Recent Developments: Business Law in Volume 1, Issue 3 December 2008 FOREWORD

Welcome to the latest issue of Miller Thomson LLP’s Recent Developments in Business Law Review. This publication is produced by Miller Thomson’s Ontario Business Lawyers and targets legal developments which may impact on your businesses. It is an off-shoot of our internal continuing education program which focuses on keeping our lawyers abreast of those developments and their practical implications. We wanted to share that with you. Our goal is to provide you with a high level snapshot of what is going on in business law in Ontario and what that may mean for your business.

This issue features articles covering the recent Delaware case of Schoon v. Troy , a case which could have a significant impact on the indemnities of directors, recently introduced legislation designed to modernize federal non-share capital , consumer product safety as well as copyright law. In addition, you will find the latest updates regarding the recent changes to the 5th protocol to the Canada - US tax convention.

Our Ontario Business Lawyers are available to discuss any of the issues raised in the articles or any other business related issues you may have.

We welcome your questions and comments on this publication and look forward to continuing to keep you ahead of the curve on the latest developments in business law.

Yours truly,

Barbara R.C Doherty Jason L. Rosen Sukesh Kamra Table of Contents

BUSINESS & SECURITIES

Director’s Indemnities Schoon v. Troy Corporation - A Cautionary Tale 1

The Decision to Block the MacDonald, Dettwiler and Associates Ltd./ Alliant Techsystems Inc. Deal 1

Compete to Win: Report of the Canada Competition Review Panel 3

Proposed New Rule Permits Listing of Special Purpose Acquisition Corporations on the TSX 4

National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings 5

Bill C-52 and Product Safety: A Call for Recall 5

FINANCIAL SERVICES

Awakening the Giant - Trade and Investment Opportunities in India 6

The Wage Earner Protection Program Act and Recent Changes to the Bankruptcy and Insolvency Act 7

INTELLECTUAL PROPERTY & INFORMATION TECHNOLOGY

Canadian Copyright Act Amendments: Round Two 8

TAX, ESTATES & TRUSTS

Conversion Proposals for Income Trust: Planning for 2011 and Beyond 9

Canada - US Tax Treaty: Hybrid Entities 10

Canada - US Tax Treaty: New Limitation on Treaty Benefits 11

Bill C-62 - A Modernization of Federal Non-Share Capital Corporation Legislation 12 Miller Thomson Analysis BUSINESS & SECURITIES There are a number of options to limit exposure as a director. The first is simply to ensure that the indemnification and advancement provisions in the by-laws extend into perpetuity. Of course, this would not prevent any future board of directors Director’s Indemnities – A Cautionary Tale from amending the by-laws and removing the rights, despite the wording contained in the by-laws. The by-laws of most corporations, both for profit and not-for-profit, typically contain indemnity provisions in favour of the directors A second option is for the director to enter into a separate bilateral of the organization by which the corporation agrees to pay any indemnification agreement with the corporation or organization. costs incurred by the director resulting from their position. Such an agreement should be crafted to fit the situation in addition to the usual indemnification and advancement obligations. A non- The indemnity provisions are intended to be a safeguard to protect termination clause would also be included under all circumstances, the directors in the event legal action is brought against them including resignation or removal of the director. Such an agreement personally for actions taken on behalf of the corporation. Ancillary could not be terminated unilaterally by the corporation, removing to the indemnity, the corporation generally also agrees to advance the risk that the indemnity could be revoked. Of course, the funds to pay any ongoing legal or other costs incurred by the indemnity of the corporation is only enforceable to the extent director in the defence of the claim brought against them as and that the corporation remains solvent. when such costs are incurred. The third and most effective option is to ensure that the organization The intention of the indemnity and advancement provisions is to has sufficient and appropriate Directors and Officers Insurance ensure that there are no monetary repercussions resulting from (D&O Insurance) coverage in place. D&O Insurance remedies a director’s decision to serve on the board of a corporation or the concern that the corporation may not be in a position to organization. It is in the best interest of a corporation to attract the satisfy its financial obligations, presuming that the premiums best candidates to sit on its board, and as a result, they want to have been paid regularly. There are a wide variety of coverages reduce the reasons that a director would decline to serve with the available in the D&O market, including packages that include organization. tailing coverage, which provides coverage for a set period of time after a director has left the board. Such coverage should be A recent case argued in Delaware, Schoon v. Troy Corporation, discussed with your insurance broker and can be tailored to dealt with issues surrounding the indemnification of directors. correspond with the relevant limitation periods. There is wide In that case, a current and a former director of Troy Corporation discrepancy in the terms contained in D&O policies. Any policy were involved in litigation with Troy resulting from actions taken should be reviewed carefully to ensure that adequate coverage by a minority owner attempting to sell its shares of Troy. When is received. they attempted to enforce their rights to indemnification and advancement, they were informed that the other directors of Troy Should the reasoning contained in Schoon v. Troy Corporation be had held a meeting for the purpose of amending the by-laws of adopted in Canadian jurisdictions, it could have a significant the corporation so that the indemnity and advancement provisions impact on the risks associated with serving on a board of directors. would only apply to current directors. As a result, the current director The most efficient method of reducing any potential risk is to (Schoon) was included, but not the former director (Bohnen), whom ensure that appropriate Directors and Officers Insurance coverage Schoon had replaced on the board. is in place, including coverage that continues after a director has left the board. The court was asked to determine if the by-laws could be amended retroactively to remove the indemnification and advancement obligations; and whether the right to indemnification vested and Andrew S. Roth became enforceable at the time Bohnen agreed to serve as a T. 519.593.3264 director, or when the action was commenced against him. E. [email protected]

The court found that the amendment to the by-law could apply retroactively and had the effect of removing the indemnity and advancement protections for all former directors. It also found that the right to indemnification only vested when an action was The Decision to Block the ATK/MDA Deal commenced against a director. Should this decision be followed in Canada (Delaware corporate cases are generally well received The Investment Canada Act in other jurisdictions) it would open former directors to significant The Investment Canada Act provides a regulatory review framework potential liability for actions taken when they were still members that allows the federal government to review foreign investments of the relevant board. in Canada. An investment is reviewable if there is an acquisition

1 does not send a notice under subsection (1) within the of control of a Canadian business and the asset value of the forty-five day period referred to in that subsection, the business being acquired equals or exceeds the threshold (set out Minister is deemed to be satisfied that the investment is in section 14 of the statute) as well as those investments the likely to be of net benefit to Canada and shall send a notice government considers “sensitive”, such as acquisitions of cultural to that effect to the applicant. businesses such as book publishing and distribution by a foreign entity. If the Minister of Industry is satisfied that a proposed Under section 21, the Minister must consider all of the information investment is likely to be of “net benefit to Canada”, then the provided by the foreign investor as well as the factors set out in Minister will approve the foreign investment under the Investment section 20, and based on these, the Minister must be satisfied Canada Act. that the foreign investment is likely to be of net benefit to Canada.

