Doing Business in Canada (11th edition)

Doing Business in Canada 11th Edition

The information in this publication should not be relied upon as legal advice. We encourage you to contact us directly with any specific questions. © 2023 Davies Ward Phillips & Vineberg LLP. All rights reserved.

i About This Guide Davies’ Doing Business in Canada is designed to provide executives, counsel and foreign investors with an overview of the legal framework governing Canadian business operations. This comprehensive guide outlines key considerations for investing and conducting business in Canada, particularly in Ontario and Québec. The contents of this Guide are current as of July 2023, and are intended as general information and not as legal advice or opinion. We invite you to reach out to any Davies lawyer to discuss your specific legal matters. Contact one of our offices or visit our website at

Contents Chapter 06 Foreign Investment 43 Chapter 07 Competition Law 55 Chapter 08 Tax Considerations 67 Chapter 09 Intellectual Property 91 Chapter 10 E-Commerce, Data Protection and Privacy 99 Chapter 01 Introduction 01 Chapter 02 Types of Business Organizations 05 Chapter 03 Corporate Governance 17 Chapter 04 Financing a Business Operation 27 Chapter 05 Public Mergers & Acquisitions 33

iii Chapter 15 Temporary Entry and Permanent Residence 141 Chapter 16 Civil Litigation 147 Chapter 17 Insolvency and Restructuring Proceedings 163 Chapter 18 Foreign Anti-Corruption Measures 173 Chapter 11 Real Estate 107 Chapter 12 Environmental Law and Indigenous Rights 115 Chapter 13 Employment Law 127 Chapter 14 Retirement Plans, Employee Benefits and Savings Plans 137

CHAPTER 01 1 Davies | Introduction

Political and Constitutional Structure Canada is a parliamentary democracy and constitutional monarchy, with a political system originally modelled on that of the United Kingdom. Although King Charles III is Canada’s official head of state, the governments of Canada are democratically elected. Because Canada is a federal state, legislative and executive jurisdictions are constitutionally divided between the federal government and the 10 provincial governments. Each government is separately elected; federal and provincial governments are often from different political parties. The federal government has exclusive jurisdiction over some matters; others are reserved for the provincial governments. In other areas, however, both levels of government may regulate different aspects of a particular activity. In addition, provincial governments delegate certain powers to local governments. A business may therefore be regulated at three levels: federal, provincial and municipal. The federal Parliament has, for the most part, constitutional jurisdiction over issues concerning Canada as a whole, such as international trade, trade between provinces, national defence, citizenship and immigration, criminal law, currency, intellectual property, ports, aeronautics and broadcasting. The federal Parliament is also responsible for Yukon, Nunavut and the Northwest Territories, which have been given some authority to govern themselves on local matters through elected territorial councils. In certain regions, as a result of treaties or agreements, Canada’s Indigenous peoples exercise limited self-government. The 10 Canadian provinces have authority to make laws concerning matters such as property, contracts, natural resources, land use and planning, the administration of justice, education, healthcare and municipalities. Most general commercial law of concern to businesses is provincial law. There is considerable consistency between most of such provincial laws across Canada. Most general commercial law of concern to businesses is provincial law. There is considerable consistency between most of such provincial laws across Canada. 2 Doing Business in Canada

In practice, Canadian federal and provincial governments often cooperate, by cost-sharing programs and delegation of authority, to create consistent national approaches for matters that are under provincial legislative jurisdiction. For example, there are national standards and federal funding for healthcare. Although provinces have constitutional authority to impose income taxes, all provinces, except Québec, delegate the collection of income taxes to the federal government, thus making income tax rules and procedures relatively uniform throughout Canada. Canada’s Constitution includes the Canadian Charter of Rights and Freedoms, which guarantees certain rights to individuals. Provincial and territorial governments also have legislation protecting individual rights and freedoms. Legal Structure All the provinces of Canada, except Québec, are common law jurisdictions, which derive their legal systems from British common law. Québec is a mixed common law/civil law jurisdiction in which private law matters, such as contracts and property, are governed by a civil code. Although Québec civil law is historically derived from France, today it is strongly influenced by Canada’s North American location and orientation. Canada tends to look to the United States rather than Europe for its regulatory models. For example, Canadian securities laws evolve in response to developments in the United States. Canada’s courts of general jurisdiction are provincially administered, but the Supreme Court of Canada acts as a court of final appeal for all of Canada. Although Canada also has a federal court system, its jurisdiction CHAPTER 01 Introduction is very limited compared with federal courts in the United States. The Canadian federal court system deals primarily with matters arising under Canadian federal statutes and claims against the federal government. Although all judges of provincial superior courts in Canada and judges of the Federal Court and Supreme Court, are appointed by the federal government, the independence of the judiciary is well established, and courts are not subjected to political interference or influence. Each province also has lower courts presided over by provincially appointed judges who hear less important cases. Economic System Canada is an affluent, high-tech industrial society with a market-oriented economic system and high living standards. Since World War II, the impressive growth of the manufacturing, mining and service sectors has transformed the nation’s economy from largely rural to primarily industrial and urban. Given its natural resources, skilled labour force, stable political and economic systems and modern capital infrastructure, Canada enjoys solid economic prospects. Canada is a party to many multilateral and bilateral international trade and investment agreements. The Canada-United States-Mexico Agreement has created close trade and economic integration between Canada and the United States (and to a lesser extent Mexico). Canada also has free trade agreements with other trading blocs and individual countries, such as the European Union and the European Free Trade Association, the United Kingdom, Australia, Japan, Malaysia, New Zealand, Panama, South Korea, Vietnam, Israel, Ukraine, Jordan, Colombia, Peru, Costa Rica, Honduras and Chile, and has entered into exploratory discussions and negotiations with additional countries. 3 Davies |

