dentons.com Doing business in Canada Dentons Canada LLP
Avoiding frostbite Top considerations for doing business in Canada The Canadian economy is dominated by free market activities and private enterprise. As a result, it is relatively easy to commence or expand business activities in Canada. Additionally, in recent years, the federal government has acknowledged the need for, and benefits of, attracting foreign investment into the country. There is no general insistence that foreign businesses operate only on a joint venture basis with Canadian controlled businesses or that they attract Canadian minority investors. For North American investors, entry into Canada is even easier than it is for other foreign investors, pursuant to the North American Free Trade Agreement (NAFTA). One of the primary objectives of the NAFTA is to eventually eliminate all barriers to trade in goods and services between Canada, the US and Mexico. As a result of the implementation of the NAFTA, the Canadian business climate is increasingly more receptive to new investments, and Canadian industry is continuing to be challenged to be more competitive and export-driven. The United Nations Human Development Reports consistently rank Canada among the best countries in the world in terms of overall quality of life. These findings reinforce Canada s position as a premier place to invest, relocate, and commence or acquire a business. Canada continues to be ranked very highly as a place in which to live, work and raise a family. Canadian legislation affecting business conduct may be national, provincial or municipal in origin, depending on the nature and scope of the business activity. This Top 10 list has been prepared to provide a general overview of the principal corporate, tax and other legal considerations that would be of interest to foreign businesses wishing to establish or acquire a business in Canada. As the practice of Dentons Canada is, to a great extent, based in the provinces of British Columbia, Alberta, Ontario and Quebec, most of the material contained in this document focuses on the legislation of these respective provinces, as well as the applicable federal legislation. This material is not meant to be an exhaustive analysis of the law. Persons considering commencing or acquiring a business in Canada should obtain professional advice as it relates to their specific investment or activity. For more information, please visit doingbusinessincanada.com 2 dentons.com
1. Foreign investment There are two key pieces of Canadian federal legislation which may impact foreign investors. Investment Canada Act While the Canadian government supports an open business environment and values foreign investment, it does monitor and sometimes scrutinize foreign investment in Canada. It does this through the Investment Canada Act. When a transaction involving the acquisition of control of a Canadian business is particularly large (based on the size of the target business), or involves a cultural industry, it may be subject to government approval pre-closing. In most cases, a foreign company acquiring a Canadian business is required only to notify the Canadian government of the transaction. Where the transaction exceeds certain monetary thresholds, however, the Act will require the buyer to apply for review and approval by the Minister of Industry (the Minister of Canadian Heritage for cultural business targets). In addition, investments by a foreign company may be subject to a national security review where the investment is seen as injurious to Canada s national security. Competition Act Under Canada s Competition Act, mergers meeting certain monetary and shareholding thresholds are subject to pre-merger notification. In addition, whether or not a merger is notifiable, it may be subject to review by the Commissioner of Competition, who in turn can challenge a proposed merger before the Competition Tribunal if it views the merger as anticompetitive. The Tribunal may prohibit a proposed merger or order full or partial divestiture or dissolution following a consummated merger if it finds that the merger prevents or lessens, or is likely to prevent or lessen, competition substantially in a relevant market. dentons.com 3
2. Formation of Canadian entities A business may be carried on in Canada in various forms. Most commonly, a foreign corporation operating in Canada would use a corporate vehicle, either a Canadian incorporated subsidiary or a branch operation of the foreign corporation. Depending on the nature and scope of the activity, the degree of limited liability required and certain tax and other considerations, the business activity could also be conducted through a sole proprietorship (for an individual), a partnership or a joint venture. It is also possible, in some circumstances, to supply goods and services in Canada through various contractual arrangements, such as distributorship agreements, without actually setting up business operations in Canada. The legal implications of these vehicles vary, and full consideration should be given to these options. 3. Labour and employment In Canada, labour and employment relations are, for the most part, governed by the laws of the province in which an employee works. The term labour relations is used to refer to the union context, while employment relations is a general term covering employment laws and practices which are not specific to trade unions. Federal jurisdiction in the labour and employment field is limited to federal works or undertakings, including interprovincial transportation, telecommunications, broadcasting and banking. All other businesses are provincially regulated. A manufacturing operation, for example, with plants in different provinces may, therefore, find itself subject to the laws of several jurisdictions. Notwithstanding the different jurisdictions, as a general rule, all Canadian jurisdictions are consistent in overall direction. However, the specifics of legislation and the administering agencies vary greatly from province to province. When