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  • Latest developments in the Canadian infrastructure market / The Canada-Europe Free Trade Agreement: impacts on the infrastructure industry / Biomethanization: a fast-growing market in Québec

    TABLE OF CONTENTS Latest developments in the Canadian market Fengate acquires a solar project portfolio from Canadian Solar TerraForm Power increases the financing of its Canadian solar power portfolio SaskPower launches a call for tenders for 200 MW of wind energy Boralex closes the financing of the Port Ryerse wind farm in Ontario CPDQ posts an 11 .1% return on its infrastructure sector in 2016 Infrastructure Ontario appoints a new CEO SNC-Lavalin intends to launch a new infrastructure fund in 2017 InstarAGF raised $549M for its Essential Infrastructure Fund Bombardier and Metrolinx move toward a trial The Government of Québec confirms its support for the CDPQ’s REM project The future Canada Infrastructure Bank: a role which remains to be clarified Teacher’s former CEO to advise the Canada Infrastructure Bank Metrolinx CEO becomes an advisor to the Canada Infrastructure Bank British Columbia Budget 2017 provides for record levels of infrastructure investments Road programming 2017-2018: more than $4 .6B to be invested in the Québec road infrastructure network Alberta Budget 2017 increases infrastructure investments Québec Budget 2017 provides for massive investments in public transportation Newfoundland and Labrador Budget 2017 introduces a five-year infrastructure investment plan Innergex announces the commissioning of the 81 .4 MW Upper Lillooet River hydroelectric power plant Manitoba Budget 2017 steps up its commitment to public-private partnerships The Canada-Europe Free Trade Agreement: Impacts on the infrastructure industry Biomethanization: a fast-growing market in Québec Latest developments in the Canadian market Fengate acquires a solar project portfolio from Canadian Solar On February 1, 2017, Fengate closed the acquisition of three solar projects from Canadian Solar . The three projects, located in Sault Ste . Marie, in Ontario, represent a total capacity of 59 .8 MW . This acquisition constitutes Fengate’s largest power investment to date. The three projects each have a power purchase agreement with the Independent Electricity System Operator (IESO) with an average remaining life of approximately 15 years . These projects will continue to the operated by Canadian Solar under a long-term operating and maintenance agreement with Fengate. TerraForm Power increases the financing of its Canadian solar power portfolio On March 2, 2017, TerraForm Power announced that it increased by $114M the amount of financing dedicated to four Canadian solar projects . The group of projects includes the SunE Perpetual Lindsay (15 .5 MW), Marsh Hill (18 .5 MW), Woodville (12 .6 MW) and Sandringham (13 .1 MW) parks, which all have a 20-year power purchase agreement with IESO. Following this increase, the total financing amount for this group of projects is $234M while the initial loan was $120M . The financing term is seven years. Deutsche Bank and CIBC were joint bookrunners and joint lead arrangers for the transaction . Commonwealth Bank of Australia, Siemens Financial, the Fédération des caisses Desjardins du Québec and the Laurentian Bank are also members of the banking syndicate. SaskPower launches a call for tenders for 200 MW of wind energy On February 7, 2017, SaskPower launched a call for tenders for 200 MW of wind energy intended for independent producers able to develop, finance, build, own and operate wind power projects in Saskatchewan . The projects must be operational by April 30, 2020, in accordance with the terms of the call for tenders. Bids are expected by May 2, 2017 . SaskPower will assess the proposals based on criteria that include the proposed price, community involvement, participation of aboriginal groups, environmental aspects, etc . SaskPower intends to grant up to two 25-year power purchase contracts. Boralex closes the financing of the Port Ryerse wind farm in Ontario On February 22, 2017, Boralex announced the closing of a $33 .4M post- construction financing for the 10 MW Port Ryerse wind farm, located on privately owned lands east of the hamlet of Port Ryerse in Norfolk County, Ontario . This is a long-term financing provided by the DZ Bank AG Deutsche Zentral-Genossenschaftsbank (New York Branch) . The financing consists of a $2 .0M letter of credit facility and a long-term tranche of $31 .4M, the latter to be amortized over a period of 18 years. Note that the project is covered by a 20-year power purchase agreement with Ontario’s Independent Electricity System Operator (IESO) and that Boralex is now the sole holder of the project . CPDQ posts an 11.1% return on its infrastructure sector in 2016 The Caisse de dépôt et placement du Québec (“CDPQ”) posted an 11 .1% return on its infrastructure segment over calendar year 2016, according to an announcement made on February 24, 2017 . This same segment brought a 6 .6% return in 2015. The amount CDPQ invested in the infrastructure sector was $14 .6B in 2016 against $13B in 2015 . The pension fund invested Cdn .$1 .4B in infrastructure projects in 2016, against Cdn .$705M in 2015 . The pension fund holds 25 infrastructure assets worldwide, allocated between Australasia (10), North America (7), Europe (7) and Latin America (1) according to InfraAmericas. Transport and social infrastructures make up half of the infrastructure portfolio of CDPQ . The other half includes energy and health care. Infrastructure Ontario appoints a new CEO Mr. Ehren Cory has been appointed CEO of Infrastructure Ontario (IO) on February 2, 2017 for a 3-year term which should therefore terminate on February 1, 2020. Mr. Cory replaces the agency’s interim president and CEO, Toni Rossi. He joined IO in 2012 and recently held the position of president of the project delivery division . Prior to IO, he was a partner at McKinsey & Company, where he was a leader in the Infrastructure and Public Sector practices. SNC-Lavalin intends to launch a new infrastructure fund in 2017 At the announcement of the 2016 Q4 financial results, SNC-Lavalin’s management confirmed that they intend to finalize a new fund in 2017, which is intended for the Group’s North American operating infrastructure assets. The net book value of SNC’s investment portfolio is $417M . Its average fair market value as of March 1, 2017 was $4B . The assets include light trains, hospitals and highways worldwide . But Highway 407 will not be included in the fund. SNC seeks to entice passive investors in the fund, particularly insurance companies and small pension funds interested in investing in assets without participating in operations . InstarAGF raised $549M for its Essential Infrastructure Fund InstarAGF Essential Infrastructure Fund (“EIF”) obtained $549M in commitments to date (Source: InfraAmericas). The fund, concentrated on North America, has set a $750M target, with a maximum of $850M . The final closing of the fund is expected to occur during the 2017 fiscal year . The term of the fund is 15 years and includes a 2-year extension period . The objective is an internal return rate of between 9% and 14%. The target industries include transport, social infrastructures, renewable energies, power generation and public services . The fund seeks projects offering protection against market shifts, such as longterm contracts, concession contracts or a specific regulatory regime. Approximately 40% of the fund has been invested since January 2015 . The current portfolio of InstarAGF includes the Billy Bishop airport terminal, two wind projects totalling 30 MW in British Columbia and the Steel Reef Mainstream company, based in Calgary. Bombardier and Metrolinx move toward a trial The date of the trial of Bombardier and Metrolinx concerning the supply of light rail vehicles for the Eglinton and Finch West LRT projects should be known soon, at the conclusion of the hearings before the Superior Court of Ontario. Metrolinx blames Bombardier for the delays in delivering the 182 vehicles under the contract . For its part, Bombardier maintains that the delays are due to Metrolinx repeatedly modifying its requirements . The dispute already resulted in the postponement of the deadline for filing proposals for the $1B Finch West LRT project. The three preselected teams in the Finch West LRT project have been invited to include the supply of vehicles in their proposals, which paves the way to an alternate solution to that of Bombardier. If the supply and delivery model of the Finch West LRT project may be still modified, such is no longer the case for the Eglinton LRT contract, as the financial closing of the $5B project occurred in July 2015. The Government of Québec confirms its support for the CDPQ’s REM project According to a press release published on March 28, 2017 by the Caisse de dépôt et placement du Québec (“CDPQ”), the Government of Québec intends to invest $1 .28B in the Réseau électrique métropolitain (“REM”) project in Montréal. For its part, the CDPQ should invest $2 .67B in the project, in parallel with a $2 .28B contribution from the federal government, in respect of which discussions are still ongoing. The CDPQ’s net interest in the project should eventually be 51%, while the provincial and federal governments will each hold a 24 .5% interest. The CDPQ anticipates a return rate which should be between 8% and 9% for the project, which is consistent with the general return objective of the CDPQ, which is 6%. The federal and provincial governments will receive dividends when the 8% return rate for the project is reached . The dividends will then be paid to the minority shareholders until they reach their minimum 3 .7% target return rate . The 3 .7% target rate corresponds to the average borrowing cost of the entire debt of the Government of Québec . Once the minority shareholders reach the target return rate, the dividends will be paid in accordance with the ownership percentages. The project, which is considered to be a public-public partnership, involves the acquisition of a light 67 km railway system including 24 stations and linking downtown Montréal with the South Shore, the West Island, the North Shore and the Pierre Elliott Trudeau International Airport . The estimated cost of the REM is between $0 .69 and $0 .72 per passenger/km. The future Canada Infrastructure Bank: a role which remains to be clarified The Canadian Government recently shed some light on the creation of the Canada Infrastructure Bank (“CIB”), but many stakeholders still wonder about the functioning of the future institution and some have concerns about the consequences on the market. On March 22, 2017 in Ottawa, at the Parliament session on the budget, the Minister of Finance, Bill Morneau, stated that the CIB would commence operations by the end of 2017. The budget also referred to the status of key public transportation project which would be in the sights of the future bank, such as phase 2 of the Ottawa LRT, the Calgary Green LRT, Ontario’s RER program and Vancouver’s Millennium Line Broadway Extension, without, however, promising financing from the CIB. The launch of the process for appointing the CEO and chairman of the board of the bank has been announced. Some stakeholders in the industry wonder about the fact that the CIB could adopt a model similar to that of the CDPQ with Montréal’s Réseau électrique métropolitain (“REM”) project, which is called a “public-public” project. Moreover, many note the fact that there already is an increase of private financing and not enough investment opportunities in the infrastructure market, which calls into question the usefulness of a new player in this area. However, some stakeholders talk about major projects which would bring about broader economic benefits to the country and could justify subsidies from the bank in the form of equity investments or nonrefundable contributions. The government reiterated that it does not intend for the CIB to compete with existing provincial agencies such as IO, Saskbuilds, Partnerships BC or the Société québécoise des infrastructures. Teacher’s former CEO to advise the Canada Infrastructure Bank Jim Leech, former CEO of the Ontario Teachers’ Pension Plan (“OTPP”) will be a special advisor for the launch of the CIB. He will be responsible for setting up an implementation team, negotiating agreements with stakeholders, providing strategic advice on investments and, more directly, for specific projects across Canada. The CIB anticipates to deliver projects worth in excess of $200B over 10 years while minimizing the use of public money . The capital of the bank, that is, $35B over 10 years, would add up to the private financing provided by institutional investors in order to propose equity financings or subordinated loans in chosen projects. The federal government already courted some of the largest public pension funds of Canada, as well as foreign investors . The government wishes to attract investments of as much as four or five dollars in private capital for every tax dollar invested in new projects. In his economic statement in the fall of 2016, the government maintained that increased participation of institutional capital in infrastructures constitutes a priority. Jim Leech became president and CEO of the OTPP after having worked within the organization for six years . He retired from the fund on December 31, 2013. Metrolinx CEO becomes an advisor to the Canada Infrastructure Bank Bruce McCuaig, the CEO of Metrolinx, accepted a new position with the federal government, at the Privy Council Office, to support the launch of the CIB. Mr . McCuaig will be an executive advisor and will support the CIB special advisor Jim Leech – who was also recently appointed – as part of the process of launching the bank. Bruce McCuaig joined Metrolinx in 2010 . Under his leadership, the agency developed projects worth $8B financed by the private sector, notably the Eglinton Crosstown LRT, the new East Rail maintenance facility, Finch West LRT, Hurontario LRT and Hamilton LRT. Mr . McCuaig will be temporarily replaced by Mr . John Jensen, currently Chief Capital Officer with Metrolinx, pending the recruitment of a permanent successor. British Columbia Budget 2017 provides for record levels of infrastructure investments The 2017-2018 budget of British Columbia provides for $24 .5B investments over the next three fiscal years, that is a $1 .7B increase for the current fiscal year . This is the fifth balanced budget tabled by the liberal government, which also reaffirmed its commitment to public-private partnerships. This budget in investments and PPP projects include the following: $2.7B for hospital projects; $2.6B for post-secondary establishment infrastructure; $2B for the maintenance, replacement, renovation or expansion of educational institutions for students from kindergarten to 12th grade; $1.4B by the departments for the construction of infrastructures such as courthouses, correctional centres, office buildings and information systems; $7B for investments in transportation, including the project for the replacement of the George Massey tunnel (ongoing call for tenders). Road programming 2017-2018: more than $4.6B to be invested in the Québec road infrastructure network The Government of Québec will invest in excess of $4 .6B in the Québec road network between 2017 and 2019 in order to undertake, continue or complete 2,062 road construction projects throughout Québec and create and maintain more than 31,000 jobs. On March 3, 2017, in Montréal, the Minister of Transport, Sustainable Mobility and Transport Electrification, Mr . Laurent Lessard, announced the road programming for the next two years with the Minister responsible for the Montréal region, Mr. Martin Coiteux. The $4 .6B to be invested over the next two years are allocated as