A Q&A guide to construction and projects law in Canada.
The Q&A gives a high level overview of the main trends and significant deals; the main parties; procurement arrangements; transaction structures and corporate vehicles; financing projects; security and contractual protections that funders require; standard forms of contracts; risk allocation; excluding liability, including caps and force majeure; contractual provisions covering material delays and variations; appointing and paying contractors; subcontractors; licences and consents; projects insurance; labour laws; health and safety; environmental issues; corrupt business practices and bribery; bankruptcy/insolvency; public private partnerships (PPPs); dispute resolution; tax and mitigating tax liability; the main construction organisations; and proposals for reform.
To compare answers across multiple jurisdictions, visit the construction and projects Country Q&A tool.
This Q&A is part of the PLC multi-jurisdictional guide to construction and projects law. For a full list of jurisdictional Q&As visit www.practicallaw.com/construction-mjg.
The flat global economy has caused a slowing of the Canadian domestic economy, which has affected the Canadian construction industry.
However, the infrastructure sector remains strong. PPP financing has been considered or used for much of Canada's recent infrastructure development, particularly in Ontario, British Columbia, Alberta and Québec. Competition from abroad has increased in recent years, particularly on infrastructure projects.
The growth in the Canadian infrastructure sector has been very important to the Canadian construction industry in recent years. It is anticipated that this growth will continue. For example, a PWC-sponsored report predicts that from 2010 to 2015 Canadian infrastructure will grow at more than two and a half times the growth rates seen over the previous five years (see the report at www.pwc.com/ca/en/media/release/2011-05-05-canadian-construction-projects.jhtml).
Transport infrastructure projects form an important element of this infrastructure growth. Given that currently more than 80% of Canadians live in urban areas, there has been an increase in government efforts to expand public transit, notably in Toronto (a light rail transit project and a subway extension to York Region) and Ottawa (a light rail transit project).
Toronto will host the Pan Am Games in 2012, leading to the construction of sports venues and other facilities. A new airport rail link will be constructed in Toronto from Union Station to Lester B Pearson airport.
The Can$5 billion Detroit River International Crossing project is also underway in Ontario (as at 1 April 2012, US$1 was about Can$1).
There are many hydro projects under construction or planned, with several large projects in Québec including the Can$6.5 billion hydro complex in Haure-Saint-Pierre, Québec and a Can$5 billion project in the James Bay area.
In Alberta, there are 20 potential new oil sands projects to commence within the next five years which will result in significant infrastructure spending to support oil sands development.
Most construction contracts are entered into between a purchaser, typically the owner, and a contractor, who agrees to produce a defined scope of work over a defined period of time under a defined pricing mechanism.
The scope of the work may be limited to construction, with the purchaser of the deliverable supplying the design, or it may include both design and construction. The designer will play a key role in the project in the preparation of the design employing the relevant architectural and engineering disciplines (including mechanical, electrical, structural, geotechnical, and other engineering disciplines).
The methods described below are utilised by both local contractors and international contractors. International contractors have been particularly active in projects involving public private partnerships.
The design-bid-build method is the most traditional type of delivery method used. Under this method, the owner retains the designer (architect or engineer). The designer then prepares the plans and specifications for the project. The contractor reviews the plans and specifications and submits a bid to the owner to perform the work. The designer and the contractor each have separate contracts with the owner and each report directly to the owner. The designer may be assigned the role of consultant under the construction contract between the owner and contractor. In this role, the consultant takes on certain tasks such as inspecting the work, administering payment, and making impartial determinations and/or findings in the event that disputes arise between the contractor and owner.
Under the design build method, the owner retains a design professional to develop a conceptual design only and then retains a design builder. The design builder will both prepare the design and construct the project. Under this method, the owner is able to transfer both the design and construction risks to the design builder.
Under a design-build-bridge model, the owner hires both a designer and a design builder. The owner assigns the design agreement to the design builder once the project documents are sufficiently developed and once the scope and the budget of the project are adequately understood. Following the assignment, the design builder becomes responsible for both design and construction.
Under the design-build-operate-maintain method, the design builder is required to operate and maintain the project upon its completion for a specified period of time. This method is sometimes utilised on large-scale projects such as hospitals and highway projects. The design builder will often receive a portion of the operating revenues generated by the project to compensate it during the operation and maintenance phase.
The vehicle used for a project is often a reflection of:
The nature of the project.
The project's risk.
The lender's tolerance for unconventional structures.
For example, special purpose vehicles (SPVs) are often used to develop large projects, because SPVs isolate risk to a particular project. Banks are prepared to accommodate this structure because they are protected by inter-company and sometimes personal guarantees.
