Publications

This Need to Know Express is part of a series of newsletters which each answers one or several questions in a practical and concrete way. These bulletins have been or will be published over the next few weeks. In addition, a consolidated version of all the Need to Know Express newsletters published on this topic will be available upon request.These various newsletters, as well as others published on the subject of governance, are or will be available on our website (Lavery.ca/publications – André Laurin). 3. WHAT PRECAUTIONS SHOULD A PROPOSED DIRECTOR TAKE PRIOR TO ACCEPTING TO ACT AS A CORPORATE DIRECTOR? A person who is invited or wishes to become a director should clearly make some prior verifications, including: his interest for the organization and its objectives; the requirements of the position as to time and efforts and his availability in that respect; the actual possibility to make a significant contribution, therefore resulting in added value for the legal person; the quality of incumbent directors, who will be his colleagues if he accepts to act as a director; the receptivity of management respecting sound governance and the help provided by management to directors to enable them to discharge their duties and play their full role; the quality of the existing corporate governance; the financial health of the legal person; the existence of actual or threatened significant proceedings against the legal person; the compliance by the organization with laws and contracts; the existence of adequate directors’ and officers’ liability insurance coverage; the availability of an indemnification undertaking by the legal person in favour of the director; the existence of recent director resignations and the reason thereof; the proportionality of compensation relative to the liability risks (mainly in the case of reporting issuers).Preliminary discussions with the chief executive officer, the chairman of the board and some current and former directors may be helpful in obtaining adequate confirmations in respect of many of these items. However, these discussions should be completed by reviewing documents such as the financial statements, court records, minutes...).A person who is an officer, director or employee of a corporation must also ensure that the new office as director is acceptable to the first corporation. The new office may in fact contravene a policy of the corporation, the contract between the individual and the corporation or the interest of the corporation.The risks to reputation related to accepting to act as director with some legal persons are not to be neglected either. We have recently seen that the reputation of high quality persons who had accepted on a pro bono basis to act as directors of not-for-profit organizations suffered as a result. The media, politicians and even auditors general sometimes draw quick, ill-founded conclusions as to the proper discharge of their duties by directors.4. WHAT ARE THE DUTIES OF A MEMBER OF A BOARD OF DIRECTORS?Incorporating statutes, particularly the Canada Business Corporations Act1 and the Business Corporations Act2 (Quebec), as well as the Civil Code of Québec3 all stipulate two general duties which directors are subject to, that is, the duty of care and the duty of loyalty. The Canada Business Corporations Act stipulates these duties as follows:“122. (1) [Duty of care of directors and officers] Every director and officer of a corporation in exercising their powers and discharging their duties shall (a) act honestly and in good faith with a view to the best interests of the corporation; and (b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.”In addition to these general duties, a director is also subject to many statutory obligations or presumptions of liability or guilt under various statutes, particularly for unpaid salaries and remittance of deductions at source and GST/QST. It is important for directors to be aware of all the statutory obligations and presumptions and know how to recognize them, ensure that the legal person takes appropriate measures in this respect and that the board supervises such measures. _________________________________________1 Canada Business Corporations Act, R.S.C. 1985, c. C-44.2 Business Corporations Act, C.Q.L.R., c. S-31.1 art. 119.3 Civil Code of Québec, L.R.Q., c. C-1991, articles 321 and following.

LAVERY: A LEADER IN MONTREAL IN THE PRIVATE EQUITY, VENTURE CAPITAL AND INVESTMENT MANAGEMENT INDUSTRY Creating and setting up private equity and venture capital funds are complex initiatives requiring specialized legal resources. There are very few law firms offering such services in Quebec. Lavery has developed enviable expertise in this industry by working closely with promoters to set up such structures in Canada and, in some cases, the United States and Europe, in conjunction with local firms. Through Lavery’s strong record of achievements, the firm sets itself apart in the legal services market by actively supporting promoters, managers, investors, businesses and other partners involved in the various stages of the implementation and deployment of private equity and venture capital initiatives. Following the recent public consultations held by the federal government on the issue of treaty shopping, the 2014 Budget proposes to implement in the Canadian domestic law a general anti-treaty shopping rule (“GATSR”) which private investment funds investing in Canada (“Funds”) may have to deal with.Treaty shopping refers to a situation where, for example, a non-resident person who is not entitled to benefits under a Canadian tax treaty uses an entity in a country with which Canada has concluded a tax treaty and, to obtain Canadian tax benefits, earns or realizes income sourced in Canada indirectly through that entity.The GATSR would probably be integrated into the Income Tax Conventions Interpretation Act. Its application would result in denying in whole or in part the benefits claimed pursuant to a tax treaty.The GATSR provisions would provide for the following items: Main purpose provision: Subject to the relieving provision, the purpose of the GATSR would be to deny the benefit of a tax treaty to a person where it is reasonable to conclude that one of the main purposes of the transaction or series of transactions is to allow that person to obtain the benefit. Conduit entity’s rebuttable presumption: It would be presumed that one of the main purposes of the transaction or series of transactions is to obtain a benefit pursuant to such a treaty if the income in question is primarily used to pay, directly or indirectly, an amount to another person (such as a limited partner of a Fund) who would not have been entitled to an equivalent or more favourable benefit had that person received directly the income in question. Safe harbour’s rebuttable presumption:Subject to the rebuttable presumption of use of a conduit entity, it would be presumed that none of the main purposes for undertaking a transaction was for someone to obtain a benefit under a tax treaty if, as the case may be: the person carries on an active business, other than managing investments, in the foreign treaty country and, where the income in question is derived from a related person in Canada, the active business is substantial compared to the activity carried on in Canada by such related person; the person is not controlled, de jure or de facto, by another person who would not have been entitled to the benefit had that person directly received the income in question; the person is a corporation or trust listed on a recognized stock exchange. Relieving provision: The Minister of National Revenue (“Minister”) would, at his discretion, allow the grant of the benefit, in whole or in part, when circumstances reasonably justify it. Some examples of application of the GATSR suggest that a Fund may be targeted by the new rule. A fund which is set up as a limited partnership generally relies on a holding corporation which may be considered by the Minister as a conduit corporation pursuant to the GATSR. Funds should not assume that the legislator will provide relieving transitional rules for current structures, but rather consider right now the implementation of mechanisms to avoid or reduce the effects of the GATSR.

This Need to Know Express is part of a series of newsletters which each answers one or several questions in a practical and concrete way. These bulletins have been or will be published over the next few weeks. In addition, a consolidated version of all the Need to Know Express newsletters published on this topic will be available upon request.These various newsletters, as well as others published on the subject of governance, are or will be available on our website (Lavery.ca/publications – André Laurin).1. IS A DIRECTOR REQUIRED TO BE A SHAREHOLDER OR MEMBER OF THE LEGAL PERSON?Subject to the following, the answer to this question is no.However, the governing statute, articles of incorporation, internal or administrative by-law or unanimous shareholder agreement may stipulate specific eligibility conditions.For example, as a non-exhaustive list of examples: the incorporating statute or the by-law of a not-for-profit organization (NFPO), professional corporation or some other legal persons may stipulate requirements as to membership, residence, citizenship, etc.; the articles of incorporation of a corporation or a unanimous shareholder agreement may confer on a shareholder the authority to appoint one or several directors or provide that a director must also be a shareholder.2. WHO IS ELIGIBLE TO BECOME A DIRECTOR?The eligibility conditions are mainly found either in the Civil Code of Québec1 for legal persons governed by it or in the incorporating statute of the legal person, as completed in both cases by the internal or administrative by-law duly adopted by the legal person or a unanimous shareholder agreement.Under all relevant statutes, a director must be a natural person. A legal person cannot be a member of the board of directors of another legal person.Article 327 of the Civil Code of Québec2 stipulates that “Minors, persons of full age under tutorship or curatorship, bankrupts and persons prohibited by the court from holding such office” are disqualified for office as directors. Exclusions which are similar in whole or in part are to be found in most incorporating statutes of legal persons.Most incorporating statutes do not require directors to be shareholders or, in the case of a NFPO, a member of the legal person.Moreover, some incorporating statutes prescribe eligibility conditions, such as citizenship or residence.Some statutes other than the incorporating statutes or some regulations or decisions of regulatory authorities establish prohibitions from acting as a director generally or, in other circumstances, from acting as a director of specific legal persons.In another publication entitled “May a director be removed by the board of directors during his term of office?”3 we discussed some additional eligibility conditions which may be prescribed by the internal or administrative by-law. Some legal person may, for example, wish to impose as an eligibility condition the absence of criminal record to avoid having to file an application with the court under article 329 of the Civil Code of Québec4 to obtain the removal of a director who has been found guilty of an offence pursuant to the Criminal Code.Failure to meet the conditions of eligibility and the loss of eligibility should, in our opinion, result in most cases and for most purposes, in the automatic disqualification of a natural person as a director.Any person who is invited to become a director of a legal person and the legal person itself must therefore verify that the applicable eligibility conditions are met. _________________________________________1 Civil Code of Québec, CQLR, c. C-1991.2 Civil Code of Québec, CQLR, c. C-1991.3 Lavery website - Publications - André Laurin - “The Corporate Director’s Q & A”, “20. May a director be removed by the board during his term of office?”.4 Civil Code of Québec, CQLR, c. C-1991.

LAVERY: A LEADER IN MONTREAL IN THE PRIVATE EQUITY, VENTURE CAPITAL AND INVESTMENT MANAGEMENT INDUSTRY Creating and setting up private equity and venture capital funds are complex initiatives requiring specialized legal resources. There are very few law firms offering such services in Quebec. Lavery has developed enviable expertise in this industry by working closely with promoters to set up such structures in Canada and, in some cases, the United States and Europe, in conjunction with local firms. Through Lavery’s strong record of achievements, the firm sets itself apart in the legal services market by actively supporting promoters, managers, investors, businesses and other partners involved in the various stages of the implementation and deployment of private equity and venture capital initiatives. The U.S. House of Representatives passed a bill in December 2013 that would exempt many private equity fund advisers in the United States from the provision in the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) that requires advisers with more than $150 million in assets under management to register with the U.S. Securities and Exchange Commission (the “SEC”). The bill’s passage into law remains, however, uncertain. As a result, most private equity fund advisers in the United States remain under the oversight of the SEC.Canada, in contrast, remains one of the very few remaining jurisdictions where most private equity fund managers do not have to register with any securities regulator. When the Canadian Securities Administrators (the “CSA”) proposed the adoption of National Instrument 31-103 – Registration Requirements in 2007, many feared that this would change. A record number of comments made on the original draft in response to such changes led the regulators to clarify, in the final version of the policy adopted along with the new instrument, that the intention of the CSA was not to subject typical private equity funds to such requirements.REGISTRATION AS A PORTFOLIO MANAGERThe CSA indicates that venture capital and private equity funds (and their general partners and managers) (collectively, the “VCs”) are not required to register as a portfolio manager if the advice provided to the fund (and indirectly to the GUILLAUME LAVOIE [email protected] ANDRÉ VAUTOUR [email protected] investors of the fund) in connection with the purchase and sale of securities is incidental to their active management of the fund’s investments (notably as a result of the VC having representatives sitting on the boards of directors of the portfolio companies in which they invest) and if the VCs do not solicit clients on the basis of their securities advice. It must be also clear that the expertise of the manager of the VC is sought in connection with the management of the portfolio companies and that its remuneration is connected to such management and not to any securities advice it might be considered to be giving to the fund and its investors.REGISTRATION AS AN INVESTMENT FUND MANAGERVCs are typically not considered to be mutual funds because of the fact that their units or shares are not redeemable on demand. VCs that have redemption provisions in their organizational documents will typically have a series of important redemption restrictions that prevent them from being considered redeemable on demand. The CSA generally takes the view that where an investment fund allows its investors to redeem the securities they own in the fund less frequently than once a year, the fund does not provide an “on demand” redemption feature.Further, VCs are generally involved in the management of the companies they invest in. Such involvement can take the form of a seat on a board of directors or a direct involvement in the material management decisions or in the appointment of managers of such companies. As a result, they will not be considered to be “non-redeemable investment funds” as defined in Canadian securities legislation.A VC that is neither a mutual fund nor a non-redeemable investment fund will not be considered to be an “investment fund” for the purposes of Canadian securities legislation. Consequently, its manager will typically not have to register as an investment fund manager.REGISTRATION AS A DEALERWith regards to the dealer registration requirement, one must determine if the manager can be considered to be “in the business” of trading in securities. “Trading in securities” includes the sale of securities of the fund but also the simple act of soliciting potential investors on behalf of the VC. Determining factors in making such assessment will be (i) whether the manager is carrying on the activity of trading securities with repetition, regularity or continuity, (ii) whether it is being, or expected to be, remunerated or compensated for such activity and (iii) whether it is directly or indirectly soliciting investors. Based on these factors, most VCs will not normally be considered to be in the business of trading in securities.VCs solicit investors to invest in the fund, but this will typically be done for a limited period of time, without repetition, regularity or continuity and will normally be incidental to the involvement of the manager in the management of the portfolio companies. Further, the manager will typically not receive any compensation for its fund raising. Its compensation will rather relate to the management of the portfolio investments themselves in the form of a management fee and of a carried interest in the profits generated by these investments. These factors will normally allow the VC to be able to consider that it is not in the business of trading in securities.VCs that have a dedicated sales/marketing team or that have formed funds with open commitment and investment periods that regularly raise capital and invest such capital in portfolio companies should, however, be careful as to whether this reality may cause them to be characterized as being in the business of trading in securities. Given the ambiguity of the law in this respect and that such determination is fact-specific, some institutional investors may require that the promoter of the fund registers as an exempt-market dealer even when an argument can be made that no registration is required.In the context of the foregoing regulatory framework and in light of the growing Canadian private equity market, Canada can be an interesting market for private equity fund managers to launch a first venture capital or private equity fund without having to immediately bear those expenses mandated by the registration process with a securities regulatory authority.