follows, based on the main axes of intervention established by the Ministère: $2.1B will be allocated to structures which the MTMDET is responsible for, and $252.6M will be allocated to the municipal network structure; An amount of over $1.2B will be allocated to pavement; $626.9M will be allocated to network improvement; $463.7M will be allocated to network development. From these amounts, $1.3B will be used to complete projects related in whole or in part to road safety improvement. Moreover, 90% of the amounts invested will be used to maintain assets. Alberta Budget 2017 increases infrastructure investments The 2017 budget of Alberta increases by $1.4B the infrastructure investment in addition to what had been announced in the 2016 budget, for a total of $29 .5B over the four coming years. The main areas of investment include: $7.6B in municipal infrastructure support; $4.7B for capital maintenance and renewal; $4.5B for health infrastructure; $3.8B for climate change and environmental sustainability; $2.6B for schools, including $500M for new school projects over the next four years and an additional $488M for future school projects beginning in 2018-2019; $3.1B for roads and bridges; $100M to support Albertans living on reserves who do not have reliable access to clean drinking water. Alberta’s last PPP project, the Southwest Calgary Ring road, worth $1.42B, is currently under construction and should be open to traffic in October 2021. Québec Budget 2017 provides for massive investments in public transportation The 2017 budget of Québec provides for infrastructure expenses of $91.1B over 10 years, that is a $2.4B increase over last year budget. Significant investments will be made in public transportation and in restructuring its management in the Montréal area. An additional $1.5B will be invested in public transportation for the following major initiatives: Réseau électrique métropolitain (REM) The Government of Québec intends to invest $1.28B in the Réseau électrique métropolitain (REM) project in Montréal. This contribution will be added to the $2 .67B of CPDQ and that of the federal government in the amount of $2 .28B which currently is under discussions . Calls for proposals are ongoing for the construction, rolling stock and maintenance aspects. The proposals must be submitted by the summer of 2017. Metro blue line The project includes a 5.5 km extension of the blue line toward Anjou, in the northeastern part of Montréal. The work should begin in 2021 and the investment will be described in the 2017-2027 Infrastructure Plan. Autorité régionale de transport métropolitain (ARTM) The government will create the ARTM in order to centralize the planning and delivery of public transportation in the Montréal area. This organization will be managed by the Montréal Metropolitan Community (MMC) . Its financing over five years will include $399M to [TRANSLATION] “maintain excellent financial solidity” and $587.7M for its role in the REM project. Complementary improvements to public transportation The government invests an additional amount of $333M over five years (in addition to the current amount of $1.2B) in the improvements to public transportation, adapted transportation and regional public transportation services across Québec. Newfoundland and Labrador Budget 2017 introduces a five-year infrastructure investment plan Newfoundland and Labrador budget 2017 provides for a $3B investment in infrastructure over the next five years . The government also announced that it intends to analyze all the major infrastructure projects to determine their eligibility for public-private partnerships. The major investments provided for in the infrastructure plan include the following: $330.9M for major health care projects; $53.8M for the construction of new schools and related repair and maintenance work; $44.7M for post-secondary establishments; $461.1M for municipal infrastructure, in partnership with the federal government; $372.2M for transportation infrastructure; $86.5M for the repair, maintenance and modernization of affordable housing units. Furthermore, the plan emphasizes the interest for partnerships with the private sector which stimulate innovation and allow for benefiting from the best market practices in managing operations. Innergex announces the commissioning of the 81.4 MW Upper Lillooet River hydroelectric power plant Innergex Renewable Energy Inc. (TSX: INE) has begun commercial operation of the 81.4 MW Upper Lillooet River run-of-river hydroelectric facility located in British Columbia. Innergex owns a 66.7% interest in the hydro facility and Ledcor Power Group Ltd. owns the remaining 33.3%. This is the largest hydroelectric power plant built by Innergex to this day. The facility is located on crown land, approximately 40 km north of the Village of Pemberton, in the Sea-to-Sky district of British Columbia. Construction began in October 2013 and was completed in March 2017. The facility is part of the Upper Lillooet River Hydro Project which includes two run-of-river clean energy generation facilities located in the Pemberton Valley: Upper Lillooet River (81.4 MW) and Boulder Creek (25.3 MW). On March 17, 2015, the Corporation announced the closing of $491.6M non-recourse construction and term project financing for both these projects. The commissioning of the Boulder Creek hydroelectric facility is expected in the second quarter of 2017. The Upper Lillooet River facility’s average annual production is estimated to reach 334,000 MWh, enough to power around 31,850 British Columbia households. All of the electricity it produces is covered by a 40-year fixed-price power purchase agreement with BC Hydro, granted in the context of the 2008 call for tenders for clean energy, which provides for an annual adjustment to the selling price based on a portion of the Consumer Price Index. Manitoba Budget 2017 steps up its commitment to public-private partnerships Manitoba’s budget 2007 provides for an infrastructure investment of over $1.7B in 2017-2018 and confirms the intention of the government to eliminate regulatory obstacles to private investment in public infrastructure in order to promote public-private partnerships. In the context of one of the largest infrastructure budget in Manitoba’s history, here are some of the major investments to be made in 20172018: $747M for roads, highways, bridges and protection against floods; $641M for health, education and housing infrastructure; and $370M for municipal and local infrastructure and other provincial infrastructures. The City of Winnipeg implemented several PPP projects in the areas of transportation and social assets. The Canada-Europe Free Trade Agreement: impacts on the infrastructure industry The Canada-European Union Comprehensive Economic and Trade Agreement (“CETA” or the “Agreement”) will create one of the largest free-trade zones in the world. It may come into force on a provisional basis once the Canadian Senate has validated Bill C-30. Then, only the approval of each of the member countries of the European Union (“EU”) will remain to be obtained for the Agreement to come into force on a final basis since it has already been ratified by the European Parliament. CETA will provide access to the large European market, which represents a GDP of approximately 15,000 billion euros per year and more than 500 million consumers, to Canadian businesses. The coming into force of CETA will have a significant impact on the infrastructure industries in Canada and Europe. We can already identify four aspects of the Agreement which will have direct consequences on same. Access to the European public market The European infrastructure public market represents between 2,000 and 3,000B dollars per year, which is even more than that of the United States. With CETA, Canadian firms, working particularly in the areas of engineering, project management and construction, will gain access to the national public markets of the EU 28 member States . Moreover, businesses will be allowed to participate in calls for tenders of, among others, public law bodies such as hospitals, schools and universities, European utilities (such as gas, power and water distribution) and entities responsible for urban and rail transportation. CETA will also provide European businesses with access to the Canadian public market, which has the wind in its sails since the announcement of the creation of the Canada Infrastructure Bank in the Government of Canada’s 2017 budget. Better labour mobility CETA will also increase labour mobility between Europe and Canada by facilitating the temporary assignment of some categories of persons (for example business people) . Therefore, it will be easier for businesses who bid on call for tenders to do business with the EU by having a person directly in the field. It will also be possible, in some cases, for businesses (such as those offering, for instance, installation and maintenance services), to send their own employees on site to supervise the work or train employees for this purpose. Another interesting aspect of CETA is the chapter on the recognition of the professional qualifications, which aims to establish a procedure for facilitating the potential negotiation of agreements for the recognition of qualifications of professionals and individuals working in regulated trades. Accordingly, it will be easier for Canadian and European businesses to hire qualified personnel. Elimination of tariffs The Agreement will eliminate all the tariffs currently collected on originating products used for infrastructure construction and maintenance. This includes building materials, energy production equipment, electrical equipment, railway products and information and communication technology products. The elimination of these duties represents a significant economic benefit for Canadian businesses, which had to pay high tariffs on many categories of products . For example, the customs duties on equipment for energy production and distribution could be as high as 14% and 6.5% for concrete products. European products will also enter Canada duty-free. Cooperation in regulatory matters Lastly, the Agreement will also implement the Protocol on the Mutual Acceptance of the Results of Conformity Assessment, which will facilitate the acceptance by Canada and the EU of test results and product certification from the other party, resulting in lower costs for businesses. Indeed, a business which had to go to Europe to have its products certified will be able to do so in Canada and the certification will be recognized by the EU . The same process will apply to European businesses wishing to have their products certified in Canada. This protocol applies, among other things, to building materials, machinery, electronic equipment and ATEX (“atmosphere explosive”) equipment. In closing, once CETA is in force, even on a provisional basis, Canadian and European businesses will benefit from privileged access to each others’ markets . Corporations in the infrastructure sector would be well-advised to carefully consider the new business opportunities resulting from the application of the Agreement. Biomethanization: a fast-growing market in Québec Biomethanization is a process whereby organic matter is fermented in the absence of oxygen, leading to the production of biogas (or biomethane) and a solid waste called digestate. Biogas may be reclaimed under the form of thermal or electrical energy or, once refined, it can replace natural gas. Digestate can be used as an organic fertilizer. Biomethanization is considered to be a renewable source of energy which participates in the energy transition toward a decarbonised economy. This form of energy has been around for many years in Québec with private projects such as the Gazmont power plant in 1996, located near the Miron Quarry in Montréal and EBI Energy’s power plant in 2003, located in Saint-Thomas, in the Lanaudière region . More recently, in 2017, Lavery participated in the financing of the Biomont project, a biogas cogeneration power plant located in Montréal, in the Villeray - Saint-Michel - Parc-Extension borough. The biomethanization sector has found a new impetus since 2010, with the implementation of the Program for the Treatment of Organic Matter through Biomethanization and Composting1 which encouraged municipalities and private stakeholders to undertake biomethanization projects. This initiative, which was developed by the Government of Québec and relies on the resources of the Green Fund, aims to banish any form of disposal of organic materials in landfills by 2020 . More recently, in 2016, the federal government confirmed $5B in investments over 5 years2 through the Green Infrastructure Fund, which aims, among other things, to reduce the production of greenhouse gases. The various programs offer financial support to many types of sponsors-operators, particularly cities (40%), regional county municipalities (“RCM”, 13%) and common-interest partnerships (47%) grouping cities, private businesses and RCMs . There are currently seven projects in the development phase, two in the construction phase, three in the commissioning phase and four in the operating phase. Among the largest projects in the development phase are those of the City of Montréal ($237M in investments), Québec City ($124M) and the City of Laval ($123M). The four completed and operating projects are those of Vallée-du-Richelieu, the City of Rimouski, the Rocher-Percé RCM and Multitech Environment, Rouyn-Noranda. The size of the projects varies from one community to the other based on the quantity of metric tonnes to be processed annually. The total cost of the investment is between $1 .3M and $237M (median of $27 .1M) . Both levels of government participate in the financing of the various projects in proportions varying between 20% and 70% of the total cost of the projects (53% on average) . In addition to the financing granted by the provincial and federal governments, the remainder of the financing is split between municipalities and private investors. Biomethanization is still a young technology in Québec and even in Canada. Giving time the market to adapt to this new reality will lead to its mastery, a challenge that sponsors-operators must face . Implementing these projects involves an adequate assessment of the risks related to the design, construction, technological choices and operational management, failing which costs are likely to spiral out of control . In this respect, the necessity of importing outside know-how still seems relevant, since many suppliers and operators who are involved in these projects are based in Europe or the United States . For European businesses, the new Canada-Europe free trade agreement may certainly promote their increased involvement. Lastly, another challenge brought about by these projects is that of profitability, namely, the valorization of outputs relative to inputs and the production process in a context of pressures on the price of gas and electricity. However, the growth of the carbon market, which henceforth includes Québec, the State of California and Ontario, seems to pave the way to a new source of income for sponsors and may improve the financial model of these projects. In conclusion, the program of the Government of Québec contributed to more than 16 biomethanization projects throughout the province, thereby reducing the environmental impact. The latest is the Matane biomethanization project, for which the municipality just completed a call for tenders on April 6, 2017. These projects represent many potential business opportunities for businesses operating in fields such as waste processing, waste-water treatment, renewable energies, etc., that wish to diversify their activities by taking advantage of the growth of the green economy.   Program running until December 31, 2017 (French only) www.infrastructure.gc.ca/plan/gi-iv-eng.html