Given its natural resources, skilled labour force, stable political and economic systems and modern capital infrastructure, Canada enjoys solid economic prospects. The exchange rate of the Canadian dollar is allowed to float in relation to other currencies. Canada’s central bank, the Bank of Canada, sets key interest rates – in practice, independently of the federal government. Canada offers many advantages as a place to do business: – Canada ranks third among OECD high-income countries for the lowest number of procedures, costs and time required to establish a new business. (Doing Business 2020, The World Bank Group) – Canada ranks 14th in the world in overall economic competitiveness. (IMD World Competitiveness Rankings 2022, IMD World Competitiveness Center) – Canada ranks 14th in the world in the global competitiveness index. (Global Competitiveness Report 2019, World Economic Forum) 4 Doing Business in Canada

CHAPTER 02 Types of Business Organizations 5 Davies |

Corporations GENERAL A corporation, which is the most common form of business organization in Canada, has a legal personality distinct from its shareholders and management. A corporation’s existence is potentially perpetual, since it is not affected by the departure or death of any or all of its shareholders or managers. As a separate legal entity, a corporation has rights, powers and obligations similar to those of individuals. It can hold property, carry on a business and incur legal and contractual obligations. Shareholders are the owners of a corporation, but they usually do not manage its business or enter into transactions on its behalf. By statute, they are protected from liability for obligations of the corporation. Generally, the authority to manage the corporation rests with the directors, who are elected by the shareholders. However, if the shareholders prefer to retain direct control of the corporation, they can enter into a unanimous shareholder agreement. Such an agreement can effectively transfer responsibility (and liability) for the management of the corporation from the directors to the shareholders. A corporation may be either public or private. Shares of public corporations are traded on stock exchanges and other public markets. Public corporations are subject to extensive regulation in order to protect investors (see the Corporate Governance and Financing a Business Operation chapters of this guide). By contrast, the transfer of shares in a private corporation is restricted and usually requires the consent of a majority of the directors or shareholders. Private corporations are not subject to most aspects of securities regulation. The main advantages of the corporation as a business entity are the limited liability of the shareholders, the possibility of perpetual existence and the flexibility of the corporate form for financing and estate planning purposes. The disadvantages include the costs associated with the incorporation, operation, annual maintenance and dissolution of the corporation. Since a corporation is a separate taxpayer, shareholders cannot access directly any tax losses it may generate, and it may be more difficult to use as a tax-efficient vehicle than an unincorporated entity like a partnership. As a separate legal entity, a corporation has rights, powers and obligations similar to those of individuals. It can hold property, carry on a business and incur legal and contractual obligations. 6 Doing Business in Canada

