Packed with valuable information, our publications help you stay in touch with the latest developments in the fields of law affecting you, whatever your sector of activity. Our professionals are committed to keeping you informed of breaking legal news through their analysis of recent judgments, amendments, laws, and regulations.
International tax planning endorsed by the Court
In the recent decision in Agracity Ltd. v. The Queen1, the Tax Court of Canada (the “Court”) endorsed the Canadian tax consequences of business transactions between a Canadian corporation (“Agracity”) and its Barbados affiliate (“NewAgco-Barbados”) within a group of companies operating in the agrochemical industry (the “Group”). NewAgco-Barbados is an offshore company established for the purpose of negotiating and purchasing a particular herbicide (the “Herbicide”) internationally for resale in Canada. All of NewAgco-Barbados’s profits were generated by the resale of the Herbicide, which were subject to Barbados’s low tax rate. Agracity was in charge of receiving and filling orders for the Herbicide from Canadian consumers, under a service agreement with NewAgco-Barbados for the logistics, storage and transportation of the Herbicide from abroad to Canadian consumers. The Canada Revenue Agency (the “CRA”) attempted to allocate all of NewAgco-Barbados’s profits to Agracity, relying primarily on sham transaction rules and secondarily on transfer pricing rules under subsection 247(2) of the Income Tax Act2 (the “Act”). The Court held that the negotiation and procurement of the Herbicide by NewAgco-Barbados constituted a legitimate commercial objective and a genuine function within the Group. It ruled in favour of Agracity in this case and confirmed that the transactions between Agracity and NewAgco-Barbados were not deceptive and did not warrant any adjustment to Agracity’s profits under transfer pricing rules. This case sheds new light on how to interpret the business role of foreign subsidiaries and the limits of the CRA’s remedial authority with respect to transfer pricing provided for in the Act, making it easier for domestic businesses to implement international business structures. When properly set up and operated, these structures can provide substantial tax savings. The decision in Agracity v. The Queen has not been appealed. Our taxation team can assist you with national and international tax planning for your business transactions. 2020 CCI 91 R.S.C. 1985, c. 1 (5th suppl.);
Canadian Patents: What to Keep in Mind One Year After the Coming into Force of the New Rules?
The first anniversary of the entry into force of the new Canadian Patent Rules, which significantly changed certain practices surrounding the filing and prosecution of patent applications in Canada, is an opportunity to look back at the major changes that have had a significant impact on Canadian patent practice. Indeed, the past year has allowed us to observe the changes, which in certain aspects seem to be confusing for patent applicants, and to observe their effect in practical terms. We discuss below the scope of some of the legislative amendments that came into force on October 30, 2019, to clarify such issues and assist patent applicants in Canada. Things are moving faster Under the new Rules, the time limit for filing a request for examination has been reduced from 5 years to 4 years, and the time limit for responding to an examination report is now 4 months instead of 6 months, thus shortening the process of obtaining a patent in Canada. Although there are mechanisms to extend these time limits by a few months, they result in additional costs to patent applicants and may also jeopardize priority examination procedures under paragraph 84(1)(a) of the Patent Rules. As a result, we have noted a generally accelerated pace of examination over the past year. Time is running out for “latecomers” Canada was for a long time one of the only jurisdictions where it was possible to defer entry into the national phase until the 42nd month after the priority date as a matter of right by simply paying a late filing surcharge. However, under the new Rules, PCT applications will only be eligible for so-called “late” national phase entry if the failure to meet the initial 30-month deadline occurred despite "due care" (a suitable explanation will be required to demonstrate such a showing of due care). It is important to note that PCT applications with an international filing date (not a national phase entry date) prior to October 30, 2019 are subject to the old Rules in this respect, and therefore ”late” national phase entry in Canada between the 30th and 42nd month following the priority date is still possible for such PCT applications by paying the surcharge, without justification. Patent applicants would be advised to identify their pending PCT patent applications that are still eligible for “late” national phase entry under the old Rules, and file in Canada before the 42nd month expires in those cases where protection in Canada is desired. Stricter deadlines for examination requests and maintenance fees – be careful Under the old Rules, for most of the time limits set by the Patent Act or the Commissioner of Patents, failure to meet such a time limit triggered a further 12-month period to fulfil the requirement in question via the abandonment and reinstatement system (applications), or the late payment of maintenance fees system (patents). Under the new Rules, this additional 12-month period no longer applies in cases of failure to meet the deadline for requests for examination and maintenance fees. However, the new system offers additional protection to applicants since failure to comply with the time limits for these actions triggers the issuance of a CIPO notice requesting the completion of the required action within a new time limit (usually 2 months). However, a “due care” requirement comes into effect after the expiry of the period specified in the notice or six months after the initial missed deadline, whichever is later. In addition to the “due care” requirement, third party rights may apply during the abandonment period. This leads to situations where a patent application is abandoned for two different reasons, with different deadlines and requirements for reinstatement, increasing the risk of confusion for applicants. Consider a hypothetical case where an applicant who was unsure whether they wanted to pursue a patent application decided to allow the application to become abandoned by not responding to an examination report by the November 1, 2019, deadline, and to retain the option of reinstatement the following year. In this now abandoned application, the applicant also did not pay the maintenance fee initially due on December 1, 2019, triggering a 6-month delay to pay the maintenance fee and a late fee. Non-payment of the maintenance fee and late fee by June 1, 2020 would thus result in a second reason for abandonment. However, in October 2020, the applicant finally decided to continue with the application, and to respond to the examination report with a request for reinstatement and payment of the reinstatement fee, thereby removing the first reason for abandonment. However, for the second reason for abandonment, the request for reinstatement must also include a statement that the non-payment of the maintenance fee and late fee within the prescribed time limit occurred despite the fact that the applicant exercised “due care” in attempting to make the payment. It is therefore important that patent applicants who deliberately abandon an application, but wish to retain the possibility of reinstatement at a later date, be well aware of the “due care” requirement and of the third party rights that may apply in certain circumstances, including ensuring that the time limits for requests for examination and maintenance fees are respected in order to avoid loss of rights. Manage your priorities well You are now required to file a certified copy of any priority application, or to refer to a digital library providing access to this document (CIPO accepts the “WIPO-DAS” code assigned to a priority application in this regard). For Canadian applications resulting from PCT applications, if the PCT requirements for a certified copy in the international phase have been met, it is not necessary to resubmit a certified copy upon entry into the Canadian national phase. However, for Canadian applications with a priority claim under the Paris Convention, the certified copy or digital library reference must be filed within 4 months of filing or 16 months of the priority date, whichever is later. Also, it is now possible to restore the priority of a Canadian application within 14 months of the priority date where the failure to file an application within the prescribed 12-month period was unintentional. The time limit for requesting restoration of priority is two months from the filing date for non-PCT filings, and one month from the national phase entry date for PCT filings. No longer lost in translation – more flexibility for non-PCT filings Prior to October 30, 2019, it was required to submit a patent application in one of Canada’s two official languages (English/French) and pay the prescribed filing fee at the time of filing to get a filing date in Canada for both non-PCT filings and PCT national phase entries. Under the new Rules, and only for non-PCT filings, it is possible to file an application in a language other than the two official languages and/or not to pay the prescribed fee at the time of filing. In such cases, CIPO will issue a notice requiring that a French or English translation of the application be provided and/or that the filing fee be paid within a specified period of time. This flexibility for non-PCT filings does not apply to filings based on PCT applications. For national phase entries of a PCT application filed in a language other than English or French, applicants must ensure that they have a translation of the application on hand at PCT national phase entry in Canada. Registration of documents and transfers It was previously necessary to register a copy of a document evidencing a transfer of rights (e.g., an assignment) and pay a registration fee in order to effect a change in ownership of a patent application or patent. However, under the new Rules, the registration of a transfer of ownership and the registration of evidence of the transfer (e.g., a signed transfer document) are separate actions for which separate fees must be paid. It is important to note that the mere registration of a document evidencing a transfer only results in that document being recorded, but is not treated as a request to record a transfer. It is also important to note that former section 51 of the Patent Act—which provided that any assignment is void against any subsequent assignee, unless the assignment is registered as prescribed by those sections, before the registration of the instrument under which the subsequent assignee claims—has been repealed and replaced by subsection 49(4), which in turn refers only to transfers of patents. Thus, the priority is to record the transfer. In light of this, it is strongly recommended that patent applicants and patent holders promptly register any transfer of rights with CIPO in order to update their Canadian file and to prevent any subsequent and illegitimate transfer registration in favour of a third party. Conclusion If you have any questions or require further information on these or any other aspects of Canadian patent practice, feel free to contact a member of our team!