The size and magnitude of industrial and infrastructure projects often mean that joint ventures are often used. Typical transaction structures are described in Question 3.
The type of corporate vehicle used depends on the project size and the financial strength of the participating entities. Single purpose vehicles, including joint ventures, are often used on projects involving international entities.
The financing of a construction project depends on:
The project size.
The project's purpose.
The financial strength of the owner or developer.
Debt and equity financing are the most common tools for funding projects. These are often supplemented by mezzanine financing, particularly in phased projects.
The financing of large-scale PPP projects is particularly complex including detailed lender's agreements which are one of the key agreements on PPP projects.
These arrangements tend to be the same for both local and international projects.
A private funder typically takes security over the land on which a project will be completed, usually in the form of some kind of mortgage. This security will usually be supplemented by:
A general security agreement.
Guarantees from the borrower's related companies or individual principals.
An assignment of rights over the construction revenue source.
The relationship between a developer and a private lender is usually governed by a loan agreement. Contractual protections are a negotiated reflection of the allocation of risk. In the event of a default, the lender will typically have a right to:
Appoint a receiver-manager to take control of the property of the company and potentially manage the company.
The lenders' rights to assignments of revenue or other proprietary rights are typically a reflection of the security package.
Standard forms of contracts are published by the:
Canadian Construction Documents Committee (CCDC).
Canadian Construction Association (CCA) (see box, Main construction organisations).
Royal Architectural Institute of Canada (RAIC).
In addition, the federal government, the various provincial governments, and many regional and municipal authorities have their own standard form documents, including well-developed standard documents for PPP projects.
Parties to an international project can use the Canadian standard forms of contract (see above, Local projects), but in part because international participants will usually be unfamiliar with these forms, it is more usual to either:
Negotiate a stand-alone contract tailored to the project.
Use a standard form with greater international profile, for example, the forms published by the International Federation of Consulting Engineers (Fédération Internationale des Ingénieurs-Conseils) (FIDIC).
For further information, see PLC Practice note, FIDIC Forms of Contract.
Contracting parties manage risk by explicitly allocating risks in the contract. The contract governs the allocation of risk associated with unforeseen conditions. Risk allocation depends, in part, on whether the contract is tendered or negotiated:
Tendered contracts. In tendered contracts, most risks are typically allocated to the contractor. In particular, public authorities tend to use standard form contracts that allocate many risks to the contractor. For example, these contracts generally exclude liability of the owner for certain risks, including material price escalation and ground conditions (see Question 9).
Negotiated contracts. In negotiated contracts, risk is typically assigned to the party that is best able to evaluate, manage and assume it. For example, using a costs plus contract, contractors can attempt to minimise their risk because the contractor is paid on the basis of its costs of construction plus an extra amount for profit and overhead. In this case, the owner bears certain risks, for example, the risk of an increase in materials prices.
In contrast, a stipulated price contract will fix the contract price so that the contractor typically bears the risk of material price escalation and unanticipated ground conditions. The CCDC 2 2008 Stipulated Price Contract is the most frequently used standard form stipulated price contract in Canada.
In Québec, contract terms are interpreted in the context of each party's obligation under Québec civil law to:
Act in good faith.
Inform the other of information which is material to the project.
Liability (including liability for indirect or consequential loss) is typically excluded by contract through limitation of liability provisions, known as exculpatory provisions.
The courts will generally enforce exculpatory provisions, but will limit the scope of clauses to the meaning of the words employed and any ambiguity will be construed against the party that drafted the clause. Therefore, any limitation or exclusion clause must:
Be clearly articulated.
Clearly cover the circumstances that have arisen.
In addition, the courts will refuse to enforce exculpatory clauses in the following situations:
Breach of fiduciary duty.
Breach of a statutory prohibition.
The Supreme Court of Canada set out a three part test to determine whether or not an exclusion clause applies. The court will consider:
Whether as a matter of interpretation the exclusion clause applies to the circumstances established in evidence. This depends on the court's assessment of the intention of the parties as expressed in the contract.
Whether the exclusion clause was unconscionable at the time the contract was made (for example, in situations of unequal bargaining power between the parties).
The court may then consider whether it should nevertheless refuse to enforce the valid exclusion clause due to an overriding public policy (that the party seeking to avoid enforcement of the clause must prove), that outweighs the very strong public interest in the enforcement of contracts.
In Québec, joint and several liability applies to the contractor, architect and engineer that directed or supervised a project, and the subcontractor (with respect to work performed by it), for any loss occurring within five years after the work was completed. This liability arises whether the loss resulted from:
Faulty design or improper construction or production.
Unfavourable soil conditions.
