Banking & Financial Services Law : Canadian and U.S. / Cross-Border Credit Market Lawyers & Attorneys : Osler Hoskin & Harcourt Law Firm

On December 21, 2011, the Canadian federal government released a consultation paper (the Consultation Paper) containing certain proposals to strengthen Canada’s anti-money laundering (AML) and anti-terrorist financing (ATF) legislative framework, which is administered through the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLA) and related regulations (collectively, AML Legislation). The full text of the Consultation Paper is available here. The deadline for submitting comments on the proposed amendments is March 1, 2012.

On November 7, 2011, the Canadian federal government had released a consultation paper proposing certain amendments to the AML Legislation. Whereas the amendments proposed in November 2011 were limited to customer identification and due diligence and were meant to mainly address Canada’s rating of non-compliance with a recommendation of the Financial Action Task Force (FATF), the Consultation Paper released in December 2011 proposes a broader set of amendments. (See our Osler Update dated November 17, 2011.)

The key objectives of the Consultation Paper are stated to be the following: 

• reviewing Canada’s AML/ATF legislative framework in preparation for the upcoming Parliamentary review of the AML Legislation (this review is required by statute every 5 years);
• addressing the recommendations of an independent consultant included in the Report of the 10-Year Evaluation of Canada’s AML/ATF regime, released in March 2011;
• responding to stakeholder concerns, raised by both the private sector and federal regime partners, particularly law enforcement and intelligence agencies;
• meeting Canada’s international commitments by improving Canada’s compliance with the recommendations of FATF;
• responding to the interim report of the Special Senate Committee on Anti‑Terrorism, entitled Security, Freedom and the Complex Terrorist Threat: Positive Steps Ahead;
• responding to the final report of the Commission of Inquiry into the Investigation of the Bombing of Air India Flight 182, entitled Air India Flight 182: A Canadian Tragedy; and
• responding to the 2009 Privacy Commissioner of Canada’s Audit Report of the Financial Transactions and Reports Analysis Centre of Canada.

The amendments proposed by the Consultation Paper fall into the following categories, details of which are available by clicking "Continue Reading" below:

1. strengthening customer due diligence standards;
2. closing gaps in Canada’s regime;
3. improving compliance, monitoring and enforcement;
4. strengthening information sharing in the regime;
5. introducing a list of potential countermeasures; and
6. updating reporting requirements.

This entry is based on the Osler Update Canadian Government Proposes Comprehensive Amendments to Anti-Money Laundering Legislation authored by Stephen D.A. Clark and Kashif Zaman

Continue Reading...

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The British Columbia (“BC”) legislature has introduced amendments to expressly identify transferable licences as personal property under the BC Personal Property Security Act (the “BC PPSA”). These amendments (the “Amendments”) received Royal Assent on November 24, 2011 and are expected to come into force by regulation in 2012. As a result of the Amendments, the BC PPSA will expressly permit the creation of security interests in transferable licences. In BC, this will facilitate the provision of credit on the security of licences provided as collateral.

The Amendments will expand the definition of “licence” under the BC PPSA to include any transferrable grant of rights entitling the holder of such rights to deal with or acquire personal property or provide services. The expanded definition is intended to capture transferable licences generally, including liquor, fishing and forestry licences, whether issued under a regulatory regime or by private contract.

By expanding the definition of “licences”, the Amendments will provide outcomes similar to the 2008 Supreme Court of Canada decision in Saulnier v. Royal Bank of Canada (“Saulnier”), in which a licence to participate in the fishery coupled with a proprietary interest in the fish harvested thereunder was ruled to be a “bundle of rights” sufficient to fit within the extended definitions of “personal property” in the Nova Scotia Personal Property Security Act.

The Personal Property Security Acts (“PPSAs”) of most other Canadian provinces and territories (including Ontario) do not have a definition for the term, “licence”; debtors and creditors in those jurisdictions must rely on the applicability of the factors in Saulnier to their particular circumstances in respect of any licences purported to be provided as collateral. The PPSAs of Saskatchewan, the Northwest Territories and Nunavut have definitions of the term, “licence” that are similar to that in the Amendments.