Miller Thomson Analysis Net Benefit Test The MDA Decision The factors to be considered in assessing a proposed investment On May 8, 2008, the Minister of Industry, Jim Prentice, confirmed are listed in section 20 of the Investment Canada Act. A prospective his initial rejection of the planned $1.3-billion acquisition of the investor whose transaction is subject to review must address: Information Systems Business of MacDonald, Dettwiler and 20. For the purposes of section 21, the factors to be taken Associates Ltd. (“MDA”) by U.S. based Alliant Techsystems Inc. into account, where relevant, are (“ATK”). This is the first rejection of a transaction by a Minister (a) the effect of the investment on the level and nature of of Industry since the inception of the Investment Canada Act in economic activity in Canada, including, without limiting 1985. Since thousands of proposed foreign investments have been the generality of the foregoing, the effect on , on reviewed and allowed to proceed under the Investment Canada Act, resource processing, on the utilization of parts, components investors wonder whether this rejection signals a shift in the way and services produced in Canada and on exports from Canada; foreign investments in Canada will be treated in the future. In (b) the degree and significance of participation by Canadians in order to draw any conclusions about what the implications of this the Canadian business or new Canadian business and in any unprecedented decision will be, it is important to remember that the industry or industries in Canada of which the Canadian decision was very much the product of unique circumstances. business or new Canadian business forms or would form a part; (c) the effect of the investment on productivity, industrial efficiency, At the heart of the Minister’s decision to block the sale of satellite technological development, product innovation and product and space robotics manufacturer MDA were jurisdictional questions variety in Canada; over the transfer of Radarsat-2, a sophisticated surveillance satellite that was developed through a public-private partnership (“P3”) (d) the effect of the investment on competition within any industry or industries in Canada; between MDA and the Canadian Space Agency. Radarsat-2’s ability to track ships and map sea ice from space is considered essential (e) the compatibility of the investment with national industrial, to protecting Canada’s Arctic sovereignty. Uncertainty as to economic and cultural policies, taking into consideration whether U.S. ownership of the satellite could deprive Ottawa of industrial, economic and cultural policy objectives enunciated control of the satellite and access to its data was a major factor by the government or legislature of any province likely to be significantly affected by the investment; and in Minister Prentice’s decision to block the acquisition. Undoubtedly, the Minister was aware of the political ramifications of approving (f) the contribution of the investment to Canada’s ability to the sale of the Radarsat-2, which was developed with $445-million compete in world markets. of Canadian taxpayers’ money, and only months after proclaiming at its launch that the satellite would help “protect our Arctic To ensure net benefit, the Minister of Industry sometimes requires sovereignty as international interest in the region grows.” the investor to commit to undertakings as a condition for approval. These undertakings are negotiated with reference to the factors When Minister Prentice rejected the proposed acquisition because enumerated above. Industry Canada has recently revealed that it was not “likely to be of net benefit to Canada”, he used section there has been an increased emphasis on commitments related 21 of the Investment Canada Act to substantiate his decision, to productivity, technology transfer and efficiency. Industry Canada which reads as follows: has also indicated that potential improvements in the capacity 21. (1) Subject to sections 22 and 23, the Minister shall, and capabilities of the Canadian business, as well as the degree within forty-five days after the certified date referred to in of Canadian participation, have taken on more weight in the subsection 18(1), send a notice to the applicant that the review process. Minister, having taken into account any information, undertakings and representations referred to the Minister Although these general trends are indicative of Industry Canada’s by the Director pursuant to section 19 and the relevant priorities, the statute itself provides no guidance as to how the net factors set out in section 20, is satisfied that the investment is likely to be of net benefit to Canada. benefit test is to be applied and what combination of factors must be met. This flexibility allows the Minister to ensure, on (2) Subject to section 22 and 23, whereby the Minister a case-by-case basis, that specific investments serve evolving

2 Canadian interests; however, the discretionary nature of the test, Undoubtedly, the impact of the MDA decision on foreign investment coupled with confidentiality provisions that prevent decisions in Canada will become clearer over time. While it is likely that the from being published, reduce predictability and transparency. rejection was an isolated response to a unique set of circumstances, Aside from the legislation and the Minister’s public remarks, it foreign investors and domestic enterprises should be aware of can be difficult to determine what considerations would motivate the applicability of the Act in their own affairs and transactions. the Minister to make any particular decision and what factors in the test are key to a finding of net benefit. In addition, it should be noted that nothing prevents the Minister from taking into Andy Chan account other factors that are not explicitly set out in the net T. 905.415.6751 benefit test. E. [email protected]

Reasons for the MDA Rejection and In the wake of Minister Jim Prentice’s decision to block the sale of MDA, there has been a lot of speculation about what caused Danielle Douek, Law Student him to reject the deal. After the initial rejection under section 22 of the Act, ATK was prepared to make significant undertakings in order to have the sale approved. Nevertheless, Minister Prentice determined that the transaction was not of net benefit to Canada, Compete to Win and given the discretionary nature of the test, he disallowed the sale. The Competition Policy Review Panel released its report in June National security concerns relating to Artic sovereignty spawned by 2008. “Compete to Win” reviews Canada’s competition and the threat of losing control of Radarsat-2 likely played a large role foreign investment policies and makes recommendations for in Minister Prentice’s decision to reject the sale of MDA. Moreover, making Canada more competitive globally. The basic premise is the absence of an express national security test in the Act enabled that greater competition is the key to increasing productivity and the Minister to consider the impact of the proposed investment prosperity. The Panel found that Canadians had various concerns on national security. Most other jurisdictions have explicit national regarding its global competitiveness including the loss of Canadian security tests in their foreign investment law and Canada has business to foreign competitors, Canada’s limited presence in considered amending the Investment Canada Act to include such markets other than the US, our lagging productivity and our weak provisions as well. Although previous initiatives have failed, Minister innovation. It concluded that Canada must address these issues. Prentice has indicated that in the near future, the government will once again examine the necessity of an explicit national security A number of Canada’s competitive strengths were acknowledged test. The MDA decision coupled with the Minister’s comments including its relationship with the US, its abundant natural regarding the development of an explicit national security test resources and a highly educated population. However a small signal that national security may be given more weight in future population relative to land mass, small domestic market, a reviews of foreign investment in Canada by non-state-owned multitude of internal barriers and a lack of entrepreneurial ambition enterprises. are Canada’s weaknesses in the world market.

Some has also suggested that the decision was made in response Miller Thomson Analysis to general concerns about the extent of foreign takeovers of Investment Canada Act Canadian firms. In a speech to the Canadian Space Agency on The Panel’s mandate was to look at the Investment Canada Act April 11, 2008, the Minister discussed the transfer of intellectual (ICA) and the Competition Act (CA). The ICA provides for federal property to non-Canadians saying, “Canada must retain control government review of foreign investments in Canada. Some of over technologies that are vital to the future of our industry and the specific recommendations from the Panel included (i) raising the pursuit of public policy objectives”. Whether this is a sign the ICA’s minimum review threshold to $1 billion in enterprise of a new approach towards the review of investments in the high value from the current level of $295 million in gross assets; (ii) tech industries or limited to the specific context of the space reversing the onus for showing that a particular transaction would industry is not clear. The timing of the message and the target be contrary to Canada’s interest; (iii) improve transparency, audience, however, suggest that it was a direct reference to the predictability and timeliness; and (iv) reviewing cultural industry proposed acquisition of the MDA technology. policies every five years.

At a more practical level, some industry analysts have commented Financial Services Sector on MDA’s failure to properly discuss or “lobby” the Minister on the The Panel noted that allowing greater international competition transaction prior to its announcement. At the very least, effective and more competition between bank and non-bank lenders would communication with the government may have flagged the benefit the financial services sector as well as the public interest. problem prior to the matter being made public. The Panel has also recommended that the Minister of Finance

