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Packed with valuable information, our publications help you stay in touch with the latest developments in the fields of law affecting you, whatever your sector of activity. Our professionals are committed to keeping you informed of breaking legal news through their analysis of recent judgments, amendments, laws, and regulations.

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  • Crypto asset works of art and non-fungible token (NFT) investments: Be careful!

    On March 11, 2021, Christie’s auction house made a landmark sale by auctioning off an entirely digital artwork by the artist Beeple, a $69 million transaction in Ether, a cryptocurrency.1 In doing so, the famous auction house put non-fungible tokens (“NFT”), the product of a decentralized blockchain, in the spotlight. While many extol the benefits of such crypto asset technology, there are also significant risks associated with it,2 requiring greater vigilance when dealing with any investment or transaction involving NFTs. What is an NFT? The distinction between fungible and non-fungible assets is not new. Prior to the invention of blockchain, the distinction was used to differentiate assets based on their availability, fungible assets being highly available and non-fungible assets, scarce. Thus, a fungible asset can easily be replaced by an equivalent asset with the same market value. The best example is money, whether it be coins, notes, deposit money or digital money, such as Bitcoin. On the contrary, a non-fungible asset is unique and irreplaceable. As such, works of art are non-fungible assets in that they are either unique or very few copies of them exist. Their value is a result of their authenticity and provenance, among other things. NFTs are crypto assets associated with blockchain technology that replicate the phenomenon of scarcity. Each NFT is associated with a unique identifier to ensure traceability. In addition to the art market, online, NFTs have been associated with the collection of virtual items, such as sports cards and other memorabilia and collectibles, including the first tweet ever written.3 NFTs can also be associated with tangible goods, in which case they can be used to track exchanges and transactions related to such goods. In 2019, Ernst & Young developed a system of unique digital identifiers for a client to track and manage its collection of fine wines.4 Many projects rely on cryptocurrencies, such as Ether, to create NFTs. This type of cryptocurrency is programmable and allows for metadata to be embedded through a code that becomes the key to tracking assets, such as works of art or other valuables. What are the risks associated with NFTs? Although many praise the benefits of NFTs, in particular the increased traceability of the origin of goods exchanged through digital transactions, it has become clear that the speculative bubble of the past few weeks has, contrary to expectations, resulted in new opportunities for fraud and abuse of the rights associated with works exchanged online. An unregulated market? While there is currently no legislative framework that specifically regulates crypto asset transactions, NFT buyers and sellers are still subject to the laws and regulations currently governing the distribution of financial products and services5, the securities laws6, the Money-Services Business Act7 and the tax laws8. Is an NFT a security? In January 2020, the Canadian Securities Administrators (CSA) identified crypto asset “commodities” as assets that may be subject to securities laws and regulations. Thus, platforms that manage and host NFTs on behalf of their users engage in activities that are governed by the laws that apply to securities trading, as long as they retain possession or control of NFTs. On the contrary, a platform will not be subject to regulatory oversight if: “the underlying crypto asset itself is not a security or derivative; and the contract or instrument for the purchase, sale or delivery of a crypto asset results in an obligation to make immediate delivery of the crypto asset, and is settled by the immediate delivery of the crypto asset to the Platform’s user according to the Platform’s typical commercial practice.”9 Fraud10 NFTs don’t protect collectors and investors from fraud and theft. Among the documented risks, there are fake websites robbing investors of their cryptocurrencies, thefts and/or disappearances of NFTs hosted on platforms, and copyright and trademark infringement. Theft and disappearance of NFT assets As some Nifty Gateway users unfortunately learned the hard way in late March, crypto asset platforms are not inherently immune to the hacking and theft of personal data associated with accounts, including credit card information. With the hacking of many Nifty Gateway accounts, some users have been robbed of their entire NFT collection.11 NFTs are designed to prevent a transaction that has been concluded between two parties from being reversed. Once the transfer of the NFT to another account has been initiated, the user, or a third party such as a bank, cannot reverse the transaction. Cybercrime targeting crypto assets is not in its infancy—similar schemes have been seen in thefts of the cryptocurrency Ether. Copyright infringement and theft of artwork images The use of NFTs makes it possible to identify three types of problems that could lead to property right and copyright infringement: It is possible to create more than one NFT for the same work of art or collectible, thus generating separate chains of ownership. NFTs can be created for works that already exist and are not owned by the person marketing them. There are no mechanisms to verify copyrights and property rights associated with transacted NFTs. This creates false chains of ownership. The authenticity of the original depends too heavily on URLs that are vulnerable and could eventually disappear.12 For the time being, these problems have yet to be addressed by both the various platforms and the other parties involved in NFT transactions, including art galleries. Thus, the risks are borne solely by the buyer. This situation calls for increased accountability for platforms and others involved in transactions. The authenticity of the NFTs traded must be verified, as should the identity of the parties involved in a transaction. Money laundering and proceeds of crime In September 2020, the Financial Action Task Force (FATF)13 published a report regarding the main risks associated with virtual assets and with platforms offering services relating to such virtual assets. In particular, FATF pointed out that money laundering and other types of illicit activity financing are facilitated by virtual assets, which are more conducive to rapid cross-border transactions in decentralized markets that are not regulated by national authorities;14 that is, the online marketplaces where cryptocurrencies and decentralized assets are traded on blockchains. Among other things, FATF pointed to the anonymity of the parties to transactions as a factor that increases risk. Considering all the risks associated with NFTs, we recommend taking the utmost precaution before investing in this category of crypto assets. In fact, on April 23, 2021, the Autorité des marchés financiers reiterated its warning about the “inordinately high risks” associated with investments involving cryptocurrencies and crypto assets.15 The best practices to implement prior to any transactions are: obtaining evidence identifying the party you are transacting with, if possible, safeguarding your crypto assets yourself, and checking with regulatory bodies to ensure that the platform on which the exchange will take place is compliant with applicable laws and regulations regarding the issuance of securities and derivatives. https://onlineonly.christies.com/s/beeple-first-5000-days/lots/2020 On April 23, 2021, the Autorité des marchés financiers reiterated its warnings about issuing tokens and investing in crypto assets. https://lautorite.qc.ca/en/general-public/media-centre/news/fiche-dactualites/amf-warns-about-the-risks-associated-with-crypto-assets https://www.reuters.com/article/us-twitter-dorsey-nft-idUSKBN2BE2KJ https://www.ey.com/en_gl/news/2019/08/ey-helps-wiv-technology-accelerate-fine-wine-investing-with-blockchain Act respecting the regulation of the financial sector, CQLR, c. E-6.1; Act respecting the distribution of financial products and services, CQLR, c. D-9.2. Securities Act, CQLR., c. V-1.1; see also the regulatory sandbox produced by the CSA: https://www.securities-administrators.ca/industry_resources.aspx?ID=1715&LangType=1033 CQLR, c. E-12.000001 https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/compliance/digital-currency/cryptocurrency-guide.html; https://www.revenuquebec.ca/en/fair-for-all/helping-you-meet-your-obligations/virtual-currency/reporting-virtual-currency-income/ https://lautorite.qc.ca/fileadmin/lautorite/reglementation/valeurs-mobilieres/0-avis-acvm-staff/2020/2020janv16-21-327-avis-acvm-en.pdf https://www.telegraph.co.uk/technology/2021/03/15/crypto-art-market-infiltrated-fakes-thieves-scammers/ https://www.coindesk.com/nifty-gateway-nft-hack-lessons; https://news.artnet.com/opinion/nifty-gateway-nft-hack-gray-market-1953549 https://blog.malwarebytes.com/explained/2021/03/nfts-explained-daylight-robbery-on-the-blockchain/ FATF is an independent international body that assesses the risks associated with money laundering and the financing of both terrorist activities and the proliferation of weapons of mass destruction. https://www.fatf-gafi.org/media/fatf/documents/recommendations/Virtual-Assets-Red-Flag-Indicators.pdf, p. 1. https://lautorite.qc.ca/en/general-public/media-centre/news/fiche-dactualites/amf-warns-about-the-risks-associated-with-crypto-assets