Tax Aspects of Insolvency and Bankruptcy
The current crisis caused by the COVID-19 pandemic has already caused, and will continue to cause, significant liquidity problems for some businesses. Companies whose financial difficulties threaten their very existence will have to restructure in order to avoid bankruptcy, either by availing themselves of the protection of the Companies' Creditors Arrangement Act1 (the "CCAA") or by using the proposal mechanism of the Bankruptcy and Insolvency Act2 (the "BIA"). Tax considerations related to an arrangement or a proposal accepted by creditors Making use of the provisions of the CCAA or the BIA entails tax considerations for the debtor corporation that directors and owner-operators need to consider. Some of these tax considerations are discussed below. In the context of the restructuring of a debtor company, creditors may accept a partial settlement of their claim or a conversion of their claim into shares in the debtor company. If a corporation is not bankrupt within the meaning of the Bankruptcy and Insolvency Act, the settlement of a debt for an amount less than its principal will have tax consequences for the debtor corporation. For example, certain tax attributes of the debtor corporation such as the balance of loss carryforwards, the undepreciated portion of the capital cost of depreciable property or the adjusted cost base of capital assets will be reduced by the amount of the reduction in the receivable, if any. In certain cases, if the tax attributes of the debtor corporation are insufficient to absorb the amount of debt forgiven, inclusion in the calculation of its taxable income may occur, creating a tax liability. Several strategies can be adopted to limit undesirable consequences in the context of a restructuring under the Companies' Creditors Arrangement Act. As mentioned, it may be possible, among other things, to convert the debt into shares of the debtor company without causing adverse consequences, if the fair market value of the shares issued upon conversion of the debt is equal to the principal of the debt. In some cases, a debt held by a shareholder of the debtor company could be written off without consideration and without the need to issue shares. Finally, it may be possible, in certain situations, to avoid inclusion in the income of the debtor corporation through the use of certain reserve mechanisms or through tax deductions. Insolvency is a delicate situation for any business. Proper tax planning will allow the debtor company to maximize the effectiveness of the restructuring process offered by the CCAA. Our taxation team can help you set up effective planning in this context. R.S.C. 1985, c. C-36 and amendments R.S.C. 1985, c. B-3 and amendments
The Unforeseen Benefits of Driverless Transport during a Pandemic
The COVID-19 pandemic has been not only causing major social upheaval but disrupting business development and the economy as well. Nevertheless, since last March, we have seen many developments and new projects involving self-driving vehicles (SDV). Here is an overview. Distancing made easy thanks to contactless delivery In mid-April 2020, General Motors’ Cruise SDVs were dispatched to assist two food banks in the delivery of nearly 4,000 meals in eight days in the San Francisco Bay Area. Deliveries were made with two volunteer drivers overseeing the operation of the Level 3 SDVs. Rob Grant, Vice President of Global Government Affairs at Cruise, commented on the usefulness of SDVs: “What I do see is this pandemic really showing where self-driving vehicles can be of use in the future. That includes in contactless delivery like we’re doing here.”1 Also in California in April, SDVs operated by the start-up Nuro Inc. were made available to transport medical equipment in San Mateo County and Sacramento. Toyota Pony SDVs were, for their part, used to deliver meals to local shelters in the city of Fremont, California. Innovation: The first Level 4 driverless vehicle service In July 2020, Navya Group successfully implemented a Level 4 self-driving vehicles service on a closed site. Launched in partnership with Groupe Keolis, the service has been transporting visitors and athletes on the site of the National Shooting Sports Centre in Châteauroux, France, from the parking lot to the reception area. This is a great step forward—it is the first trial of a level 4 vehicle, meaning that it is fully automated and does not require a human driver in the vehicle itself to control it should a critical situation occur. Driverless buses and dedicated lanes in the coming years In August 2020, the state of Michigan announced that it would take active steps to create dedicated road lanes exclusively for SDVs on a 65 km stretch of highway between Detroit and Ann Arbour. This initiative will begin with a study to be conducted over the next three years. One of the goals of this ambitious project is to have driverless buses operating in the corridor connecting the University of Michigan and the Detroit Metropolitan Airport in downtown Detroit. In September 2020, the first SDV circuit in Japan was inaugurated at Tokyo’s Haneda Airport. The regular route travels 700 metres through the airport. A tragedy to remind us that exercising caution is key On March 18, 2018, in Tempe, Arizona, a pedestrian was killed in a collision with a Volvo SUV operated by an Uber Technologies automated driving system that was being tested. The vehicle involved in the accident, which was being fine-tuned, corresponded to a Level 3 SDV under SAE International Standard J3016, requiring a human driver to remain alert at all times in order to take control of the vehicle in a critical situation. The investigation by the National Transportation Safety Board determined that the vehicle’s automated driving system had detected the pedestrian, but was unable to classify her as such and thus predict her path. In addition, video footage of the driver inside the SDV showed that she did not have her eyes on the road at the time of the accident, but rather was looking at her cell phone on the vehicle’s console. In September 2020, the authorities indicted the driver of the vehicle and charged her with negligent homicide. The driver pleaded not guilty and the pre-trial conference will be held in late October 2020. We will keep you informed of developments in this case. In all sectors of the economy, including the transportation industry and more specifically the self-driving vehicles industry, projects have been put on hold because of the ongoing COVID-19 pandemic. Nevertheless, many projects that have been introduced, such as contactless delivery projects, are now more important than ever. Apart from the Navya Group project, which involves Level 4 vehicles, all the initiatives mentioned concern Level 3 vehicles. These vehicles, which are allowed on Quebec roads, must always have a human driver present. The recent charges against the inattentive driver in Arizona serve as a reminder to all drivers of Level 3 SDVs that regardless of the context of an accident, they may be held liable. The implementation of SDVs around the world is slow, but steadily gaining ground. A number of projects will soon be rolled out, including in Quebec. As such initiatives grow in number, SDVs will become more socially acceptable, and seeing these vehicles as something normal on our roads is right around the corner. Financial Post, April 29, 2020, “Self-driving vehicles get in on the delivery scene amid COVID-19,”.