acquiring a Canadian business, you should be aware of the successor rights provisions of each province s labour relations regulations. These provisions may leave the purchaser bound to a current collective agreement, including the obligation to honour the existing terms and, upon expiry, to negotiate a new agreement. You may also be liable for outstanding employee lawsuits, grievances, labour relations board complaints, human rights inquiries, workers compensation board claims or health and safety orders that could affect the ongoing business. Additionally, most agreements require the purchaser to offer employment on similar terms recognizing the employees service with the vendor (which is an obligation pursuant to the statutory laws of many of the provinces as well). For these reasons, a thorough understanding of the statutory and common law regime in each province, in addition to the specific legal contracts and obligations governing the employment relationships of any given corporation, should be obtained prior to acquiring a business in Canada. 4 dentons.com
4. Immigration restrictions There are restrictions on the employment of foreign nationals in Canada. Subject to limited exceptions, in order for foreign nationals to be able to work in Canada, they must either apply for and receive a work permit or attain permanent resident status by satisfying the requirements for immigrating to Canada. Work is defined in the Immigration and Refugee Protection Act as any 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. An individual need not be paid in Canada (e.g. if remuneration is paid by a foreign entity) for the activity to be considered work. The policy underlying the legislation focuses on the protection of the Canadian labour market, to ensure that any employment opportunities in Canada are available to Canadians first, and thereby prevent any adverse impact on the employment of Canadians by the hiring of foreign workers. While a foreign company may own or control a Canadian business, such ownership or control does not give it the right to staff that business, even in part, with foreign nationals without first obtaining work permits for them. 5. Import/export considerations The duty rate is normally calculated upon the value for duty, which is determined in accordance with the Customs Act. Goods imported into Canada may be subject to both import duties and taxes. In addition, importers must also consider other admissibility requirements when importing into Canada including, but not limited to, product standards, labeling requirements and other relevant regulatory requirements. Goods that are exported from Canada may also be subject to certain export reporting requirements and/or permit requirements. The amount of customs duties levied on the importation of goods into Canada is calculated by reference to their classification and applicable duty rate set out under the List of Tariff Provisions in the Schedule to the Customs Tariff. The duty rate is normally calculated upon the value for duty, which is determined in accordance with the Customs Act. Some duties are levied on a specific basis and not an ad-valorem basis. Canada applies different duty rates (preferential and non-preferential) to the same goods on the basis of their origin and other criteria. The origin of goods is usually determined by reference to where they are manufactured, grown or extracted, or even manufactured. For goods that qualify as originating from a country with which Canada has a trade agreement, the duty preference rules and rates arising from that specific agreement will normally apply. dentons.com 5
6. Tax planning Canada imposes corporate and personal income tax on its residents and non-residents who carry on business in Canada, are employed in Canada or sell property situated in Canada. Canadian resident individuals and corporations are taxable on their income, including capital gains earned anywhere in the world. Non-residents of Canada are generally only taxable on their income from Canadian activities and investments, including gains on the sale of certain types of Canadian investments. Federal tax rates are uniform across the country, with certain reductions and credits intended to encourage the development of business activity and employment in certain industries of the economy, and in certain regions in Canada. Tax incentives are also available to encourage research and development in Canada. It is important to have an understanding of Canada s tax laws and to identify the tax consequences at the outset of the planning process. Tax incentives are also available to encourage research and development in Canada. 7. Financing an acquisition Financing a transaction in Canada typically takes the form of either debt or equity financing. While debt financings can take a variety of forms, the most common sources of such financings are banks and other institutional lenders. Debt financing can also be sourced from parent companies or other shareholders. Generally speaking, there are currently no federal laws of general application governing securities transactions in Canada. Each province and territory has enacted its own securities legislation, and compliance is enforced by a securities commission in each province and territory. The provincial and territorial bodies coordinate regulatory initiatives through the Canadian Securities Administrators (CSA), and most securities legislation applicable to acquisitions is the same across Canada. The CSA, a voluntary umbrella organization, has made progress in pursuing a national system of harmonized securities laws. The CSA has implemented a national passport system in every province and territory in Canada other than Ontario. In Ontario, the CSA allows issuers and registrants to deal with only the regulator in their principal jurisdiction, and exempts such issuers and registrants from certain legal requirements in other provinces and territories. Securities regulation in most provinces and territories has the same broad objectives of protecting the investing public, the integrity of the capital markets and the confidence of investors. This is accomplished through comprehensive sets of rules to ensure equal access to information, to provide for a level playing field for market participants, and to set qualifications and standards of conduct for persons in certain fiduciary and other positions. 6 dentons.com