LAVERY: A LEADER IN MONTREAL IN THE PRIVATE EQUITY, VENTURE CAPITAL AND INVESTMENT MANAGEMENT INDUSTRY Creating and setting up private equity and venture capital funds are complex initiatives requiring specialized legal resources. There are very few law firms offering such services in Quebec. Lavery has developed enviable expertise in this industry by working closely with promoters to set up such structures in Canada and, in some cases, the United States and Europe, in conjunction with local firms. Through Lavery’s strong record of achievements, the firm sets itself apart in the legal services market by actively supporting promoters, managers, investors, businesses and other partners involved in the various stages of the implementation and deployment of private equity and venture capital initiatives. The Integrity in Public Contracts Act, also referred to as Bill 1, has been assented to on December 7, 2012. This Act imposes new requirements on public contracts tenderers. Managers of infrastructure funds have to be familiar with the rules under this Act as they most likely will have to deal with them in the context of an investment or a project involving a public body.AMENDMENTS TO THE ACT RESPECTING CONTRACTING BY PUBLIC BODIESThe Act Respecting Contracting by Public Bodies (“ARCPB”) determines the conditions applicable to contracts between a public body and private contractors involving an expense of public funds. The ARCPB applies to supply contracts, to services contracts and construction contracts entered into with these public bodies, as well as to public private partnership agreements entered into as part of an infrastructure project.Bill 1 amended the ARCPB in order to reinforce integrity in public contracts and control access to these contracts. It further increases the number of public bodies covered by the ARCPB by adding entities such as Hydro-Québec, Loto-Québec and the SAQ.The amendments provides for the implementation of a system to verify that enterprises wishing to enter into contracts with public bodies or municipalities meet the required conditions as regards integrity. Therefore, an enterprise wishing to enter into a contract (or a related subcontract) with a public body for an amount equal to or greater than a threshold determined by the government is required to obtain an authorization from the Autorité des marchés financiers (the “AMF”).The enterprise must generally have obtained this authorization by the date it files its bid. In the case of a consortium, each member enterprise must be individually authorized by that date. An authorization must be maintained throughout the performance of the public contract or subcontract. An authorization is valid for a period of three years and must be renewed upon expiry. The AMF keeps a public register of enterprises holding an authorization to enter into a contract or a subcontract with public bodies. These rules also apply to contracts awarded by towns and municipalities.CONDITIONS FOR OBTAINING AN AUTHORIZATIONAn application for an authorization must be made to the AMF. The contractor must provide with his application an attestation from Revenu Québec, stating that the enterprise has filed the returns and the reports required under tax laws and that it has no overdue account payable to the Minister of Revenue. Lastly, the enterprise must not have been refused an authorization or have had its authorization revoked in the preceding 12 months.Upon receipt of an application for authorization from an enterprise, the AMF sends to the permanent anti collusion squad (Unité permanente anticorruption or “UPAC”) the information obtained in order for the UPAC to make the verifications it deems necessary in collaboration with the Sûreté du Québec, Revenu Québec, the Régie du bâtiment du Québec and the Commission de la construction du Québec (“CCQ”). The UPAC sends to the AMF a report analysing the enterprise compliance with the integrity requirements. The AMF renders a decision on the application for an authorization.DECISION OF THE AMFBill 1 provides for mandatory and discretionary grounds for refusal. Thus, the fact, for an enterprise or related person, of having been found guilty, within the five preceding years, of any offence under various provincial or federal laws listed in Schedule I to this Act will result in the enterprise being automatically denied its application for an authorization. The offences listed in Schedule 1 mainly relate to criminal law and tax laws.If the enterprise applying for an authorization, or if any of its shareholders holding 50% or more of the voting rights attached to the shares of the enterprise, or any of its directors or officers has, in the preceding five years, been found guilty of an offence listed in such Schedule I, the AMF will refuse to grant or to renew an authorization. The AMF may even revoke an authorization if an enterprise or any of its related persons is subsequently found guilty of such an offence.Furthermore, if an enterprise has, in the preceding five years, been found guilty by a foreign court of an offence which, if committed in Canada, could have resulted in criminal or penal proceedings for an offence listed in Schedule I, the AMF will automatically deny the issuance or renewal of an authorization. Lastly, an enterprise found guilty of certain offences described in electoral laws or who, in the preceding two years, has been ordered to suspend work pursuant to a decision of the CCQ will also be denied its application for an authorization.Furthermore, the AMF may also, at its sole discretion, refuse to grant or to renew an authorization or even revoke an authorization already granted to an enterprise if the enterprise fails to meet the high standards of integrity that the public is entitled to expect from a party to a public contract or subcontract. In this respect, the AMF, following an investigation by the UPAC, will review the integrity of the enterprise, its directors, partners, officers or shareholders as well as that of other persons or entities that have direct or indirect legal or de facto control over the enterprise (a “related person”). To that end, the AMF may consider certain elements which are described in the ARCPB, particularly the fact that the enterprise or a related person maintains connections with a criminal organization, has been prosecuted, in the preceding five years, in respect of certain offences or has repeatedly evaded or attempted to evade compliance with the law in the course of the enterprise’s business. The AMF will also consider the fact that a reasonable person would conclude that the enterprise is the extension of another enterprise that would be unable to obtain an authorization or that the enterprise is lending its name to another enterprise that would be unable to obtain an authorization.CONSEQUENCES OF FAILURE TO BE AUTHORIZEDA contractor or subcontractor whose authorization expires, is revoked or denied upon application for renewal is deemed to have defaulted on the public contract or subcontract to which it is a party. In such a case, the enterprise must cease its work, except for contracts where only the obligation to honour the contractual guarantees remains. However, the enterprise may continue to perform the contract if the public body applies to the Conseil du trésor for permission for the continued performance of the contract or subcontract for reasons of public interest and the Conseil du trésor grants such permission. The Conseil du trésor may subject the permission to certain conditions.TRESHOLDS AND APPLICATIONUpon coming into force, the Act provided that the new provisions would apply to public contracts and subcontracts that involve an expenditure equal to or greater than $40,000,000. This threshold has been lowered to $10,000,000 in December 2013. Furthermore, the Act provides that regardless of the amount of the contract, the government may, before March 31, 2016, determine that the rules requiring an authorization apply to public contracts or subcontracts even if they involve a public expenditure amount of less than this threshold or that such rules apply to a category of contracts other than those currently regulated pursuant to the ARCPB. In such a case, the government may stipulate special terms for the applications for authorization that enterprises must file with the AMF in respect of such contracts.Lastly, the Act provides that the government may still before 31 March 2016, require enterprises that are parties to public contracts currently in process to file an application for authorization within the time it specifies. This provision is not limited to the contracts currently in process at the time Bill 1 comes into force and may therefore affect any contract in process before March 31, 2016.

CONTENTS The 2014 Federal Budget Plan sounds the death knell for two family tax planning measures much appreciated by entrepreneurs and some professionals The Expert and the Court You signed a contract for services... with an employee? How to properly identify the relationship between the parties and what are the consequences of a wrong categorization ? Application of GAAR to a cross-border debt “clean-up” transaction: The Pièces Automobiles Lecavalier Inc. CaseTHE 2014 FEDERAL BUDGET PLAN SOUNDS THE DEATH KNELL FOR TWO FAMILY TAX PLANNING MEASURES MUCH APPRECIATED BY ENTREPRENEURS AND SOME PROFESSIONALSMartin BédardINCOME SPLITTING THROUGH A TRUST OR PARTNERSHIPFirst, the 2014 Federal Budget Plan (the “Budget”) ends the possibilities for splitting the income of trusts and partnerships in respect of business and rental income attributed to a minor child.Such income will henceforth be considered as being part of the split income of the trust or partnership and taxed at the marginal rate.As described in the Budget, the conditions of application of this new measure are as follows: the income is derived from a source that is a business or a rental property; and a person related to the minor is actively engaged on a regular basis in the activities of the trust or partnership to earn income from any business or rental property, or has, in the case of a partnership, an interest in the partnership (whether held directly or through another partnership) The structures affected by these new measures could be used by professionals conducting their activities through a partnership of which their minor children or a trust established for their benefit were members. Such structures allowed for directly or indirectly allocating a portion of the income of the partnership to the minor child and thus benefit from progressive tax rates.As of 2014, the rules governing split income will apply to these structures, which will no longer offer a tax benefit. However, it is still possible to split such income with related persons who have reached the age of majority.POST-MORTEM INCOME SPLITTING: THE TESTAMENTARY TRUSTThe Budget also puts an end to the progressive tax rates applicable to a testamentary trust, a measure which was announced in the 2013 Federal Budget Plan.Up to now, testamentary trusts were allowing their beneficiaries to benefit from several progressive tax rates. Among the tax planning possibilities associated with the availability of such progressive tax rates were the use of numerous testamentary trusts, the postponement of the completion of the administration of an estate for tax purposes or the avoidance of the Old Age Security Recovery Tax.Testamentary trusts will henceforth be uniformly taxed at their marginal tax rates. However, progressive tax rates will remain applicable in the following two cases: (i) for the thirty-six (36) first months of an estate which is a testamentary trust and (ii) in the case of a trust whose beneficiaries are eligible for the federal disability tax credit.The Budget also provides that the tax year-end of testamentary trusts must henceforth be December 31 of each year starting December 31, 2015.These measures will apply to taxation years 2016 and following.THE EXPERT AND THE COURTDominique VallièresIn the context of litigation, lawyers frequently require the testimony of experts, particularly accountants. Well presented, this evidence may have a decisive influence on the outcome of a trial. In the contrary situation, a debate on the quality of the expert or the weight to be given to his or her testimony may occur. This is why we review in this bulletin the role, qualification and credibility of the expert.THE ROLE OF THE EXPERTThe role of the expert is to express an opinion based on his or her scientific, economic or other knowledge, which exceeds that of the judge and without which it is impossible to draw from the facts the correct conclusions. In other words, when the judge is able by himself to understand the facts and draw the correct inferences, an expert is neither necessary nor admissible. For example, the calculation of the gross profits from a contract, which only constitute a mathematical operation, will not require a particular expertise and an accountant called upon to testify on that matter will be at best considered as an ordinary witness. The role of the expert is to enlighten the Court in as objective or impartial a manner as possible.THE QUALIFICATION OF THE EXPERTTo express his or her opinion, the expert must first be recognized as such by the Court. The expert will therefore be first examined respecting his or her training and experience. If the expert qualification is contested, and the Court considers that the expert is insufficiently qualified, it may refuse to hear him or her. The qualifications of the expert must be related to the matters about which he or she testifies.The training of the witness and his or her practical experience, will be considered. Although either may be enough, a really convincing expert will generally have solid training and experience, failing which, even if the Court accepts to hear him or her, less weight may be given to his or her testimony.THE WEIGHT GIVEN TO HIS OR HER OPINIONAs is the case with any other witness, the Court will have to assess the credibility of the expert, particularly in the presence of contradictory opinions. The Court may review the seriousness of the steps taken by the experts. It will give more weight to the opinion of a witness who directly noted the facts and reviewed the data than to the opinion of another witness who only relied on what he or she has been told. A mostly theoretical opinion or an opinion which only describes principles will also be given less weight. It is important for the witness to explain why the particular facts of the case allow for drawing a particular conclusion. Furthermore, in the presence of diverging schools of thought on a particular item, the Court appreciates that the expert considers them and explains why one should be favoured over the other in the situation at hand. Dogmatism, the absence of justification and the out of hand dismissal of a recognized approach will also generally be negatively perceived.This is consistent with the very basis of the role of the expert, which is to impartially and objectively enlighten the Court. The Court will want to ensure that the expert keeps the required distance and independence to issue a credible opinion. If the Court perceives that the expert is taking sides or “pleads the case” of the party who