Canada: Corporate Digest - July 2004

Last Updated: August 13 2004
Article by Rodney Seyffert


  • Competition Bureau Issues Draft of Revised Merger Enforcement Guidelines - Originally published in the M&A UPDATE-May 2004
  • Communications to Plan Members - Originally published in the PENSIONS BULLETIN-VOL.1, NO.2
  • Supreme Court Has Ruled on Canola Gene Patent - Originally published in the PHARMACAPSULES-SPECIAL REPORT
  • Anti-Terrorism Laws Regulating Food and Drugs Come into Force in Canada and the United States - Originally published in PHARMACAPSULES-VOL.3, NO.9
  • Manufacturing and Processing Credits for Farmers - Originally published in TAXATION LAW BULLETIN-VOL. 2, NO.7
  • Hold Periods for Private Placements and IPOs Shortened and Simplified: Replacement of Multilateral Instrument 45-102 - Resale of Securities - Originally published in the SECURITIES LAW UPDATE- APRIL 2004
  • Canada Creates E-Authentication Principles - E.NEWS@GOWLINGS.COM-VOL.2, NO.7
  • Whistleblower Legislation introduced - GOVERNMENT BRIEFING-VOL 10, NO2
  • Who Do You Know? Who Should You Know? - INKSTER REPORT- WINTER 2004
  • "Deleterious Substance" Conviction Under Federal Fisheries Act Requires Different Proof than "Impairing Water" Offfence Under Ontario Water Resources Act, Ontario Court of Appeal Rules - ENVIRONMENTAL BULLETIN- VOL.1, NO.5

Competition Bureau Issues Draft Of Revised Merger Enforcement Guidelines

The Competition Bureau (the "Bureau") recently released for public comment a revised version of its Merger Enforcement Guidelines ("MEGs"), which explains how the Bureau analyses proposed mergers under the Competition Act. The draft revised MEGs amend the current MEGs with respect to the following areas: the definition of merger, market definition, market share and concentration, anti-competitive effects, countervailing buyer power and efficiencies.

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Communications To Plan Member

The importance of communications to members of a pension plan was recently highlighted by the decision of the Ontario Superior Court of Justice in Hembruff et al. v. Ontario Municipal Employees Retirement Board.

The Decision

The plaintiffs in this case were Toronto police officers who were members of the Ontario Municipal Employees Retirement System ("OMERS"), all of whom elected to retire at various times in 1998. Upon retirement, each of the plaintiffs elected in accordance with the available portability options to transfer the commuted value of his defined benefit pension to a locked-in account outside of the Plan.

Prior to 1998, OMERS was faced with an increasing surplus in its pension fund. Throughout 1998 and early 1999, OMERS considered various alternatives to the use of surplus, including contribution holidays and benefit enhancements. The enhancements would have increased the commuted value of the benefits of the plaintiffs, if they chose to continue employment and keep their money in the plan. In May 1999 OMERS finally approved the benefit enhancements, which amendments were made effective as of January 1, 1999.

The court analyzed in detail the particular circumstances of each plaintiff and the internal debate within OMERS during 1998 concerning surplus management and the introduction of benefit enhancements. OMERS did not finally recommend the benefit enhancements in question to the Ontario government until November 1998. The enhancements were not guaranteed until this recommendation was adopted by the Ontario government through amendments to the plan in May 1999. OMERS issued a member newsletter in November 1998, identifying the potential benefit improvements.

The Court determined that as time passed in 1998, the likelihood that plan benefits would be enhanced increased significantly. Indeed, the likelihood increased so significantly that the court held that OMERS had a positive duty to inform members in advance of potential changes to the Plan in order that members be able to make informed financial decisions. The Court determined that this duty arose before November 1998, the date on which OMERS recommended the benefit enhancements in question to the Ontario government.

