Fenêtres Magistral Windows inc. -vs- M. Sarto Blouin - The Revocation of the Striking off of Registration is Effective Retroactively

February 1, 2003

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December 5, 2022

Construction: An unwarranted contestation may be considered an abuse of procedure

In the decision in 9058-4004 Québec inc. c. 9337-9907 Québec inc.1 rendered on October 21, 2022, the court granted compensation to a subcontractor for its extrajudicial fees further to a general contractor’s unfounded contestation of its claim as part of a hypothecary action. The facts In May 2019, Portes de garage Citadelle Ltée (“Citadelle”) and general contractor 9337-9907 Québec inc. (“AllConstructions”) concluded a contract for the provision of services and materials needed to install unloading docks in a building under construction. On May 16, 2019, notice of the contract was given to the building owner, 9058-4004 Québec inc. (“Transport Pouliot”). The first two phases of Citadelle’s work were completed between June and August 2019. In late September 2019, AllConstructions allegedly vacated the worksite after a dispute with Transport Pouliot. The third phase of Citadelle’s work was completed in October 2019. On November 25, 2019, Citadelle sent a statement of account to AllConstructions and registered a legal hypothec on the building two days later. On December 23, 2019, after registering a prior notice of the exercise of a hypothecary right, AllConstructions brought a hypothecary action against Transport Pouliot in the Superior Court, claiming the sums it was owed. For its part, Citadelle brought a hypothecary action against the owner, Transport Pouliot, and instituted legal proceedings against AllConstructions in April 2020. It is important to note that during the proceedings, AllConstructions admitted that it had received payment from Transport Pouliot for the sums invoiced by Citadelle. To justify its refusal to pay its subcontractor Citadelle, AllConstructions argued summarily that the services and materials provided were inadequate and did not meet standards. Despite its weak position and the lack of compelling evidence, AllConstructions maintained its argument. Citadelle had no choice but to pursue its legal proceedings and apply to have AllConstructions’ action declared abusive in order to recover its extrajudicial fees. AllConstructions’ abuse of procedure Citadelle claimed that AllConstructions’ defence was unfounded, frivolous and intended to delay. AllConstructions only had testimonial evidence to support its allegations, and it failed to file any expert opinions or exhibits. The contract did not contain a “pay when paid” clause, and AllConstructions admitted in the proceedings that it had received payment from Transport Pouliot for the sums invoiced by Citadelle. AllConstructions claimed that it had serious arguments to make in response to the application to have its action declared abusive. It stated that the work performed by Citadelle was inadequate and that the materials and services provided were not up to standards. It maintained its position, despite the fact that it had vacated the worksite a month before Citadelle’s work was completed and, therefore, could not have verified the actual quality of the work performed. In March 2022, AllConstructions ultimately abandoned its contestation of Citadelle’s claim a few days before the trial and nearly a year and a half after the proceedings began. The judge allowed Citadelle’s application to have AllConstructions’ action declared abusive. AllConstructions’ defence was unfounded, frivolous and intended to delay. It had no solid factual or legal basis. The allegation that Citadelle failed to comply with standards in the performance of its contract is mere speculation, as AllConstructions left the worksite in September 2019. Citadelle incurred unnecessary extrajudicial fees as a result of AllConstructions’ unfounded contestation of its claim. The judge awarded Citadelle a sum of $9,000.00 as compensation for the legal fees that it had paid. What it means A general contractor that cannot justify a deduction from its subcontractor’s claims after the work is completed but does so anyway risks having its contestation declared abusive. Jurisprudence has established that abuse of procedure may consist of légèreté blâmable [blameworthy conduct]2 or témérité [recklessness] resulting from allegations that do not stand up to careful analysis or are exaggerated beyond the scope of the dispute between the parties.3 A manifestly unfounded action is a civil fault that may be subject to legal proceedings and sanctions in accordance with article 51 of the Code of Civil Procedure.4 A party that considers itself the victim of abusive proceedings may, in addition to applying to have the proceedings declared abusive, claim the reimbursement of reasonable legal fees it has paid.5 This is precisely what Citadelle did and what it obtained. AllConstructions irresponsibly managed its dispute with its subcontractor. It made arguments based only on unverified assumptions, even though the evidence set out in the application was relatively solid and complete. As a victim of abuse of procedure, Citadelle was granted a reimbursement of its legal fees in addition to the sums that it was owed by AllConstructions. Court file No. 760-22-011912-204 Royal Lepage commercial inc. c. 109650 Canada ltd., 2007 QCCA 915 El-Hachem c. Décary, 2012 QCCA 2071 2741-8854 Québec inc. c. Restaurant King Ouest, 2018 QCCA 1807 (CanLII) Only extrajudicial fees deemed reasonable are reimbursed in full. The factors considered in establishing a total reasonable amount are summarized in paragraph 32 of the case at hand and are cited from Groupe Van Houtte inc. c. Développements industriels et commerciaux de Montréal inc., 2010 QCCA 1970, and Iris Le Groupe visuel (1990) inc. c. 9105-1862 Québec inc., 2021 QCCA 1208

