Originally part of an 18 jurisdiction Country Comparative Guide by The Legal 500, this Q&A chapter on Lending & Secured Financing in Canada has been republished with permission. View the full list of jurisdictional chapters.
Available now, The Legal 500: Lending & Secured Finance Country Comparative Guide is a resource for legal and non-legal professionals to learn more about the lending and secured finance laws and regulations in 18 jurisdictions. Each chapter of this guide provides information about foreign lenders, interest, security registration requirements, guarantees and tax incentives.
Gowling WLG partners Christopher Alam and Kelby Carter, and articling student Jae Gee, are the contributing authors for "Canada: Lending & Secured Finance."
Download a PDF version of the full guide
Lending & Secured Finance laws in Canada: Q&A
No. However lenders carrying on business in Canada will require regulatory approval or licensing of varying degrees and lenders enforcing on security may require business licensing.
In Canada, parties are subject to laws and regulations that limit the amount of interest that can be charged by lenders.
Generally, under the Canada Interest Act, RSC 1985 parties are free to allow and exact, on any contract or agreement, any rate of interest or discount that is agreed upon. However, the Act sets a default interest rate of five per cent per annum when no rate is fixed by the agreement or by law. If a loan is secured by real property by way of mortgage or immovable hypothec, lenders cannot increase rates of interest on the principal advanced, other than the rate shown in the agreement.
The Canadian& Criminal Code, RSC 1985 (the "Code"), provides for the creation of a criminal interest rate, which makes it an offence to enter into an agreement to receive interest at a criminal rate, or to receive a payment or partial payment of interest at a criminal rate. As of the date of this publication, the criminal rate is defined as a rate of sixty per cent per annum, which includes the aggregate of all charges and expenses, including in the form of a fee, fine, penalty, commission, or other similar charge or expense, subject to some exceptions. The Code provides an exception to the criminal interest rate, being payday loan agreements (as defined in the Code), if (a) the amount of money advanced under the agreement is for a maximum of $1,500 or less, and the maximum term of the loan is 62 days or less; (b) the lender is licensed by the provincial government; and (c) the federal government has designated the province as having legislative measures that protect borrowers of payday loan loans.
In general, there are no foreign exchange or currency restrictions in Canada which restrict loans being made or paid in a foreign currency. In fact, Canadian tax legislation permits lenders to make loans to Canadian borrowers without the implementation of Canadian withholding tax being imposed on those loans. However, foreign lenders must be mindful that there is no regulated bank in their corporate structure, as the restrictions of the federal Bank Act, SC 1991 may apply.
i. real property (land), plant and machinery; ii. equipment; iii. inventory; iv. receivables; and v. shares in companies incorporated in your jurisdiction.
Security interests can be taken over all of the types of assets listed above, subject to certain limitations by contract (e.g. contractual restrictions on assignment) or by law (e.g. permits or licenses).
i. Real Property
Under Canadian law, a lender may take security over real property by way of a charge or mortgage of land, a debenture or – if real, or "immovable," property is located in Québec – an immovable hypothec. Most provinces and territories have an electronic land registry system to record mortgage – or "hypothec" in Québec – and other secured interests in real property. Although these registry systems are similar in concept, each jurisdiction has certain unique provisions and requirements for real property security. In many cases, a title insurance policy or a title opinion will be obtained by the secured creditor in support of its charge or mortgage document.
ii. Personal Property, including Plant and Machinery, Equipment, Inventory, and Receivables
Each of the common law provinces and territories has enacted a personal property security act (PPSA) that governs the creation, perfection and enforcement of personal property security interests. PPSA legislation is similar to Article 9 of the Uniform Commercial Code (UCC) in the U.S., although there are some differences (including differences among common law provinces and territories) in how the applicable PPSA addresses the perfection of a security interest in certain types of assets – such as deposit accounts, cash collateral and intellectual property – from the equivalent treatment under the UCC.
iii. Shares in Companies Incorporated in Canada
Security can be taken over shares of companies incorporated in Canada, subject to any restrictions noted in such company's organizational documents.