In coming to its decision, the Court determined that OMERS was negligent in failing to establish, implement and monitor a communications policy that took into account all members, in particular those members (such as the plaintiffs) who would likely be affected by the proposed amendments to the plan. The Court went on to determine that OMERS breached its fiduciary duty to the plaintiffs by (a) failing to communicate material information (the likelihood of benefit improvements) to them on a timely basis, and (b) failing to establish, implement and monitor a communications policy that would serve to ensure the fulfillment of its fiduciary duty.

Implications and Questions

Pension benefits standards laws impose a duty upon a plan administrator to communicate plan amendments to affected plan members within a prescribed period of time after the amendment has been registered. The Hembruff decision takes this obligation one step further by imposing an obligation upon an employer/administrator to determine whether the amendment must be communicated to members of the plan, or certain of them, before the proposed amendment is formally approved. The decision to inform plan members will not always be an easy one - indeed, if a particular proposed amendment is communicated but is not implemented, this too could give rise to a determination that the employer/administrator breached its fiduciary duty to plan members, or was negligent in communicating proposed plan amendments that were not implemented.

In many cases, a requirement to communicate proposed plan amendments may well interfere with bona fide business decisions. For example, if an employer is contemplating transactions (downsizings, plant closure, sale of a business, etc.) that would give rise to a wind-up, in whole or in part, of a pension plan, does this give rise to an obligation to inform plan members so that they can make an informed decision as to whether or not they will retire prior to a date on which they would otherwise be included in the partial wind up and thereby be entitled to statutory grow-in benefits? What implications does such a communication have on communications with other stakeholders such as investors and the securities markets?

OMERS is a defined benefit plan. As all investment decisions in such plans are made by the plan administrator or third-party professional investment managers, members of defined benefit plans make relatively few decisions in the context of their pension. This should be contrasted to capital accumulation plans such as defined contribution pension plans, where the members make decisions - in particular investment decisions - on a continual basis. The implications of this decision would appear to have even more far-reaching implications for communications in the context of capital accumulation plans.

OMERS has announced that it will appeal this decision. In its announcement, OMERS stated that the court made "far-reaching statements about a plan sponsor's and plan administrator's duties to inform plan members about possible benefit improvements", and that "clarification of these issues from the Ontario Court of Appeal is desirable and necessary."

Regardless of the outcome of this case, the decision to communicate with plan members, and the content of any such communication, will always turn on the particular facts. The Hembruff decision highlights the importance of member communications both in terms of timing and content.


Supreme Court Has Ruled On Canola Gene Patent

On May 21, 2004, the Supreme Court of Canada released its much anticipated decision, which was split 5-4, in the case of Monsanto Canada Inc. v. Schmeiser. This was a positive decision for the growing biotechnology industry in Canada, confirming that it is possible to obtain and enforce patents claiming a gene, methods for inserting the gene, and derived cell lines.

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Anti-Terrorism Laws Regulating Food And Drugs Come Into Force In Canada And The United States

The U.S. Food and Drug Administration (FDA) has adopted the final regulations required to implement section 303 of the Public Health Security and Bio-terrorism Preparedness and Response Act of 2002 (the "Act"). Under section 303 of the Act, the FDA may order the detention of any article of food found in the course of an inspection if the article presents a threat of serious adverse health consequences or death to humans or animals. Anti-terrorism legislation in Canada will permit the Minister of Health to make an interim order if the Minister believes that immediate action is required to deal with a significant risk, direct or indirect, to health or safety.

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Manufacturing And Processing Credits For Farmers


In an effort to encourage manufacturing and processing industries, section 125.1 of the Income Tax Act provides a tax credit for corporations engaged in these activities. The credit is available to corporations that carry on an active business and derive at least 10 per cent of their gross revenue from the sale or lease of goods manufactured or processed in Canada. The credit is equal to 7 per cent of the corporation's Canadian manufacturing and processing profits that are not eligible for the small business deduction, subject to certain adjustments. Corporations, including farming corporations, should consider whether they are eligible for the credit, as its overall effect is to reduce the corporation's tax rate.