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  • Artificial Intelligence and the 2017 Canadian Budget: is your business ready?

    The March 22, 2017 Budget of the Government of Canada, through its “Innovation and Skills Plan” (http://www.budget.gc.ca/2017/docs/plan/budget-2017-en.pdf) mentions that Canadian academic and research leadership in artificial intelligence will be translated into a more innovative economy and increased economic growth. The 2017 Budget proposes to provide renewed and enhanced funding of $35 million over five years, beginning in 2017–2018 to the Canadian Institute for Advanced Research (CIFAR) which connects Canadian researchers with collaborative research networks led by eminent Canadian and international researchers on topics including artificial intelligence and deep learning. These measures are in addition to a number of interesting tax measures that support the artificial intelligence sector at both the federal and provincial levels. In Canada and in Québec, the Scientific Research and Experimental Development (SR&ED) Program provides a twofold benefit: SR&ED expenses are deductible from income for tax purposes and a SR&ED investment tax credit (ITC) for SR&ED is available to reduce income tax. In some cases, the remaining ITC can be refunded. In Québec, a refundable tax credit is also available for the development of e-business, where a corporation mainly operates in the field of computer system design or that of software edition and its activities are carried out in an establishment located in Québec. This 2017 Budget aims to improve the competitive and strategic advantage of Canada in the field of artificial intelligence, and, therefore, that of Montréal, a city already enjoying an international reputation in this field. It recognises that artificial intelligence, despite the debates over ethical issues that currently stir up passions within the international community, could help generate strong economic growth, by improving the way in which we produce goods, deliver services and tackle all kinds of social challenges. The Budget also adds that artificial intelligence “opens up possibilities across many sectors, from agriculture to financial services, creating opportunities for companies of all sizes, whether technology start-ups or Canada’s largest financial institutions”. This influence of Canada on the international scene cannot be achieved without government supporting research programs and our universities contributing their expertise. This Budget is therefore a step in the right direction to ensure that all the activities related to artificial intelligence, from R&D to marketing, as well as design and distributions, remain here in Canada. The 2017 budget provides $125 million to launch a Pan-Canadian Artificial Intelligence Strategy for research and talent to promote collaboration between Canada’s main centres of expertise and reinforce Canada’s position as a leading destination for companies seeking to invest in artificial intelligence and innovation. Lavery Legal Lab on Artificial Intelligence (L3AI) We anticipate that within a few years, all companies, businesses and organizations, in every sector and industry, will use some form of artificial intelligence in their day-to-day operations to improve productivity or efficiency, ensure better quality control, conquer new markets and customers, implement new marketing strategies, as well as improve processes, automation and marketing or the profitability of operations. For this reason, Lavery created the Lavery Legal Lab on Artificial Intelligence (L3AI) to analyze and monitor recent and anticipated developments in artificial intelligence from a legal perspective. Our Lab is interested in all projects pertaining to artificial intelligence (AI) and their legal peculiarities, particularly the various branches and applications of artificial intelligence which will rapidly appear in companies and industries. The development of artificial intelligence, through a broad spectrum of branches and applications, will also have an impact on many legal sectors and practices, from intellectual property to protection of personal information, including corporate and business integrity and all fields of business law. In our following publications, the members of our Lavery Legal Lab on Artificial Intelligence (L3AI) will more specifically analyze certain applications of artificial intelligence in various sectors and industries.

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  • The latest news from the Canadian infrastructures market / Major trends in the infrastructures market for 2017