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June 16, 2020

Resumption of Mergers and Acquisitions: What May Change After the Crisis

The COVID-19 crisis has significantly slowed economic activity in all respects. The area of corporate mergers and acquisitions is no exception, and the level of activity, which was high before the crisis, has dropped significantly because of it. It is difficult to predict when and at what pace such activity will resume, but we expect that, like many other sectors of the economy, this market will be different from what it was before the crisis. Among other things, we expect that the uncertainty regarding economic recovery will see vendors and purchasers increasingly rely on earnout clauses to reach agreements on the value of a business. Opportunities to obtain financing for the acquisition of a competitor or a complementary business are also likely to be limited, which will change how such transactions are financed. The new behaviours made necessary by the post-crisis economic environment will certainly have considerable fiscal impacts. The tax rules applicable to earnout clauses can be complex, and parties to such transactions should learn about them before signing a letter of intent for a potential transaction. Those wishing to sell could get an unpleasant surprise in terms of the net result of the sale of their business if they aren’t properly advised from the outset. In some cases, the sale of a business that would normally be expected to generate a capital gain with only 50% of such gain being included as taxable income could instead be 100% taxable as business income. Earnout clauses offer very interesting tax planning possibilities in some cases, such as the maximization of capital dividend accounts that corporations can use to pay tax-free dividends to their shareholders. The same care should be applied by those wishing to acquire or sell a business with regard to the different methods of financing transactions that are likely to become popular after the crisis, such as partial financing by the vendor. Poor tax planning in this regard could result in liquidity problems for vendors if payment of the balance of the sale price is spread out over too long a period. Purchasers will also want to maximize the tax benefits of this type of financing. The main way to do so involves banking on interest costs resulting from the financing of the purchase price, but to reap such benefits and others, the commercial agreements relating to the purchase must be carefully structured. Tax complexities are numerous in M&A transactions, and those mentioned above are just two examples. The tax incidence of such transactions should be analysed as soon as they are contemplated. Parties to M&A transactions often wait too long before analyzing tax aspects. They thus greatly limit their opportunities to benefit from optimal tax planning. For more information, our taxation team is available to help you.

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October 29, 2019

Bill 37: What changes can be expected for Public Contracts?

