Avoiding Frostbite: Top Considerations for Doing Business in Canada

transcript

Avoiding FrostbiteTop Considerations for Doing Business in Canada

Presented by: David P. Little, Partner, FMCdavid.little@fmc‐law.com(613) 783.9639www.fmc‐law.comhttp://www.doingbusinessincanada.com

Ross H. Manella, Partner, Hinshawrmanella@hinshawlaw.com(954) 375.1138

Daniel A. Zabludowski, Partner, Hinshawdanz@hinshawlaw.com(305) 358.7747

www.hinshawlaw.com

Overview

• Canadian Economic Update– Key indicators– Trade with Florida

• Top Considerations for Cross Border Business– What constitutes “doing business in Canada?”– Immigration– Labour & Employment– Foreign Investment – Tax– Securities and Corporate– Litigating in Canada– Doing Business in Quebec

Economic Update – Key Indicators

• Population: CDA – 34M; Florida 19M

• Change in real GDP (2011): CDA ‐ + 2.5%; US ‐ + 2.9%

• Forecast change in real GDP (2012): CDA ‐ + 2.1%; US ‐ + 2.2%

• Change in residential construction (2011): CDA ‐ + 2.1%; US ‐ ‐5.3%

• Forecast change in residential construction (2012): CDA ‐ ‐ 2.0%; US ‐ +14.6%

Economic Update – Key Indicators

• Unemployment rate (Mar/Apr 2012)(1): CDA ‐ 7.2%; US ‐ 8.1%• Budget deficit (2011): CDA ‐ Cdn$33.4 billion(2); US ‐ US$1.3 trillion(3)

• Forecast budget deficit (2012): CDA ‐ Cdn$16 billion(4); US ‐US$1.1 trillion(3)

• National Debt (May 2012): CDA – $583B; US – US$14.7T• Exchange rate (May 4, 2012): Cdn$1.00 = US$1.0046(5)

Sources: (1) Statistics Canada; Census Bureau(2) Finance Canada(3) Congressional Budget Office(4) Toronto Dominion Bank(5) Bank of Canada

Florida – Not Just for Snowbirds

• $597B in bilateral trade between Canada and U.S. (2011)

• Close to $8B in products movement between Canada and Florida (does not include close to $3.5B in tourism) (2011)

• Close to 500,000 jobs in Florida depend on Canada – U.S. trade

• Canadian imports from Florida have grown by over 50% in the last decade – Canada ranks 3rd only to Switzerland and Brazil as Florida’s largest market for goods made in the state

• Florida’s largest foreign market for agriculture is Canada –about 25% ‐ larger than Florida’s next 4 foreign markets for agriculture combined

Canada's Economic Driver – Natural Resources

• Canada is largest foreign energy supplier to U.S.

• Natural gas, electricity and oil – about 13% of Canada’s exports to Florida in this area are in the energy sector

• Challenges to this ongoing relationship

• Keystone XL pipeline hold‐up

• Opening of energy trade with Asian markets

Exports to Canada from Florida

• Fruits and vegetables

• IT products/electronic components

• Medical devices and equipment

• Pharmaceuticals

• Telecommunications equipment

• Fertilizers

• Aerospace products and parts

Provincial Concentrationof Direct Trade with Florida

23.12.17East

15.829.031West and North

24.118.623Quebec

37.050.339Ontario

% of Exports to Florida% of Imports from Florida

% of Populationof Canada

Top Considerations for Doing Business in Canada• What Constitutes Doing Business in Canada?

• Immigration

• Labor & Employment Laws

• Foreign Investment Review

• Income Tax

• Securities and Regulatory Overview

• Litigating in Canada

• Doing Business in Quebec

What Constitutes “Doing Business in Canada?”

• Act of doing business with Canada covers the broad range of simply exporting goods to Canada from outside the country to maintaining a “permanent establishment” in Canada, and all points in between

• Forms of business organizations are very similar to what you see in the United States – corporations, partnerships, limited partnerships, joint ventures, etc. although Canadian law is generally more protective of minority interests compared to the United States

• Subsidiary operations• Branch operations• Selling into Canada• Really is an income tax exercise – i.e., whether the operation will attract income tax liability within Canada

• Treaty Protection – NAFTA• Canadian import controls a factor

Immigration

• Subject to very limited exceptions, in order to work in Canada, citizens of another country must either obtain permanent resident status or obtain a “work permit”

