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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.

On December 20, 2013, the Quebec Department of Finance and the Economy issued Information Bulletin 2013-14 (the “Bulletin”), announcing inter alia changes to various tax measures specifically applicable to the natural resources industry.The Bulletin is certainly important in respect of both the income tax for mining corporations and the “super” tax deductions to which an individual who subscribes for flow-through shares issued by a corporation which, directly or indirectly, conducts exploration activities from the surface of the soil in Quebec is generally entitled to.The Bulletin also makes public the intention of the Government to make some changes to those already announced in the context of the proposal for the revision of the Mining Tax Act unveiled on May 6, 2013 through Information Bulletin 2013-4.INCOME TAX FOR MINING CORPORATIONSA qualified mining corporation which incurs certain exploration expenses in Quebec is eligible to a refundable tax credit under the Taxation Act (Quebec). The Tax Credit relating to Mining, Petroleum, Gas or Other Resources (the “Resources Credit”) may reach, in certain cases, 38.75% of the eligible expenses, particularly where a qualified corporation that does not operate a mineral resource or an oil or gas well in reasonable commercial quantities incurs certain exploration expenses in certain northern areas. Furthermore, to obtain the highest Resources Credit rate (the “Preferential Rate”), the qualified mining corporation must not be related to a corporation operating a mineral resource or an oil or gas well in such quantities.The following table shows the Resources Credit rates that currently apply depending on the various applicable parameters.In the March 20, 2012 Budget Speech, rate reductions for the Resources Credit1 were announced regarding expenses incurred after December 31, 2013: a 10% reduction for corporations not operating any natural resource and 5% for the other corporations.It was furthermore stated that such corporations could benefit from an increase of the Resources Credit equal to such rate reduction in exchange for an option to the Quebec government to acquire an equity stake in the development. However, the terms of such option to acquire an equity stake in the development have not to date been unveiled by the Government.Acknowledging that the international context is less favourable to investments in mining exploration, which may among other things be explained by a decrease in metals prices, the Government announced the postponement to January 1st, 2015 of the coming into force of these modifications to the Resources Credit.The Bulletin also contains two technical modifications which will restrict the scope of the notion of “qualified corporation that does not operate a mineral resource or an oil or gas well in reasonable commercial quantities” for the purposes of the Resources Credit.First, the notion of “related corporation” used to determine whether there is operation or not of a resource for the purposes of such notion will be replaced with the notion of “associated group”, similar to the notion used in respect of the Tax Credit for Investments relating to Manufacturing and Processing Equipment.2It is also intended to replace the condition that the qualified corporation must not operate a mineral resource or an oil or gas well in reasonable commercial quantities with the requirement that no gross income be earned from the operation in reasonable commercial quantities of such a resource. Thus, corporations which indirectly earn gross income derived from the operation of a mineral resource, under the form of royalties for example, will henceforth no longer be eligible to the Preferential Rate, even if they don’t operate any natural resource and are not associated with any corporation that operates such a resource.A corporation which earns gross income of any nature whatsoever (including royalties) from the operation of a mineral resource or an oil or gas well in reasonable commercial quantities will therefore “taint” all the other corporations of its associated group and no corporation of the group will be eligible to the Preferential Rate.It is intended that the amendments pertaining to the Resources Credit will apply to the taxation years beginning after December 20, 2013. It should be noted that these new rules will also apply mutatis mutandis to partnerships.THE FLOW-THROUGH SHARE REGIMEThe Quebec legislation provides for two additional deductions of 25% each (the “super” deductions) for individuals who subscribe for flow-through shares, the first one respecting some exploration expenses incurred in Quebec and the second one when the exploration expenses in question are surface exploration expenses. At the present time, the eligibility for these “super” deductions is among other things conditional upon the issuing corporation not operating or having operated a mineral resource or an oil or gas well in reasonable commercial quantities at the time it incurred the expenses and throughout all of the preceding 12 months. In addition, the eligibility to these “super” deductions is conditional upon the issuer