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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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  • Adoption of Bill 82: The insurer’s duty to defend can now be adjusted

    On Thursday, May 27, 2021, article 2503 of the Civil Code of Québec was amended as part of the adoption of Bill 82, titled An Act respecting mainly the implementation of certain provisions of the budget speech of 10 March 2020, which we had discussedin a publication last December. The added paragraph provides that in cases to be provided for by regulation, it will now be possible to depart from the insurer's duty to defend and the exclusive allocation of insurance coverage to injured third parties, within the meaning of article 2500 of the Civil Code of Quebec: 2503. The insurer is bound to take up the interest of any person entitled to the benefit of the insurance and assume his defence in any action brought against him. Legal costs and expenses resulting from actions against the insured, including those of the defence, and interest on the proceeds of the insurance are borne by the insurer over and above the proceeds of the insurance. However, the Government may, by regulation, determine categories of insurance contracts that may depart from those rules and from the rule set out in article 2500, as well as classes of insureds that may be covered by such contracts. The Government may also prescribe any standard applicable to those contracts  This legislative amendment confirms the government’s desire to allow contractual limits to certain rules of public order previously applicable to liability insurance for “categories of insurance contracts” and certain “classes of insureds” to be established by regulation. According to the May 12, 2021 debates, the government does not intend to include insurance contracts for individuals and small and medium-sized businesses in the categories covered. Instead, Finance Minister Éric Girard referred to public companies and insurance for directors and officers. This is what he said when the bill was presented for adoption last May 27: In terms of insurance, there is also a change in defence costs, which can be excluded from the insurer’s liability, because we had, in Quebec’s Civil Code, a distinction with the rest of Canada that put large public companies in Quebec at a disadvantage with respect to their competitors. That is to say that insurance premiums for directors and officers were much higher in Quebec, and now, with what we are introducing here, we will be able to make a difference and help our companies to grow and encourage head offices to be here. We will continue to closely monitor the presentation of the regulation that will specify the departures allowed under the new article 2503 of the Civil Code of Québec.

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  • The Superior Court of Québec rules on de facto spouses and the right to use a residence during legal proceedings

    In a judgment handed down on February 16, 2021, in a case involving former de facto spouses, the Superior Court dismissed an interlocutory injunction filed by the plaintiff seeking the eviction of the defendant from what had been their common residence. After having lived together in a de facto union for 32 years, the parties separated. The plaintiff, sole owner of the family residence, left the residence while the defendant continued to live there. The parties’ adult children were financially independent and no longer lived in the residence. After a few weeks of separation, the plaintiff decided to put the residence up for sale and asked the defendant to leave the residence in preparation for a buyer who had shown interest to take possession of it. The defendant refused, which led to the plaintiff’s application for an interlocutory injunction to evict the defendant from the residence. The defendant simultaneously instituted proceedings against the plaintiff for unjust enrichment. Prima facie case In the case of a mandatory interlocutory injunction, the burden of proof that the plaintiff must meet is what the Court describes as a “strong prima facie case.”01 One of the reasons for this is that there are few situations where a plaintiff will not obtain relief at a trial on the merits. TDhe significant consequences of a mandatory interlocutory injunction on the defendant do indeed require that the judge conduct such an analysis. In this regard, the plaintiff argued that he was the sole owner of the residence, as evidenced by the title. The defendant raised the issue of unjust enrichment resulting from the family obligations that she had had to bear, leaving her unable to work while the plaintiff was free to invest in his increasingly successful career. She also raised the financial arrangements that the parties had made during their life together. Defendant argued that since the beginning of their relationship, they had reached an agreement on the partition of accumulated assets. The defendant considered that the combining of the parties’ efforts and assets during their life together also applied to the residence from which the plaintiff was trying to evict her. According to the defendant, it had always been clear that she was a co-owner of the residence, although no title made mention of this. According to the Court, [translation] “the parties’ family arrangement as part of a long-term, traditional, de facto union”2 precluded the plaintiff’s claim to a unilateral right to make decisions about the family residence. Irreparable prejudice On the issue of irreparable prejudice, the Court found that it was not plausible that the residence would lose value simply because it could not be sold immediately. Moreover, should there be any prejudice, it could not be described as irreparable. On the contrary, for the Court, it was rather the defendant who would suffer serious and irreparable prejudice, and the sale of the house before the hearing on the merits would preclude her from proposing to acquire the plaintiff’s share in the house should the Court find that she was entitled to a portion of its value. Balance of convenience The Court concluded that the balance of convenience favoured the defendant. The only inconvenience for the plaintiff was a financial one. The inconvenience for the defendant, who has no assets or income and suffers from multiple sclerosis, would be much more serious, as she would have to move during winter, probably at a significant distance from the environment that she had become accustomed to living in for the past 30 years. Conclusion This Superior Court judgment dismissing the plaintiff’s injunction in the context of a de facto union will certainly be significant for the advancement of the rights of de facto spouses, as it allows a former de facto spouse without minor children to stay in a residence for which she has no title of ownership at the time of the interlocutory injunction. In 2013, the Supreme Court ruled on the much-publicized Eric and Lola case, and the majority opted to maintain the status quo; that is, no right to obtain support and no right to the partitioning of assets that a de facto spouse does not own.3 However, many de facto spouses may find themselves in precarious situations after a separation. What Laroche c. Couillard teaches is how important agreements made during de facto unions are, and that such agreements are valid even if the relationship ends. This decision on interlocutory injunction will certainly be useful for other former de facto spouses who find themselves in a similar situation after their separation. The residence that de facto spouses live in during their life together is often a substantial asset, and protecting it is advantageous. Thus, consulting a family law lawyer can help avoid ambiguous situations at the end of a relationship and protect the rights of the parties beforehand. Lavery’s Family, Estate and Personal Law team is at your disposal to assist you in your projects and in finding solutions to protect your rights.  We would be happy to discuss our legal service offerings with you to help you determine which one is best for you. R. v. Canadian Broadcasting Corp.,2018 SCC 5, para.  15. Laroche c. Couillard, 200-17-031680-200, February 16, 2021, para. 21. Quebec (Attorney General) v. A., 2013 SCC 5.; Caroline Harnois, “Eric and Lola: The Supreme Court rules on the rights of de facto spouses in Quebec” (2013), Lavery Lawyers – Publications

