploma, degree or trade or apprenticeship credential and have at least
one year of skilled work experience in Canada, and have sufficient language
proficiency, may consider applying for permanent residence under this class.
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Individuals may also become permanent residents of Canada by investing in a province
in Canada and starting a business which creates employment for Canadians in that
particular province.
•
*
Provincial Nominee Program: Most provinces’ respective nominee programs also
contain a component designed to attract entrepreneur business applications
and/or investment capital. Opportunities Ontario, for example, helps companies
making an investment in Ontario to recruit or relocate key employees to ensure
the long-term success of the investment
*
*
*
*
*
This paper is intended to give prospective investors an overview of some of the important legal factors
related to investing in Canada. It does not provide legal advice.
Davis LLP would be pleased to provide specific legal advice on any of the issues mentioned in this paper.
These materials are the exclusive property of Davis LLP and, except as expressly stated here, Davis LLP
reserves all rights in them. Davis LLP invites our clients to use these materials subject to certain
conditions. By receiving these materials, you acknowledge your acceptance of these conditions. As a
client of Davis LLP, we invite you to read this copy of the materials and to use it in the course of
administering your business. However, you must not otherwise use, reproduce, modify, encode,
summarize, distribute, or publish these materials or any portion of them without the prior written consent
of Davis LLP.
© 2012 Davis LLP
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