3 remove the de facto ban on bank mergers subject to regulatory Miller Thomson Analysis safeguards in recognition that financial institutions all over the Overview of SPACs world have merged, creating larger more powerful competitors. A SPAC is a publicly-traded shell company which uses the equity raised from its IPO to later acquire an operating business. The SPAC Competition Act is set up by a small group of securityholders (Founders) each holding Only minor changes to the CA were recommended by the Panel, at least a 10 per cent equity interest in the SPAC, purchased in including aligning the merger notification process to that of the advance of the IPO, often at a nominal rate. The SPAC must then US, repealing the criminal pricing provisions and examining the raise IPO proceeds of at least $30 million, with a minimum price thresholds triggering notification of a merger transaction. The Panel of $5.00 per security. The securities issued in the IPO must have also concluded that Canada should update its regulatory frame- a conversion right and liquidation distribution feature, both of work to put directors of Canadian companies on the same footing which are described below. as their Delaware, US counterparts. In order to protect the capital invested by the public investors, at Public Policy Priorities for Action least 90 percent of the IPO proceeds must be placed in trust with The Panel also reviewed those public policy areas which it a trustee unrelated to the transaction and acceptable to the TSX. considered most critical to Canada’s future competitiveness. In addition, 50 per cent of the underwriter’s commission in respect Recommendations included reducing corporate tax rates, investing of the IPO must also be deferred and placed in trust pending in education, fast-tracking skilled worker applications for permanent acquisition of an operating business. residency, eliminating internal barriers, considering national securities regulation, addressing US trade and security concerns, The acquisition of an operating business, also known as the modernizing the Canadian intellectual property system and qualifying transaction (QT), must be accomplished within three establishing an independent Canadian Competitiveness Council years from the date of closing of the distribution under the IPO to advocate for improvements to Canadian competitiveness. prospectus. The QT must be approved by a majority of security holders, excluding the Founders. In seeking securityholder approval, Reaction to the report has been mixed. Some have said the the SPAC must provide the securityholders with prospectus-level recommendations are burdensome, controversial, unoriginal and disclosure relating to the QT. In addition, the QT must represent uninspired. Most agree that the implementation of these changes at least 80 per cent of the value of the IPO proceeds in trust. in the near future, given a minority government and a possible election, is doubtful. Conversion Right and Liquidation Distribution Feature If the proposed QT is completed, the conversion right enables the public securityholders who vote against it to exchange their Jennifer Hewitt securities for a pro rata portion of the proceeds held in the trust. T. 416.595.2972 While Part X does not currently contemplate setting a maximum E. [email protected] threshold amount for conversion rights, a SPAC may opt to impose such limits or conditions. If a SPAC elects to impose such terms, it must be disclosed in the IPO prospectus and information circular.

If a QT is not completed within the required time, the liquidation Proposed New Rule Permits Listing of SPACs distribution feature provides for the return of a pro rata portion on the TSX of the proceeds held in trust to securityholders. Founders will not be permitted to participate in either the liquidation distribution The Stock Exchange (TSX) has proposed a new rule that or the conversion feature. provides for the use of special purpose acquisition corporations (SPACs) as a method of listing securities on the TSX. To some Conclusion extent SPACs are similar to capital pooling companies (CPCs) listed The thirty day public comment period on Part X expired on on the TSX Venture Exchange, however SPACs, if the rule is adopted September 15, 2008. Upon receiving the necessary approval by the by the TSX in the proposed form, will require that a minimum of Ontario Securities Commission, SPACs will be available in Canada, $30 million be raised on the SPAC initial public offering (IPO). In providing investors with an additional outlet for raising capital. drafting the proposed rule, Part X to the TSX Company Manual (Part X), the TSX sought guidance from the SPAC listing requirements Kimberly Muio in the United States while incorporating the TSX’s original listing T. 416.595.2653 requirements and taking into consideration the size of the Canadian E. [email protected] marketplace.

4 National Instrument 52-109 Certification • they have caused the issuer to disclose in its MD&A any change in the issuer’s ICFR that has materially affect- of Disclosure in Issuers’ Annual and ed the issuer’s ICFR; and Interim Filings • on an annual basis they have evaluated the effective- On August 15, 2008, the Canadian Securities Administrators ness of the issuer’s DC&P and ICFR and caused the issuer to disclose their conclusions about the effective- published National Instrument 52-109 Certification of Disclosure ness of DC&P and ICFR in the issuer’s MD&A. in Issuers’ Annual and Interim Filings (NI 52-109), which repealed Multilateral Instrument 52-109 Certification of Disclosure in Control Framework Issuers’ Annual and Interim Filings. NI 52-109 applies to annual NI 52-109 requires an issuer to use a control framework in the and interim filings for all reporting issuers (other than investment design of its ICFR. Companion Policy 52-109 provides that the funds) for financial periods ending on or after December 15, 2008. control framework should be established by a body or group that has followed due-process procedures, including the broad NI 52-109 is meant to improve the quality and reliability of distribution of the framework for public comment. reporting issuers’ annual and interim disclosure, and to help to maintain and enhance investor confidence in the integrity of Venture Issuers capital markets. The new instrument provides that venture issuers are not required to include representations in their certificates relating to DC&P Miller Thomson Analysis and ICFR. In addition, venture issuers are not required to discuss DC&P and ICFR changes in ICFR or the certifying officers’ conclusions about the The new instrument requires non-venture issuers to establish and effectiveness of DC&P or ICFR in their annual or interim MD&A. maintain DC&P and ICFR. DC&P are disclosure controls and procedures that are designed to (i) provide reasonable assurance Exemptions that information to be disclosed in annual filings, interim filings There are exemptions under NI 52-109 available for: or other reports are filed, recorded, processed, summarized and • issuers that comply with the SEC’s certification and reported on time and (ii) ensure that information in annual filings, internal control requirements; interim filings or other reports filed or submitted is collected and communicated to management. ICFR is a process of internal • certain foreign issuers that qualify under and comply with control over financial reporting designed by certifying officers to sections 5.4 and 5.5 of National Instrument 71-102; provide reasonable assurance regarding the reliability of financial • exchangeable securities issuers that qualify under and reporting and the preparation of financial statements for external comply with subsection 13.3(2) of NI 51-102; and purposes. • credit support issuers that qualify under and comply with Management Discussion and Analysis (MD&A) Disclosure subsection 13.4(2) of NI 51-102. If there is a material weakness in the issuer’s DC&P or ICFR, NI 52-109 requires the issuer to disclose the following in its Virginia Huang annual or interim MD&A: T. 416.595.2987

• a description of the material weakness; E. [email protected]

• the impact of the material weakness on the issuer’s financial reporting and its ICFR; and

• the issuer’s current plans, if any, or any actions already undertaken, for remediating the material weakness. Bill C-52 and Product Safety: A Call for Recall

CEO/CFO Certification On April 8, 2008, the Minister of Health introduced Bill C-52 NI 52-109 also expands on the CEO/CFO certification requirements in the House of Commons. Bill C-52, which passed its second and an issuer’s CEO and CFO must personally certify that: reading in May, will repeal Part I of the Hazardous Products Act

• the issuer’s annual filings and interim filings do not contain (the HPA), the current Act governing this area, and will create the any misrepresentations; Canada Consumer Product Safety Act (the CCPSA). The following briefly outlines the purpose and key features of Bill C-52, and • the financial statements and other financial information in examines its potential implications for business practice in the the annual filings and interim filings fairly present the financial condition, results of operations and cash flows consumer product industry. of the issuer; Background • they have designed DC&P and ICFR, or caused them to Bill C-52 was introduced as part of Prime Minister Stephen Harper’s be designed under their supervision; $133 Million dollar “Food and Consumer Action Plan” (the Plan).

