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  • Steps to a successful venture capital financing round

    An entrepreneur who invests time and energy raising the funds necessary to launch a startup, usually from family and friends (love money), will necessarily want their startup to grow exponentially. Achieving exponential growth requires always more capital, and so the entrepreneur will need to find additional sources of financing. One of these could be venture capital financing. For an entrepreneur, going this route may seem daunting, but if well prepared, it can also be a very wise choice. Here are the steps to take in order to succeed in a round of venture capital financing and get the most leverage out of this type of financing. What is venture capital? Venture capital is a non-guaranteed equity investment, made with an investment horizon of typically five to ten years, with a view to realizing an exponential gain and participating in the strategic decisions of the startup in which the capital is invested. Investors who provide venture capital do not undertake to play a passive role—quite the opposite! Entrepreneurs who opt for such financing must be prepared to exchange ideas with investors and justify certain decisions they intend to make as managers. On the flip side, they’ll also benefit from their investors’ advice and networks. Application for financial assistance Once you’ve grasped how venture capital works and resolved to resort to it, you’re ready to launch a round of financing with one or more potential investors. Our advice: don’t wait until you really need the funds to take this step. As soon as your startup takes off, get into networking mode! Meet with dozens of investors and present your vision, team and business plan. Investors will be more interested in your vision, talent and the growth potential of your business than in its current results, and they will probably be as much interested in these aspects as they are in your business plan. And if things don’t immediately go your way, don’t give up! Often all it takes is for one investor to bet on you for others to follow. Letter of intent If the ?nancing round is well received, investors will con?rm their interest by submitting a letter of intent. A letter of intent states an investor’s intention to invest under certain conditions, but it doesn’t constitute a binding undertaking. It will set out the terms and conditions of the proposed investment (form of investment, subscription price, etc.) which, while not binding on the investor, are nonetheless binding on the company once it has accepted them. Once an entrepreneur has accepted a letter of intent, it may be very dif?cult to get the investor to waive the rights granted in their favor by the letter. Due diligence Once the letter of intent is agreed to, the investor will conduct a due diligence review on the company. A due diligence investigation allows an investor to better assess the legal, ?nancial and other risks associated with a startup and validate certain statements or assumptions stated in the company’s business plan. In a due diligence review, the following will usually be scrutinized, among others : Accounting and corporate records Material contracts Intellectual property (patents, trademarks, etc.) Disputes involving the company Environmental aspects Negotiation of final agreements Generally speaking, in venture capital ?nancing, two main acts key documents will con?rm the terms of the agreement between the company and the investor: a subscription agreement and a shareholders’ agreement. A subscription agreement is a document similar to a share purchase agreement, except that it isn’t concluded with a shareholder but with the company itself. It speci?es the form of the subscription (common shares, preferred shares, subscription rights, etc.) and contains numerous representations and warranties on the part of the company for the bene?t of the investor, as well as an undertaking to indemnify the investor should one of the representations or warranties prove to be false and cause a loss for the investor to suffer prejudice. A shareholders’ agreement is a document signed by all the shareholders of a company and the company itself. Typically, such an agreement determines who will sit on the board of directors and how it will operate. It contains a number of clauses that govern the issuance and transfer of the company’s shares and grants the investor a right of oversigh —and often even veto power—over certain decisions. Closing Once the ?nal agreements are negotiated, closing can take place. At the closing, the parties will sign all relevant documents agreements and certi?cates, including the subscription agreement and shareholders’ agreement, and deliver the documents required to meet all conditions. The parties will also sign the subscription agreement and shareholders’ agreement. The company’s lawyers will provide a legal notice opinion to con?rm to the investors that the securities subscribed to are validly issued, that the company has the legal capacity to enter into all the agreements prepared by the investor’s legal counsel, that the agreements have been duly approved, and that the signatory has the authority to sign the agreements and bind the company. A forewarned entrepreneur is forearmed! You now understand that for an entrepreneur, the secret of a successful ?nancing round lies in being properly prepared, being realistic about investors’ expectations and requirements, and having a large dose of con?dence in the business. If you’ve started to solicit ?nancing from potential investors or are planning to do so soon, there’s still time to get legal advice to avoid unpleasant surprises at a critical moment.

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  • Five good reasons to list your company on the stock exchange and opt for equity financing

    In 2020, the pandemic disrupted the Quebec economy and the trend continued in 2021. After a difficult year for local businesses, there is an opportunity for business owners to rethink their business model as they develop their recovery plan. In this context, an initial public offering and equity financing might be a good idea. While the process is relatively costly and time-consuming for senior management, not to mention that it results in a series of obligations for the company and its executives and major shareholders, the benefits far outweigh the disadvantages. Here are five good reasons to take your company public and use equity financing to ensure a successful future. 1. Equity financing: financing your company’s growth differently The moment your company goes public, you significantly expand and diversify your equity financing sources. You are no longer dependent on traditional bank loans. Your company can now raise capital much more easily and at a much lower cost, for example through the issuance of convertible securities, share capital, rights or warrants. In addition, your pool of funders expands considerably, going far beyond founding shareholders, your banker and your very close friends and relatives. All these equity financing tools make it possible to more aggressively manage the growth of your business and take advantage of new business opportunities. 2. Equity financing: facilitating mergers and acquisitions Having a company listed on the stock exchange means having a key advantage when it comes to your expansion plan. Once listed, you can acquire another business using your company’s shares as leverage. This added flexibility increases your chances of success in negotiations. You can thus be more bold in your growth management, as you will no longer be limited to conventional financing methods. 3. Equity financing: gaining notoriety By making the decision to take your business public and opting for equity ?nancing, you will give your business greater visibility. First, the initial public offering will be an opportunity to make your company known to investors through promotional events organized by the brokers participating in the issuance, among others. Second, public companies are often followed by ?nancial analysts, and such attention can be an asset when it comes to marketing products and services. In short, by having your company in the spotlight, it will inevitably gain notoriety, both with investors and economic partners. Finally, for many customers and suppliers, doing business with a publicly traded company is reassuring. They see it as a sign of a well-established business, and this perception can facilitate the conclusion of a sale or supply contract. 4. Equity financing: increasing the market value of your business Better ?nancing costs, greater liquidity for your company’s shares, improved growth potential and increased visibility will all make the market value of your company signi?cantly higher than it was before going public. Once listed, book value will no longer be the main indicator used to determine your company’s worth. It will be worth what investors recognize its value to be, based on its potential for growth and pro?tability and its performance relative to competitors. 5. Company succession made easier When the time comes, it will be much easier for you to retire from your business and bene?t from the fruits of your years-long effort. You will have a number of options, including disposing of your shares through a secondary offering. It will also be easier to attract talented people to take over your business because of the multiple bene?ts that come with the status of public company. The advantages of listing your company on the stock exchange and opting for equity ?nancing are many. In addition to the ?ve points presented here, we could add increased credibility with clients and suppliers, better compensation for key employees, less dilution during fundraising, and others. More companies entering the stock market will rebuild our economy. If you are thinking of transforming your company into a public one, opting for equity ?nancing and taking the plunge into the stock market, do not hesitate to call on one of our lawyers practicing in business law to guide and advise you in the process.

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  • Court upholds deductibility of carrying charges

    The Tax Court of Canada (the “Court”) recently upheld the deductibility of carrying charges incurred in connection with an issuance of shares.  In so doing, the court upheld the tax benefits arising from a common financing practice. In addition, the Court reiterated the principle in tax matters according to which, save in exceptional cases, the legal relationships established by one or more taxpayers must be respected. In this case1, Laurentian Bank (the “Bank”) issued shares from its share capital to the Caisse de dépôt et placement du Québec (“CDPQ”) and the Fonds de solidarité des travailleurs du Québec (“FSTQ”) totalling $120M, through a private placement.  In addition to assuming a portion of the costs incurred by CDPQ and FSTQ in connection with this issuance of shares, the Bank agreed to pay each of the investors, as professional fees for services rendered in connection therewith, an amount corresponding to 4% of the total amount of their investment.  The Canada Revenue Agency challenged the Bank’s deduction, over 5 years, of the total amount of $4.8M paid to CDPQ and FSTQ, in particular on the grounds that no services had been rendered to the Bank by the two investors and that the expense was unreasonable. The Court ruled in favour of the Bank and allowed it to deduct the amount of $4.8M in computing its income on the basis of paragraph 20(1)(e) of the Income Tax Act, namely, in 20% increments over five fiscal years. Not only did the Court recognize the merits of the Bank’s arguments as to the fact that it had incurred an expense for services obtained from the CDPQ and the FSTQ, but the Court also confirmed that the expense was reasonable under the circumstances. In this decision, the Court recognized the favourable tax consequences for an issuer of shares arising from a common practice in the field of financing through share issuance. It also appears that the reasons for the Court’s decision could be applied to other costs incurred in the context of financing activities and thus allow entities incurring such costs to obtain a significant tax advantage.   It is therefore to the advantage of corporations issuing shares or borrowing to carefully analyze and negotiate the financing agreements they are considering in order to maximize their tax benefits. Our taxation team can assist you in setting up a share issuance that is both successful and optimal from a tax standpoint.   Banque Laurentienne du Canada c. La Reine, 2020 CCI 73

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  • What solutions for Startups Affected by COVID‑19 in Their Search for Financing?

