1. What Is The Legal System (Civil Law, Common Law Or A Mixture Of Both)?
Canada is a federation comprised of ten provinces and three territories. Legal authority is divided between the federal and provincial or territorial governments, although jurisdiction overlaps in some areas. The legal system is based on the English common law, with the exception of the province of Québec which has a civil law system based on the Napoleonic Code.
2. Are There Any Restrictions On Foreign Investment (Including Authorisations Required By Central Or Local Government)?
Foreign investors must notify the Canadian government when they begin a new business activity in Canada and when they acquire control of an existing Canadian business (Investment Canada Act, R.S.C. 1985, c.I-21.8). The following acquisitions are subject to review in order to ensure they provide a net benefit to Canada:
- A direct acquisition of control of a Canadian business (by way of shares or assets) if the asset value of the business being acquired equals or exceeds Can$5 million (about US$4.8 million).
- An indirect acquisition of control of a Canadian business (the acquisition of a non-Canadian parent of a Canadian entity) if the asset value of the business being acquired either:
- equals or exceeds Can$50 million (about US$47.6 million), where the asset value of the Canadian business being acquired is less than 50% of the global transaction's asset value;
- equals or exceeds Can$5 million, where the asset value of the Canadian business being acquired exceeds 50% of the global transaction's asset value.
For residents of World Trade Organisation member states the threshold for direct acquisitions is Can$295 million (about US$281 million) in 2008. This is adjusted annually for inflation on 1 January. This higher threshold does not apply to acquisitions of Canadian businesses involved in certain sensitive sectors such as uranium production, financial services, transportation services or cultural business. Indirect acquisitions are generally not reviewable, but are subject to notification requirements.
The acquisition or establishment of a Canadian business by a foreign investor can be subject to review regardless of the above thresholds if the business is related to Canada's cultural heritage or national identity (for example, publishing, film, video, music and broadcasting).
Particular industry sectors, such as telecommunications, financial services and broadcasting are subject to additional laws that regulate foreign investment.
3. Are There Any Exchange Control Or Currency Regulations?
There are no exchange control or currency regulations.
4. What Grants Or Incentives Are Available To Investors? Are Any Of These Aimed Specifically At Foreign Investors?
The federal government provides investment incentives, particularly in the areas of manufacturing and processing. Assistance is generally in the form of repayable loans and technical, marketing and export financial support.
Grant programmes also target business and research development as well as employment. Available incentives vary significantly depending on the industry.
5. What Is The Most Common Form Of Business Vehicle Used By Foreign Companies To Conduct Business In Your Jurisdiction? In Relation To This Vehicle, Please Provide Details On:
- Registration Formalities (Including Timing).
- Minimum (And Maximum) Share Capital.
- Whether Shares Can Be Issued For Non-Cash Consideration, Such As Assets Or Services (And Any Formalities).
- Any Restrictions On The Rights That Can Attach To Shares.
- Any Restrictions On Foreign Shareholders.
- Management Structure And Any Restrictions On Foreign Managers.
- Directors' Liability.
- Parent Company Liability.
- Reporting Requirements (Including Filing Of Accounts) And Cost Of Compliance.
The most common form of business vehicle used by foreign companies is the corporation. A corporation can be incorporated federally under the Canada Business Corporations Act, R.S.C. 1985, c.C-44 or provincially. The following applies to federal corporations:
- Registration formalities. The corporation's name must be approved by Corporations Canada (the governmental entity that administers corporate laws governing federal companies). A corporation is formed by electronically filing with Corporations Canada:
- articles of incorporation;
- an initial registered office address and first board of directors form;
- the requisite fee.
- Share capital. The articles of incorporation set out the classes of shares and maximum number of shares the corporation is authorised to issue for each class (this is usually unlimited). All shares are without nominal or par value.
- Non-cash consideration. Consideration for shares can be in the form of money, past services or property transferred to the corporation. If payment is by way of past services or property it cannot be worth less than the fair equivalent of the money that the corporation would have received had the shares been issued for money.
- Rights attaching to shares. The articles of incorporation specify the rights, privileges, restrictions and conditions for each class of shares, including provisions relating to voting, dividends, share of assets on liquidation or dissolution, priority on liquidation or dissolution, and any rights on conversion, redemption and retraction.
- Foreign shareholders. There are no restrictions preventing foreigners from being shareholders.