The PPSA of each common law province and the Civil Code of Quebec generally permit the securing of future assets and obligations, as long as the grant of the security interest and registration is sufficiently clear as to the future assets themselves. However, a security interest cannot be granted over future assets involving real property, as a security interest over real property can only be granted once the debtor actually owns the property interest itself.
A single security agreement in the form of a general security agreement (GSA) can be used to grant security over all of a debtor's present and after-acquired personal property in each common law province. The GSA should include a description of the collateral, and must be registered under the PPSA filing regime in each applicable province where collateral is located.
A GSA generally does not extend to real property, so mortgages against real property must be taken according to the steps outlined in Question 4 above.
In Quebec, a hypothec can be granted by a debtor to secure any obligations, and create charges on existing and after-acquired personal or real property. In most cases, hypothecs be must published in the Quebec Register of Personal and Movable Real Rights in order to be enforceable against third parties.
There are generally no notarization requirements with respect to security agreements of personal property in the common law provinces. However, Québec has particular requirements for the execution of instruments. For example, certain instruments must be executed in front of a notary, and certain formal requirements for security documents and the timing of their registration – or "publication" in Québec – differ from those of the common law provinces and territories.
i. Real Property
Each province has its own registry system relating to real estate in the province. Each registration document generally requires: (a) information relating to the form of the security related to the real property; and (b) the basis of the security interest and charge.
ii. Personal Property
Each province has its own electronic public registry system to record PPSA security interests granted by debtors over their personal property. Each system consists of a notice-based registry, which provides notice of the existence of security interests that have been granted by debtors to secured creditors. The underlying security documents creating those security interests are not registered.
Although the PPSA legislation in each of the common law provinces and territories is similar in concept, the provisions and requirements vary slightly. Consequently, security given by debtors with assets in multiple provinces and territories will need to comply with the statutes of each of those jurisdictions, and PPSA registrations in multiple provinces and territories may be necessary.
(for example, stamp duty on security, notarial fees, registration costs or any other charges or duties), either at the outset or upon enforcement?
There are minimal registration and notarial fees to be aware of in granting and registering a loan, guarantee, or security interest in Canada. Registration fees are payable to the registrar of each province, and are generally in nominal amounts. Notarial services are not generally required, except in the province of Quebec in dealing in real estate securities.
Generally, companies can guarantee or secure the obligations of another company under relevant Canadian corporate law statutes, so long as the debt is of benefit to the corporation as a whole. However, such a transaction may give rise to corporate benefit concerns when it does not provide any benefit to the corporation. Such transactions may be challenged as oppressive by other stakeholders, including creditors or minority shareholders, and may give rise to an allegation that the fiduciary duties of the directors approving the transaction have been breached.
(i) of the company; (ii) of any company which directly/indirectly owns shares in the company; or (iii) in a related company?
There are no such restrictions on companies receiving financial assistance for the acquisition of shares in itself or a holding company, subject to what has been outlined in Question 10.
(i) hold security on the syndicate's behalf, (ii) enforce the syndicate's rights under the loan documentation and (iii) apply any enforcement proceeds to the claims of all lenders in the syndicate?
Lenders in a syndicate can, and often do, appoint a trustee or agent to hold security in all of the above circumstances. Trust and agency agreements are well-recognized and in robust practice across Canada.
Not applicable (see above).
Most payments of interest made by Canadian borrowers to domestic lenders who operate at arm's length do not attract Canadian federal withholding tax. However, payments of interest made by Canadian borrowers to a non-arm's length foreign lender does attract Canadian federal withholding tax, charged at up to 25% of gross interest paid, subject to some exceptions. This is subject to any tax treaties or conventions between Canada and the foreign lender's jurisdiction.