On September 18, 2019, the Minister Responsible for Government Administration and Chair of the Conseil du trésor introduced Bill 37, An Act mainly to establish the Centre d’acquisitions gouvernementales et Infrastructures technologiques Québec1 As its name suggests, this bill is intended to implement the restructuring of government procurement announced in the 2019–2020 budget2. If the bill is passed, the Centre de services partagés du Québec (CSPQ), as well as some other procurement organizations, will be replaced by two bodies: the Centre d’acquisitions gouvernementales will be the organization responsible for meeting the government’s general procurement needs, and Infrastructures technologiques Québec will handle its digital procurement. In 2017–2018, information technology contracts accounted for 17% of public body contracts3. Some administrative functions of the CSPQ would also be transferred to the Agence du revenu du Québec and the Conseil du trésor. Bill 37 also makes a number of amendments to the Act respecting contracting by public bodies, CQLR c. C-65.1, and its regulations, two of which are noteworthy. It is planned that, as of April 1, 2020, information relating to contracts involving an expenditure of more than $10,000, whether reached by mutual agreement or following a call for tenders, will have to be published in the electronic tendering system. The current limit is $25,0004. The bill also provides that, as of the date its assent (currently scheduled for the end of 2019), the imposition of a penalty for a final reassessment under the general anti-avoidance rule regarding an abusive tax avoidance transaction5 on the part of a company or related person will be recorded in the Register of Enterprises Ineligible for Public Contracts for five years. Such penalties will also be considered by the Autorité des marchés publics in its decision to authorize a contract with a public body. A 60-day transitional period is provided for in Bill 37, during which a taxpayer may make a late preventive disclosure to the Minister of Revenue6 by filing the form Mandatory or preventive disclosure of tax planning (TP-1079.DI-V). However, this type of disclosure will not be accepted if an audit by the Agence du revenu du Québec or the Canada Revenue Agency is already ongoing with respect to such a transaction. This measure is part of the current fight against aggressive tax planning7. Quebec (National Assembly), Bill 37, An Act mainly to establish the Centre d’acquisitionsgouvernementales and Infrastructures technologiques Québec, 42nd Legislature, 1st Session. Quebec (Conseil du trésor), 2019–2020 Budget Plan (Quebec, Off. Publ., March 2019), p. H.61. Québec (Conseil du trésor), Statistiques sur les contrats des organismes publics 2017–2018 (Québec, Direction de la reddition de comptes et du soutien à l’encadrement des contrats publics, March 2019), p. 1. Sections 22 and 23 of the Act respecting contracting by public bodies, CQLR c. C-65.1; sections 39 and 39.2 of the Regulation respecting supply contracts of public bodies, CQLR c. C-65.1, r. 2; sections 52 and 52.2 of the Regulation respecting service contracts of public bodies, CQLR c. C-65.1, r. 4; sections 42 and 42.2 of the Regulation respecting construction contracts of public bodies, CQLR c. C-65.1, r. 5; sections 73 and 75 of the Regulation respecting contracting by public bodies in the field of information technologies, CQLR c. C-65.1, r. 5.1. Sections 1079.13.1 and 1079.13.2 of the Taxation Act, CQLR c. I-3. Section 1079.8.7.1 of the Taxation Act, CQLR c. I-3. See, in particular, Quebec (Conseil du trésor), 2019–2020 Budget Plan (Quebec, Off. Publ., March 2019), p. D.81.