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  • Accelerated trademark examination – Canada

    Good News from the Canadian Intellectual Property Office! CIPO is taking measures to allow expedited examination of trademark applications in the following cases: Upcoming or current court action in Canada; Combating counterfeit products at the Canadian border; Protecting intellectual property rights from being severely disadvantage on online marketplaces; Preserving a claim to priority within a set deadline and in response to a foreign Trademarks Office request. All requests must be made by way of an affidavit or statutory declaration. There are no fees involved. If the request is accepted, the application will be examined as soon as possible. If not, an explanation for the refusal will be provided. Important to note that if the examination is expedited, this advantage could be lost if the applicant requests an extension of time or misses a deadline.

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  • Entrepreneurs and Intellectual Property: Avoid These Thirteen Mistakes to Protect Yourself (Part 1 of 3)

    In this three-part article series, we will share with you the intellectual property (IP)–related mistakes that we regularly see with startups. We hope you will find it useful for your business. Happy reading! Part 1 of 3: Mistakes concerning IP in general Mistake #1:                 Believing that IP issues don’t affect you Some companies don’t put too much thought into intellectual property considerations, either because they feel they don’t have any intellectual property worth protecting, or because they simply don’t want to go through the trouble of obtaining such protection. While refraining from obtaining IP protection might, in rare instances, be a viable business decision, that does not mean that your company should ignore IP considerations altogether. This is because of the existence of third-party intellectual property rights. As an example, if your business sells or uses technology that has already been patented by a competitor, or your business uses a trademark that is confusingly similar to that of a competitor, then said competitor may be able to sue you for infringement, regardless of whether or not said infringement was deliberate. This is why it is always important to consider third-party IP rights, regardless of the nature of your business activities, and regardless of whether you intend on obtaining IP protection. Mistake #2:                 Believing that IP will cost you too much Many business owners think that intellectual property is too expensive to warrant spending money on when their company is just starting out.  However, while obtaining intellectual property rights can sometimes be an expensive process, it is important to remember that investing in your company’s IP rights is just that: an investment, one that can result in the creation of a valuable asset for your company. This can include a trademark registration for a brand that, over the years, will become incredibly popular, or a patent for a highly sought-after piece of technology. In fact, if properly protected, a company’s intellectual property assets can easily become more valuable than any physical asset. And just like any other valuable asset, it will increase your company’s worth and make your business all the more appealing for potential investors.   Mistake #3:                 Hoping for the intervention of the “IP police” Some entrepreneurs believe that once they have obtained an IP right, the government will be the one to enforce it with their competitors. This is unfortunately not the case. It is up to you, as an IP owner, to monitor the market and ensure that your competitors don’t infringe your rights. Should you fail to do so, you’ll be leaving the door wide open to those who would wish to imitate your products and services. In addition, you even risk losing some of your previously acquired rights. For example, your trademark could become non-distinctive—meaning you would no longer be able to protect it—if you were to fail to react and let a third party copy it. Reacting to every single situation isn’t necessarily called for, but each case should be examined in order to determine what consequences third-party use might have on your rights as a holder. Should you discover, in your market monitoring, that a third party is imitating your intellectual property, talk to your IP advisor or lawyer. They can help you decide on an effective first approach to take, either on your own or through them. Said approach might involve asking the third party to cease its activities, claiming compensation for prejudice caused, requiring that certain modifications be made to the use, and/or negotiating a coexistence agreement or a license with or without royalties. Mistake #4:                 Believing that you won’t be able to “defend your IP” We sometimes hear entrepreneurs say that securing IP rights isn’t worth their while, as they won’t be able to “defend their IP.” They essentially believe that the only purpose of holding IP rights is to sue competitors who imitate their products and services, which they necessarily believe is very expensive. The result is that they fail to protect their innovations and let their competitors appropriate their products and services. Without IP rights, it is true that they have little recourse. In reality, a lawsuit is usually the last option to use against competitors. Many other steps can be taken before resorting to a lawsuit. As is the case for other IP owners, holding IP rights may allow you to: -          Significantly discourage competitors from imitating your products and services by clearly indicating that you hold IP rights; and -          Negotiate agreements with your competitors who would like to imitate or who are already imitating your products and services. Remember that only a small minority of IP disputes are resolved in court; all other disputes are resolved out of court quickly and at relatively little cost. Mistake #5:                 Launching your product or service on the market and waiting to see if it will be a success before obtaining IP protection Some entrepreneurs, preoccupied with saving money, launch their new products or services on the market and wait to see if they are successful before protecting them with IP rights. This constitutes a serious mistake, because some IP rights may no longer be available. More specifically, once a product or service is launched, the possibility of protecting it by patent or industrial design is no more. Note that some exceptions apply, particularly in some jurisdictions that allow grace periods. If you are considering protecting one of your products or services by patent or industrial design, you should start the protection process before you launch your innovation on the market. However, said protection process doesn’t need to be completed in order to begin marketing your product or service. Conclusion Lavery’s intellectual property team would be happy to help you with any questions you may have regarding the above or any other IP issues. Why don’t you take a look at our Go Inc. start-up program? It aims to provide you with the legal tools you need as an entrepreneur so you can start your company on the right foot! Click on the following links to read the two previous parts. Part 2 | Part 3