    The impact of COVID-19 is particularly strong on start-ups in need of short-term financing and venture capitalists, whose contribution is essential to support the growth of these companies and who must make investment decisions in a context of widespread uncertainty. Like others, we have noticed the slowdown in investment activity and that many start-ups are now finding it difficult to close rounds of financing or even get time or attention from potential investors. In this context of uncertainty, we advise entrepreneurs who anticipate the need to soon close a round of financing to consider the following items: Current investors First and foremost, it is vital to consider the rights of your business’s current investors, contained in corporate documents and agreements between the investors and the corporation, as they could impact your round of financing’s feasibility. For example, if a valuation was obtained a few months ago and it is presently impossible to find a new investor to offer to purchase the corporation’s shares at an equal or higher valuation, the consequences of proceeding “down round” will have to be considered. In some circumstances, the success of a new round of financing may even depend entirely on existing investors’ support and consent. It is also possible that, under certain conditions, existing investors may be willing to take a share of the risk faced by the corporation by participating in a new round of financing, thus eliminating the need of seeking funding from new investors. Lastly, especially if one of the current investors is a venture capital fund or an active investor, it is likely that the corporation has agreed to specific milestones with that investor that could add to the difficulty of operating the business during a pandemic (for example, aggressive sales or production growth targets). But it is possible that your investor will be understanding and accept to review these milestones and associated timelines, which could lead to a positive impact on the corporation’s burn rate and give it  more leeway to weather the crisis. In all cases, we recommend transparency between the corporation and its investors, adopting a “partnership approach” and, above all, not to try to hide the corporation’s situation in its communications with its investors. Potential investors If there is no other option than seeking funding from new financial partners, it will be crucial to know the current situation of any targeted potential investor. As the current pandemic situation affects everyone, understanding the constraints faced by a potential investor is key in order to optimize the search for financing and the pitch process.  For example, if the potential investor has a specific investment thesis or policy, the investor may be even more thesis-driven and show less flexibility than before. Conversely, the investment thesis may be undergoing a re-evaluation. In addition, many potential investors will be impacted by the type of clients they serve. For example, a fund manager whose clients are government institutions may still have as much capital to deploy in the current context as before Covid-19, unlike a fund manager whose clients are high-net-worth individuals who face uncertainty and liquidity problems themselves and put pressure on the fund manager to take a more conservative stance. So, more than ever, you need to target your approach and make sure your potential investor is available to enter into a transaction in the near future. Assistance programs The various levels of government and some Crown corporations have released several assistance programs. In the context of a funding round, Export Development Canada (“EDC”) and the Business Development Bank of Canada (“BDC”) both announced co-investment assistance programs to provide access to additional financing for start-ups that already have a certain level of support from private investors. These programs are a good opportunity for entrepreneurs who need to complete or initiate a round of financing, who are not eligible for certain other government assistance programs, and who are not generating enough cashflow to finance their activities through credit facilities on conditions that are viable for their business. The program announced by EDC proposes a co-investment by EDC of an amount equivalent to that considered in an eligible round of financing, up to a maximum of $5,000,000. As for the program announced by the BDC, the BDC Capital Bridge Financing Program also provides assistance in the form of co-investment in an amount equivalent to the amount the company receives from qualified investors: BDC will offer financing as convertible notes whose default terms include a 20% discount rate on the price per share of the next round of financing and a term of three years. BDC may, however, decide to deviate from these terms and invest under the same conditions as the investors leading the round of financing. The company receiving the investment must be Canadian and have raised $500,000 in external capital in the past. It must also have a proven business model and an existing customer base prior to the impact of COVID-19. The business must have been “specifically impacted by COVID-19.” Unlike some other government assistance programs, this one does not have a fixed scale relative to this criterion. Businesses can demonstrate how the current situation affects them through qualitative and quantitative indicators (e.g. disruptions in their supply or distribution chains, difficulties in getting paid). The important thing will be to show that the lack of cashflow and the difficulty of concluding a round of financing are related to the impact of COVID-19 and not to a situation inherent to the company. The round of financing for which co-investment is being sought must have started after February 1, 2020. The round of financing must be for a minimum amount of $250,000 (prior to investment by BDC) and the overall round of financing must ensure 18 months of runway before additional funding is required by the company. For example, a business with a monthly operational burn rate of $30,000 and $300,000 in financing would meet this criterion since (1) the round, prior to BDC investment, is over $250,000, and (2) the overall round of financing, including co-investment by BDC, would be $600,000 and would ensure 20 months of runway, based on its current burn rate. There are no fixed criteria for determining who is an “eligible investor.” We understand, however, that the investor must be a private firm that has demonstrated its capacity as a lead investor for the funding round in question its ability to conduct the due diligence process. The investor does not have to be Canadian but must be sufficiently known and credible in Canada. We consider this convertible note financing offer to have three main advantages in the current environment: It increases the total “post-financing” value of the business in the form of additional cash, and the size of the funding round without increasing the principal investor’s risk, thus making the investment more attractive. It avoids immediate valuation issues for the company, allowing the lead investor to maintain control over the valuation process through the funding round. It is relatively simple, quick and inexpensive, and should not make the transaction process more complicated or burdensom for the lead investor. In short, these co-investment-based assistance programs are appealing as they can be presented to an investor by a company with financing needs whose planned or ongoing funding round is currently at a standstill due to the situation created by COVID-19. The programs may also be interesting elements to consider for an investor who wishes to have a co-investor or who would like the round of financing to reach a certain threshold to ensure that the company being invested in has sufficient runway after the investment, especially in the current context where it is difficult to predict subsequent rounds of financing. However, the parties wishing to benefit from such programs will have to ensure that their situation meets each program’s criteria and that they evaluate the financing terms offered as part of the assistance program in the context of the transaction. Conclusion Start-ups currently in need of financing should first discuss with their existing investors to try to find room for manoeuvre and assess the possibility of quickly obtaining financing, part of which could come from one of the assistance programs available. In all cases, it will be necessary to measure the impact that additional funding from new investors could have on the rights and obligations that exist between the corporation and its current investors and to ensure that it does not trigger any particular rights or recourse or create ambiguities, contradictions or even events of default. For more information in this regard or to find out about other measures that could help your business, do not hesitate to contact the Lavery team. Our team is following current developments related to COVID-19 very closely in order to best support our clients and business partners. We invite you to visit the web page that centralizes all of the tools and information produced by our professionals.

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  • Cash flow management by investment fund managers: considerations when setting up subscription credit facilities