5 The Plan, which features Bill C-52 and its companion Bill, Bill will differ. Finally, critics of the proposed Act refer to the fact C-51 (which will amend the Food and Drugs Act) was created in that the CCPSA does not remedy the issue of lack of personnel response to the increase in consumer product recall in recent years. to carry out product inspections that currently exists under the HPA. As an illustration, while there were 32 product recalls in Canada in 2006, there were 90 such recalls in 2007. In addition, Bill C-52 Only time will tell if the proposed Canada Consumer Product is a recognition of the growing number of products that move Safety Act and more generally, the Consumer Action Plan will be across borders in the increasing global marketplace, the need for effective in increasing consumer product safety. However, those governments both within the country and foreign governments to in the consumer product industry may want to rethink their current share information regarding unsafe or dangerous products, and the system for quality control before Bill C-52 becomes law. need to create a regulatory system regarding consumer products that is complementary to the regulatory system regarding the environment. Sarah Lowy Application T. 416.595.8679 Broadly stated, the purpose of the CCPSA is to create a new, more E. [email protected] effective system to regulate food and consumer products which pose, or may reasonably be expected to pose a danger to human health and safety. “Consumer products” are defined in the proposed Act as: a product, including its components, parts or accessories, FINANCIAL SERVICES that can reasonably be expected to be obtained by an individual to be used for non-commercial purposes, including for domestic, recreational and sports purposes, and includes its packaging. It is important to note that certain consumer products regulated Awakening the Giant – Trade and Investment by other existing acts are exempt from the application of the CCPSA (as set out in Section 4 of the draft act). Opportunities with India

Key Features Investing in the Indian market has received a lot of attention in Essentially, the proposed CCPSA will: (i) allow the federal recent years. It has been identified by Canadian companies involved government to become more involved in providing safety guidelines in a wide spectrum of industry areas, and by the government of for new products during their developmental stage; (ii) provide for Canada, as a region that presents tremendous opportunity over the more effective governmental oversight by imposing the prohibition next decade. While there are significant opportunities for Canadian of certain listed products, increased record-keeping and reporting companies looking to invest in India, there are also significant requirements on those who manufacture, import and advertise hurdles to overcome and considerations to be aware of. consumer products, and by giving the Minister of Health more power to inspect and test products; (iii) enable the federal Why India? government to issue mandatory recall orders for unsafe products India’s population is currently in excess of one billion. Of that once dangers associated with them have been identified; and total population, approximately 81 per cent are under the age (iv) create a system of criminal and administrative monetary of 45. India’s GDP has grown at approximately 8 per cent on penalties to enforce compliance. average for the last four years. This is expected to exceed 9 per cent in 2008. Conversely, inflation has been reduced dramatically Miller Thomson Analysis from an average of 10 per cent in the 1990s to approximately 4.5 The implications of the proposed Act for businesses in the consumer per cent in 2008. Its foreign exchange reserve has multiplied product industry may prove to be significant. The allowance for more from $6 billion in 1991 to approximately $290 billion in 2008 governmental, regulatory oversight and the ability to issue mandatory and its account deficit has improved from a deficit of 2 per cent recall orders will require consumer product importers, marketers of GDP in 1996 to a surplus of 2 per cent in 2006. and producers to be more accountable to the buyer with respect to the quality of their product or face the consequences of a much In terms of the regulatory environment, while there are still delays more comprehensive penalty regime than imposed under the HPA. and bureaucracy to contend with, the government has since 1991, after extensive reform, adopted a non-interventionist approach However, some critics of the proposed Act believe that it does not that allows for an open economy with extensive participation of go far enough to protect the consumer. They note that the CCPSA the private sector. does not impose product testing as a condition of market entry, but applies only on suspicion of a health concern. In addition, Miller Thomson Analysis it has been pointed out that although significant financial penalties Considerations for Canadian companies currently exist under the HPA as well, it has fallen far short of The booming economy ensuring compliance. Thus, it remains to be seen how the CCPSA While the Indian economy has been the fastest growing in the

6 world for in excess of four years and has exhibited unprecedented The FIPPA growth, there are concerns that the economy may “overheat” and To stimulate trade between Canada and India and offer investor be subject to inflationary pressures. That coupled with reducing protection to alleviate some of the obstacles described above, levels of credit funded consumption, increasing costs of capital in June 2007, Canada and India concluded negotiations on the and tightened monetary policy has created concern for the short Foreign Investment Promotion and Protection Agreement (FIPPA). to medium term future of the economy. As stated by Foreign Affairs and International Trade Canada, “[t]hrough the establishment of a framework of legally binding Labor standards and infrastructure rights and obligations, this agreement will provide greater As there is an increase in exposure to global labor standards and predictability and certainty for investors considering investment workforce productivity, there is likely to be a need for more social opportunities in each of our respective markets.” The FIPPA is balance in the medium long term. This will require significant thought to be the pre-cursor to a full free trade agreement which funding which is expected to come from increased taxation. should result in significantly greater trade and investment between India is also lacking in terms of infrastructure. By 2013, India the two countries. will need a network of approximately 13,000 kilometers worth of roads and highways. Airports and ports require major overhauls such as in the major cities of Delhi and Mumbai, plus expansion Deepesh Daya of existing facilities such as those in Bangalore and Chennai. T. 416.595.8553 This lack of infrastructure, together with power shortages, can E. [email protected] greatly increase the costs of production and generally of doing business in India. While some of the current projects may alleviate the issue in the medium term, deficiencies in infrastructure can add between 60 per cent -130 per cent to the costs of production of goods and the delivery of services. The WEPPA and Recent Changes to the BIA

Credit defaults On July 7, 2008, the Wage Earner Protection Program Act (WEPPA) Indian companies have a history of payment defaults and generally and certain changes to the Bankruptcy and Insolvency Act (BIA) have poorer credit and rating agency ratings than their North came into force. American counterparts. As a Canadian joint venturer or investor, this is of concern as it may not only impact your credit rating but The WEPPA establishes the Wage Earner Protection Program where your Indian joint venturer is responsible for maintaining (the Program). The Program is administered by the federal operations in India, late payments and defaults may severely government and is designed to protect the wages of employees jeopardise the viability of those operations. whose employment is terminated as a result of a bankruptcy or receivership. The term “wages” is defined to include salary and Access to Justice vacation pay but not severance or termination pay. The amount Lastly, the court system in India can be slow, costly and not always payable to an individual for wages under the Program is capped lead to the outcome that you would expect had the matter been at $3,000 and those wages must have been earned during the brought before a Canadian court. In 1999, there were approximately six months immediately preceding the employer’s bankruptcy or 12.3 million cases. By 2006, this number reached nearly 16 receivership. Eligibility is further limited to those individuals million, representing a leap of 28 per cent in seven years. Further, who were not officers, directors or who had a controlling interest arbitration and other alternative dispute resolution mechanisms in the business of the employer. are still in their infancy in India and subject to many of the same issues as the court system. Miller Thomson Analysis Under the WEPPA, trustees in bankruptcy and receivers are It is advisable therefore to be able to have your matter heard outside required to perform various duties including: of India if there is disagreement between the parties. The best (a) identifying employees who are owed wages for the six months way to ensure this is to agree with your Indian counterpart from immediately preceding the employer’s bankruptcy or the outset on international arbitration and to ensure that your receivership; joint venture agreement (or other business agreements) properly (b) determining the amount those employees are owed; and documents such agreement. International arbitration is widely recognized as being efficient provided the locus of arbitration (c) informing employees about the existence of the Program is in an “arbitration friendly” jurisdiction. Possible venues include and its features. Singapore, London, Paris, Stockholm and New York. Lack of Another significant feature of the WEPPA is that unpaid wage planning may however lead to increased costs and delays. Worse claims are granted a super-priority charge on all current assets still, a poorly drafted arbitration clause may also lead to courts of the insolvent employer. That charge is limited to a maximum intervening notwithstanding agreement between the parties. of $2,000 per employee. Previously, employees of a bankrupt