    TABLE OF CONTENTS The latest news from the Canadian infrastructures market Defense Construction Canada issues Request for Expressions of Interest for an energy performance contract Boralex completes financing of the Yellow Falls hydro project in Ontario Boralex and AWEC announce a new partnership CC&L and Desjardins acquire a majority interest in the South Fraser Road project Boralex purchases Enercon’s interest in the Niagara Region Wind Farm in Ontario United States: State officials seek abolition of the Clean Power Plan The sale of TerraForm Power moves forward CDPQ and DP World launch a US$3.7 billion port assets fund The Canadian government approves two pipeline projects TerraForm Power successfully refinances its solar power portfolio in Canada The Northwest Territories are seeking financial consulting services for PPPs Crown corporations concerned over the market’s ability to deliver all the infrastructure projects currently planned in Canada Québec is considering a PPP for the Louis-Hippolyte- LaFontaine Tunnel rehabilitation project Consortiums pre-qualified for the Montréal LRT contracts Canada’s Minister of Infrastructure and Communities, Amarjeet Sohi, outlines the federal government’s infrastructures plan Alberta approves 400 MW of new renewable energy projects procurement Refinancing of Montréal Gateway Terminals partnership completed Axium acquires its first solar assets in the U.S. PPP for île d’Orléans Bridge? Global Infrastructure Partners creates the largest infrastructure fund in the world Fiera Infrastructure acquires 50% interest in an Ontario wind farm Major trends for 2017 The latest news from the Canadian infrastructures market Defense Construction Canada issues a Request for Expressions of Interest for energy performance contract Defense Construction Canada (DCC) has issued a Request for Expressions of Interest, dated December 20, 2016, for improvements in energy efficiency contracts covering nine military facilities across Canada (Québec, Ontario, Alberta, Nova Scotia and New Brunswick). The services required include preparation of a feasibility study, financing, performance guarantees, and construction and project management. The payment mechanism, financial structure and energy-saving targets would be specific to each project. The approximate value of the contract would be $52 million, on the basis of a 10-15% reduction in service costs and a maximum amortization of 15 years from the beginning of work. Responses to the Request for Expressions of Interest had to be submitted February 1, 2017. DCC plans to finalize the process by March 31, 2018. Boralex completes financing of the Yellow Falls hydro project in Ontario On December 16, 2016, Boralex announced that it had closed a $74.3 million financing for its Yellow Falls hydro project in Ontario. The 16MW Yellow Falls hydroelectric power station is on the Mattagami River, near the town of Smooth Rock Falls. The total project cost is approximately $91.7 million. Financing was structured on the basis of a hybrid model and includes a short-term tranche of $9.1 million fully amortized over 10 years, and a long-term (39-year) tranche of US$65.2 million which will begin amortizing over 29 years after repayment of the shorter tranche, the balance being due at maturity. Together, both tranches will bear a fixed average interest rate of approximately 5% over the life of the loans. The lenders are Canada Life, The Great West Life Assurance Company and London Life. Construction of the Yellow Falls hydroelectric site has already begun, with commissioning planned for the end of the 2nd quarter of 2017. The plant will operate under a 39-year power purchase agreement with IESO. The Yellow Falls project was developed jointly with First Nation partners, the Taykwa Tagamou Nation and the Mattagami First Nation. The two First Nations, as well as the initial project proponent, Canadian Hydro Developers, hold options allowing them to acquire a participation of up to 31.25% of the project. Boralex and AWEC announce a new partnership On December 15, 2016 Boralex and the Alberta Wind Energy Corporation (AWEC) announced the creation of the Alberta Renewable Power Limited Partnership, owned respectively 52% and 48% by the two entities. This collaboration will allow Boralex and AWEC to pool their mutual expertise in developing and implementing wind and solar projects in Alberta and in Saskatchewan. This new joint venture marks Boralex’s entry into Alberta’s renewable energy market. The partnership will focus primarily on public utility wind farms with capacities greater than 5 MW and will also seek sites for potential solar projects. The partnership expects to prepare tenders for the Windy Point and Old-Elm/Pothole projects in Alberta, and for a portfolio of other projects in Alberta and in Saskatchewan. CC&L and Desjardins acquire a majority interest in the South Fraser Road project Connor, Clark & Lunn Infrastructure (“CC&L”) and the Desjardins Group Pension Plan acquired a majority interest in the South Fraser Perimeter Road project in British Columbia, a public-private partnership (PPP) project. ACS (50%), Star America Infrastructure Fund (25%) and Ledcor Infrastructure Investments (25%) were the project’s initial shareholders. ACS sold 37.5% of the total project for $24.7 million, and will retain a 12.5% minority interest in the project. The transaction closed on December 9, 2016. The project was refinanced in October 2015 for $228 million. Boralex purchases Enercon’s interest in the Niagara Region Wind Farm in Ontario In a media release dated December 8, 2016, Boralex announced its acquisition of Enercon’s 50% interest in the 230 MW Niagara Region Wind Farm in Ontario for a total cash consideration of $238.5 million. The Wind Farm, which extends over the Regional Municipality of Niagara, the Township of West Lincoln, the Town of Wellfleet and Haldimand County in Ontario, was commissioned on November 2, 2016 and comprises 77 Enercon E-101 turbines. The Wind Farm has a 20-year power purchase agreement with IESO. In October 2016, Enercon and its partner, Grand River Development Corporation, secured a $828.3 million non-recourse financing for the project. Grand River Development Corporation financed its capital investment in the project by way of a non-recourse loan from Enercon that will be transferred to Boralex. United States: State officials seek abolition of the Clean Power Plan A coalition of attorney generals and government agency representatives of 24 U.S. states have urged the Trump administration to issue an executive order declaring the Clean Power Plan unlawful. In a letter dated December 14, 2016 to Vice-President Mike Pence, House Leader Paul Ryan and Senate Majority Leader Mitch McConnell, the signatories contend that the Clean Power Plan contradicts section 111 of the Clean Air Act, maintaining that the section does not give the EPA power to regulate emissions from a source that is already regulated. They also claim that the rules subvert each state’s authority over its own sources of electricity generation. The Clean Power Plan, widely regarded as draft environmental legislation bearing President Obama’s stamp, fixes carbon emission reduction objectives applicable to power plants. One of the aims of the draft legislation was to accelerate the shutdown of coal-fired plants while increasing the share of renewal energy projects. The legislation remains suspended further to the Supreme Court’s February 2016 decision delaying implementation. In his campaign, President Donald Trump stated that he opposed the Clean Power Plan. The signatories of the letter noted that an order would not formally cancel the plan, but would however assure States that it would not be applied. The groups also suggested that Congress and the administration work together on legislation that would prevent the EPA from drafting regulations similar to the Clean Power Plan in the future. The letter was also signed by the representatives of West Virginia, Wyoming and Kentucky, the three largest coal-producing states in 2014. Industry participants stated they do not expect any significant changes in the short term if the Clean Power Plan is cancelled and noted that the growth in renewable energy production was largely stimulated by state initiatives rather than by federal mandates. The sale of TerraForm Power moves forward TerraForm Power, the yieldCo created by the US developper Sun Edison, is currently assessing preliminary offers from various strategic buyers and investors, in preparation for the next phase of the sale process, namely committed offers, which had to be submitted mid-January 2017. Pattern Energy Group, Brookfield Asset Management, a Texas-based renewable energy company and other entities established in Asia, are among the potential bidders. TerraForm Power, with a market capitalization of US$1.9 billion, manages US$3 billion in solar and wind assets in North America and in the UK. The energy company SunEdison, currently under bankruptcy legislation protection, remains the largest shareholder of TerraForm Power. CDPQ and DP World launch a US$3.7 billion port assets fund Caisse de dépôt et placement du Québec (CDPQ) and Dubai-based DP World have created a $5 billion (approximately US$3.7 billion) fund, to be used as a platform for investing in ports and terminals around the world (excluding the United Arab Emirates). DP World holds a 55% interest in this investment vehicle, and CDPQ holds the remaining 45%. This new vehicle will invest directly in equity, primarily in existing infrastructure assets, but will also invest up to 25% in projects under development. The fund has invested $865 million in two of DP World’s Canadian container terminals, located in Vancouver and Prince Rupert. CDPQ has acquired a 45% interest in the combined assets. CDPQ Infra, the infrastructure division of Caisse de dépôt et placement du Québec, currently has $13 billion in assets under management, 25% of which is invested in the United States, and 10% in Canada. In November 2013, CDPQ acquired a 26.67% interest in Global Infrastructure Partners in the Port of Brisbane in Australia. The Canadian government approves two pipeline projects According to a November 29, 2016 statement, the federal government has approved two major oil pipeline projects: the Kinder Morgan’s Trans Mountain Expansion Project and the Enbridge Line 3 replacement project. The Trans Mountain pipeline has been in existence for 63 years. It transports crude and refined oil between Alberta and British Columbia. The expansion project will increase the pipeline’s nominal capacity from 300,000 to 890,000 barrels a day. Construction of the Trans Mountain project is scheduled to begin in September 2017, with a commissioning date planned for the end of 2019. The cost of the project would be approximately $7 billion. Calgary-based Enbridge’s Line 3 Replacement Project involves replacing a 50-year old pipeline from Alberta to Wisconsin that would double its original capacity to 760,000 barrels a day. Project completion is planned for 2019. The Canadian government rejected a third pipeline project, the Northern Gateway project, also proposed by Enbridge. The project was envisaged as a twin pipeline system that would have exported bitumen and imported natural gas condensate. TerraForm Power successfully refinances its solar power portfolio in Canada TerraForm Power recently contracted a $120 million 7-year loan with Deutsche Bank to refinance its Canadian solar power portfolio. The loan bears interest at an average interest rate of 3.7%. TerraForm Power’s solar power portfolio includes the following projects: SunE Perpetual Lindsay (15.5MW) March Hill (18.5 MW) Woodville (12.6 MW) Sandringham (13.1 MW) The four projects have 20-year power purchase agreements with IESO. The financing terms and conditions give TerraForm Power the possibility of expanding the loan principal by an additional $123 million (“accordion feature”). The Northwest Territories are seeking financial consulting services for PPPs The Government of the Northwest Territories has launched a call for tenders for financial consultancy services for future PPP projects. The selected firm’s mandate would be to assist the government in developing and evaluating the call for tender process. It will also contribute to the creation of appropriate administrative structures and training programs. The province contemplates at least three potential projects being carried out in PPP mode. A first project, estimated at $700 million would to construct a section of highway in the Mackenzie Valley from Wrigley to Normal Wells. A second project involves construction of the All Season road (approximately $150 million). The third project is also a highway, extending to the Arctic Coast as far as a deep water port