Time limit extensions: What are the possible consequences on limitation periods for tax purposes?
A recent Ministerial Order1 from the Minister of National Revenue has formally extended certain deadlines under the Income Tax Act (“ITA”) and the Excise Tax Act (“ETA”). The Order is retroactive to March 13, 2020. The extension is 6 months or until December 31, 2020, whichever is earlier. This Ministerial Order will have various implications for taxpayers and registrants, in particular in terms of limitation periods. For example, notices of reassessment may be issued until December 31, 2020, for taxpayers whose reassessment period under the ITA expired between May 20, 2020, and December 30, 2020, even in circumstances where there is no misrepresentations attributable to negligence, carelessness or wilful default in tax returns and no waivers of the regular reassessment period have been signed. As a result, the taxation years subject to the Order (in particular 2016 or 2017, depending on the taxpayer) and reporting periods would not be statute-barred in these circumstances. Reporting periods and taxation years that became statute-barred on or before May 19, 2020, are not subject to the Order. It remains to be seen how the Canada Revenue Agency (“CRA”) intends to apply the Ministerial Order. The CRA has stated that “generally, taxpayers would be informed of the details of a potential (re)assessment, including whether or not the CRA is applying an extension to a (re)assessment period under the Ministerial Order.”2 Time limits extended by 6 months The period for claiming SR&ED expenditures (Form T661), normally 12 months after the corporation’s filing due date for a return;3 The period for claiming an SR&ED investment tax credit (Form T661 and Schedule 31 or Form T2038), normally 1 year after the corporation’s filing due date for a return; The normal reassessment period for a taxation year (normally 3 years or 4 years after the issuance of a notice of assessment under the ITA) that would normally have expired after May 19, 2020, but before December 31, 2020; The normal reassessment period for a reporting period (normally 4 years following the issuance of an assessment under the ETA) that would normally have expired after May 19, 2020, but before December 31, 2020; The deadline for applying for an extension of time to file a Notice of Objection under the ITA and the ETA that would normally have expired after March 12, 2020 (normally 1 year after the expiry of the time limit for filing a Notice of Objection), as well as the time limit for appeal of the Minister’s decision dismissing such an application with the Tax Court of Canada. Our taxation team can help you manage your deadlines and your interactions with the tax authorities. Canada Gazette, Part I, Vol. 154, No. 37: COMMISSIONS, September 12, 2020 https://www.canada.ca/en/revenue-agency/services/covid-19-ministerial-orders/time-period-other-limits-faq.html For corporations and trusts with a tax year-end from September 13, 2018, to December 31, 2018, and an SR&ED reporting deadline from March 13, 2020, to June 30, 2020, the deadline is extended by 6 months. For corporations and trusts with a tax year-end from January 1, 2019, to June 29, 2019, and an SR&ED reporting deadline from July 1, 2020, to December 29, 2020, the deadline is extended to December 31, 2020. For individuals who operated a sole proprietorship for which the tax year ended on December 31, 2018, and whose SR&ED reporting deadline was June 15, 2020, the deadline is extended to December 15, 2020.
Court upholds deductibility of carrying charges
The Tax Court of Canada (the “Court”) recently upheld the deductibility of carrying charges incurred in connection with an issuance of shares. In so doing, the court upheld the tax benefits arising from a common financing practice. In addition, the Court reiterated the principle in tax matters according to which, save in exceptional cases, the legal relationships established by one or more taxpayers must be respected. In this case1, Laurentian Bank (the “Bank”) issued shares from its share capital to the Caisse de dépôt et placement du Québec (“CDPQ”) and the Fonds de solidarité des travailleurs du Québec (“FSTQ”) totalling $120M, through a private placement. In addition to assuming a portion of the costs incurred by CDPQ and FSTQ in connection with this issuance of shares, the Bank agreed to pay each of the investors, as professional fees for services rendered in connection therewith, an amount corresponding to 4% of the total amount of their investment. The Canada Revenue Agency challenged the Bank’s deduction, over 5 years, of the total amount of $4.8M paid to CDPQ and FSTQ, in particular on the grounds that no services had been rendered to the Bank by the two investors and that the expense was unreasonable. The Court ruled in favour of the Bank and allowed it to deduct the amount of $4.8M in computing its income on the basis of paragraph 20(1)(e) of the Income Tax Act, namely, in 20% increments over five fiscal years. Not only did the Court recognize the merits of the Bank’s arguments as to the fact that it had incurred an expense for services obtained from the CDPQ and the FSTQ, but the Court also confirmed that the expense was reasonable under the circumstances. In this decision, the Court recognized the favourable tax consequences for an issuer of shares arising from a common practice in the field of financing through share issuance. It also appears that the reasons for the Court’s decision could be applied to other costs incurred in the context of financing activities and thus allow entities incurring such costs to obtain a significant tax advantage. It is therefore to the advantage of corporations issuing shares or borrowing to carefully analyze and negotiate the financing agreements they are considering in order to maximize their tax benefits. Our taxation team can assist you in setting up a share issuance that is both successful and optimal from a tax standpoint. Banque Laurentienne du Canada c. La Reine, 2020 CCI 73
Artificial Intelligence and Telework: Security Measures to be Taken
Cybersecurity will generally be a significant issue for businesses in the years to come. With teleworking, cloud computing and the advent of artificial intelligence, large amounts of data are likely to fall prey to hackers attracted by the personal information or trade secrets contained therein. From a legal standpoint, businesses have a duty to take reasonable steps to protect the personal information they hold.1 Although the legal framework doesn’t always specify what such reasonable means are in terms of technology, measures appropriate for the personal information in question must nevertheless be applied. These measures must also be assessed in light of the evolution of threats to IT systems. Some jurisdictions, such as Europe, go further and require that IT solutions incorporate security measures by design.2 In the United States, with respect to medical information, there are numerous guidelines on the technical means to be adopted to ensure that such information is kept secure.3 In addition to the personal information they hold, companies may also want to protect their trade secrets. These are often invaluable and their disclosure to competitors could cause them irreparable harm. No technology is immune. In a recent publication,4 the renowned Kaspersky firm warns us of the growing risks posed by certain organized hacker groups that may want to exploit the weaknesses of Linux operating systems, despite their reputation as highly secure. Kaspersky lists a number of known vulnerabilities that can be used for ransom attacks or to gain access to privileged information. The publication echoes the warnings issued by the FBI regarding the discovery of new malware targeting Linux.5 Measures to be taken to manage the risk It is thus important to take appropriate measures to reduce these risks. We recommended in particular that business directors and officers: Adopt corporate policies that prevent the installation of unsafe software by users; Adopt policies for the regular review and updating of IT security measures; Have penetration tests and audits conducted to check system security; Ensure that at least one person in management is responsible for IT security. Should an intrusion occur, or, as a precautionary measure for businesses that collect and store sensitive personal information, consulting a lawyer specializing in personal information or trade secrets is recommended in order to fully understand the legal issues involved in such matters. See in particular: Act respecting the protection of personal information in the private sector (Quebec), s. 10, Personal Information Protection and Electronic Documents Act (Canada), s. 3. General Data Protection Regulation, art. 25. Security Rule, under the Health Insurance Portability and Accountability Act, 45 CFR Part 160, 164. https://securelist.com/an-overview-of-targeted-attacks-and-apts-on-linux/98440/ https://www.fbi.gov/news/pressrel/press-releases/nsa-and-fbi-expose-russian-previously-undisclosed-malware-drovorub-in-cybersecurity-advisory
An introduction to Trade Secrets: What they are and why they matter to your business