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  • Reimbursement clause for extrajudicial fees by a surety: valid or invalid?

    On April 6, 2021, the Court of Appeal, per Justice Mark Schrager, rendered an interesting decision in Bank of Nova Scotia c. Davidovit (2021 QCCA 551). The Bank of Nova Scotia (the “Bank”) had granted a commercial loan to a company, of which Aaron Davidovit (“Davidovit” or the “Surety”) was the principal, for the operation of a gym. Under a clause contained in the personal guarantee (suretyship) signed by Davidovit, he was to reimburse all costs and expenses incurred by the Bank to collect amounts owed to it by the principal debtor or Surety, including, but not limited to, legal fees on a solicitor/client basis (the “Clause”). The Bank was claiming $31,145.22 in extrajudicial fees and legal costs from Davidovit, while the amount claimed from the Surety in capital and interest amounted to $35,004.49. The trial judgment The trial judge, the Honourable Frédéric Bachand, concluded that the contract of suretyship was a contract of adhesion within the meaning of article 1379 of the Civil Code of Québec (the “C.C.Q.”) and agreed with Davidovit’s arguments that the Clause was invalid because it was excessively and unreasonably detrimental to the adhering party and contrary to the requirements of good faith, in violation of article 1437 C.C.Q. Justice Bachand emphasizes two main problems with the Clause: (i) it was unilateral, thus giving a disproportionate advantage to the Bank while the Surety did not benefit from such an advantage; (ii) it could restrict access to justice in that it could deter the Surety (who was already vulnerable vis-a-vis his opponent) from contesting the Bank’s claim, the Clause thus doing little to promote the rule of law.  Appeal decision The Court of Appeal reversed Justice Bachand’s judgment on the invalidity of the Clause, but confirmed Davidovit’s personal condemnation as Surety. Firstly, the Court of Appeal pointed out that a unilateral clause is not in itself abusive. All of a borrower’s obligations under a loan agreement or a surety’s obligations under a contract of suretyship are unilateral, but that this fact alone cannot determine whether a clause is abusive. The logic applied by the trial judge would lead to the conclusion that the repayment of a balance due at the end of a loan is abusive, because it is unilateral. Secondly, the fact that one party finds itself at a disadvantage is also not reason to conclude that a clause is abusive. Section 23 of the Quebec Charter of Human Rights and Freedoms, raised by Justice Bachand in dealing with equality of arms in a judicial process, did not apply in this case, despite the fact that a bank may appear to have more means to initiate legal proceedings than a surety does. Thirdly, just because the law provides for a monetary sanction, such as payment of legal fees or other damages (e.g. in application of article 54 or 342 of the Code of Civil Procedure) for an abusive situation (e.g. a frivolous defence of a surety), this does not mean that contracting parties cannot agree to provide for such payment. The judges of the Court of Appeal held that, on the contrary, a clause for the reimbursement of extrajudicial costs and fees allows for legitimate claims to be pursued before the courts against principal debtors and sureties who refuse to pay. Justice Schrager also took the liberty of commenting on the trial judge’s conclusion regarding the qualification of the contract of suretyship as a contract of adhesion. However, considering that neither party questioned this qualification, the Court of Appeal did not formally rule on this aspect, but pointed out that the mere fact that the terms of a contract appear on a preprinted form does not necessarily mean that it constitutes a contract of adhesion, although a preprinted form may be an indication that the terms imposed are not negotiable. The reasonableness of the amount claimed under the Clause Although valid, the Clause must still be subject to control by the courts to ensure that the amount claimed for extrajudicial costs and fees is not abusive and is claimed in good faith. The Court found that the reimbursement of more than $31,000 in legal fees where the principal claim amounts to just over $35,000 is unreasonable and disproportionate. Given 1) the complexity of the case, 2) the amount of the claim against the Surety, 3) that the burden of demonstrating the reasonableness of the costs was on the Bank, 4) that claims for reimbursement of extrajudicial costs and fees must be exercised reasonably and in good faith (in accordance with articles, 6, 7 and 1375 C.C.Q.), the Court of Appeal reduced the claim and arbitrarily established it at $12,000. Conclusion Clauses for the reimbursement of extrajudicial fees have a certain acceptability in society, particularly in the commercial sphere. Even in a contract of adhesion, they are not necessarily abusive and invalid, but their application is subject to control by the courts so that they are exercised reasonably and in good faith.