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June 13, 2019

The government wants to know the shareholders’ true identity

Following the adoption of Bill C-86, which amends certain provisions of the Canada Business Corporations Act ("CBCA"), corporations will now need to compile a list of "individuals with significant control" in the corporation in a new register, to be maintained by the corporation. The purpose of these amendments is to create greater transparency in the ownership and control of business corporations, in order to contribute to the fight against money laundering and tax evasion. The new CBCA provisions, which will come into force on June 13, 2019, will apply to all corporations governed by this law and that are private issuers. Who is an "individual with significant control"? An "individual with significant control of a corporation" is defined as: An individual who is the registered holder of a "significant number of shares"; An individual who is the beneficial owner of a significant number of shares; An individual who has direct or indirect control or direction over a significant number of shares; An individual who has any direct or indirect influence that, if exercised, would result in control in fact of the corporation; and/or An individual to whom prescribed circumstances apply.1. What is a “significant number of shares”? A significant number of shares is defined as: Any number of shares that carry 25% or more of the voting rights attached to all of the corporation’s outstanding voting shares; or Any number of shares that is equal to 25% or more of all of the corporation’s outstanding shares measured by fair market value. If a “significant number of shares” is held jointly by many individuals, or if one of the above-mentioned rights is subject to any agreement or arrangement under which the right or rights are to be exercised jointly or in concert by those individuals (such as a unanimous shareholder agreement, for example), each of those individuals will be considered to be an “individual with significant control”. The name of the individual(s) and the other information mentioned below must then be recorded in the register. What Information Must the Register Contain? Bill C-86 provides that, in addition to the other registers currently maintained by corporations with respect to directors, shareholders and securities, corporations must now also maintain a register of "individuals with significant control". This register must include the following information with respect to each of the "individuals with significant control" : Name, date of birth and last known address; The jurisdiction of residence, for tax purposes; The date on which the individual became an “individual with significant control” of the corporation and, if applicable, the date on which the individual ceased to have significant control; A description of how the individual is an “individual with significant control” and, as applicable, a description of his or her rights and interests with respect to the shares of the corporation; Any other prescribed information; 2; Another section of the register must provide a description of each step taken by the corporation to update the information. Corporations must ensure that the information recorded in the register is accurate, complete and up-to-date at least once during each financial year. However, it should be noted that the corporation must also update the register within 15 days after becoming aware of any changes to the information mentioned above. Who Can Access the Register? The information contained in this new register will not be accessible to the public. Only the Director of Corporations Canada, the shareholders, or the creditors of the corporation (as well as their representatives) can, upon request, consult the register. However, the information obtained by the corporation’s shareholders or creditors may only be used in connection with: an effort to influence the voting of shareholders of the corporation; an offer to acquire securities of the corporation; any other matter relating to the affairs of the corporation; The shareholder or the creditor must provide an affidavit to the corporation to this effect. Federal Bill C-97, which also amends the CBCA, will require a corporation, at the request of an investigative body (such as police forces and the Canada Revenue Agency or its provincial counterparts) that has reasonable grounds to suspect that an offence has been committed, to provide the investigative body with a copy of its register of individuals with significant control, or any information specified by that investigative body that appears in the register3. What are the Consequences of a Failure to Comply? The legislative provisions provide for several penal sanctions which can be severe: A corporation that, without reasonable cause, contravenes these new provisions is guilty of an offence and is liable to a fine not exceeding $5,000; A person that, without reasonable cause, uses the information recorded in the register for purposes other than those described above is guilty of an offence and is liable to a fine not exceeding $5,000 or to imprisonment for a term not exceeding 6 months, or to both; 3) Directors or officers of a corporation who, knowingly, (i) authorize, permit or acquiesce in the contravention by the corporation of these new provisions relating to the maintenance of a register, (ii) record, or authorize, permit or acquiesce in the recording of false or misleading information in the register, (iii) provide, or authorize, permit or acquiesce in the provision of false or misleading information in relation to the register to any person or entity, are liable to a fine not exceeding $200,000 or to imprisonment for a term not exceeding 6 months, or to both; 4) Shareholders of a corporation who provide or authorize the provision of false or misleading information to any person or entity, or refuse to disclose the requested information, are liable to a fine not exceeding $200,000 or to imprisonment for a term not exceeding 6 months, or to both. And in the Canadian Provinces? Most Canadian provinces, including Quebec, have already announced that they will follow Parliament’s lead. British Columbia is the first province to propose an amendment to the Business Corporations Act (BC). The Business Corporations Amendment Act of 2019 introduced the “Transparency Register”, which is the equivalent of the federal register of individuals with significant control and its application criteria. This bill also contains a provision enabling police forces to access the register in specific situations. And in Other Countries? The requirement to maintain a register of individuals with significant control was introduced, in particular, in the United Kingdom, in April 2016, with the ultimate objective of deterring money laundering and tax evasion by promoting corporate transparency. Moreover, the register implemented in the United Kingdom is accessible to the public. The legislation in the United Kingdom also includes penal sanctions for non-compliance with its provisions. To date, there have been no references in the media of the United Kingdom to penal charges against corporations that failed to complete the People with Significant Control (PSC) register, or recorded false information in the register. Instead, the Companies House agency seems to be focused on intervening in minor deficiencies of the register in order to reduce the number of incorrect statements about individuals with significant control over a corporation. Companies House also states that the compliance rate of corporations — ranging from 97% to 99% — is excellent. Conclusion The intentions behind these new provisions are laudable, but several questions remain unanswered on reading the legislative provisions that will soon come into force. Difficulties in interpretation and application will inevitably arise, at least until regulations are enacted or the courts can provide some guidance. For example, in cases where corporate structures involve several corporations and/or trusts, the calculation of voting rights or fair market value may be complex. Similarly, when a corporation has issued both preferred and common shares, how will the fair market value of those shares be determined? And what about the concept of “direction” over a significant number of shares, which is not defined in the new legislation? How should this concept be interpreted? Finally, with respect to the “control in fact” of the corporation, will it be necessary to refer to the tax legislation and to the courts’ interpretation of this concept? All these questions will have to be assessed in the coming months. We invite you to communicate with our team in order to implement the measures required by this new legislation. Note that no regulation has been adopted and no draft regulations have been published as of the date hereof. Note that no regulation has been adopted and no draft regulations have been published as of the date hereof. Bill C-97 was adopted by the House of Commons in 3rd reading on June 6, 2019 and is in first reading before the Senate as of the date hereof.

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