FEDERAL OR PROVINCIAL INCORPORATION A business corporation can be incorporated either federally, under the Canada Business Corporations Act (CBCA), or in any of the provinces. Ontario and Québec each have a Business Corporations Act (OBCA and QBCA, respectively). The CBCA, OBCA and QBCA prescribe essentially the same requirements, with some exceptions, the most significant of which are discussed below. Under all of these statutes, incorporations can be effected quickly and at a reasonable cost. A federal corporation has the right to carry on business under its corporate name in any province of Canada (although it must use a French form of its name in Québec). In contrast, a corporation incorporated under provincial law cannot do so as of right in another province. Hence, an OBCA or QBCA corporation cannot be licensed or registered under its name in another province if a confusingly similar name is already being used there by another corporation. If this is a concern, incorporation under the CBCA may be advantageous, although as a practical matter, a CBCA corporation may need to operate under a different name in any province where its corporate name would be confusing. However, it may be easier to obtain a desired corporate name by incorporating provincially. Under the OBCA and QBCA (unlike the CBCA), proposed corporate names are not subject to pre-clearance for possible confusion with existing names. Incorporators can decide for themselves whether there is any risk of other parties objecting to the names they wish to use. Both federally and provincially incorporated corporations must satisfy the registration requirements of every province in which they intend to carry on business. In most provinces, corporations must file corporate returns annually to keep their registrations up to date. Generally, only public corporations, whether federally or provincially incorporated, must file financial statements on the public record. The directors and officers of all corporations must be disclosed on the public record, but not the shareholders (except in Québec, where the three largest voting shareholders must be disclosed, and except as required to comply with the transparency requirements discussed below). In Québec, if all of the powers of the directors have been withdrawn pursuant to a unanimous shareholders’ agreement, the names and domiciles of the shareholders or third persons having assumed such powers must be declared with the Québec Registraire des entreprises (REQ). The CBCA requires at least 25% of the directors to be Canadian residents, unless a corporation has fewer than four directors, in which case it needs to have at least one Canadian resident. The OBCA and QBCA do not require that any directors be Canadian residents. The CBCA, OBCA and QBCA all require, however, that a public corporation have at least three directors and that a certain number of such directors be independent. Additional corporate governance requirements are imposed by securities regulators on public corporations (see the Corporate Governance chapter of this guide). The CBCA, OBCA and QBCA allow directors and shareholders to participate and to vote at meetings by electronic means. There are a few other important differences between the CBCA and the OBCA on the one hand, and the QBCA, on the other. The QBCA authorizes the creation of shares with or without par value and provides for the issuance of shares that are not fully paid up, whereas the CBCA and OBCA prohibit par value shares and the issuance of shares that are not fully paid up. The QBCA has a special regime for sole shareholder corporations, and the sole shareholder may choose not to establish a board of directors and not to comply with some requirements of the QBCA relating to bylaws and CHAPTER 02 Types of Business Organizations 7 Davies |

A business corporation can be incorporated either federally, under the Canada Business Corporations Act, or in any of the provinces. Each of Ontario and Québec has a Business Corporations Act. meetings of shareholders and directors. The QBCA also allows certificates issued by the Registrar to have, in addition to the date, the time of the issuance of the certificates, which may be useful for some transactions. The corporate statutes of most other provinces in Canada are generally similar to the CBCA, the OBCA and the QBCA. However, there are differences in detail that may provide additional flexibility to certain investors. For example, British Columbia permits a corporation to hold its own shares on a long-term basis, whether directly or through a subsidiary (which is restricted under the CBCA, OBCA and QBCA). A corporation can be “continued” from one jurisdiction in Canada to another, with no break in its corporate existence, if it is necessary or desirable to do so (e.g., an OBCA corporation could be continued under the CBCA). OFFICERS AND DIRECTORS The daily operations of a corporation are normally carried out by its officers. Officers can be non-residents of Canada provided that they have complied with Canada’s immigration laws (see the Employment Law chapter of this guide). Directors and officers must act honestly and in good faith with a view to the best interests of the corporation. They must also exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. Directors and officers may incur personal liability if they cause the corporation to contravene applicable laws. Directors also may be liable under statutes such as Ontario’s Employment Standards Act, 2000, Québec’s Act respecting labour standards and the federal Income Tax Act for employees’ unpaid wages and amounts that should have been remitted to taxation authorities, if the corporation becomes bankrupt. 8 Doing Business in Canada

A corporation may indemnify its directors and officers for personal liability they may incur when acting in such capacities, or it may purchase insurance for their benefit to cover such liability. However, indemnification will generally cover only those acts that were performed by the directors and officers in good faith. The CBCA, OBCA and QBCA permit broader insurance coverage to be maintained, even in respect of acts contrary to directors’ and officers’ fiduciary duties, although such insurance may not, in practice, be obtainable at a reasonable cost. SUBSIDIARY OR BRANCH? A foreign corporation may carry on business in Canada either through a branch or by setting up a new corporation as a Canadian subsidiary. Tax considerations will be important in making this choice, but the non-tax considerations discussed below may also be relevant. Most provinces in Canada do not provide for hybrid forms of corporate entity with certain partnership-like characteristics. In particular, no Canadian jurisdiction provides for limited liability companies (LLCs). However, some provinces permit the formation of unlimited liability companies (ULCs), the shareholders of which do not have limited liability, but which are otherwise similar to ordinary corporations. Although a ULC is treated as a corporation for Canadian tax purposes, it is eligible for flow-through treatment for U.S. tax purposes. Therefore, ULCs are sometimes used in cross-border transactions. However, as a result of the amended Canada-U.S. tax treaty, careful planning may be required for U.S. residents to obtain beneficial tax treatment through the use of a ULC (see the Tax Considerations chapter of this guide). There are important differences between ULCs, depending on the province in which they are incorporated. In particular, the shareholders of an Alberta ULC are liable for any liability, act or default of the ULC, whereas in Nova Scotia and British Columbia, the shareholders of a ULC have no direct liability to creditors, and their liability arises only when the ULC is wound up and there are insufficient assets to satisfy its obligations. Subsidiary If the incorporation of a subsidiary is chosen, the cost of incorporating the corporation and the ongoing expenses of maintaining it must be taken into account. If it is incorporated under the CBCA, consideration must be given to whether appropriate resident Canadians are available to serve as directors. Certain corporate records must generally be maintained in Canada. Since the subsidiary is a separate legal entity from its parent, the parent will not generally be liable for obligations incurred by the subsidiary (unless the subsidiary is a ULC). A foreign corporation may carry on business in Canada either through a branch or by setting up a new corporation as a Canadian subsidiary. CHAPTER 02 Types of Business Organizations 9 Davies |