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  • Loss of personal information: The Superior Court dismisses a class action

    On March 26, 2021, the Superior Court rendered a decision dismissing a class action against the Investment Industry Regulatory Organization of Canada (“IIROC”) on the loss of personal information of thousands of Canadian investors.1 The lack of evidence of compensable injury and IIROC’s diligent behaviour are the main reasons for the dismissal of the class action. The Facts On February 22, 2013, an inspector working for IIROC forgot his laptop computer in a public place. The computer, which contained the personal information of approximately 50,000 Canadians, was never found. The information had originally been collected by various securities brokers who were under inspection by IIROC. Mr. Lamoureux, whose personal information was on the computer, brought a class action on behalf of all persons whose personal information was lost in the incident. He claimed compensatory damages for the stress, anxiety and worries associated with the loss of personal information, as well as compensation for the injury associated with the identity theft or attempted identity theft of members. He also claimed punitive damages for unlawful and intentional infringement of the right to privacy protected by the Quebec Charter of Human Rights and Freedoms. On this point, the members claimed that IIROC had been reckless and had delayed in notifying affected persons and brokers, as well as relevant authorities. Decision The class action is dismissed in its entirety. Compensatory damages The Superior Court started by acknowledging IIROC’s admission that it was at fault for the loss of the computer, and that the computer was not encrypted as it should have been to comply with IIROC policies. With respect to compensatory damages, the Court reiterated the principle according to which the existence of fault does not presume the existence of injury; each case must be analyzed on the basis of the evidence.2 In this case, the injury alleged by the members can be summarized as follows: They suffered worry, anger, stress and anxiety about the incident. They were forced to monitor their financial accounts, and in particular their credit cards and bank accounts. They were inconvenienced and wasted time in having to deal with credit agencies and ensuring that their personal information was protected. They felt shame and suffered delays caused by identity checks on their credit applications attributable to flags on their files. In its analysis, the Court held that, apart from the fact that the members were generally troubled by the loss of their personal information, there was no evidence of any particular and significant difficulties related to their mental state. Relying on Mustapha v. Culligan of Canada Ltd.,3 the Court reiterated that “the law does not recognize upset, disgust, anxiety, agitation or other mental states that fall short of injury.” If the injury is not serious and prolonged, and is limited to ordinary discomforts and fears that are inherent to life in society, it does not constitute compensable injury. In this case, the Court found that the negative feelings experienced as a result of the loss of personal information did not rise above the level of ordinary discomforts, anxieties and fears that people living in society routinely accept. Having to monitor one’s personal accounts more closely does not qualify as a compensable injury, as the courts equate this practice with that of [translation] “a reasonable person who protects their assets.”4 The Court also considered the fact that IIROC provided members with free credit monitoring and protection services. It thus concluded that, in this respect, there was no injury to compensate. Finally, the experts who were mandated to analyze the circumstances and wrongful use of the investors’ personal information found that there was no clear indication of wrongful use of the information by a person or group of persons, although evidence of wrongful use of personal information is not necessary to assert a claim. Punitive damages The plaintiff, on behalf of the members of the class action, also sought punitive damages on the grounds that IIROC had been reckless in its handling of the incident. To analyze IIROC’s diligence, the Court noted the following facts.  IIROC launched an internal investigation in the week that followed that of February 22, 2013, the date on which the computer was lost. On March 4, 2013, the investigation revealed that the computer likely contained the personal information of thousands of Canadians. IIROC filed a police report. On March 6, 2013, it mandated Deloitte to identify what personal information was lost and who were the affected persons and brokerage firms, and to help it manage the risks and obligations associated with the loss of the personal information. On March 22, 2013, Deloitte informed IIROC that the computer contained “highly sensitive” and “increased sensitivity” information about thousands of Canadian investors. On March 27, 2013, IIROC notified the Commission d’accès à l’information du Québec and the Office of the Privacy Commissioner of Canada. On April 8 and 9, 2013, IIROC met with representatives of the affected brokerage firms, and simultaneously mandated credit agencies to implement safeguards for investors and brokerage firms. IIROC also set up a bilingual call center, issued a press release about the loss of the computer and sent a letter to affected investors. The Court also accepted expert evidence according to which IIROC’s response was consistent with industry best practices, and that the measures put in place were appropriate in the circumstances and consistent with other responses to similar incidents. In light of the evidence, the Court concluded that the loss of the unencrypted laptop computer and the resulting violation of the right to privacy were isolated and unintentional. It therefore dismissed the claim for punitive damages. The outcome is that IIROC was not reckless: it rather acted in a timely manner. Comments This decision introduces a basis for analyzing the diligent conduct of a company should the personal information that it holds be compromised, and confirms that a prompt and diligent response to a security incident can safeguard against a civil suit. It also confirms that the mere loss of personal information, no matter how sensitive, is not in itself sufficient to justify financial compensation, and that it must be proven that injury was suffered. Furthermore, ordinary annoyances and temporary inconveniences do not constitute compensable injury, and monitoring financial accounts is not exceptional, but is rather considered the standard practice expected of a reasonable person protecting their assets. At the time of writing this bulletin, the time limit for appeal has not expired and the plaintiff has not announced whether he intends to appeal the judgment. Lamoureux v. Organisme canadien de réglementation du commerce des valeurs mobilières (OCRCVM), 2021 QCCS 1093. Sofio v. Organisme canadien de réglementation du commerce des valeurs mobilières (OCRCVM), 2014 QCCS 4061, paras. 21 and 22. Mustapha v. Culligan of Canada Ltd., 2008 SCC 27 [2008] 2 SCR 114. Lamoureux v. Organisme canadien de réglementation du commerce des valeurs mobilières, 2021 QCCS 1093, para. 73.

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  • Pre‑ruling Consultation with the Canada Revenue Agency (CRA): a little‑known yet practical service

