Beyond results
TM
Keeping you in the loop
Fall 2006 - Montréal & Québec City
www.fasken.com
In this Issue
Corporate Strategies .........................1
A New Conviction for Breaches of Quebec’s
Lobbying Law: Fresh Warning for Associations,
Companies and their In-house Lobbyists
By Pierre B. Meunier and Shelley L. Kath
CORPORATE STRATEGIES
A NEW CONVICTION FOR BREACHES OF QUEBEC’S
LOBBYING LAW: FRESH WARNING FOR
ASSOCIATIONS, COMPANIES AND THEIR IN-HOUSE
LOBBYISTS
Construction / Sureties .................... 4
BY PIERRE B. MEUNIER AND SHELLEY L. KATH
Contractors’ Ability to Secure Costs of the
Impact of Client Requested Orders for Change
By Pierre J. Deslauriers
Contract Interpretation ..................... 8
A Million Dollar Comma
By Denis Paquin
Security Interests / Tax Law ............10
Can Quebec Refundable Tax Credits Still
Be Validly Hypothecated?
Special collaboration
Tax Law - Trusts ...............................12
Quebec Trusts: Government Amends Rules
Retroactively
By Hugo Patenaude
Aboriginal / Energy and Natural
Resources .........................................15
Natural Resource Development with
Aboriginal People: Tools for Consultation
By Anne Drost and Gaël C. Gravenor
On September 21, 2006, Lobbyists Commissioner André C. Côté announced that
the president and CEO of the Association des ingénieurs-conseils du Québec
(Association of Consulting Engineers of Quebec), Ms Johanne Desrochers, pleaded
guilty to two counts of breaching the Lobbying Transparency and Ethics Act,1 (“the
Act”) and that she had been issued fines totaling $1,260 for these offences.
Both violations involved lobbying without being duly registered. In February 2005,
Ms Desrochers sought a financial contribution in favour of the Association from
Hydro-Quebec. In May 2005, Ms Desrochers engaged in some lobbying before the
Ministry of Transport in order to seek changes to the method by which consulting
engineers are remunerated.
Quebec’s Attorney General served the statements of offence following an inquiry
undertaken by the Lobbyists Commissioner.
Va n c o u v e r
FASKEN MARTINEAU DUMOULIN LLP
Calgary
N e w Yo r k
To r o n t o
London
Montréal
Johannesburg
Québec City
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This marks the second time a violation of the Act has led to a conviction and fines.
The first conviction, made in March 2006, involved an immigration lawyer who had
lobbied the Ministry of Immigration and Cultural Communities without being duly
registered and had made a contingency arrangement, in contravention of the Act. He
was issued fines totaling $3,105.
1) Important new aspects of the latest conviction
Compared with the first conviction, this new sanction includes four new elements
that send important signals to CEOs, presidents and other leaders of associations and
companies that engage in lobbying activities before public office holders in Quebec.
This latest conviction represents the first time that a sanction under the Act has been
imposed for an offence involving:
• An in-house lobbyist;
• A non-lawyer;
• Lobbying aimed at obtaining a financial benefit from a governmental entity;
• Lobbying representations made before a government enterprise or agency.
“(…) important signals
to CEOs, presidents
and other leaders of
associations and
companies that engage
in lobbying activities
before public office
holders in Quebec.”
In-house lobbyist. While the previous conviction involved a lawyer acting as
a consultant lobbyist, the latest conviction involved an in-house lobbyist
working for an association. Under Quebec law, in-house lobbyists are referred
to under the Act as “organization lobbyists” if they work for an association
or other non-profit group and “enterprise lobbyists” if they work within a
profit-seeking enterprise. Furthermore, not all persons who lobby on behalf of
non-profit organizations are defined as “organization lobbyists” and thus
targeted by the Act. Specifically, only those non-profit organizations
constituted to serve management, union or professional interests, or those
whose members are profit-seeking enterprises or representatives of such
enterprises, have reporting obligations under the Act.