- Management structure. The shareholders of a corporation elect a board of directors, which in turn appoints the corporation's officers. At least 25% of a corporation's directors must be Canadian residents. If a corporation has less than four directors, at least one director must be a Canadian resident. There is no residency requirement for the corporation's officers. The directors' powers and liabilities can be transferred to shareholders by a unanimous shareholder agreement.
- Directors' liability. Directors are under an obligation to:
- comply with applicable corporate legislation, the corporation's articles and any unanimous shareholder agreement;
- exercise their powers diligently and with due care;
- act honestly and in good faith, with a view to the best interests of the corporation.
- Directors who breach these duties can be held personally liable for any resulting loss. In addition, directors can be liable for breaches of certain statutory requirements, including unpaid taxes, employee wages and environmental contamination.
- Parent company liability. Shareholders are not liable for a subsidiary's obligations.
- Reporting requirements. Corporations are required to file:
- annual returns;
- notice of any change of address of the registered office;
- notice of any change in directors.
- In addition, there are also provincial registration requirements in each province in which the corporation does business.
6. What Are The Main Laws Regulating Employment Relationships?
The employment relationship is principally governed by provincial legislation, except in the case of certain federally regulated industries (for example banking) that are governed by federal legislation.
Provincial and federal employment standards legislation sets out the minimum standards that apply in relation to:
- Minimum wages.
- Hours of work.
- Statutory holidays and annual vacation.
- Maternity and parental leave.
- Notice of termination of employment and severance.
- Equal pay for equal work.
The employment relationship is also regulated by provincial or federal legislation relating to human rights, workers' compensation, privacy legislation and common law. Unionised workplaces are also regulated by federal or provincial labour relations legislation that provides for collective bargaining rights.
Generally, the rights given by this legislation cannot be contracted out of or waived.
7. Is A Written Contract Of Employment Required? Are Any Agreements And/Or Implied Terms Likely To Govern The Employment Relationship?
A written employment contract is not usually required, but is often recommended. Where there is no written employment contract, minimum federal or provincial statutory entitlements are implied into the employment relationship. Certain terms are also implied into employment relationships under common law, including that the:
- Employer must provide a safe workplace.
- Employee is entitled to pay for work done.
- Employer must provide reasonable notice of termination to an employee, where there is no just cause or a written contract to the contrary.
8. Are Employees Entitled To Management Representation And/Or To Be Consulted In Relation To Corporate Transactions (Such As Redundancies And Disposals)?
Employees are not entitled to management representation or to be consulted in relation to corporate transactions, with the exception of some unionised workplaces where this is expressly provided for in a collective agreement.
9. How Is The Termination Of Individual Employment Contracts Regulated?
If an employee is dismissed without just cause, the employer must provide a period of notice (or pay in lieu of notice), which complies with the applicable federal or provincial employment standards legislation and common law (subject to the terms of any employment contract).
A federally regulated employee with a minimum of three consecutive months' service at the time of dismissal has a statutory entitlement to a minimum of two weeks' notice (or pay in lieu of notice). A federally regulated employee with 12 consecutive months' of continuous employment at the time of dismissal is entitled to statutory severance pay equal to the greater of either:
- Two days wages for each completed year of employment.
- Five days wages.
Unless an employment contract provides otherwise, under common law, an employee is entitled to reasonable notice of termination, which is generally between one week and one month per year of service depending on an employee's age, length of service, position and marketability. A written employment contract can provide for a different notice period or pay in lieu of notice on termination, so long as the minimum statutory entitlement is met.
If an employee is dismissed for just cause, notice obligations do not apply. Examples of just cause include:
- Continued incompetence or neglected duty (after specific warnings).
10. Are Redundancies/Mass Layoffs Regulated? If So, Please Give Details.
Both provincial and federal statutes regulate mass layoffs and redundancies. If a federally regulated employer terminates the employment of 50 or more employees in a period of four weeks or less, it must give 16 weeks prior written notice to the federal minister and the employee (or the applicable trade union). In most cases, the employer must also establish a joint planning committee, which must include employee or trade union representatives.
The group termination notice provisions in provincial and federal legislation are in addition to any individual notice required.
11. Do Foreign Employees Require Work Permits And/Or Residency Permits? If So, How Long Does It Take To Obtain Them And How Much Do They Cost.