In Quebec, this liability is of a public order and cannot be contractually excluded or capped, although a party can present certain legal defences to relieve itself of this liability.
Parties often, but not always, agree on a cap on liability. A liability cap is an example of an exculpatory provision. Caps are commonly included in contracts for industrial projects. Liability is usually capped at either:
A fixed amount of loss (typically a percentage of the contract price).
A category of loss.
Architectural and engineering agreements often include caps on liability. In this case, liability is usually capped at the architect's or engineer's fee, or professional liability insurance.
Liability for the statutory five-year warranty in Québec cannot be capped (see Question 9).
Force majeure clauses are consistently included in construction contracts and are enforceable. However, most clauses only address circumstances involving delays to the work, and do not extend to increases in the pricing of materials and equipment for reasons beyond the control of the parties.
For example, the CCDC 2 2008 Stipulated Price Contract sets out the following force majeure events, which allow a contractor a time extension to complete the work (but not the costs associated with the delay):
Abnormally adverse weather conditions.
In Québec, the Civil Code defines force majeure as an unforeseeable and irresistible event. A contractor is not liable for damages resulting from a force majeure event unless it has agreed to be responsible for such damages.
Local and international projects address material delays in a similar manner. Material delays can be categorised as follows:
Excusable material delays. These are delays caused by external events such as weather and strikes which typically entitle the contractor to an extension of the completion deadline, but not to costs that it incurs because of the delay.
Contractor's material delays. The owner can typically claim against the contractor for any delay (and its associated costs) caused by the contractor, for example, a delay due to its failure to properly staff the construction work.
Owner's material delays. If the owner creates a delay, for example, by failing to provide access to the site of the works, or making material changes to the design, it must typically provide the contractor with a time extension, and in some cases with compensation for costs related to the delay. However, many construction contracts contain onerous notice terms with which the contractor must comply as a pre-condition to seeking compensation for owners' material delays.
Often, one party will resist a delay-related claim by alleging that the other party was also responsible for delay. The courts will attempt to allocate responsibility for delays as best they can where allegations of delay are made.
Variations (changes) to the works are addressed through either a change order or change directive:
A change order is a written order to the contractor by the owner or architect, issued after execution of the contract, authorising a change in the work and/or an adjustment to the contract price or time. The parties typically liaise through a consultant and once they have agreed on a new price and time, their agreement becomes effective and is recorded as a change order.
A change directive is a written order directing a minor change to the works, without the contractor's agreement. The owner imposes the change through a consultant and the contractor makes the change. Price is adjusted afterwards, according to any expenditure or savings resulting from the change, under the price adjustment mechanism provided in the original contract. If the contractor and the owner ultimately do not agree on the proposed adjustment to the contract price or time, the matter is referred to and decided by the consultant, and, if not resolved through the consultant's determination, is addressed through the dispute resolution mechanism in the contract.
Contractual provisions which are often subject to intensive negotiations include the following:
Warranties (including the scope and length of the warranties).
Limitation of liability provisions.
Responsibility for arranging and obtaining permits and licences.
Potential regulatory changes (including potential changes to tax structure).
Site investigation and unanticipated conditions.
A tender process is often used to select construction professionals. In some instances, public sector entities may be required to utilise a competitive procurement model. For example, in Ontario, any entity which is subject to the Broader Public Sector Procurement Directive 2011 is required to competitively procure goods and services, including those of design professionals in the construction context.
On a design-build project, the designers may be part of a joint venture bidding in a competitive environment on a project.
Under the traditional procurement model, the owner typically appoints construction professionals using standard form agreements. The Royal Architectural Institute of Canada has a standard form contract for architectural services, as do provincial architects' associations, but these standard form contracts may be viewed as weighted in favour of architects, from the owner's or contractor's perspective, and therefore an owner or contractor may choose to negotiate a stand-alone contract, tailored to the needs of the project, particularly on a larger project.
Design professionals must be licensed by the Canadian province or territory in which they intend to work and are governed by legislation affecting their profession (see Question 18).
Construction professionals may also be subject to claims in negligence for failure to meet the requisite standard of care of their profession. The liability of construction professionals is often limited to the coverage and amount of their professional liability insurance.
Under a fixed price contract, payment is typically based on the extent of project completion. The contract will identify:
The materials or services required (for example concrete or steel).
The amount required of those materials or services to complete the contract.
The time period for payment (for example, once per month). Periodically, a construction professional will visit the site to certify how much of the project has been completed, based on the percentage or amount of materials used. Payment is then made based on this assessment.
The other common form of payment method is based on achievement of milestones, identified in the contract.