Non-lawyer. Unlike the first conviction, which involved a lawyer acting as a
lobbyist, the person involved in this latest conviction was not a lawyer. While
many lobbyists, particularly consultant lobbyists, are lawyers for whom
familiarity with the legal requirements of registration is often a routine
matter, many are not. Rather, many organization and enterprise lobbyists are
persons with other qualifications and backgrounds, including members of
other professional orders. Some of these persons find the demands of lobbyist registration rather daunting, and understandably so.
Lobbying aimed at obtaining a financial benefit from a governmental
entity. Some of the representations underlying the latest conviction were
aimed at obtaining a financial contribution from a governmental organization.
Lobbying activities undertaken in order to obtain subsidies or other financial
benefits from government ministries, departments or organizations nearly
always require filing returns with the Quebec Lobbyist Registry (Registre des
lobbyistes du Québec). As such, great care must be taken by non-profit
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organizations subject to the Act, as well as by companies, to ensure that
whenever subsidies, contracts or any other form of financial assistance are
sought from the provincial government or its entities, such activities are duly
registered if so required under the Act.
Pierre B. Meunier is a senior partner
at Fasken Martineau and specializes
in environmental law. He is also in
charge of Fasken Martineau's Strategic
Counsel Group for Quebec. Before
joining Fasken Martineau, Mr. Meunier
worked for several years as a senior
public servant for the Quebec
Government. In particular, he was
Deputy Minister of the Environment,
Deputy Minister of Housing and
Consumer Protection and President of
the Consumer Protection Office.
Pierre Meunier can be reached at
514 397 4380 or at
[email protected].
Lobbying representations made before a government enterprise
or agency. Unlike the first conviction, which involved lobbying of public
office holders serving a Ministry, the current conviction involves lobbying
before a government enterprise, in this case a Crown corporation. There are
over 350 governmental agencies and enterprises in Quebec, and lobbyists of
all kinds, including those representing companies and associations, must
report lobbying activities involving any and all of these entities. While many
are included in Annex 2 of the Quebec Auditor General’s report entitled,
Vérificateur général du Québec - Rapport annuel de gestion pour 2005-2006
(available in French only), the Lobbyist Commissioner has indicated that this
list cannot be relied on as providing a complete list of all entities subject
to the Act.
2) Monetary penalties are possible for more than simple failure to register
What the two convictions have in common is that both cases involved a clear
omission to make the necessary filings to the lobbyist registry. Certainly, it is not
surprising that the Act imposes monetary penalties on those who engage in lobbying
of public office holders without registering. But it is very important to recognize that
less dramatic breaches of the Act, as well as breaches of the Code of Conduct for
Lobbyists 2 (“the Code”), enacted as a regulation, are also punishable by fines. Thus,
this latest conviction provides the occasion for reviewing the penalties that may be
imposed for breaches of the Act or the Code.
3) Examples of offences under the Act and the Code of Conduct for Lobbyists
Shelley L. Kath is an associate at
Fasken Martineau and specializes in
lobbying law with Fasken Martineau's
Strategic Counsel Group. She also
practices environmental and energy
law as part of Fasken Martineau's
Environmental, Energy and Natural
Resources Law Practice Group.
Shelley L. Kath can be reached at
514 397 5236 or at
[email protected].