    Canada’s tax system is very complex and tends to become more complex over time. Amendments to tax laws in recent years have not simplified our tax system, quite the contrary. The introduction of various intention tests in tax laws has also further increased tax authorities’ discretion as to the application of such laws. In this context, it is often a good idea to obtain the Canada Revenue Agency’s (“CRA”) advice on the application of tax laws to proposed transactions. Given that the CRA is responsible for applying the Income Tax Act (the “ITA”) and other legislation, some Canadian taxpayers would be well advised to ensure that the CRA will agree with their interpretation of the ITA in the context of a proposed tax plan or transaction. Getting the CRA’s opinion will help to steer clear of differences in opinion that could lead to lengthy and costly debates. The CRA has long offered Canadian taxpayers the opportunity to consult it before proceeding with tax plans or transactions. The two best known mechanisms for doing so are requests for a Technical Interpretation and requests for a Ruling. As a request for a Technical Interpretation is made anonymously, the resulting interpretation as to the application of the ITA is not binding on the CRA, and it requires a considerable amount of time to obtain. A request for a Ruling, on the other hand, requires identification of the parties and details of the proposed tax plan or transaction, and the resulting Ruling will bind the CRA to certain conditions. It is also faster to obtain. The CRA charges a fee to render a Ruling, but does not charge one for a Technical Interpretation. There is, however, a third, lesser-known mechanism available to taxpayers: a Pre-ruling Consultation. Some of its advantages include: Faster feedback for taxpayers as to the likelihood that the CRA will render the Ruling sought. Lesser preparation costs, as a Pre-ruling Consultation request requires less information than a request for a Ruling. Lower fees to be paid to the CRA in cases where the CRA believes that it cannot render the Ruling a taxpayer is seeking. The use of the Pre-ruling Consultation service will often be the best way to begin the request for a Ruling process. By using the service, taxpayers can quickly determine, at a relatively low cost, whether they should engage in the request for a Ruling process. The service isn’t a substitute for obtaining such a Ruling, however, as a Ruling has the advantage of binding the CRA with respect to the tax consequences of a proposed tax plan or transaction.   Our taxation team can guide you and answer your questions regarding the services that the CRA offers in connection with tax compliance.

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  • Studios and designers: How to protect the intellectual property of your video games?

    Behind every video game, there is intellectual property (IP) which is worth protecting to optimize monetisation of the game. As discussed in Studios and designers: Are you sure that you own the intellectual property rights to your video games, the first step for studios and designers is to make sure that they own all IP rights on the video game. The next step is to identify what type of IP protection is available between trademarks, copyrights and patents and then put in place an IP strategy to protect these assets in Canada and abroad. Below is a summary of the types of protection to consider to fully protect a video game. Trademarks The name of a video game is a valuable asset, with a potential to become internationally famous. Just think about Call of Duty, Fortnite, Minecraft and Assassin’s Creed or, for the more nostalgic, classic games such as Super Mario. Pokémon and Pacman. Trademarks have this power to evoke unique and captivating experience in the gaming world. In this industry, experience shows that a video game may become an instant international success, since it is an online market with powerful gaming influencers. For this reason, being proactive with trademark protection is key. What does it mean? First, clearance searches should be made as soon as you decide on the name of your game, in the most important markets where you anticipate sales. The idea here is to make sure that your brand is not conflicting with other marks so that you may use it and register it in your main market. Once the mark is cleared, you may then proceed with filing. Here again, the earlier the better as trademark protection is, in most countries, granted to the first-to-file. Filing before your project becomes public is therefore strongly recommend. As for the scope of the application, it should of course cover the game itself but also potential merchandising goods, either because it is part of the business plan to monetize the brand, or as a defensive strategy. Apart from the main brand, other aspects of the game may qualify as trademarks and be protectable. For instance, a sound or sequence of sounds associated with starting a console or a game could potentially be registered as trademarks. The names and image of characters in a game may also be protected, especially for merchandising goods.  In short, for studios and designers involved in the video game industry, trademark registration is key to getting the most value out of a video game. This begins with a well-orchestrated protection strategy to minimize risk of conflicts and to build a solid and valuable brand. Copyrights A video game is a mix of literary, artistic and musical works which are protected by copyright, including computer program behind a game’s architecture is also explicitly protected by law.1 The protection offered by the Copyright Act (“CA”) applies as soon as a work is created, without the need for registration. This protection extends to the 176 member countries of the Berne Convention. Although the protection of a work by copyright is automatic, copyright owners may register their right with the Canadian Intellectual Property Office (“CIPO”) at any time. In particular, registration makes it easier to prove ownership of the right in the event of a dispute in that it creates the presumption that the person named in the registration owns the copyright. Copyright protection applies to the entirety of the game, as well as to its various components. Any infringement of these rights by a third party may give rise to a copyright infringement claim if the work or a substantial part of it is copied, unless a defense such as fair dealing is applicable. In this respect, the following activities may qualify as fair dealing: research and private study, education, parody as well as criticism or review and news reporting. Is video game live streaming copyright infringement? In recent years, the phenomenon of video game live streaming has really taken off. Video gamers film or record their computer screens and broadcast them on platforms such as YouTube and Twitch to show their characters, strategies and tactics for completing certain levels of a game. Some live streaming video gamers, who make this their living, have achieved celebrity status and have thousands of followers. Is live streaming a video game without express permission copyright infringement? The courts have yet to rule on whether live streaming games online constitutes a copyright infringement to communicate the work to the public by telecommunication under section 3(1)(f) of the Act. Faced with this widely popular trend, some studios accept this practice because positive reviews from such gamers can boost game sales. Others criticize the fact that they profit from video games without copyright owners receiving any compensation. Chances are that live streaming is not the highest priority of the video industry who is more concerned by the illegal downloads and counterfeits, which may explain why the courts have not yet had the opportunity to rule on video game live streaming. Patents Patents protect the functional aspects of an invention. The owner of a patent may prevent anyone from making, using or commercializing the patented innovation from the date the patent is obtained. Three aspects are taken into consideration before granting a patent:2 Novelty – The invention must be different or be innovative compared to anything that has been done before, anywhere in the world. Utility – The invention must have a useful function and economic value. Inventiveness – The invention must not be obvious to a person skilled in the field. In Canada, it is not possible to patent an abstract idea, but it is possible to patent the physical embodiment of that idea, provided that it meets the criteria of novelty, utility and inventiveness. Canadian patents in the video game industry Patents obtained in the video game industry mainly relate to consoles, controllers, headsets and other gaming accessories. The video game industry has proved to be innovative with the development of inventions that are both fun and useful. In 2012, Nike patented an invention to encourage physical activity among video game players.3 The patent describes a device placed in a gamer’s shoe when the gamer is physically active and connected to a video game. The energy spent by the gamer gives energy to the virtual character. Once the character’s energy is depleted, the gamer must engage in physical activity again. Are game play mechanics patentable? Certain aspects of a video game are less easy to patent, in particular the game play mechanics, which are a distinctive aspect from the standpoint of gamers when choosing a video game. The game play mechanics consists in the virtual experience of a video game: character movement, the interaction of the player with the game, the way the player moves through the levels of the game, etc. Unique and well-developed game play mechanics can be a great asset for a developer wanting to market new versions of a game. Gamers will go back to a familiar game to get immersed in a new experience. This makes patenting such an experience appealing for a studio. Given that game play mechanics are developed using computer code, it might seem that even if the criteria of novelty, utility and inventiveness were met, this type of invention could not be physically embodied and thus could not be patented. To be patented, game play mechanics must have a physical component in addition to the code itself. Consider a patent describing a video game in which a gamer’s heartbeat is integrated into the game,4 which is a good illustration of physical embodiment. Such transposition of a gamer’s vital signs is done physically through a heart monitor worn by the gamer and connected to the game. As all these aspects were described in the invention, this type of inventive game play mechanics was considered patentable. In the United States, the criteria for patents are similar to those in Canada, meaning that abstract game play mechanics would have to be linked to a physical aspect in order to be patentable.   Conclusion Implementing an IP protection strategy prior to launching a video game can prevent conflicts, increase the value of assets and strongly position a company in the market to maximize profits. Copyright Act, section 2. “A guide to patents,” Canadian Intellectual Property Office, Government of Canada, 2020-02-24. Patent No. 2,596,041, issued February 9, 2006. Patent No. 2,208,932, issued June 26, 1997.