in western Nunavut. To date, the province has been involved in two PPPs: the Stanton Territorial Hospital which completed its financial close in August 2015, and the Mackenzie Valley fibre optic line, which finalized its closing in November 2014. Crown corporations concerned over the market’s ability to deliver all the infrastructure projects currently planned in Canada A number of Canada’s main PPP agencies appear to be concerned over the market’s ability to deliver the increasingly high number of projects that are planned across the country. Some agencies, such as Partnership BC or Infrastructure Ontario, try to structure their procurement process to maintain market competitiveness, for example by giving companies more time to assess their needs, or by saturating the market with a large number of requests over a short period of time. Public sector agencies that must manage a growing number of projects in development must also deal with this problem. Québec considering a PPP for the Louis-Hippolyte-LaFontaine Tunnel rehabilitation project In the early part of 2017, Transports Québec will assess private-sector interest in the Louis-Hippolyte-LaFontaine Tunnel rehabilitation project. The government agency is planning a major rehabilitation of the tunnel as well as related work on Highway 25. A traditional procurement model will be assessed alongside Design – Build – Finance and Design – Build – Finance – Operate options. Transports Québec will conduct a market survey of potential privatesector partners (engineering consulting firms, general contractors, investors) regarding the commercial structure, allocation of risk, and terms of remuneration for the project. The various aspects of the project include replacement of the concrete screed and installation of a surface protective coating. The project cost and project schedule have not yet been determined. However preliminary work the project is underway, and the second phase of the project is slated to begin after 2018. Consortiums pre-qualified for the Montréal LRT contracts CDPQ Infra, a subsidiary of the CDPQ, conducted a pre-selection of consortiums for the Réseau Électrique Métropolitain (“REM”) project, the cost of which is estimated at $5.9 billion. In June 2016, the CDPQ published two requests for qualification: one for the infrastructure engineering, procurement and construction (EPC) contract and the other for the rolling stock, systems and operation and maintenance services (RSSOM) contract. The cost of the EPC contract will be approximately $4.4 billion and the RSSOM contract will be approximately $1.5 billion. The following consortiums and companies were pre-selected: For the EPC contract: Groupe NouvLR: SNC Lavalin, Dragados, Aecon, Pomerleau, EBC, Aecom Kiewit-Eurovia, a partnership: Construction Kiewit, Eurovia Québec, WSP, Parsons For the RSSOM contract: Alliance Montréal Mobilité (AMM): Parsons, Hyundai Rotem Company, RATP Dev Canada and Thales Bombardier Transportation Canada Inc. Groupe des Partners pour la Mobilité des Montréalais (PMM): Alstom, SNC-Lavalin The pre-selected teams each have six months to submit a final proposal. Construction is expected to start in the spring of 2017 and the first trains are expected to be in operation by the end of 2020. The project will allow for the deployment of a new high-frequency light rail transit network by building and transforming close to 67 km of double tracks, 24 stations, 9 bus terminals and 13 park-and-ride facilities. The project will also include the acquisition of a fleet of over 200 cars. Canada’s Minister of Infrastructure and Communities, Amarjeet Sohi, outlines the federal government’s infrastructures plan In an interview granted to InfraAmericas, Amarjeet Sohi, Canada’s Minister of Infrastructure and Communities explained the federal government’s infrastructure projects and in particular the role of the future Canada Infrastructure Bank (“CIB”). The CIB’s mandate will be to advise the federal government as well as provincial and municipal authorities on building infrastructure projects through public-private partnerships. The CIB, which has received $15 billion in government funding, will review each transaction and will structure it to ensure the protection of the public interest, while seeking to attract private capital. The relevant projects are primarily in the area of transit infrastructure: building of roads, bridges, tunnels, public transit and interprovincial transit lines. The mandate of the CIB is also to promote renewable energy projects so that ultimately the use of coal will be eliminated in Canada, in furtherance of the COP21 Agreement signed in Paris in 2015. The Minister cited the REM project developed by the CDPQ in Montréal as an example of the situation where an institution dedicated to infrastructure can make a difference by mobilizing private capital for a project that would not otherwise be achievable because the investment required would be too high for government budgets. As regards asset recycling transactions – another way to fund new projects - the government is awaiting the result of a Department of Finance Canada study, which would determine the role that the CIB could play. PPP Canada will continue to play a role in formulating new infrastructure projects and will support the Government in creating the Infrastructure Bank. Alberta approves 400 MW of new renewable energy projects procurement The Government of Alberta has authorized the Alberta Electric System Operator (AESO) to launch a call for tenders for 400 MW of renewable energy in 2017. This call for tenders would be the first of a series that should span the next 14 years, in the knowledge that Alberta plans to add 5,000 MW of renewable generation capacity by 2030. The AESO would accept projects that have a capacity of at least 5 MW and that would be operational by the end of 2019. The Authority will consider new projects and expansions of existing facilities. The AESO plans to issue a Request for Expressions of Interest in the 1st quarter of 2017, a request for qualification in the 2nd quarter 2017 and a request for proposals in the 4th quarter of 2017. Renewable energy is part of Alberta’s long-term climate policy. The province plans to gradually eliminate coal-fueled electricity generation from 49% to zero by 2030. Refinancing of Montréal Gateway Terminals partnership completed A group of Montréal Gateway Terminals shareholders, led by Axium Infrastructure, closed the refinancing of the company’s bank debt, which amounted $252 million on November 17, 2016. in March 2015, a consortium comprised of Axium, Desjardins, Manuvie, FTQ and Industrial Alliance, acquired the company’s assets from Morgan Stanley’s first infrastructure fund. The transaction was initially financed by $252 million in “mini-perm” bank financing over a five-year term. The debt was refinanced via a private bond placement in which several American and Canadian buyers, such as Prudential, Barings and Manuvie participated. Axium acquires its first solar assets in the U.S. Axium Infrastructure has acquired an 84-MWac (110 MWdc) portfolio of solar photovoltaic installations in the USA and Canada from Renewable Energy Trust Capital (RET Capital). The transaction, which closed on November 17, 2016, is Axium Infrastructure’s first solar investment in the US. The portfolio includes eight solar parks in California, Georgia and Ontario. These facilities reached commercial operations between 2012 and 2015. They each have long-term fixed-price power purchase agreements with investment-grade utilities. PPP for île d’Orléans Bridge? The Government of Québec will review all possible options for carrying out the project for a new cable-stayed bridge linking the île d’Orléans to the north shore of the St. Lawrence River. Until now, the preferred option was traditional public sector construction and operation. Two other options are currently under consideration: having the project carried out either in the private sector or in a private-public-partnership (PPP). The question of a bridge toll appears to be definitively ruled out. On November 24, 2016, the ministère des Transports du Québec (MTQ) launched a call for tenders for consultants specialized in finance and economics whose mandate would be to review and analyze the various modes of delivery for the île d’Orléans Bridge project. MTQ officials have estimated the cost of traditional construction and maintenance, i.e., fully government-funded. Although that assessment has not been disclosed, there is an unofficial estimate circulating that puts the budget at $400 million. The current bridge dates from 1935. It must be replaced to conform to new seismic standards, and also because its piles are sinking into the soft bed of the river, on the north shore. The most recent schedule put forward by the government is that the bridge will be in operation by 2024. The new bridge, if built as a concrete structure would have a life-span of 75 years, and if built as a metal structure, would have a life-span of more than 100 years. Global Infrastructure Partners creates the largest infrastructure fund in the world The third fund created by Global Infrastructure Partners – baptized as Global Infrastructure Partners III (“GIP III”) – was completed at US$15.8 billion. The final amount of GIP III is bigger than that of the Brookfield Infrastructure Fund III (“BIF III”), which achieved a final closing of US$14 billion in July 2016. The GIP III will have a 10-year mandate with two options to extend, each for one year. It is planning on making 10 to 14 equity investments of approximately US$500 million to US$1.75 billion over a five-year period. Fiera Infrastructure acquires 50% interest in an Ontario wind farm On January 25, 2017, Fiera Infrastructure Inc., a subsidiary of Fiera Capital Corporation, announced that it had acquired Suncor Energy’s 50% interest in the 100-MW Cedar Point II wind facility in Ontario, through its Fiera Infra LP fund. This is Fiera Infrastructure’s first wind energy investment. Cedar Point II is located in the counties of Lambton and Plympton-Wyoming and has been operational since October 2015. It sells its entire output to IESO under a 20-year power purchase agreement. NextEra Energy Canada, a subsidiary of NextEra Energy Resources, holds the remaining 50% of the project’s assets. National Bank Financial Markets acted as Fiera Infrastructure’s adviser, financial arranger and lender. Major trends in the infrastructures market for 2017 It is interesting to note the major worldwide trends in the infrastructures sector for 2017. Below is a compilation for our readers of the recurring themes gleaned from the analyses of experts in the field. A political commitment to reviving economic growth by means of infrastructure spending Accepted by most economic analysts and political leaders across the spectrum, investments in public infrastructures are universally acknowledged as an effective tool for economic interventionism. Generally, such investments are accompanied by measures to stimulate private investment which in turn optimizes government expenditures. The proliferation of infrastructure investment vehicles accompanied by competition in the fund industry over fund size Intended to attract private capital to infrastructure projects, the number and size of investment funds should continue to grow, particularly under the influence of investors from emerging countries. In some cases, they could compete head-on with traditional developers and builders. Growing competition in the construction industry should increase pressure on sector company margins This phenomenon should stimulate cooperation among firms seeking synergies and economies of scale, and also promote technological innovation. The transportation sector should play a more important role and surpass that of energy in new infrastructure investments Growing urbanization, associated with congestion and pollution in large cities and the need to facilitate trade will push governments to prioritize urban transit projects, especially rail projects. Economic expansion in China China should accelerate its economic expansion in Asia due to the USA’s disinvestment in the region and the failure of the TransPacific Partnership. This situation will affect North American companies and small local Asian companies that cannot compete with large Chinese companies. The energy storage sector The exponential growth of the energy storage sector caused by the problem of managing an increasingly complex energy mix, including renewable energy, which by its very nature is intermittent, and fossil fuels and nuclear energy, the flexibility of which remains limited. Commercially operational technological solutions are beginning to emerge and will represent opportunities for sophisticated investors.