One of the most common questions we receive as intellectual property lawyers is “How can I prevent others from using technology that I have developed and that has significant value to my business?” That question can often be answered by advising clients to file a patent application. However, there exists another type of intellectual property protection, known as a “trade secret,” that may be more suitable for certain situations and technologies. This brings us to the main topic of this newsletter: the importance of trade secrets. Specifically, this newsletter will first provide a general definition of trade secrets, including examples thereof, followed by information regarding the various ways trade secrets can be effectively used and protected by a business. Brief overview of trade secrets The definition of a trade secret is incredibly broad; in fact, the term “trade secret” can include any valuable business information that derives its value from secrecy. This information can be, for example, financial, business, or scientific information, such as patterns, plans, compilations, formulas, programs, codes, prototypes, or techniques. As indicated by the Canadian Intellectual Property Office, to protect and benefit from trade secrets in Canada, a business must: Obtain value from the secret; Keep the information a secret; and Take all possible measures to ensure that the information remains a secret. Generally, if the above criteria are met, then the information in question can be considered a trade secret. Some of the most famous examples of trade secrets are for recipes (such as the Coca-ColaTM recipe or the KFC Original RecipeTM); chemical formulas (such as WD-40TM); and the client information of social media platforms and dating apps (such as FacebookTM or TinderTM). While the definition of a trade secret may seem quite broad, this breadth is precisely why trade secrets can be such a powerful tool: they can allow your company to monopolize information or technology that may not be protected using other means, such as patents. In addition, the protection granted by keeping valuable information secret can last indefinitely (or at least until the secret is revealed). The premise behind trade secrets is that, by keeping this valuable information secret, third parties are prevented from accessing and using the information in question, thereby giving your business an advantage over competitors. Accordingly, if your company has information from which it derives value (such as a newly developed piece of technology), trade secrets may be an appealing alternative to patents and other forms of IP protection. Best practices for businesses with respect to their trade secrets Having provided a brief overview of trade secrets, we will now focus on practical considerations, specifically with respect to helping ensure that trade secrets are kept confidential even when the information in question needs to be shared with an employee or a third party. Frequently, businesses will have to share their trade secrets with others. For example, specific employees of a company will often have access to some (or all) of that company’s trade secrets. Similarly, companies will often have to share their trade secrets with third parties; for example, a company that hires an external consultant may be required to furnish that consultant with trade secret information. Also, a company that has developed a new piece of technology it aims to keep secret may be required to divulge how to make said technology to a third-party manufacturer. In such situations, it is important to have certain measures in place that will better ensure that your trade secret remains a trade secret. Contractual obligations When employed correctly, the use of contractual clauses can provide ample protection with regard to a company’s trade secrets. Specifically, for any employee or third party that may gain access to trade secrets, it would be prudent to ensure that a robust written agreement is signed that stipulates what said employee’s or third party’s obligations are with respect to the trade secrets to which they gain access. Some examples of clauses pertaining to trade secrets that can be included in an employment contract or a contract with a third party include the following: Definition of "Confidential Information" or “Trade Secrets”: This clause would give a definition as to what information to be provided to the employee or third party is considered a trade secret. Obligation of non-disclosure and non-use: This clause would specify that the employee or third party in question is not allowed to use or disclose the confidential information they receive except in accordance with “permitted uses.” Definition of "permitted uses”: This clause would define the manner in which an employee or third party is allowed to use or disclose the confidential information they receive. Undertaking not to use/disclose/publish/reproduce confidential information of third parties (e.g., a former employer): This clause would remind an employee or third party that they are forbidden from using or disclosing confidential information they have received from a previous employer or contractor. Data destruction/return of documents: This clause would specify that the employee or third party is required to destroy and/or return all confidential information they have received to the company upon termination of their contract. Obligation to report if information was inadvertently transmitted: This clause would specify when and how an employee or third party must notify the company should any confidential information in their possession be disclosed or used in a manner that contravenes their contractual obligations. Penalty clause (articles 1622 and 1623 of the Civil Code of Quebec): This clause would specify that the employee or third party is obliged to pay the company a certain fee should any confidential information they receive be disclosed or used in a manner that contravenes their contractual obligations. The above clauses represent but a few examples of important clauses that can be included when drafting a written contract for any employee or third party that will be given access to a company’s trade secrets. However, it is not always feasible to draft a robust written agreement. Accordingly, there are other ways to implement the above clauses; for example, the above clauses can be defined in a company’s policy manual that would be provided to employees when they are being hired by the company. It is also important to remind employees or third parties of their obligations regarding your company’s trade secrets at the relevant times. For instance, when a contract with an employee or a third party is to be terminated, that might be an opportune moment to remind the employee or third party that they have a duty to return and/or destroy all confidential information and documents they have received from your company. This reminder can be made in an email, in a release to be signed by the employee, or even during an exit interview. Employee duty of loyalty It should be mentioned that, in Quebec, all employees have a duty of loyalty to their employers, due to article 2088 of the Civil Code of Quebec, which states inter alia that “The employee is bound […] to act faithfully and honestly and not use any confidential information he obtains in the performance or in the course of his work. These obligations continue for a reasonable time after the contract terminates […].” [emphasis added]. Accordingly, even without a written employment contract containing the above-discussed clauses, employees are still required to keep trade secrets confidential and to not appropriate the material or intellectual property of the employer. However, this protection is quite limited (for example, it only applies for a reasonable time once the employment contract is terminated), and so it is always more prudent to explicitly define an employee’s obligations regarding trade secrets in, for example, an employment contract or a company policy manual. It should also be mentioned that article 2088 of the Civil Code of Quebec concerns employees only, and does not apply to third parties who gain access to trade secrets. Remedies Even with the best of safeguards in place, a current or former employee or third party may nonetheless use or disclose your company’s trade secrets. While such a situation is unfortunate, there are a number of legal remedies that can allow you to mitigate the damage done, as well as to recover amounts from the rule-breaking parties. Specifically, it is generally possible to obtain injunctions or safeguard measures against parties that have misappropriated your company’s trade secrets. In addition, it is generally possible to recover damages from said parties. While the above remedies may seem relatively inconsequential, they can be quite severe under certain circumstances. One recent example is a lawsuit commenced in 2017 by Motorola Solutions against Hytera Communications in the United States. In their lawsuit, Motorola Solutions alleged inter alia that three former Motorola Solutions employees had gone to work for Hytera and taken Motorola trade secrets with them, after which Hytera used these trade secrets to develop its Digital Mobile Radio (DMR) products. Motorola was eventually awarded a jury verdict of $764.6 million earlier this year. The above example not only demonstrates how powerful legal remedies regarding trade secret protection can be, but it also demonstrates why it is important to respect the trade secrets of others. Otherwise, your company may find itself on the receiving end of a lawsuit similar to the one commenced by Motorola. It is also worth mentioning that, despite the lawsuit taking place in the United States, the injunction sought by Motorola (which has yet to be ruled upon) would forbid Hytera from selling any of the contested DMR products worldwide. In addition to civil remedies (such as the example provided above), there are also criminal ramifications for violating the trade secrets of others. In Canada, the newly implemented Canada-United States-Mexico Agreement (CUSMA) has required Canada to implement criminal procedures and penalties specifically for trade secret theft. Said regulations no doubt serve as an additional incentive to respect the trade secrets of competitors. Conclusion We hope that the above has demonstrated the importance of trade secrets, both in terms of how they can be used and why the trade secrets of competitors should be respected. However, while the above guidelines may serve as a good starting point for protecting your company’s trade secrets, the best strategy (including whether or not trade secrets are preferable over, say, patents) will depend heavily on your business, the information/technology in question, and various other factors. Accordingly, our intellectual property team would be happy to help you with any questions you may have regarding how to best protect your business’ most valuable information and technology.