Foreign nationals require a work permit to work temporarily in Canada. The fee is Can$150 (about US$143). Before a work permit is issued, the Canadian employer must generally first obtain a confirmation or labour market opinion of the job offer in favour of the foreign worker from a federal agency, which must conclude that no Canadian or permanent resident is available for the job. This can take several weeks or months and requires that the position be advertised. Confirmation is not required for certain intra-company transferees or, under the North America Free Trade Agreement (NAFTA), for professionals
Depending on the applicant's citizenship, a visa can also be required to travel to Canada. If the foreign national is from a country that is a party to the Canadian visa waiver programme, applications for work permits can be made in person at a Canadian port of entry (land, air or sea) and there is no need to apply for a temporary resident visa. Otherwise, a foreign national must apply for both their work permit and a temporary resident visa through a foreign visa office (an additional cost of Can$75 (about US$71) for single entry and Can$150 for a multiple entry visa).
12. In Relation To Employees, What Constitutes Tax Residency In Your Jurisdiction?
For tax purposes, residence is determined by an individual's connection to Canada (including financial, residential, personal and social ties). An individual can also be deemed a resident of Canada for tax purposes if he or she resides in Canada for 183 days or more in any given taxation year.
13. What Income Tax Or Social Security Contributions Must The Following Pay:
- Tax Resident Employees?
- Non-Tax Resident Employees?
- Employers, In Relation To Their Employees?
Tax Resident Employees
A person who is resident in Canada (see Question 12) during a tax year is subject to the following taxes on his or her worldwide income:
- Federal income tax. Federal income tax rates in 2008 are as follows:
- 15% on taxable income up to and including Can$37,885 (about US$36,053);
- 22% on taxable income greater than Can$37,885 and up to and including Can$75,770 (about US$72,104);
- 26% on taxable income greater than Can$75,770 and up to and including Can$123,184 (about US$117,225);
- 29% on taxable income over Can$123,184.
- Provincial income tax. Provincial income tax varies depending on the amount of income and the province of residence.
- Canada pension plan (CPP). The contribution rate is 4.95%, payable on earnings up to a maximum of Can$44,900 (about US$42,728) and with a basic personal exemption of Can$3,500 (about US$3,331).
- Quebec pension plan (QPP). Quebec workers contribute to the separate QPP.
- Employment insurance (EI). This is payable at 1.73% on earnings up to Can$41,100 (about US$39,112).
Non-Tax Resident Employees
A non-tax resident must pay tax on income from his or her employment in Canada (subject to any tax treaties). The top marginal rate is approximately 43%.
Employers are required by federal law to deduct certain amounts from their employees' income for EI premiums, CPP or QPP contributions and income tax. Employers must generally contribute to both the CPP or QPP and the federal EI plan.
14. In Relation To Business Vehicles, What Constitutes Tax Residency In Your Jurisdiction?
A corporation is deemed resident in the country where its central management and control is situated. A corporation incorporated in Canada after April 26, 1965 is deemed to be a resident in Canada throughout the tax year.
15. Please Give Details Of The Main Taxes That Potentially Apply To A Tax Resident Business Vehicle (Including Rates).
A corporation resident in Canada must pay tax on its worldwide income (income includes 50% of capital gains). The federal corporate income tax rate for general income in 2008 is 19.5%. Provincial rates vary by province. Reductions in these rates are possible in certain circumstances.
Goods And Services Tax (GST)
GST of 5% is payable on the supply of most goods and services. GST registrants that are exclusively engaged in commercial activities are entitled to recover GST payable on input costs.
16. How Are The Activities Of Non-Tax Resident Business Vehicles Taxed?
A non-resident corporation is subject to tax on its taxable income from carrying on a business in Canada and from the disposition of taxable Canadian property (subject to any applicable Canadian tax treaty) (Income Tax Act, R.S.C. 1985, c.I (5th Supp.)).
17. Please Explain How Each Of The Following Is Taxed:
- Dividends Paid To Foreign Corporate Shareholders.
- Dividends Received From Foreign Companies.
- Interest Paid To Foreign Corporate Shareholders.
- Intellectual Property (IP) Royalties Paid To Foreign Corporate Shareholders.
- Dividends paid. Dividends are generally subject to non-resident withholding tax at the rate of 25% (subject to any applicable Canadian tax treaty).
- Dividends received. An individual or corporation resident in Canada must include dividends paid by a foreign corporation in income. In certain circumstances, a corporation resident in Canada can deduct dividends paid by certain foreign affiliates that are paid out of the foreign affiliate's active business income.
- Interest paid. Payments of, or on account of, interest to an arm's length non-resident are not subject to withholding tax. Exemptions from this tax do not apply where the debtor is a related party.
- IP royalties paid. IP royalties are generally subject to non-resident withholding tax at the rate of 25% (subject to any applicable Canadian tax treaty).