Calculating the Credit

The formula for calculating the credit is set out in the regulations. The formula requires that the manufacturing and processing activities be identified and that the cost of labour and capital of these activities be determined. The formula then separates "manufacturing and processing", which are eligible for the credit, from "other income", which is not eligible for the credit. Alternatively, if a corporation qualifies as a "small manufacturer" under the regulations , its entire "adjusted business income" is deemed to be manufacturing and processing profits, and is eligible for the credit. To qualify as a "small manufacturer" a corporation's active business income, less its active business losses, plus the net active business income of its associated corporations must not exceed $200,000.

Identifying "Manufacturing or Processing" Activities

The Act does not define "manufacturing or processing"; however, it does specifically exclude certain activities. These activities include farming, fishing, logging, construction, and several other resource related activities. The CCRA states its position in Bulletin IT-145R(C), stating that "the manufacture of goods normally involves the creation of something (e.g. making or assembling machines, clothing, soup) or the shaping, stamping or forming of an object out of something (e.g. making steel rails, wire nails, rubber balls, wood moulding)". The bulletin goes on to describe processing as "a technique of preparation, handling or other activity designed to effect a physical or chemical change in an article or substance, other than natural growth." It cites as examples of processing the galvanizing of iron, creosoting fence posts, dyeing cloth, dehydrating foods and homogenizing and pasteurizing dairy products. The bulletin also states that the "activities of breaking bulk and repackaging for subsequent resale where there is a systematic procedure to make a product more marketable are generally considered to be processing".


As mentioned above, the Act excludes farming from manufacturing or processing. Farming is defined in the Act to include the "tillage of the soil, livestock raising or exhibiting, maintaining of horses for racing, raising of poultry, fur farming, dairy farming, fruit growing and the keeping of bees, but does not include an office or employment under a person engaged in the business of farming". However, some activities that farmers engage in may be considered manufacturing or processing, and therefore eligible for the tax credit. The difficulty is often in determining where the farming activity stops and the manufacturing or processing activity begins.

For example, the steps taken by a farmer, after harvesting, to prepare his produce for market can be considered farming or processing. The Court in Federal Farms found that the washing, brushing, spraying, drying, sizing, culling and grading of potatoes and carrots, in an effort to make them more marketable, was included in processing. The Court in W.G. Thompson found that the cleaning and packaging of white beans for sale was also processing. Similarly, the Court in Roy Legumex found that the dehydration of legumes was a processing activity. Finally, in B.C. Columbia Ice & Cold Storage the Court found that the blast freezing of fruit for storage was part of the processing activities. However, the Court in De Cloet found that the curing of tobacco was a farming activity and excluded from manufacturing or processing. Sarchuk T.C.J. stated that "agricultural farming involves the whole aspect of commercial production of any crop or plant which has economic value, and in my view, encompasses all of the activities of a farmer."

Other activities, like the hatching of chicks, add to the uncertainty about what can be classified as manufacturing and processing rather than farming. For example, in Fleming Farms the incubation of chicken eggs to produce chicks was found to be manufacturing. The Court explained that the hatching of chicks was not "livestock raising" or "raising of poultry" because the chicks were not raised, but just produced for sale. However, in Pollon the Court found that the selling of day-old chicks was a farming activity. The Court explained that it could not be manufacturing because, while the farmer provided the artificial environment, the process in the egg was natural. Other activities, such as the transportation of goods, may also be considered processing depending on the circumstances.

The CCRA does provide some guidance. It lists as examples of processing the aging of cheese, the plucking of chickens, the cleaning, polishing and treating of beans, and the cleaning, sorting, grading and spraying of eggs. The CCRA also states that farmers must separate their processing activities from their farming activities, and clearly delineate the income from each business, for the processing activities to be considered a distinct business.