In addition, certain sectors manage payment on a cost plus basis, based on periodic (typically monthly) measurement of work in place.
In every common law province and territory, contractors can place a construction lien on an improvement, to (at least partially) secure the payment obligations to the contractor and subcontractors, and therefore mitigate the risk of non-payment to those participating in the construction pyramid who have provided services or materials to the project. A lien is a statutory form of security and can be enforced by a civil action. A similar regime applies in Québec (legal hypothecs).
In October 2010, the Ontario government passed the first substantive changes to its lien legislation in 20 years. Among other changes, the legislation expands the definition of improvements which are subject to a lien.
Owners and their lenders, consider the preservation of a lien to be an antagonistic step and liens can threaten commercial relationships. Accordingly, from a transactional perspective, contractor payment is more likely to be secured, if at all, by a parental guarantee.
Labour and material payment bonds and performance bonds are commonly used on Canadian construction projects (see Question 17).
Parties typically manage their relationships with subcontractors through the use of bespoke standard form subcontracts, which include provisions such as:
Indemnities. A contractor can insist on including a clause indemnifying the contractor against its subcontractor's acts, errors, losses and omissions. This type of clause is permitted, but must be clearly expressed.
Surety bonds. A contractor can require that its subcontractors provide a surety bond to ensure that, if the subcontractor becomes insolvent or defaults under the contract, the completion of its work is ensured by the surety. Surety bonds must be issued by a duly licensed surety company and are usually developed in accordance with the latest edition of the CCDC-approved bond forms (see Question 6).
Payment stipulations. Contractors often require their subcontractors to provide certain documentation together with their payment requests, including:
releases from sub-subcontractors and major suppliers;
evidence of payment of government fees and contributions;
a release of their recourse against the contractor and owner in relation to work performed to date.
Subcontractors are also frequently required to agree to a pay when paid provision.
Generally, Canadian provinces do not require contractors to be licensed, although there are exceptions including:
Québec. Contractors working in Québec must obtain a licence from the provincial construction regulator, the Régie du Bâtiment (see box, Main construction organisations). If a foreign contractor does not take this step, it can be sanctioned and precluded from registering a legal hypothec.
British Columbia. Residential builders in British Columbia must be licensed by the Homeowner Protection Office (see box, Main construction organisations).
Ontario. Contractors of new homes and condominiums must be licensed by the Tarion Warranty Corporation (see box, Main construction organisations).
In addition, construction professionals (particularly engineers and architects) must be licensed by the Canadian province or territory in which they work (see Question 21).
Penalties for breach of local licensing laws include:
Prohibitions against collecting fees for unlicensed services.
Generally, apart from federal environmental assessments, licensing falls under the jurisdiction of the provinces and therefore licensing requirements may vary from province to province.
In addition to the construction permit generally required for construction projects, there will likely be planning and zoning permissions required from the municipal or provincial authority. Occasionally, a federal licence for projects involving property owned by the federal government is required. In addition, environmental approval may be required before construction begins (see Question 25).
Inspections of the construction work are regularly carried out by the project consultant or owner's representative to ensure:
That the work conforms with the plans and specifications.
The quality of the work.
These inspections can also be a condition precedent to the approval of the contractor's payment requests. Depending on the nature of the project, government representatives from the Health and Safety Board or the local authority may visit the project to ensure conformity with applicable building codes.
At the end of the work, construction professionals usually sign off on the project and produce documentation attesting to the status of completion of the work. Other documentation may be required depending on the financing and transaction structure of the project.
All employers, including all contractors and subcontractors, must subscribe to the relevant provincial workers' compensation plan, which insures workers from the risk of loss of wages due to on-site injury.
As a matter of government procurement policy and private-sector practice, nearly all project contracts stipulate that the contractor must obtain certain insurance. For example, the CCDC 2 2008 Stipulated Price Contract requires a contractor to provide the following types of insurance cover:
Aircraft and watercraft.
Boiler and machinery.
The amount of insurance will typically be a matter of negotiation between the parties.
These insurance policies are required for both local and international projects.
A wide range of insurance products are available to construction parties, including:
Builders' risk insurance.
Commercial general liability policies.
Errors and omissions policies covering liability of professionals.
Pollution liability insurance.
These products are obtained on both local and international projects.
Hiring requirements for construction employees vary based on the applicable legislation in each province and territory. Certain provinces impose licensing requirements. For example:
Québec. Most construction workers must hold a required Québec competency certificate from the Québec Construction Commission (see box, Main construction organisations). The Regulation respecting the issuance of competency certificates sets out eight situations in which an exemption can be obtained from holding such a certificate. Important exceptions apply to:
those with relevant qualifications from outside Québec;
inter-governmental agreements. Québec has inter-governmental agreements with Ontario, New Brunswick and Newfoundland/Labrador that allow workers that are authorised by an organisation recognised by the agreement to practice a trade without a Québec competency certificate.