Branch An unincorporated branch may be chosen as an alternative to a subsidiary. A foreign corporation must register in all provinces in which it wishes to carry on business. A foreign corporation cannot register if its name is the same as or similar to one already in use in that province. In addition, in Québec the foreign corporation must register a French name. Business names used by a branch should also be registered and should not be the same as or similar to names used in the province. A foreign corporation that establishes a branch in Ontario must obtain a licence under the Extra-Provincial Corporations Act (or, in the case of an LLC, register its name under the Business Names Act), although this is generally a routine matter. Transparency Disclosure Requirements Consistent with the initiatives undertaken by other members of the Organisation for Economic Cooperation and Development (OECD) to combat money laundering and other financial crimes, private corporations in most Canadian jurisdictions, including CBCA and OBCA corporations, are required to maintain a register of individuals who have a significant interest in the corporation. Generally, such a register must record individuals who hold, or directly or indirectly control, shares accounting for 25% or more of the voting rights or fair market value of the corporation’s shares (including beneficial owners if they are different from the registered owners of the shares, and individuals exercising direction or influence over such shares). Wholly owned subsidiaries of public companies, and certain other entities, are exempt from this requirement. In Québec, subject entities are required to declare their ultimate beneficiaries to the REQ, rather than maintain a register per se. The requirement to declare ultimate beneficiaries applies to all entities that carry on business in Québec, including corporations, partnerships and trusts, regardless of their jurisdiction of formation (in contrast, the CBCA and other provincial corporate statutes, including the OBCA, require only corporate entities to maintain a register). Ultimate beneficiaries are individuals holding or controlling, directly or indirectly, 25% or more of the voting shares or units, or 25% or more of the fair market value, of all the shares or units issued by the entity. Individuals who have any direct or indirect influence that if exercised would result in control in fact of an entity are also ultimate beneficiaries. For each ultimate beneficiary, as well as for certain other individuals associated with the registrant (such as the registrant’s directors, officers and shareholders), the registrant must disclose to the REQ certain information, including their names, domiciles, dates of birth and addresses. This information is publicly accessible, except that birth dates and, in cases where a professional address is provided in addition to a residential address, residential addresses are not available to the public. Corporations must also file with the REQ a copy of a valid identification document for each of their directors. The identification documents are destroyed by the REQ in accordance with Québec law once they are processed. Regulations requiring CBCA corporations to disclose their registers to the federal corporate regulator annually and making such registers publicly accessible are in an advanced stage but are not yet in force. Such requirements are similarly not yet in effect under the OBCA, nor in some other provinces. In addition, tax, police and similar authorities may request access to the registers in connection with an investigation. 10 Doing Business in Canada

Partnerships Partnership is the relationship between persons carrying on business in common with a view to profit. Partners may be individuals, corporations or other partnerships. In Canada, a partnership is not regarded as a separate legal entity from its partners. There are two principal types of partnership. In a general partnership, all of the partners can participate in the management of the business, but are exposed to unlimited liability for partnership obligations. In a limited partnership, limited partners’ liability is limited to their investment in the partnership, but they must remain passive investors and not take part in the control of the partnership business. Ontario and Québec (as well as other provinces) also permit professionals to practise through a special type of general partnership known as a limited liability partnership, which provides individual partners with a degree of protection against unlimited liability for the negligent acts of other partners. In Ontario, the governing statutes are the Partnerships Act and the Limited Partnerships Act, which define the rights and obligations of the partners between themselves and in relation to third parties. Partnership law also includes non-statutory common law and equitable principles. In Québec, partnerships are governed by the Civil Code of Québec and the Act respecting the legal publicity of enterprises, which similarly set out the rights and obligations of partners between themselves and toward third persons, as well as conditions for the creation, operation and dissolution of a partnership. The provisions of these statutes that address the rights and obligations of partners between themselves can generally be altered by agreement between the partners. Because the relationships between the partners can be determined by agreement, great flexibility is possible in providing for such matters as capital contributions or other financing of the partnership, participation in profits and management structure. Income and losses of a partnership, although computed at the partnership level, are taxed in the hands of the partners. This tax treatment is the primary reason for using a partnership rather than a corporation, since each partner may offset its eligible share of the partnership’s business tax losses against income from other sources. GENERAL PARTNERSHIPS The main characteristic of a general partnership is the unlimited liability of each partner for the liabilities and obligations incurred by the partnership to third parties. Each partner may bind the others, unless a third party has notice that the partnership agreement restricts a partner’s authority to act on behalf of the partnership. However, a partner is generally not liable for obligations incurred before it became or after it ceased to be a partner. The main disadvantages of a general partnership are the unlimited liability of the partners and the ability of each partner to incur partnership obligations that will bind the other partners. In Ontario, all the partners of a general partnership must register the name of the partnership under the Business Names Act unless the business is carried on under the names of the partners. In Québec, a general partnership must file a declaration of registration under the Act respecting the legal publicity of enterprises. This declaration must include a French name for the purpose of carrying on business in Québec. In both Ontario and Québec, these registrations require that the partnership business and the names and addresses of the partners be disclosed. In Québec, the general partnership must file an annual declaration every year to maintain its CHAPTER 02 Types of Business Organizations 11 Davies |