Hold Periods For Private Placements And IPOs Shortened And Simplified: Replacement of Multilateral Instrument 45-102 – Resale of Securities

The securities regulators in all of the provinces and territories of Canada (other than Québec) (collectively, the "Jurisdictions") have adopted a new rule to further harmonize and simplify resale restrictions on securities traded in Canada. Multilateral Instrument 45-102 ("MI 45-102") – Resale of Securities which, together with Form 45-102F1 and Companion Policy 45-102CP (collectively, the "New Resale Rule"), replaced the former MI 45-102, Form 45-102F1, F2 and F3 and Companion Policy 45-102CP (collectively, the "Former Resale Rule"), effective March 30, 2004.


One reason for controlling the resale of securities is to allow time for information about securities initially distributed under an exemption from the requirement to file a prospectus (a "Prospectus Exemption") to be publicly disseminated by requiring these securities to be held for a period of time prior to resale. Generally, in order to complete a distribution of securities, an issuer or selling security holder must either file a prospectus (the "Prospectus Requirement") or rely on a Prospectus Exemption. The regime for the resale of securities in the Jurisdictions deems the first trade of securities, which were initially distributed under a Prospectus Exemption, to be a distribution unless, among other requirements, the securities are held for a "seasoning period", "restricted period", or both, before they become freely tradable.

Another reason for controlling the resale of securities is to ensure that an issuer's "control persons" do not exploit any informational advantage they may have over the public when trading the issuer's securities. In the Jurisdictions, generally, a person or company, or a combination thereof, that holds a sufficient number of any securities of an issuer to affect materially the control of that issuer is considered a control person. Any trade in previously issued securities of an issuer from the holdings of a control person of that issuer is deemed a "control distribution" which requires the control person to file a prospectus or find a Prospectus Exemption to trade in such a security. The regime for the resale of securities in the Jurisdictions grants an exemption from the Prospectus Requirement for a control distribution provided that, among other requirements, the control person holds the securities for a prescribed period and makes the prescribed filings.

While the New Resale Rule does not change the reasons for controlling the resale of securities, it does simplify certain resale requirements imposed on first trades of securities initially distributed under a Prospectus Exemption, as well as the requirements imposed on control distributions.


The New Resale Rule:

  • eliminates the concept of a "qualifying issuer" and imposes the same hold periods on all reporting issuers, regardless of their capitalization;
  • reduces the 12-month "restricted" and "seasoning" periods to a four month restricted period, four month seasoning period, or both, for all reporting issuers;
  • eliminates the requirements found in the Former Resale Rule to file a form: (i) when an issuer ceases to be a private company or a private issuer; and (ii) when an issuer has distributed securities persuant to a Prospectus Exemption;
  • adds a new exemption to permit the resale of securities without complying with the four month seasoning period if the issuer of the securities becomes a reporting issuer after the distribution date by filing a prospectus in one of the prescribed provinces; and
  • reduces the hold periods on securities issued before March 30, 2004 without requiring certificated securities issued before that date, that have legends prescribed under the Former Resale Rule, to be reissued in order to take advantage of the reduced hold periods.

The following is a summary of the New Resale Rule. The full text of the New Resale Rule can be found on the Ontario Securities Commission's Web site at: lation/Rulemaking/Rules/rule_20031219_45- 102_resale-securities.htm."

1. Seasoning Periods

  • The first trade in a security that was initially distributed pursuant to one of the Prospectus Exemptions that is subject to "seasoning period" requirements, will only be freely tradable if:

- the issuer is and has been a reporting issuer in a jurisdiction of Canada for the four months immediately preceding the trade (the "Seasoning Period");

- the trade is not a control distribution;

- no unusual effort is made to prepare the market or to create a demand for the security that is the subject of the trade;

- no extraordinary commission or consideration is paid to a person or company in respect of the trade; and

- if the selling security holder is an insider or officer of the issuer, the selling security holder has no reasonable grounds to believe that the issuer is in default of securities legislation (collectively, the "Seasoning Period Requirements").