7 employer were only entitled to a preferred claim for the same publish a work; and to prevent others from copying a work without amount under the BIA. If the government pays out under the permission. The term of copyright may differ, but for most subject Program it becomes subrogated to the rights of the employee matter the right extends for the life of the author plus an additional vis-à-vis the employer. A trustee in bankruptcy or receiver who fifty years. disposes of current assets covered by this super-priority charge is liable for the amount realized on the disposition of those assets. Recent case law focusing on copyright issues provides guidance regarding the development of copyright law in Canada and the The WEPPA also provides for a super-priority for unpaid pension scope of copyright. The Supreme Court of Canada in CCH Canadian contributions (normal pre-filing contributions and not unfunded Ltd. v. Law Society of Upper Canada held that a work must be pension liabilities). Unpaid pension contributions are granted original. To be original, a work must be “more than a mere copy super-priority charge on all assets of the insolvent employer. of another work,” it must also express an idea in a manner that Unlike the super-priority charge for unpaid wages, there is no per exemplifies an “exercise of skill and judgement” and that involves employee limit on the charge for unpaid pension contributions. “intellectual effort.” Previously, unpaid pension contributions constituted unsecured claims in an employer’s bankrupt estate. As with unpaid wage Additional judicial commentary focuses on the role of balance claims, a trustee in bankruptcy or receiver who disposes of assets between a copyright user and a copyright owner, which ultimately covered by this security is liable for the amount realized on the affects the scope of copyright. Copyright law sets strict prohibitions disposition of those assets. upon the ways in which copyright may be utilized by a non-owner. However, the Court states that these limitations should not be In order to protect against the potential pitfalls of the WEPPA and over-exerted so as to impose restrictions upon a user that are not BIA amendments, lenders would do well to consider a range of supported by the copyright. An analogy of a scale, which should safeguards, including: not be tipped in favour of either party, is utilized by the Court (a) requiring additional security to take into account the additional to represent this relationship. risk posed by the super-priority charges; Beyond common law changes to copyright, attempts to introduce (b) enhanced monitoring to ensure the borrower is meeting its statutory amendment to copyright law have also been launched. payroll and pension obligations; A first attempt at amending Canadian copyright laws was launched (c) incorporating retention of title clauses into equipment financing in a report prepared in May 2004 by the Standing Committee on agreements to avoid a super-priority charge in respect of unpaid Canadian Heritage. The proposed changes set out in the report pension contributions; and were met by a wall of criticism from academics and industry. (d) entering into intercreditor agreements with other secured lenders Yet, in spite of this, the Committee remained unanimous regarding to pool the potential risk associated with super-priority charges. its proposed changes, choosing to re-table the report in November 2004. Due to government changes in Canada the report was ultimately abandoned. Ryan T. Sills T. 519.931.3514 Miller Thomson Analysis E. [email protected] So now the Harper government is taking its turn at proposing modifications to Canada’s Copyright Act in the form of Bill C-61. Initially introduced on June 12, 2008, Bill C-61 has drawn considerable commentary due to the significant changes it proposes. INTELLECTUAL PROPERTY & Some of these changes codify aspects of recent jurisprudence, INFORMATION TECHNOLOGY while others draw copyright into new territories either by extending copyright protection to new subject matter, or by strengthening the role of copyright in previously protected works. The following Canadian Copyright Act Amendments: highlights some of the modifications suggested in Bill C-61.

Round Two • Personal Use Exception – Section 80 of the present Copyright is often considered less important than other intellectual Copyright Act offers a personal use exception for copying property rights in the course of business discussions. Despite this music rendered outdated due to technological changes trend, the importance of copyright in a business setting can be in the music recording industry. Bill C-61 both updates significant, particularly because copyright may be utilized to protect a and expands the personal use exception to encompass wide variety of assets – from software code to artistic works. current technologies including music as well as other mediums, such as copies of movies and television programs. Moreover, the right itself and the term of the protection are The Bill further proposes amendments that permit PVR noteworthy. In general, copyright grants an owner the sole right copying of content for personal viewing at a later time. to: produce or reproduce a work; to perform a work in public; to

8 • Lessons & Educational Institutions – Bill C-61 further introduces lessons taught at educational institutions TAX, ESTATES & TRUSTS into the ambit of copyright protection. This addition to copyrightable subject matter causes the copying of lessons to be an infringement of copyright. Additionally, the Bill extends to educational institutions the right to copy content Conversion Proposals for Income Trusts: from the Internet for the purpose of use in a lesson. Planning for 2011 and Beyond

• Performers’ Performances – Bill C-61 proposes several On July 14, 2008, the Minister of Finance (Canada) (the Minister) additions and modifications to the Copyright Act that are released the long-awaited draft conversion rules (the Conversion relevant to “performers’ performances.” The effect of this Proposals) to allow income trusts to convert into corporations on change is evident in the very phrase applied in Bill C-61 a tax-deferred basis. The Conversion Proposals generally apply to describe this class of rights – whereas the Copyright to conversions that occur on or after July 14, 2008 and before Act references a “performer’s performance” Bill C-61 2013. Certain Conversion Proposals apply to conversions that applies the term “performers’ performances.” This change occur on or after December 20, 2007 to accommodate income evidences an acknowledgment that in the present-day trusts that have already gone ahead and converted into corporations. society, the right is likely to extend to multiple performers. Income trusts that are subject to the specified investment flow- through (SIFT) rules (referred to as SIFT trusts) under the Income • Moral Rights – Bill C-61 expressly expands the scope of Tax Act (Canada) (the ITA), and that do not convert to corporations, moral rights from “work” into the realm of performers’ will have to pay tax at combined federal/provincial corporate tax performances. This proposed amendment encompasses rates on certain distributions of Canadian source income, including live aural performances as well as performances fixed in income from a business carried on in Canada and income (other a sound recording. Additionally, the Bill includes clauses than taxable dividends) and taxable capital gains from non-portfolio that specifically address infringement of moral rights. property as described below, starting in 2011.

• Technological Means of Protection – Bill C-61 proposes the Generally, an income trust will be a “SIFT trust” if it meets all inclusion of a section of clauses directed at “Technological of the following conditions: (i) the trust is resident in Canada Measures and Rights Management Information.” This (the residence test), (ii) equity and/or debt securities of the trust amendment has been identified as the Canadian version of are listed or traded on a stock exchange or other public market the US Digital Millennium Copyright Act. In basic terms, this (the public trading test), and (iii) the trust holds one or more section sanctions the implementation of technological measures non-portfolio properties (the property test). The draft legislative to protect copyright (such as encryption, scrambling, etc.) proposals released on July 14, 2008 include a proposed and restricts the circumvention of such measures. amendment to exclude certain debt securities held by persons or partnerships not affiliated with the income trust in applying • Internet Service Providers – Bill C-61 proposes to offer the public trading test. protection from infringement challenges to providers of Internet services and digital networks. Merely providing For purposes of applying the property test, non-portfolio property access to, or caching, a work does not implicate any provider includes, among other things, (i) securities of trusts resident in of an Internet service or a digital network as an infringer. Canada, corporations resident in Canada, Canadian resident partnerships (within the meaning of the ITA), and non-resident • Contractual Provisions – Bill C-61 proposes to extend persons or partnerships that are not “Canadian resident reliance upon contractual terms to provide a means of partnerships” if the principal source of income of such entities overriding aspects of copyright. The Bill expressly permits is one or any combination of sources in Canada, that are held by contractual provisions to prevail in the context of copyright the trust in a taxation year and that have a total fair market value for photos, downloading music, and downloading works (FMV) greater than 10 per cent of the equity value of such entity, from the Internet. or that together with all securities that the trust holds of entities affiliated with such entity, have a total FMV greater than 50 per cent of the equity value of the trust, (ii) Canadian real, immovable or Karen Durell resource property (as defined in the ITA), if at any time in the T. 416.595.7913 taxation year, the total FMV of such properties held by the trust E. [email protected] is greater than 50 per cent of the equity value of the trust, and (iii) property that the trust, or person or partnership with whom the trust does not deal at arm’s length, uses in the course of carrying on business in Canada.