    Subscription credit facilities have become a popular tool to increase flexibility in managing an investment fund’s cash flows. However, these instruments are not always well understood by all parties. The popularity of these facilities has also led investors associations, such as the Institutional Limited Partners Association (“ILPA”), to raise concerns about the unrestricted use of such facilities. This article summarizes the main considerations to take into account when setting up subscription credit facilities and describes some of the best practices in this area, as recommended by the ILPA in June 2017. Background It has become customary for general partners (“GPs”)1 of private equity or venture capital funds to set up credit facilities for their funds. Most of the time, the main or sole purpose of these facilities is to provide bridge financing to fund portfolio transactions (and other expenses) in anticipation of future capital calls. A bridge facility simplifies the management of drawdown requests to limited partners (“LPs”) by allowing the GP to limit the number of those requests and schedule for them (often quarterly). The GP will then manage the fund’s cash flow between capital calls by drawing on the facility. However, such facilities create somewhat of a misalignment of the LPs’ and the GP’s interests. This misalignment results from the added ability provided to the GP by such facilities to delay capital calls and the fact that such a delay may indirectly impact the moment when the GP’s carried interest is paid and even perhaps the amount of such carried interest. The distribution waterfall of most investment funds is typically structured in such a way that LPs are favoured over the GP in the allocation of distributable cash until the cash distributed to the LPs provide them with an internal rate of return (“IRR”) equal to their hurdle rate.2 Given that the IRR is affected by the timing of cash inflows and outflows, LPs generally wish for the GP to call on their capital as soon as possible.3 Earlier cash inflows put pressure on the GP to cause the fund to make distributions earlier (or in greater amounts) to achieve the targeted IRR and allow the GP to receive its carried interest earlier. In the usual set up, the factors that can affect the IRR are mostly out of the hands of the GP (i.e. it can postpone the timing of the capital calls until it requires the funds to complete a portfolio investment or cover expenses, but no further). However, with a bridge facility, the GP benefits from the ability to delay capital calls, which indirectly favours a higher IRR and thus its chance of being entitled to a carried interest.4 Even if the initial objectives of implementing a subscription credit facility are not to influence the IRR or the payment of the carried interest, such an operation nevertheless allows the GP to control at least one of the factors impacting the IRR, and therefore slightly alter the initial equilibrium between the interests of the LPs and those of the GP set out in the fund’s limited partnership agreement (“LPA”). ILPA’s best practices In June 2017, the Institutional Limited Partners Association (the “ILPA”) released a document entitled “Subscription Lines of Credit and Alignment of Interests – Considerations and Best Practices for Limited and General Partners” (the “ILPA’s Best Practices”). The document generally highlights what the ILPA perceives to be adverse effects of a wide and unrestricted use of subscription lines of credit by investment funds as well as some of the best practices for dealing with such credit facilities. According to the ILPA and as noted above, one such adverse effect is a distortion in the application of the conditions related to the carried interest. The ILPA also demonstrates that the impact of the use of a line of credit on the IRR will be greater early in the life of the fund5 and describes two of the effects of this impact, i.e. the potential for the GP to receive a carried interest in cases where the unlevered IRR may not meet the preferred return hurdle and the associated clawback issues. Clawback issues arise when a GP is paid a carried interest during the life of the fund while calculations of the IRR later in the fund’s life reveal that no such carried interest should have been paid. Most funds’ LPAs contain clawback provisions forcing the GP to reimburse the carried interest previously received if paid unjustly based on the subsequent performance of the fund.6 However, depending on how the LPA was negotiated, clawback provisions may lose their grip where the cash has in fact been distributed by the GP to its shareholders. This is why LPAs sometimes provide for escrow provisions or personal guarantees in support of the clawback undertakings. To avoid this distortion and the risk of such issues arising, the ILPA recommends that the distribution provisions in LPAs specify that the date of cash inflow used to calculate the IRR should be the date at which the credit facility is drawn upon to make a portfolio investment or pay fund expenses rather than that when capital is called from the LPs to reimburse the amount drawn on the facility. Seeing how this recommendation is a departure from what is typically found in most investment funds’ LPAs, the ILPA is probably attempting here to influence change in existing standards. Typical restrictions found in LPAs LPAs generally limit the ability of a GP to use leverage in the management of the fund, including in the context of the aforementioned bridge facilities. Restrictions are typically imposed on the amount of indebtedness (and guarantees of indebtedness) that can be incurred by the fund. The potential exposure of the fund is typically capped by a percentage of the undrawn capital and/or of the fund’s aggregate capital (lenders also impose similar limits for reasons explained below).7 The LPAs also often restrict the purpose for which a credit facility can be used, limiting it to bridging portfolio investments or, depending on the type of fund, to providing letters of credit to facilitate the negotiation and acquisition process of portfolio investments or to hedging purposes. It is to be noted that those two other types of facilities are structured differently than facilities for bridging capital calls and our comments herein may not apply to such types of facilities. Another typical restriction found in LPAs is a requirement for the GP to reimburse the lender and complete the required cash calls within a predetermined time period (often around 90 days after drawing on the facility). The ILPA proposes that such period should be no longer than 180 days. This restriction is meant to reduce the distortion in the application of the conditions related to the carried interest described in the previous section. Considerations when negotiating with lenders One of the first concerns of a GP looking to set up a line of credit for its investment fund is to find a lender that has experience with those types of facilities. While most Canadian banks now have teams that are dedicated to this sector and have experience in negotiating these types of facilities, it may be worthwhile to have an in depth discussion with the lending team regarding their level of experience and knowledge: the structure of a subscription credit facility for investment funds differs greatly from that of a standard commercial credit facility. Here are a few of the particularities of those facilities. The borrowing base and the collateral Most facilities rely on a borrowing base, i.e. the mechanism used to determine the amount that can be borrowed by the fund under the facility. Such borrowing base is calculated using a percentage of the undrawn capital committed by eligible investors. The relevant percentage of the undrawn capital generally depends on the rating attributed by predetermined rating agencies to eligible investors. The parameters for the calculation of the borrowing base are therefore crucial and attention should be paid to how they are defined in the agreements governing the facility. As the borrowing base is typically limited to undrawn capital, the security should be in line with same, i.e. be limited to an assignment and pledge of the undrawn capital and of the rights of the GP to make capital calls. The assignment and pledge are sometimes coupled with a power of attorney granted to the lender, allowing it to make capital calls to investors on behalf of the GP following a default under the credit facility. In addition, the lender may request that a blocked account be set up and be subject to a security interest. The account will be used to receive the funds of investors following a capital call and the lender may trigger control over the account (or daily sweeps)8 following a default under the credit facility. The ILPA’s Best Practices recommend that lines of credit should be secured solely by LP commitments and not by the underlying assets of individual LPs or the invested assets of the fund. Based on our experience, this recommendation reflects the current market standards for such facilities. Granting security over the LPs’ assets (even if only on the units of the fund held by them) is generally not an option for a fund looking to raise capital from Canadian pension funds as they are usually prohibited from borrowing money (except in limited circumstances). Such LPs are thus often concerned that the creation of certain types of obligations on their part in favour of the lender may result in a violation of such prohibition. For this reason, they often impose restrictions (by way of side letters signed with the GP) on the ability of the GP to offer any such security on the pension funds’ interest.9 Granting security over the fund’s investment is generally not an option either as prohibitions on assignments, among other difficulties, are usually attached to the investments. Master-feeder and parallel fund structures Investment funds that use master-feeder structures or have parallel funds may need to invest additional time in making sure that such structures and their impacts on the fund and the lender are well understood by all parties involved in setting up the line of credit . The complexity of the issues raised by such structures increases with the level of complexity of the structure of the fund. For example, the question of whether the other funds in the structure should act as co-borrowers or guarantors will probably be raised by the lender, especially if the borrowing base includes undrawn capital of those other funds. However, if those assets are part of the borrowing base, one cannot avoid them being part of the collateral. A careful analysis of the terms of the LPAs as well as of the economic impact of decisions regarding the liability of the other funds (including whether such liability is joint or joint and several (solidary in Québec)) is crucial. The GP must ensure, as part of such analysis, that the rights granted to the lender under the facility will not result in some LPs being favoured over others in the investment fund structure. Such a situation, even if it was not intended by the GP and solely results from a lender exercising its rights, could potentially cause the GP to become liable to the disadvantaged LPs in certain situations. The GP must ensure, as part of such analysis, that the rights granted to the lender under the facility will not result in some LPs being favoured over others in the investment fund structure. These are only a few of the examples of the particularities associated with credit facilities tailored for investment funds. Further, a good knowledge by the lender of the standard structures used by investment funds will facilitate the due diligence process and the understanding of the various concerns or issues that may arise in the context of such facilities. For example, the GP typically wants to limit the documentation or requirements that a lender imposes on the LPs (to avoid unnecessary delays and costs but mostly because LPs often impose restrictions, in side letters signed with the GP, on documents they can be required to execute for the benefit of a lender). In many cases, the lender requires that investors be notified of the security given by the fund and the GP on the account or claim that constitutes their undrawn capital. The lender may also request, instead of a mere notice, that the investors acknowledge and acquiesce to the lender’s security and its rights in case of a default under the credit facility. In some cases, the lender may also be justified in obtaining confirmations from investors as to the amount of their undrawn capital. Parties should be well aware of the various consequences of such requests. In all cases, in order to simplify negotiations and structuring of credit facilities, the GP should also have initially ensured that it has sufficient flexibility in the fund’s LPA and in the various side letters it entered into with LPs to avoid either amending the LPA or seeking consents from the LPs. Reporting to LPs Notwithstanding the foregoing, subscription credit facilities remain an effective fund management tool. As such, restrictions imposed by LPs should aim to ensure that such facilities are used by the GP in an effective and appropriate manner (and that rights granted to the lender do not overly expose LPs). One important concern for LPs, however, should be to ensure that the GP’s reporting on the use of the facility is adequate. GPs should also be forthcoming in that regard. The ILPA’s Best Practices recommend that detailed quarterly reports be provided to LPs as to the following information: the number of days outstanding for each drawdown, the current use of the proceeds of the lines of credit, the net IRR with and without the use of the credit facility, the terms of the credit facility (term, upfront fee, standby fees, etc.) and costs to the fund (interest and fees). They also suggest that advisory committees include discussing the lines of credit as part of the meetings’ agenda to allow investors sitting on such committees to assess whether the terms of the facilities are considered consistent with “market” practices. The ILPA also proposes that detailed information on the terms of the facilities be disclosed to LPs, including, for example, terms that may introduce additional risks to the fund (e.g. any provision providing lender discretion over management decisions, or providing exposure beyond the amount of unfunded commitments). GPs should also ensure that the right to use such credit facilities is well described in the offering or private placement memorandum distributed to investors. Conclusion Subscription credit facilities for investment funds must be tailored to this very specific industry. Applying the principles of traditional lending to such facilities will result in the inadequacy of the facility and will not serve any party’s interest. For all parties involved, one essential rule remains: the economics of a fund and the mechanisms of the facility must be well understood by all so that the credit agreement, the LPA and the side letters are aligned and operate without conflicts. What you want in the end is a well-oiled machine.   Most private equity and venture capital funds are structured as limited partnerships whereby the manager is acting as general partner of the fund. For more information on the method of determination of the distribution waterfall, see our article entitled “Private equity fund economics in Canada: an overview of the essentials” published in December 2014 in the Lavery Capital newsletter No. 3. In addition, given that LPs must ensure that their capital is readily available to answer cash calls, such capital would generally produce low returns (or no returns at all). This is one more reason why LPs prefer to have their capital used by the fund manager as early as possible to generate returns. This is also why GPs would never simply call the capital of LPs regularly in advance in anticipation of future portfolio investments solely to simplify the management of drawdown requests. We refer you to the ILPA’s Best Practices for the financial demonstrations. Some LPAs will provide for a single clawback mechanism triggered at the time of the dissolution of the fund, while others will also provide for an interim clawback mechanism after a certain number of years. The ILPA’s Best Practices recommend that the maximum amount that can be drawn on a facility should equal a maximum percentage of the uncalled capital rather than being based on the fund’s aggregate committed capital. The terms and conditions of a blocked account agreement may vary but will ultimately give the lender control over the funds deposited in the account in case of a default under the credit facility. For more information on restrictions applying to pension funds, see our article entitled “Pension Plans and their investment rules: investing in alternative investment funds in full compliance” published in October 2016 Lavery Capital newsletter No. 12. For the same reason, Canadian pension funds will sometimes want to restrict the ability of the GP to grant the lender rights allowing it to require reimbursement of the facility directly from the LPs.