registration in good standing, and must disclose the date of birth of individual partners and ultimate beneficiaries (as discussed above under “Transparency Disclosure Requirements”). LIMITED PARTNERSHIPS A limited partnership combines the advantages of limited liability and the ability to flow tax losses through to passive investors (subject to certain restrictions under tax legislation). This form of business structure is often used for private equity funds, public financings and real estate syndications. A limited partnership is made up of one or more general partners, each of which has the same rights and obligations as a partner in a general partnership, and one or more limited partners, whose powers and liabilities are limited. The general partner or partners manage the partnership. A limited partner may not take part in the management of the partnership without jeopardizing the partner’s limited liability. The primary advantage of a limited partnership over a general partnership is the limited liability of the limited partners. This enables passive investors to receive tax benefits without risking their personal assets beyond their investment in the partnership. To establish a limited partnership in Ontario, a declaration signed by the general partners must be filed under the Limited Partnerships Act. The declaration must be renewed every five years, and when the partnership wishes to cease operations, a declaration of dissolution must be filed. The names and capital contributions of the limited partners do not have to be disclosed on the public record, although this information must be disclosed on request. Although a declaration of change must be filed if there is a change in any information in the declaration, no annual return filing is required. A limited partnership combines the advantages of limited liability and the ability to flow tax losses through to passive investors (subject to certain restrictions under tax legislation). 12 Doing Business in Canada

In Québec, a limited partnership must file a declaration of registration under the Act respecting the legal publicity of enterprises. This declaration must include the name and domicile of each of the general partners and the names and domiciles of the three limited partners that provided the largest contributions and, as discussed above, the date of birth of individual partners and ultimate beneficiaries. Every year, the limited partnership must file an annual declaration to maintain its registration in good standing. UNDECLARED PARTNERSHIPS In Ontario, although a limited partnership can only be formed by the filing of a declaration under the Limited Partnerships Act, a general partnership may exist without any registration or filing on the public record. (If it uses a firm name or business name other than the name of the partners, that name must be registered under the Business Names Act, but the failure to do so would not affect the existence of the partnership.) If the relationship satisfies the legal criteria for a general partnership, its members will be liable as general partners for obligations relating to the partnership business and will be bound by any such obligations incurred by any of the partners, even to third parties that are not aware of the existence or identity of the other partners. This reflects the common law principle that an undisclosed principal will be liable in the same manner as a disclosed principal for obligations incurred by its agent. CHAPTER 02 Types of Business Organizations In Québec, a general or limited partnership that does not file a declaration under the Act respecting the legal publicity of enterprises is an undeclared partnership. An undeclared partnership may arise from a written or oral agreement or from acts indicating an intent to form an undeclared partnership. In the absence of an agreement, the relations of partners to each other in an undeclared partnership are treated by the provisions of the Civil Code of Québec in the same manner as those of general partners. If a partner of a Québec undeclared partnership contracts in the partner’s own name with a third party that is unaware of the existence of the undeclared partnership, only that partner incurs liability to the third party (unlike a general partner that can bind the other partners). If, however, a third party is aware that a partner of an undeclared partnership is acting in a partnership capacity in dealing with the third party, the other partners of the undeclared partnership will also be liable to the third party. Joint Ventures A joint venture is an agreement entered into by two or more parties to pool capital and skills for the purpose of carrying out a specific undertaking. It may or may not involve co-ownership of the project assets by the venturers. Because it is essentially a contractual relationship not specifically regulated by statute, the venturers are free to agree on whatever terms they choose. Since a joint venture is not a recognized entity for tax purposes, income and losses for tax purposes are computed separately by each joint venturer rather than at the joint venture level. 13 Davies |