9 Miller Thomson Analysis These trusts should consider other alternatives such as an asset Conversion Proposals sale, a privatization transaction or mergers with other income The Conversion Proposals include two main alternatives for trusts to reach a size that is more appropriate for conversion into conversion of an income trust into a corporation on a tax-deferred a corporation. basis. We note that the Conversion Proposals are currently in draft form and may be subject to further amendments before they are The decision to convert or not to convert into a corporation and enacted. the timing of any such conversion requires an analysis of various factors that is beyond the scope of this article. Miller Thomson Distribution Alternative has the tax expertise to provide advice to income trusts (including Under the first alternative (the Distribution Alternative), an income real estate investment trusts (REITs)) with respect to conversion, trust can convert into a corporation by distributing all of its property, reorganization, sale, merger and privatization transactions, and which must consist only of shares of a taxable Canadian corporation, to assist them in planning for 2011 and beyond. to the unitholders on its winding-up on a tax-deferred basis. The Distribution Alternative may also be used in respect of trust-on-trust structures (the so-called second-generation income Lyne M. Gaulin trust structures) where the income trust is the sole beneficiary T. 416.595.8590 of a sub-trust which in turn owns property. The distribution E. [email protected] mechanism for a trust-on-trust structure requires that the sub-trust distribute all of its property, which must consist only of shares of a taxable Canadian corporation, to the income trust by winding-up on a tax-deferred basis. The income trust can then convert into a corporation by distributing the shares received from sub-trust Canada-US Tax Treaty: Hybrid Entities to its unitholders on a tax-deferred wind-up of income trust. The Fifth Protocol to the Canada-United States Income Tax Income trusts that do not have a trust-on-corporation structure Convention (Treaty) has been ratified by Parliament and is (the so-called first-generation income trust structures) will have expected to be ratified by year-end in the United States. The to reorganize in order to be able to convert into a corporation under Fifth Protocol includes new rules that clarify the tax treatment the “Distribution Alternative.” Depending on the circumstances, of “hybrid” entities under the Treaty. Hybrids are entities that it may not always be possible for an income trust to reorganize are treated as taxable in one contracting state and “fiscally in such a manner for tax and/or non-tax related reasons. Another transparent” (i.e. liability for tax does not apply at the entity disadvantage of the Distribution Alternative is that it does not level, but rather “flows-through” to the owners, members or preserve the tax attributes of an income trust which are lost on partners thereof) in the other. Historically, hybrids have been its winding-up. used to obtain tax efficient results from cross-border struc- tures. Cross-border structures involving entities such as US Unit-for-Share Exchange Alternative limited liability companies (LLCs) or Canadian unlimited lia- Under the second alternative (the Unit-for-Share Exchange bility companies (ULCs) may be affected once the Fifth Alternative), an income trust can convert into a corporation by Protocol comes into effect. If the Fifth Protocol is fully ratified having its unitholders exchange all of their units of income trust in 2008, the new rules affecting hybrids will apply as of for shares of a taxable Canadian corporation which then becomes January 1, 2010; although the application of other new parts the sole shareholder of an income trust. The exchange mechanism of the Treaty introduced by the Fifth Protocol (i.e. limitation of is modelled on the existing share-for-share exchange mechanism benefits provisions) may accelerate the date by which an enti- in section 85.1 of the ITA but with some important differences. ty will need to take corrective action. This date could be as Additional steps are required after the unit-for-share exchange in early as January 1, 2009. order to eliminate the income trust (and sub-trust if applicable). Income trust (and sub-trust if applicable) may be eliminated by Miller Thomson Analysis using the Distribution Alternative described above. Alternatively, LLCs income trust (and sub-trust if applicable) may be eliminated LLCs are treated as corporations for Canadian tax purposes, but under proposed winding-up rules modelled on existing winding-up may be treated as fiscally transparent in the United States. As rules in subsection 88(1) of the ITA which preserve the tax attributes a result of this discrepancy, LLCs do not presently enjoy benefits of an income trust. under the Treaty. However, with the addition of paragraph 6 to Article IV of the Treaty, the Fifth Protocol will extend treaty benefits To Convert or Not to Convert to US residents that derive income in Canada through an LLC, The conversion into a corporation may be appropriate for large provided certain residency and other qualifying conditions are income trusts that are able to sustain a high-level of distributions met. Going forward, income, profit or gain will be “derived by” but may not be viable for small and medium size income trusts. a resident of either Canada or the United States if, under the

10 laws of either contracting state in which the owner is resident, James A. Fraser such amounts are derived through an entity that is not a resident T. 416.595.8594 of the state of source, the receiving entity is fiscally transparent E. [email protected] under the laws of the state of residence and the tax treatment attaching to the amounts is the same as if derived directly by and the owner. James A. Hutchinson ULCs T. 416.597.4381 Canadian ULCs (e.g. Nova Scotia ULC, Alberta ULC and British E. [email protected] Columbia ULC) are considered taxable in Canada, but are treated as fiscally transparent in the United States. ULCs have been commonly used by US residents as operating companies in financing structures and as holding companies because they are “disregarded” for US tax purposes. Under new paragraph 7 of Canada-US Tax Treaty: New Limitation on Article IV of the Treaty introduced by the Fifth Protocol, income, Treaty Benefits profit or gain will not be considered to be “derived by” a resident of a contracting state if such amounts are considered to have A new rendition of the Canada-US income tax convention (the been received from a hybrid entity resident in the state of source Canada-US Treaty) is set to become effective beginning in 2009. that is fiscally transparent under the laws of the recipient’s state The revisions are set out in the 5th Protocol to the Canada-US of residence (or home state) and the tax treatment of such amounts Treaty and introduce a concept new to the Canadian tax system: under the laws of the home state would be different if the hybrid a “Limitations on Benefits” provision. entity was not considered fiscally transparent under the laws of the home state. These new rules will eliminate the treaty benefits The new Limitation on Benefits article aims to combat the perceived (i.e. reduced withholding rate on dividends) presently attaching mischief of “treaty shopping.” Treaty shopping occurs when a to distributions made, for example, by a Canadian ULC to a US corporation or other entity is established in a treaty country and the parent corporation. This will significantly affect the inbound main purpose of establishing that entity is to gain access to treaty structures of US residents coming into Canada. With that said, benefits. The Limitations on Benefits provision must be considered there are a number of solutions that address the problem that when, instead of a direct relationship between a Canadian entity a Canadian ULC may pose to an existing cross-border structure, and a third country entity or a US entity and a third country entity, including: there are entities in the US, Canada and the third country, and 1. Interposing a particular type of corporation between the benefits under the Canada-US Treaty are being derived. Canadian ULC and its US parent; Miller Thomson Analysis 2. Converting the Canadian ULC into a corporation for US tax The existing Canada-US Treaty includes a form of Limitations on purposes; Benefits provision, however it is enforceable only by the US. 3. Liquidating the Canadian ULC to become a branch of its The new Limitations on Benefits provision will be reciprocal US parent; (enforceable by both the US and by Canada). As this is Canada’s 4. Reducing Canadian business activities in the ULC and first bilateral Limitations on Benefits provision, there is considerable increasing business activities in a Canadian branch; and uncertainty as to how the Canada Revenue Agency will administer the provision and the types of structures that will be affected. 5. Maximizing distributions from the Canadian ULC prior to the effective date of the new hybrid rules in the Treaty. If the Limitation on Benefits provision applies, Canada-US Treaty The applicability and effectiveness of these solutions will depend benefits, including: on the particular tax considerations of the Canadian ULC and its • 5 per cent withholding tax on cross-border dividends; US parent. A careful review of an existing cross-border structure is required to determine which solution may work best in the • 0 per cent withholding tax on cross-border interest; and circumstances. • 10 per cent withholding tax on cross-border royalty payments