The Amendments will also provide that a licence provided as collateral may be disposed of, retained or held only in accordance with the terms and conditions of such licence and the terms and conditions applicable by law or contract to such licence. The Amendments will require any secured party who wishes to seize a licence on default to provide notice of such seizure to the relevant minister if the licence was granted pursuant to legislation or, in any other case, to the grantor of the licence; notice of seizure to the debtor will continue to be required, as is the case under the current BC PPSA.

It will be interesting to see if the inclusion of the defined term, “licence” in the PPSAs of BC, the Northwest Territories, Nunavut and Saskatchewan leads other Canadian jurisdictions to enact similar legislation.
 

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“Today I am presenting the essential commitments our Government made on March 22.”

The Honourable Jim Flaherty
Minister of Finance

On June 6, 2011, the Honourable Jim Flaherty, Minister of Finance, tabled the first federal budget of the Conservative majority government. The Budget includes all of the measures that were introduced in the March 22, 2011 budget. The March 22, 2011 budget was not adopted by Parliament before its dissolution on March 26, 2011.

The Budget provides an update of the government’s projected budgetary deficits. The government now projects that the deficit in 2010-11 will be $36.2 billion (as compared to $40.5 projected in the March 22, 2011 budget) and that the deficit in 2011-12 will be $32.3 billion (as compared to $29.6 billion projected in the March 22, 2011 budget). The government now projects that by reducing expenses, a surplus will be achieved in 2014-15, one year earlier than was projected in the March 22, 2011 budget.

The Budget includes a provision in 2011-12 for $2.2 billion in support of a satisfactory agreement between Canada and Quebec on sales tax harmonization. It also provides for the gradual elimination of the per vote allowance paid to political parties by 2015-16.

The Budget reintroduces all of the tax measures announced in the March 22, 2011 budget, and does not introduce any additional tax measures. For a detailed discussion of the March 22, 2011 budget measures, see our Budget Briefing 2011. The Budget provides that all of the measures in the March 22, 2011 budget that were to be effective on the “Budget Date” are to be effective on March 22, 2011.

To access the Budget and related documents, click here.

If you have any questions or require additional analysis of the Budget’s tax measures, please contact any member of our Tax Department.

 

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In Canada, the Nova Scotia Companies Act, the Alberta Business Corporations Act, and the British Columbia Business Corporations Act provide for the formation of unlimited liability corporations (“ULCs”). Although a corporation for Canadian income tax purposes, a ULC may elect to be treated instead as a flow-through entity for U.S. income tax purposes. For this reason, ULCs have been used frequently by U.S. taxpayers for investments in Canada as well as by Canadian taxpayers in U.S. transactions.

As the name suggests, both past (especially under the Alberta statute) and present shareholders of a ULC may become liable for the obligations and liabilities of the ULC: under the Nova Scotia and British Columbia statutes, to the extent of any shortfall in assets versus liabilities upon the winding up the ULC; and under the Alberta statute, jointly and severally with the ULC even before dissolution. There is a risk that a secured lender taking a pledge of ULC shares may inadvertently become (or be legally deemed to have become) a shareholder of the ULC, thereby exposing the lender to liability for the liabilities of the ULC. The more the rights obtained by the lender with respect to the ULC shares resemble rights normally associated with ownership, the more significant the risk.

Accordingly, it is prudent to restrict in the relevant pledge agreement the lender’s rights with respect to management and control of the ULC before demand and realization. Lenders often attempt to accomplish this by including a provision to the effect that any such rights are disclaimed, together with a proviso that the lender may determine, at the appropriate time, the extent to which it actually wishes to exercise the remedies otherwise available to it. While this may be satisfactory in theory, as a practical matter the lender must ensure that it does not, as a matter of fact, obtain (or be deemed to have obtained) a beneficial interest in the ULC share collateral. Besides the obvious (e.g. not becoming or applying to become registered as a shareholder or member of a ULC, not requesting or agreeing to a notation being entered in its favour in the share register of a ULC, and not obtaining, exercising, or attempting to exercise any rights of a shareholder or member of a ULC), this might also include (in the case of a ULC with private company restrictions in its organizational documents) not having the directors of the ULC provide any required share transfer consent in advance.