A joint venture may be difficult to distinguish from a partnership, and the parties’ characterization of their relationship may not be conclusive. The most important legal distinction is that sharing of profits is essential to a partnership, whereas joint venturers generally contribute to expenses and divide revenues of the project, but do not calculate profit at the joint venture level. Equal participation in management of the business is characteristic of a general partnership, but less usual in a joint venture, where one party often operates the project, or management is contracted out. Joint venturers that do not want their joint venture to be treated as a partnership should enter into a written agreement setting out their respective rights and obligations in detail and exercise care in dealing with third parties. In Québec, joint venturers should also file the proper declaration under the Act respecting the legal publicity of enterprises to avoid being characterized as a general partnership, in which case each partner would be fully liable for partnership obligations and subject to tax as a partner, rather than as a joint venturer. Trusts Although it has always been possible to use a trust as a form of business organization, only comparatively recently has the income trust become a common form of public offering in Canada. The primary reason for employing a trust rather than a corporate structure is to realize greater tax efficiencies for investors than would be possible by distributing corporate earnings to shareholders by way of dividends. In most cases, the trust is not itself the operating business entity. However, tax changes have reduced the tax advantages of a trust structure and some income trusts have been converted to corporations (see the Tax Considerations chapter of this guide). In Ontario, a trust is primarily governed by the provisions of the declaration establishing the trust and nonstatutory principles of equity, although trusts are also subject in certain respects to statutes such as the Trustee Act. In Québec, trusts are governed by the Civil Code of Québec and the Act respecting the legal publicity of enterprises. A commercial trust such as a business trust, investment trust or real estate investment trust must now register with the REQ unless the trustee of the trust is already registered. The primary reason for employing a trust rather than a corporate structure is to realize greater tax efficiencies for investors than would be possible by distributing corporate earnings to shareholders by way of dividends. 14 Doing Business in Canada

A trust is not a separate legal entity. In law, its assets are held by the trustees, who are also liable for obligations incurred in carrying on its activities (although the trustees are entitled to be indemnified out of the trust assets for such liabilities). Unlike shareholders of a corporation, investors in a trust have not had the benefit of statutory limited liability. Therefore, there has been some concern that in certain circumstances investors might be exposed to liabilities arising from the operations of the trust. Ontario has passed legislation clarifying that investors in a publicly traded trust (that is formed under Ontario law and that files its public disclosure documents under Ontario securities laws) will not incur such liabilities as beneficiaries of the trust. Sole Proprietorships A business owned by one person is called a sole proprietorship. This is the simplest form of business organization. The individual is responsible for all the obligations of the business. Accordingly, his or her personal assets are at risk if these obligations are not met. There is no legislation dealing specifically with sole proprietorships; however, a sole proprietor may need to comply with federal, provincial and municipal regulations affecting trade and commerce, licensing and registration. For example, in Ontario, a sole proprietor who carries on business or identifies his or her business to the public under a name other than his or her own name must register the name under the Business Names Act. In Québec, every person who uses a name or designation other than his or her own complete name must register a declaration under the Act respecting the legal publicity of enterprises. A sole proprietorship may be suitable for a small enterprise because it avoids many of the costs of setting up and running a corporation and the complex regulatory scheme that governs corporations. Non-capital startup losses of the business are generally deductible against the sole proprietor’s income from other sources. The disadvantages of a sole proprietorship are the unlimited liability of the owner and that the business can be transferred only by selling the assets. Contractual Arrangements FRANCHISING A franchise is an agreement whereby one party, the franchisor, gives another, the franchisee, the right to make use of a trademark or trade name within a certain territory. Franchising involves an ongoing relationship between the parties. The franchisor generally retains some degree of control over the manner in which the franchisee carries on its business, but neither party is the agent of the other. In Québec, franchises are governed only by the general law of contracts. Ontario has legislation regulating franchises, which defines “franchise” broadly and may apply to some distribution agreements that might not be thought of as franchises. As well as imposing disclosure obligations on franchisors, such legislation imposes a statutory duty of fair dealing in the performance and enforcement of a franchise agreement and precludes a franchise agreement from contracting out of the application of the legislation, or providing for disputes to be litigated or arbitrated in another jurisdiction. Some other Canadian provinces have similar legislation. CHAPTER 02 Types of Business Organizations 15 Davies |

LICENSING Licensing is a contractual relationship between two parties whereby a licensor grants a licensee the right to use its copyright, industrial design, patent, trademark, trade name or know-how. The relationship is governed primarily by the general law of contracts, although the federal statutory regime regulating the relevant form of intellectual property may have some impact. Conclusion In deciding on the most appropriate form of business organization, the specific needs of the enterprise must be assessed. Factors that require particular consideration include the complexity of the organization, the nature of the business, transferability of interests, participation in management, extent of liability, financing aspects and tax implications (both in Canada and in the home jurisdiction of a nonresident investor). In deciding on the most appropriate form of business organization, the specific needs of the enterprise must be assessed. 16 Doing Business in Canada