Alberta. The employment of tradespeople in Alberta is governed by the province's apprenticeship and industry training system, managed by Alberta Apprenticeship and Industry Training (AAIT). Trades are divided into "compulsory trades" and "optional trades" The different trades and their requisite certifications are described at www.tradesecrets.gov.ab.ca. Employers are responsible for ensuring that employees working in compulsory trades have the required qualifications.
Ontario. Skilled tradespeople are required to obtain government certification as described at www.tcu.gov.on.ca. In order to obtain a certificate of qualification, an individual must write a provincial qualification examination. In order to write this examination, an individual must prove that he or she has experience in the trade. The governments of Ontario and Québec have an agreement to improve construction labour mobility between the two provinces.
A foreign construction worker must be authorised to work in Canada, either:
As a permanent resident of Canada.
Under a temporary work permit issued by the relevant regulatory authority.
There are certain licensing restrictions for certain types of foreign workers in the construction industry.
The following organisations provide information about the licensing of foreign architects and engineers in Canada:
Each province and territory has enacted statutes that govern labour and employment standards within that jurisdiction. These establish minimum standards in certain areas including:
Maximum working hours.
Holidays and holiday pay.
Leaves of absence.
Termination notice and pay.
In addition, each province and territory has workers' compensation legislation, which requires employers to register with and make payments to a compensation fund. Employees are then prevented from suing their employer or fellow employees for workplace injuries, and instead receive compensation from the fund.
Each province has legislation in place that allows for unions to be formed and to negotiate collective agreements.
Examples of provincial labour legislation include the following:
Québec. The Act Respecting Labour Relations, Vocational Training and Manpower Management in the Construction Industry governs labour relations in the construction industry. This Act provides that:
union membership is compulsory;
there is a vocational training and qualification system for construction workers;
employers of construction workers must belong to the Québec Association of Construction Contractors for collective agreement purposes.
Alberta. The Employment Standards Code and the Employment Standards Regulation set out minimum employment standards for non-unionised employees. There are various amendments to the minimum requirements for "construction employees" (section 44 and Part 4, Employment Standard Regulation). In particular, construction employees have different holiday pay entitlements and are not entitled to notice of termination or pay in lieu of notice unless they are employed or perform ongoing maintenance as an office employee (for other employees, the employer must provide notice or pay in lieu of notice, and in some cases severance pay). The employment of unionised employees in Alberta is governed by their applicable collective agreement and the Labour Relations Code. Part 3 of the Code, "Construction Industry Labour Relations", is particularly relevant to construction employees.
Ontario. The Employment Standards Act sets out minimum requirements that employers and employees must follow. This Act is enforced by the Ministry of Labour. Certain provisions of the Act do not apply to construction workers and those involved in road building and sewer and water main construction have different rules applied than those applied to other types of construction employees.
Statutory redundancy and other payments depend on provincial legislation (see Question 22).
Each province and territory has enacted occupational health and safety statutes and regulations applicable to the construction industry. These laws apply generally, and in some cases specifically to the construction sector. Worker health and safety is generally a very high priority.
Environmental regulation exists at both a federal and provincial/territorial level. Therefore, there is a range of environmental regulatory regimes across the provinces and territories.
In most cases, the main regulator of environmental matters will be the provincial or territorial government in which a project is located. The most notable exception relates to construction projects within areas of specified federal jurisdiction, for example:
Nuclear power facilities.
Interprovincial and international pipelines and transmission lines.
The most significant pieces of federal legislation are the Canadian Environmental Protection Act and Canadian Environmental Assessment Act, which provide for several different areas of environmental protection and impact assessments, respectively.
Air emission standards are typically regulated by the local governments and often reflect a combination of:
European Union standards.
US Environmental Protection Agency standards.
With the continued attention to CO2 emissions internationally and in Canada, air emission standards are in a continued state of flux, but the general trend is towards increased and more stringent regulation.
Water regulation is a complex combination of federal law (mainly, the Fisheries Act) and provincial regulation of specific uses of water. Several international agreements with the US govern the many watersheds that straddle the US/Canadian border.
Waste management is mainly regulated by provincial governments. However, federal law applies increasingly to overseas and offshore transportation of waste. New regulations are being developed under the Canadian Environmental Protection Act that would see additional regulation of the movement of waste across international boundaries.
Federal and local governments set out environmental assessment requirements. These requirements vary depending on the nature of the construction project. They range from:
Screening reports for smaller projects with little environmental impact.
