Doing Business In Quebec 2012 - Corporate and Company Law

A. INTRODUCTION

Except where otherwise noted, this paper is current as of August 29, 2012 and provides preliminary information on Canadian and Québec legal matters to assist you in establishing a business in Québec and provides general guidance only. This paper is a general guide and not an exhaustive analysis of provisions of Canadian or Québec law. We recommend that you contact a corporate/commercial lawyer with Davis LLP's Montréal office for specific advice before proceeding with your investment in Canada. Davis LLP has substantial presence and capabilities to help you successfully launch your business transaction 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 Québec and a common law system in the rest of the country.

The Québec civil law system relies on the provisions found in the Civil Code of Québec ("CCQ") for private law matters. Québec courts are also inspired by the rule of precedent of the common law tradition when rendering decisions implicating private legal relationships, such as obligations and property. 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-a-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 Québec. Each of Canada's 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 legislature composed of 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 an 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 rarely used.

Québec

Québec, Canada's largest (1,667,926 km²) and second most populous province, offers a unique business experience for investors due to its abundance of natural resources and exceptional quality of life. Montréal, Québec's largest city, located near other major urban centres, such as New York, Boston and Toronto, constitutes an interesting strategic location for potential investors.

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 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 Canada and in Québec 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 three 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 Québec

In order to incorporate a corporation in Québec under the Business Corporations Act (Québec) (the "QBCA"), 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, the proposed name must be approved by the Enterprise Registrar (Québec). This name must comply, in particular, with the Charter of the French Language (the "French Charter"). According to the French Charter, a corporation must have a French version of its corporate name;

(ii) as provided by the Act Respecting the Legal Publicity of Enterprises (the "Publicity Act"), the Enterprise Registrar can reserve a name for a period of 90 days;

(iii) along with the articles of incorporation, a notice establishing the head office and the list of directors must be filed. However, filing the initial declaration for a legal person (Form RE-200-T) can substitute the obligation concerning the filing of these two notices. Unless a designating number has been requested as corporate name, a declaration stating that reasonable means have been taken to ensure that the name chosen is in compliance with the law must also be filed;

(iv) a corporation in Québec may be constituted by one or more founders. Any individual who is qualified to be a director or even a corporation may be the founder(s) of a new corporation. A Québec corporation may have an unlimited number of directors and officers;

(v) filing fees of approximately $308 (or $462 fee with priority service), legal fees and other disbursements must be paid.

A company incorporated in Québec is required to have its head office and a records office in Québec at the location specified in its articles. Davis LLP's Montreal office often acts as power of attorney and records office of corporations it incorporates.

In Québec there are no residency requirements for the corporation's directors. This can make Québec an attractive jurisdiction in which to incorporate. Moreover, according to the Ontario Bar Association "the QBCA represents the most recent and innovative contribution to profit corporate legislation in the country". If a corporation incorporated in Québec decides to carry on business activities in other provinces or territories, it must register extra-provincially (extra-territorially) in each of those other provinces or territories and must obtain approval for the use of its name from each such jurisdiction.

(b) Incorporation of a Federal Corporation

An investor may choose instead to incorporate a federal company under the Canada Business Corporations Act (the "CBCA"). The requirements for incorporation of a federal CBCA corporation are:

(i) selection of a name through a federal NUANS search report and approval by Canada Corporations of the requested name;

(ii) filing of articles of incorporation, a Notice of Directors and a Notice of Registered Office (a federal corporation may have an unlimited number of directors); and

(iii) filing fees of approximately $350 plus legal fees and disbursements or online filing fees of $200 plus legal fees and disbursements must be paid. A federal CBCA corporation carrying business activities in Québec must also register in Québec (registration fees of $308 must be paid). Additional legal fees apply to incorporate a federal corporation.

Under the CBCA, 25% of directors of the federal corporation must be resident Canadians (or Canadian permanent residents), except when there are fewer than four directors, in which case at least one must be a resident Canadian.

A federal corporation may carry on business in Québec (or other provinces), provided it extra-provincially registers in Québec (or such other province).

A non-Québec company carrying on business and which does not have a place of business in Québec must appoint an attorney to whom the company's notices and legal documents may be delivered or served. The attorney may be a company incorporated in Québec or an individual who resides in Québec.

