A Q&A guide to finance in Canada. The Q&A gives a high level overview of the lending market, forms of security over assets, special purpose vehicles in secured lending, quasi-security, negative pledge clauses, guarantees, and loan agreements. It covers creation and registration requirements for security interests; problem assets over which security is difficult to grant; risk areas for lenders; structuring the priority of debt; debt trading and transfer mechanisms; agent and trust concepts; enforcement of security interests and borrower insolvency; cross-border issues on loans; taxes; and proposals for reform.
To compare answers across multiple jurisdictions, visit the Finance Country Q&A tool. This article is part of the PLC multi-jurisdictional guide to finance. For a full list of contents visit www.practicallaw.com/finance-mjg.
Activity in the secured lending market has resumed in line with other developed countries during 2011. This has been supported by the relatively strong financial position of the major Canadian banks.
Common law jurisdictions. All Canadian provinces and territories are common law jurisdictions, except for Québec, which is a civil law jurisdiction (see below, Québec). In common law jurisdictions, real property generally comprises:
Land and buildings.
Easements (such as rights of access over adjacent property).
Profits-à-prendre (rights to take minerals, hydrocarbons or other things from another's property).
All minerals and hydrocarbons on or under the land, together with rights of access to extract them, unless expressly excluded in the title to land. This may include some mineral and oil and gas royalties that are construed as creating interests in land.
The provinces all have condominium legislation enabling commercial and residential units to be owned in multi-unit buildings. Real property can also include interests in property-holding partnerships (where the partnership property is real property), but generally not shares in property-holding companies.
Real property interests include rents and similar profits from land. However, these interests are also treated in some ways as personal property for secured lending purposes. Leasehold interests are not technically real property at common law but rather are considered to be chattels. In many respects commercial leases are interpreted and enforced primarily as contracts. Leases can be registered against the property demised by the lease and the tenant is able to mortgage its leasehold interest, either by means of an assignment of the lease or a sublease of the leased premises.
Québec. In Québec, real property comprises (Civil Code of Québec (Civil Code)):
Any constructions and works of a permanent nature located on the land.
Anything forming an integral part of the land.
Plants and minerals, as long as they are not separated or extracted from the land.
Common law jurisdictions. Canadian common law provinces predominantly use Torrens and "lien theory" registration systems, with some of the older jurisdictions in Eastern Canada still based on marketability of title and "title theory" registration systems. In all common law provinces, security over real property can be granted by way of a mortgage or trust deed, with no material distinction in terms of validity or available remedies between the two. Security is ordinarily perfected by registration of the mortgage or trust deed against title. Each province maintains its own real property title registration system, with varying degrees of centralisation and computerisation.
The creation requirements also vary by province.
Real estate security granted in relation to Indian reserve lands and certain lands relating to railway undertakings are registered at special federal registry offices. In addition, the following real property is subject to special rules:
Most federally regulated facilities, for example, Canada's major shipping ports, prisons and airports.
Certain unpatented lands (that is, Crown lands which have never been held privately, typically in remote parts of the country).
Québec. Security over real estate (and/or rents generated by real estate as well as insurance indemnities covering such rents) can only be granted by a deed of hypothec, signed by the parties in the physical presence of a Québec notary. A deed of hypothec must be registered in the land register, maintained at the registry office of the registration division where the immovable property is located. Special registers are also maintained for the publication of security over the following:
Cable communication networks.
Power lines or oil or gas pipelines.
See above, Common forms of security.
Common law jurisdictions. In common law jurisdictions, security over all types of personal (that is, movable) property can be given under the Personal Property Security Act (PPSA) (which is very similar to Article 9 of the Uniform Commercial Code (UCC) in the US). Under the PPSA, tangible movable property primarily comprises goods that are either equipment or inventory.
Québec. There is no separate definition of tangible movable property in the Civil Code.
Common law jurisdictions. Security over tangible movable property is granted by a security agreement between the creditor and debtor. It is common practice for a security agreement to grant a security interest in all of the debtor's present and after-acquired personal property.
A security interest is not enforceable against third parties unless it has attached. Attachment occurs only when the following conditions are satisfied (PPSA):
Value is given (that is, there is a debt or obligation, for which the security is being granted).