2. Restricted Periods

  • The first trade in a security that was initially distributed under one of the Prospectus Exemptions that is subject to "restricted period" requirements, will only be freely tradable if:

- the Seasoning Period Requirements have been satisfied;

- four months have elapsed from the date of the distribution of the security under the Prospectus Exemption (the "Restricted Period"); and

- the certificate representing the security bears a legend restriction notation that the security holder must not trade the security during the Restricted Period and, if applicable, the Seasoning Period, unless otherwise permitted by securities legislation (collectively, the "Restricted Period Requirements").

  • Securities that are not issued in certificate form, such as those registered under an electronic book-entry system, may carry the prescribed legend on an ownership statement.

3. Exemption for a Trade by a Control Person

  • The trade in a security of an issuer by a control person of that issuer, as well as a distribution by a lender, pledgee, mortgagee or other encumbrancer for the purpose of liquidating a debt made in good faith by selling or offering for sale a security pledged, mortgaged or otherwise encumbered in good faith as collateral for the debt if the security was acquired by the lender, pledgee, mortgagee or other encumbrancer in a control distribution, are exempt from the Prospectus Requirement provided that:

- the issuer is and has been a reporting issuer in a jurisdiction in Canada for the four months immediately preceding the trade;

- the selling security holder, or the lender, pledgee, mortgagee or other encumbrancer if the distribution is for the purpose of liquidating a debt, has held the securities for at least four months;

- no unusual effort is made to prepare the market or create a demand for the security that is the subject of the trade;

- no extraordinary commission or consideration is paid to a person or company in respect of the trade; and

- the selling security holder has no reasonable grounds to believe that the issuer is in default of securities legislation.

  • Control persons, or lenders, pledgees, mortgagees or other encumbrancers if the distribution is for the purpose of liquidating a debt, must:

- file the prescribed Form 45-102F1 at least seven days before the first trade of securities that is part of the distribution (certifying that the seller has no knowledge of a material fact or material change with respect to the issuer that has not been generally disclosed); and

- file an insider report within three days after completing the trade.

4. Exemption for a Trade if the Issuer Becomes a Reporting Issuer After the Distribution Date

  • If an issuer becomes a reporting issuer by filing a prospectus in Alberta, British Columbia, Manitoba, Nova Scotia, Ontario, Québec or Saskatchewan after the issuer has distributed a security pursuant to any Prospectus Exemption and is a reporting issuer in a jurisdiction of Canada at the time of the trade, then the Seasoning Period is eliminated from the Seasoning Period Requirements or Restricted Period Requirements, as the case may be, for the first trade of the security to be freely tradable.

5. Exemption for a Trade in a Security Acquired in a Take-over Bid or Issuer Bid

  • The first trade of a security of a take-over bid offeror or issuer-bid offeror is exempt from the Seasoning Period Requirements, if:

a securities exchange take-over bid circular or securities exchange issuer bid circular relating to the distribution of the security was filed by the take-over bid offeror or issuer-bid offeror, as the case may be, on SEDAR;

the trade is not a control distribution; and

the take-over bid offeror or issuer-bid offeror was a reporting issuer on the date the securities of the offeree issuer were first taken up under the take-over bid or issuer bid, as the case may be.

6. Exemptions for First Trades in Securities by Certain Non-Reporting Issuers Outside of Canada

  • The Prospectus Requirement does not apply to the first trade in a security that was initially distributed under a Prospectus Exemption provided that:

- the issuer of the security was not a reporting issuer in any Canadian jurisdiction on the date of the initial distribution of the security (the "Distribution Date") or at the date of the trade in the security;

- on the Distribution Date, residents of Canada did not own directly or indirectly more than 10 per cent of the outstanding securities of the class or series of the security;

- on the Distribution Date, residents of Canada did not represent in number more than 10 per cent of the total number of owners directly or indirectly of securities of the class or series of the security; and

- the trade is made through an exchange, or a market, outside of Canada or to a person or company outside of Canada.


Canada Creates E-Authentication Principles

In an effort to build trust and confidence in electronic communications, Industry Canada and the Authentication and Principles Working Group have introduced a set of high-level principles for electronic authentication that are designed to guide the development, implementation and use of authentication products and services in Canada.