Full assessment processes with environmental impact statements and potential hearings for more significant infrastructure projects, for example, nuclear or other large energy facilities.
Sustainability as a requirement for construction projects is in its infancy in Canada. Generally, sustainability has not been regulated, but has been dealt with through voluntary measures. Due to increased concern over liability related to environmental matters, the trend is towards increased regulation on sustainability.
There is no requirement for a building to meet carbon emission or climate change targets unless it is a facility (for example, a power plant) that emits a significant volume of greenhouse gases. In these cases, regulations under the Canadian Environmental Protection Act or similar provincial environmental protection statutes apply (several provinces have legislation similar to the Canadian Environmental Protection Act).
Some Canadian provinces impose reporting requirements, but only relating to facilities generating sizeable emissions.
The federal and provincial carbon regulatory regime is under development but moving slowly.
A number of activities are prohibited in Canada, including:
Financing of terrorist activities.
Secret commissions. This is an indictable offence punishable by up to five years' imprisonment and prosecution by the criminal courts (section 426, Criminal Code).
Bribery of public officials to obtain a public contract (section 121, Criminal Code and Corruption of Foreign Public Officials Act).
Fraud against an individual and intent to defraud the stock market (section 380, Criminal Code).
Selling or buying a public office (section 124, Criminal Code).
Selling defective goods to the government (section 418, Criminal Code).
In many federal government procurement processes, the solicitation documents outline offences that will render a bidder ineligible to be awarded a government contract. These typically include activities prohibited under the Criminal Code (see above). The bidder can be liable if the prohibited act is committed by any employee or subcontractor that is included as part of its bid. The prohibition will only apply if the individual or company is charged with the offence.
In addition, if a contract is awarded based on illegal behaviour such as a bribe, it may be void and unenforceable based on the doctrines of:
The bribery of public officials to obtain a public contract is an indictable offence punishable by up to five years' imprisonment (section 121, Criminal Code and Corruption of Foreign Public Officials Act).
Québec recently adopted strong legislation which prevents a contractor from bidding on publicly funded projects if it has been convicted of a criminal offence or tax evasion. The existing legislation was broadened so that not just construction industry-related fraud but rather any fraud prevents a contractor from being able to bid on public contracts. The legislation also adds reference to tax fraud.
In most Canadian construction contracts, the owner and contractor typically agree that the contractor's bankruptcy or insolvency will be a ground of termination. This clause is found in most standard construction contracts, including the CCDC 2 2008 Stipulated Price Contract.
However, if a company is restructured under the Bankruptcy and Insolvency Act or the Companies Creditors Arrangement Act, construction contracts can be assigned to a trustee, and this termination right is typically suspended or stayed. In certain cases, lien rights can be affected as well.
In addition, owners often use the following rights in the event of the contractor's insolvency:
An owner-imposed holdback on a contractor's progress payment request, which can typically represent as much as 10% of the value of the work performed up to the date of default.
Enforcement of the contractor's performance bond and a labour material payment bond (each of which will be at least 50% of the contract price).
PPP models have been used extensively in Ontario and British Columbia, and to a lesser degree in Québec and Alberta. For example, the government of Alberta has initiated various PPP projects for the construction of hospitals, schools and highways. In Québec, there has been a significant increase in the use of the PPP project delivery model in light of Québec's infrastructure deficit.
The sectors in which PPPs have been used in Canada include:
Law enforcement facilities.
Federal and provincial governments have developed agencies and regulations which encourage the use of PPPs.
At federal level, under the Canada Strategic Infrastructure Fund Act, the federal government provides funding for qualified large-scale infrastructure projects that contribute to economic growth or quality of life, or advance Canada's infrastructure objectives.
In 2009, PPP Canada Inc was created to manage and invest the federal government's Public-Private Partnership Fund, an infrastructure programme designed to:
Invest in PPP using a range of financing arrangements.
Advise the federal government on the execution of PPP projects.
Access PPP options for major projects seeking funding from federal infrastructure programmes.
In addition, the provinces have created various agencies including:
British Columbia. Partnerships British Columbia is owned by the provincial minister of finance, which brings together ministries, agencies and private sector players to develop PPP projects. The Transportation Investment Act regulates PPPs in the motorway sector.
Québec. The Act Respecting Contracting by Public Bodies establishes conditions governing all contracts between public bodies and provincial contractors, and includes a chapter setting out certain requirements for the tendering process in a PPP contract. The regulatory agency is Infrastructure Québec which:
advises the Québec government on PPP-related matters;
provides knowledge and expertise to the PPP industry;
consults with government departments on their proposed PPPs (this consultation is obligatory);
assesses all infrastructure projects worth Can$40 million, whether PPP or not.