(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) 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 may be desirable to incorporate federally so that the corporation will be entitled to carry on business in every province under the same name;

(ii) the corporate name of a federal corporation will be accepted by the Québec Registrar of enterprises (and all other provincial and territorial registrars in Canada) for the conduct of business. By comparison, a Québec corporation's name may not be accepted in another province or territory if there is an existing conflict or perceived conflict between its name and that of an existing corporation in that other jurisdiction;

(iii) a federal corporation must comply not only with the CBCA, but also with the corporate requirements of each province in which it conducts business;

(iv) as identified above, there are no residency requirements for directors of Québec corporations, unlike federal corporations;

(v) the by-laws of a corporation generally deal with requirements relating to meetings and to notices of meetings. Most jurisdictions (including Québec and federal) state that, unless the articles or the by-laws otherwise provide, the directors may meet anywhere;

(vi) shareholders' meetings of a federal corporation must be held somewhere in Canada unless all shareholders agree otherwise. Under the QBCA, a meeting of shareholders of a Québec corporation must take place in Québec (as provided in the corporation's by-laws or, in the absence of such a provision, at the place within Québec determined by the board of directors) unless another location, outside of Québec, is provided for in the articles or, in the absence of such a provision, if all shareholders entitled to vote at the meeting agree that the meeting is to be held outside Québec. In lieu of holding a physical meeting of the shareholders, a consent resolution of all shareholders is a possible substitute for both federal corporations and Québec corporations;

(vii) requirements as to financial disclosure for public corporations are very similar in Québec and federally. Financial information on a private or non-reporting corporation is usually available to the directors, the shareholders and their personal representatives, but not to the general public. The board of a Canadian federal corporation or a Québec corporation must approve the corporation's financial statements annually and present them to the shareholders; and

(viii) generally there is no requirement to file a Canadian corporation's or Québec corporation's financial statements with a government body, except in the case of 'public' corporations. Federal 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 Québec corporations, additional financial information must be disclosed to the public. These disclosure requirements are governed by separate Québec and federal securities legislation. In this regard, the Québec government enacted the Securities Act which imposes specific disclosure requirements that must be respected by public corporations.

(d) "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 Québec) must register in Québec no later than 60 days after the date on which it started carrying on business in Québec. In order to become registered in Québec, a foreign corporation must:

(i) declare a name that complies with specific conditions set out in the Publicity Act, for example, to insure compliance with the French Charter;

(ii) file a registration declaration before the Enterprise Registrar (Form RE-00-T), that includes, if applicable:

A. the foreign corporation's name and any other name used by the corporation in Québec and by which the corporation is identified in carrying on an activity. A statement indicating the foreign corporation's juridical form and domicile;

B. the names and domiciles of the three shareholders controlling the greatest number of votes, in order of importance, and identity of the shareholder holding an absolute majority (more than 50% of votes);

C. a statement as to the existence or not of a unanimous shareholder agreement, entered in accordance with the laws of a Canadian jurisdiction, that restricts the powers of the directors or withdraws all powers from the directors;

D. the foreign corporation's elected domicile and the name of the person mandated to receive documents for the purposes of the Publicity Act;

E. the title of and reference to the statute under which the foreign corporation was constituted, as well as the place and date of such constitution;

F. the name and domiciles of the directors and the positions they hold and the date of entry into office and the date of cessation of office. The name and domiciles of certain officers and the name and address of the foreign corporation's attorney;

G. a statement indicating the foreign corporation's two main activities;

H. the addresses of the corporation's establishments in Québec and the number of employees whose workplace is in Québec; and

I. The expected date on which the corporation expects to cease to exist.

(iii) pay the prescribed fees of $308 to the Minister of Revenue of Québec.

As mentioned above, a foreign corporation must either have a place of business in Québec or must ensure the continuing appointment of an attorney for service in Québec. The attorney for service must be a Québec resident or a Québec corporation. Davis LLP can act as attorney for service, if requested.