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  • COVID-19: Anticipating Capital Gains, Wealth, Gift and Inheritance Taxes

    The deficits being generated by the emergency measures that the federal and provincial governments have implemented since March 2020 are a reminder of the magnitude of our governments’ pre-crisis deficits. This situation will inevitably lead to a greater tax burden for businesses and individuals at some point. Despite the unprecedented nature of these circumstances and the difficult financial situations that organizations find themselves in, steps can be taken now to mitigate repercussions. For several years, there has been increasing speculation about the capital gains inclusion rate being increased. Rumours also abound about the potential creation of an inheritance tax, which would undoubtedly be accompanied by a gift tax and a wealth tax. In this context, it is becoming ever more plausible that the federal government will finally increase the capital gains inclusion rate and tax the value of inheritances and gifts as early as the next budget, which has been postponed because of the ongoing crisis. An annual wealth tax on high net worth individuals could likewise be in the pipeline. As is now customary, the measures would apply as of midnight the night before the budget is tabled, closing the door to most tax planning strategies to reduce the impact of such measures. In the face of this situation, several steps can be taken as of now as, for instance: Crystallization of unrealized capital gains using a business corporation, partnership or trust; Gifts of money or property to family members or trusts; Termination of Canadian tax residency in favour of a lower-tax jurisdiction. The majority of tax planning strategies aiming to reduce or postpone the impact of such measures can be reversed should the anticipated measures not be adopted. In the event that governments do not increase the tax burden straightaway or opt for other, difficult-to-predict measures, well-planned transactions, such as realizing an accumulated gain on certain assets, making a direct gift, or making a gift through a trust, will ensure that additional taxes need not be paid. If you would like more information, our taxation team is available to help you.

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  • Product advertising in the time of COVID-19: Health Canada and the Competition Bureau are on the lookout for misleading claims