The principles are intended to apply to authentication processes used in connection with electronic communications that take place between businesses or governments and other organizations, between organizations and individuals (consumers or citizens), and between individuals. The principles are expressed at a high level of generality and are designed to foster a well-functioning, fair and competitive marketplace for authentication products and services. Furthermore, the principles have been developed to ensure compatibility with international developments in authentication.

The principles establish the functions and responsibilities of participants in authentication processes and provide a framework to assess and manage the risks that accompany these responsibilities. The principles also identify security, privacy, disclosure and complaint-handling matters that need to be taken into account at each stage of the design, development, implementation and assessment of an authentication process.


Whistleblower Legislation Introduced

The government has introduced whistleblower legislation in Parliament intended to establish a mechanism for the disclosure of wrongdoing in the public sector and to protect those who disclose wrongdoing. Described as being "part of the government's broader commitment to ensure transparency, accountability, financial responsibility and ethical conduct," if passed, Bill C-25, the Public Servants Disclosure Protection Act will cover all federal sector employees, including chief executives, and those working for Crown corporations. It will also require all deputy ministers or CEOs to establish internal disclosure mechanisms, including the designation of senior officers to receive disclosures and to investigate possible wrongdoings. For reasons of security and differing employment status, the legislation would not apply to the Canadian Security Intelligence Service, the Communications Security Establishment, uniformed members of the RCMP or to the Armed Forces. Nor will it extend to ministerial staff.

Introduced by Privy Council President and Minister responsible for the Public Service Human Resources Management Agency of Canada, Denis Coderre, the proposed legislation calls for the creation of a Public Sector Integrity Commissioner, appointed by the Governor-in-Council for a seven-year term on approval by both the Senate and the House of Commons. This officer will not report directly to Parliament, but rather through a designated minister. Normally, employees must use and follow internal procedures before recourse to the Commissioner. However, if (and only if) the person believes on reasonable grounds that it would not be appropriate to disclose matters to his or her supervisor or the senior officer, or if he or she feels that the matter has not been appropriately addressed, allegations may be taken directly to the Commissioner who has the power to investigate alleged wrongdoings (including reprisals) and to make recommendations to chief executives and deputy heads concerning corrective measures to be taken by them.

The proposed bill defines wrongdoing as the breaking of relevant laws, the misuse of public funds or assets, gross mismanagement in the federal public sector, a serious breach of a code of conduct, an act or omission that creates a substantial and specific danger to the life, health and safety of Canadians or the environment, and an act of reprisal taken as a result of a disclosure made in good faith. Those who make frivolous, vexatious or bad faith disclosures could be subject to appropriate disciplinary action.

Reprisal is defined to mean any disciplinary measures (demotion, termination of employment, measures that adversely affect employment or working conditions or threats to do same) taken against a person because of disclosure of wrongdoing undertaken in good faith. Those alleging reprisal may complain in writing to the Public Service Staff Relations Board or to the Canada Industrial Relation Board no later than 30 days after the date "the complainant knew, or in the Board's opinion ought to have known, that the reprisal was taken" or no later than 30 days "after the Commissioner reports his or her findings to the complainant and the appropriate chief executive." Complaints may not be referred by a public servant to arbitration or adjudication

Further information can be obtained from Sean Moore at Gowlings (Ottowa office).


Who Do you know? Who Should you know?

You should know your senior executives, management, directors, suppliers, potential joint venture partners, clients, and financing sources. In short, you need to know the people with whom you are doing business.

As we pursue maximum profit and the thrill of the deal, it is often easy to forget to consider certain risks associated with fraud and other criminal activity. No CEO or board of directors, acting responsibly, would consider entering into a business deal without completing the necessary due diligence. Significant resources are invested reviewing sales figures, contracts and tax implications.What is often forgotten, however, is the due diligence required on the people involved in the deal.