retained his or her services, his or her credibility will suffer. Thus, even though it is admissible, the testimony of the expert and his or her conduct will be more closely scrutinized if it is demonstrated, for instance, that he or she is employed by a party or expressed in the past an opinion on similar issues.Although this situation is rarer, the Court could even refuse to hear the witness if it is convinced that he or she will be unable to be impartial. Such may be the case when the expert personally advocates in favour of the position defended by a party or the fact that he or she was personally involved in similar litigation. The animosity or the closeness which may exist between the expert and a party may also negatively affect the expert. In this respect, it is important for the expert to be transparent to the party who retains his or her services.CONCLUSIONThe really useful expert is the one whose conduct may be summarized by these three words: competence, thoroughness and objectivity.YOU SIGNED A CONTRACT FOR SERVICES… WITH AN EMPLOYEE? HOW TO PROPERLY IDENTIFY THE RELATIONSHIP BETWEEN THE PARTIES AND WHAT ARE THE CONSEQUENCES OF A WRONG CATEGORIZATION?Valérie Korozs and Martin BédardThe Court of Appeal of Québec recently issued an interesting decision on this subject in the Bermex international inc. v. L’Agence du revenu du Québec case1 (“Bermex”).It must be noted that regardless of the fact that the parties have described their agreement as a contract for services or an agreement with a self-employed person, a court is not in any way bound by such a description.The courts have developed certain criteria for analyzing the legal status of a person in order to determine whether that person is an employee or a self-employed person. Among these criteria, the relationship of subordination, that is, whether a person works under the direction or control of another person, has always been decisive.What about when a person is not, strictly speaking, “under the direction or control of another person”,2 due to the fact that he or she runs the business? This is the question the Court of Appeal had to answer in the Bermex case.The Court adopted a broad interpretation of the concept of the subordination relationship by considering the degree of integration of the worker into the company, a criterion derived from the common law.THE FACTSFollowing a tax audit of four companies, the Agence du revenu du Québec (the “Agency”) concluded that Mr. Darveau, their main director and officer, did not have the status of a self-employed person but rather that of an employee. Accordingly, the Agency was of the view that the management fees paid to Mr. Darveau had to be considered employment income and therefore, had to be included in the companies’ payroll.The four companies targeted challenged the Agency’s assessments before the Court of Québec but to no avail.THE DECISION OF THE COURT OF APPEALJust like the trial judge , the Court of Appeal concluded that the intent of the parties to enter into a service contract was not clear from the evidence in the case.The fact that Mr. Darveau was a shareholder of the appellant corporations allowed him some freedom of action, giving the impression that he acted as a self-employed person. It is not surprising that as an officer, Mr. Darveau managed his own schedule, work and compensation nor is it surprising that he was not under the direct supervision of another authority. This freedom resulted from his status as an officer and not from the contract for services upon which he was relying.The Court of Appeal placed a particular emphasis on the fact that it was the appellant companies who assumed all risk of loss and who profited from the activities: [translation] “Yet, a company does not assume the errors of an external consultant”.3 Mr. Darveau did not bring any [translation] “expertise requiring the intervention of an external person in an area that he knows better than anyone, he simply deals with the day-to-day problems of his companies, as he so acknowledges.”4CONCLUSIONAccording to the line of case law followed by the Court of Appeal in the Bermex case, one shall take criteria such as control, ownership of tools, expectation of profits and risks of loss, as well as integration into the company into consideration for the purpose of determining a person’s status as a self-employed individual or an employee.An erroneous categorization of the nature of the contract may have significant financial impacts on the company and the individual in question, both from a tax and labour law perspective. It is therefore essential to undertake a careful analysis of the true status of the person involved before the beginning of the contractual relationship._________________________________________1 2013 QCCA 1379.2 Article 2085 of the Civil Code of Québec.3 Para 59 of the Court of Appeal’s judgment.4 Para 60 of the Court of Appeal’s judgment.APPLICATION OF GAAR TO A CROSS-BORDER DEBT “CLEAN-UP” TRANSACTION: THE PIÈCES AUTOMOBILES LECAVALIER INC. CASE LAVERY, AN OVERVIEWÉric GélinasThe Tax Court of Canada recently rendered a decision dealing with the general antiavoidance rule (“GAAR”) in the context of the elimination of a cross-border debt between Greenleaf Canada Acquisitions Inc. (“Greenleaf”) and Ford US, its American parent company, prior to the sale of Greenleaf’s shares, who owed the debt, to a third party. In the case under review, Ford US subscribed for additional Greenleaf shares and Greenleaf used the proceeds from the subscription to repay its debt to Ford US.The purpose of the transactions in question was to avoid the application of section 80 of the Income Tax Act (“ITA”) upon the forgiveness of a portion of the debt. Without the debt repayment, the rules pertaining to debt parking contained in paragraphs 80.01(6) to (8) ITA would have resulted in the application of section 80 ITA in such a way as to reduce Greenleaf’s tax attributes and even add to its income the portion of the “forgiven amount” not being sheltered.The Minister of National Revenue (“Minister”) was of the view that GAAR applied to the “clean-up” transaction in such a way that Greenleaf had to realize a capital gain of $15 million on the forgiveness of the debt. Greenleaf’s tax attributes were accordingly reduced and certain adjustments to its taxable income were made pursuant to section 80 ITA.ANALYSIS OF THE COURTFrom the outset, the taxpayer acknowledged that the transactions provided it with a tax benefit, namely, the preservation of Greenleaf’s tax attributes through the avoidance of the provisions of section 80 ITA.As to whether these transactions constituted “avoidance transactions”, the taxpayer attempted, particularly through the testimony of the accounting expert, to prove that they had been carried out only for US tax and accounting purposes, and that they therefore had bona fide non-tax purposes and did not constitute avoidance transactions. The Court did not rely on this testimony because it constituted hearsay. Furthermore, the Court applied the negative inference doctrine since no representative of Ford US had testified and that the testimonies provided were deemed not to be credible.With respect to the issue of abuse, the Court agreed with the Minister’s argument to the effect that the “clean-up” transactions were abusive since they circumvented the purpose and spirit of section 80 ITA: if the debt had not been repaid using the proceeds from the subscription, the rules governing debt parking would have applied and Greenleaf’s tax attributes would have been reduced pursuant to section 80 ITA.CONCLUSIONThis decision is particularly important in a context of debt reorganization within a corporate group. The type of transactions discussed in the decision under review is frequently used. Practitioners will have to pay particular attention to the tax impact of such a transaction. When it is possible to do so, it will obviously be preferable to simply convert a debt into shares of the debtor corporation to the extent that paragraph 80(2)(g) ITA is applicable so that no forgiven amount will result from the conversion.

SOME MEASURES TO TAKE TO PROTECT YOUR CONFIDENTIAL INFORMATION IN THE CONTEXT OF THE SALE OF YOUR BUSINESSThe process of selling a business may pose some risks to the seller, particularly those related to the disclosure to third parties of confidential information concerning the operation of the business. In order to better identify these risks and exercise adequate control over the flow of information exchanged as part of the selling process, the seller is advised to take some protection measures such as: identifying the confidential information, the disclosure of which may pose risks to the seller; entering into a confidentiality agreement with the purchaser; taking some precautions and implementing procedures aiming to protect the confidentiality of the contemplated transaction; establishing a disclosure strategy respecting the confidential information related to the seller or the targeted business.IDENTIFY YOUR CONFIDENTIAL DOCUMENTS AND INFORMATIONThe team brought together by the seller should first establish a list of the relevant information and documents for a potential purchaser according to their contents and relevance. In order to anticipate the requests of a potential purchaser and classify the information in the most optimal way, it may be useful to refer to a due diligence list template. A lawyer with experience in mergers and acquisitions should be in a position to provide you with such a list.Second, the seller’s team should identify the documents and confidential information, including documents and confidential information protected by professional secrecy or which contain confidentiality clauses or sensitive information respecting the competition such as documents and confidential information pertaining to the prices, cost prices or market shares of the business. The purpose of this step is to avoid that the disclosure of documents or information pertaining to the business results in (a) the loss of the protection of professional secrecy respecting some items of information, such as those pertaining to litigation in which the business is involved or (b) liability of the business related to the violation of a confidentiality clause or applicable laws, such as those pertaining to competition law or personal information of the employees.PROTECT YOURSELF WITH A CONFIDENTIALITY AGREEMENTPrior to confidential information pertaining to the targeted business are disclosed to the purchaser by the seller or the targeted business, the seller should enter into a confidentiality agreement with the purchaser. This agreement will usually contain terms pertaining to (i) the definition and use of confidential information, (ii) the persons who have access to the confidential information, (iii) the term of the confidentiality agreement (usually from one to three years), (iv) the return or destruction of confidential information upon the end of negotiations, and (v) the right of indemnification of the seller in case of violation of a commercial secret disclosed to the purchaser, including his employees and advisors, in the context of the contemplated transaction. The confidentiality agreement may be unilateral and restrict the disclosure or use of the confidential information provided by the seller or the targeted business or be bilateral and restrict the disclosure of confidential information provided by the seller or the targeted business and the purchaser. From the point of view of the seller or the targeted business, the confidentiality agreement should define the confidential information as widely as possible in order to include all the information provided to the potential purchaser in any form whatsoever, including in writing, verbally or electronically, whatever its nature, even if such information is not identified as such at the time of disclosure. Depending upon the quantity of items of information pertaining to the employees which will be disclosed prior to the signature of a letter of intent or a purchase agreement between the parties, the seller or the targeted business could require the addition of a non-solicitation clause respecting his or its employees in the confidentiality agreement. The purchaser also frequently seeks to limit the possibility for the seller to solicit or enter into other offers for the purchase of the targeted business through the use of an exclusivity clause.MAINTAIN THE CONFIDENTIALITY OF THE CONTEMPLATED TRANSACTIONIn order to maintain the confidentiality of the contemplated transaction, the seller’s team should take some precautions and implement procedures, such as: hiring a broker or an investment banker who is in a position to identify serious potential buyers; identifying officers, employees or external advisors who may be made aware of the transaction and notify them that they must not disclose its existence to third parties; giving a code name to the transaction and all the involved parties; holding meetings related to the transaction outside the premises of the targeted business.The identification of the employees who may be made aware of the transaction is a particularly sensitive issue. Although most employees are generally informed late in the sale process, it is sometimes preferable for the seller to notify them at the beginning of the process when the seller is of the view that it is necessary to avoid the employees experiencing loss of confidence.ESTABLISH A STRATEGY FOR DISCLOSING YOUR CONFIDENTIAL INFORMATIONThe seller should establish a confidential information disclosure strategy which takes into account the risks related to its disclosure. Such strategy should include the following: that the persons having access to confidential information only get it to the extent needed to perform their work; the identification of the officers, employees and advisors of the seller of the targeted business who will communicate or receive confidential information; the signature by some advisors, such as brokers or investment bankers of a confidentiality agreement – since lawyers are bound by professional secrecy, it will not be necessary to have them sign such an agreement; the creation of a traditional due diligence room, preferably outside the premises of the business, or a virtual due diligence room; if the confidential information will be available in electronic form or in paper form; if the purchaser will be allowed to print electronic documents or make copies of paper documents.The seller may also stipulate that the disclosure of confidential information will be made gradually, when certain steps have been completed. For example, the seller could decide that (i) first, after the signature of a confidentiality agreement, to disclose basic information pertaining to the business, (ii) in a second stage, after the signature of a letter of intent with the purchaser, to disclose more information pertaining to the operation of the business and (iii) lastly, after the signature of a purchase agreement, to disclose more sensitive information. Such an approach of disclosure by stages may provide the seller with better control over the flow of confidential information which is exchanged.Your legal advisor can provide you with customized solutions. Do not hesitate to consult him or her.