Incidentally - and, significantly from a secured creditor’s perspective – a ULC would not appear to be a “foreign subsidiary” for purposes of 956 of the U.S. tax code. A US corporate parent should therefore be able to pledge a 100% ownership interest in a Canadian subsidiary which is a ULC without resulting adverse tax consequences.

Please note that the historical cross-border tax arbitrage advantage afforded by ULCs has now been moderated by new tax rules (potentially resulting in higher rates of withholding tax) which came into effect on January 1, 2010. More information on the new rules is provided on our website here and here.

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Secured parties reviewing Ontario Personal Property Security Act (PPSA) searches can now rely upon an appropriate collateral description to limit the scope of a collateral classification to perfect only the collateral described.

As described in an earlier entry on our blog, on August 1, 2007 section 46(3) of the PPSA was inadvertently repealed as part of former Bill 152 which contained a number of amendments to the Act. The repealed section 46(3) provided that a collateral description could limit the scope of a collateral classification in a financing statement to perfect only the collateral described.

Ontario Bill 68 (An Act to promote Ontario as open for business by amending or repealing certain Acts) received Royal Assent on October 25, 2010. Schedule 5 of the legislation provides for the reinstatement of the old section 46(3) as a new section 46(2.1), as follows:

Except with respect to rights to proceeds, where a financing statement or financing change statement sets out a classification of collateral and also contains words that appear to limit the scope of the classification, then, unless otherwise indicated in the financing statement or financing change statement, the secured party may claim a security interest perfected by registration only in the class as limited.

Further, the legislation deems this amendment to have come into force as of August 1, 2007, the date that the original provision was inadvertently removed.

This amendment will restore some certainty regarding the effect of a collateral description in a financing statement. It will also reduce transaction costs where a prospective secured party chooses not to obtain acknowledgements or subordinations due to the limited nature of certain prior registrations.
 

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On March 22, 2010, the Superior Court of Quebec approved a plan of arrangement under the Canada Business Corporations Act (the “CBCA”) that allowed MEGA Brands Inc. to achieve a worldwide restructuring of its business under a corporate statute, rather than a more typical insolvency and restructuring statute like the Companies’ Creditors Arrangement Act (Canada) (the “CCAA”).

The Arrangement

MEGA Brands is a corporation governed by the CBCA, with its head office and senior management in Montreal. The arrangement involved a transaction between MEGA Brands and a number of related corporations and direct and indirect subsidiaries in Canada, the United States, Luxembourg, and Mexico.

The arrangement affected the claims of secured lenders under a credit agreement and two swap agreements as well as the claims of holders of convertible debentures. The arrangement also effected a significant dilution of shareholders, but preserved an equity stake in the continuing company for these shareholders. The Court granted a temporary stay of proceedings against the applicant corporations as well as impleaded parties in the United States, Europe, and Mexico.
Shareholders and lenders voted overwhelmingly in favour of the arrangement.

The Court allowed the company to have recourse to the CBCA because the restructuring involved solvent entities and would result in a solvent entity.

On March 23, 2010, the United States Bankruptcy Court for the District of Delaware granted an order enforcing the arrangement in the United States.

Unique Restructuring

It is the first time an arrangement of this nature has been implemented in Canada.

These orders confirm that the arrangement provision at CBCA section 192 provides an effective mechanism for a company to restructure its debt securities by exchanging them for cash, equity, new debt, or a combination thereof.

Unlike the CCAA, the CBCA allows the arranged entities to remain in control of the restructuring process and does not call for a trustee or court-appointed monitor to oversee the transaction. Thus, a CBCA arrangement may provide a more efficient and flexible alternative for corporations that choose to restructure debt. In addition, the CBCA process is faster and less costly than the CCAA, and there may be a business benefit to not undertaking insolvency proceedings.