Federal Court clarifies the assessment of patent-eligible subject matter in Canada
In Yves Choueifaty v. Attorney General of Canada1, the Federal Court of Canada has issued a significant decision concerning the assessment of patent-eligible subject matter, including the approach to be used for such assessment during the examination of Canadian patent applications. Historical perspective In keeping in step with advances in technology, the Canadian Courts have assessed and established certain principles in assessing patent-eligible subject matter. A key decision in this regard related to the patentability of Amazon.com’s “one-click” method for online purchasing. In the Amazon decision2, the Federal Court of Appeal in particular established that the assessment of patent-eligible subject matter requires a “purposive construction” of the claims, utilizing the criteria and approach long established by the Supreme Court3, and notably requiring the assessment as to whether or not a claim element is essential. As summarized by the Federal Court, two questions in particular are to be asked in this regard: Would it be obvious to a skilled reader that varying a particular element would not effect the way the invention works? If modifying or substituting the element changes the way the invention works, then that element is essential. Is it the intention of the inventor, considering the express language of the claim, or inferred from it, that the element was intended to be essential? If so, then it is an essential element. Importantly, the Supreme Court established that such an assessment should not be based on what is considered to be the “substance of the invention.” Subsequent to the Amazon decision, the Canadian Intellectual Property Office (CIPO) established examination guidelines to assess the patent-eligibility of subject matter in various technology areas. Such guidelines in particular followed a problem-solution approach to determine whether an element is essential and in turn the patent eligibility of a claim. Background The Choueifaty case concerns Canadian Patent Application No. 2,635,393 entitled “Method and Systems for Provision of an Anti-Benchmark Portfolio”, claiming a computer-implemented method for providing an anti-benchmark portfolio. Briefly, the method entails acquiring and processing data regarding securities in a portfolio via particular steps and calculations to generate an anti-benchmark portfolio, the various steps being carried out using a computer. During examination and appeal proceedings at CIPO, the assessment of patentable subject matter was performed via the problem-solution approach set forth in the examination guidelines relating to computer-implemented inventions. Using this approach, it was determined that the solution and in turn the essential elements of the claims were “directed to a scheme or rules involving mere calculations”, and that using a computer was not an essential element of the claims. The claims were thus rejected by CIPO on the basis that: When a claim’s essential elements are only the rules and steps of an abstract algorithm, however, that claim is non-statutory. The Court’s decision On appeal to the Federal Court, it was determined that CIPO did not apply the proper test, noting that the problem-solution approach of CIPO’s examination guidelines not only did not follow the purposive construction test of the Supreme Court, but further is an approach that the Supreme Court established should not be used: The Appellant submits, and I agree, that using the problem-solution approach to claims construction is akin to using the “substance of the invention” approach discredited by the Supreme Court of Canada ... Notably, the Court noted that CIPO’s approach failed to consider the second factor noted above, concerning the inventor’s intention, which is contrary to the test established by the Supreme Court. The Court thus allowed the appeal and set aside CIPO’s decision to reject the application, requesting that CIPO undertake a fresh assessment of this issue in accordance with the Court’s reasons. Future considerations This decision brings much needed clarity to the assessment of patentable subject matter in Canada and is a welcome development for patent applicants in a variety of technology areas. The Court’s clear instructions to use the criteria of purposive construction established by the Supreme Court will assist in the analyses of various issues of patentability during patent examination. It will be interesting to see how CIPO will proceed in light of the decision, in respect of its fresh assessment as directed by the Court and also the possibility of pursuing an appeal. Stay tuned and please do not hesitate to contact a professional of our Patents team for more information! 2020 FC 837. Canada (Attorney General) v. Amazon.com, Inc., 2011 FCA 328. Free World Trust v. Électro Santé Inc., 2000 SCC 66; Whirlpool Corp. v. Camco Inc., 2000 SCC 67
Intellectual Property: New Options for Patent Ownership Disputes
Since 1995, the Federal Court of Canada has refused to hear questions relating solely to patent ownership. In Lawther v. 424470 B.C. Ltd.1 the Federal Court declined jurisdiction, stating that “[t]his Court has no jurisdiction to entertain a dispute which is solely a matter of contract”, thereby deeming that such a dispute fell within the jurisdiction of the provincial superior courts of each province (hereinafter a “Provincial Court”). In Quebec, the provincial superior court is the Superior Court of Québec. Therefore, in patent ownership disputes, the inventor, or the person to whom the patent had been assigned, had to seek relief for these contractual issues in Provincial Court (typically, these issues would pertain to an assignment, an employment contract, an option to purchase, etc.). The Federal Court would then have to endorse the decision and ultimately order the Patent Office to change the name of the patent owner. At a time where the proportionality of proceedings in relation to the nature of disputes is a hot-button issue,2 the Federal Court’s adherence to this 20th century decision, which was the norm until recently, could leave a bitter taste in one’s mouth. However, in Salt Canada Inc. v. Baker, 2020 FCA 127, in a unanimous decision rendered on July 28, 2020, the Federal Court of Appeal overturned a Federal Court decision that followed this precedent, thereby closing the door on a long-standing jurisprudential trend. Justice Stratas, in his reasons, relies on section 52 of the Patent Act, stating that “the Federal Court has jurisdiction, on the application of the Commissioner or of any person interested, to order that any entry in the records of the Patent Office relating to the title to a patent be varied or expunged.” For Justice Stratas, the fact that even the Commissioner of Patents must refer any question of title to the Federal Court is important and demonstrates that Parliament intended to assign a judicial function, and not merely an administrative function, to the Federal Court. The Federal Court is a statutory court, such that it must derive its jurisdiction from a statute, unlike provincial superior courts, which are courts of original and general jurisdiction. There appears to have been a debate before the Court of Appeal on the enabling statutory provisions. The respondent argued that the Federal Court’s jurisdiction in intellectual property matters is derived from section 20 of the Federal Courts Act: Industrial property, exclusive jurisdiction 20 (1) The Federal Court has exclusive original jurisdiction, between subject and subject, as well as otherwise, (…) (b) in all cases in which it is sought to impeach or annul any patent of invention or any certificate of supplementary protection issued under the Patent Act, or to have any entry in any register of copyrights, trademarks, industrial designs or topographies referred to in paragraph (a) made, expunged, varied or rectified. Industrial property, concurrent jurisdiction (2) The Federal Court has concurrent jurisdiction in all cases, other than those mentioned in subsection (1), in which a remedy is sought under the authority of an Act of Parliament or at law or in equity respecting any patent of invention, certificate of supplementary protection issued under the Patent Act, copyright, trademark, industrial design or topography referred to in paragraph (1)(a). Considering the title “Industrial property, (…) jurisdiction,” and the fact that the issue here is a question of jurisdiction, the following statement by Justice Stratas may seem surprising: “Arguably, it has no relevance whatsoever. This matter does not arise and has nothing to do with section 20 of the Federal Courts