Guide to Doing Business in Canada: Secured financing

10 minute read
20 October 2023

View full guide »

Secured financing

The secured financing market in Canada is well-established, and qualified borrowers have several borrowing options readily available from banks and other financial institutions, as well as from private lenders. Financing may be obtained from a single lender or from a syndicate of lenders where larger loan amounts are required. Loan syndications in Canada are structured in a very similar way to those in the United Kingdom and the United States.

  1. Banks
  2. Other financial institutions and private lenders
  3. Security

1. Banks

The banking system in Canada is sophisticated and well regulated. Bank loans are available from domestic banks, as well as from foreign bank subsidiaries operating in Canada or Canadian branches of foreign banks. The six largest Canadian banks command most of the market and provide debt financing, cash management and investment services across the country. Some of these banks also have subsidiaries operating in the U.S. and outside of North America.

Banks are regulated under the Bank Act (Canada), which authorizes and governs domestic banks (Schedule I), foreign subsidiary banks controlled by eligible foreign institutions (Schedule II) and foreign bank branches of foreign institutions (Schedule III). With increasing competition in the banking sector, a business borrower has a wide range of financing sources and options.

2. Other financial institutions and private lenders

In Canada, there are also a number of non-bank lenders that provide debt financing, often in the form of asset-based loans, term loans or mezzanine debt. Among these institutions are trust and loan companies, credit unions (caisses populaires in Québec) and, in some instances, insurance companies. Financing is also increasingly available from investment funds, equipment finance companies and a wide range of large private companies.

3. Security

Loans can be unsecured or, more commonly, secured against the property of the borrower and any guarantors. In Canada, there are no statutory financial assistance rules that prohibit a corporation from giving guarantees to a lender in respect of loans made to a corporation's subsidiary or parent. However, it is still necessary to comply with general global corporate law principles requiring directors to act in the best interests of a corporation. Security can be taken against personal property - including accounts receivable, securities and intellectual property - and against real property.

a. Personal property

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.

Each province has its own electronic public registry system to record PPSA security interests granted by borrowers and guarantors 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 their 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 corporate borrowers 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.

The choice of province or territory of registration depends on several factors, including the location of the debtor which determines the governing law. The location of the debtor can vary based on the type of debtor entity (individual, partnership, corporation, etc.). In cases where none of the debtor entity criteria apply, it is determined by the jurisdiction where the chief executive office of the debtor is located or "domicile" (for example, the registered head office of a corporation) in Québec, serving as the secondary factor in the governing law.  Other factors include where the assets are located and what type of assets are subject to the security.

The Civil Code of Québec governs equivalent matters in this province, where security over personal property - known as "movable property" in Québec - is generally taken by way of a movable hypothec, with or without delivery. The Civil Code of Québec also provides for certain types of security by way of title retention, such as equipment lease and conditional sale. Subject to certain specific regimes, movable hypothecs and title retention security must be registered in the province's Register of Personal and Movable Real Rights (RPMRR). Similar to the PPSA systems, the RPMRR is a notice-based registry providing notice of the existence of security and other rights that have been granted by debtors to their secured creditors. The underlying security documents creating the security and other rights are not registered. In Québec, the Civil Code of Québec permits a secured creditor to obtain control of money on deposit in a deposit account either by entering into an agreement with the third-party bank and the grantor, called a control agreement, by which the third party agrees to comply directly with the secured party's instructions or the secured party becomes the account holder of the financial account. If the secured hypothecary creditor obtains control of the deposit account then its hypothec ranks ahead of any other movable hypothec encumbering the account, from the time that control is obtained, regardless of when that other hypothec is published.

As of June 1, 2023, the Charter of the French must be carefully reviewed and complied by. Some documents, including security documents governed by Québec law, may need to be signed in French language, and as of September 1, 2022, the RPMRR and the land registry office only accepts registration in the French language regardless of the language used in the underlying security document. 

Québec also has particular requirements for the execution of instruments. For example, certain instruments must be executed in front of a notary qualitied to practice in Québec, 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. For instance, an instrument must be executed prior to its registration at the appropriate registry office. Recent amendments to the Civil Code of Québec have served to streamline the structuring of syndicated loan transactions and the perfection - or "opposability" in Québec - of security in cash collateral and deposit accounts. Also title retention security must be registered within 15 days of the date of the agreement to preserve the creditor's title rights.

Canada is also a signatory of the Cape Town Convention, such that the perfection of security in aircraft and other similar mobile assets is also regulated by international protocol in conjunction with various laws in the provinces and territories.

b. Real property

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 will be obtained by the secured creditor in support of its charge or mortgage document.

c. Bank Act (Canada) security

Pursuant to the Bank Act (Canada), Schedule I, Schedule II and Schedule III banks also have the ability to take security from certain types of borrowers over certain types of property specified in the Act - such as raw materials, work in progress or finished goods in the inventory of businesses. Certain formal requirements must be met in order to take Bank Act (Canada) security. Special security documents must be executed by the borrower to obtain this security, and a separate registration system is involved. Bank Act (Canada) security is available only to secure the repayment of direct loans and advances made to a borrower, and is not available to secure a guarantor's liabilities.

d. Inter-creditor arrangements

Borrowers frequently satisfy their financing requirements from multiple sources, with different secured creditors having security over different assets, or having different security rankings over the same asset pool. In these situations, inter-creditor agreements are usually required in Canada to modify those relative priority rankings that would otherwise apply to the assets under the applicable legislation in the absence of an inter-creditor agreement.

In Québec, if an inter-creditor agreement includes a subordination of rank of security - or "cession of rank" in Québec - such subordination of rank must be registered - or "published" in Québec - at the appropriate registry office. Additionally, in Ontario, estoppel letters often must be obtained from secured creditors with prior registrations in order to limit the scope of the security interests claimed by them.

Learn more about Gowling WLG services in secured financing »

NOT LEGAL ADVICE. Information made available on this website in any form is for information purposes only. It is not, and should not be taken as, legal advice. You should not rely on, or take or fail to take any action based upon this information. Never disregard professional legal advice or delay in seeking legal advice because of something you have read on this website. Gowling WLG professionals will be pleased to discuss resolutions to specific legal concerns you may have.