For more detailed information on this restructuring, please see this Osler Update.
 

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As reported in Bloomberg Businessweek, on June 5, 2010, the G-20 finance ministers failed to agree on a proposal to impose a global tax on banks, settling instead for a common set of guidelines. G-20 finance ministers and central bank governors said in a statement in Busan, South Korea, that governments will take account of each nation’s “circumstances and options.” The result allows nations such as Canada, China and Brazil, whose banks suffered less during the global financial crisis, to skip introducing a tax. European countries and the U.S. have advocated the levy. This statement by the G-20 finance ministers leaves in place an initiative to seek tighter global standards for capital levels at banks. The Ministers said they now recognized that there are a “range of policy options” open to countries and agreed instead to adopt “principles” that protect taxpayers and reduce the risks of further crises.

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The Ontario government has taken steps to “fix” its inadvertent repeal of former section 46(3) of the Personal Property Security Act (Ontario)(“PPSA”). The repeal occurred on August 1, 2007 as part of former Bill 152 which contained a number of amendments to the PPSA. The repealed section 46(3) provided that a collateral description could limit the scope of a collateral classification in a financing statement to perfect only the collateral described. That section read as follows:

Except with respect to rights to proceeds, where a financing statement or financing change statement sets out a classification of collateral and also contains words that appear to limit the scope of the classification, then, unless otherwise indicated in the financing statement or financing change statement, the secured party may claim a security interest perfected by registration only in the class as limited.

This section was sometimes relied upon by secured lenders when reviewing PPSA search results prior to advancing funds. Lenders could choose not to obtain a subordination of a prior secured party’s security interest, or an acknowledgement of that secured party’s limited collateral, where the scope of that secured party’s PPSA registration was sufficiently limited by a collateral description. This could reduce transaction costs by reducing the number of documents to be obtained from third parties. After this section was repealed in 2007, collateral descriptions could not technically be relied upon to limit the scope of the prior registration.

Schedule 5 of Bill 68 (An Act to promote Ontario as open for business by amending or repealing certain Acts) received first reading on May 17, 2010. It includes an amendment to the PPSA that would add a new section 46(2.1) to reinstate the language excerpted above. Further, the legislation would deem this amendment to have come into force as of August 1, 2007, the date that this provision was inadvertently removed. 

This amendment will restore some certainty regarding the effect of a collateral description in a financing statement. It will also reduce transaction costs where prospective secured parties choose not to obtain acknowledgements or subordinations due to the limited nature of certain prior registrations.

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The Nova Scotia legislature has introduced Bill 33, the Securities Transfer Act (STA). The bill received third reading on May 4th, 2010.

STA legislation in Canada is based on the Uniform Securities Transfer Act ("USTA") - a model act that was developed and endorsed by the USTA Task Force of the Canadian Securities Administrators. The intent behind this legislative initiative is to have substantively uniform statutes across the country governing the holding and transfer of securities and other investment property. The STA affects how security interests in investment property are granted and perfected.

If the Act comes into force in Nova Scotia, then Prince Edward Island will be the only Canadian province without STA legislation.

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Bill 26, the Securities Transfer Act, was recently introduced in the Nunavut Legislative Assembly. As of today, “STA” legislation is in force in every province and territory of Canada, other than Yukon territory, Nova Scotia, Prince Edward Island and Nunavut (where Bill 26 is pending).

STA legislation in Canada is based on the Uniform Securities Transfer Act (“USTA") - a model act that was developed and endorsed by the USTA Task Force of the Canadian Securities Administrators. The intent behind this legislative initiative is to have substantively uniform statutes across the country governing the holding and transfer of securities and other investment property. Just over three years after the first STA legislation came into force in Alberta and Ontario, the objective of uniformity has almost been achieved.

Both the STA and USTA are modeled after Revised Article 8 of the Uniform Commercial Code. The close similarities among STA legislation and Revised Article 8 assist in creating a more consistent cross-border legal framework governing securities transfers.
 

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