not controlling a corporation that operates such a natural resource or being controlled by such a corporation.It is stated in the Bulletin that changes similar to those pertaining to the Resources Credit will be made to the flow-through share regime. More specifically, the notion of “operation of a mineral resource or oil or gas well” will be replaced with the requirement that no gross income be earned from the operation in reasonable commercial quantities of such a resource.Furthermore, like the modification respecting the notion of related corporations in the context of the Resources Credit, the notion of “control” will be replaced with the broader notion of association, i.e. that of the “associated group”.A mining corporation will thus no longer be allowed to issue flow-through shares providing an entitlement to the “super” deductions if it is associated with another corporation (for example, a sister corporation) which derives gross income from the operation in reasonable commercial quantities of a mineral resource or an oil or gas well.The modifications to the flow-through share regime are intended to apply to shares issued after December 31, 2013.MINING TAX ACTThe Government also announced through the Bulletin its intention to ease the restriction applicable to the depreciation allowance which may be claimed in the computation, for mining tax purposes, of the annual earnings from a mine. This restriction generally provides that no amount on account of depreciation may be deducted in respect of class 4 property (which is essentially comprised of property acquired by an operator after March 30, 2010) if the undepreciated capital cost (“UCC”) of its classes 1 to 3 is greater than zero. In other words, an operator must fully amortize, for mining tax purposes, the property it acquired on or before March 30, 2010 before being allowed to claim a depreciation allowance in respect of its class 4 property.The easing considered by the Government would allow an operator to claim, in the calculation of its annual earnings from a mine, an amount on account of depreciation allowance in respect of class 4 property provided it also deducts the maximum amount of the depreciation allowance relating to its class 1, 2 and 3 property used in the operation of this mine. There would no longer be a requirement that the UCC of the classes 1 to 3 be equal to zero before being able to obtain a depreciation allowance in respect of class 4 property.The Bulletin states that this measure will be declaratory, which means that the Government will apply it as if it had been passed at the same time as the coming into force of the restriction in 2010. Accordingly, to the extent that the four-year limitation period from the date of the first assessment for a fiscal year is not expired or that a waiver was sent in due time, an operator may amend the return filed in respect of that fiscal year if the restriction on the depreciation allowance applied to it.It should be noted that the Bulletin further indicates that the easing for class 4 property would apply mutatis mutandis to class 4A property. However, the creation of class 4A (which would include some items of property currently included in class 4) is provided for in Bill 55, which has not yet been passed by the Quebec legislature.It is worthwhile to remember that Bill 55 was not warmly received by the opposition parties and that, accordingly, many amendments may still be made to it. This reform of the Quebec mining tax has never been detailed or even announced by the Government in a budget. In this very particular context, taxpayers should remain prudent in respect of the amendments to the Mining Tax Act announced on May 6, 2013 in Information Bulletin 2013-4 and included in Bill 55, their coming into force being subject to the Quebec legislature passing the Bill in question.CONCLUSIONThe decision to postpone for one year the decrease of the Resources Credit rates seems to indicate that the decline in mining investments in Quebec, particularly respecting mineral exploration activities, has continued during the last few months and that the Government seeks to stimulate this sector after a 2013 filled with uncertainty and turmoil.As to the restrictions pertaining to the eligibility to the Preferential Rate and the “super” deductions, these technical changes were foreseeable since the underlying tax policy has always been to direct this kind of tax incentive toward corporations that lack access to the necessary funds to finance their exploration activities. However, it remains that these restrictions could have unforeseen consequences on the financial projections of some mining corporations and the representations made to Quebec investors in the context of the issuance of flow-through shares._________________________________________1 With the exception of the 15% Resources Credit with regards to the eligible expenses related to renewable energy and energy savings.2 While the concept of “related persons” generally refers to legal control, the concept of “associated corporations” is wider. For example, two corporations are associated if one has the de facto control over the other, but they will not necessarily be related if there is no de jure control.