The debtor has rights in the collateral.
The security agreement contains a description of the collateral, sufficient for its identification.
Following attachment, the creditor must perfect its security interest in the collateral to ensure its priority over other creditors' rights. Under the PPSA, perfection is most commonly achieved by registration. The creditor (or its legal counsel) registers a financing statement against the debtor in accordance with the PPSA. A security interest in tangible personal property can also be perfected by possession. This is unusual for goods, although a security interest in chattel paper, documents of title, instruments or money might more often be perfected by possession.
Under the PPSA, the validity, perfection, effect of perfection and priority of a security interest over tangible movable property is generally governed by the law of the jurisdiction where the collateral is situated at the time of attachment. Therefore, registration may be required in multiple jurisdictions, depending on the location and type of collateral.
Québec. Québec law does not have the concepts of attachment and perfection. Security over tangible movable property is created under a deed of hypothec. Where the hypothec takes the form of a pledge, the pledge is created on the delivery of the pledged property to the pledgee by the pledgor. A deed of hypothec charging movable property does not need to be signed in the physical presence of a Québec notary.
The validity and publicity of security affecting movable property is governed by the law of the jurisdiction where the movable property is situated. Security on movable property is published either by:
Registration in a central registry called the Register of Personal and Movable Real Rights.
Physical delivery of the hypothecated property to the hypothecary creditor or to a third party custodian agreed on by the debtor and the creditor.
See above, Common forms of security.
The Canadian federal government has legislative jurisdiction over aircraft, ships and most railways. Although security can be granted under the PPSA or Civil Code over these assets, additional steps under the applicable federal legislation can be advisable to obtain a first priority security interest. The federal government and several provinces have passed legislation to implement the Convention on International Interests in Mobile Equipment (Cape Town, 2001) and the related protocol on matters specific to aircraft equipment, but that legislation is not yet in force.
Financial instruments, such as shares and other securities (both in certificated and dematerialised form) are governed by provincial legislation. In most provinces, the relevant law is called the Securities Transfer Act (STA), and based on Revised Article 8 of the UCC.
The relevant law in Québec is substantially the same.
Under the PPSA, security can be granted over investment property, which comprises the following:
Securities, whether certificated or uncertificated.
Futures contracts or futures accounts.
A creditor must attach and perfect its security interest (see below).
Most commonly security is taken over certificated securities by way of a pledge agreement/security agreement or deed of moveable hypothec (in Québec). The security is perfected through a combination of registration and/or possession of relevant securities.
Security is taken over other investment property by way of a pledge agreement/security agreement or a deed of moveable hypothec (in Québec). The security is perfected through a combination of registration and/or the use of control agreements.
Attachment requires the same conditions to be satisfied as for tangible movable property (see Question 3, Common forms of security: Common law jurisdictions). However, the third condition (a description of the collateral sufficient for its identification) can alternatively be satisfied by obtaining control or possession of the investment property.
Perfection can be achieved in one of three ways under the STA and related provisions of the PPSA:
By registering a financing statement in accordance with the PPSA.
By obtaining control of the investment property. If securities are certificated and registered in the debtor's name, a creditor obtains control by delivery of the certificates, evidencing the securities. If securities are uncertificated, or are held through the book-entry system, a creditor can obtain control by (as applicable):
arranging the registration by the issuer of the securities in its name;
obtaining a control agreement from the issuer (in the direct holding system) or from the securities intermediary who maintains the securities account in which the securities are held (in the indirect holding system);
arranging for someone else to have control for the benefit of the creditor.
By obtaining possession of the investment property. This only applies to certificated securities.
A security interest perfected by registration is subordinate to a security interest in the same investment property perfected by control or possession.
The validity, perfection, effect of perfection and priority of a security interest in investment property is governed by the law of one of the following:
The jurisdiction where the certificate is located, if the collateral is a certificated security.
The issuer's jurisdiction, if the collateral is an uncertificated security.
The securities intermediary's jurisdiction, if the collateral is a security entitlement or a securities account.
The future intermediary's jurisdiction, if the collateral is a futures contract or account.
The jurisdiction where the debtor's place of business (or chief executive office if there is more than one place of business) is located for investment property (including certificated or uncertificated securities) perfected by registration.