CONTENTS  Requirements for ITC and ITR claims: A judgment of the Court of Québec sets the record straight Restrictive covenants transactional context vs. employment context Patrimony protection and transmission liquidator of a succession: what do you do? The Bagtech case, or the impact of a unanimous shareholder agreement on the status of canadian-controlled private corporation REQUIREMENTS FOR ITC AND ITR CLAIMS: A JUDGMENT OF THE COURT OF QUÉBEC SETS THE RECORD STRAIGHTPhilippe Asselin and Jean-Philippe LatreilleIn the past few years, the Agence du revenu du Québec (“ARQ”) has acted aggressively towards any taxpayers whom it suspects of being involved in a “false invoicing scheme”. However, a crack seems to have appeared in the position generally held by the ARQ on this issue as a result of a recent decision by the Court of Québec in the case of Système intérieur GPBR Inc.The facts of this case are typical of files of this nature: a building contractor was denied input tax refunds (“ITRs”) it had claimed on the grounds that it did not meet the legal requirements for obtaining them, and because some of its subcontractors turned out to be “suppliers of false invoices”.Firstly, the Court noted in its judgment that certain documentary requirements set out in the law and regulations must be complied with in order to validly claim ITRs, including, among other things, the obligation to obtain the name of the supplier or intermediary, or the name under which it is doing business, the QST registration number assigned to the supplier or intermediary, the date of the invoice, a sufficient description to identify each supply, etc.The ARQ maintained that only the names of the suppliers of services having actually performed the work for which ITRs were claimed could appear on the invoices. This argument was dismissed by the Court because the regulatory provisions expressly provide that the name of an intermediary may appear thereon.In addition, the ARQ claimed that a taxpayer wishing to claim ITRs was subject to numerous additional obligations, in addition to complying with the prescribed regulatory requirements. For example, according to the ARQ, the taxpayer had to confirm the legal existence of the subcontractors in the Enterprise Register of Quebec, verify the validity of their license issued by the Régie du bâtiment du Québec, or obtain data from the Commission de la construction du Québec and the Commission de la santé et de la sécurité du travail du Québec on the subcontractors’ workforce.The Court did not accept this claim by the ARQ. Indeed, taxpayers have a right to strictly rely on the statutory provisions in conducting their tax affairs, and it is not the courts’ role to create new rules in this area. Therefore, the courts must not impose requirements relating to ITR claims that are not provided for in the legislation or regulations.Thus, the Court concluded that the taxpayer had proven its right to the ITRs claimed because it had met the documentary requirements, the services billed for had been truly rendered, and its right had not been affected by the fact that some of its subcontractors subsequently turned out to be “suppliers of false invoices”. On this last point, the Court indicated that the ARQ had adduced no evidence of collusion by the taxpayer with its subcontractors with a view to benefit from this “scheme”. The ARQ has already announced its decision to appeal this case, noting that it does not intend to change the way in which it handles matters of “false invoices”. It therefore appears that the ARQ does not seem to have heard the plea for caution by the Court, which, moreover, noted that a “conviction by association” can have disastrous consequences for a business and its principals. However, this does not mean that taxpayers should necessarily refrain from contesting GST or QST assessments issued by the ARQ in similar circumstances.RESTRICTIVE COVENANTS TRANSACTIONAL CONTEXT VS. EMPLOYMENT CONTEXT André PaquetteWhy are non-competition or non-solicitation covenants added to contracts? The purpose of inserting so-called “restrictive” covenants in a contract is generally the desire to protect a company’s goodwill either upon the termination of an employment relationship, the termination of a business relationship, or the acquisition of a business. Clearly, the parties’ bargaining power will vary depending on the context: an employee’s bargaining power is usually less and warrants different treatment from the treatment applying to a businessman or woman negotiating the sale of his or her business. In addition, where a business is the subject of an acquisition transaction, the goal of maintaining smooth business operations is a strong factor supporting rules of interpretation that favour the preservation of the goodwill of the business. It is therefore no coincidence that the rules applying to such covenants will depend on the nature of the contract involved.The Supreme Court of Canada reminded us of this, among other things, in the recent case of Payette v. Guay inc.1 rendered on September 12, 2013.In that case, restrictive covenants had been inserted in a contract for the sale of assets pursuant to which Guay Inc. (“Guay”), a company operating a crane leasing business, had acquired the assets of certain companies controlled by a Mr. Yannick Payette (“Payette”) and his partner, in October 2004, for an amount of $26 million. A clause had also been inserted into the contract providing for transitional services by Payette as a consultant for a maximum period of six (6) months following the closing of the transaction, with the option of concluding an employment contract at a later date. Both the transitional services and the employment contract were subsequently implemented.However, everything changed on August 3, 2009 when Guay dismissed Payette, who joined a firm in competition with Guay, bringing several of Guay’s employees with him!The Supreme Court first considered the nature of the rules applicable to restrictive covenants contained in a contract for the sale of assets: was it a transactional context or an employment context?Indeed, the Civil Code of Québec (“C.C.Q.”) is not insensitive to the reality faced by employees since it provides, in article 2095, that an employer may not invoke a non-competition clause contained in an employment contract if it has dismissed the employee without a serious reason. The C.C.Q. is however silent on the issue with respect to restrictive covenants in a commercial context.In this case, the Court could not dissociate the restrictive covenants from the contract for the sale of the assets, even in the context of the termination of Payette’s employment, which triggered its application. According to the Court, the reason why the restrictive covenants were agreed upon was the sale of the business and not the employment relationship which followed the closing of the transaction. The result: Payette was not afforded the protection of article 2095 C.C.Q. as an employee of Guay.The Court therefore interpreted the restrictive covenants in accordance with commercial law and concluded that the dismissal of Payette, whether done with or without sufficient cause, had no effect on the enforceability of the restrictive clause.________________________________1 2013 SCC 45.PATRIMONY PROTECTION AND TRANSMISSION LIQUIDATOR OF A SUCCESSION: WHAT DO YOU DO? Marie-Claude ArmstrongYou learn that you have been appointed as liquidator of the succession of a relative or client pursuant to his or her will, or according to the wishes of a majority of his or her heirs.You can accept or refuse the office of liquidator.If you refuse to act as liquidator, you are required to execute a document to this effect and inform the successors (the persons who may receive the succession, but have not yet officially accepted it) thereof.If you accept to act as liquidator, the appointment must be published in the register of personal and movable real rights to publicize the fact that you act as liquidator in order for the beneficiaries and creditors of the deceased or the succession to know who to contact for anything related to the patrimony of the deceased person (article 777 C.C.Q.).Prior to the transmission of the bequeathed property and the partition of the succession, you are required to perform various administrative duties, including the following:  Will search in the registry of the Chambre des notaires du Québec and the registry of the Barreau du Québec Acceptance of the office of liquidator Will probate and communication thereof to the heirs Obtaining letters of verification (when immovables included in the succession are located in jurisdictions outside Quebec) Payment of the deceased’s debts Payment of the funeral arrangements Collection of revenues and debts Closing the deceased’s bank accounts and transfer of the balances to the account of the succession Identification of the investments and transfer in the name of the succession Continuance of lawsuits (as plaintiff, defendant or impleaded party) Payment of instalments to tax authorities Preparation of an inventory of the property of the succession Submission of an annual account Alienation of the assets (limited power of disposal in certain cases) Preparation and filing of the federal and provincial tax returns of the deceased and eventually of the succession Partition of the family patrimony and the matrimonial regime Clearance or distribution certificate (to be obtained from tax authorities) Publication of a notice of closure of the inventory An holograph will or a will made in the presence of two witnesses must be probated by the Court. A notarial will does not have to probated by the Superior Court of Quebec. Will search certificates must be obtained from the Chambre des notaires du Québec and the Barreau du Québec in all cases.As liquidator, you are required to render an annual account of your administration and a final account at the time of the final distribution of the succession. Any discretionary power, as wide as it can be, does not authorize you to act in a partial manner or to place yourself in a situation of conflict of interests.It is generally appropriate for the liquidator to have a law professional, an accountant and a tax expert assist him or her when the nature of the property or certain succession issues justify it. The liquidator should also refrain from giving legal, accounting or tax advice to the heirs. He or she should rather encourage them to consult independent experts of their choice.THE BAGTECH CASE, OR THE IMPACT OF A UNANIMOUS SHAREHOLDER AGREEMENT ON THE STATUS OF CANADIAN-CONTROLLED PRIVATE CORPORATIONMartin BédardA recent decision of the Federal Court of Appeal in Canada v. Bioartificial Gel Technologies (Bagtech) Inc. (“Bagtech”) has shed new light on the criteria that applies to the concept of control of a corporation and to the effect of a unanimous shareholder agreement (“USA”) in assessing a corporation’s status as a Canadian-controlled private corporation (“CCPC”) under the Income Tax Act (“ITA”).In that case, Bagtech sought to qualify as a CCPC in order to obtain an additional tax credit of 15% on its research and development expenses, and to make it eligible for a refundable tax credit. In fact, the majority of Bagtech’s shareholders were not residents of Canada.However, the ITA requires that, in order for a corporation to claim the status of a CCPC, a test of de jure control must be met, namely, the ability to elect a majority of the corporation’s directors. Thus, if each share belonging to non-residents or listed companies were held by one and the same person (the “particular person”), where a corporation is under the de jure control of this person, it would be disqualified.However, in the case of Bagtech, a USA stipulated that the majority of the directors were to be elected by resident Canadian shareholders.At first instance, the court found that the particular person was deemed to be a party to the USA, a conclusion which was not called into question on appeal. Then, the Federal Court of Appeal, relying on the decision of the Supreme Court in Duha Printers (Western) Ltd. v. Canada, held that once a shareholders’ agreement qualifies as a USA, all the clauses restricting the power to elect the board of directors are relevant for purposes of determining de jure control of the corporation. As a result, thanks to its USA, Bagtech was able to qualify as a CCPC, even though the majority of its shareholders were non-residents.Thus, unless legislative measures are introduced to counter the effect of the Bagtech decision, it is possible for a corporation held by a majority of non-residents or a listed company to adopt a USA that would enable it to qualify as a CCPC. By doing so, such a corporation can obtain a number of tax benefits, including the small business deduction, enhanced research and development expenses and credits, and access to the capital gains deduction for Canadian shareholders.