The foregoing comments are of a general nature and do not will be denied; all such cross-border payments between Canada address all of the issues that should be considered in light of and the US will be subject to 30 per cent US withholding tax or the Fifth Protocol. Please contact a member of our Tax Group 25 per cent Canadian withholding tax. for further information on how the new rules introduced to the Treaty by the Fifth Protocol may affect cross-border structures Qualifying Persons Test currently in place. Under the new Limitations on Benefits provision, if an entity is a “Qualifying Person,” that entity is entitled to all the benefits of

11 the Convention. If an entity is not a Qualifying Person, limited Required Review treaty benefits may be available if one of two tests are met. The Limitation on Benefits provision of the Canada-US Treaty will likely come into force on January 1, 2009. There is no “Qualifying Persons” are residents of either Canada or the US grandfathering contemplated, thus both proposed and existing including: structures must be reviewed before the end of 2008 to ensure • natural persons that benefits under the Canada-US Treaty will not be denied on cross-border payments made after the end of 2008. • government entities; • estates; Leela Hemmings • not-for-profit organizations; T. 416.595.8623 • publicly traded entities (or entities controlled by them) E. [email protected] if certain tests are met; and • private corporations if certain tests are met;

In each case, particular criteria must be satisfied. To qualify as a Qualifying Person, a publicly traded company or trust must Bill C-62 – A Modernization of Federal have its principal class of shares or units primarily and regularly Non-Share Capital Corporation Legislation traded on a recognized Canadian or US stock exchange (a listing on a foreign stock exchange will not satisfy the test). As well, a Bill C-62, An Act respecting not-for-profit corporations and certain public company or trust will not be a Qualifying Person if a other corporations (the New Act), received first reading on June “disproportionate class” of shares or units is not regularly traded. 13, 2008. It is substantially similar to Bill C-21, which died on A disproportionate class is one that entitles the holder to a larger the order paper when parliament was dissolved in November portion of income, profits or gain of the corporation or trust. 2005. Unfortunately, like Bill C-21, the New Act also died on the order paper when parliament was dissolved in September 2008 For private corporations, at least 50 per cent of votes and value and a federal election was called. must be owned by Qualifying Persons. Further, expenses deductible from gross income that are paid or payable to persons that are The New Act represents the first significant change to federal not Qualifying Persons cannot exceed 50 per cent of gross income. non-share capital corporation legislation in many generations. This new legislation tracks conceptually with business corporation “Active Business” and “Derivative Benefits” Tests for Non- legislation and is modeled significantly on the Canada Business Qualifying Persons Corporations Act. However, as will be discussed in further detail below, many of the concepts taken from the business corporation If an entity is not a Qualifying Person, limited benefits under the context do not make sense when applied to non-share capital Canada-US Treaty may still be available if either the “Active Trade corporations, which are typically not-for-profit organizations and or Business” test or the “Derivative Benefits” test is met. charities. Highlighted below are some of the more significant changes introduced in the New Act. Under the Active Trade or Business test, the benefits of the Canada-US Treaty will be applicable to a resident of contracting Miller Thomson Analysis state engaged in active conduct of trade or business in that state, Incorporation as of right but only with respect to items of income connected or incidental The New Act introduces incorporation as of right to the non-share to such trade or business. The test requires that the activity be capital environment. Under the current regime governed by the substantial in relation to the other contracting state. Canada Corporations Act (the CCA), a minimum of three applicants wishing to incorporate must apply, with accompanying by-laws, Under the Derivative Benefits test, a resident of Canada or the to the Minister of Industry for a charter creating a “body corporate” US will be entitled to limited treaty benefits if the owner of the in order to carry on certain objects specified in the application. resident would be entitled to the same benefits had the income Under the current system, incorporation can take two to four weeks been earned directly by that owner. The test is a technical one because an Industry Canada examiner reviews the entire application and includes the condition that the third-country owner would for compliance with the CCA and Industry Canada policy. Much be eligible for treaty-reduced rates at least as low as the rates like existing business corporation legislation, the New Act introduces under the Canada-US Treaty. If there is interest being paid the concept of incorporation as of right for non-share capital cross-border between Canada and the US, the third-country owner corporations. Incorporation will be granted as of right once the will fail the Derivative Benefits test, as neither Canada nor the appropriate documents and fees are submitted, thus foregoing the US has 0 per cent withholding on interest in any of its other treaties. need for ministerial review of the application or by-laws. This change should reduce the time it takes to incorporate non-share capital corporations.

12 Under the New Act, although the purpose of a corporation must The New Act also provides that a director is not liable if the be stated in the articles of incorporation, a corporation will have director has exercised such care, in good faith, when relying upon the capacity, rights, powers and privileges of a natural person. the financial statements of the corporation or on professional advice. This is a departure from the CCA under which a corporation only has the powers listed in the statute and the corporation's governing Members documents. Under the New Act a corporation and its directors The New Act gives non-members certain voting rights, including will have powers immediately upon incorporation, even prior to the right to vote on proposed amendments to membership classes the passing of the corporate by-laws. The New Act also removes and rights, a sale of assets, amalgamation and dissolution. This will the need for a corporate seal. be problematic where an existing CCA corporation has non-voting members (which are typically honorary members) and does not Continuance Requirement want these members to gain voting rights upon continuance under If enacted, the New Act will repeal the CCA in its entirety. All federal the New Act. Granting non-voting members rights effectively gives non-share capital corporations will be established under the New this class of members the authority to prevent change even when Act. Existing corporations subject to Part II of the CCA will be approval of all other voting classes has been obtained. This is required to bring their corporate documentation into compliance with particularly problematic where non-voting members are numerically the New Act. This will require the filing of articles of continuance, insignificant. as well as possible amendments to corporate by-laws, to ensure that the corporation conforms with the requirements of the New The New Act also introduces an oppression remedy and derivative Act and obtains the benefits of its new provisions. Existing CCA action remedy to the non-share capital corporation context. This corporations must complete the continuance procedure within change is particularly problematic in this context. While these three years of the coming into force of the New Act, otherwise remedies may be appropriate in the business corporations’ context they could be dissolved. where shareholders have property and ownership interests to protect, such remedies are not appropriate in the non-share capital Soliciting versus Non-Soliciting Corporations environment where organizations are typically run as not-for-profits The New Act creates new distinctions between different types and charities. The New Act provides a faith-based defence with of corporations. One such distinction is based on whether a respect to the use of these new remedies. corporation falls within the definition of a “Soliciting Corporation.” A soliciting corporation is essentially a corporation that has, within Auditing Requirements the prescribed period, received income in excess of the prescribed Another distinction between corporations introduced in the New Act amount in the form of: is the concept of a “Designated Corporation and a Non-designated (a) donations or gifts of money or other property from a person Corporation”. Designated corporations must appoint a public who is not a member, director, officer or employee of the accountant and are subject to a higher level of financial review. corporation, or someone who is related to such a person; or A designated corporation means: (b) grants or similar financial assistance from the federal, provincial (a) a soliciting corporation that has gross annual revenues for or municipal government. its last completed financial year that are equal to or less than $50,000, or that is deemed to have such revenues; and The prescribed period under the New Act, as currently drafted, is (b) a non-soliciting corporation that has gross annual revenues three years and the prescribed amount is $10,000. The definition for its last completed financial year that are equal to or less requires more than mere solicitations to the public for funds. than $1,000,000. This is an important determination as it will impact on the corporation’s obligations and permitted actions. As well, soliciting Members of a designated corporation may resolve not to appoint corporations will be required to provide in their constating an auditor. documents that, on dissolution, any remaining property will be transferred to qualified donees (which are essentially Canadian Conclusion registered charities). While the New Act has died on the order paper, we are hopeful that it will be revived after the election when the new government Directors is formed. Certain members of the Charities and Not-for-Profit Corporations that are not soliciting corporations are permitted to group of Miller Thomson LLP were in the midst of making have one director. Soliciting corporations must have at least submissions to the Minister regarding the New Act’s more three directors. problematic provisions when the New Act died. These efforts will continue if and when the legislation is revived. Part II of the CCA does not contain any standards for the actions of directors. The New Act provides that directors must act honestly and in good faith with a view to the best interests of the corporation, Amanda J. Stacey and must exercise the care, diligence and skill that a reasonably T. 416.595.8169 prudent person would exercise in comparable circumstances. E. [email protected]