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  • October news on the Canadian infrastructure market

    Creation of a Canadian infrastructure bank On October 20, 2016, the Advisory Council on Economic Growth published its report entitled “Unleashing Productivity Through Infrastructure”. One of the report’s recommendations is to create a Canadian Infrastructure Development Bank whose objective would be to deliver projects with an aggregate value of more than $200 billion over 10 years, while at the same time minimizing the use of government budgets. The new bank could grant financing in the form of subordinated debt or equity to supplement the financing provided by institutional investors in various projects. The new entity would, in fact, promote the PPP delivery model or alternative financing models, although its role would not be to replace the existing provincial bodies, such as Infrastructure Ontario or the Société québécoise des infrastructures. Moreover, the federal government will also wish to ensure that the establishment of an infrastructure bank does not discourage investments by the private sector. Finally, on November 1, 2016, the Finance Minister, Bill Morneau, confirmed the creation of the Canada Infrastructure Bank (“CIB”) in 2017. The new institution will receive an initial capitalization of $35 billion. It remains to be seen whether the CIB will be governed by the Bank Act or whether a new legislative scheme will be set up for this new institution. Project to privatize eight Canadian airports In the aforementioned report, “Unleashing Productivity through Infrastructure”, the Advisory Council on Economic Growth proposes the privatization of the airports of Toronto, Vancouver, Montreal, Calgary, Edmonton, Ottawa, Winnipeg and Halifax. The Council also recommends the use of private investment in other public infrastructures such as toll highways and bridges, highspeed railways, smart cities, broadband internet networks, power transmission lines and natural resources infrastructure. This is not the first time the federal government has considered a project to privatize airports, but no decision seems yet to have been made at this stage, nor any agenda unveiled. However, the Canada Development Investment Corporation (“CDEV”), a federal Crown corporation reporting to the Finance Minister, Bill Morneau, has been mandated to hire consultants to advise the government. On the other hand, during his speech to the Montreal Chamber of Commerce on November 2, 2016, the Minister of Transport, Marc Garneau, mentioned that privatization was only one of the options on the table. Boralex closes a €100 million wind farm project financing in France Boralex Inc. has announced the closing of financing for the Mont de Bagny (24 MW), Artois (23.1 MW) and Voie des Monts (10 MW) wind farms in France, for a total of approximately €100 million (Cdn$145 million). This financing is provided by Crédit Industriel et Commercial (Groupe Crédit Mutuel) and BPI France Financement. The construction of each of the projects is already underway and they should all be commissioned by the end of 2017. This announcement was made shortly after Boralex acquired a wind farm portfolio of nearly 200 MW in France and Scotland, in September 2016. In June 2016, Boralex also closed another financing of €20.4 million for two wind farms in France. These large transactions confirm Boralex’s position as France’s largest independent producer of onshore wind power, through its Boralex Europe subsidiary. Possible refinancing of Montreal Gateway Terminals’ debt The Montreal Gateway Terminals project is currently studying the possibility of refinancing its bank debt. This consortium, including Axium, Desjardins, Manulife, the FTQ and Industrial Alliance, acquired the company’s assets from Morgan Stanley’s first infrastructure fund in March 2015. The transaction was financed with mini-perm bank financing of $252 million over a five-year term. The banking syndicate currently consists of BMO, CIBC, MUFG & BTMU, RBC and Scotiabank. DBRS downgrades Montreal hospital bonds On October 20, 2016, the DBRS credit rating agency downgraded the rating of the senior secured bonds of the Centre hospitalier de l’Université de Montréal (“CHUM”) from BBB (high) to BBB. This downgrade was due to the postponement of the substantial completion date of phase 1 from the second quarter of 2016 to the first quarter of 2017. This represents an additional delay of 20 weeks since the date of DBRS’s last review and 48 weeks since the initial substantial completion date of April 22, 2016. The project will be in default if delays continue beyond July 2017. HSBC implements a worldwide infrastructure financing platform HSBC recently announced that it was setting up an infrastructure financing platform with a worldwide mandate, whose purpose will be to mobilize capital from institutional investors. The team will be based in London and plans to sign its first mandate with the HSBC insurance company, which seeks to invest primarily in senior, investment grade infrastructure debt. In doing so, HSBC is imitating other international institutions that are seeking to capitalize on the appetite for private capital for infrastructure debt. For example, the French bank, Natixis, has also established its own infrastructure debt platform, based on investments from insurance companies. CIBC Asset Management establishes an energy and infrastructure team CIBC Asset Management has just set up an infrastructure and power projects financing team. The team’s mandate will be to take out interests in the form of private placements or public bond issues in the Canadian infrastructure, PPP, and renewable or non-renewable power production markets. This is therefore a new player from the banking industry positioning itself in the market for long-term public and private financing of infrastructure projects. Until now, TD Asset Management and Desjardins Asset Management were the two most well-known Canadian banking institutions active in fixed income infrastructure financing, in competition with the insurance companies that traditionally dominate this market. Bond refinancing for Kingston solar park On October 19, 2016, Connor, Clark & Lunn (“CC&L”), Samsung and a group of co-investors closed a $633 million bond issue for the refinancing of the Kingston Solar project in Ontario. Kingston Solar is a 100 MW project, one of the largest in Canada, located near the city of Kingston, Ontario, which commenced operations in September 2015. The project benefits from a 20-year power purchase contract with IESO. The bond issue, which DBRS rated BBB, will mature on July 31, 2035 and bears interest at a fixed rate of 3.571%. This is CC&L’s second refinancing of a solar park through the issuance of bonds after the refinancing of Grand Renewable Solar — a project of the same size as Kingston Solar — completed in June 2016. Public bond issues are an appealing option for the refinancing of Canadian renewable energy projects. However, the number of transactions completed to date has been relatively modest, in part because of the constraints imposed by the credit rating agencies, which, until now, had encouraged promoters to turn to more traditional types of financing, such as medium-term bank loans or private placements.

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  • In force since June 1, 2015: The Extractive Sector Transparency Meadures Act (Canada)

    In keeping with trends in other jurisdictions, Canada has brought into force federal rules requiring businesses in the extractive sector to publish annual reports on payments of $100,000 or more made to governments in Canada and abroad. Payments to Aboriginal governments will be covered by these rules starting in 2017. The purpose of the legislation – for which many regulations remain to be published - is to implement Canada’s international commitments to participate in the fight against corruption through the implementation of measures applicable to the extractive sector, including measures that enhance transparency and measures that impose reporting obligations with respect to payments made by entities. WHO MUST REPORT? The Extractive Sector Transparency Measures Act1 (ESTMA) applies to any corporation or trust, partnership or other unincorporated organization that is engaged in the commercial development of oil, gas or minerals in Canada or elsewhere or that controls a corporation or a trust, partnership or other unincorporated organization that is engaged in the commercial development of oil, gas or minerals in Canada or elsewhere, and is listed on a stock exchange in Canada or has a place of business in Canada, does business in Canada or has assets in Canada and that, based on its consolidated financial statements, meets at least two of the following conditions for at least one of its two most recent financial years: (i) it has at least $20 million in assets, (ii) it has generated at least $40 million in revenue, (iii) it employs an average of at least 250 employees; or is an entity listed by regulation, and has made payments of $100,000 or more to governments in Canada and/or abroad in a financial year. WHEN MUST THE REPORT BE FILED? The report must be filed with the federal minister (to be designated) annually, within one hundred and fifty (150) days of the end of the entity’s financial year. ESTMA’s transitional provisions specify that reporting is required for the first full financial year of an entity following the coming into force of the Act (June 1, 2015). The report must be made public in a manner to be prescribed by regulations and it must remain available to the public for at least five years. WHAT MUST BE REPORTED? Entities must report on payments to payees. Payments can be in cash or in kind (value is equal to the cost to the entity — or, if the cost cannot be determined, the fair market value — of the goods or services that it provided), and the threshold for reporting ($100,000 in the aggregate, or an amount prescribed by regulation) is calculated by payment category: taxes, other than consumption taxes and personal income taxes; royalties; fees, including rental fees, entry fees and regulatory charges as well as fees or other consideration for licences, permits or concessions; production entitlements; bonuses, including signature, discovery and production bonuses; dividends other than dividends paid as ordinary shareholders; infrastructure improvement payments; or any other prescribed category of payment. Payments need to have been made in relation to the commercial development of oil, gas or minerals. Commercial development of oil, gas or minerals is defined as meaning (a) the exploration or extraction of oil, gas or minerals (“exploration” and “extraction” to be defined by regulation); (b) the acquisition or holding of a permit, licence, lease or any other authorization to carry out any of the activities referred to in paragraph (a); or (c) any other prescribed activities in relation to oil, gas or minerals. Oil is defined to mean crude petroleum, bitumen and oil shale; gas is defined as natural gas, including all substances, other than oil, that are produced in association with natural gas; and minerals are defined as all naturally occurring metallic and non-metallic minerals, including coal, salt, quarry and pit material, and all rare and precious minerals and metals. Payee means: any government in Canada or in a foreign state; a body that is established by two or more governments; any trust, board, commission, corporation or body or authority that is established to exercise or perform, or that exercises or performs, a power, duty or function of government for a government referred to in paragraph (a) or a body referred to in paragraph (b); or any other prescribed payee. Beginning in June 2017, “payee” will include the following: an Aboriginal government in Canada; a body established by two or more Aboriginal governments in Canada; and any trust, board, commission, corporation or body or authority that is established to exercise or perform, or that exercises or performs, a power, duty or function of government for a government referred to in paragraph (a) or a body referred to in paragraph (b). DEEMING PROVISIONS The reach of the Act is expansive, and it contains many deeming provisions. For example, note that for the purposes of the Act, a payment that is made to an employee or public office holder of a payee is deemed to have been made to the payee; a payment that is due to a payee and that is received by a body that is not a payee for the payee is deemed to have been made to the payee; a payment that is made by an entity that is controlled by another entity is deemed to have been made by the controlling entity; and a payment that is made for an entity is deemed to have been made by the entity. Subject to the regulations, an entity is controlled by another entity if it is controlled by the other entity, directly or indirectly, in any manner. An entity that controls another entity is deemed to control any entity that is controlled, or deemed to be controlled, by the other entity. DETAILS ON REPORTING The responsible minister may issue instructions on how to present information that is required to be included in reports. Reports must include an attestation made by a director or officer of the entity, or an independent auditor or accountant, that the information in the report is true, accurate and complete. The responsible minister may accept substitute reports from other jurisdictions after consideration of equivalency requirements. Subsidiaries can obtain permission not to report in those cases where the parent company files a consolidated report. Data contained in reports must be retained for seven years or the period prescribed by regulation. ENFORCEMENT The responsible minister will have search and seizure powers, as well as order powers. Failure to file a report, failure to comply with an order, structuring payments to avoid reporting or providing false or misleading information are offences punishable on summary conviction by a fine of up to $250,000 per day, for each day the offence continues. Any officer, director or agent or mandatary of a person or entity that commits an offence who directed, authorized, assented to, acquiesced in or participated in its commission is a party to and guilty of the offence and liable on conviction to the punishment provided for the offence, whether or not the person or entity has been prosecuted or convicted. Due diligence is available as a defence to persons and entities. GETTING STARTED ESTMA has arrived. It will be important for reporting entities to start thinking about the possibility of report substitution (from other jurisdictions), reporting exemptions (for subsidiaries), or data collection, storage and retrieval options (pending receipt of instructions from the government on reporting format). Stay tuned for important information that will become available as the federal government rolls out the regulations, for example, respecting the circumstances in which any of the provisions of the Act do not apply to entities, payments or payees, and prescribing the rate of exchange for the conversion of payments into Canadian dollars. _________________________________________ 1 S.C. 2014, c. 39, s. 376.