8. Privacy legislation The Personal Information Protection and Electronic Documents Act (PIPEDA) is the main statute regulating the collection, use and disclosure of personal information in Canada. The legislation attempts to balance the needs of organizations to collect, use and disclose information from and about individuals in Canada, with the obligation to respect the individual s right to control the collection, use and disclosure of information about the individual. The law applies to organizations that engage in the collection, use or disclosure of such information in the course of commercial activity, unless a substantially similar provincial law applies. PIPEDA applies to all organizations in Canada involved in the collection, use or disclosure of personal information in the course of commercial activity, unless provincial privacy legislation exists that is substantially similar to PIPEDA. In addition, PIPEDA applies to foreign organizations that have a real and substantial connection to Canada based on their activities in Canada, including through contracting with Canadian organizations or marketing to Canadian consumers. Anti-Spam Legislation On July 1, 2014, most of Canada s Anti-Spam Legislation (CASL) came into force. CASL governs the sending of commercial electronic messages and the installation of computer programs. The law applies to business-to-business communications as well as businessto-consumer communications. Global organizations may already be aware of and compliant with the US Controlling the Assault of Non- Solicited Pornography And Marketing Act of 2003 ( CAN-SPAM ). However, CASL differs in important respects. These differences are important in designing a compliance program. CASL has extraterritorial effect. If an organization sends email, text messages or direct messages over social media to electronic addresses in Canada or from Canada to anywhere in the world, CASL applies to the organization. dentons.com 7
9. Environmental liability Jurisdiction over the environment is shared between provincial and federal authorities. As a general rule, provincial authorities will regulate environmental matters for most purposes. Federal authorities do, however, have jurisdiction over a number of specific areas including federal lands, Aboriginal peoples, fisheries, shipping and navigation, aviation, railways, toxic substances and interprovincial and international matters, including import and export. It is common for businesses operating in Canada to require both provincial and federal approvals. When doing business in Canada, it is important to keep in mind that environmental laws are not uniform among the provinces. Attempts have been made to harmonize certain standards and criteria; however, there remain many differences with which companies operating in more than one province need to be familiar. Directors and officers can be liable for the environmental consequences of the actions of their corporations in Canada, particularly in relation to the remediation of contaminated land. Directors and officers insurance policies are available, but standard policies will routinely exclude coverage for environmental liabilities. Certain types of large projects may trigger the need for an Environmental Assessment before a permit can be obtained. Environmental Assessments are comprehensive studies of environmental effects that involve scientific and engineering consultation, as well as public participation. Environmental Assessments may be required at either or both the federal and provincial levels and can be harmonized in some, but not all, cases. Many large projects will also require legally mandated consultation with Aboriginal peoples. 8 dentons.com
10. Corporate insolvency The primary federal legislation governing corporate insolvency in Canada is the Bankruptcy and Insolvency Act (BIA) and the Companies Creditors Arrangements Act (CCAA). Because Canada is a federation though, both federal and provincial statutes may be relevant to corporate insolvencies in Canada. Under the Constitution Act, provincial governments have jurisdiction over property and civil rights within a province. As such, they have enacted statutes dealing with fraudulent conveyances and preferences, and the perfection of security interests in property. All of these statutes impact upon bankruptcy and insolvency in Canada, which is federally regulated. Notwithstanding this jurisdiction, provincial statutes often complement federal insolvency legislation. For instance, corporate statutes of the provinces provide for the dissolution or winding up of the affairs of com panies having provincial objects, as well as the distribution of corporate assets. Yet, these provisions are not available to corporations in circumstances of insolvency. If a corporation is insolvent, the proper mechanism for the distribution of its assets is through federal insolvency legislation. Whenever there is conflict between federal and provincial enactments, federal legislation will be paramount. There are three main types of insolvency proceedings in Canada: proceedings under the CCAA; the appoint ment of a receiver under provincial law and/or under the BIA; and proceedings under the BIA. Additional information relating to the establishment, acquisition or conduct of a business in Canada may be obtained from our professionals at any of the offices of Dentons Canada. Key contacts Chris Pinnington Canada Chief Executive Officer Toronto D +1 416 863 4409 chris.pinnington@dentons.com JoAnne Wakeford National Director, Marketing and Business Development Calgary D +1 403 268 6813 joanne.wakeford@dentons.com dentons.com 9
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