CONTENTS The Pros and Cons of Arbitration Clauses in Commercial Contracts Pirating and Using Software Without a Licence: The BSA | The Software Alliance Case Interprovincial Taxation: The Importance of Severing Residential Ties on Departure Security Under Section 427 of the Bank Act: Do the Rights of a Bank Rank Ahead of Those of the Holder of a Retention Right? THE PROS AND CONS OF ARBITRATION CLAUSES IN COMMERCIAL CONTRACTSCatherine Méthot and André PaquetteArbitration clauses are increasingly finding their way into commercial contracts. However, the fact that arbitration is a frequently chosen path nowadays does not necessarily mean that it is always the best solution. One must know its advantages and disadvantages and be wary of standard clauses which may be ill-adapted to one’s situation.Generally, the main advantages and disadvantages of arbitration clauses which are most often mentioned are the following:Advantages: (i) simplified procedure; (ii) less documentation to file; (iii) obtaining a decision is quicker than in the context of the judicial process; (iv) generally reduced costs compared to the judicial process; (v) absence of a right to appeal; and (vi) the confidentiality of the process and the decision, subject to an application for homologation of the arbitral award or a recourse to cancel the decision.Disadvantages : (i) the absence of a right to appeal, with some exceptions; (ii) the risk of the arbitration clause being ill-adapted to your particular situation; (iii) costs beyond the expectations of the parties, particularly when three arbitrators are appointed, some authors even maintaining that in such a case, arbitrators’ fees are sometimes almost multiplied by four because of the delays caused by time management and communications between three arbitrators;(iv) the impossibility to access items of evidence in the hands of opposing party outside of the judicial process; and (v) the exclusion of this decision from case law while the issue in dispute may constitute an important law issue.Before inserting an arbitration clause in a contract, one must assess these advantages and disadvantages and, if arbitration is chosen, the terms of the clause must be adapted, particularly with respect to following items : (i) things and situations covered under the clause; (ii) applicable law, making sure to verify whether such law limits or prohibits arbitration (for example, section 11.1 of the Consumer Protection Act,1 which prohibits stipulations whereby the consumer is obliged to refer a dispute to arbitration or restrict his right to go before a court, particularly by prohibiting him from bringing a class action or being a member of a group exercising such a remedy); (iii) the opportunity to provide for a right to appeal; (iv) the confidentiality of the arbitration process (subject to an application for homologation or a recourse for cancelling the decision); (v) the arbitration process (number of arbitrators, rules for submitting evidence, etc.); and (vi) the opportunity to provide for mediation meetings prior to arbitration.In all cases, the objective sought should be to ensure that in the event a dispute occurs, your interest will be better served by arbitration rather than the judicial process. If such is not the case, avoid inserting an arbitration clause in your contract._________________________________________1 C. P-40.1.PIRATING AND USING SOFTWARE WITHOUT A LICENCE: THE BSA | THE SOFTWARE ALLIANCE CASEBruno VerdonThe claims of the BSA | the Software Alliance (the “BSA”) against Quebec and Canadian businesses seem to be increasingly frequent.The BSA is a U.S.-based non-profit organization operating in more than 80 countries. Its members include companies such as Adobe, Apple, IBM and Microsoft.According to the information it publishes on its website, the BSA particularly fights copyright infringement when software has been installed by users without acquiring the necessary licence. It would appear that most investigations of the BSA target businesses and are conducted further to calls on its anti-piracy line or anonymous reporting via its website. Most reports come from current or former employees. In principle, after receiving information alleging software infringement, the BSA contacts the business to investigate the matter further and invites it to negotiate a settlement where it concludes that there is actual infringement. If a settlement cannot be reached, the BSA assigns the file to its attorneys and ultimately, if they cannot negotiate a settlement, the case goes to court.In Quebec and elsewhere in Canada, the BSA bases its claims for use of software without a licence on the provisions of the Copyright Act.1 this Act particularly provides that “When a person infringes copyright, the person is liable to pay such damages to the owner of the copyright as the owner has suffered due to the infringement and, in addition to those damages, such part of the profits that the infringer has made from the infringement and that were not taken into account in calculating the damages as the court considers just.”2In addition, since the Act to amend the Copyright Act,3 assented to on June 29, 2012, came into force, the holder of the infringed copyright may elect to claim, instead of damages and profits made by the person who infringed the copyright in question, an award of statutory damages which are not less than $500 and not more than $20,000 per violation if the infringements are for commercial purposes and not less than $100 and not more than $5,000 in the case of violations for non-commercial purposes.4Therefore, since 2012, a business which uses software without having acquired the required licences is liable to a claim of not less than $500 and not more than $20,000 per licence which it failed to acquire.In the case of Adobe Systems Incorporated et al. c. Thompson (Appletree Solutions),5 the Federal Court was called upon to apply this new provision of the Copyright Act. the Court noted that in awarding statutory damages, the following must be taken into account: (1) the good or bad faith of defendant, (2) the conduct of the parties before and during the proceedings; and (3) the need to deter other infringements of the copyright in question.Having concluded that proof had been made of the intention of the defendant to infringe and that severe deterrent measures were warranted, the Federal Court issued an injunctive order to prevent defendant from continuing to violate copyrights. On the issue of damages, the Court declared:“ I find no reason not to award maximum statutory damages in the amount of $340,000, being $20,000 per work infringed for each of the three Plaintiffs.”Proof the (1) the good or bad faith of defendant, (2) the conduct of the parties before and during the proceedings; and (3) the need to deter other infringements of the copyright in question being easier to make than that of the damages, it is anticipated that the BSA and its members will not hesitate in invoking the statutory damages provided for in this new provision of the Act in support of their claims.As these statutory damages can be well beyond the value of each non-acquired licence, it goes without saying that a negotiated settlement of the claim will constitute a preferred approach.The BSA usually publishes on its website the settlement agreements entered into with businesses.However, nothing prevents the parties from agreeing that the settlement of the claim and the settlement terms will be kept confidential, which will avoid he business concerned having its name associated with the settlement of a BSA claim._________________________________________1 R.S.C. (1895) c. C-42.2 Ibid., sec. 35.3 S.C. 2012, ch. 20.4 Ibid., sec. 38.1.5 2012 CF 1219 (CanLII).INTERPROVINCIAL TAXATION: THE IMPORTANCE OF SEVERING RESIDENTIAL TIES ON DEPARTUREJean-Philippe LatreilleThe place of residence of an individual is a fundamental tax concept which determines, among other things, his liability for provincial income tax. under the Taxation Act,1 an individual is subject to tax for a given year if he resides in Quebec on December 31 of that year. the tax base then consists of the individual’s income from all sources, except for business income from a Canadian establishment situated outside Quebec.The fact that an individual moves from a province to another usually results in a change of his place of residence for provincial tax purposes. However, it may happen that some residential ties with the province of origin remain, with unanticipated and unwanted results, as shown by a recent decision of the Court of Quebec in the case of Perron c. L’Agence du revenu du Québec.2In that case, the taxpayer was challenging assessments made by revenu Québec for taxation years 2005 to 2007, arguing that he was a resident of Alberta during the relevant period. the taxpayer, an engineer, had held various positions in Quebec prior to moving in Alberta in May 2005 after finding permanent employment there. From that time on, the taxpayer had rented a dwelling unit in Alberta and had purchased furniture for it. He also had opened a bank account and became a member of the Association of Professional engineers and Geoscientists of Alberta.However, the taxpayer had retained several residential ties with Quebec during years 2005 to 2007, particularly the following:a) His spouse, to whom he was married since 1985, and his son had continued residing in Quebec despite the departure of the taxpayer for Alberta. the taxpayer was neither divorced or separated under a judgment or a written agreement. b) the taxpayer had remained co-owner with his spouse of the family residence located in Beauport. c) the taxpayer had continued to provide for the financial needs of his son and to assume certain maintenance expenses of the residence located in Quebec. d) the taxpayer had stayed in Quebec every three months for periods of four or five days. When doing so, he was staying at his residence in Beauport. e) the taxpayer had retained his Quebec driver’s licence and maintained is eligibility to the Quebec health insurance regime. f) the taxpayer had remained a member of the Ordre des ingénieurs du Québec. g) the taxpayer had continued to use the postal address of his Beauport residence, particularly with respect to his credit cards. h) the taxpayer was the owner of a vehicle registered in Quebec, which he had given to his son in 2009. The Court determined that the taxpayer had provided prima facie evidence that his tax residence was located in Alberta during years 2005 to 2007, particularly by establishing the permanent nature of his position in Alberta and the low frequency of his visits in Quebec. the tax authorities thus had the burden to prove that the residence of the taxpayer had remained in Quebec.After reviewing the case law, the Court concluded that revenu Québec had established, by preponderance of evidence, that the taxpayer had retained his tax residence in Quebec during the disputed period by reason of the absence of severance of residential ties with Quebec.The judge particularly noted the absence of evidence corroborating the separation between the taxpayer and his spouse. According to the Court, several factors rather indicated that the spousal link was maintained between them. In addition, the taxpayer failed to establish sufficient connection to Alberta, except for his employment.This decision of the Court of Quebec, which was not appealed, underlines the importance of severing all residential ties with Quebec when moving to another province, particularly if the tax regime of the other province is less onerous. the place of residence is a complex issue which has to be decided according to the legislation in force and applicable case law. Any individual who maintains a more or less important presence in more than one province would be well-advised to consult a professional in this respect._________________________________________1 RLRQ RSQ?, c. I-3.2 2013 QCCQ 3271.SECURITY UNDER SECTION 427 OF THE BANK ACT: DO THE RIGHTS OF A BANK RANK AHEAD OF THOSE OF THE HOLDER OF A RETENTION RIGHT?Mathieu Thibault, Étienne Guertin and Jean LegaultFor financing its activities, a Quebec-based business may grant to a Canadian chartered bank a security under 427 of the Bank Act. This security interest allows the bank to exercise its rights on the borrower’s inventories as well as on the debts resulting from their sale while avoiding the formalities and notices which would otherwise be required under the Civil Code of Québec upon the exercise of a hypothecary remedy.1For its part, article 2293 of the Civil Code of Québec allows the holder of a retention right to retain the stored property until the depositor has, among other things, paid him the agreed upon compensation.In the Levinoff-Colbex, s.e.c. (Séquestre de) et RSM Richter inc.,2 the Superior Court had to decide whether the rights of National Bank of Canada (“NBC”) resulting from a security granted to it under the Bank Act, a federal statute, ranked ahead of the retention right relied upon by another creditor under the Civil Code of Québec following the failure of the debtor to meet its contractual commitments respecting the payment of the storage and refrigeration costs of its inventories.According to the Superior Court, the rights of a creditor under section 427 of the Bank Act may be described as a sui generis ownership right, according to the wording used by the Court of Appeal in the case of Banque Canadienne Nationale v. Lefaivre.3However, this sui generis ownership right does not constitute a true ownership right within the meaning of the Quebec civil law on property covered by such security interest. Section 427 and following of the Bank Act rather establish a security interest regime focused on ownership and confer on the bank which holds such security interest rights as a secured creditor and not as an owner of the property covered by such security interest.In this context, NBC could not be bound by the retention right created in favour of another creditor. In fact, the determination of the priority of these rights did not derive from holding an ownership right within the meaning of civil law: the NBC was rather a secured creditor of the debtor.The priority of creditors’ rights must be determined by applying and interpreting the Bank Act in accordance with the doctrine of paramountcy and the judgment issued by the Supreme Court of Canada in the case of Bank of Montreal v. Innovation Credit Union.4Since section 428 of the Bank Act contains an express provision resolving this priority conflict, one has simply to apply the rule provided in this section whereby the rights of the BNC had “priority over all rights subsequently acquired in, on or in respect of that property” covered by the security interest._________________________________________1 Banque de Montréal v. Hall, [1990] 1 S.C.R.2 2013 QCCS 1489. It must be noted that an appeal of this judgment has been filed with the Court of Appeal under number 500-09-023539-133.3 [1951] B.R. 83, at page 88, referring to Landry Pulpwood Co. v. Banque Canadienne Nationale, [1937] S.C.R. 605, page 615.4 [2010] 3 S.C.R.3