If a certificated security is subsequently moved to another jurisdiction, the creditor must ensure that its security interest remains perfected, as the law governing perfection and priority will change (see above). However, as long as the creditor (or its agent) retains possession of the certificate in another jurisdiction, such a move will not affect perfection, provided it is either:
Between jurisdictions within Canada.
To any other jurisdiction that recognises perfection by possession of certificated securities.
Common law jurisdictions. Claims and receivables (such as debts or rights under contracts) are considered intangible personal property under the PPSA (see Question 3, Tangible movable property: Common law jurisdictions).
Québec. Claims and receivables are considered intangible moveable property in Québec.
Common law jurisdictions. Security is taken over claims and receivables through the use of a security agreement.
Québec. In Québec, security over claims and receivables can only be granted by deed of hypothec.
Common law jurisdictions. The validity, perfection, effect of perfection and priority of a security interest is governed by the law of the jurisdiction where the debtor is located at the time of attachment. Security over claims and receivables is perfected by registration under the PPSA.
Québec. The applicable procedure is the same as for tangible movable property (see Question 3, Common forms of security: Québec).
Common law jurisdictions. Cash deposits (such as bank accounts) are considered intangible personal property under the PPSA. The perfection requirements are the same as for tangible movable property (see Question 3, Common forms of security: Common law jurisdictions). There is a proposal to amend the Ontario PPSA, to permit perfection by control of cash collateral accounts, similar to Article 9 of the UCC.
Québec. In Québec, security over cash deposits can only be granted by deed of hypothec.
Common law jurisdictions. Security over cash collateral accounts is perfected by registration under the PPSA.
Québec. The applicable procedure is the same as for tangible movable property (see Question 3, Common forms of security: Québec).
The most common types of intellectual property over which security is granted in Canada include patents, trade marks, copyright and designs.
Although most intellectual property is regulated by federal legislation, it is possible to grant security over intellectual property under the PPSA or Civil Code. Under the PPSA, intellectual property, whether registered or unregistered, is considered intangible property and perfection requirements are the same as for other intangibles (see Question 5, Formalities: Common law jurisdictions).
Québec law characterises intellectual property as incorporeal movable property. A deed of hypothec is the most common form of granting security over intellectual property (for formalities, see Question 3, Common forms of security: Québec).
In practice, a creditor wishing to protect its security in registered Canadian trade marks, copyrights or patents generally files a copy of the security agreement with the federal Canadian Intellectual Property Office (CIPO), in addition to registration under the PPSA. While filing with CIPO may not improve the creditor's priority against other secured creditors, it will serve as notice of the creditor's security interest to any purchaser of the intellectual property.
See above, Common forms of security.
A security interest can be granted over debtor's future assets under both the PPSA and the Civil Code. Typically, a security agreement provides that a creditor acquires security in the debtor's after-acquired personal property (which is the common name for future assets) as soon as the debtor acquires an interest in that personal property.
The PPSA does not expressly prohibit granting security over fungible assets. If the security interest in the goods is perfected before the goods become part of a product or mass and the goods are manufactured, processed, assembled or commingled so that their identity is lost in the product or mass, the security interest will continue in that product or mass. If more than one security interest attaches to the product or mass, the security interests rank equally according to the ratio that the cost of the goods to which each interest originally attached bears to the cost of the total product or mass.
In Québec, a hypothec can be granted over fungible assets. Hypothecs granted over movable property will similarly continue to subsist in the property resulting from the transformation and/or combination of such fungible assets. However, it is unlikely that a hypothec on money will continue to exist once the hypothecated money is commingled with other funds.
Certain receivables owed by some Canadian governmental authorities cannot validly be assigned or granted as security. Special notification and other formalities may apply to security over other receivables owed by these governmental authorities. For example, if a lender takes an assignment of rents as security and a Canadian federal government department is one of the tenants, the assignment cannot be enforced in respect of the rents, owing by such department, unless notice of the assignment has been given to and accepted by the government.
In both common law jurisdictions and Québec, security is typically released by the secured party executing a formal release and taking any further steps necessary to ensure the financing statements, mortgages or hypothecs are discharged from the public registries.