Act.” According to Justice Stratas, because the Patent Act is a federal statute, the Federal Court has jurisdiction by virtue of the combination of section 52 of the Patent Act and section 26 of the Federal Courts Act, which provides that the Federal Court has jurisdiction over any matter in respect of which jurisdiction has been conferred by an Act of Parliament. Justice Stratas goes on to review a series of decisions in which the Federal Court has agreed to interpret various contracts and legal documents as part of its jurisdiction in relation to various federal statutes, including federal tax laws, maritime law, and intellectual property disputes. Ultimately, Justice Stratas dismisses the respondent’s argument that the interpretation of contracts falls within the exclusive jurisdiction of the Provincial Courts. Finally, relying on a 1941 Supreme Court decision,3 Justice Stratas, at paragraph 24 of his decision, states the following: The rule in Kellogg is simple: the Exchequer Court (and now the Federal Court) can interpret contracts between private citizens as long as it is done under a sphere of valid federal jurisdiction vested in the Federal Court.It is true that, absent a specific statutory grant of jurisdiction to the Federal Court, parties cannot assert a contractual claim in the Federal Court against another private party to obtain a damages remedy.But Kellogg tells us that where such a grant is present, parties can claim a remedy even if their entitlement turns on a matter of interpretation of an agreement or other instrument—for example, the remedy of correcting the records in the Patent Office to recognize one’s title to a patent under section 52 of the Patent Act. Note that the Federal Court has jurisdiction only to amend the Register or to deal with matters relating to the Patent Act, such as patent infringement issues. It appears from this judgment that all other matters nevertheless remain matters of common law or civil law and fall within the jurisdiction of the Provincial Courts. In some cases, it may be advantageous to institute proceedings before the Federal Court rather than a Provincial Court such as the Superior Court of Québec. Among other things, the sums that a litigant can claim for reimbursing their attorney fees, if successful, are much higher in Federal Court than in some Provincial Courts. In addition, the time required to obtain a judgment is often shorter in Federal Court; furthermore, seeking relief in Federal Court makes it possible to avoid having to seek relief before both Federal and Provincial Courts4 in order to register rights with the Patent Office. On the other hand, if the issue doesn’t involve a strictly Canadian patent, but also corresponding patents in other jurisdictions (the United States, Europe, etc.) it is preferable to obtain a judgment before a competent Provincial Court in order to inter alia determine the full ownership of a patent family, obtain an injunction against a defendant to transfer titles, or have a judgment confirmed in each relevant jurisdiction. Conversely, the jurisdiction of the Federal Court is limited to the Canadian Patent Register and does not extend to other jurisdictions. It may also be preferable to institute proceedings in a provincial superior court if the goal is to claim damages for breach of contract or seek other remedies that fall under civil or common law. Regardless, the Salt Canada Inc. v. Baker decision provides a new strategic alternative for lawyers, meaning they now have more options to tailor procedures to the specific needs of litigants in patent ownership disputes. Lawther v. 424470 B.C. Ltd., (1995) 95 F.T.R. 81 (TD) Hryniak v. Mauldin, 2014 SCC 7,  1 SCR 87 Kellogg Company v. Kellogg,  SCR 242 Although it could be argued that a provincial superior court has jurisdiction to order a patent title entry to be changed, on reading sections 20 and 26 of the Federal Courts Act and sections 41 and 52 of the Patent Act.
Important Changes to the CEWS announced: will you now be eligible, and what should you consider?
The Canada Emergency Wage Subsidy (the “CEWS”) is a key component of the Government of Canada’s COVID-19 economic response plan. The purpose of the CEWS, adopted on April 11, 2020, is to help Canadians keep their jobs during the crisis and help companies maintain an employment relationship with their employees in order to recover more quickly when the economy returns to normal. On July 13, 2020, when the Canada Revenue Agency had already approved 667,400 applications, the Prime Minister of Canada confirmed that the CEWS will be extended until December 2020. A few days later, on July 17, the Minister of Finance of Canada announced that the CEWS will be extended until December 19, 2020. He also announced major changes to the structure of the CEWS, which, for the time being, should apply until November 21, 2020. Details are expected to follow for the eligibility period from November 22 to December 19, 2020. Summary of changes As the draft legislative proposal has not yet been adopted, the proposed changes may be modified. Duration of the CEWS Pursuant to the legislative proposal, the CEWS would now be available until November 21, 2020, and CEWS applications may be accepted until February 2021. Eligibility The concept of eligible entity remains the same, except that trusts would now be eligible for the CEWS. The changes to the CEWS are intended to make the eligibility criteria more flexible to enable more employers to benefit from the subsidy. Businesses that do not meet the 30% drop in revenue test would now be eligible to the CEWS. The base rate of the CEWS would now vary depending on the revenue decline’s level, and its application would be extended to employers with a revenue decline of less than 30%. However, despite being more flexible, the criteria would be more complex than those applicable to initial eligibility periods. CEWS’s “base” and “top-up” subsidy The amount of the CEWS for each employee would now vary according to the employer’s drop in revenue, expressed as a percentage. The CEWS would consist of two parts: a “base” subsidy and a “top-up” subsidy. During an eligibility period, the CEWS amount would be calculated by adding the base and top-up percentages, as defined in Appendix A below. Base subsidy: The maximum base CEWS rate would be gradually reduced from 60% in eligibility periods 51 and 6 to 20% for the last period (Period 9). The maximum base CEWS rate would be available for eligible entities that have experienced a revenue drop of more than 50%. It would then be gradually reduced by the percentage of the eligible entity’s revenue decline from the maximum base rate for the relevant eligibility period to zero. For example, for a revenue drop of 50% or more, the maximum CEWS amount would now be 60% for Periods 5 and 6, to be reduced to 50% for Period 7. Top-up subsidy: A maximum top-up subsidy of 25% would be offered in certain cases to provide additional support to companies particularly affected by the crisis. The top-up subsidy would be available to eligible entities that have experienced a revenue drop of more than 50% for a given eligibility period. To be eligible for the maximum top-up subsidy, a revenue drop of 70% or more must be registered for the three months preceding the relevant period. A transitional rule is provided for Periods 5 and 6 to allow eligible employers to elect the most advantageous subsidy, that is, the CEWS rate of 75% under the initial structure with a threshold of 30% or one of 60% (+ potentially 25%) under the new structure. In addition, the special rule providing for automatic eligibility forthe subsequent period would also be modified. Thus, an entity that qualified for Period 3 would automatically qualify for Period 4. However, for subsequent periods, the revenue reduction percentage from the previous qualifying period could be applied if the revenue reduction percentage for the current qualifying period is lower. For example, if an eligible entity had a 45% revenue reduction for Period 6 but its revenue reduction for Period 7 fell to 25%, the entity could benefit from the Period 6 percentage, that is, 45%. The base and top-up CEWS would apply to the remuneration of active employees. A separate CEWS rate structure would apply to furloughed employees. For furloughed employees, for Periods 5 and 6, the CEWS calculation would remain the same as it is now, but would be adjusted for Periods 7 to 9 to harmonize with income support through the Canada Emergency Response Benefit (“CERB”) and/or Employment Insurance. Calculating the CEWS In order to calculate the CEWS, the proposed legislation introduces three new definitions that are further described