In the world of investigations it is a widely held belief that 20 % of people are honest all of the time; 20 % are essentially dishonest; and 60 % of people are on the fence. People committing crimes because of personal circumstances—medical bills, divorce, gambling debt, bad investments—is not unheard of.

The onus falls on businesses to identify the 20 % of people who are dishonest, and to pinpoint the red flags that might push the other 60 % over the edge. For instance, conducting background checks when hiring staff or vetting suppliers when awarding a significant contract can mitigate the risk of entering into a risky relationship.

These examples illustrate the type of information a background check might uncover:

  • An executive of a publicly traded jointventure company was found to have been convicted and incarcerated for laundering $36 million for a known member of the Columbian drug cartel;
  • The CEO of a subsidiary—who would potentially become the parent company’s CEO—was secretly operating a business that was in direct competition with his employer;
  • An employee’s résumé indicated that he had worked in a penal institution, when, in fact, he had been incarcerated in that institution;
  • Investors and/or lenders being used by a money launderer;
  • Preferred supply companies operated by company employees or family members.

It is difficult to disagree with the statement that a company’s strength is its people.The reverse also holds true—the human element can also be an Achilles heel. Most companies have quality control procedures in place to ensure the integrity of their products and services. However, if the people are unprincipled, the company is vulnerable.

A simple cost benefit analysis will demonstrate that it is better to invest a few dollars upfront to avoid a problem, than it is to spend significantly more money solving the problem later. No one wants to be on the wrong side of the American Patriot Act or Foreign Corruption Practices Act, even unwittingly, or to be a part of a law enforcement investigation, or to discover that a long-standing employee has been defrauding the company.

Case Studies

An Ounce of Investigation is Worth a Pound of Prevention

An educational institution in a small Ontario community was considering a business relationship with an individual we’ll call "Joe Partner." Joe’s résumé was very impressive and the parties looked forward to a mutually-satisfying business relationship. Joe’s name was not unfamiliar in the business community.The educational institution, after making discreet enquiries, began to hear rumours of a sullied reputation. Was it the same Joe?

After some creative probing, the Inkster Group discovered that in the early 1990s, Joe Partner had pled guilty to six counts of fraud and uttering a forged document involving millions of dollars. He had also been a part of the Ontario Securities Commission’s investigation of a company with "significant irregularities."

More recently, Joe Partner had been hired by a publicly-traded company in the United States as the interim vice-president of sales, while he continued to reside in Ontario. During his short tenure as vicepresident, he inflated company sales by US $6 million by documenting fraudulent sales to companies in Canada and the U.S. Joe Partner collected significant commissions on these sales.When the fraud was uncovered, the company fired Joe Partner and was forced to restate its earnings, which resulted in an SEC investigation and significant negative press.

The client was dumbfounded—Joe Partner’s résumé made no reference to the U.S. employer, although we did determine that he was, in fact, the same Joe. In the end, the client decided to look for another person with whom to have a business relationship.

Truth or Consequences

A widget company planned a joint venture with a similar organization we’ll call "MoreWidgets Inc.," a small, publicly-traded company. As part of its due diligence, the widget company decided to investigate More Widgets’ senior management team.Three of the four executives were legitimate.The company president, however, had a less than clear past. He had a Ph.D. in economics from Harvard University, had taught at a number of Ivy-league universities, and provided consulting services for the World Bank and a handful of large American commercial banks. He had also spent a number of years in a Luxembourg prison for laundering $30 million for members of the South American drug cartel.The result? No deal!

Know your company. Know your people. Protect your reputation.


"Deleterious Substance" Conviction Under Federal Fisheries Act Requires Different Proof Than "Impairing Water" Offence Under Ontario Water Resources Act, Ontario Court Of Appeal Rules

A conviction under ss. 36(3) of the federal Fisheries Act for depositing a deleterious substance does not require proof the receiving waters are deleterious to fish.