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  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.

CONTENTS  Some practical advice on the recording of customer phone calls in Quebec Employment placement agencies : who is responsible for the source deductions? What are your recourses if you believe a contract is about to be, or has been, awarded to another bidder?  SOME PRACTICAL ADVICE ON THE RECORDING OF CUSTOMER PHONE CALLS IN QUEBECGuillaume LabergeMany businesses engage in the practice of recording customer calls. They do so for various reasons, including to verify quality of service, to handle complaints or to train employees.Because these recordings contain customers’ personal information, certain precautions must be taken in the collection and retention of such information, especially since the subsequent use thereof, without a customer’s consent, may infringe on his privacy rights.1The Québec Act Respecting the Protection of Personal Information in the Private Sector2 (“APPIPS”) does not govern this process and, to the best of our knowledge, the Commission d’accès à l’information du Québec has not yet ruled on the issue.The Office of the Privacy Commissioner of Canada has published Guidelines for Recording of Customer Telephone Calls3 for private sector companies operating in Canada. Given that the obligations imposed by the Personal Information Protection and Electronic Documents Act4 (“PIPEDA”) are substantially the same as those imposed by APPIPS, it is our opinion that the federal guidelines should be followed by Québec companies.The Office of the Privacy Commissioner is of the view that the recording of customer calls is permitted under PIPEDA subject to compliance with certain requirements, applicable both to incoming and outgoing calls.First, the collection of information must be motivated by a specific purpose. In Québec, the APPIPS expressly provides that, “[a]ny person collecting personal information to establish a file on another person or to record personal information in such a file may collect only the information necessary for the object of the file”5. This suggests that the use of such recordings for purely administrative purposes would be difficult to justify in view of this requirement. Customer service representatives must exercise caution when recording phone calls and must refrain from asking questions or making comments that could result in the collection of information that is unrelated to the reasons for recording the call.Federal guidelines also stipulate that in order to comply with PIPEDA, it is necessary to inform the person, at the outset, that his or her call may be recorded. A customer’s consent may be obtained in several ways. He or she can be verbally advised either by an automatic recording or by a customer service representative. According to federal guidelines of the Commissioner, a clear statement by the company printed on customers’ monthly statements could also suffice.Furthermore, a reasonable effort must be made to inform the customer of the reasons for the recording. It is important to note that the company must communicate clearly the real reason. It cannot claim, for example, that the recording is for the purpose of quality control when in fact it will be used to fulfill other objectives, as legitimate as those may be.However, a caller’s tacit consent may be inferred if, knowing the conversation is being recorded for a particular purpose, the caller does not object thereto and continues the conversation. If the caller refuses to allow the recording, he must be offered certain practical solutions, such as to not have the call recorded, to present himself at the nearest branch or point of sale, or to submit a complaint, question or comment online or by mail. In our opinion, it is not necessary that these options be presented at the outset of each call but they can be outlined in the company’s privacy policy, for example, or as a stipulation appearing on customers’ monthly statements.Notwithstanding a few exceptions, telephone conversations cannot be recorded without the express or implied consent of the person whose personal information is being collected. Included in the exceptions, under PIPEDA, consent is not required when the purpose of the recording is debt recovery or investigation of potential fraud. In such circumstances, the need to obtain consent could adversely affect the company’s ability to obtain accurate information.Lastly, the guidelines only address the protection of personal information of customers. However, the recordings may also infringe the privacy rights of employees. Therefore, employees should also be informed of the practice and the reasons for the recording._________________________________________1 Civil Code of Québec, S.Q. 1991, c. 64, arts. 35 and 36.2 R.S.Q., c. P-39.1.3 Office of the Privacy Commissioner of Canada, Guidelines for Recording of Customer Telephone Calls, June 10, 2008, available online: https://www.priv.gc.ca/resource/fs-fi/02_05_d_14_e.asp4 S.C. 2000, c. 5.5 Section 5, APPIPS.EMPLOYMENT PLACEMENT AGENCIES: WHO IS RESPONSIBLE FOR THE SOURCE DEDUCTIONS?Carolyne CorbeilQuebec employers are increasingly resorting to placement agencies to quickly meet their need for occasional workers. While this new business model is gaining in popularity and offers many advantages, it also upsets the traditional bipartite “employer-employee” relationship. Thus, since the placement agency functions as an intermediary between the client and the worker, a tripartite employment relationship is created. This raises the issue as to whether the employer-employee relationship remains intact and, if so, then who is responsible for the source deductions. The Court of Québec recently answered these questions in the case of Agence Océanica inc. v. Agence du revenu du Québec.1FACTSIn this case, the placement agency, Océanica (hereinafter “Océanica”), was in the business of providing nursing staff for the short-term needs of hospitals, residential and long-term care centres (CHSLDs) and local community service centres (CLSCs) (hereinafter the “clients”). It operated as an intermediary between the clients and nurses: clients informed Océanica of their nursing staff requirements and Océanica did the recruiting. At the clients’ workplace, the nurses received their instructions from the clients, particularly in terms of the duties to be performed by them and their work methods, acting under the clients’ supervision. Océanica billed the clients for the nurses’ compensation, plus an amount for Océanica’s profit margin. Based mainly on the testimony of the nurses working for Océanica, it was apparent that they had no written employment contract with Océanica, they bore no risk of profit or loss, and they paid for their employment expenses themselves, without reimbursement by Océanica.Océanica considered the nurses to be self-employed workers rather than employees. Thus, the compensation paid to the nurses would not be subject to the applicable source deductions in Quebec, i.e. for the QPP (Québec Pension Plan), QPIP (Québec Parental Insurance Plan), HSF (Health Services Fund) and CNT (Commission des normes du travail).On the other hand, the Agence du revenu du Québec (hereinafter the “ARQ”) submitted that the nurses were not self-employed workers, but rather employees, and therefore assessed Océanica for the amounts due, plus penalties and interest, on account of the aforementioned source deductions on the compensation paid to the nurses.Océanica appealed the assessment by the ARQ to the Court of Québec for a ruling on whether the nurses were employees or self-employed workers.THE COURT OF QUÉBEC’S DECISIONAfter conducting a general review of the definitions of the concepts of employer and employee under various tax statutes, the Court admitted that there was not much substance to these definitions and that they were not very helpful in characterizing such a complex relationship as the one that existed between Océanica and its nurses. Nevertheless, the Court found that the payment of compensation was of particular importance for a person to qualify as an “employer” for purposes of the Taxation Act2 (Quebec).As for the concept of the employment contract under the Civil Code of Québec,3 the Quebec case law has noted on many occasions that it must be analyzed on the basis of its three components, namely the performance of work, the compensation, and the relationship of subordination between employer and employee, with subordination being the main criterion for a finding of employee status. However, in the context of a tripartite relationship involving an intermediary, as opposed to the classic employment relationship between two parties, determining who is the true employer based on the subordination criteria may be difficult. Instead, a more general and broader analysis of the criterion of the employees’ legal subordination must be conducted and other criteria should also be considered, such as the selection of the employees, hiring, training, discipline, evaluation, etc. Thus, the Court took a more general approach to the relationship between Océanica and its nurses which was not limited to the nurses’ functions and to the degree of supervision exercised by Océanica over them.The fact that some of the classic functions of the employer (i.e. recruiting, training and supervision) were shared between Océanica and the clients did not change the nature of the nurses’ work per se. Indeed, if the clients had not been there to offer employment and Océanica had not functioned as the link between the clients and nurses, the nurses would have been unable to offer their services. The nurses were integrated into the clients’ businesses and acted under their supervision. The nurses were not administering a business. To claim that the nurses were self-employed workers because Océanica, by itself, did not fulfill all the attributes