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  • Managing potential conflicts of interest in investment funds

    The high level of information asymmetry between investment fund managers and their investors1 can give rise to significant conflicts of interest which must be adequately managed. This article discusses the main conflicts of interest encountered in standard private equity, venture capital and hedge fund structures and how to mitigate or prevent them. The idea that conflicts of interest must be adequately managed is not a novel one. However, since 2015, this concern has come to the forefront of regulatory reviews by the United States Securities and Exchange Commission (the “SEC”)2 and has been an important focus in many investors’ operational due diligence in Canada and the U.S.3 The concerns arise mainly from inherent deficiencies in private equity, venture capital and hedge fund structures which entail an asymmetry of information between managers and investors and involve inherent conflicts of interest, including those resulting from the compensation of the managers in most of these funds as more fully described below. Common conflict of interest situations Fee structure Compensation arrangements in investment funds can lead to numerous inherent conflicts of interest. While most private equity, venture capital and hedge funds provide for a carried interest or performance fee, it remains that a significant portion of managers’ compensation comes from management fees charged to the fund. Those management fees are intended to compensate the manager for internal overhead costs incurred in its day-to-day operations and are not meant to be a source of profit. However, when a manager plays an active role in managing the assets of the funds (as is often the case with private equity and venture capital funds), those management fees typically do not cover all the overhead incurred in connection with the active management of those assets (for example, as a result of the need to hire additional staff to monitor a portfolio company). In this type of situation, the manager will often seek alternative forms of compensation by charging additional fees or expenses to the investment funds or the portfolio companies in which the funds invest. These fees can be in the form of an asset management fee or a negotiation fee charged in connection with securing a portfolio investment or for the day-to-day management of a portfolio investment. It can also be in the form of compensation paid directly to the principals of the manager acting as officers or directors of such portfolio companies. Although these types of compensation are not problematic in and of themselves, they create an inherent conflict of interest since the additional fees are an expense assumed directly or indirectly by the fund and at the same time constitute a source of revenue for the manager or its principals. As a result, and since any such fees or expenses decrease the overall asset value of the funds, it is imperative that these fees and situations be adequately disclosed to investors (the disclosure must describe not only the type or nature of the fee but also how it will be calculatedand has been an important focus in many investors’ operational due diligence in Canada and the U.S.4). The timing of such disclosure is important; investors must be aware at the time of their commitment to the fund, that this type of fee could be charged to the fund or its portfolio investments by the manager or its affiliates or principals and has been an important focus in many investors’ operational due diligence in Canada and the U.S.5. Disclosure made during the life of the fund (for example, when the fee is actually paid) would not be considered sufficient or adequate. An example of the foregoing is the situation that resulted in Blackstone Management Partners (“Blackstone”) being forced to pay a civil monetary penalty in 2015 for failing to disclose that it was entitled to accelerate the payment of future monitoring fees charged to the portfolio companies of its funds upon termination of the monitoring agreements it had signed with those portfolio companies6. Blackstone effectively terminated the monitoring agreements upon the private sale or initial public offering of the portfolio companies and then accelerated the payment of the future monitoring fees in accordance with the terms of the agreements. It must be highlighted that Blackstone had disclosed to investors at the time of their investment that it could receive monitoring fees from portfolio companies held by the funds it advised and disclosed the amount of the accelerated monitoring fees during the life of the funds. However, the SEC held that Blackstone had breached the U.S. Investment Advisers Act of 1940 by failing to disclose to the funds’ limited partners prior to their capital commitment that it could accelerate future monitoring fees once the monitoring agreements ended. This decision highlights the importance of not only disclosing the potential fees and expenses to be borne by investors and the funds, but also any circumstances which might lead to an increase or decrease in their amount. The Blackstone case clearly shows the importance of having sufficiently detailed disclosure in the private placement or offering memorandum (“PPM”) (or other disclosure document) provided to investors when they subscribe to the fund7. Such disclosure should include, for example, a statement that the principals of a venture capital fund could receive shares or fees to sit on the board of directors of start-ups in which the fund invests. Hedge fund managers should carefully disclose any side arrangement with a portfolio or sub-portfolio adviser, broker-dealer8 or custodian (including, in particular, referral or soft dollar arrangements). Managers that use a master-feeder investment fund structure should ensure that the disclosure clearly indicates how the fees and expenses incurred for the benefit of different funds in the structure will be allocated among these funds. These are only a few examples of the types of disclosure that should be provided to investors as part of their pre-investment due diligence. In addition to such disclosure made at the time of subscription, managers should also ensure that the quarterly and annual reports provided to investors are transparent regarding the compensation compensation directly or indirectly received by the manager, its affiliates and principals. The Institutional Limited Partners Association (the “ILPA”) provides a template of the disclosure to be included in quarterly reports as part of its “Reporting Best Practices”9, which managers can use to ensure an adequate level of reporting. Investment funds subject to Regulation 81-106 respecting Investment Fund Continuous Disclosure10 (“NI 81-106”)11 should also refer to the rules in that Regulation and in particular section 2.5 of Form 81-106F1, Contents of Annual and Interim Management Report of Fund Performance (MRFP), which states that any commission, spread or other fee paid by the investment fund to any related party12 in connection with a portfolio transaction must be discussed under the heading “Related Party Transactions”. Regardless the level of disclosure provided in the PPM or in quarterly reporting, managers should also always ensure that the funds’ organizational documents explicitly authorize them to charge the fees (or other forms of compensation) that are being charged directly or indirectly to the funds. Furthermore, notwithstanding the existing disclosure requirements, the Canadian Securities Administrators also provide that registered managers should consider whether any particular benefits, compensation or remuneration practices are inconsistent with their obligations to clients13. Transactions involving multiple funds managed by a single manager Another typical conflict of interest is the transfer, as part of the liquidation process of a private equity or venture capital fund, of the interest the fund held in certain portfolio companies to a follow-on fund. Such transfers occur when the manager was unable to find a successful exit for a portfolio company but considers that the investment is performing sufficiently well to justify transferring it to a follow-on fund. These situations lead to an inherent conflict of interests since the fund manager will effectively be negotiating on both sides of the table with respect to the sale of such investment between the funds as it manages both the selling fund that controls the portfolio company and the follow-on fund purchasing the investment in the portfolio company. The manager can be incentivized to benefit the selling fund to maximize its carried interest or, depending on how the selling fund has been performing, might be tempted instead to use the portfolio company as an attractive seed asset for its follow-on fund. Since the manager is negotiating with itself, investors could be concerned that the transaction will not occur at a fair market value. This can adversely impact either the investors of the selling fund or those of the follow-on fund as some limited partners of a previous fund will often invest in the follow-on fund, but typically not all of them. The favored way to manage such conflicts of interest is by stating in the funds’ organizational documents that if a transaction occurs among funds managed by the fund manager, the manager will seek a formal valuation of the portfolio companies being transferred from an independent third party appraiser or will submit the pricing terms and conditions of the transaction for approval to the investors or to the fund’s advisory committee. The organizational documents could also provide that the investors or the fund’s advisory committee can be entitled to require an independent third party valuation if they so wish. Funds with overlapping investment periods and investment policies create another situation in which a manager can be incentivized to favour one or more funds it manages over others. A manager finding itself in this situation will have to choose which funds will invest in a specific opportunity and in what proportion. Again, the manager could be tempted to favour certain funds over others depending on how they have been performing or according to their compensation structure. The rules set forth in the organizational documents of private equity and venture capital funds typically prohibit their managers from managing simultaneous competing14. funds in order to avoid such conflicts of interest, often with an exception allowing the manager to create a follow-on fund (with a similar or overlapping investment policy) once a certain percentage of the undrawn capital commitments of the previous fund have been invested (or reserved for follow-on investments and expenses). The best way for investors to protect themselves against the inherent conflict of interest arising from such a situation is to provide in the fund’s organizational documents or in side letters that the manager is required to cause both funds to make parallel investments during any such period based on the amount of each fund’s respective undrawn capital commitment. Contrary to private equity and venture capital fund managers, hedge fund managers typically are not prevented from managing competing funds and often simultaneously manage various funds with investment policies that overlap in certain situations (and may also manage other clients’ accounts under a discretionary mandate). These managers should adopt a clear policy to determine how they will allocate investment opportunities among their funds. The policy should be sufficiently detailed to allow an investor to determine whether the terms of the policy have been met with respect to a given investment. Preferably, the policy should not simply state that the manager will allocate trades in a fair and equitable manner in light of the investment objectives and strategies of the funds and other factors. The content of the policy should be adequately described to investors in the PPM given to them when they subscribe. The PPM should also clearly describe that such a conflict of interest could arise and how the manager will deal with it. Conclusion While the above describes some of the more commonly encountered conflicts of interests, the diversity of such situations should not be underestimated. For example, different “related-party” transactions “Not all conflicts of interests are problematic and need to be addressed.” can occur during the life of a fund. Both the manager and investors have an incentive to ensure that the organizational and disclosure documents of the funds clearly define what types of transactions they will consider to be “related-party transactions” and how these transactions will be handled and reviewed by the managers and/or the advisory committee15. Adequate and detailed disclosure will make clear to the manager which situations fall within the scope of “relatedparty transactions” and are thus subject to the conflict of interest rules established by the manager. In its reporting template, the ILPA proposes a definition of “related party”16 which can be used by managers and investors as a guideline to determine which situations should be covered. On the other hand, investors must understand that not all conflicts of interests are problematic and need to be addressed. There is a certain level of misalignment between the manager’s and the investors’ respective interests in a fund17 and not all of it can be managed in a cost-efficient manner; meaning that it is preferable for investors to accept that managerial actions may conflict with their best interests rather than seeking a perfect alignment of the manager’s interests with their own or trying to give to the advisory committee a power of oversight over any type of misalignment. Hence, all parties involved should take a balanced approach in negotiating the conflict of interest provisions of a fund’s limited partnership agreement or a side letter between the manager and an investor and pinpoint specific situations in which the advisory committee should be consulted or approve a related-party transaction.   See SAHLMAN, William A. (1990). The Structure and Governance of Venture-Capital Organizations. Journal of Financial Economics, Vol 27, pp. 473-521 regarding the issue of information asymmetry in investment funds. Securities and Exchange Commission speech – Julie M. Riewe, Co-Chief, Asset Management Unit, Division of Enforcement, “Conflicts, conflicts everywhere”, February 26, 2015. This article cites certain regulations and policy statements of the Canadian Securities Administrators(« CSA ») and certain cases litigated by the SEC in the United States. Although many Canadian private equity or venture capital funds and their managers are not subject to regulatory oversight by the CSA and are therefore not governed by these regulations or case law, the guidelines developed by the CSA and the extensive jurisprudence developed by the SEC could potentially support a lawsuit brought by investors in Canada against unregistered managers for breach of fiduciary duty based on the Civil Code of Québec, , in Québec, the organizational documents of the funds, or the securities legislation of certain provinces providing for a statutory right of rescission or damages for misrepresentations in PPMs. The standards discussed in this article should therefore be relevant and should also be used as guidance for Canadian managers not registered with a Canadian securities regulator. In the case of a fee based on an amount of assets under management, for example, the disclosure should clarify how those assets are valuated See Section 13.4 of the Policy Statement to Regulation 31-103 respecting Registration Requirements, Exemptions and Ongoing Registrant Obligations (“Policy Statement 31-103”) which states: “Registered firms and their representatives should disclose conflicts of interest to their clients before or at the time they recommend the transaction or provide the service that gives rise to the conflict.” SEC, Litigation, Release No. 4219, 2015. Policy Statement 31-103 states that the disclosure must “be prominent, specific, clear and meaningful to the client, and explain the conflict of interest and how it could affect the service the client is being offered”. See in particular the requirements set forth in Regulation 23-102 respecting Use of Client Brokerage Commissions and the related policy statement. Reminder: A registered manager has a “best execution” obligation, i.e. it must find the most advantageous trading execution terms reasonably available under the circumstances when selecting a broker-dealer for trades effected on behalf of the fund, as prescribed by Regulation 23-101 respecting Trading Rules. ILPA Best Pracices. See more particularly footnotes 4 and 5 of the sample report attached to the Quarterly Reporting Standards, Version 1.1 of the ILPA (originally released in October 2011 and revised in September 2016). Regulation 81-106 respecting Investment Fund Continuous Disclosure in Québec. NI 81-106 applies to investment funds (as defined in the Securities Act (Québec)) that are reporting issuers. For more information on the definition of “investment funds” in the Securities Act (Québec), see our article entitled “Registration Requirements of Venture Capital and Private Equity Fund Managers in Canada: A Favourable Regulatory Framework” published in May 2014 in the Lavery Capital newsletter. NI 81-106 refers to the Canadian Institute of Chartered Accountants Handbook with respect to the notion of “related party”. See Section 13.4 of Policy Statement 31-103 under the “Compensation Practices” section. See also the “Compensation-related conflicts of interest” section in the Investment Industry Regulatory Organization of Canada (IIROC) Notice 12-0108. In this article, the term “competing funds” simply refers to funds that are authorized to invest in the same opportunities and can therefore be considered to be competing with each other with respect to certain types of investment opportunities. The requirement to submit a related party transaction to the advisory committee is typically found in investment funds raising capital from institutional investors, not in retail-type funds See the “Related Party Definition” tab of the ILPA Reporting Template (Version 1.1 published in January 2016). For example, the carried interest compensation structure typically found in many funds can give the manager an incentive to make riskier or more speculative investments than what would normally be in the best interests of the fund’s investors in order to generate greater compensation.