It is common in Canada to take security both over the shares of an SPV set up to hold the borrower's assets and directly over these assets.
Sale and leaseback transactions are common in Canada.
Factoring is common in Canada.
Hire purchase arrangements are not commonly used in Canada as quasi-security structures.
Consignment arrangements based on retention of title are used. However, they are not very common as it is often uncertain whether an arrangement will be recognised as a true consignment that is excluded from the PPSA.
Chattel leases are very common, but leases for a term of more than one year are subject to the PPSA and must be registered.
Due to the PPSA's very broad scope, once-common financing arrangements like conditional sales contracts are no longer used, as they are subject to the PPSA and treated as security agreements.
Canadian courts generally respect the legal form of a transaction as specified by the parties in their agreement. However, Canadian courts may recharacterise the transaction if either:
The characterisation in the agreement is ambiguous.
The transaction appears to be different, in substance, from what it purports to be.
In addition, the Civil Code invalidates any clause under which a creditor reserves a right to become the irrevocable owner of the debtor's property, or to dispose of it, if the debtor fails to perform its obligation.
Negative pledge clauses are often used in credit agreements but are often subject to a pre-agreed list of standard permitted encumbrances.
Guarantees are commonly used in Canada and are created by guarantee agreements executed by the guarantor.
Most Canadian corporate statutes have repealed financial assistance rules or amended them to allow corporations to provide financial assistance to "any person for any purpose", subject to certain disclosure obligations. However, a few Canadian corporate statutes prevent companies from providing financial assistance for the acquisition of their shares. In addition, a company governed by the Québec Companies Act cannot provide financial assistance to its shareholders or a shareholder of its parent corporation. (However, draft legislation that is currently before the Québec legislature will remove this financial assistance prohibition, if it is enacted.)
Canadian corporate law statutes do not contain provisions regarding corporate benefit rules. However, entering into a transaction that has no benefit for the corporation may breach the directors' fiduciary duties, or be challenged as oppressive by minority shareholders or creditors. Guarantees supporting indebtedness of related corporations would generally be legal, even if the guarantor does not benefit directly from the financing, because the financing is beneficial to the corporate group as a whole.
There are no restrictions on making loans to or guaranteeing loans of directors other than:
Potential disclosure obligations.
Corporate conflict of interest rules (preventing a director from voting to approve a loan to the director).
The directors may be subject to increased income tax liabilities, depending on the nature of the transaction.
A person is guilty of an indictable offence if he either (section 347, Criminal Code (Canada)):
Enters into an agreement or arrangement to receive interest at a criminal rate (currently 60%).
Receives a payment or partial payment of interest at a criminal rate.
Interest is defined very broadly to include the aggregate of all charges and expenses, including a fee, fine, penalty, commission or similar charge or expense, or in any other form, paid or payable for advancing credit under an agreement or arrangement (section 347, Criminal Code (Canada)).
If a loan violates section 347 of the Criminal Code, a court may hold that all obligations of the borrower to pay interest (as defined above) are illegal and unenforceable.
In addition, no fine, penalty or rate of interest can be stipulated for, taken, reserved or exacted on any arrears of principal or interest secured by a mortgage on real property or hypothec on immovables, that has the effect of increasing the charge on the arrears beyond the rate of interest payable on principal money not in arrears (Interest Act (Canada)).
Canadian corporate law statutes do not have any other rules which would directly affect the taking of security by a creditor.
Generally, merely holding security over land, as opposed to enjoying possession, does not have the requisite degree of control to trigger environmental liability. However, environmental laws in most provinces are drafted broadly and therefore there is a risk that, once a creditor enforces its security, liability could be imposed on a creditor who is deemed to have (or have had) the requisite degree of control over the property, even if it is not responsible for the pollution. To avoid this open-ended statutory liability, some provinces have enacted provisions to protect creditors from environmental liability in certain circumstances.
Contractual subordination of debt is possible and common in Canada. Contractual subordination of debt can be achieved by an intercreditor agreement between the debtor's secured creditors.
Structural subordination is possible in Canada if a loan is made and security is given at different levels in the corporate structure.
Intercreditor arrangements are common. Typically the borrower and each of the relevant lenders are party to such arrangements. The typical terms of these agreements relate to:
The sharing of collateral/priority of liens.