Generally, withholding tax does not arise on the proceeds of enforcing a security or claiming under a guarantee. However, if a taxable amount, like accrued interest, is subsumed in the amount of proceeds received, then withholding taxes may arise
Withholding tax on interest to arm's length lenders in Canada is nil (other than for participating debt interest). However, payments of interest made by Canadian borrowers to a non-arm's length foreign lender does attract Canadian federal withholding tax under the federal Income Tax Act, RSC 1985, charged at up to 25% of gross interest paid (excluding fully exempt interest). This rate may be reduced for treaty countries. The withholding rates for treaty countries varies. For the United States, the withholding rate is 0%, and there are no other countries for which the rate is reduced to 0%. For most other countries, the withholding rate is 10% to 15%, with some outliers, like the Dominican Republic, which is 18%.
Unlikely, however lenders should seek tax advice with respect to their corporate structuring.
Generally, there is no history in Canada of financing structures being challenged by tax authorities. However, there are bespoke tax driven transactions that can attract review by the Canada Revenue Agency under general anti-avoidance provisions or other provisions of the federal Income Tax Act, RSC 1985.
(in particular, English law) to govern the terms of any agreement entered into by a company incorporated in your jurisdiction?
Canadian courts do generally give effect to the choice of other laws to govern the terms into any agreement entered into by a company incorporated in Canada. The "governing law" clause, also known as "choice of law" allows parties to select the jurisdiction whose laws will govern their contract when legal issues arise.
The choice of governing law for a guarantee and security agreement in a Canadian secured loan transaction involving foreign guarantors and foreign-based assets depends on a variety of considerations, including the amount of the loan, the foreign jurisdiction involved, and the value of the collateral.
Depending on the foreign jurisdiction and the nature of the collateral, the contracting parties may be able to negotiate and decide on the governing law of the loan documents. It is a well-established principle at common law that the courts will uphold the governing law clause of a contract, even when the contracting parties have no connection to the jurisdiction chosen, if the choice of law is (a) bona fide, (b) legal, and (c) not against public policy.
and is your country a member of The Convention on the Recognition and Enforcement of Foreign Arbitral Awards?
At common law, a Canadian court will enforce a non-Canadian judgment if the judgment if it is shown that the judgment (a) comes from a court of competent jurisdiction, (b) is final and conclusive, and (c) the order is adequately precise.
Canada is party to The Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958) and the UNCITRAL Model Law on International Commercial Arbitration (the Model Law). Both instruments were ratified federally in 1986 through the United Nations Foreign Arbitral Awards Convention Act, RSC 1985, and through each of the common law provinces.
In Quebec, enforcement of non-Quebec civil and commercial arbitration awards is governed by the Quebec Code of Civil Procedure, which requires courts to consider the New York Arbitration Convention in their interpretation of the relevant provisions.
There are three main insolvency statues in Canada: (1) the Bankruptcy and Insolvency Act (BIA); (2) the Companies' Creditors Arrangement Act (CCAA); and (3) the Winding-Up and Restructuring Act (WURA). The BIA governs proposals, which are a restructuring regime for individuals and small to mid-sized companies, receiverships, and bankruptcies, both personal and corporate. The CCAA is a restructuring and liquidation regime for larger Canadian corporations. The WURA is a liquidation statute designed to deal with, among other things, the formal liquidation of certain regulated entities including financial institutions and insurance companies.
Insolvency proceedings can be commenced voluntarily, although there are no express obligations imposed on the directors of a debtor company to initiate bankruptcy or restructuring proceedings on behalf of a debtor company.
Outside of a formal insolvency process, secured lenders can enforce their security by exercising their contractual rights, as well as under the prescribed legislation governing personal property and real estate. Generally, these regimes have prescribed statutory notice periods.
In formal insolvency proceedings outside of a bankruptcy proceeding, secured lenders are subject to a stay of proceedings subject to limited exceptions. In a bankruptcy under the BIA, secured lenders are not subject to the stay of proceedings and can enforce their rights and remedies.