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  • Substantial upcoming tax impact on investment funds’ management compensation

    On September 8, 2017, the Minister of Finance introduced unexpected legislative and regulatory proposals regarding partnership distributions to a general partner, which will now be subject to GST/HST. On the other hand, the Québec government has yet to propose similar changes, but we believe it will follow suit, if the federal government adopts such rules. Under the current federal and provincial (Québec) tax regimes, a general partner carrying on activities (such as management or administration) in its capacity as a general partner is generally not considered to be making a supply to the limited partnership, provided such activities are made in the normal course of the partnership’s activities. As such, no GST/HST is applied to distributions made by the partnership to the general partner for such activities. Under the proposed rules, a new tax concept known as an “Investment Limited Partnership” will be introduced into the law. In general terms, a limited partnership will be described as an investment limited partnership if its primary purpose is to invest funds in property consisting primarily of financial instruments, and if it is represented or promoted as a hedge fund, mutual fund, private equity fund, venture capital fund, or other similar collective investment vehicle. For example, this could include limited partnerships in tiered investment fund structures such as master-feeder funds or funds-of-funds. If a limited partnership were recognized as an investment limited partnership, as described above, even if the general partner provides the management or administrative service to the partnership pursuant to its obligations as a partner of the partnership, the provision of the service would be deemed not to be done by the general partner as a member of the investment limited partnership, and the supply of such service would be deemed to have been made otherwise than in the course of the investment limited partnership’s activities. Therefore, certain limited partnership distributions which are paid or became payable to general partners after September 7, 2017 may now be subject to GST/HST, and the limited partnership will normally not be able to claim input tax credits on such distributions. The Minister of Finance will be receiving comments on the proposed rules until October 10, 2017. We are currently studying the new rules in greater detail and recommend that you contact us to discuss potential ways to reduce their negative impact on your structure.

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  • Latest developments in the Canadian infrastructure market / The privatization of Canadian airports: Why, how and what is at stake? / Canada Infrastructure Bank Act: highlights