in Appendix A below. These definitions are used to calculate the base and top-up subsidies. Base percentage (if revenue decline < 50 %) Base percentage (if revenue decline = 50 %) Top-up percentage (if revenue decline > 50 %) CEWS Period 5: July 5 to August 1st, 2020 CEWS Period 6: Period 6 : August 2 to August 29, 2020 1.2 x % decline 60 % 1.25 x (% of revenue decline on preceding three-month average – 50 %) Max 25 % CEWS Period 7: August 30 to September 26, 2020 1 x % decline 50 % 1.25 x (% of revenue decline on preceding three-month average – 50 %) Max 25 % CEWS Period 8: 27 septembre au 24 octobre 2020 0.8 x % decline 40 % 1.25 x (% of revenue decline on preceding three-month average – 50 %)Max 25 % CEWS Period 9: October 25 to November 21, 2020 0.4 x % decline 20 % 1.25 x (% of revenue decline on preceding three-month average – 50 %)Max 25 % CEWS amount The maximum weekly amount per employee would be increased from $847 to a maximum percentage of 85% (maximum base and top-up subsidies) of the lesser of the weekly remuneration paid and $1,129, for a maximum of $960 per week, per employee. This percentage would be reduced according to an eligible employer’s revenue decline. The concept of eligible remuneration would remain the same, but the concept of basic remuneration would no longer apply as of Period 5, except in the case of employees that do not deal at arm’s length with the employer. Other significant changes to the CEWS A variety of other changes were announced, including: An appeal process based on the existing Notice of Determination procedure to make it possible to appeal to the Tax Court of Canada. For example, an employer denied the CEWS in whole or in part could avail itself of the objection and appeal process under the Income Tax Act to challenge the CRA decision in this regard. On June 17, 2020, as part of the economic response plan, the CRA announced that it would begin post-payment audits of CEWS claims as early as September 2020. Employers whose employees are paid through a payroll service provider would now be able to claim CEWS for the salaries of their eligible employees; For reference periods beginning July 5, employees who have not received remuneration for 14 consecutive days would still be granted eligible status; New optional reference periods have been added to each qualifying period to account for the particularities of seasonal businesses; Corporations formed on an amalgamation would be deemed to be the same corporation and a continuation of each of the corporations existing immediately before the amalgamation; Trusts would now be eligible entities; Continuity rules would be introduced to make it possible for employers who have purchased all or substantially all the assets of a business to calculate their drop in revenues for the purposes of CEWS. Labour and employment law considerations As in the previous version of CEWS, an employer would not be required to pay employees the pre-crisis remuneration they were receiving in order to be eligible to the CEWS2. However, it is important to remember that a substantial change in an employee’s working conditions, especially one lasting for an extended period of time, may give rise to allegations of constructive dismissal. An analysis of the employment contract of employees affected by a change in their working hours, remuneration, position or duties is recommended, as well as obtaining legal advice. Considering the elimination of the requirement that an employee should not be “without remuneration from the eligible employer in respect of a period of 14 or more consecutive days in the claim period,” employers will now have more flexibility in terms of call-back dates and employee schedules. Caution is still advised when calling employees back to work. While employer eligibility for CEWS is no longer dependent on the “14-day rule,” employees may still be required to reimburse the CERB benefits received, depending on their income level during the applicable eligibility period. Currently, an employee must reimburse the CERB in the following cases: 1st1 CERB eligibility period Other CERB eligibility periods An employee will be required to reimburse the sum of $2,000 if they have earned or will earn, for at least 14 consecutive days during that period, , more than $1,000 (before deductions) in employment or self-employment income. An employee will be required to reimburse the sum of $2,000 if they have earned or will earn more than $1,000 (before deductions) in employment or self-employment income during this period. Finally, despite CEWS’s rules being more flexible, some employers will have to consider permanently laying off part of their workforce. Legal advice should be obtained in order to assess an employer’s obligations under the employment contracts’ terms and applicable law. Particular considerations also apply to notice and severance pay for an employer benefiting from the CEWS, as the amounts paid generally cannot be subsidized through the CEWS. Lavery’s tax and labour law teams are available to answer all your questions regarding the application of the CEWS and to support in the case of audits by tax authorities. APPENDIX A “Revenue reduction percentage” means the percentage of revenue reduction for the qualifying period relative to revenue for the reference period used to determine eligibility. For qualifying periods beginning July 5, 2020, employers would now have the option of calculating their revenue reduction percentage by electing the greater of: The revenue reduction obtained by comparing the current month with the same month in 2019; and The revenue reduction obtained by comparing the previous month with the same month in 2019. Otherwise, an eligible employer would have the possibility of electing to calculate the revenue reduction percentage by comparing either: The current month and the average of January and February 2020; or The previous month and the average of January and February 2020. Employers would be able to decide which calculation method they wish to use for the qualifying period beginning July 5, regardless of the election they made for qualifying periods prior to that date. The method chosen for the eligibility period beginning July 5 would become mandatory for all subsequent qualifying periods. The reference periods for the purposes of calculating the revenue reduction percentage of an eligible employer would thus be as follows: Reference period (revenue reduction percentage) Optional reference period (revenue reduction percentage) Qualifying period 5: July 5 to August 1, 2020 July 2020 compared to July 2019 or June 2020 compared to June 2019 July or June 2020 compared to the average of January and February 2020 Qualifying period 6: August 2 to August 29, 2020 August 2020 compared to August 2019 or July 2020 compared to July 2019 August or June 2020 compared to the average of January and February 2020 Qualifying period 7 : August 30 to September 26, 2020 September 2020 compared to September 2019 or août 2020 comparé à août 2019 September or August 2020 compared to the average of January and February 2020 Qualifying period 8: September 27 to October 24, 2020 October 2020 compared to October 2019 or September 2020 compared to September 2019 October or September 2020 compared to the average of January and February 2020 Qualifying period 9: October 25 to November 21, 2020 November 2020 compared to November 2019 or October 2020 compared to October 2019 November or October 2020 compared to the average of January and February 2020 “Top-up percentage” is the percentage equal to the lesser of: 25%; 1.25 multiplied by the result of the following subtraction: The average monthly revenue for the last three calendar months divided by the average decrease in revenue compared to their respective reference period; minus 50% The qualifying periods and their corresponding reference periods for the purpose of calculating the top-up percentage are set out in the table below: Qualifying period Reference period (top-up percentage) July 5 to August 1, 2020(Period 5) Average of April to June 2020 compared to the average of April to June 2019 or January and February 2020 August 2 to August 29, 2020(Period 6) Average of May to July 2020 compared to the average of May to July 2019 or January and February 2020 August 30 to September 26, 2020 (Period 7) Average of June to August 2020 compared to the average of June to August 2019 or January and February 2020 September 27 to October 24, 2020(Period 8) Average of July to September 2020 compared to the average of July to September 2019 or January and February 2020 October 25 to November 21, 2020(Period 9) Average of August to October 2020 compared to the average of August