The BIA and CCAA allow for pre-insolvency transactions to be set aside in the following situations:
- where a preference has occurred;
- where a transaction at undervalue has occurred; and
- where a bankrupt corporation has made certain payments within a defined period prior to the initial bankruptcy event at a time when the corporation was insolvent
A preferential transaction occurs where one creditor receives payment over another creditor before the initial bankruptcy event, or the date proceedings were commenced under the CCAA, with the effect of the debtor preferring one creditor over another.
One of the following circumstances must be evident for a transaction to be considered a preference under the BIA or CCAA:
- if the debtor and creditor are not related, the payment must have been made within three months of the initial bankruptcy event; and
- if the parties are related (such as a family member), the payment must have been made within 12 months of the initial bankruptcy event.
A transaction deemed preferential is void and will be set aside by the court. The money is then distributed to the bankrupt's estate.
Transaction at undervalue
A transaction at undervalue occurs where the debtor was insolvent at the time the transaction occurred, or became insolvent as a result of the transaction, and the intent of the debtor was to defeat, delay or defraud its creditors.
For a transaction to be considered a transaction at undervalue under the BIA or CCAA, the transaction must have occurred:
- if the parties are not related, within one year of the commencement of the bankruptcy proceedings and while the debtor was insolvent, with intent to defeat creditors; and
- if the parties are related, within:
- one year of the commencement of bankruptcy proceedings, without proof of insolvency at the time of the transaction and without demonstrating intent to defeat creditors; or,
- five years of the commencement of the bankruptcy proceedings if the debtor was insolvent at the time of the transaction or the transaction was intended to defeat creditors.
Where a transaction at undervalue occurs, a court can set aside the transaction, or order the recipient of the payment to pay the difference between what they paid for the property and the actual fair market value of that property.
Improper payments by the bankrupt corporation
Under the BIA, a court may inquire into whether the following payments made by a debtor corporation was made at the time when the corporation was insolvent (or such payment rendered the corporation insolvent):
- the payment of a dividend (other than a stock dividend) or redemption or purchase for cancellation any of the shares of the capital stock of the corporation; or
- the payment of termination or severance pay or incentive pay or other benefits to a director, officer or manager of the corporation.
If a court finds that such payments have been made improperly, judgement may be made against the directors of the debtor corporation requiring repayment of such amounts.
In Canada, during insolvency, a right of set-off can arise in three ways: (a) by law, (b) in equity, or (c) by contract.
There are two requirements for the claim of legal set-off to be made:
- the cross claims must be liquidated, enforceable and mature; and
- the claims must have arisen between the same parties acting in the same capacity (the claims must be mutual).
An equitable set-off does not require the claims to be liquidated, enforceable and mature, or be mutual. However, when determining if equitable set-off is available, the courts will inquire into the connection between the claims and examine the general equities between the parties. Equitable set-off is available where it would be manifestly unjust to allow one claim to be enforced without taking the other claim into account.
The remedy of contractual set-off is the recognition of the entitlement of parties to explicitly contract to allow for setting-off obligations owing between them. A party with a contractual entitlement to set-off is not required to meet the threshold for legal or equitable set-off.
In the event of an insolvency, there are a number of super-priority claims that rank ahead of secured claims. These claims generally rank in the following order:
- valid trust claims;
- realty property taxes;
- certain deemed trusts;
- claims for specified amounts and periods for wages and pension contributions;
- qualified and unpaid supplier claims;
- unremitted payroll deductions; and
- court-ordered charges in CCAA proceedings and proposal proceedings under the BIA and receivership proceedings.
and do you see any trends emerging in your jurisdiction?
Traditional bank financing continues to dominate the Canadian lending market, however, with the onset of COVID-19, some non-traditional bank lenders have become players.
Canada will likely replace its market offering rate (CDOR) in similar fashion to the replacement of LIBOR. COVID 19 government assistance is tailing off which will have an as yet unknown impact on borrowers and their financial needs. However there are no immediate external factors which will materially change drafting and structuring of deals.