18. Are There Any Thin Capitalisation Rules (Restrictions On Loans From Foreign Affiliates)? If So, Please Give Details.
Thin capitalisation rules restrict the deductibility of interest on certain loans from foreign affiliates to the extent that the loan exceeds twice the corporation's capital.
19. Must The Profits Of A Foreign Subsidiary Be Imputed To A Parent Company That Is Tax Resident In Your Jurisdiction (Controlled Foreign Company Rules)?
Controlled foreign corporation rules require a resident taxpayer to include in his or her income for a taxation year the participating percentage of foreign accrual property income of every share owned by the taxpayer in a controlled foreign affiliate. There is also the possibility of imputed income from investment in a foreign investment entity.
20. Are There Any Transfer Pricing Rules? If So, Please Give Details.
Where a taxpayer and a non-arm's length non-resident person enter into one or more transactions the transfer pricing rules generally provide that:
- If the consideration paid in the transaction is not an arm's-length amount, the consideration paid is deemed to be the arm's-length amount.
- If transaction is not one which would have been entered into had the parties been at arm's length (and it may reasonably be considered that the transaction was not entered into other than to obtain a tax benefit) the nature of the transaction entered into is deemed to be that which would have been entered into had the parties been at arm's length.
21. How Are Imports And Exports Taxed?
The Customs Act, R.S.C. 1985, c.I (2nd Supp.) imposes customs duties on an importer of goods. The duty rate, if any, varies depending on the type of goods.
The Excise Tax Act, R.S.C. 1985, c.E-15 requires every person who is liable to pay duty on goods imported into Canada or who would be liable to pay duty if the goods were dutiable, to pay GST at 5% on the value of the goods (see Question 15).
Canada is a party to NAFTA (with the US and Mexico), and also has free trade agreements with Chile, Costa Rica and Israel. The purpose of these treaties is to eliminate most tariffs on qualifying goods.
Generally, exported goods are not subject to Canadian excise taxes or duties.
22. Is There A Wide Network Of Double Tax Treaties? If So, Please Give Details.
Canada is a party to over 80 tax treaties, including treaties with the US, UK, Australia, China and France.
23. Are Restrictive Agreements And Practices Regulated By Competition Law In Your Jurisdiction? If So, Please Give Brief Details.
The Competition Act, R.S.C. 1985, c.C-34 is aimed at maintaining and encouraging competition in Canada by preventing corporations and individuals from engaging in anti-competitive conduct.
The act focuses on two types of practices:
- Civil matters. These are subject to review by the Competition Tribunal (the governmental entity that hears and decides all applications filed under the Competition Act and any related matters) and include:
- abuse of a dominant position;
- tied selling;
- refusal to deal;
- exclusive dealing;
- market restriction;
- delivered pricing;
- certain misleading advertising practices.
- Criminal matters. These are subject to prosecution in Canadian courts and include:
- predatory pricing;
- discriminatory promotional allowances;
- conspiracies to unduly lessen competition in Canada;
- price maintenance and refusal to supply;
- price discrimination;
- multi-level marketing;
- certain misleading advertising and telemarketing practices.
Civil matters are subject only to remedial orders, whereas criminal matters are punishable by fines and/or imprisonment.
24. Please outline the main intellectual property rights that are capable of protection in your jurisdiction. In each case, please state:
- Nature Of Right.
- How Protected.
- How Enforced.
- Length Of Protection.
- Nature of right. In order to patent an invention (Patent Act, R.S.C. 1985, c.P-4) it must:
- be novel;
- possess utility;
- not be obvious.
- How protected. A patent application must be filed with the Canadian Intellectual Property Office (CIPO).
- How enforced. The patent owner can sue a patent infringer for damages.
- Length of protection. Patents last for 20 years from the filing date, provided the prescribed maintenance fees are paid. In rare circumstances, the life of patent rights can be extended by an act of Parliament giving an extension of a particular patent to a particular patent holder.
- Nature of right. Rights arise in a trade mark as soon as it is used in association with wares or services.
- How protected. Under the common law action for passing off, a trade mark holder can prevent the subsequent use of the same or confusingly similar trade mark for similar wares and/or services. However, without registration protection is limited to the geographic area in which there is a reputation in the trade mark. Only registration under the Trade-marks Act, R.S.C. 1985, c.T-13 with the CIPO, gives the full legal protection available. It also allows an action to be brought in any court of competent jurisdiction to prevent depreciation of goodwill in the trade mark.