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  • Supreme Court of Canada Ruling in Tsilhqot’in: Aboriginal Title and the Common Law

    On June 26, 2014, the Supreme Court of Canada rendered a decision confirming aboriginal title to approximately five percent of the Tsilhqot’in First Nation’s traditional territory in British Columbia. This decision is very significant because it marks the first time a ruling defines aboriginal title “on the ground”. ABORIGINAL RIGHTSThe Constitution Act, 1982 provides that existing aboriginal and treaty rights of the aboriginal peoples of Canada are recognized and affirmed. Among those rights are the right to engage in traditional activities such as hunting and fishing, the right to self-government, and aboriginal title. Tsilhqot’in deals with the existence of aboriginal title, its incidents, and the rights it confers.RECOGNITION OF ABORIGINAL TITLEThe Supreme Court of Canada confirmed that aboriginal title enjoyed by a First Nation over a given territory through its sufficient, continuous and exclusive occupation thereof prior to the assertion of sovereignty by the British Crown is preserved and must be recognized.In order to establish the existence of aboriginal title, the First Nation must show that it enjoyed sufficient, continuous and exclusive occupation of the claimed lands prior to the assertion of sovereignty. As the Court noted: “Sufficiency, continuity and exclusivity are not ends in themselves, but inquiries that shed light on whether Aboriginal title is established.”SUFFICIENCY OF OCCUPATION. “[R]egular use of territories for hunting, fishing, trapping and foraging is “sufficient” use to ground Aboriginal title, provided that such use, on the facts of a particular case, evinces an intention on the part of the Aboriginal group to hold or possess the land in a manner comparable to what would be required to establish title at common law. InTsilhqot’in, the Supreme Court of Canada confirmed that nomadic and semi-nomadic groups could establish title to land, provided they demonstrate sufficient physical possession, which is a question of fact.CONTINUITY OF OCCUPATION. Proof of continuous occupation of the territory claimed may be based on proof of continuity between present and pre-sovereignty occupation, showing that the present occupation is rooted in pre-sovereignty times.EXCLUSIVITY OF OCCUPATION. Exclusive occupation should be understood in the sense of intention and capacity to control the land. This is a question of fact which depends on various factors such as the characteristics of the claimant group, the nature of other groups in the area, and the characteristics of the land in question.With respect to the manner of applying these criteria, Chief Justice Beverly McLachlin, speaking for the majority, stated:In my view, the concepts of sufficiency, continuity and exclusivity provide useful lenses through which to view the question of Aboriginal title. This said, the court must be careful not to lose or distort the Aboriginal perspective by forcing ancestral practices into the square boxes of common law concepts, thus frustrating the goal of faithfully translating pre-sovereignty Aboriginal interests into equivalent modern legal rights. Sufficiency, continuity and exclusivity are not ends in themselves, but inquiries that shed light on whether Aboriginal title is established.CONTENT OF ABORIGINAL TITLEAboriginal title confers upon its holder the right to enjoy, use and control the land and to enjoy the benefits deriving therefrom. It is a collective title and consequently cannot be transferred except to the Crown. Furthermore, the land may not be used for a purpose that would deprive future generations of its enjoyment.However, we note that the Court stated as follows in the Delgamuukw case: “If aboriginal peoples wish to use their lands in a way that aboriginal title does not permit, then they must surrender those lands and convert them into non-title lands to do so.”EFFECT OF ABORIGINAL TITLEThe Supreme Court of Canada confirmed that, subject to what follows, provincial laws of general application apply to lands held under aboriginal title.The effect of aboriginal title varies depending on whether the title is being claimed or has been recognized. Where title is claimed, the rules in Haïda nation continue to apply: when a First Nation claims title over a given territory, before authorizing a given project or activity, the Crown (federal or provincial government, as the case may be) must consult the First Nation and, depending on the circumstances, accommodate its concerns. The intensity of the duty to consult varies as a function of two criteria, namely the strength of the Nation’s claim on one hand and the extent of the proposed infringement on the other.If the First Nation has a recognized aboriginal title over an area — as is now the case for the Tsilhqot’in First Nation — then consent of the First Nation is required before activities may proceed in the area. The exception to this rule is when the infringement is justified by a compelling and substantial public purpose, but even then, the infringement must be consistent with the Crown’s fiduciary duty towards the First Nation. This caveat is similar to the notion of expropriation in the public interest, except that here, the public interest must be weighed against the interest of the First Nation.In the Supreme Court’s decision in Delgamuukw, Chief Justice Antonio Lamer, writing for the majority of the Court, described as follows what could constitute a compelling and substantial public purpose:In my opinion, the development of agriculture, forestry, mining, and hydroelectric power, the general economic development of the interior of British Columbia, protection of the environment or endangered species, the building of infrastructure and the settlement of foreign populations to support those aims, are the kinds of objectives that are consistent with this purpose and, in principle, can justify the infringement of aboriginal title. Whether a particular measure or government act can be explained by reference to one of those objectives, however, is ultimately a question of fact that will have to be examined on a case-by-case basis.The Court in Tsilhqot’in reproduced the above passage without comment. It then declared:If a compelling and substantial public purpose is established, the government must go on to show that the proposed incursion on the Aboriginal right is consistent with the Crown’s fiduciary duty towards Aboriginal people. [...] The beneficial interest in the land held by the Aboriginal group vests communally in the title-holding group. This means that incursions on Aboriginal title cannot be justified if they would substantially deprive future generations of the benefit of the land.In the Tsilhqot’in case, the province had authorized a third party to engage in logging on lands claimed by the Tsilhqot’in First Nation without consulting the First Nation, that is to say, in violation of the rules that apply on lands subject to land claims. Now that title was recognized, the Supreme Court of Canada analyzed whether the infringement of aboriginal title without the consent of the First Nation was justified. It sided with the lower courts in finding that the reasons invoked by the province for authorizing the logging (economic benefits of the harvest and measures needed to stem mountain pine beetle infestation) were not supported by the evidence.COMPENSATION FOR INFRINGEMENT OF ABORIGINAL TITLEThe question of compensation, not decided in Delgamuukw, is dealt with as follows in Tsilhqot’in: “The usual remedies that lie for breach of interests in land are available, adapted as necessary to reflect the special nature of Aboriginal title and the fiduciary obligation owed by the Crown to the holders of Aboriginal title.”CONCLUSIONThe Tsilhqot’in decision of the Supreme Court of Canada confirms that aboriginal title, recognized by the common law, does exist in Canada and it identifies a region of British Columbia where this holds true. The First Nation title holder has the right to decide how the land will be used, unless a compelling and substantial public purpose that is compatible with the Crown’s fiduciary duty toward the First Nation justifies infringing on title without the consent of the holder. In these cases, the usual remedies are available, adapted as necessary. What Tsilhqot’in has not changed is the policy, so to speak, of the Supreme Court as regards the role of the judiciary in relation to the process of reconciliation between Aboriginal peoples and Canadian society. This process must be a good faith negotiation by both parties.

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  • Forum on Mining Royalties – Consultation document