13 Toronto / Markham Max Spearn 416.595.2974 [email protected] Business & Securities Jennifer Bishop 416.595.8502 Robert M. Stewart 416.595.2963 [email protected] [email protected]

Paul E. Brace 905.415.6703 David Tsubouchi 905.415.6716 [email protected] [email protected]

David B. Buchanan 416.595.2665 John Turner,P.C., C.C., Q.C. 416.595.8607 [email protected] [email protected]

Andy Chan 905.415.6751 Steven L.Wesfield 416.595.8606 [email protected] [email protected]

Barbara R.C. Doherty 416.595.8621 Judson D. Whiteside 905.415.6701 [email protected] [email protected]

Eamonn J. Flaherty 905.415.6795 Financial Services [email protected] Jennifer E. Babe 416.595.8555 Beryl B. Green 416.595.8627 [email protected] [email protected] Jeffrey C. Carhart 416.595.8615 Michelle Greenwood 416.595.2952 [email protected] [email protected] Anthony K. Crossley 416.595.8689 Jennifer Hewitt 416.595.2972 [email protected] [email protected] Deepesh Daya 416.595.8553 Jay M. Hoffman 416.595.8508 [email protected] [email protected] Maurice V. R. Fleming 416.595.8686 Virginia Huang 416.595.2987 [email protected] [email protected] Jennifer Hewitt 416.595.2972 James M. Klotz 416.597.4373 [email protected] [email protected] Elizabeth Hutchison 416.595.8190 Sarah Lowy 416.595.8679 [email protected] [email protected] Richard D. Leblanc 416.595.8657 Ian Mak 416.595.2955 [email protected] [email protected] Joseph Marin 416.595.8579 Kimberly Muio 416.595.2653 [email protected] [email protected] Craig A. Mills 416.595.8596 Michael J. Pace 416.595.8533 [email protected] [email protected] Nora F. Osbaldeston 416.595.8680 James A. Proskurniak 416.595.8598 [email protected] [email protected] Eric Sherkin 416.595.8599 Jason Rosen 416.595.2644 [email protected] [email protected] Robert Shipcott 416.595.8628 Rachel Blumenfeld 416.596.2105 [email protected] [email protected]

Tom Tower 416.595.8674 John M. Campbell 416.595.8548 [email protected] [email protected]

Donald Carr, O.Ont., Q.C., L.H.D. 416.595.8506 Intellectual Property [email protected] & Information Technology David W. Chodikoff 416.595.8626 William Bankiner 416.595.8597 [email protected] [email protected] Gordon Cooper, Q.C. 416.595.8198 Anil Bhole 416.595.2645 [email protected] [email protected] Gerald D. Courage 416.595.8163 C. Donald Brown 416.595.8540 [email protected] [email protected] Arthur B.C. Drache, C.M., Q.C. 416.595.8681 Roxanne Chow 416.595.2649 [email protected] [email protected] James A. Fraser 416.595.8594 Anthony de Fazekas 416.595.8603 [email protected] [email protected] Lyne M. Gaulin. 416.595.8590 Karen Durell 416.595.7913 [email protected] [email protected] Matthew Getzler 416.597.4374 M. Stephen Georgas 416.595.8558 [email protected] [email protected] Robert Fuller, Q.C. 416.595.8514 Eugene J.A. Gierczak 416.596.2132 [email protected] [email protected] Robert B. Hayhoe 416.595.8514 Eduardo Krupnik 416.595.8524 [email protected] [email protected] Leela Hemmings 416.595.8623 J. Fraser Mann 416.595.8195 [email protected] [email protected] James A. Hutchinson 416.597.4381 Lou H. Milrad 416.595.7926 [email protected] [email protected] Hugh M. Kelly, Q.C. 416.595.8176 Andrew J. Sprague 416.595.8556 [email protected] [email protected] Kate Lazier 416.595.8197 Elisabeth Symons 416.595.8575 [email protected] [email protected] Susan M. Manwaring 416.595.8583 [email protected] Tax, Estates & Trusts Krystle Ng-A-Mann 416.595.2962 Dalton Albrecht 416.595.4360 [email protected] [email protected] Alon Ossip 905.415.6727 Elena Balkos 416.595.2965 [email protected] [email protected] Rosanne T. Rocchi 416.595.8532 Douglas Graham 519.593.2399 [email protected] [email protected]

Martin J. Rochwerg 416.596.2116 Trevor Grant 519.593.3285 [email protected] [email protected]

Amanda Stacey 416.595.8169 John J. Griggs 519.593.3231 [email protected] [email protected]

Andrew Valentine 416.595.2980 F. Glenn Jones 519.931.3512 [email protected] [email protected]

Katherine Xilinas 416.595.8165 Gregory P. Hanmer 519.593.3233 [email protected] [email protected]

Southwestern Ontario Tiffany K. Koch 519.931.3512 Business Law [email protected]

Aaron E. Atcheson 519.931.3526 Dwayne K. Kuiper 519.593.3243 [email protected] [email protected]

Robert R. Berry 519.780.4636 Jean Leonard 519.593.3246 [email protected] [email protected]

David Borges 519.593.3214 Thomas W.R. Manes 519.780.4614 [email protected] [email protected]

Frank O. Brewster, Q.C. 519.780.4618 J. Jamieson K. Martin 519.593.3247 [email protected] [email protected]

Stephen R. Cameron 519.593.3207 Richard G. Meunier, Q.C., 519.593.3251 [email protected] [email protected]

William S. Dahms 519.593.3211 Alissa K. Mitchell 519.931.3501 [email protected] [email protected]

Jeffrey D. Elliott 519.931.3505 Robin-Lee A. Norris 519.780.4638 [email protected] [email protected]

Scott J. Galajda 519.780.4615 Steven J. O’Melia 519.593.3289 [email protected] [email protected]

Peter A. Gifford, Q.C. 519.780.4626 Alessandra Prioreschi 519.593.3272 [email protected] [email protected]

Angus Gordon 519.780.4631 James Rhodes 519.593.2403 [email protected] [email protected]

A. Duncan Grace 519.931.3507 Andrew S. Roth 519.593.3264 [email protected] [email protected]

Lorelei Graham 519.780.4601 Karyn Sales 519.780.4655 [email protected] [email protected]

Andrew Graham 519.593.2398 Daniel Schmidt 519.593.3276 [email protected] [email protected] Eric N. Schneider 519.593.3200 This newsletter is provided as an information service to our clients [email protected] and is a summary of current legal issues. These articles are not meant as legal opinions and readers are cautioned not to Daryl W. Schnurr 519.593.3226 act on information provided in this newsletter without seeking [email protected] specific legal advice with respect to their unique circumstances. Miller Thomson LLP uses your contact information to send you David Schnurr 519.593.3287 information on legal topics that may be of interest to you. It does [email protected] not share your personal information outside the firm, except with subcontractors who have agreed to abide by its privacy policy and Kristina Shaw 519.931.3511 other rules. [email protected] © Miller Thomson LLP, 2008 All Rights Reserved. All Intellectual Ryan T. Sills 519.931.3514 Property Rights including copyright in this publication are owned by [email protected] Miller Thomson LLP. This publication may be reproduced and distributed the form or content. Any other form of reproduction or Heather Tanner 519.780.4603 distribution requires the prior written consent of Miller Thomson LLP [email protected] which may be requested from the editor at [email protected]. Anthony G.L. Van Klink 519.931.3509 [email protected]

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