    TABLE OF CONTENTS Latest developments in the Canadian infrastructure market Ontario introduces a balanced budget which includes $30 billion in infrastructure investments Nova Scotia introduces its second balanced budget and increases investments in highways New LNG production capacity in Montréal resulting from a strategic partnership between Gaz Métro and Investissement Québec SNC-Lavalin purchases British engineering firm WS Atkins The Canadian parliament introduces a bill authorizing the establishment of the Canada Infrastructure Bank The Canadian government launches the process for recruiting the management team of the Canada Infrastructure Bank . Rumours concerning the sale of the Toronto Pearson airport intensify Waterloo launches a call for tenders for a PPP transit centre Infrastructure Ontario issues request for qualification for the Rutherford Station project The AMT grants a contract to Chinese firm CRRC . The U.S. transport Secretary, Elaine Chao, unveils the Trump Administration’s infrastructure plan Call for financial proposals for the Québec Nicolas-Riou community wind project Pattern and Samsung close the financing of the North Kent Wind project Metrolinx adds Alstom as supplier for the light-rail project in the Toronto area Brookfield to launch a new infrastructure mega fund in 2018 Concert Infrastructure Fund closes its fourth round of funding Ontario closes its second offering of Hydro One shares. Blackstone lance un fonds d’infrastructures de 40 G$ US Offshore wind projects to launch soon in Canada? Governments of Canada and Nunavut announce funding for 9 community infrastructure projects benefitting 19 communities . Innergex completes the acquisition of three wind projects in France The privatization of Canadian airports: Why, how and what is at stake? Canada Infrastructure Bank Act: highlights   Latest developments in the Canadian infrastructure market Ontario introduces a balanced budget which includes $30 billion in infrastructure investments The government of Ontario introduced a balanced budget for 2017, which increases by $30 billion the investments pertaining to the 13-year infrastructure plan. The most significant investments relate to transportation projects across the province, with a focus on public transport. Major infrastructure investments totalling $156 billion over the next decade include: $56 billion for public transport; $26 billion for highways; in excess of $20 billion for hospitals, including $9 billion for the construction of new major hospital projects; nearly $16 billion in capital grants for school boards. The new public transit systems previously announced will be built using Ontario’s Alternative Financing and Procurement (“AFP”) approach, including: Eglinton Crosstown LRT, Finch West LRT, Hamilton LRT, Hurontario LRT (Mississauga), ION Stage 1 LRT (Waterloo), Confederation Line (Ottawa), Ottawa LRT Phase 2, York Viva (vivaNext), and several GO stations. Furthermore, design and planning work is currently underway for operating a new high-speed rail system running from Toronto to Windsor. Lastly, some road projects that use the AFP approach are at various stages of completion. They include Highway 401 expansion to Regional Road 25, Highway 407 East Phase 2 (under construction); and Highway 427 expansion (under construction). Nova Scotia introduces its second balanced budget and increases investments in highways The government of Nova Scotia introduced its second consecutive balanced budget which includes a $136.2 million surplus. The 2017 budget includes a supplementary $390 million investment over the next seven years to twin three highway segments in the province. The highway projects are as follows: twinning the 38 km section of Highway 104 from Sutherlands River to Antigonish; twinning the 22 km section of Highway 103 from Tantallon to Hubbards; twinning the 9.5 km section of Highway 101 from Three Mile Plains to Falmouth, including the Windsor causeway; construction of the divided Burnside Expressway. No new toll will be implemented to finance these projects. The tolls on Highway 104 (Cobequid Pass) will be removed. The budget also reaffirmed the undertaking to redevelop the QEII Health Sciences Centre, possibly on a public-private partnership (“PPP”). basis. Nova Scotia has two other operational PPP projects: the Central Nova Scotia Correctional Facility and the East Coast Forensic Hospital. New LNG production capacity in Montréal resulting from a strategic partnership between Gaz Métro and Investissement Québec On April 24, 2017, Sophie Brochu, President and CEO of Gaz Métro, and Pierre Gabriel Côté, President and CEO of Investissement Québec announced that the new liquefied natural gas (“LNG”) production capacity of Gaz Métro GNL, a subsidiary of Gaz Métro and Investissement Québec, is now available at the Gaz Métro liquefaction plant located in Montréal.. Announced in September 2014, the project aimed to equip the plant with new loading facilities and a new liquefaction train that would triple the total annual LNG production and deliveries. The Gaz Métro liquefaction plant — the only one of its kind in Eastern Canada — now boasts a total annual production capacity of over nine billion cubic feet of LNG. It is thus able to meet the growing demand from a variety of markets for LNG, a competitive and cleaner energy source than petroleum-based products The provision of LNG constitutes an advantage for all the companies that do not benefit from proximity to a pipeline network. It is worth noting that Gaz Métro LNG already supplies Stornoway’s Renard mine, the heavy trucks of several transportation companies such as Groupe Robert, Transport Jacques Auger and Transport YN.-Gonthier, and the ferry F.-A.-Gauthier operated by Société des traversiers du Québec. For its part, Groupe Desgagnés has also ordered four ships that can run on LNG. Lastly, ArcelorMittal has announced an LNG pilot project at its Port-Cartier pelletizing plant. The LNG comes from Gaz Métro’s liquefaction plant in the East of Montréal, in operation for 45 years. It is stored in the plant’s cryogenic tanks. The plant has two loading docks for filling tanker trucks, which supply refuelling stations or service customers directly. LNG can then be distributed to customers within a radius of over 1,000 km from the liquefaction, storage and regasification (LSR) plant or quickly vaporized and injected in the gas network to meet balancing needs during winter peaks. SNC-Lavalin purchases British engineering firm WS Atkins SNC-Lavalin completed the acquisition of British engineering firm WS Atkins for a consideration of $3.6 billion, $1.9 billion of which was financed by the Caisse de dépôt et placement du Québec (“CDPQ”). With this acquisition, the Québec engineering firm hopes to generate annual revenues of $12.1 billion. Founded in 1938, WS Atkins is a consulting firm specializing in design, engineering and project management which generated revenues of £1.86 billion in 2016. Based in the United Kingdom, the firm has 18,000 employees and maintains offices in Europe, North America, the Middle East and Asia. It is the largest engineering firm of the United Kingdom, the 4th largest specialized in engineering and architecture in Europe and one of the 10 firms most present in the Middle East and the U.S. Its clients include companies such as Airbus, BP, EDF, Rolls Royce and Hitachi as well as many governments, including England, the United States, Denmark and even China (China Harbourg Engineering). SNC-Lavalin completed the purchase of the entire share capital of the company for a cash consideration of $3.6 billion, that is, £20.80 per share, which gives WS Atkins an enterprise value of $4.2 billion. The $1.9 billion financing from CDPQ includes a private placement of $400 million in equity and a $1.5 billion loan secured by the shares and proceeds of tolls of SNC-Lavalin from Highway 407 in Toronto. The remainder of the financing will be obtained through $1.2 billion in warrants, a draw in the amount of £350 billion on its existing credit facility and a £350,000 unsecured term loan from a North American bank syndicate. SNC-Lavalin will henceforth have 53,000 employees worldwide (compared to its current workforce of 35,000 employees), which will make it one of the largest engineering firms in the world. The Québec multinational wishes to expand into Europe, where its market share has reached a ceiling of 5.3%. The Canadian parliament introduces a bill authorizing the establishment of the Canada Infrastructure Bank On April 11, 2017, the House of Commons proceeded with the first reading of Bill C-44 pertaining to the Canada Infrastructure Bank (“CIB”). The Bill establishes the Infrastructure Bank of Canada as a Crown corporation which will invest and seek to attract private sector investments in revenue-generating infrastructure projects in Canada. All bills must undergo three readings in the House. The House debates the bill on its second reading and votes on the third reading. If the House passes the bill, it is then sent to the Senate and undergoes a similar protocol. In order to come into force, the bill must be approved by both the House and the Senate. The Minister of Finance, Bill Morneau, declared in March that the CIB would become operational by late 2017. The Canadian government launches the process for recruiting the management team of the Canada Infrastructure Bank The Canadian government launched the process for recruiting the management team of the Canada Infrastructure Bank (“CIB”). In a press release dated May 8, 2017, the Canadian government mentioned that it would first choose a chairman of the board. The board of directors and CEO will be chosen later. The Government expects the CIB to be fully operational by late 2017. The Canada Infrastructure Bank will invest up to $35 billion in federal money in infrastructure projects as part of the Government’s 12-year, $180 billion investment plan. According to the Government’s press release, the head office of the CIB will be located in Toronto and the new institution should have Crown corporation status. The Bank will collaborate with provincial, territorial, municipal, aboriginal and private investment partners to encourage pension funds and other institutional investors to invest in revenue generating infrastructure projects. The Bill establishing the CIB is now at second reading in the House of Commons. Rumours concerning the sale of the Toronto Pearson airport intensify InfraAmericas reports some rumours – unconfirmed by Transport Canada – according to which the assets of the Toronto Pearson International Airport are up for sale. However, Canadian pension funds acquiring a minority interest would seem to be a more likely scenario It is to be noted that following the report of the federal Minister of Finance’s Advisory Council on Economic Growth, published in October 2016, which proposed the privatization of airports in the cities of Toronto, Vancouver, Montréal, Calgary, Edmonton, Ottawa, Winnipeg and Halifax, the federal government engaged Credit Suisse in 2016 to study the cost-benefit of privatizing Canada’s eight largest airports. The federal government has been analysing this possibility for over a year but has yet to announce its position on the issue. Waterloo launches a call for tenders for a PPP transit centre On April 28, the Region of Waterloo launched a call for tenders for establishing a new multi-modal transport hub in downtown Kitchener, in Ontario. The King Victoria Transit Hub infrastructure should be divided into two lots, the first one including a transit hall, 100 parking spaces, a public area and a transit area and the second one, GO and Via rail platforms located in the Metrolinx rail corridor Interested parties are required to submit their qualifications for the project no later than June 30, 2017. The municipality plans to announce its choice of up to three teams on August 31, 2017 Infrastructure Ontario issues request for qualification for the Rutherford Station project On May 2, 2017, Infrastructure Ontario (“IO”) issued a request for Qualification (“RFQ”) for selecting private sector promoters to design, build and finance the Rutherford Station project, which includes the expansion of the rail corridor and parking infrastructure at the facility. The project is part of the IO and Metrolinx Regional Express Rail joint project, which aims to improve transit infrastructure throughout the Greater Toronto and Hamilton areas. Other projects recently launched under this program include the Cooksville Station, Union Station and the Stouffville Station. The RFQ should be issued this fall. The RFQ is IO’s first PPP operation this year. According to the 2016 fall report of the Crown corporation, approximately nine PPPs should be entered into during calendar year 2017. The AMT grants a contract to Chinese firm CRRC The Agence métropolitaine de transport (“AMT”) opted to have Chinese company CRRC build 24 commuter train vehicles instead of Bombardier Transport. The Chinese state corporation has been making a breakthrough in North America since 2014, having won rolling stock contracts in Boston, Chicago and Philadelphia, for which Bombardier was also bidding. However, the AMT contract is CRRC’s first major contract in Canada. According to Les Affaires, CRRC proposed to build for $69 million the 24 two-story vehicles, for which the AMT had budgeted $103 million. CRRC likely benefitted from the decision of the AMT to lower from 25% to 15% the Canadian content requirement in order to attract more bidders. The first commuter train vehicles must be delivered to the AMT in 24 months, that is, in spring 2019. It is to be noted that in 2009, Zhuzhou Electric Locomotive, a subsidiary of CRRC, had wanted to participate in the call for tenders for the cars of the Montréal metro, which had been refused. The contract has finally been granted to a consortium formed by Bombardier and Alstom. The U.S. transport Secretary, Elaine Chao, unveils the Trump Administration’s infrastructure plan During various interventions, particularly in a May 15, 2017 speech at the U.S. Chamber of Commerce and on May 17 in a testimony before the U.S. Senate Committee on Environment and Public Works, the U.S. transport Secretary, Elaine Chao, declared that the Trump Administration intends to release its infrastructure plan in the next several weeks. Ms. Chao declared that the plan would concentrate on “principles” rather than on specific projects. The plan is expected to include $200 billion in direct federal funding, which would allow the raising of US$1 trillion (thousand billion) in investments in infrastructure over the next decade. She did not explain the process through which states could obtain federal funds, but noted that the Administration sought to associate public and private financings for future projects. The Secretary said that 16 different departments, including the Treasury, the Department of Labor and the Department of Defense are looking beyond the transportation sector to explore opportunities for private investment in energy, water and broadband Internet and even veterans hospitals. Although recognizing that there is no “one size fits all” solution to meet the infrastructure needs of the U.S., she declared that the authorization process required to be reformed for the Administration to carry out its plan. She particularly noted that the Federal Highway Administration established a working group whose mission is to explore means to streamline the process for approving infrastructure projects. “Private-public partnerships will be one of numerous financing options that the Administration would consider” said Elaine Chao. According to Ms. Chao, “It is not the location of the project that’s determinative in a VFM (Value for money) but the availability of economies of scale and opportunities for private sector innovation and efficiency”. In other words, she states that the issue is not whether projects must be financed by tolls but rather whether the potential for financial partnership between the federal government, the states, the local communities and the private sector would provide the taxpayers with better value than the conventional way of carrying out projects. Call for financial proposals for the Québec Nicolas-Riou community wind project EDF Énergies nouvelles (“EDF EN”) launched a call for financial proposals aimed at commercial banks and institutional investors for financing the Nicolas-Riou wind project in Québec. It must be noted that the Nicolas-Riou wind project is a community project carried out through a partnership between EDF EN Canada, the Bas-Saint-Laurent RCMs, the Maliseet of Viger First Nation and the Régie intermunicipale de l’énergie – Gaspésie-Îles-de-la-Madeleine. EDF EN Canada holds 50% of the project. Located in the Bas-Saint-Laurent region, on private and public lands, the Nicolas-Riou project will be comprised of 65 Vestas wind turbine generators for a total installed capacity of 224.25 MW. It will benefit from a 25-year power purchase agreement with Hydro-Québec. The approximate cost of the project is estimated to be $500 million. Nicolas-Riou is one of the three wind projects granted by Hydro-Québec as part of the December 18, 2013 450 MW community call for tenders. It is the eighth wind project obtained by EDF EN in Québec following the 2008, 2010 and 2013 calls for tenders. It is also the fourth project held by EDF EN in partnership with RCMs. The project is currently in the construction phase – entirely selffinanced by the sponsors – and the beginning of commercial operations is scheduled for December 2017. The financing sought will therefore only apply to the operations phase. The form of the financing sought is not specified as of yet: commercial bank debt, institutional long-term loan or hybrid structure, all options are on the table. Pattern and Samsung close the financing of the North Kent Wind project Pattern Development and Samsung closed on the $300 million financing for the 100 MW North Kent Wind project in Ontario in May 2017.  