    Here is an overview prepared by Lavery of the highlights of the consultation document (in French) released last Thursday by the Quebec government in connection with the forum on mining royalties to be held on March 15, 2013. OVERVIEW OF THE CONSULTATION DOCUMENT ENTITLED:“LE RÉGIME D’IMPÔT MINIER DU QUÉBEC” March 8, 2013 We have reviewed the consultation document entitled “Le régime d’impôt minier du Québec – mars 2013” posted on the Internet on March 8, 2013, in anticipation of the forum regarding mining royalties scheduled for March 15, 2013.This memo is not intended to be a detailed review of all items raised in the consultation document but rather a summary of the salient information contained therein. This memo reproduces the titles of the relevant sections of the consultation document.MESSAGE FROM THE MINISTERSIn 2011, half of the mining companies operating in Quebec did not pay mining royalties. The regime currently in place did not allow the community to benefit from the mining activities of public non-renewable resources despite the high prices of commodities around the world.INTRODUCTIONThe document is divided into five sections:  Overview of the mining industry in Quebec; Overview of the mining tax regimes; Analysis of the mining tax regime applicable in Quebec; Quantitative analysis of the taxes levied on the mining companies together with tax subsidies for the mining industry; and Feedback requested from the mining industry. The review undertaken by the government is governed by two principles:a) Any mining company that operates a mine in Quebec should pay a minimum mining royalty to the government in lieu of financial compensation for the exploitation of mineral resources owned by the community; andb) When the profits of the mining companies increase the Quebecers in general shall be entitled to benefit from a larger portion of these profits.The mining industry players are invited to provide comments in order to feed the reflection and discussion.1. THE MINING INDUSTRY IN QUEBEC1.1 Mineral development processSection 1.1 provides an overview of the mining industry in Quebec, mostly information you are already aware of.1.2 Mineral productionSection 1.2 of the document provides comparative data in respect of mineral production with other jurisdictions in Canada.1.3 Comparative market data of mineral production in Quebec and other jurisdictionsSection 1.3 of the document provides comparative data in respect of mineral production with foreign jurisdictions.1.4 Mining investmentsMining investments that occurred in Quebec amounted to $4.8 billion in 2012, of which 14% (i.e. $696 million) were incurred for mining exploration and development costs. These investments were made mostly in the regions of Abitibi-Témiscamingue, Côte-Nord and Nord-du-Québec. The mining investments for 2013 are forecasted at $4.1 billion.1.5 Labour matters in the mining sectorSection 1.5 provides market data on labour force in the Quebec mining industry.1.6 Economical EnvironmentThe demand for iron ore shall maintain the price of this commodity. In recent years, the prices of iron ore resulted in the development of significant mining projects in Quebec. In upcoming years, the world demand shall continue to grow but at a slower pace than the growth of the offer. The consultation document refers to an analysis of KPMG, November 2012. Based on a consensus of 13 financial institutions, on a short term basis, the price of iron ore shall be around US $130 per ton. Graphs 3 and 4 of this section set forth market data on iron ore.2. MINING TAX REGIMES2.1 Features of the types of mining tax regimesThe most common royalty regimes are the following:a) Royalties based on specific units (by volume or weight)This regime is generally suitable for bulk raw materials, materials of low value or requiring little processing, such as surface mineral substances, sand, gravel, stone, etc. It ensures stable revenues for the government, has the advantage of being transparent and requires audits of limited scope to verify the accuracy of the amounts reported. It would not be applicable in the case of metallic minerals, especially because the latter cannot be sold on the market before having undergone a treatment to extract the marketable substance.b) Ad valorem royalties based on the gross value of productionThis regime provides the government with stable revenues since the mining companies pay royalties regardless of their level of profitability. It is fairly simple to administer, but the application of a single rate limits the incentive to invest in processing activities. This is why many countries and states modulate the rate depending on the level of treatment or define the base on which royalties are levied by taking into account certain costs incurred by mining companies. However, this type of regime is less efficient in terms of economic allocation. It nevertheless remains the most common royalty regime.c) Royalties or taxes based on mining profitsThis regime is based on the computation of a mining income to which are deducted operating costs and allowances, in order to establish the value of the resource at the extraction stage. It generates an unstable income stream for the government as royalties or taxes paid by mining companies may be low or nonexistent during the first years of operation. However, this regime is very efficient in terms of economic allocation and it adjusts to prevailing market conditions. On the other hand, a low level of transparency is associated to this regime. It is typically more complex to implement and monitor, which requires an effective administration by the tax authorities.d) Royalties or taxes based on resource rentThis regime usually taxes a portion of income that exceeds a given return on investment threshold. It allows for a better distribution of income from the exploitation of the resource and has a very high level of efficiency in terms of economic allocation. Its implementation is complex and requires the development of underlying tax concepts with respect to the notion of rent.e) Hybrid regimes combining ad valorem royalties and royalties or taxes based on profits or rentHybrid regimes usually combine minimum royalties and royalties or taxes based on profits or rent. The goal is to limit the risk that the government ends up receiving no revenue if a given mining company never becomes profitable. Hybrid regimes have the advantages and disadvantages of the regimes that compose them.Table 4 at page 16 illustrates the performance of the different regimes with respect to the main governmental goals.2.2 Overview of mining tax regimes outside of QuebecTable 5 at page 17 presents an overview of the mining tax regimes of the other Canadian provinces and some foreign countries.3. MINING TAX REGIME IN QUEBECMining profits are currently taxed at a rate of 16% in Quebec. The regime applies a mine-bymine approach, meaning that a loss in respect to a given mine cannot reduce earnings from another mine.The mining profits are calculated from the gross value of the annual production of a mine, to which are subtracted some expenses and allowances (including for depreciation, postproduction development, processing, exploration and pre-production development).Table 6 at page 19 summarizes how the current mining tax regime works in Quebec.4. MINING ROYALTIES AND OTHER TAXES4.1 Evolution of mining royaltiesTable 7 at page 23 sums up the financial results of mining companies from 2000 to 2011.During this period, mining companies have reported a total gross value of production of $43.7 billion. The gross value was relatively constant for the years 2000 to 2005, but has experienced a gradual increase from 2006. From 2006 to 2011, the gross value of the annual production has more than doubled, from $3.1 billion to $7.3 billion.The industry profits have skyrocketed, particularly those of the four main producers. Between 2006 and 2011, with a gross margin of over 40%, the concept of excess profits has made its way. It is the responsibility of the government to ensure that Quebecers obtain their fair share.4.2 Imperfect regimeAlthough mining royalties have increased, half of mining companies did not pay any in 2011. These companies did not have mining profits, either because they were not profitable or because they were at the beginning of commercial operation and they claimed deductions and allowances that had the effect of reducing their mining profits to nil. Indeed, to acknowledge the investments made by the mining companies, the current mining tax regime allows them to recover a portion of their investments before subjecting them to the payment of royalties.Mining companies that paid mining tax in 2011 accounted for 81% of the gross value of annual production. These companies paid the government the equivalent of 5.9% of the gross value of production.4.3 Taxes levied on the mining companies and tax subsidies for the mining industryIn addition to the mining tax, mining companies are also subject to corporate income tax and must contribute to the Health Services Fund. However, the tax on capital was abolished in 2010.The refundable tax credit for resources is a direct assistance mechanism to support mineral exploration. The basic rate is currently 15%. As of January 1, 2014, the rate will be reduced to 10%.The flow-through share regime aims to promote the financing of mining companies. It provides for a basic deduction of 100% of the cost of flow-through shares in the calculation of the investor’s taxable income. An extra 25% deduction is granted if the expenses are incurred in Quebec by a non-operating company. An additional 25% deduction is allocated if the exploration is conducted from the surface, which gives a total possible deduction of 150% of the amount invested.4.4 Taxes levied by governmentsIn total, taxable income of mining companies is taxed at a rate of 38.6%.5. FEED-BACK REQUESTED FROM THE MINING INDUSTRY5.1 Fundamental principlesThe basic principle that will guide the government in the revision of the mining tax regime is clear: since the mineral resource belongs to the community and has a value, all companies exploiting a mine in Quebec will have to pay a royalty on the extracted resource.In parallel, the government's decision with respect to mining taxation policy will have to take into account the following objectives:5.1.1 Adequate sharing of the resource rentThe new mining regime will have to ensure a better sharing of the resource rent between Quebecers and mining companies.When the price of commodities is very high so that the profits of mining companies increase beyond a certain threshold, the government has to collect a portion of the excess profits. Mining companies argue, rightly, that the periods of high profits are offset by periods when prices are down or during which they make major investments. The new regime will therefore have to maintain a balance between the taxation of excess profits and maintaining the attractiveness of Quebec to investors.5.1.2 Optimal tax baseThe tax base of the new regime will have to provide sufficient revenues from the exploitation of the collective resource. It should encourage the influx of additional capital for exploration and development of mining projects in order to eventually create a multiplier effect. As market prices will not always be high and the existence of excess profits is not guaranteed, the chosen tax base will have to be self-sufficient for periods when there will be no excess profits.5.1.3 Efficiency of the tax system from an economical point of viewa) Stability of revenuesThe new royalty regime must generate a stable income stream for the government. However, royalties based on profits or resource rent offer less stability than the other regimes.b) FairnessThe concept of fairness will have to play at two levels in the new mining regime:a) Mining companies that generate the same amount of resource rent should be subject to the same tax rate;b) Mining companies should each pay royalties or taxes in proportion of their operating results, regardless of the level of resource rent.c) Transparency and stabilityThe new regime should allow mining companies to accurately predict the long-term tax liability associated to their activities.The new mining regime should also be transparent to Quebecers. In this regard, the new regime could be inspired from the new disclosure rules that will be introduced soon in the United States as well as the Extractive Industries Transparency Initiative to which many countries participate.d) Administrative efficiencyThe administration of the new regime should be simple for both mining companies and the government. However, this should not be at the expense of economic efficiency.On the other hand, administrative efficiency should not lead to an exploitation of the resource that is not beneficial for Quebecers as a whole, including the payment of mining royalties.e) CompetitivenessThe new system should enable companies operating in Quebec to be competitive. Many of them are also active in other parts of the world. They must remain competitive in Quebec to maintain their operations here and attract investments from their parent companies.Although Quebec has recently tightened some requirements regarding mining tax, the tax burden of mining companies is lower in Quebec than in many other countries.Many governments around the world have reformed their mining tax regimes or are considering doing the same. During the year 2010-2011 alone, at least 25 countries and states in the world have increased or announced plans to increase their mining royalties or taxes, including Australia, Peru, Tanzania, India, China, Zimbabwe, Chile, Congo, Mongolia, the Philippines, Poland and the United States.On the basis of these principles and issues, the government of Quebec considers it important to establish a constructive dialogue with the mining industry.5.2 Contemplated alternativesThe government of Quebec wants to improve the sharing of the wealth generated by the exploitation of mineral resources in the province. To do this, different options are contemplated.Choosing a hybrid regime seems more appropriate in order to combine the advantages of each regime, namely (1) guaranteed minimum revenues and (2) an appropriate sharing of the resource rent.5.2.1 Guaranteed minimum revenues: ad valorem royaltiesTo achieve the goal of guaranteed minimum revenues for the government, the ad valorem royalties constitute the best regime. It involves applying a given rate to the gross value of the annual production of mining companies. The royalties could be varied, for example, by adjusting the rate for value added products or by defining the tax base in order to avoid penalizing processing activities.The royalties could be considered as a minimum amount that must pay any company that operates a mine in Quebec and thus ensure a revenue stream to the government at any time. Once this regime is established, it should be relatively simple to administer.The ad valorem royalties could, according to the chosen approach, be deducted in the calculation of the second component of the regime.5.2.2 Appropriate sharing of the resource rentTo ensure that mining companies pay more royalties when their profitability is high, several approaches can be considered.a) Regime based on the profit marginThis regime would have the same tax base as the current one. However, the applicable rate would progressively increase once a certain level of profitability is reached. The profitability of a mining company would be determined by its profit margin.This approach would progressively increase the amount of royalties paid by mining companies. It has a high degree of economic and tax efficiency and allows an optimal sharing of the resource rent. Under this approach, a mining company would be required to pay royalties corresponding to the highest of the ad valorem royalties and the mining tax calculated on the annual profits.b) Regime based on resource rentHere, the royalties would be based on resource rent, that is to say the profits that are beyond a threshold of acceptable return on investment based on risk.This regime would have the advantage of maximizing governmental revenues when there are excess profits. It is very effective in terms of economic allocation and fairness. However, it must include clear definitions and a well-structured methodology in order to facilitate its administration.The royalties would be applied only beyond the expected return on investment. In order to guarantee a return on investment to a mining company, the profits of its activities would be tax free up to the annual deductions representing the expected return on its investment, amortized over its lifetime.If a mining company has excess profits once the ad valorem royalties are subtracted, a tax at the rate of 30% would be applied to these excess profits.The proposed formula is independent of the financing structure, allowing mining companies discretion in this regard.List of graphsGraph 1 Evolution of mining investmentGraph 2 Labour in the mining sector allocated by administrative regions in 2011Graph 3 Price of iron ore (years 2000-2013)Graph 4 World supply and demand for iron oreGraph 5 Price of gold (years 2000-2013)Graph 6 World demand for goldList of tablesTable 1 Quebec’s mineral production (2011-2012)Table 2 Value of Canadian mineral production (2012)Table 3 World production of gold and iron ore and that of Quebec and the main producing countries (2011)Table 4 Qualitative evaluation of the performance of the different types of royalties and taxes as measured against the key tax objectives of the governmentTable 5 Mining tax regimes applicable outside of QuebecTable 6 Illustration of the current mining tax systemTable 7 Data on operators (years 2000 to 2011)Table 8 Number of companies, mining tax and total gross value of mineral production (2011)Table 9 Taxes levied on mining companiesTable 10 Combined effective rate of corporate income taxes and mining tax (2013)

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  • Francization – Bill No 14 amending the Charter of the French language

    This publication was authored by Luc Thibaudeau, former partner of Lavery and now judge in the Civil Division of the Court of Québec, District of Longueuil. The title of this newsletter gives a good summary of the explanatory notes that serve as an introduction to Bill 14, entitled An Act to amend the Charter of the French language, the Charter of human rights and freedoms and other legislative provisions (the “Bill”). The legislator is concerned that English is being used systematically in certain workplaces. The Bill was tabled on December 5, 2012 and the proposed amendments are designed to reaffirm the primacy of French as the official and common language of Quebec.

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