Ontario. Infrastructure Ontario (IO) is the agency responsible for the delivery of public infrastructure improvements in Ontario. The Ontario Ministry of Infrastructure has legislative responsibility for IO. PPP financing is known as alternative financing and procurement (AFP) in Ontario. If a proposed project has a projected value of between Can$50 million and Can$300 million, IO is mandated to:
set project criteria;
bring together public and private sector organisations;
conduct a procurement process to select a private sector consortia in respect of certain projects including:
water systems; and
Alberta. Currently there is no formal statutory or regulatory PPP framework in Alberta. Instead, PPP projects have been co-ordinated by the specific Treasury Board ministries involved. However, Alberta has entered into a memorandum of understanding with British Columbia to collaborate on the development of PPP processes and practices.
The procurement process for a typical PPP transaction is as follows:
A federal, provincial or municipal government authority issues a request for qualification (RFQ) to prospective bidders (that is, a request for them to demonstrate their qualifications to perform the work).
The bidding teams respond to the RFQ and provide information on their teams (the proposed concessionaire, design-builder and maintenance provider).
The authority selects a number of proponent teams from the initial bidders, and issues them with a request for proposal (RFP), which lists certain information that they must submit to the authority.
During the RFP stage, each team:
obtains financing for the project;
prepares its construction designs and maintenance plans;
submits the information required in the RFP to the authority;
comments on the terms of the proposed agreement with the authority; and
seeks to set the key terms of the agreements between its team members.
The authority selects one of the teams.
A closing date for the transaction is set.
The authority finalises its agreement with the contractor and the team members finalise their respective agreements.
The parties obtain the security and corporate documentation required for the transaction to close.
Once financing is secured, agreements are executed and other requirements are satisfied, the transaction closes and the project starts.
The most common dispute resolution methods are:
There are no specialised courts dealing exclusively with construction disputes. In some jurisdictions such as Ontario, subordinate judicial officers (known as masters) can preside over construction lien trials by way of reference from a superior court judge.
Court decisions can be appealed within the province, and ultimately to the Supreme Court of Canada, if leave is granted, and to the extent the case raises issues of national interest.
The Canadian International Trade Tribunal (CITT) (www.citt.gc.ca) can review bid challenges in respect of federal government contracts. CITT decisions are mandatory and final but are subject to judicial review. The CITT is perceived as an open, fair and timely means of adjudicating bid challenges. However, the CITT only receives between 60 and 90 cases a year, a small fraction of the number of annual procurements.
Contractual dispute resolution boards (DRBs), although not common in Canada, can provide an effective and speedy dispute resolution method and remove the need to resort to litigation. The DRB will hear both parties' arguments and deliver a non-binding recommendation.
For further information, see Practice note, Dispute boards: what are dispute boards?.
Mediation is increasingly used and accepted as an effective dispute resolution method in Canada, and is included in the CCDC 2 2008 Stipulated Price Contract. Some contracts provide for an early mediation and settlement process to favour the completion of the project. Several jurisdictions have incorporated mandatory or optional court-appointed mediation sessions or settlement conferences into the court litigation process.
Binding arbitration is often used as a final step-in dispute resolution process. A binding arbitration clause in a construction contract is only enforceable if it:
States that arbitration is mandatory rather than optional.
Provides for a final award which is binding on the parties.
The grounds on which courts can reject an arbitral award are limited.
If a contractor is a tax resident in Canada, its income derived from construction projects in Canada is subject to Canadian and provincial income tax. Depending on whether the contractor is a company or an individual, income tax will be either:
Personal tax. Personal income is taxed at progressive rates up to 50% (when residing in the highest taxed province).
Corporate income tax. Corporate tax is taxed at rates up to 33.26% (when taxed in the highest taxed province and earned by a large corporation).
A construction project can also be taxable in Canada when a non-resident contractor carries on business in Canada. However, many double tax treaties relieve a non-resident contractor from Canadian taxation where the construction project lasts no longer than 12 months.
If a foreign company has a Canadian subsidiary, withholding tax applies to the subsidiary's corporate distributions and other payments to its foreign parent (see Question 35). In certain cases, a tax treaty can reduce this withholding tax. In addition, recent changes to the federal Income Tax Act exempt some interest payments from this withholding tax when these parties act at arm's length. However, this exemption does not affect interest payments that are in effect a distribution of profits.