Generally, any person who contravenes an obligation prescribed by the Act, or any
provision of the Code, is guilty of an offence and liable to a fine of between $500
and $25,000. If the offence involves lobbying in violation of an order prohibiting
registration or lobbying in violation of an order canceling all entries in the lobbyist
registry, however, then the minimum fine is $5000 rather than $500. Fines are
doubled in the case of a second or subsequent offence. Specific offences under the
Act and Code are numerous. Here are some examples:
• Engaging in lobbying activities in the absence of registration;
• Filing a return that the lobbyist knows to be false or misleading;
• Lobbying in violation of an order issued by the Lobbyists Commissioner
prohibiting the lobbyist from registering or canceling the lobbyist’s
registration;
• Hindering the work of the Lobbyists Commissioner, or one of his representatives, in the course of an inspection or inquiry;
• Acting in return for compensation that is contingent on success;
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• Acting in return for compensation derived from a grant or loan received
from the Government, a municipality or a government or municipal body
or agency;
• Awarding a contract, grant or benefit to the lobbyist himself, where the
lobbyist has been mandated by a public officer holder to award such a
benefit to others;
• Making false or deceptive representations to a public office holder or exerting
undue influence upon him;
• Inducing a public office holder to contravene the standards of conduct
applicable to him or her.
4) Disciplinary measures – including one-year ban on lobbying
In addition to monetary penalties, breaches of the Act or Code may result in
disciplinary measures. For repeated or grave breaches of either the Act or the Code,
the Lobbyists Commissioner may prohibit the registration of the lobbyist in the
registry for a period not exceeding one year. Furthermore, the Act authorizes the
Attorney General to claim from the lobbyist the amount or value of any compensation payable to the lobbyist in relation to the activities giving rise to the breach. The
business or non-profit organization within which the lobbyist was acting at the time
of the breach is solidarily liable to pay the amount claimed.
5) Conclusion
1) R.S.Q. c. T-11.011;
2) R.S.Q. c. T-11.011, r.0.2.
Clearly, this latest conviction provides a firm reminder to those who communicate
with public office holders – whether in Ministries, municipalities, or before
governmental or municipal agencies or enterprises – to take lobbyist registration
seriously. Furthermore, it provides the occasion to recall that, in order to avoid
fines or disciplinary action, full compliance with both the Act and the Code is
strongly advised.
CONSTRUCTION / SURETIES
CONTRACTORS’ ABILITY TO SECURE COSTS OF
THE IMPACT OF CLIENT REQUESTED ORDERS
FOR CHANGE
BY PIERRE J. DESLAURIERS
The legal hypothec that parliament has made available to those who contribute to the
construction or renovation of an immoveable often turns into a nightmare for
owners, project managers and general contractors.
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Virtually overnight, anyone involved in the construction or renovation of an
immoveable who contracted with the owner can, subject to subsequent judicial
recognition, unilaterally place against that immoveable a first-ranking hypothec for
any amount it may claim is owing, too often arbitrarilary.1
Until recently, debtors of that kind of hypothec thought comfort lay in the fact that
parliament had limited this amount to the “value added to the immoveable by the
work, materials or services supplied or prepared for the work.” 2
The courts did indeed believe, to this date, that a tight correlation had to exist
between the components of the claim and the added value they contributed to the
immoveable. Subject to the requisite formalities, the incorporation of material posed
no great difficulty when assessing the added value.
“This means that the
notice places on the
owner that wishes to
protect itself against a
legal hypothec the
obligation to monitor the
financial evolution of the
contract that it is given
notice of.”
However, doing so became somewhat more difficult when the often intangible costs
of the impact of orders for changes to the project came into play. Many believed, for
example, that general expenses, administrative fees and profits, late penalties,
acceleration fees, costs of extending deadlines, termination fees and the expense of
substituting methods or materials could not be secured by legal hypothec, as these
were unsecured claims, in other words, not guaranteed.
One example of this jurisprudential position is Construction Sicor v. 2944-9519
Québec Inc.,3 in which the Superior Court repeated that a claim that brought no
added value to an immoveable could not be secured by legal hypothec.
Consequently, the judge ordered the cancellation of the hypothec that was meant to
secure a claim for foregone productivity. Similarly, Constructions Éclair v. Décor
Alliance 4 cancelled a hypothec securing a claim for delay, while in 141577 Canada
Inc. v. Alta Mura,5 the court refused to acknowledge that a claim for foregone
productivity resulting from winter work could be secured. According to the court,
“[TRANSLATION] such a claim does not change the nature of the work to be
executed, nor what that work contributes to the immoveable. It just becomes more
costly to execute.”