CONTENTS Easing the financing rules while waiting for crowdfunding Avoiding disputes by entering into a shareholders’ agreement Tenth anniversary of Bill 72 : Land protecton and rehabilitationEASING THE FINANCING RULES WHILE WAITING FOR CROWDFUNDINGJosianne BeaudryThere is no doubt that small and mediumsized enterprises (“SMEs”) and businesses in the startup phase (also known as early- stage businesses) face multiple challenges when seeking financing. Not only must they identify investors who are prepared to take the risk of investing in their projects, they must also ensure that they comply with the rules on raising capital imposed by the securities regulators.Under the rules in force in Quebec and the rest of Canada, for a corporation to raise capital, unless it has an exemption, it must retain the services of a firm registered in an appropriate category with the Canadian Securities Administrators, and must also prepare and provide the purchasers with a disclosure document known as a “ prospectus”.This procedure is generally too onerous and demanding for SMEs and startups, not to mention the obligations these companies would have after the financing to prepare and distribute continuous disclosure documents, such as financial statements, management’s discussion and analysis and press releases.Thus, SMEs and startups are often limited to raising funds from business associates, family (“love money”) and accredited investors — which are generally persons with a net income before taxes exceeding $200,000 or net assets of at least $5,000,000.SMEs and startups also have the option of soliciting funds from a broader range of investors without having to prepare a prospectus through the use of an offering memorandum. The offering memorandum is a disclosure document similar to a prospectus but which is more simple to prepare and less costly. This financing alternative seems generally to be overlooked and underused by SMEs and startups. The lack of use of the offering memorandum is likely due to the accompanying regulatory requirement of preparing audited financial statements drawn up in accordance with the IFRS. This type of financing appears to be much more popular in the Canadian West.However, in this regard, on December 20, 2012, the Autorité des marchés financiers (“AMF”) issued an interim local order allowing SMEs and startups that are not otherwise reporting issuers, as defined in the securities legislation, to distribute their securities by means of an offering memorandum without having to include audited financial statements drawn up in accordance with the IFRS.Thus, it is henceforth possible for these corporations to issue an offering memorandum without having to prepare audited financial statements. Moreover, the unaudited financial statements accompanying the offering memorandum may even be drawn up in accordance with the Canadian GAAP applying to private issuers.However, to take advantage of this easing of the regulatory requirements, the issuer must limit the total amount of all of its offerings made under this rule to $500,000 and limit the aggregate acquisition cost per purchaser to $2,000 per 12-month period preceding the offering (and not $2,000 per issuer). A warning must also be added to the offering memorandum clearly informing any purchaser of the fact that the financial statements are not audited and are not drawn up in accordance with the IFRS, and of the limits on the investment threshold.It should also be noted that, under the Quebec legislation, the use of an offering memorandum by a corporation to raise funds is subject to translation requirements. Thus, for purposes of soliciting financing in the province of Quebec, the offering memorandum must either be written in French or in both French and English.Conscious of the financing needs of SMEs and startups, at the same time as the AMF was announcing the easing of the rules on the contents of the offering memorandum (which is slated to apply for a maximum period of two years), the AMF also launched a consultation on equity crowdfunding.Equity crowdfunding consists of raising capital from a large number of investors, who are not necessarily accredited investors, by means of an electronic platform in return for the issuance of securities. Some jurisdictions such as the United States (under development since April 5, 2012), England and Australia have adopted rules authorizing equity crowdfunding.These rules generally provide that corporations may only raise a modest amount through this type of financing. Similarly, the amount investors may invest is also small. At present, this type of financing is prohibited in Canada unless one has an exemption or issues a prospectus.The main objective of equity crowdfunding is to facilitate access to capital at a reduced cost. However, this objective is difficult to reconcile with recent developments in the regulation of Canadian securities markets aimed at protecting investors.Indeed, in carrying out their mission to protect investors, Canadian authorities have continued to increase the regulatory requirements (disclosure, compliance, proficiency, etc.), which also has the effect of increasing the operating costs of the various participants in the financial markets.Some financial market stakeholders are concerned about the risks of an exodus of innovative Quebec corporations and talent which could be tempted to move south to the U.S. to finance their projects, where they would benefit from a more streamlined and less costly financing environment. The Canadian Securities Administrators will have to meet the challenge of finding the difficult balance between the financing needs of SMEs and startups and the protection of investors.AVOIDING DISPUTES BY ENTERING INTO A SHAREHOLDERS’ AGREEMENTJean-Sébastien DesrochesDisputes between shareholders sometimes have serious consequences for a business corporation and can be an impediment to the carrying on of the operations in the ordinary course of business. Such disputes are usually complex and costly while also being protracted in nature. In this context, a well-written shareholders’ agreement that is tailored to the business can help to avoid disputes or, at least, limit their scope and provide a framework for managing them.Shareholders’ agreements may not age well over time. They may not evolve in sync with the business and its shareholders, particularly in a context of expansion and growth. Furthermore, it is generally difficult to change a shareholders’ agreement once it has been signed, and an attempt to change the ground rules in midstream could be a source of additional conflicts between the shareholders. It is therefore imperative for the shareholders to establish their rights and obligations, as well as those of the corporation, in a shareholders’ agreement as early as possible in the life of the corporation.No one will be surprised to learn that money is the main cause of disputes between shareholders, whether it is the money invested (or to be invested) in the corporation or money that the corporation pays (or will pay) to its shareholders in the form of dividends or otherwise. At the same time, the shareholders’ contributions in property, services, time and money often create friction within the corporation, particularly since the shareholders’ business, financial and other expectations may evolve differently - even in opposite directions - over time.Apart from financial issues, personal conflicts can also inflame the relationship between the shareholders, especially when family members are involved with the business. The same is true when decisions are to be made on the global objectives of the corporation and strategic issues.In addition, if the corporation has shareholders from different jurisdictions, cultural differences can also give rise to tension between the shareholders. In such cases, the text of the shareholders’ agreement must be very explicit and should, if possible, be supported by concrete examples of the application of the more complex clauses, such as valuation of the shares and the procedure for exercising a right of first refusal. In all cases, it is essential to provide for the order of priority for the exercise of the various rights, remedies and mechanisms contained in the agreement to avoid adding issues of interpretation of the agreement to the existing business issues.It is often at times when the business of the corporation is not faring so well that the common disagreements between shareholders tend to flare up and lead to litigation. The shareholders’ agreement should therefore anticipate the future situations which the corporation may face, whether positive or negative, such as refinancing, the arrival of new shareholders, family succession, the acquisition or sale of a business, international expansion, the development of new markets, and retirement from the business.The ability to anticipate future developments takes on its full importance when one considers the context in which the shareholders’ agreement is being entered into. Thus, the shareholders’ and drafter’s objectives may be different in the case of an agreement concluded for tax and estate planning purposes versus an agreement dealing, for instance, with the arrival of a new investor, a transaction for the acquisition of the business (e.g., business transfer or succession) or a start-up situation. Even in a very particular context such as this, the shareholders’ agreement should still give the corporation and its shareholders the means to achieve their ambitions and the requisite flexibility to carry out all their business projects.In addition to their status as shareholders, the shareholders may also hold several other titles or functions in the corporation, since they often also act as directors, officers and employees. Disputes may therefore arise as a result of these different roles and the associated rights and obligations, and degenerate very quickly into personal disputes.The drafting and negotiation of a shareholders’ agreement is a complex and exacting exercise requiring both legal and practical experience. Thus, a review of the cases in the courts shows that disputes pertaining to the most complex terms and conditions of the agreement, such as the mechanisms for the arrival and departure of shareholders and transfers of securities (right of first refusal, purchase and sale (shotgun) clause, etc.) as well as interpretation of non-competition, non-solicitation and intellectual property provisions, are among the subjects most frequently debated in the courts.Valuation mechanisms for assessing the price of the shares in different situations should also be clearly established in the shareholders’ agreement. Such mechanisms should oversee and govern any discussions on the value to be attributed to the shares of the corporation in the context of a sale or transfer, including in complicated situations where there are ongoing disputes among the parties.Lastly, it is fundamental to provide for effective conflict resolution mechanisms tailored to the needs of the parties ( confidentiality of the process, cultural and linguistic factors, obligation to pursue the operations of the business as a going concern in spite of the dispute, etc.) that allow for action to be taken quickly to preserve the value of the business. This will enable the parties to avoid the forced liquidation of the business, with its disastrous consequences for the employees, suppliers and clients.TENTH ANNIVERSARY OF BILL 72: LAND PROTECTION AND REHABILITATIONSophie PrégentThe planning of a construction project or start-up of an industrial activity requires prior verification of a number of matters. Despite the introduction, ten years ago this year, of rules in the Environment Quality Act (EQA) governing the protection and rehabilitation of contaminated lands, the physical condition of the project site is often still a neglected issue.While the question of soil contamination can raise issues of civil relations, such as, for example, civil liability or the warranty of quality (against latent defects), in this article, we will focus exclusively on the obligations that can arise from the EQA.The purpose of the EQA is environmental protection. This protection is embodied in measures for prior protection, emergency responses and rehabilitation in the EQA. The EQA also imposes certain duties to act on the users of immovables.POWER TO ISSUE ORDERSThe Minister of Sustainable Development, Environment, Wildlife and Parks ( MSDEWP) has broad powers, including, in particular, the power to order the filing of a rehabilitation plan if he has reason to believe, or ascertains, that contaminants are present on land in a concentration exceeding the limit values prescribed by regulation,1 or that they are likely to affect the environment in general.2Since 2003, this power has applied to all persons who have had custody of the land, in any capacity whatsoever. Such an order can therefore be imposed on tenants and is not limited only to the owner or “polluter” of the land.Thus, it is important for any purchaser to be familiar with the history of the land so that it can assess whether there is a risk that this type of situation could arise.Where such an order has been issued, some means are available for a person to exempt himself from it, in particular, where (i) he was unaware of or had no reason to suspect the condition of the land having regard to the circumstances, practices and the duty of care, or (ii) he was aware of the condition of the premises, but shows that he acted at all times with care and diligence in conformity with the law and, finally, (iii) he shows that the condition of the premises is a result of circumstances exterior to the land and attributable to a third party.CESSATION OF INDUSTRIAL OR COMMERCIAL ACTIVITYWhere a person permanently ceases carrying on a commercial or industrial activity referred to in schedule III of the Land Protection and Rehabilitation Regulation3 (LPRR), the operator must conduct a characterization study of the land.4 This obligation applies where the activity permanently ceases and it triggers the further obligation to carry out the rehabilitation of the land if the contaminants present in the soil exceed the regulatory concentration limit. This work must be performed in accordance with a rehabilitation plan which is submitted to the MSDEWP and approved by him.While this obligation to carry out the rehabilitation of the land only applies to the operator of the activity, it creates a restriction on the use of the land which must definitely be taken into account by the purchaser in the context of a transaction. Indeed, the failure by the operator to perform the rehabilitation will have significant consequences for the purchaser, especially if it wishes to change the use of the land.CHANGE IN USEWhere a person wishes to change the use of land which served as the site of a commercial or industrial activity listed in schedule III of the LPRR, he must conduct a characterization study, unless he already has such a study in hand, and it is still current.5Obviously, in the context of an acquisition, if this obligation exists, it is advisable for the purchaser to ensure it is satisfied by the vendor, or, at the very least, that the condition of the premises be very clearly disclosed to avoid any unpleasant consequences down the road.If the characterization study reveals that contaminants are present in amounts exceeding the regulatory limits, a rehabilitation plan will have to be submitted to the MSDEWP for approval, after which the rehabilitation will have to be done before the new use of the land can commence. This work will obviously create delays for the purchaser since the municipality will not issue the necessary permits to proceed with the subdivision or construction until the land has been decontaminated.In the event that the land has already been decontaminated in accordance with the applicable procedures, it is important for the purchaser to carefully review the rehabilitation plan submitted to the MSDEWP and the various entries made in the land register to determine whether there are any restrictions on the use of the land, or whether any excess contaminants may have been left in the ground with the consent of the MSDEWP.REGISTRATION REQUIREMENTSThe EQA contains a series of measures requiring the publication of notices in the land register with respect to contaminated lands,6 specifically, notices of contamination, notices of decontamination, and notices of use restriction. In addition, in some circumstances, certain notices must also be given to the local municipality, to the Minister of SDEWP, and even to neighbours.Clearly, the existence of such notices must be verified when any transaction is being undertaken. However, it is important to remember that the EQA does not regulate all of the situations relating to contaminated lands and, in particular, historic contamination and contamination resulting from activities not covered by the LPRR. The existence or lack of registrations against the land in the land register does not therefore guarantee that the premises are in compliance with the rules of the EQA on the rehabilitation of contaminated soils.LIMITED APPLICATIONThus, as far as contaminated soils are concerned, the application of the EQA is limited. For instance, there is no general obligation to perform the rehabilitation of land following the completion of a characterization study done on a voluntary basis. However, the presence of contaminants could trigger a restriction on the use of the land which could prevent the purchaser from being able to use it for the planned activity.7Accordingly, as a purchaser, it is very important to be well informed of the condition and history of an immovable, and even, most of the time, to obtain an environmental characterization of the subject property. It is a question of exercising the care and diligence of a responsible purchaser._________________________________________ 1 The Land Protection and Rehabilitation Regulation, CQLR, chapter Q-2, r 37.2 Section 31.43 of the Environment Quality Act, CQLR, chapter Q-2, provides more specifically that this applies to contaminants which are “likely to adversely affect the life, health, safety, welfare or comfort of human beings, other living species or the environment in general, or to be detrimental to property”.3 Supra, note 1. This is a list of most of the activities that are likely to cause soil contamination.4 See sections 31.51 and following of the EQA.5 See sections 31.51 and following of the EQA.6 See sections 31.51 and following of the EQA.7 For example, a residential development that cannot proceed on land where contaminants exceed the acceptable limits for residential usage.