The syndicate of lenders include BMO, CIBC, KDB, KfW, the National Bank of Canada and Sumitomo Mitsui. According to the information published by InfraAmericas, the financing is of the construction plus 12 years type and bears interest at a rate of CDOR (Canadian Dollar Offered Rate) plus 162.5 base points. The project is currently in the construction phase, and operations should begin during the first quarter of 2018. North Kent was one of the renewable projects which Samsung carries out with the government of Ontario under the Green Energy Investment Agreement (“GEIA”). Metrolinx adds Alstom as a supplier for the light-rail project in the Toronto area In a press release dated May 12, 2017, Metrolinx indicated that it had determined that Alstom has the required competence for acting as an alternate supplier to provide light rail cars for the Eglinton LRT and Finch West LRT. Alstom has been contracted to supply 61 light rail vehicles at a price of approximately $529 million. It must be noted that Metrolinx and Bombardier are going through litigation respecting the delivery schedule of the vehicles. The dispute resolution process could take from 8 to 12 months and Metrolinx wanted to have an alternate solution in the event that Bombardier would be unable to fulfill its contractual obligations Eglinton LRT is a $5.3 billion project that should be commissioned in 2021. In 2010, Metrolinx had entered into a contract with Bombardier for the delivery of 182 vehicles, including 76 for Eglinton LRT and 23 for Finch West LRT. Alstom will build 17 vehicles for the Finch West LRT project and, if necessary, 44 for Eglinton LRT. If Alstom’s vehicles are not necessary for Eglinton LRT, they will be reassigned to the Hurontario LRT project. Brookfield to launch a new infrastructure mega-fund in 2018 According to available information, Brookfield Asset Management plans to launch a new infrastructure fund in 2018, which may exceed $20 billion according to some analysts. It must be noted that in July 2016, Brookfield closed the Brookfield Infrastructure Fund III (“BIF III”) at US$14 billion with commitments from more than 120 investors. BIP III would be currently over 45% deployed. The increasing size of infrastructure funds over the last few years reflects the growing interest in infrastructure assets worldwide. More investment opportunities may arise as the U.S. market is assessing how private capital can play a role in improving infrastructure assets such as airports, toll roads and bridges. The largest infrastructure fund raised to this day remains Global Infrastructure Partners III, which closed at US$15.8 billion in January 2017. Concert Infrastructure Fund closes its fourth round of funding On May 15, 2017, Vancouver-based Concert Infrastructure Fund announced the completion of a fourth round of funding for an amount of $150 million, entirely raised from existing shareholders. This new financing raises the total capital of the fund to $505 million. It must be noted that Concert Infrastructure Fund was launched in 2010 and mainly focuses on direct, long-term investments in Canadian infrastructure assets, with an emphasis on social infrastructure and public-private partnerships. The unitholders of the Fund include ten union pension funds. The Fund holds portfolio investments with a total value of $2.2 billion. Ontario closes its second offering of Hydro One shares According to an announcement dated May 17, Ontario closed a second offering of Hydro One shares and raised $2.79 billion. The province sold 120 million common shares at a price of $23.25 per share. Ontario now owns 49.4% of the common shares issued and outstanding of Hydro One. RBC Capital Markets and CIBC Capital Markets were the lead underwriters in the context of this transaction. The province expects to raise a total of approximately $9 billion by progressively selling up to 60% of Hydro One. The provincial government intends to use $4 billion from the proceeds to finance infrastructure projects through a fund named Trillium Trust. The balance of the proceeds, that is, $5 billion, would be used to repay the existing debt of Hydro One. It is to be noted that Ontario made its first sale of 12.1% of its shares of Hydro One on the public market in April 2016. Blackstone launches a US$40 billion infrastructure fund The Blackstone investment bank intends to take advantage of the Trump Administration’s infrastructure plan and will invest US$20 billion in a fund focused on infrastructure with the Public Investment Fund of Saudi Arabia (“PIF”). With a focus on the U.S. market, Blackstone and PIF wish to build a US$100 billion portfolio in equity and debt investments. Blackstone then intends to increase the capital of the fund by approximately $20 billion by raising this amount from other investors. Offshore wind projects to launch soon in Canada? Copenhagen Infrastructure II and Canadian developer Beothuk Energy have signed a joint venture agreement to carry out wind projects off Canadian coasts. The first project under development is the 180 MW St. George Bay project, located 18 km off the shore of Newfoundland. If the new joint venture succeeds in financing the project, it may become the first offshore wind project in Canada./p> The estimated value of the St. George Bay project during construction is $555 million. According to Beothuk Energy, its pricetag may double to $1.1 billion after commissioning. The sponsors expect to obtain regulatory approvals by the fourth quarter of 2017. A power purchase agreement is expected for 2018. Construction should begin in 2019. The project is expected to use 8 MW Siemens turbines. Other projects under development include Burgeo Banks (1,000 MW), Prince Edward Island (200 MW), New Brunswick (500 MW), St. Ann’s Bay (500 MW) and Yarmouth (1,000 MW). Governments of Canada and Nunavut announce funding for 9 community infrastructure projects benefitting 19 communities The governments of Canada and Nunavut will grant joint funding of over $230 million to nine infrastructure improvement projects across the territory. A total of 19 communities will benefit from these projects for the improvement of solid waste management and water and wastewater systems throughout the territory. Federal funding is provided through the Clean Water and Wastewater Fund (“CWWF”) and the Small Communities Fund (“SCF”). These projects are in addition to the CWWF projects announced in September 2016 as part of the bilateral agreement signed by Canada and Nunavut and the SCF projects announced in February 2016 and February 2017. Innergex completes the acquisition of three wind projects in France On May 24, 2017, Innergex Renewable Energy Inc. (TSX: INE) announced that it had completed the acquisition of three wind projects in France with a total aggregate installed capacity of 119.5 MW from Velocita Energy Developments (France) Limited (a subsidiary of Riverstone Holdings LLC). Innergex holds a 69.55% interest in these projects and Desjardins Group Pension Plan holds the remaining 30.45% On May 26, 2017, Innergex further announced that two of these wind farms, namely, Vaite (38.9 MW) and Rougemont-1 (36.1 MW), which were recently acquired, have begun commercial operation. All the power produced by these wind farms will be sold under fixed-price power purchase contracts entered into with Électricité de France (“EDF”) for an initial term of 15 years, which provide that part of the price will be adjusted annually based on inflation-related indexes. Following the commissioning of these two projects, Innergex now holds 12 operating wind farms in France, just over one year after its first acquisition.   The privatization of Canadian airports: Why, how and what is at stake? On October 20, 2016, the Advisory Council on Economic Growth published its report entitled “The path to prosperity - resetting Canada’s growth trajectory” in which it recommends the privatization of the Toronto, Vancouver, Montréal, Calgary, Edmonton, Ottawa, Winnipeg and Halifax airports. This proposal aims to ensure the financing necessary to meet the maintenance, repair and improvement needs of airport infrastructure within the next ten years. Other reports on the same subject, particularly that of the Institute for Governance of Private and Public Organizations (“IGOPP”), published in 2014 and entitled “The Governance of Canadian Airports”, acknowledge that the current status of airports and their capitalization method does not adequately meet their needs. We will therefore first review the objective of such a privatization, then the legal mechanism to achieve it and, lastly, the potential positive and negative impacts of such an operation. The objectives The main objective behind the privatization concept is the transfer, from the public sector to the private sector of the economic burden of maintaining and operating these infrastructures. Furthermore, the amounts raised by the government following the privatization process can be reinvested in other infrastructure projects, a principle commonly called “asset recycling”. In Canada, in a report dated February 7, 2017, the C.D. Howe Institute estimated that the potential proceeds from privatizing Canadian airports would be between $7 and $16 billion. However, privatizing also entails several risks if the anticipated economic results fail to materialize and that the private sector is struggling to maintain and operate these infrastructures. The legal and corporate status of airports in Canada Most airports in Canada, except some small regional airports, are managed by airport authorities (“AA”), which are not-for-profit organizations, without share capital, incorporated pursuant to Part II of the Canada Corporations Act 1.The AA are the tenants of airports lands and buildings pursuant to 60-year emphyteutic leases with a 20-year renewal option. In this way, the Canadian government remains the owner of the airports and the infrastructure thus acquired during the lease by the AAs must be transferred to the Government at the expiry of the lease for a symbolic consideration of one dollar. Pursuant to section 8 of the Airport Transfer (Miscellaneous Matters) Act 2,AAs do not pay income tax but pay rent to the Government and part of the municipal taxes 3. Possible means for privatization There are many degrees of privatization of an airport infrastructure. It may be a full privatization pursuant to which the private sector entirely replaces the public authority. It then owns and manages the infrastructure. Other structures may also be considered, under which the public authority retains ownership of the infrastructure while partnering with the private sector through a management contract, a concession or a joint venture. There are many possibilities. In Canada, airport privatization would first be achieved by the “corporatization” of the AA, namely, the addition of a share capital to increase their available liquidities. This “corporatization” could be made using one of the following methods, namely: (i) the federal government could pass a special law providing for the conversion of AAs into business corporations governed by the Canada Business Corporations Act 4,or (ii) it could pass a special law transferring the assets, debts and employees of the AA to a business corporation created in parallel. These modifications to the structure of AAs would also have consequences on the rights and interests currently held by some creditors pursuant to already incurred financial debts: particularly financial institutions and bond holders. For instance, under the Master Trust Indentures, which are agreements governing the bond financings entered into by some AAs, the holders of the outstanding bonds would be required to consent to this privatization by passing a special resolution. Whether the process involves changes in structure or the transfer of assets, it would modify the corporate status of the AAs and, accordingly, require creditor approval. Furthermore, respecting air regulations, Canada is subject to the international standards governing air transport. These standards are independent from the nature or control of the airports. In fact, whether public or private, airports are required to comply with specific policies under international agreements in respect of landing, overflight and clearance charges. These international requirements impose responsibilities on the Government, even where air infrastructures are privatized. The Government remains responsible even if it no longer owns the airports. This situation results in full or partial privatizations being governed by regulations. These regulations, which are mandatory to ensure compliance of the country with international standards, reduce the management freedom which a private corporation which owns an airport would otherwise have and accordingly, impact its business model and profitability. Economic issues The privatization of an airport requires an indepth economic analysis and a rigorous implementation process to ensure its viability. In this respect, the Chicago Midway Airport provides us with an example of a failed privatization attempt. This airport participated in a privatization pilot program, namely, the Airport Privatization Pilot Program. While the transaction was to become the U.S. standard in matters of privatization, it failed due to the capital markets breakdown following the financial crisis of 2008. The City of Chicago had, at the time, spent in excess of US$13 million in the privatization process and the bidder paid a US$126 million penalty. In 2013, after relaunching the call for tenders, the City of Chicago ended up withdrawing its candidacy for the privatization pilot program due to the lack of interest of the private sector. In an article published in 2006, entitled “Airport Privatization: Ownership Structures and Financial Performance of European Commercial Airports”, Hans-Arthur Vogel describes the challenge of privatization as follows: increase airport performance, while they no longer have the financial benefits associated to the moral backing of the public sector. He concludes that public-private partnership constitutes the structure which is most likely to ensure profitability. This conclusion is in line with the 2014 report of the Canada Minister of Transport entitled “Pathways: Connecting Canada’s Transportation System to the World – Tome 1” which promotes the implementation of protection against insolvency, concurrently with private sector investments. Conclusion The privatization of airports is an idea that has been around for a long time: many European airports operate under various private holding schemes. One example is the privatization of Heathrow airport in 1986 and that of the Frankfurt airport in 1997 or, more recently (October 2016), that of the Nice airport. Nevertheless, it is clear that the situation of Canadian airports is somewhat particular. The presence of an existing operational structure requires a two-step process: discarding the former structure and implementing a new one. Experiences elsewhere in the world in that respect will be very useful to Canadian authorities for making the decisions that are the most appropriate for the Canadian market.   Canada Infrastructure Bank Act : highlights On November 1, 2016, in the wake of the announcement by the Trudeau government of major infrastructure investments, Minister of Finance Bill Morneau announced the establishment of the new Canada Infrastructure Bank (“CIB” or the “Bank”), planned for the following year. In May 2017, the designated minister, namely, the Minister of Infrastructure, Amarjeet Sohi, ultimately selected Toronto for hosting the future Infrastructure Bank, despite the Couillard government’s sustained efforts to bring the Bank to Montréal. In this context, an analysis of Bill C-44 on the Canada Infrastructure Bank Act, at first reading, is relevant to understand the true mission of the Bank, its rules of governance, management and powers. Mission The primary mission of the Bank is to invest in infrastructure, particularly using innovative financial vehicles, but also to seek to attract investment from private sector investors and institutional investors in infrastructure projects in Canada and, more generally, to promote overall economic development and support the viability of the infrastructure sector across Canada. That mission first requires the Bank to receive and structure proposals for projects and negotiate with promoters. Secondly, the Bank must act as an expertise centre for infrastructure projects, which means that it will have to provide opinions to the government on projects, as well as collect and assess data on the state of infrastructure in Canada. Governance The Bank will have a board of directors composed of 8 to 12 directors, appointed by the minister, possibly after consulting the provinces. The directors will be appointed to hold office during pleasure for renewable 4-year terms. However, the chairperson is appointed with no specific term of office. The government may terminate the appointment of a director or the board may do so, subject to the government’s approval. Moreover, under this bill, the designated minister may set up committees partly composed of members of the board of the Bank to advise him or to whom he may delegate particular powers. Management and control of the Bank As most Crown corporations, the Infrastructure Bank must submit annually a corporate plan to the designated minister for the purpose of government approval. In the same manner, it must submit annually to the designated minister an operating budget and a capital budget for the next financial year. This budget must be approved by the Treasury Board, subject to the approval of the Minister of Finance. Powers The Bank has many powers in order to protect the investments it makes. The investments of the Bank may be made under several forms; it can invest in the share capital of a business, lend money to a business, acquire derivatives, acquire and hold a security interest or acquire or dispose of rights or interests in movable or immovable property or entities. However, the Bank cannot provide loan guarantees except where the guarantees are approved by the Minister of Finance. Furthermore, the Minister of Finance is particularly authorized to pay to the Bank amounts of not more than $35 billion in the aggregate, approve loan guarantees and make loans from the Bank’s treasury. Every five years thereafter, the designated minister must cause a review of the provisions and operation of the Canada Infrastructure Bank Act for this report to be then filed with each House of Parliament. The future Infrastructure Bank will therefore have extended powers to match its ambitions: ensuring the sustainability and renewal of infrastructure in Canada while stimulating economic growth.   RSC 1970, c C-32. S.C. 1992, c. 5. An act respecting Aéroports de Montréal, L.Q. 1991, ch. 106. R.S.C. 1985, c. C-44.