    It’s been more than a year since the COVID-19 pandemic began, and many companies are attempting to market products intended to help consumers deal with the risks associated with COVID-19. Some of the most common examples of such products include face masks, testing devices, hand sanitizers, and hard-surface disinfectants. However, while many of these products can be useful (such as by helping reduce the risk of infection), there remains the question of what COVID-19 related claims, if any, can be attributed to the product (e.g. on the product's packaging or in an advertisement). An inaccurate or inappropriate statement can garner the attention of both Health Canada and the Competition Bureau. In fact, since the start of the pandemic, the Competition Bureau has been issuing compliance warnings to businesses across Canada regarding potentially false or misleading claims that their products and services can prevent the disease and/or protect against the virus.1  Accordingly, we have written this newsletter to summarize what Health Canada and the Competition Bureau are looking for when assessing COVID-19-related claims. We also provide examples of the types of statements that have been considered “unacceptable,” as well as a brief description of the consequences of utilizing such unacceptable statements. Please note that the following does not address which licenses are necessary to sell specific products in Canada, nor does it address which legal requirements apply. For example, hand sanitizers, in order to be sold in Canada, must meet the requirements of the Natural Health Products Regulations (NHPR). The general principles of the Competition Act and the rules of the Canadian Competition Bureau With respect to both COVID-19-related claims and product claims in general, the Competition Act prohibits false or misleading claims about any product, service, or business interest. This applies to both the literal meaning of a statement and the general impression it creates. Furthermore, the Competition Act prohibits performance claims that are not backed up by adequate and proper testing. First, such testing must be performed prior to the claim being made and on the actual product being sold, as opposed to a comparable or similar product. Second, they must reflect the product's real-world usage—such as in-home use. Third, the results of the tests must support the general impression created by the claims.  Since as early as May 2020, the Competition Bureau has enforced the above guidelines by issuing direct compliance warnings to a variety of businesses across Canada to stop potentially deceptive claims, including warnings against: Making claims that certain products (including herbal remedies, bee-related products, vitamins, and vegetables) can prevent COVID-19 infections; and Making claims—without first conducting the testing required by law—that certain UV and ozone air sterilization systems, as well as certain air filters or air purifiers, will effectively kill or filter out the virus. Accordingly, the above rules should always be followed when making any COVID-19-related claim about a product. Examples of advertising incidents addressed by Health Canada Health Canada has provided a list of more than 400 advertising incidents related to COVID-19.2 The table provided in footnote 2 lists products and corresponding companies or advertising media found to engage in non-compliant marketing, which are currently under review or have been resolved. While many of these incidents have been resolved, it is unclear what resolution occurred. Was the claim modified or removed entirely? Did the company have to pay a fine? Did the company manage to convince Health Canada that their claim was acceptable as is? Nonetheless, it is clear that the statements were questionable enough that Health Canada found it necessary to intervene. The COVID-19-related claims found therein can thus serve as an effective guide of what claims not to use when advertising products. Along with many unauthorized general claims of “preventing” or “treating” coronavirus and/or COVID-19, some interesting examples of statements flagged by Health Canada include the following: “To protect against Coronavirus” – with respect to a “bandana and protection mask set.” “Flatten the curve with these on trend Fashion Masks” – with respect to a face mask. “Anti-Microbial Micropoly Fabric” – with respect to a face mask. “Ideal for Covid-19” – with respect to a face mask. “Anti-coronavirus, blocks pollution like: exhaust fume, smog, flu virus” – with respect to a face mask. “Effectively isolates saliva carrying coronavirus” – with respect to an “Anti-Dust And Anti-Fog Hat Anti Coronavirus Hat.” “The importance of boosting the immune system during the threat of COVID-19” – with respect to various natural health products. “Suitable in bathroom, living room, bedroom hotel, flu Covid-19” – with respect to a “UV Disinfection Lamp Steriliser.” “labeled ‘COVID-19’ under tab” – with respect to a face mask. As can be seen, some of the statements do not even directly mention COVID-19 or coronavirus, and instead reference concepts such as “flattening the curve” or make general representations about having “anti-microbial” properties. Moreover, many of the claims simply reference COVID-19, without making any representations about treating and/or preventing it. In addition to consulting the above guidelines and examples, it may be wise to seek out products that have been approved by Health Canada for use against COVID-19. Some examples of such products include the following: Disinfectants with evidence for use against COVID-19. Authorized medical testing devices for uses related to COVID-19. Authorized medical devices other than testing devices for uses related to COVID-19. Based on the above, products should only bear COVID-19-related claims if they have been approved for use against COVID-19 by Health Canada, and, even then, such claims should be limited to said use and to what the supporting evidence demonstrates. Some of the links above also contain information on how to obtain the aforementioned approval from Health Canada. Please note that, as of the date of this newsletter, no hand sanitizers have been approved in Canada with COVID-19-related claims.3 Consequently, although hand sanitizers can help reduce the risk of infection by, or spread of, microorganisms, COVID-19-related claims should not be used with such products. Even so, Health Canada has provided a list of hand sanitizers that they have authorized for sale in Canada. In general, a sound policy is to thoroughly review your marketing materials to identify any claims related to the prevention or treatment of COVID-19 that may be false, misleading, or unsubstantiated, and immediately modify or remove such claims accordingly. Penalties for false representations and misleading marketing practices The penalties for using COVID-19-related claims that do not comply with the law can be quite severe and can include fines and jail time.4 In fact, false or misleading representations and deceptive marketing practices, regardless of whether they involve COVID-19-related claims, can be prosecuted under civil law and/or criminal law. As an example, under civil law, the court may order a person to cease an activity, publish a notice and/or pay an administrative monetary penalty. On first occurrence, individuals are liable to penalties of up to $750,000, and corporations, up to $10,000,000. For subsequent occurrences, the penalties increase to a maximum of $1,000,000 for individuals and $15,000,000 for corporations. Under criminal law, a person is liable to a fine of up to $200,000 and/or imprisonment for up to one year. We thus strongly recommend avoiding making false or misleading COVID-19-related claims at all times.     We hope that our newsletter serves as a useful guide regarding what Health Canada and the Competition Bureau consider an “inaccurate” or “false” COVID-19-related claim, and that it has clearly laid out what the consequences of making such a claim in association with a given product can be. However, whether a COVID-19-related claim is appropriate will depend on many factors, such as the exact wording of the claim and the exact nature of the product. Our intellectual property team would be happy to help you with any questions you may have regarding what COVID-19-related claims, if any, you should use on your products, as well as any other legal requirements that must be met before a specific product can be sold in Canada. https://www.canada.ca/en/competition-bureau/news/2020/05/competition-bureau-cracking-down-on-deceptive-marketing-claims-about-covid-19-prevention-or-treatment.html https://www.canada.ca/en/health-canada/services/drugs-health-products/covid19-industry/health-product-advertising-incidents.html https://www.canada.ca/en/health-canada/services/drugs-health-products/disinfectants/covid-19.html https://www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/eng/03133.html

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  • Payment to non-residents of Canada: How can the Multilateral Instrument (MLI) be applied?

    The internationalization of trade has led to an increase in payments made by Canadian companies to non-residents of Canada, which are most of the time subject to Canadian withholding taxes. Canadian payers must ensure that they withhold the correct percentage of Canadian tax on such payments, as they are liable to the tax authorities for any failures on their part in this regard. In addition, payment recipients will normally want to minimize Canadian withholding taxes and ensure that they have benefitted from the lowest applicable rate.  Canadian Tax Treaties In many cases, determining the Canadian withholding tax rate will depend on the application of a tax treaty between Canada and the payment recipient’s country of residence for tax purposes. Canadian tax treaties may reduce the rate of the tax that a Canadian payer must withhold. If interpreting tax treaties was already complex in many situations, it has become even more so with Canada’s adoption of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“Multilateral Instrument” or “MLI”).   Since January 1, 2020, the MLI generally applies to most tax treaties between Canada and other countries, and its application may result in the non-application of certain provisions of a tax treaty. In such situations, a Canadian payer will be required to withhold the rate provided for in the Income Tax Act (“ITA”), that is, 25%, instead of the reduced rate provided for in the tax treaty between Canada and the recipient’s country of residence for tax purposes, which will typically vary from 0% to 15%, depending on the type of payment involved and the recipient’s tax status.   The application of the Multilateral Instrument (MLI) For the time being, applying the Multilateral Instrument (MLI) is tricky for several reasons. First, the MLI does not apply to all of Canada’s tax treaties, nor to all of the articles of the treaties to which it does apply. It thus becomes necessary to first verify whether the MLI applies to a reduction in the withholding rate provided for in a Canadian tax treaty. Second, the Multilateral Instrument (MLI) provides for a general anti-avoidance rule with rather unclear application criteria. When the rule does apply, it may have the effect of denying a benefit provided for in a tax treaty. In short, the MLI is making the application of the ITA’s withholding tax on payments to non-residents more complex. Given that Canadian tax authorities will now apply the Multilateral Instrument (MLI), Canadian taxpayers should exercise caution and obtain proper advice before applying a rate less than the ITA’s 25% rate. Our taxation team is available to assist you and answer your questions regarding the application of the Multilateral Instrument (MLI) to payments made to non-residents.

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