• Work permits require formal application process and, if issued cover from a few months of service to 3 years depending on circumstances

• Exceptions to work permit requirements for Americans under NAFTA are:– business visitors– intra‐company transferees– entrepreneurs– professionals

• While a US‐based company may own or control a Canadian‐based business, this does not give it the right to staff the Canadian business with non‐Canadians

Employment Law in Canada• No employment at will• Terminated employees are entitled to notice of termination or pay in lieu thereof• Most employers subject to provincial employment standards legislation (only about 10% of employees are under Federal jurisdiction ie. banks, railways, airline, federal government)

– Employers have to comply with employment standards legislation in every Province in which they operate

• Provincial employment standards legislation establishes minimum termination entitlements (1‐8 weeks)

• Additional severance obligations may apply for longer term employees in Ontario• Common law notice is in addition to employment standards minimums

– May be as much as 1 month per year of employment (no more than 24 months); determined with reference to employee’s position, age, length of service, etc.

– Can contract out of common law notice but can’t contract out of employment standards

• Unions common in many industries

Employment Context• In appropriate cases, the corporate veil may be pierced and the individual or entity behind the corporate employer may become personally liable to the employee – important for U.S.‐based parents

• The employment standards legislation in several provinces include “common employer” provisions, for example s. 4(1) of the Ontario Employment Standards Act states:

4. (1) Subsection (2) applies if,(a) associated or related activities or businesses are or were carried on by or through an employer and one or more other persons; and(b) the intent or effect of their doing so is or has been to directly or indirectly defeat the intent and purpose of this Act. 2000, c. 41, s. 4 (1).

(2) The employer and the other person or persons described in subsection (1) shall all be treated as one employer for the purposes of this Act. 2000, c. 41, s. 4 (2).

• When dealing with common employer provisions, the court will examine the relationship and may lift the corporate veil for purposes of determining outstanding wages and other payments (but typically not severance), for example, but this varies from province to province

Foreign Investment Review

• Governing statute is the Investment Canada Act (ICA)

• Establishment of a new business in Canada, regardless of size, normally requires no more than the filing of a short notice by the foreign investor

• The notice is simply for information purposes

• Two exceptions are where the new business is in a culturally‐sensitive sector, such as publishing, or the new business triggers a national security review

• In a direct acquisition of control of an established Canadian business, through a purchase of assets or voting interests of a corporation, partnership, trust or joint venture, the foreign acquirer may be required either to file a notice or an application for review and approval, depending upon the circumstances

• Neither obligation will arise if the transaction falls within one of the general exceptions under the ICA (which general exceptions are, in turn, subject to specific exceptions for certain types of business)

• If none of the exceptions apply, the transaction will be subjectto pre‐closing review if the Canadian business has assets with a book value in excess of:

– Cdn$312 million (in 2011, with the threshold adjusted annually) if the investor is from a country that is a member of the World Trade Organization

– Cdn$5 million otherwise

• As a result of recent amendments to the ICA, the review threshold will increase upon the promulgation of new regulations to: Cdn$600 million for that year and the following year; Cdn$800 million for the next two years; subsequently Cdn$1 billion indexed to inflation

• Outside of the cultural industry, there have been only two transactions that have been rejected under the ICA:

– In 2008, the proposed acquisition of the geospatial business of MacDonald, Dettwiler and Associates Ltd. by the American company, Alliant Techsystems

– In 2010, the proposed acquisition of Potash Corporation of Saskatchewan by the Australian company, BHP Billiton

• The rejections do not seem to represent a sea‐change in Canada’s openness to foreign investment

Income Tax

• Non‐residents of Canada are generally only taxable on their income from Canadian activities and investments

• Canadian tax imposed at both the federal and provincial levels ‐ combined federal and provincial tax rates for corporations range between 28% and 34% depending on the province – although Canadian income tax rates have been steadily decreasing over the past number of years, no further downward change is anticipated in Ontario rates for now. Combined individual tax rates range from 39% to 48.35% depending on the province

• Canada also imposes withholding tax on non‐residents who receive certain distributions including dividends , interest, rent and management fees

• Canada‐U.S. Tax Treaty provides relief in many instances

Income Tax

• A subsidiary incorporated in Canada will be considered to be a Canadian resident for income tax purposes and will be subject to income tax on its income earned globally from any source, subject to a credit for foreign taxes paid on non‐Canadian income