CONTENTS  Life Insurance Policy: How to Extract Funds from a Corporation with No Tax Impact Constructive Dismissal Analyzed in the Context of a Business Acquisition The Right of Withdrawal, a Controlled Form of Contractual Freedom Transfers of Residences Involving a Spousal Testamentary Trust LIFE INSURANCE POLICY: HOW TO EXTRACT FUNDS FROM A CORPORATION WITH NO TAX IMPACTLuc Pariseau with the collaboration of Martin Bédard, articling studentIndividual shareholders who wish to withdraw funds from a corporation can face some tax challenges that are sometimes difficult to overcome. Nevertheless, there are various ways of achieving this objective that limit or eliminate the negative tax consequences to the shareholder and the corporation, provided certain conditions are complied with. The transfer of a life insurance policy by an individual shareholder to a corporation where the two are in a non-arm’s length relationship is often an effective way of accomplishing this.The technique is simple. The individual transfers his policy to his corporation and receives a consideration equal to the fair market value of the policy, as determined by an actuary. The consideration paid by the corporation may be in the form of money or a promissory note that will be paid when the corporation has the necessary cash available. By operation of the ITA, the proceeds of disposition are deemed to be equal to the cash surrender value of the policy transferred at the time of the disposition.1The shareholder is then taxed on the difference between the cash surrender value of the policy and its adjusted cost base, and the resulting gain, if any, is considered to be income from property and not a capital gain.2 Assuming that the cash surrender value of the policy is low and that its fair market value is high, the shareholder will benefit from a significant disbursement of funds with little or no negative tax impact.The fair market value of a policy will be higher than its cash surrender value, for instance, where the insured’s health condition has deteriorated since he or she took out the policy. This will also be the case where the theoretical premium for a comparable policy would be higher than that paid for the policy in question for financial reasons attributable to the type of policy purchased or to changes in pricing.As for the corporation, it ends up making a non-deductible outlay of funds and acquiring an interest in an insurance policy with an adjusted cost base equal to its cash surrender value. Thus, upon the death of the shareholder, in addition to receiving the insurance proceeds, the corporation will also benefit from an increase in its capital dividend account equal to the indemnity received, less the adjusted cost base of the policy.3The Canada Revenue Agency acknowledges the validity of this type of planning, but seems to be uncomfortable with the result.4 It has submitted this issue to the Department of Finance which has indicated that it is studying the issue. However, no amendment has been made to the statute to date, more than 10 years after the issue was raised for the first time in 2002.In addition, there are certain advantages to the corporation holding the insurance policy and paying the premiums, particularly the fact that the after-tax cost of the premiums is often lower to the corporation than it would be to the shareholder.The foregoing analysis is obviously general in nature and a more detailed assessment is advisable for any individual who is in a position to transfer a personally owned policy to a corporation.________________________________  1 Subsection 148(7) of the Income Tax Act (“ITA”).  2 Subsection 148(1) and paragraph 56(1)(j) ITA.  3 Subsection 89(1) “capital dividend account” d) ITA.  4 CRA, Technical Interpretation 2002-0127455, “Non arm’s length disposition” (May 7, 2002); CRA, Technical Interpretation 2003-0040145, “Transfert d’une police d’assurance-vie” (October 6, 2003); ARC, Technical Interpretation 2008-0303971E5, “Transfer of a life insurance policy” (May 27, 2009).CONSTRUCTIVE DISMISSAL ANALYZED IN THE CONTEXT OF A BUSINESS ACQUISITIONGuy Lavoie and Élodie Brunet with the collaboration of Brittany Carson, articling studentIn the case of St-Hilaire c. Nexxlink inc.1 the Court of Appeal of Québec analyzed the concept of “constructive dismissal” in the specific context of a business acquisition.In this case, Nexxlink was the subject of an acquisition that resulted in a series of changes to the business, some of which affected the employment conditions of Mr. St-Hilaire. Believing that this had resulted in substantial changes to the essential conditions of his employment contract, Mr. St-Hilaire left his employment shortly after the transaction, alleging that he had been constructively dismissed. He claimed $525,000 in damages from Nexxlink.The Court of Appeal affirmed the decision of the Superior Court, holding that Mr. St-Hilaire had not been constructively dismissed.According to the criteria laid down by the Supreme Court of Canada, constructive dismissal involves [translation] “1) a unilateral decision by the employer, 2) a substantial change or changes to the essential terms of the employment contract, 3) the employee’s refusal of the changes, and 4) the employee’s departure.”2 These criteria are assessed from the perspective of a reasonable person placed in the same situation.3In the context of the transaction in this case, the change in the title of Mr. St-Hilaire’s position from vice-president, business development to vice-president, infrastructure equipment sales did not amount to a substantial change in his employment conditions nor a demotion, but rather a change in the organization of the business, which was within the management rights of Nexxlink.With respect to the changes alleged by Mr. St-Hilaire to his responsibilities and target market, these were only fears. In the context of a business acquisition, some of the senior executives’ duties may be changed or clarifi ed over time: [translation] “a period of uncertainty or adjustment is entirely foreseeable”. According to the Court, a reasonable person placed in the same context as Mr. St-Hilaire could have foreseen that he would have retained his client accounts, and that various opportunities could be expected within the new business.With regard to Mr. St-Hilaire’s compensation, it consisted primarily of a base salary of $170,000, a $40,000 bonus plan, and 20,000 stock options at the time he started his employment.Contrary to Mr. St-Hilaire’s allegations, the Court found that the criteria for awarding the annual bonus had not been substantially changed. Moreover, even if this had been the case, his employment contract expressly stated that the bonus plan could be changed simply upon the approval of the board of directors. As for the cancellation of the stock options, even if this could be considered to be a reduction in Mr. St-Hilaire’s compensation, he never complained about it before leaving the company. According to the Court, Mr. St-Hilaire undoubtedly did not feel that this was an essential condition.In conclusion, the Court of Appeal found that Mr. St-Hilaire was aware of the role that was reserved for him in the new business. The structure he complained of was temporary and uncertain. In the context of this transaction, the allegations of constructive dismissal were ill founded.The interest of this decision lies in the fact that it relativizes the concept of constructive dismissal in the specific context of a business acquisition, in addition to reiterating the principle that the structure of a business is not bound to remain static.________________________________  1 2012 QCCA 1513 (C.A.)(affi rming 2010 QCCS 2276 (S.C.)).  2 Id., para. 29, citing Farber v. Royal Trust Co., [1997] 1 S.C.R. 846 (hereinafter “Farber”).  3 Farber, para. 26.THE RIGHT OF WITHDRAWAL, A CONTROLLED FORM OF CONTRACTUAL FREEDOMCatherine MéthotThe right of withdrawal, also referred to as an “opting out” clause, is the right given contractually or by law to a party to withdraw from a transaction without justifi cation prior to it being actually entered into. Although the withdrawal clause may procure a high degree of freedom, one cannot invoke it in a cavalier manner. Indeed, a withdrawal clause cannot be used in a malicious or abusive manner, nor can it run against the requirements of good faith. Furthermore, to be valid and effective, a withdrawal clause must be enforceable and explicit.The Court of Appeal of Québec recently reminded us of these principles in the case of London v. Kyriacou.1 In this case, the owners of a day-care centre (the “Sellers”) accepted from Mrs. Kyriacou and Mrs. Teologou (the “Purchasers”) an offer to purchase the daycare centre. The sale was initially scheduled to take place on September 29, 2006. This date was thereafter postponed several times and the terms of the offer were also amended on several occasions as the months went by. Among other things, the parties agreed to increase the sale price by $150,000.00 conditionally to the day-care centre being granted a government subsidy within 15 months from the date of the sale. As soon as autumn 2006, the Sellers introduced the Purchasers to the parents of the children attending the day-care centre as being the new owners of the facility from January 2007. In May 2007, the Purchasers began operating the day-care centre and acting like true owners, particularly by having repairs made at their own cost and establishing a new educational program. From May 2007, the parties exchanged several draft sale agreements and the transaction was to take place in August 2007. However, on August 10, 2007, following receipt of a letter from government authorities confi rming that the day-care centre would be subsidized beginning in March 2008, the Sellers notifi ed the Purchasers that they were withdrawing from the negotiations. They also changed the locks of the day-care centre and denied access thereof to the Purchasers.The Purchasers brought a motion for the transfer of title before the Superior Court of Québec to force the Sellers to carry out the transaction. The Sellers opposed the motion, among other things alleging that the initial offer to purchase included an opting-out clause, which they were entitled to rely upon. The clause read as follows: “After due diligence is said and done and all conditions have been agreed upon, if one of the parties’ purchaser or vendor refuse to go ahead the other will be liable for professional fees occurred.”In the first instance, the Superior Court refused to apply the clause because the Sellers had acted in bad faith all along the negotiation process, that further, the clause was not explicit and that had it been explicit, the Sellers, by their actions (particularly by encouraging the respondents to operate the day-care centre and the substance of the discussions on the sale agreement) waived its application. The Superior Court found from the evidence that all the conditions mentioned in the original offer had been satisfied and that there had been an agreement on all the new elements raised thereafter by the Sellers. In short, the terms of the transaction had been agreed upon by the parties and it only remained to make it offi cial by executing an agreement. The Superior Court therefore ordered the parties to sign the agreement and the Court of Appeal affirmed that decision.Although including an opting-out clause in a contract or a letter of offer may constitute a very attractive strategy, the decision summarized in this bulletin articulates the importance of carefully drafting it and demonstrates that one is better to consult a professional before relying on it.________________________________  1 2013 QCCA 37.TRANSFERS OF RESIDENCES INVOLVING A SPOUSAL TESTAMENTARY TRUSTDiana DarilusThe sale of a house by a spousal testamentary trust and the purchase of a new residence in replacement of the former may result in adverse tax consequences if all required precautions are not taken prior to the fact.EXEMPTION FOR PRINCIPAL RESIDENCEWhen a spousal testamentary trust gains possession of a house following the death of a taxpayer and thereafter wishes to dispose of it, the availability of the principal residence exemption to reduce the taxable capital gain resulting from the transfer must be ascertained.Furthermore, the tax act1 provides for certain presumptions when a taxpayer disposed of a house in favour of a spousal testamentary trust through a tax rollover upon death so the trust can benefit from the principal residence exemption for the years during which the deceased taxpayer owned the house.Generally a spousal testamentary trust may benefit from the principal residence exemption upon the sale of the house for all the years during which the deceased taxpayer or the trust itself owned it, to the extent that several conditions are met.One of these conditions is that when the trust was the owner of the residence, the residence must have been ordinarily inhabited by a specified beneficiary, by the spouse or common-law partner or the former spouse or common-law partner of such beneficiary or a child of such beneficiary. A specified beneficiary generally means any person benefi cially interested in the trust who ordinarily inhabited the housing unit (or has a spouse or common-law partner or former spouse or common-law partner or a child who ordinarily inhabited the housing unit).Furthermore, prior to designating the house as principal residence for the years of ownership by the deceased taxpayer while he or she was living or by the trust itself, the trust must also ascertain that no principal residence designation on another property has been made in respect of these years, neither by the deceased person or his or her family unit, nor by a specified beneficiary or his or her family unit.MAINTENANCE OF TESTAMENTARY TRUST STATUSIn the context of a transaction for the sale and purchase of residences involving a testamentary trust, one must be careful not to jeopardize the testamentary trust status of this trust, which benefits from taxation at progressive rates.Therefore, in order to retain its testamentary trust status, no item of property must be contributed to the trust otherwise than by an individual on or after his or her death and as a consequence thereof. The trust could then lose its testamentary trust status and related tax benefits if, for example, it does not deal at the fair market value when acquiring the new residence: the seller may be considered as having made a contribution equal to the excess of the fair market value of the property over the fair market value of the consideration paid by the trust.Subject to certain exceptions, the testamentary trust status of the trust may also be lost if the trust incurs a debt or any other obligation owed to, or guaranteed by, a beneficiary of the trust (for example, the spouse of the deceased person) or another person with whom a beneficiary of the trust does not deal at arm’s length.CONCLUSIONThe tax consequences of transactions involving real property transferred by or to a spousal testamentary trust should always be carefully reviewed beforehand in order to avoid unpleasant surprises.________________________________  1 Income Tax Act.