of a classic employer would have led to an absurd result. For these reasons, the Court held that it was an error to claim that Océanica’s nurses were self-employed workers.Therefore, the Court found that the nurses were employees of Océanica. Indeed, the judge stated that by inserting itself into the classic relationship between the clients and the nurses, Océanica assumed some of the employer’s functions, such as the recruiting and payment of the nurses’ compensation. In this regard, the Court found that Océanica acted as the clients’ mandatary and had entered into binding obligations on their behalf. As a result, Océanica became responsible for the clients’ tax liabilities, in accordance with the concept of mandate set out in the Civil Code of Québec.4COMMENTSThe Court essentially took a two-pronged approach to this decision. Firstly, it dismissed Océanica’s argument that the nurses were self-employed workers. Secondly, since the nurses were found to be employees, the Court had to determine who was liable for the source deductions. The Court strongly emphasized the role of the person paying the compensation in reaching the conclusion that the nurses were employees of Océanica, since Océanica paid them their wages directly.At first sight, this decision confirms the role of the employment agency as an employer of workers and its obligation to make the source deductions in Quebec from the compensation paid to them. Thus, employment agencies should remember that they must be vigilant with respect to the status of their personnel and the tax obligations for which they are responsible.However, the Court’s conclusion regarding the mandator-mandatary relationship between Océanica and the clients may lead to confusion. Indeed, it is unclear what effect this conclusion would have in a situation in which the placement agency is delinquent and fails to make the requisite source deductions.Finally, it should be noted that Océanica has appealed this decision to the Québec Court of Appeal. Hopefully, the Court of Appeal will take the opportunity to clarify the conclusion of the Court of Québec. We will be following these developments closely. Until then, caution is advised..._________________________________________1 2012 QCCQ 5370.2 R.S.Q., c. I-3 and amendments.3 S.Q. 1991, c. 64 (“C.C.Q.”).4 Article 2157 C.C.Q.WHAT ARE YOUR RECOURSES IF YOU BELIEVE A CONTRACT IS ABOUT TO BE, OR HAS BEEN, AWARDED TO ANOTHER BIDDER?Julie CousineauQuestions concerning the legality of the call for tenders process are regularly submitted to the courts. Obviously, when the contract contemplated in a call for tenders is important, each of the businesses that went through the process will have an interest in, and will want to obtain, the contract.What should you do if your business is not awarded the contract you wanted so badly? Below is a brief description of the legal remedies available in light of the recent case law. It should be noted that the remedies described below can be instituted against any business, whether public or private. However, in the case of an action against the government itself, it will not be possible to institute injunction proceedings, but it is possible to obtain a safeguard order in very exceptional circumstances. (We will not consider those circumstances in this article.)Firstly, before anything else, you must ensure that you responded to all the requests and formalities set out in the call for tenders. It goes without saying that the courts will not be able to sanction the party contracting out the work (the client) at the behest of a bidder that did not comply with the rules laid down in the call for tender documents.1GENERAL RECOURSE: DAMAGESSeveral recourses are available to aggrieved bidders. Most often, they will institute an action in damages seeking compensation for the losses they have suffered and profits they were deprived of. The bidder’s lost profits must be proven with well-documented evidence to obtain the amounts claimed, and will not be awarded unless it is clearly proven that the bidder ought to have received the contract. Note that the evidence of damages generally requires the disclosure of sensitive information belonging to the aggrieved company, such as profit margins or financial statements.Furthermore, in the event that a bidder participates in a second call for tenders launched by the client after participating in a first call for tenders (where the first call for tenders was canceled), if the bidder subsequently institutes an action in damages based on the first call for tenders, it may be dismissed on the grounds that the bidder waived this recourse when it decided to bid in the second call for tenders.2APPLICATION FOR A DECLARATORY JUDGMENT OR ACTION IN NULLITYSometimes, an aggrieved bidder may wish to apply for a declaration by the court that the client did not comply with the tender process or that the process should be annulled, particularly in cases where the client