2. Unlimited Liability Companies

Businesses coming to Canada from the United State have, in many instances, used unlimited liability companies (ULCs) as a vehicle for their activities in Canada because of historical favourable treatment afforded to ULCs as 'flow-through' entities under US tax law. An unlimited liability company differs from a limited corporation because shareholders retain some liability for obligations of the company. Recent changes to the Canada-United States Income Tax Convention have, however, eliminated in many cases the tax benefits associated with such entities and give rise to adverse tax consequences. British Columbia, Alberta and Nova Scotia have legislation which permits the formation of ULCs. There are no federal or Québec equivalents. Tax advice should be sought before adopting the use of a ULC for investment in Canada.

3. 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. Under the CCQ there are three types of contractual partnerships: general partnerships, limited partnerships and undeclared partnerships.

The CCQ contains rules of public order (mandatory provisions) that apply to contractual partnerships. For example, parties in a general partnership are not allowed to include a clause in their partnership contract whereby a partner is excluded from participating in the profits of the partnership or from participating in collective decisions.

A partnership formed in Québec may, as a rule, carry on business only in Québec. 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 CCQ requires general partnerships to register by providing a registration declaration as prescribed by the Publicity Act, failing that, the general partnership is deemed to be an undeclared partnership. The Enterprise Registrar has authority to refuse to register a name if the name does not comply with certain provisions under the Publicity Act. For example, in cases where the name is not in conformity with the French Charter or where the name contains an expression which the law reserves for another person or that the registrant is prohibited from using.

(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.

As with general partnerships, the limited partnership must register its business name and must comply with the registration requirements set out in the Publicity Act.

(c) Limited Liability Partnerships

Under a limited liability partnership, individual partners retain liability for their own acts and omissions and there is no general partner, as there is in a limited partnership. In Québec, limited liability partnerships are often formed by members of a profession (accountants, lawyers, etc.). These partnerships are bound by certain rules found in the CCQ (mainly those applicable to general partnerships) and the Professional Code.

4. 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.

5. 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 co-venturers' 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.

(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.

6. 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 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 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 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 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 the foreign investment notification or review requirements of the Investment Canada Act (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 Québec and many mid-sized, small and foreign banks are represented in Montréal. 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 land registry systems for purposes of recording Canadian security and real property interests granted by borrowers. To this end, the province of Québec has established the Registre Foncier (Québec land register) and the Registre des droits personnels et réels mobiliers (Register of Personal and Movable Real Rights), also known as RPMRR.

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 Québec) 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. Québec's securities regulator, l'Autorité des MarchésFinanciers ("AMF"), was established under the Act Respecting l'Autorité des MarchésFinanciers in 2004. AMF is mainly responsible for supervising the activities connected with the distribution of financial products and services, providing assistance to consumers, ensuring that certain entities of the financial sector comply with the solvency standards applicable to them, and seeing to the implementation of protection and compensation programs for consumers.

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.

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 (iii) 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) the effect of the investment on the level and nature of economic activity;

(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 non- Canadian 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.

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 Québec (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 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 the United States-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 non-resident 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 March 29, 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.

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 - Income Tax

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 top combined federal-Québec corporate income tax rate for 2012 is 26.90%.

Lower rates will apply to Canadian Controlled Private Corporations (i.e. corporations not controlled by non-residents, public companies or a combination). In addition, Québec offers many tax incentives, for example, those found in the fields of research and experimental development, exploration expenses of certain natural resources, multimedia production and science development.

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. The Québec Taxation Act defines the "establishment of a taxpayer" as a fixed place where the taxpayer carries on the taxpayer's business or, if there is no such place, the taxpayer's principal place of business (this definition includes an office, a mine, a branch, an oil or gas well, a farm, a factory, a timberland, a workshop or a warehouse).

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:

(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: Nova Scotia, New Brunswick and Newfoundland, Labrador, Ontario and British Columbia. The harmonized sales tax (HST) in Ontario is 13% and in British Columbia it is 12%. Québec sales tax (QST) is calculated at a rate of 9.5% on the sale price plus the goods and services tax (GST - calculated at a rate of 5% on the sale price. Revenu Québec is responsible for, among other things, receiving and processing applications for GST/HST registration of all individuals carrying on a commercial activity in the province of Québec.

I. 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 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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Canada: Doing Business In Quebec 2012