CONTENTS Part XII.2 Tax Applicable to Trusts: a Potentially Expensive Tax Whichis Often Overlooked Application of the Anti-avoidance Rule in Subsection 83(2.1): Caution Is Required in the Context of the Acquisition of a Private Corporation Revenu Québec to Scrutinize Trusts Directors’ Liability for the Debts of a Corporation Payable to Employees for Services Rendered During the Directors’ Term of Office  PART XII.2 TAX APPLICABLE TO TRUSTS: A POTENTIALLY EXPENSIVE TAX WHIChis OFTEN OVERLOOKEDLuc PariseauSeveral years after the creation of an inter vivos trust, the tax residence of one or several beneficiaries who were initially residents of Canada may change. For example, a beneficiary child may become a resident of the United States to study and possibly remain there, thus severing his or her residential ties with Canada. In such a case, Part XII.2 tax may apply1 to the trust whichis a resident of Canada since one or several of its beneficiaries have become non-residents of Canada under the Income Tax Act (“ITA”).The purpose of Part XII.2 tax in the ITA is to avoid situations whereby non-residents of Canada reduce their tax burden by holding assets or operating a business in Canada through a trust whichis a resident of Canada for tax purposes instead of directly holding the assets or operating the business. In fact, a non-resident who operates a business in Canada and later disposes of it and realizes a capital gain will be taxable in Canada at the same rate as a Canadian resident on his or her business income and on the capital gain thus realized. In the absence of the Part XII.2 tax, the non-resident could operate his or Part XII.2 tax applicable to trusts: a potentially exp ensive tax whic his often overlooked her business and hold the business assets through a trust resident in Canada to avoid being himself or herself liable for Part I tax.Where the conditions are met, Part XII.2 tax applies at the rate of 36%, most particularly on the income from a business operated in Canada earned by a trust, on income from real property located in Canada and on the taxable capital gains from the disposition of taxable Canadian property (“TCP”). A TCP includes, among other things, shares of private corporation to the extent that, during the 60 month period preceding the time of disposition, more than 50% of the fair market value of the shares is directly or indirectly attributable to real or immovable property located in Canada2. Thus, the presence of a non-resident beneficiary somewhat contaminates the trust resident in Canada because when the income earned by the trust is taxable under Part XII.2 of the ITA, the tax is payable irrespective of whether the income is attributed to a resident beneficiary or not3.Part XII.2 tax must be paid by the trust in the 90 days following the end of the fiscal year4. The beneficiaries who reside in Canada may generally claim a refundable tax credit representing Part XII.2 tax paid by the trust on the portion of income attributed to them. Thus, Canadian beneficiaries should generally not be penalized for the Part XII.2 tax paid by the trust. However, since the trust must first pay the Part XII.2 tax and the Canadian beneficiaries can only claim a refundable tax credit in their own tax return several months later, Part XII.2 tax may result in certain cash flow difficulties. As for the non-resident beneficiaries, Part XII.2 tax may represent a net cost if the non-resident beneficiary resides in a foreign country which taxes the income attributed by the trust residing in Canada without providing foreign tax credits or other mechanisms to enable taxpayers to avoid double taxation.Some planning may be considered when it is anticipated that the beneficiary of a trust will become a non-resident of Canada in order to reduce or avoid Part XII.2 tax. In such situation, it is important to consult a tax advisor to assess the choices that could be made._________________________________________   1 Part XII.2 tax may apply in other situations which are not covered in this bulletin.  2 Under the ITA, a gain from the disposition of real or immovable property located in Canada or Canadian resource property also constitute a TCP. Timber resource property and in certain circumstances, shares of the share capital of a corporation listed on a designated stock exchange may also be considered as TCP.  3 The expression “beneficiary” not being defined in the ITA, some issues may be raised as to the status as a beneficiary of a non-resident person who does not receive any income or capital from the trust in a given fiscal year.  4 Paragraph 104(30) ITA also provides that Part XII.2 tax paid by a trust for a fiscal year must be deducted from its income for the year.  APPLICATION OF THE ANTI-AVOIDANCE RULE IN SUBSECTION 83(2.1): CAUTION IS REQUIRED IN THE CONTEXT OF THE ACQUISITION OF A PRIVATE CORPORATION Éric GélinasMost accountants and lawyers are aware of the fact that a private corporation can pay dividends to its shareholders with no tax impact on them if the dividends are paid out of the capital dividend account (“CDA”). This tax account may consist, among other things, of the nontaxable portion of capital gains realized by a private corporation, life insurance proceeds received by this type of corporation, or capital dividends received from another private corporation. The purpose of the CDA is essentially to ensure that these amounts, which would not be taxable if they were received by the shareholder directly, are treated in the same manner when they are realized through a private corporation. The CDA is therefore a very valuable mechanism because of the favourable tax treatment attached to it.Subsection 83(2.1) of the Income Tax Act (Canada) (“ITA”) provides for an anti-avoidance rule whose purpose is to prevent the shares of a private corporation from being purchased in order to benefit from the available CDA. It reads as follows:(2.1) Notwithstanding subsection 83(2), where a dividend that, but for this subsection, would be a capital dividend is paid on a share of the capital stock of a corporation and the share (or another share for which the share was substituted) was acquired by its holder in a transaction or as part of a series of transactions one of the main purposes of which was to receive the dividend,(a) the dividend shall, for the purposes of this Act (other than for the purposes of Part III and computing the capital dividend account of the corporation), be deemed to be received by the shareholder and paid by the corporation as a taxable dividend and not as a capital dividend; and(b) paragraph 83(2)(b) does not apply in respect of the dividend.In a recent decision in the matter of Groupe Honco Inc. et al. v. The Queen (fi le no. 2009- 2134 (IT)G), rendered on September 4, 2012, the Tax Court of Canada specifi cally considered subsection 83(2.1) ITA. The Court held that subsection 83(2.1) ITA applies in a situation in which the shares of a corporation (the “Target”) were acquired where the Target was the beneficiary of an insurance policy in the amount of $750,000 on the life of the seller, who was very sick at the time of sale of the shares. Since the seller died shortly after the transaction, the insurance proceeds were received by the Target after the acquisition, thereby creating a significant CDA for the Target. Dividends from the CDA, thus created, were subsequently paid by the Target (since merged) to its shareholders. These dividends were redefi ned as taxable dividends by the Canada Revenue Agency on the basis of subsection 83(2.1) ITA.The taxpayers unsuccessfully attempted to argue that the main purpose for the acquisition of the Target’s shares was not to receive the capital dividends, but rather that it was done for other business and tax reasons (e.g. to benefit from the Target’s accumulated losses).However, the Court concluded that subsection 83(2.1) ITA applied and, accordingly, that the dividends paid were in fact taxable dividends.This decision underscores the importance of considering the potential application of subsection 83(2.1) ITA in any situation involving the acquisition of a private corporation in which a CDA remains unused or may be created subsequent to the acquisition.  REVENU QUÉBEC TO SCRUTINIZE TRUSTSDiana DarilusThe Government of Quebec recently decided to give Revenu Québec new tools so that it can ensure that trusts having operations or rental properties in Quebec are in compliance with the tax legislation. In Quebec’s last budget tabled on November 20, 2012, the Quebec government announced amendments designed to require certain trusts that are subject to Quebec tax to file a tax or information return (hereinafter referred to as the “New Rules”). These changes will apply to taxation years starting after November 20, 2012.The New Rules will require certain trusts subject to Quebec tax to file a tax return in three new situations and an information return in one new situation.However, some types of trusts are excluded from the application of the New Rules, for example, estates and testamentary trusts residing in Quebec on the last day of their taxation year if the total of the cost amounts of their property for the entire taxation year of the trust is less than $1 million.CHANGES TO THE FILING OF TAX RETURNSAllocation of income to a beneficiary whether resident or not resident in QuebecWhere a trust subject to Quebec tax for a taxation year deducts an amount allocated to a non-resident beneficiary in the calculation of its income for the taxation year, it must now file a tax return for that taxation year. Previously, it was only required to do so where the amount was allocated to an individual resident in Quebec or a corporation with an establishment there.Thus, where a trust resident in Quebec allocates its income to beneficiaries not resident in Quebec, it must henceforth file a tax return even if it has no tax to pay, realizes no capital gains, and does not dispose of any capital property during the taxation year.Trust resident in Quebec owning property the total of whose cost amounts exceeds $250,000A trust subject to Quebec tax must henceforth file a tax return if it resides in Quebec on the last day of the taxation year and it owns property, at any time during the taxation year, the total of whose cost amounts exceeds $250,000.Trust not resident in Quebec owning business property the total of whose cost amounts exceeds $250,000A trust subject to Quebec tax must henceforth file a tax return if it does not reside in Quebec on the last day of the taxation year and it owns property, at any time during the taxation year, which it uses to carry on a business in Quebec the total of whose cost amounts exceeds $250,000.CHANGES TO THE FILING OF INFORMATION RETURNSTrust resident in Canada outside Quebec holding a rental property in QuebecFrom now on, a trust residing in Canada outside Quebec which owns a rental property1 located in Quebec, or whichis a member of a partnership2 that owns such a property, must file an information return.For example, a trust residing in Canada outside Quebec which receives passive property income (as opposed to business income) from a rental property located in Quebec must henceforth file an information return in Quebec.The New Rules impose additional obligations on certain trusts that were not previously required to file a tax return or information return. The failure to comply with these New Rules may result in the imposition of penalties and interest._________________________________________   1 The New Rules use the expression “specifi ed immovable property” which means an immovable property located in Quebec (or a right in such immovable property) that is used mainly for the purposes of earning or producing gross revenue that constitutes rent.  2 These New Rules also apply to a trust that is a member of a partnership that itself is a member, directly or indirectly, through one or more other partnerships, of a partnership that owns a specifi ed immovable property.  DIRECTORS’ LIABILITY FOR THE DEBTS OF A CORPORATION PAYABLE TO EMPLOYEES FOR SERVICES RENDERED DURING THE DIRECTORS’ TERM OF OFFICE Catherine MéthotThe Quebec Court of Appeal rendered a decision on November 14, 2012 confi rming the state of the law on the scope of section 119 of the Canada Business Corporations Act (the “CBCA”), which provides as follows: “Directors of a corporation are jointly and severally, or solidarily, liable to employees of the corporation for all debts not exceeding six months wages payable to each such employee for services performed for the corporation while they are such directors respectively.” (my emphasis)In this case, Justice Dalphond found from the evidence that the three respondents, Myhill, Cochrane and Lilge, were not only the elected directors in accordance with the resolutions and records of Société Inter-Canadien (1991) Inc. (“Inter”) until their collective resignation in May or June 1999, but also that they had in fact behaved as Inter’s directors, despite the existence of a declaration by Inter’s sole shareholder divesting them of their powers. Inter terminated its operations on October 27, 1999 and declared bankruptcy on March 27, 2000. Inter’s employees claimed several million dollars in unpaid wages by Inter from the directors under section 119 CBCA.Justice Dalphond noted that section 119 CBCA, [translation] “which enacts a liability exceeding that ordinarily prescribed by the law, without proof of fault, must by its nature be interpreted narrowly [as the case law has consistently held].” The debts payable by a corporation for services performed by the employees on its behalf during the term of office of a director constitute the promised, but unpaid, consideration for the work done during the director’s term of office. This includes wages, the reimbursement of expenses incurred, and any amount earned as a result of the services rendered by the employee whose payment was deferred, such as vacation pay. On the other hand, the debts payable for services performed by the employees on behalf of the corporation do not include all the debts borne by a corporation in relation to its employees.Thus, Justice Dalphond found that the directors could not be held liable for: (i) claims for medical expenses due to the employer’s failure to pay the premiums to the insurers, (ii) pay in lieu of notice for the termination of employment under collective agreements because such pay constituted damages for wrongful breach of employment, and (iii) 40 weeks of severance pay claimed by the employees because this was not a form of deferred compensation, but a guarantee of employment security. However, the judge did find the directors liable for deductions made by the corporation out of the employees’ wages for contributions to the group insurance and for the purchase of bonds, which had not been paid to third parties in accordance with the employees’ instructions, because these amounts were still owed by Inter to the employees as a form of unpaid wages.Justice Dalphond therefore recognized the employees’ right to claim the compensation referred to above jointly and severally from the directors [translation] “if unpaid at the time the actions were instituted, not exceeding an amount equal to six months gross wages per employee”. This was in addition to the amounts that were not contested in the case, namely, back wages, unpaid wage increases, unpaid overtime, unreimbursed expenses, vacation pay, holiday pay and sick leave credits.