• Recent federal budget changes have caused concern for any US company that has a Canadian subsidiary. Thin capitalization rules will be significantly tightened, making it more difficult to capitalize Canadian subsidiaries with debt. Also, measures will be implemented designed to restrict the ability of Canadian subsidiaries from acquiring interests in foreign subsidiaries

• The fact that a foreign business has a Canadian subsidiary carrying on business in Canada will not generally subject the foreign entity to Canadian income tax

Regulatory Landscape – Securities • Any issuance of shares, debt securities or other securities must comply with Canadian securities laws

• Presently each province and territory has its own securities regulatory regime ‐provinces have historically regulated the securities industry based on provinces’constitutional jurisdiction over “property and civil rights”

• Federal government has proposed to enact a national securities regime proposed national act would create a single regulator under the federal umbrella

• Currently operate using a passport system developed in cooperation among the provinces – filing/approval in one jurisdiction will automatically apply in others

• Recent movement towards having a national securities regulator determined unconstitutional by the Supreme Court of Canada in December 2011 – lack of national regulator perceived abroad as hindrance to foreign investment

Litigating in Canada

1. Canada or the United States? – The Canadian Court Structure– Civil Litigation in the Canadian Context– Acquiring Evidence in Canada

2. Keeping the U.S. Parent out of the fight– Piercing the Corporate Veil

3. Enforcing U.S. Judgments in Canada

4. International Arbitration

Canadian Court Structure

• 10 provinces, 3 territories

• Constitutional authority for the judicial system is divided between the federal and provincial governments

• Provincial level of courts have jurisdiction over the majority of disputes

• Provincial Superior Court Judges appointed by federal government

• Criminal Code is federal, administered by courts at the provincial level

Provincial Level• Most litigation is dealt with at the provincial level

• Judges are appointed by the federal government

• Variety of court structures in each province but all have a trial level and an appellate level

Canadian Court StructureFederal Level

• Federal Court: defined jurisdiction in certain areas such as intellectual property, maritime law and federal‐provincial disputes

• Tax Court: hears federal tax cases

• Federal Court of Appeal: reviews decisions of Federal Court, Tax Court and certain tribunals (e.g. National Energy Board)

• Supreme Court of Canada: hears appeals for appellate courts of all provinces and from the Federal Court of Appeal. Ordinarily, parties must apply for leave to appeal except in certain criminal cases – “national importance” test

Quebec Legal System• All provinces except Quebec are common law jurisdictions

• The foundation of Quebec's legal system is the Civil Code of Quebec which was initially based on and inspired by the Napoleonic Code of 1804

Administrative Tribunals

• Provincial tribunals include:– Securities– Financial Services/Pensions– Labour and Human Rights– Alcohol and Gaming– Energy and Environmental

• Federal tribunals include:– Energy– Immigration and Refugee– Labour and Human Rights– Communications– Transportation

Civil Trials

• Most civil cases in Canada are tried by a judge without a jury

• Jury Notices may be served but are routinely struck

• No codification of evidentiary rules (based on Judge made Common Law) – no equivalent to US Federal Rules of Evidence

• Trials conducted in a manner similar to the U.S.

Damages

Damages:

• Punitive damages: – Canadian courts are traditionally cautious and conservative– Most punitive damage awards fall below $100,000 (highest award is $1 million)

– Punitive damage awards are virtually unheard of in breach of contract cases

Loser Pays System:

• Costs regime varies from jurisdiction to jurisdiction• Costs = legal fees and disbursements• In Ontario, costs are payable on either of two scales

– Partial Indemnity: 30% ‐ 60% of actual costs– Substantial Indemnity: 75%‐85% of actual costs

• Offers to settle which are not accepted can have costs consequences for plaintiffs and defendants (increases the scale of costs)

• Unproven allegations of fraud usually attract substantial indemnity costs

Choice of Forum: Canada v. U.S.