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

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  • CRS: Be ready for July 1st, 2017

    CRS entry into force: July 1st, 2017 The Common Reporting Standard (“CRS”) will impose new obligations on financial institutions, including investment funds, as of July 1st, 2017. These rules are an addition to the existing Foreign Account Tax Compliance Act (“FATCA”), which applies to Canadian investment funds. The entry into force of the CRS means that, as of 2018, at the time of reporting, any investment fund that does not comply with its due diligence and reporting obligations regarding a reportable account it maintains might be subject to penalties. New guides from the Canada Revenue Agency Guidance on the CRS Guidance on the FATCA Self-certification forms - for entities: English and French - for individuals: English and French The Canada Revenue Agency (“CRA”) recently published new guidance that aims to assist financial institutions in complying with the obligations under the FATCA and the CRS. Here is an overview of the new measures that will be put in place and of recent publications by the CRA. CRS Canada signed the Multilateral Competent Authority Agreement (“MCAA”) on automatic exchange of information on June 2nd, 2015. Through this agreement, Canada committed to implement the CRS. The purpose of the CRS is to make tax avoidance more complex for taxpayers. It advocates for international cooperation through the establishment of a system for the automatic transmission of tax information among the countries which adhere to it. In Canada, the implementation of this standard will be accomplished by way of an amendment to the Income Tax Act.1 This amendment will come into force on July 1st, 2017. In general terms, the CRS requires financial institutions to disclose certain information to the CRA regarding account holders or beneficial owners who are residents of foreign countries. The CRA will in turn transmit this information to the countries concerned and ensure that the taxes owed to these countries are paid. The CRS defines the due diligence procedures that must be put in place, the financial institutions that have to report, the different types of accounts to report, the taxpayers concerned, and the financial account information to be exchanged. The CRS draws significantly from the FATCA.2 Due diligence The due diligence procedure requires financial institutions, including investment funds, to identify reportable accounts by collecting information about account holders. The main objective of this procedure is to determine the tax residency of the account holders and their beneficial owners. Financial institutions are required to collect indicia linked to account holders and request account holders to self-certify their residence status. Any entity or individual who wishes to open an account after June 30th, 2017, and even before, will have to give this information to the investment fund in order to proceed with the opening of the account and the investment. Reporting Every financial institution, including every investment fund, will have to report to the CRA the required information on reportable accounts collected during the due diligence procedure. The reporting is done electronically. General information such as the name, address, foreign taxpayer identification number, jurisdiction, and birth date of the holder will be reported to the CRA if the account is classified as a reportable one. Institutions will also have to communicate the account balance, at the end of the year, and the payments made during the year. This information will be sent directly by the CRA to the tax authorities in the country of residence of the account holder or of the beneficial owners. New publications from the CRA On March 22nd, 2017, along with the presentation of the 2017 federal budget, the CRA released two new guidance documents, one on the CRS and one on the FATCA, intended for financial institutions. In addition to the guidance documents, the CRA also introduced new online self-certification form templates that can be used by financial institutions in order to ensure that they have obtained all the necessary information to comply with the standards. The use of these forms is not mandatory, but it is recommended by the CRA. Institutions that make the decision to continue using their own forms or the American W8 forms will need to ensure that they meet all their obligations and that their forms allow the collection of all necessary information and attestations from account holders. Income Tax Act, R.S.C. (1985), c. 1 (5th Supp.), section XIX. www.lavery.ca/en/publications, see our newsletter Lavery Capital, No. 4, April 2015.

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

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

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

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

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  • Changes to the Taxation of Switch Funds

    Effective January 1, 2017, new rules will govern the taxation of mutual fund corporations structured as “switch funds”. Investors switching between funds will no longer be able to do so without incurring taxable capital gains. This article summarizes the impact of such changes. Description of “switch funds” under the current regime In Canada, most mutual funds are structured as trusts and some are structured as corporations (referred to as “corporate class funds”). The mutual fund trust is comprised of a single fund in which investors receive units of the trust, while the corporate class fund can hold several funds. Each fund is structured as a different class of shares, giving investors access to different investment portfolios of the corporation. Under the corporate class structure, investors have the advantage of being able to switch between funds without incurring capital gains or losses. This is because the current rules deem switches between funds not to be a disposition of shares of the corporation, resulting in a tax deferral which is not available to investors of mutual fund trusts. Capital gains tax will be paid later upon the future disposition of the corporation’s shares. Impact of the 2016 Legislative Proposals Effective January 1st 2017, taxpayers switching between funds will be considered to have disposed of their original shares at fair market value and will therefore immediately be taxed on capital gains. However, the 2016 Legislative Proposals provide for the following two exemptions, allowing tax deferral in these specific cases: If the exchange or disposition occurs in the course of a transaction covered by section 86 of the Income Tax Act (“ITA”) or an amalgamation under section 87 ITA, a shareholder will be entitled to a tax deferral provided that: i) all shares of the particular class are exchanged, ii) the original and new shares derive their value in the same proportion from the same property, and iii) the exchange was strictly done for bona fide reasons and not to obtain a tax deferral; or If shares of a class of the mutual fund corporation are exchanged for shares of the same class, provided that: i) the original and new shares derive their value in the same proportion from the same property, and ii) that class is recognized under securities legislation as a single investment fund. The above-mentioned changes will be implemented as of January 1, 2017. Therefore, investors wishing to switch shares within a mutual fund corporation have until December 31, 2016 to benefit from the current tax deferral rules.

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