to October 2019 or January and February 2020 “Base percentage” means the percentage calculated based on the base percentage defined above and the qualifying period, as set out in the table below: Reference period (base percentage) Base percentage if the revenue reduction percentage exceeds 50% Base percentage if the revenue reduction percentage does not exceed 50% Qualifying period 4: June 7 to July 4, 2020 June 2020 compared to June 2019 or the average of January and February 2020 N/A N/A Qualifying period 5: July 5 to August 1, 2020 July 2020 compared to July 2019 or the average of January and February 2020 60 % 1.2 x revenue reduction percentage Qualifying period 6: August 2 to August 29, 2020 August 2020 compared to August 2019 or the average of January and February 2020 60 % 1.2 x revenue reduction percentage Qualifying period 7: August 30 to September 26, 2020 September 2020 compared to September 2019 or the average of January and February 2020 50 % 1 x revenue reduction percentage Qualifying period 8: September 27 to October 24, 2020 October 2020 compared to October 2019 or the average of January and February 2020 40 % 0.8 x revenue reduction percentage Qualifying period 9: October 25 to November 21, 2020 November 2020 compared to November 2019 or the average of January and February 2020 20 % 0.4 x revenue reduction percentage As set out in the table above, the base percentage rate, and therefore the total amount of CEWS paid relative to an employee’s salary, would gradually decrease over the qualifying periods. The maximum CEWS for an employee’s salary for a given week in the last qualifying period beginning October 25, 2020, would be $508. New CEWS calculation For qualifying periods beginning August 30, the amount of the CEWS that may be claimed for each employee would be calculated as follows: If the employee deals at arm’s length with the employer and is not on paid leave in a particular week: The percentage obtained by adding the base percentage and the top-up percentage for the qualifying period multiplied by the lesser of: The remuneration paid in respect of that week; and $1,129.00. If the employee does not deal at arm’s length with the employer and is not on paid leave for a particular week: The lesser of: The eligible amount of remuneration paid in respect of that week; An amount prescribed by regulation; and $0 if both the revenue reduction percentage and the top-up percentage are 0%. Eligibility periods: March 15, 2020, to April 11, 2020 (Period 1), April 12, 2020, to May 9, 2020 (Period 2), May 10, 2020, to June 6, 2020 (Period 3), June 7, 2020, to July 4, 2020 (Period 4), July 5, 2020, to August1, 2020 (Period 5), August 2, 2020, to August 29, 2020 (Period 6), August 30, 2020, to September 26, 2020 (Period 7), September 27, 2020, to October 24, 2020 (Period 8), and October 25, 2020, to November 21, 2020 (Period 9). It should be noted that the government strongly encouraged businesses to supplement employee remuneration to bring it back to pre-crisis levels wherever possible.
Further COVID-19 Update on Canadian IP
The Canadian Intellectual Property Office (CIPO) has now made a further announcement concerning the extension of deadlines, to the effect that deadlines falling within March 16 to August 7, 2020, are extended to August 10, 2020. CIPO is otherwise still open for business and our IP team members have been continuing operations and transacting with CIPO on a regular basis, in a remote and secure manner. Please do not hesitate to contact a member of our IP group should you have any questions. In addition, the Canadian government has enacted the COVID-19 Emergency Response Act, which, inter alia, has amended the Canadian Patent Act to add new section 19.4. This amendment provides a type of temporary compulsory licensing regime for patented technologies necessary to respond to a public health emergency. This is a temporary measure, since (1) if such authorization is granted, it will not last longer than 1 year (or may end sooner if the Minister of Health determines that such authorization is no longer necessary), and (2) no such authorization will be granted after Sept. 30, 2020. Under this provision, the authorized party may make, construct, use and sell the patented invention to the extent necessary to respond to public the health emergency. In return, the authorized party must pay the patentee what the Commissioner of Patents considers to be adequate remuneration under the circumstances. Rest assured that we remain at your service for all your legal needs, including those required to manage this pandemic, and that we will keep you informed as the situation evolves. We would like to offer our thoughts and support during these challenging times.
Sale of a Business: New Tax Planning Option
The sale of a business is often the most significant business transaction in an entrepreneur’s life. In addition, the net proceeds from such a sale often represent an entrepreneur’s only retirement fund. Therefore, it is crucial to maximize such proceeds by reducing or deferring the taxes resulting from the transaction as much as possible. The Canada Revenue Agency (“CRA”) recently reversed an administrative position that it had expressed in 2002 with respect to beneficial tax planning as part of the sale of a business. This change in its rather technical administrative position opens the door to very effective tax planning that offers real tax deferral opportunities to business owners wishing to sell their business. Consider the following example: Sale of 100% of shares to a third party without prior planning Ms. Tremblay wishes to sell 100% of the shares of her company (“Opco”) to a third party for their fair market value (“FMV”) of $10 million. These shares have an adjusted cost base of $1.00. Ms. Tremblay’s direct sale of 100% of Opco shares to a third party would result in a capital gain of approximately $10 million and total income taxes of approximately $2.7 million, assuming that her capital gain is not eligible for the capital gains exemption. In this scenario, Ms. Tremblay would be left with a sum of approximately $7.3 million after taxes. Sale of shares with the newly approved prior tax planning In the second scenario, prior to the sale to the third party, Ms. Tremblay would create a management company (“Gesco”) and transfer 50% of Opco shares to it on a rollover basis, with no immediate tax consequences. Gesco would then internally exchange Opco shares in order to realize a $5 million capital gain within Gesco, resulting in income taxes of approximately $1.26 million for Gesco, a portion of which would later be refunded through the use of a non-eligible refundable dividend tax on hand account. Subsequently, Ms. Tremblay would sell her remaining 50% of Opco shares to Gesco in two transactions of 25% each, both payable by a promissory note equal to the FMV of the shares—in our example, $2.5 million per transaction. Ms. Tremblay would then be deemed to have received two dividends of $2.5 million each. The first would be designated as a capital dividend by Gesco and would therefore be tax-free for Ms. Tremblay. The second would be designated as an ordinary (non-eligible) dividend, resulting in total income taxes of approximately $1.18 million for Ms. Tremblay. The designation of the second dividend as an ordinary dividend would result in a refundable dividend tax on hand for Gesco of approximately $766,000. Gesco, owning 100% of Opco shares having an adjusted cost base equal to their FMV, would sell them to a third party for a sum of $10 million, generating no additional capital gain within Gesco. By using the tax mechanisms of a capital dividend account and a non-eligible refundable dividend tax on hand account, the sale of Opco shares would result in total income taxes of approximately $1.67 million, split between Ms. Tremblay and Gesco. Ms. Tremblay would then be left with proceeds of $3.82 million after taxes, while Gesco would be left with $4.51 million after taxes. Given that Ms.Tremblay would keep funds within Gesco, she would be able to defer the time at which she would be taxed on them, that is, when Gesco would pay her a dividend. In the meantime, she could make investments through Gesco. This type of planning would result in a tax deferral of almost 38% of the income taxes that, without prior planning, would have been payable on the sale of the shares. Our taxation team will be happy to answer all your questions and advise you on the most appropriate tax planning for your business. The information and comments contained herein do not constitute legal advice. They are intended solely to enable readers, who assume full responsibility, to use them for their own purposes.