is a public entity subject to a special statute establishing a framework for the call for tenders process (e.g. Cities and Towns Act, Act Respecting Contracting by Public Bodies). In such cases, the bidder may institute an action for a declaratory judgment or an action in nullity seeking a declaration that the tendering process engaged in is null and void. The main purpose of such actions is to obtain an answer to a clear question submitted to the court.INJUNCTION OR APPLICATION FOR A SAFEGUARD ORDERAn aggrieved bidder may also apply to the court for an injunction or safeguard order to suspend a tender process that is underway (temporarily and incidentally to another action or on a permanent basis). However, it is important to know that it is difficult to succeed in an injunction action, among other things, because the criteria for a successful injunction are somewhat difficult to meet in the context of a call for tenders. Injunctions are an exceptional remedy and, since the courts have the discretion to grant or refuse them, they will frequently be reticent to intervene in a process governed by rules laid down in a statute or by the parties.To obtain an injunction order, the following criteria must be met: a prima facie case, serious or irreparable harm, and the balance of convenience.A prima facie case is met, in particular, where the applicant (the aggrieved bidder) proves to the court that the process does not comply with the applicable statutes (particularly in matters involving a public body), the client has failed to comply with the very process it put in place, or there is a major irregularity in this process. Indeed, the principle of the equality of bidders is a basic principle in tender matters that has been reaffirmed on many occasions by the courts. By itself, this criterion is generally not too difficult to meet.3Once a prima facie case has been established, the bidder must show that it would suffer irreparable or serious prejudice, i.e. which is not compensable in damages. This criterion is more difficult to meet because, in several cases submitted to the courts, they have concluded that the prejudice was ultimately compensable in damages based on the profits which the applicant bidder hoped to make. Note that the loss of expertise where the contract is awarded to the bidder’s competitor instead of the bidder, and the difficulties in assessing the amount of damages (due to mathematically complex calculations) were not found to be irreparable prejudice by the courts.4 On the other hand, where the bidder can show that his business is at risk of shutting down, the courts will be more inclined to issue the order.5Finally, if the court finds that the right on which the applicant is relying is not perfectly clear, it must decide which of the parties would suffer greater inconvenience if the order is rendered. In this regard, it should be noted that if the call for tenders involves a public body, it will benefit from a presumption that the contract contemplated in the call for tenders is made in the public interest. In such a case, it will be easier for the public body to turn the balance in its favour as compared with a private interest. On the other hand, there have been some cases involving public bodies in which the illegality committed by the public body was so great that the court concluded it was in the interest of the parties and the public to obtain a ruling on the issue of legality, while suspending the process in the meantime.6Finally, the court will also consider whether there is sufficient urgency at certain stages of the application for an injunction or safeguard order.CONCLUSIONIf you feel that you have been wronged in the context of a call for tenders, it is important to quickly assess the solutions available to you. Depending on the facts and legal issues involved, one remedy may be more appropriate than another. In any case, to benefit from all the possible remedies, you should not wait too long before evaluating which solution is best for you._________________________________________1 Simplex Grinnel inc. v. Cégep de Sainte-Foy, 2012 QCCS 4512.2 Entreprises Léopold Bouchard et Fils v. St-Tharcisius (Municipalité de ), 2012 QCCS 4071 (appeal filed).3 RJR McDonald v. Canada (P.G.), [1994] 1 S.C.R. 311, p.46.4 Entrepreneur général Uuchii inc. v. Québec (Procureur général), 2012 QCCS 4500.5 Orthofab v. Régie de l’assurance maladie du Québec, 2012 QCCS 1876.6 Ibid, note 5.

Are you ready? The harmonization of the QST and the GST may considerably impact your business or clients Sale of litigious rights : Beware of the redemption right Determining the purchase price of shares in a shareholder agreement: When “quiconque” (“any person”) excludes the person who signs Advance notice policies : A tool to consider with regard to shareholder nominations for electing directors

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

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