CHAPTER 03 Corporate Governance 17 Davies |

Corporate governance standards for public companies in Canada are set out in corporate statutes and in securities laws and regulations. In recent years, many of the changes in governance standards and best practices in Canada have resulted from pressure from institutional investors and investor advocacy groups, as well as evolving governance trends that have developed globally. A few of the changes, such as the adoption of virtual shareholder meetings, occurred as a result of the COVID-19 pandemic. Most boards of Canadian public companies in today’s climate are facing a multitude of governance issues requiring ongoing oversight and placing greater demands on directors’ time and attention. At the same time, some influential institutional investors are demanding that public companies and their boards devote more attention to advancing their organizations’ (and their stakeholders’) longer-term interests, including evaluating a company’s performance through an environmental, social and governance (ESG) lens. The challenge is how to manage these competing demands and establish priorities. The answer will be different for each issuer, depending on numerous factors. Financial Statements and Audit Committees Canadian law requires public companies to provide investors with annual audited financial statements and quarterly financial statements (which may, but need not, be audited). Financial statements must be accompanied by a management discussion and analysis and supported by certificates signed by the CEO and the CFO. For the most part, all these requirements mirror U.S. requirements. Canadian law requires public companies to have independent audit committees that meet standards that are very similar to the corresponding U.S. requirements. Internal controls over financial reporting are an important part of public company reporting in Canada, but Canadian securities regulators have not adopted the most onerous requirements of SOX 404. In particular, no management report or audit opinion is required. Instead, the CEO/CFO certification has been enhanced to provide comfort about internal controls over financial reporting and disclosure controls and procedures. In recent years, many of the changes in governance standards and best practices in Canada have resulted from pressure from institutional investors and investor advocacy groups, as well as evolving governance trends that have developed globally. 18 Doing Business in Canada

Other Annual Disclosure Requirements In addition to financial statements and management discussion and analysis, a public company (other than a venture issuer) must publicly file an annual information form, which provides extensive disclosure about the company and its business. Investors in Canadian public companies are entitled to vote at shareholder meetings in person or by proxy. In order to allow investors to form reasoned decisions about the way in which they will cast their votes, management must send investors an information circular that contains detailed disclosure about the matters that will come before the meeting, including specific disclosure about director and executive compensation. Some public companies use a more streamlined process – known as “notice and access” – for providing shareholders with notice concerning annual shareholder meeting materials and facilitating web-based access to those materials; this process can, in some cases, significantly reduce the costs associated with mailing complete packages of meeting materials to shareholders. Most investors hold their interests indirectly, through the book-based system. Securities regulation and industry practice seek to put all investors in the same position regarding the receipt of the information circular and their ability to direct the way their shares will be voted. Efforts in this regard have, among other things, resulted in the issuance of non-binding protocols delineating the roles and responsibilities of the key entities involved in the voting reconciliation process in an effort to make the proxy voting system more accurate, reliable and accountable. COVID-19 created difficulties for public companies in meeting their corporate and securities law obligations, such as holding shareholders’ meetings in the face of shelter-in-place and similar restrictions. Governments and Canadian securities regulators moved quickly to grant temporary relief, notably providing extended filing deadlines and facilitating virtual shareholders’ meetings. With COVID-19 restrictions having abated, virtual-only shareholder meetings have been criticized for having the potential to disenfranchise shareholders by limiting meaningful participation. While it is still open to public companies to hold virtual-only shareholders’ meetings, we expect that Canadian public companies will revert to in-person or hybrid shareholders’ meetings. Comply-or-Explain Governance Model Many areas of governance that are regulated in other jurisdictions fall within Canada’s “comply-or-explain” regime under National Instrument 58-101 (NI58-101). For example, the compositions and charters of the compensation committee and of the nominating and governance committee are not mandated, but rather are the subject of best practice guidelines and disclosure requirements. The Ontario Securities Commission (OSC) and most other Canadian securities regulators have enhanced the comply-or-explain regime in the past few years to promote increased gender diversity among the leadership of public companies. TSX-listed issuers and other non-venture reporting issuers are now required to disclose annually, among other things, the number and percentage of women represented on boards and in executive officer positions; whether the issuer has adopted a written policy on the representation of women on the board (and if not, why not); and whether any targets have been adopted regarding female representation on the board or in executive positions (and, again, if not, why not). CHAPTER 03 Corporate Governance 19 Davies |