• Determination of forum is a matter within the discretion of the court (subject to a contractual forum clause)

• Onus on the party challenging jurisdiction• Factors considered

– Where did the alleged tortious acts occur/where was the contractsigned

– Location of witnesses– Location of evidence– Jurisdiction in which the factual issues arose– Residence of parties/place of business– Any loss of juridical advantage to the plaintiff(s) (e.g. limitation

periods)

Enforcement of U.S. Judgments • As a general rule, Canadian courts will enforce foreign judgments,

including non‐monetary awards, without requiring the merits of the case to be re‐litigated

• To be enforceable:1. The foreign court must have had jurisdiction based on a “real and substantial

connection” to the jurisdiction in which the judgment was rendered• Defendant attorned to the foreign court

• Defendant ordinarily resident or carries on business in the foreign jurisdiction

• Van Breda v. Village Resorts Ltd. (Ontario): Jurisdiction may be warranted on grounds of fairness, even though the real and substantial test is not satisfied (a.k.a. “forum of necessity” doctrine)

2. The decision must be final (although may be appealable)3. The legal procedure followed must be just and fair

Doing Business in Quebec

• Common Law vs. Civil Law– The Civil Code of Quebec determines contractual obligations unless

the parties modify them– Common Law awards damages for breach of contract and does not

hold parties to their contractual obligations– Civil Law provides mechanisms for judicial enforcement of

performance obligations– Civil Law provides for a duty to act in good faith even at the pre‐

contractual stage whereas there is no such requirement under Common Law

– There seems to be a converging of the common law and the civil law in order to facilitate cross‐border transactions

• French Language Requirements– In Quebec businesses are required to adopt a French trade name– In Quebec consumer contracts, i.e., Smartphone contract, must be

written in French in the absence of an express agreement to the contrary

– Commercial contracts pre‐determined by one party and contracts with standard clauses must be written in French in the absence of an express agreement to the contrary

– If the consumer contract is only written in English and absent an express agreement to the contrary, the contract may be unenforceable

• Employment Law Differences– Absent a serious fault or just cause for dismissal, minimum notice or

pay in lieu of notice is required for every terminated employee depending on their length of service: • 3 months to 1 year – 1 week notice

• 1 to 5 years – 2 weeks notice

• 5 to 10 years – 4 weeks notice

• 10+ years – 8 weeks notice

– Quebec Labour Standards allow for administrative complaints where an employee can specifically seek reinstatement

– A stipulation of non‐compete may not be enforceable where the employee is terminated without just and sufficient cause

• Security Interests in Personal Property– Canada’s rules with respect to security granted by debtors against personal

property are similar to the U.S. Uniform Commercial Code and are referred to as Personal Property Security Acts (PPSA) regulated on a province by province basis (other than Quebec)

– While Quebec does not use PPSAs, the system is substantively similar– Quebec requires security to be taken over “movable” or personal property by

way of an “hypothec”– Security by way of an hypothec is perfected by “publishing” (ie: filing) a notice

at the Personal and Movable Real Rights Registry Office– All hypothecs must be “published” or registered in order for the secured

party’s interests to be enforceable against third parties– Quebec, like the rest of Canada uses the “first to perfect” rule to determine

the priority of security interests– Substantially the same rights and remedies are available to creditors in Quebec

About FMC

• Offices in Montréal, Ottawa, Toronto, Edmonton, Calgary and Vancouver

• Over 60 areas of expertise, including Business Immigration, Competition | Antitrust | Foreign Investment Review, Construction | Infrastructure, Corporate | Commercial, Cross‐Border, Employment | Labour, Energy, Entertainment | Sports | Media, Financial Services, Litigation & Dispute Resolution, Mergers & Acquisitions, Privacy, Real Estate, Securities | Corporate Finance, Tax, Technology, and Transportation

• More than 500 lawyers across Canada• For more information, please visit our website at www.fmc‐law.com

About Hinshaw

• Full‐service national law firm with an emphasis in litigation, corporate and business law, environmental, labor and employment law, professional liability defense, and wealth preservation and taxation matters

• Provides coordinated legal services across the United States, aswell as regionally and locally

• Approximately 500 attorneys in 24 offices located in Arizona, California, Florida, Illinois, Indiana, Massachusetts, Minnesota, Missouri, New York, Oregon, Rhode Island and Wisconsin

• Industries include construction, financial services, health care, insurance, legal, manufacturing, real estate, retail and transportation

The preceding presentation contains examples of the kinds of issues companies dealing with doing business in Canada could face. If you are faced with one of these issues, please retain professional assistance as each situation is unique.

Questions?David P. Little, Partner, FMCdavid.little@fmc‐law.com(613) 783.9639www.fmc‐law.comhttp://www.doingbusinessincanada.com

Thank You

Ross H. Manella, Partner, Hinshawrmanella@hinshawlaw.com(954) 375.1138

Daniel A. Zabludowski, Partner, Hinshawdanz@hinshawlaw.com(305) 358.7747

www.hinshawlaw.com

Avoiding Frostbite: Top Considerations for Doing Business in Canada

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