In reversing an acquittal and restoring a conviction of the City of Kingston for allowing the leakage of leachate from an old dump into the Cataraqui River, the Ontario Court of Appeal ruled:

…a substance is deleterious if, when added to any water, it would alter the quality of the water such that it is likely to render the water deleterious to fish, fish habitat or to the use by man of fish that frequent the water. There is no stipulation…that the substance must be proven to be deleterious to the receiving water….On the contrary, the language makes it clear that the substance is deleterious if, when added to any water, it degrades or alters the quality of the water to which it has been added.

The Court agreed with a previous B.C. Court of Appeal decision which held that "what is being defined is the substance that is added to the water, rather than the water after the addition of the substance."

The Court continued:

A deleterious substance does not have to render the water into which it is introduced poisonness or harmful to fish; it need only be likely to render the water deleterious to fish. The actus reus is a deposit of a deleterious substance into water frequented by fish. There was no requirement in ss. 36(3) or paragraph (a) of the definition of the term "deleterious substance" in ss. 34(1), of proof that the receiving waters are deleterious to fish.

The Court also clarified that its 2001 decision in R. v. Inco Ltd. establishing a "two-tier" test for a conviction under ss. 30(1) of the Ontario Water Resources Act is not applicable to a prosecution under the Fisheries Act.

In Kingston ammonia was the main leachate toxicant. Ammonia is a naturally occurring substance that can be beneficial and which dissipates quickly in water. Based on Inco, it was argued that although the Crown did not have to prove actual harm or damage to fish or fish habitat when the substance was inherently toxic but, where it is not inherently toxic, such as ammonia, the Crown must prove the substance is deleterious at the point it entered the receiving environment, and this required consideration of the quality, quantity and concentration of material as discharged.

The Court rejected this argument, as well as the submission that the test under ss. 36(3) of the Fisheries Act is the same as under section 30(1) of the OWRA and that the trial judge should have therefore made a finding of fact as to whether the leachate was inherently toxic.

As the Court put it here:

Site-specific impairment is not a necessary ingredient of the offence under ss. 36(3). Although the second step of the test formulated by this Court in Inco relates to substances that are not inherently toxic, the test does not apply to prosecutions under ss.36(3). It applies to prosecutions taken under ss. 30(1) of the OWRA, a provision that does focus on impairment of the quality of the receiving water. It may be that one method of proving that a substance, when added to water, renders that water deleterious to fish is through an examination of the nature of the substance and the quantities and concentrations in which it was discharged. However, that does not make such considerations a necessary component of the offence under ss. 36(3); rather, it provides a possible form of proof. Accordingly, in my view, ss.36(3) and 34(1) cannot be taken as requiring the Crown to prove the nature of the allegedly deleterious substance. The prohibition of ss. 36(3) is against the deposit of a deleterious substance ‘of any type.’ What must be proven is that the substance, whatever it might be, is deleterious within the meaning of paragraph (a) of the definition of that term in ss. 34(1). In this case, it meant that the prosecution had to prove that the leachate, when added to any water, was likely to render the water deleterious to fish or fish habitat… it did not have to prove which component of the leachate was responsible for the degradation or alteration of the quality of the water… Nor was it obliged to show that fish living in the vicinity of the sea were harmed. It was required only to prove the elements of the offence as set out above.

In the result the Court upheld the conviction of the City in Fisheries Act charges brought by the Ontario Ministry of the Environment. However, it allowed an appeal against conviction of the City based on privately laid charges, the proof of which had been based on analysis of the leachate toxicity on samples at 100% concentration i.e. leachate samples which had not been added to water. The Court found that the trial judge did not directly address the question of whether the the privately taken samples, if added to water, would have altered the quality of the water thereby rending it deleterious to fish; that the evidence on that point was unclear; and that on the record before the Court it could not be concluded beyond a reasonable doubt that, had the these leachate samples been added to water, the water would have been rendered deleterious to fish.

The May 12, 2004 decision in R v. Kingston (City) is cited as [2004] O.J. No. 1940

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