- How enforced. The right holder can sue under common law and/or the Trade-marks Act, the latter of which empowers a court to grant injunctive relief and the recovery of damages or profits where justified.
- Length of protection. A trade mark is valid for 15 years, but can be renewed indefinitely.
- Nature of right. To qualify for protection, a design must be original and not have been published in Canada or elsewhere more than one year before the filing date.
- How protected. Protection is through registration under the Industrial Design Act, R.S.C. 1985, c.1-9, with the CIPO which examines applications on a first-to-file basis.
- How enforced. The right holder can sue for infringement under the Industrial Design Act, which provides that the court can make orders for relief by way of injunction and/or the recovery of damages or profits.
- Length of protection. The owner of a registered industrial design has exclusive rights to it for ten years, provided the prescribed maintenance fees are paid.
- Nature of right. Literary works, artistic works, dramatic works and musical works are all protected by copyright law. Copyright does not exist in ideas themselves, but only in the original, fixed expression of ideas.
- How protected. Copyright automatically subsists in a work in Canada on the creation of an original work (whether or not the work was published), if at the time the work was created, the author was either a:
- Canadian citizen;
- British subject;
- citizen of a country that is a member of an international agreement for the protection of copyright to which Canada is a party.
- Although registration of copyright is not necessary, it is prudent. A registration application must be filed with the CIPO.
- How enforced. Copyright can be enforced by the copyright holder through common law remedies and/or remedies given by the Copyright Act, R.S.C. 1985, c.C-42 such as injunctive, monetary and/or other forms of relief.
- Length of protection. In most works, copyright subsists for the life of the author, plus 50 years. If a work is not published before the death of the author, copyright subsists until publication and for a period of 50 years after publication.
- Nature of right. The owners of trade secrets and other confidential information must rely on contractual obligations placed on the information recipients to ensure protection. The legal protection of trade secrets and confidential information from disclosure and unauthorised use is based on court rulings under common law.
- How protected. Generally, to be protected, the information in question must have been acquired in circumstances that produce an obligation of confidence. The most common example is the employer-employee relationship.
- How enforced. Owners of trade secrets can seek redress through the courts in certain circumstances if their secrets are disclosed or misused. The grounds for redress often include breach of confidence and fiduciary duty under common law. There is a duty on the owner of trade secrets to document their creation and use, as well as the measures taken to keep them confidential.
- Length of protection. The length of trade secret protection depends on the owner's ability to maintain the information in confidence.
25. Are Marketing Agreements Regulated In Your Jurisdiction? If So, Please Give Brief Details In Respect Of The Following Arrangements:
- Agency. Agency agreements are not regulated.
- Distribution. Distribution agreements are not regulated.
- Franchising. Canada does not have federal franchise legislation. However Ontario, Alberta and Prince Edward Island have provincial franchise legislation.
26. Are There Any Laws Regulating E-Commerce (Such As Electronic Signatures And Distance Selling)? If So, Please Give Brief Details.
E-commerce is regulated by both federal and provincial legislation. Under this legislation, most types of electronic signatures and documents are recognised. Some provinces have consumer protection laws that apply to internet sales and distance selling.
27. Are There Any Data Protection Laws? If So, Please Give Brief Details.
The collection, use and disclosure of personal information is regulated by both federal and provincial legislation, with personal information held by a government body subject to greater protection than that held by private sector organisations.
28. Are There Any Laws Regulating Product Liability And Product Safety? If So, Please Give Brief Details.
Product safety falls within both federal and provincial jurisdictions, with a variety of legislation regulating a wide range of products. Some provincial legislation implies statutory warranties if the quality, fitness or performance of a product does not comply with express or implied contractual terms.
In addition, product manufacturers have a post-sale common law duty to warn consumers and users of their products of defects and dangers that become known to the manufacturer after its products were manufactured and sold into the marketplace.
Post-sale duties for suppliers of certain types of products also exist under common law.
About Trevor Scott
Trevor Scott is a solicitor at Farris and provides strategic and legal advice in diverse business areas. He has extensive experience in debt and equity financings for public and private companies, representing both issuers and investment banks. He also regularly advises on business acquisitions, divestments and take-over bids, including compliance issues with the Competition Act and assisting foreign investors with Investment Canada Act matters. Trevor also advises on corporate governance matters.
* The author would like to acknowledge Nicole Cameron, Charles Pearson and Jennifer Cowan.
© 2009 Farris, Vaughan, Wills & Murphy LLP