The sharing of information.
The application of proceeds.
Secured debt is traded in Canada. If the debt is widely held by a number of lenders, debt can usually be traded on a book-entry basis (like other debt and equity securities) and security is held by a trustee under an indenture for the lenders' benefit. If the debt is held by only a few lenders, the loan agreement and security documents usually give the lenders broad powers to assign their interests in the debt and security without the debtor's consent (the security is again often held by one lender as agent for all of them). If there is a change in the lender holding security, it is usually only necessary to amend the registration of the security and sometimes obtain confirmation of the security from the debtor.
Common law jurisdictions. Agents are typically used on syndicated loans.
Québec. Agents are typically used on syndicated loans. However agents must be specifically appointed under the credit documents as fonde du pouvoir (that is, the holder of the lenders' power of attorney) by each of the lenders.
Trusts, both domestic and foreign, are recognised and a security trustee can enforce its rights in the courts.
The trust concept is recognised. However, security granted in favour of a person or entity acting for the benefit of others must be in the form of a notarial deed of hypothec securing the payment of bonds or other titles of indebtedness (Civil Code).
There are no specific formalities on how loans should be documented to be enforceable.
The circumstances in which a secured creditor will be entitled to enforce its security are specified under the contract(s) it has with the debtor, typically a credit agreement and security agreement.
In common law provinces, when a debtor defaults under a security agreement, the secured party has the rights and remedies under the security agreement and the PPSA. In Québec, a creditor under a hypothec can enforce the hypothec on the debtor's default. The statutory remedies available to the creditor are set out in the Civil Code (see Question 23).
In addition to complying with the requirements in the security agreement, the secured creditor must, in all Canadian provinces, provide common law "reasonable notice" before being entitled to enforce its security interest. Under common law, reasonable notice depends on the circumstances of the case, including:
The length of the lending relationship.
Amount of the loan.
The debtor's ability to refinance the indebtedness.
Additional notification requirements exist for certain security interests (see Question 23). When the debtor is insolvent, a secured creditor must also provide a notice of intention to enforce its security to the debtor under the federal Bankruptcy and Insolvency Act (BIA), where it intends to enforce security over all or substantially all of the insolvent debtor's:
Other property that was acquired for, or used in relation to, the insolvent debtor's business.
The secured party cannot enforce its security for ten days after giving the notice. The debtor can consent to an earlier enforcement of security, but consent cannot be given before receiving the notice of intention to enforce the security interest.
Security over real property in different common law provinces can normally be documented in a single security instrument. However, enforcement procedures vary considerably. Typically, enforcement is available through both judicial and non-judicial means. Deficiency judgments (that is, a judgment against a debtor whose foreclosure sale did not produce sufficient funds to repay the creditor in full) are available in most jurisdictions. Strict statutory notice provisions (as to timing, parties to be served, and the form of notice) apply on enforcement in all provinces, particularly in the case of agricultural lands.
Generally, a security interest can be enforced by either:
Selling the underlying collateral. The sale can be private (by sealed tender, auction or a private receiver (if the security agreement provides for this)) or public (by applying to the courts to appoint a receiver either under the general jurisdiction of the provincial courts or receivership provisions in the BIA).
The PPSA generally provides for a 15-day notice period before a private sale of personal property collateral and stipulates the parties who must be notified. Collateral may be disposed of wholly or partially. Any disposition can be by public sale, private sale, lease or otherwise and on any terms as long as every aspect of the disposition is commercially reasonable. Disposing of the collateral does not prejudice a secured creditor's right to sue the debtor or any guarantor for any outstanding amount.
Notice of disposition is not required if:
the collateral is perishable;
the secured party reasonably believes that the collateral value will decline quickly;
the collateral is of a type customarily traded on a recognised market;
the cost of care and storage of the collateral is disproportionate to its value;
on application to the court, the court is satisfied that a notice is not required;
after default, every person entitled to notice of the disposition consents, in writing, to the immediate disposition of the collateral; or
a receiver and manager disposes of the collateral in the course of the debtor's business.