Canada’s federal corporate statute has also been amended to require annual diversity disclosure by public companies relating to board and senior management diversity, in regard to not only gender but also visible minorities, Indigenous peoples and persons with disabilities. Despite efforts to improve diversity in the governance of Canada’s public companies, as in many other jurisdictions around the world, progress has been slower than expected, and regulators and investors remain focused on the need for reporting issuers to make meaningful improvements in the representation of women and other under-represented groups among their leadership. Securities regulators continue to evaluate whether increased disclosure is warranted. In 2023, they requested comments on two potential approaches to enhanced diversity disclosure: one approach would permit public companies to determine their own diversity objectives and the mechanisms to achieve those objectives, and to disclose data regarding groups specified in their diversity policies. The other approach would require disclosure in a consistent tabular format on the representation in leadership of women, Indigenous peoples, racialized persons, persons with disabilities and LGBTQ2SI+ persons. National Policy 58-201 (NP58-201) sets out 18 best practices drawn from existing Canadian standards and U.S. regulatory standards. Issuers are not required to comply with the standards set out in NP58-201, but are required to disclose information about their governance practices as set out in the associated disclosure rule, NI58-101. Canadian securities regulators are also considering whether to supplement the comply-orexplain disclosure regime with additional governance guidelines in NP58-201. Many areas of governance that are mandated in other jurisdictions, such as the composition and charter of the compensation committee and nominating and governance committee, in Canada are addressed by best practice guidelines and disclosure requirements (“comply or explain”). 20 Doing Business in Canada

Currently, NP58-201 recommends best practices in the following areas: Board Independence. A majority of the board should be “independent.” Generally, independence means the absence of any direct or indirect material relationship between the director and the issuer – that is, a relationship that could, in the view of the issuer’s board, reasonably interfere with a member’s independent judgment. Certain relationships are deemed to be material for this purpose. NP58-201 recommends regular in camera meetings for the independent directors and the separation of the positions of chair (which should be held by an independent director) and CEO. If these positions are not separated, an independent lead director should be appointed with appropriate responsibilities. Role of the Board. The board should have a written mandate that includes specified responsibilities. These responsibilities relate to organizational integrity, strategic planning, risk identification and management, succession planning, communications, internal controls, management information systems and corporate governance. Position Descriptions. The board should develop clear position descriptions for the chair of the board and the chair of each board committee. The board, together with the CEO, should develop a clear position description for the CEO. Role of the Board in the Issuer’s Integrity. The board should play an oversight role with respect to the ethical framework of the organization. The board should satisfy itself as to the integrity of the CEO and other senior officers as well as the culture of integrity they create throughout the organization. The board should approve a code of business conduct and ethics (and any amendments to the code). Any material departure from the code by a director or senior officer may need to be publicly disclosed. Board Effectiveness. There should be a comprehensive orientation program for new directors and ongoing education for all directors, as well as regular board, committee and director assessments. The board should play an oversight role with respect to the ethical framework of the organization. The board should satisfy itself as to the integrity of the CEO and other senior officers and the culture of integrity they create throughout the organization, and should approve a code of business conduct and ethics. CHAPTER 03 Corporate Governance 21 Davies |

Nominating Directors. The board should be responsible for nominating candidates for election by the shareholders. It should consider the recommendations of a nominating committee composed entirely of independent directors. In making its recommendations, the nominating committee should consider the competencies and skills required and those currently in place, as well as those that any new nominee would bring to the board. The nominating committee should have a written charter that includes specified provisions. Executive Compensation. The board should establish a compensation committee composed entirely of independent directors with a written charter and specified responsibilities. The compensation committee should be responsible for reviewing executive compensation disclosure before it is publicly disclosed and for making recommendations to the board with respect to CEO compensation (based on established corporate goals and objectives), non-CEO compensation, incentive-based compensation plans and equity-based compensation plans. Trends and Developments Many current trends in Canadian corporate governance have already been touched on in the discussion above, so the following overview discusses in detail only topics that have not been covered. SHAREHOLDER ENGAGEMENT Many of the most significant changes in Canadian corporate governance standards have come about as a result of investor pressure, as well as increased scrutiny of issuers’ practices by shareholder advisory firms such as Institutional Shareholder Services (ISS) and Glass Lewis & Co., and by corporate governance watchdogs such as the Canadian Coalition for Good Governance (CCGG). In addition to scrutiny of “say-on-pay” resolutions and director elections, public companies across a wide range of industries are facing shareholder proposals on policy- and governance-related topics, including gender diversity, climate change and executive compensation; such proposals are enjoying increasingly higher levels of support. Establishing mechanisms to facilitate direct engagement between an issuer’s significant investors and nonexecutive members of its board is now widely considered to be a key component of good corporate governance. By engaging with shareholders, a board can proactively address shareholders’ concerns that might otherwise manifest themselves as very public shareholder proposals or proxy contests. Public companies across a wide range of industries are facing shareholder proposals on policy- and governance-related topics, including gender diversity, climate change and executive compensation; such proposals are enjoying increasingly higher levels of support. 22 Doing Business in Canada