Construction projects carried out in Canada are subject to VAT, known as Goods and Services Tax (GST) at 5%. Certain provinces also charge additional GST at 7%, 8% or 10%, known as the harmonised sales tax (HST). Others charge a provincial sales tax in addition to GST at 5%, 7%, 7.5% or 10%. Whether the owner or the contractor is liable for VAT depends on the circumstances. It is relatively straightforward for the contractor to deduct input VAT. However, the owner can only receive an input VAT credit if and to the extent that it uses, or intends to use, the developed property in a commercial activity.
The transfer of real estate is subject to a duty, paid by the purchaser to the municipality. In certain provinces, the rate can reach up to 2% of value of the property for real estate worth more than Can$200,000.
Typically, a buyer of Canadian real estate from a non-resident seller will withhold, pending issuance of a clearance certificate by the Canada Revenue Agency either:
25% of the value of non-depreciable property (that is, land).
50% of the value of depreciable property (that is, buildings).
This withholding tax is fully creditable against income tax owing under the seller's Canadian income tax return (see above, Income tax) and can be reduced or eliminated under an applicable income tax treaty (see Question 36).
If a foreign company carries on business in Canada through a branch rather than through a subsidiary, a branch tax applies at a rate of 25% which may be reduced by a tax treaty.
A non-Canadian individual or entity is subject to taxation in Canada if it receives income that is both:
Earned while carrying on business in Canada.
This can be avoided by investing through a Canadian corporation. Withholding tax may apply to the dividends received by the non-Canadian entity (see Question 34, Income tax), but the investor will avoid tax on the operations and income of the Canadian corporation.
The Canadian federal, provincial and local governments offer a variety of tax incentives to encourage investment and development in certain locations or types of projects. These include, among others:
Tax rate reductions.
Canada is a signatory to a number of bilateral and regional investment treaties, for example, the Foreign Investment Protection and Promotion Agreement between Canada and Peru. However, none focus specifically on the protection of a foreign entity in construction and infrastructure projects.
Canada has entered into more than 85 tax treaties with other jurisdictions and continues to work on expanding this tax treaty network. The treaties generally follow the OECD Model Convention with respect to Taxes on Income and on Capital.
If a foreign company creates a Canadian subsidiary or branch, withholding tax on payments or branch tax may apply (see Question 34, Income tax and Branch tax). In addition, statutory restrictions apply to distributions by a Canadian subsidiary to its foreign parent if the subsidiary fails to meet certain solvency requirements.
There are currently no substantial proposed changes to Canadian construction law. However, in the federal budget of March 2012, the government announced that it was changing the law on the environmental review of contracts subject to federally legislated environmental assessment, by limiting the time for environmental assessment to two years.
The Canadian infrastructure renewal program continues, with the transactional phase of these PPP projects having fully matured to the point where the legal elements of procurement have become almost fully commoditised.
Main activities. The CCA was founded in 1918 and is the national voice of the non-residential construction industry in Canada. It has a membership of 15,000 individual firms from all regions of Canada. The CCA has a variety of mandates, including:
Engaging in a consultative role.
Making presentations to various committees and commissions.
Occasionally intervening on behalf of its members in situations where the interpretation of laws or regulations is required.
In addition, there are provincial and territorial construction associations in each province and territory in Canada.
Main activities. The CCQ applies the Act on Labour Relations, Vocational Training, and Manpower Management in the Construction Industry, which provides a legal framework for the construction industry in Québec. The CCQ offers various services, relating to social benefits, pension and insurance, vocational training, labour management and the application of collective agreements in the construction industry.
Main activities. The RBQ is a government organisation that aims to ensure quality and safety of construction work and public facilities. It develops and updates the Québec Building Code and Safety Code and other regulations, responds to requests for regulation interpretation, grants and renews contractors' licences, and supervises construction work in Québec.
Main activities. The TWC is a private corporation that protects the rights of new home buyers and regulates new home builders in Ontario. It administers the Ontario New Home Warranties Plan Act, registers new home builders, enrols new homes for warranty coverage, investigates illegal building practices, resolves warranty disputes, and promotes construction standards. When builders fail to meet their warranty obligations, customers' claims may be met by the TWC's guarantee fund.
Main activities. The HPO is a provincial government organisation under the British Columbia Ministry of Housing and Social Development. It licenses residential builders, administers owner builder authorisations, monitors the performance of the third-party home warranty insurance system underwritten by the private sector, and carries out research and education related to the construction industry in British Columbia.
Qualified. Ontario, 1983
Areas of practice. Construction law; fidelity and surety bonds.
Qualified. Alberta, 1982
Areas of practice. Construction law; fidelity and surety bonds.
Areas of practice. Construction law; fidelity and surety bonds.
Areas of practice. Construction law; fidelity and surety bonds.