Foreclosure. This involves retaining the underlying collateral to satisfy the debt in full. A secured creditor must serve a notice under the PPSA, which generally provides for a 15-day objection period. If any affected party (the debtor or other secured creditors) successfully objects, the collateral must be sold in accordance with the PPSA (see above). Generally, an objection will be successful if it can be shown that the value of the collateral is greater than the obligation owed to the enforcing secured creditor. If no timely or successful objection is made, the secured party is deemed to have irrevocably elected to accept the collateral in full satisfaction of the secured obligation and, therefore, will not have any remaining claim against the debtor or any guarantor.
Private receivers or receiver-managers would exercise the same rights under the PPSA, in addition to any rights under the security agreement. A receiver appointed by a court sells assets according to that court's orders.
Under the Civil Code, a hypothec holder has four rights. These rights are inherent to hypothec and therefore need not be stated in the deed. The four rights are:
To take possession of the property for purposes of administration.
To take the property in payment of the debt.
To cause the property to be sold privately.
To cause the property to be sold by judicial authority.
At the start of enforcement the creditor must give notice to the debtor of his intention to exercise one of these rights (see above, Common law jurisdictions). The notice must, among other matters:
Identify the events of default.
Contain a description of the hypothecated property.
Identify the amount claimed.
Request the debtor to surrender the hypothecated property before the expiry of the period specified in the notice. In the case of movable property, the period is 20 days from the publication of the notice in the Register of Personal and Movable Real Rights. In the case of immovable property, the period is 60 days. However, both periods are reduced to ten days if the creditor intends to exercise the right to take possession for the purposes of administration.
Once notice is served, the debtor or any other interested party can prevent the creditor from exercising its hypothecary right by paying the amount due. If the payment is not made and the debtor fails to voluntarily surrender the hypothecated property (specified in the notice), the creditor can obtain a court order to secure the forced surrender of the hypothecated property.
The Civil Code provides for a special regime to enforce security over rents, receivables and other claims. If the deed of hypothec authorises the debtor to collect rents or other receivables or claims until a default occurs, the creditor can withdraw that authorisation by both:
Sending a notice of withdrawal to the debtor.
Filing that notice in the Register of Personal and Movable Real Rights or land register. Once a creditor files the notice and sends to the debtor(s) a copy of the deed of hypothec (or other evidence of the hypothecation), a creditor can collect the hypothecated claims without having to provide or register any additional notices.
Company rescue or reorganisation outside of insolvency proceedings can only be achieved by private contract with the company's creditors. A private contract does not affect a secured creditor's rights to enforce its security.
A company can restructure its debt by converting debt into a combination of new debt and/or new equity by a court-supervised plan of arrangement under governing corporate legislation. These plans typically require:
Approval by a two-thirds majority of the affected creditors.
The following formal insolvency procedures exist in Canada:
Proceedings under the federal Companies' Creditors Arrangement Act (CCAA).
Proposal proceedings under the BIA.
Court-appointed receivership (provincially or under the BIA or both).
A formal bankruptcy under the BIA.
All procedures, except a formal bankruptcy, automatically stay a secured creditor's enforcement rights. However, parties can agree to exclude a secured creditor from a CCAA stay. In addition, a proposal proceeding would not stay a secured creditor's enforcement rights if that secured creditor had sent a notice of intention to enforce its security under the BIA (see Question 22) and the ten-day period expired before the debtor filed either:
A notice of intention to make a proposal under the BIA.
Transactions at an undervalue (that is, in which consideration received by the debtor is conspicuously less than the fair market value of the property or services sold or disposed of by the debtor) can be set aside under the BIA or CCAA if entered into during:
One year before the initial bankruptcy event (defined in the BIA) for transactions at arm's length.
Five years before the initial bankruptcy event for transactions not at arm's length.
Transactions executed to give one creditor a preference over others may also be set aside under the BIA or CCAA if entered during:
Three months before the initial bankruptcy event for transactions at arm's length.
One year for transactions not at arm's length.
There is also provincial legislation allowing a court to set aside fraudulent conveyances or preferences. This requires proof of intent to defeat, hinder or delay other creditors by granting security. The intent generally cannot be shown if new money is provided in consideration for the security. However, this fraudulent conveyance and preference legislation can be used successfully to set aside a grant of security for already existing debt. Common law provinces generally have a limitation period of two or six years (depending on the province) for these actions. In Québec, the limitation period is either one or three years, depending on the provision of the Civil Code on which the claim is based.
In certain cases, the court has set aside new security for a fresh advance of money when the secured lender knew or reasonably ought to have known that the debtor was insolvent or would become insolvent as a result of borrowing the additional money. However, these cases were decided on their own specific facts.
Subject to many fact-specific exceptions, the priority of claims is as follows (BIA):
Statutory priority claims in relation to an insolvent employer's failure to remit to federal authorities amounts withheld in respect of employees':
income tax payments;
employment insurance premiums;
Canada Pension Plan contributions.
Employees' claims for arrears of wages (including vacation pay but excluding termination and severance pay), limited to Can$2,000 per employee (as at 1 December 2011, US$1 was about Can$1.03). These claims rank ahead of all existing secured creditors in relation to the current assets of the debtor.
Claims for registered pension plan contributions which were required to be made but were not made.
Secured creditors' claims.
Preferred creditors' claims, which includes the administration costs of the bankrupt estate by the trustee in bankruptcy.
Unsecured creditors, including tax or other government claims.
There is no separate category of subordinated creditors under Canadian insolvency laws. Subordination is a matter of contract between secured or unsecured creditors and does not affect the above priority. The US doctrine of equitable subordination has not been applied to any meaningful extent in Canada. For equitable subordination to apply in Canada, proof of bad faith or fraud is generally required.
Generally, as between security interests governed by the PPSA and perfected by registration only, the first in time to register a financing statement under the PPSA ranks first, and so on.
Under the Civil Code, the first in time to publish a hypothec has priority. A secured party in possession or control of the collateral generally has priority over all other secured parties that have security interests in the same collateral, regardless of the order of registration.
However, there are many exceptions. There are also other types of registered or unregistered liens and charges (for example, there is a special type of security available only to Canadian chartered banks under the federal Bank Act) and complex priority issues can arise between these and PPSA security interests.
Generally, an unperfected security interest:
Is not effective against:
a trustee in bankruptcy or other creditor representative; or
a bona fide purchaser of the collateral for value and without notice.
Is subordinate to perfected security interests and other liens in the same collateral.
There are no general restrictions in Canada on granting security to foreign lenders. However, if a foreign lender acquires a Canadian business on foreclosure, Canada's foreign investment review legislation applies. The legislation in certain provinces imposes restrictions on foreign ownership of agricultural land.
There are no exchange controls in Canada that restrict payments to a foreign lender under a security document or loan agreement.
A foreign choice of law clause in a security agreement is recognised and applied by Canadian courts in common law provinces, subject to certain limited exceptions, of which the following are the most significant:
Canadian courts apply certain provincial and federal statutes that have overriding effect, such as:
some provisions concerning remedies in the PPSA;
the Criminal Code (Canada);
consumer protection legislation;
the Competition Act; and
possibly some common law doctrines relating to the enforcement of creditors' rights.
Canadian courts apply Canadian laws that are procedural in nature.
Canadian courts do not apply foreign law if its application would be contrary to public policy. In practice, this rarely happens.
A foreign choice of law clause may not be enforceable in Québec, depending on the location of the secured property or domicile of the security grantor.
Except for a modest tax on real property security in Alberta, Canada does not impose stamp duties or any other type of documentary tax in connection with granting and enforcing security.
There are flat-rate registration fees to register security interests in Canada but they are all generally nominal.
Strategies to minimise the costs of such taxes and fees are not usually required.
There are currently no proposals for reform that would materially affect secured lending practices in Canada, except as specifically noted in this chapter.
Qualified. Canada (Ontario), 1998
Areas of practice. Banking; corporate commercial; infrastructure; private equity.
Qualified. Canada (Ontario), 2004
Areas of practice. Banking; M&A (public and private); corporate commercial; private equity.
Qualified. Canada (Québec), 1989
Areas of practice. Secured (syndicated) lending; structured financing; asset-based lending.
Qualified. Canada (Ontario), 1996
Areas of practice. Restructurings, insolvencies and bankruptcies.
Qualified. Canada (Ontario), 2001
Areas of practice. Commercial real estate; corporate commercial; infrastructure.