The ruling handed down in 9096-0105 Québec inc. v. Construction Cogela Inc 6
reviewed the body of case law on this issue, which appears to be solidly established
along the classic parameters of legal construction hypothecs and the claims these are
likely to secure.
But case law has evolved and the parameters determining which claims are likely
to be secured by legal hypothec have been redefined. First, some judges have
acknowledged that costs intrinsically related to the costs of work (not costs relating
to the circumstances under which the work was performed) can be claimed, even if
they do not, as such, contribute any added value to the immoveable.
One illustration of this is Plâtriers Larrivée Inc. v. Raymond Chabot Inc. 7 in which
the court specifically stated that “[TRANSLATION] taxes form a part of the value
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of services and materials much as do the costs of purchasing the material and its
packaging.” Consequently, the court concluded that the QST and GST owing can be
secured by legal hypothec as is the case with costs of material and labour.”
This decision was a harbinger of things to come.
In 2005, the Court of Appeal of Québec handed down a judgment in Société de
cogénération de St-Félicien, société en commandite/St-Felicien Cogeneration
Limited Partnership v. Industries Falmec Inc. 8
Here, the Court of Appeal upheld the conclusions of the trial judge, who ruled that,
on the one hand, the notice of contract need not indicate the price of the contract and,
on the other, that “[TRANSLATION] all invoices pertaining to additional work
(thus not mentioned in the initial notice of contract), to the initial withholding and
to additional costs have given the company’s immoveable an added value equal to
the amounts allocated by the court, with the exception of the R-20 invoice of
$5,255.10 for telephone expenses.” (Emphasis added).
In this context, the additional work costs are covered by the original notice of
contract, regardless of whether or not the notice mentioned the contract’s price. This
means that the notice places on the owner that wishes to protect itself against a legal
hypothec the obligation to monitor the financial evolution of the contract that it is
given notice of.
Similarly, the Court of Appeal confirmed that, despite certain presumptions of facts
developed over the years, “[TRANSLATION] the amount of the added value is not
necessarily equal to the cost of the work.” 9 It repeated that the role of the trial judge
is to note the existence of the added value, not to render an opinion as to its
quantum at the stage where an application is filed to sell a building (a “motion
for forced surrender”). But this puts the owner in an untenable situation, since
the moment an added value is noted by a tribunal, the owner must wait for the
immoveable to be sold by judicial sale before challenging the quantum. How then
can the owner reimburse the right amount of the legal hypothec and still hold on to
the property?
The Court of Appeal continued, stating that “[TRANSLATION] the Civil Code does
not specify the nature of eligible work. Case law already recognizes that hypothecs
can also secure interest, additional indemnity and legal costs,” 10 which includes
taxes.11
The Court of Appeal ruled in the following words:
[TRANSLATION]
“The Civil Code does not specify what work costs must be taken into
account when establishing a claim, therefore debt must be considered
from a broader perspective. In Corpex and Shore, cited above, the
Supreme Court recognized that the price of work includes an amount to
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compensate for general work site costs. Yet insurance fees, interest and
taxes are not subtracted from the cost of work provided, even if these
components are not part of work that has been integrated into the
immoveable. These fees, like those claimed in R-36.1, are soft costs
without which the job site could not have operated, and therefore
represent the actual cost of the work carried out. With all due respect, I
cannot agree to allow the sub-contractor to lose the protection of
the builder’s hypothec solely on the grounds that it must perform
additional work for which no provision was initially made.” 12
Pierre J. Deslauriers specializes in
litigation, especially in the area of
construction law. Mr. Deslauriers is the
senior partner of the Quebec region’s
construction law practice group. He
has represented all players in the
construction industry, including owners,
consulting engineers, architects, general
contractors, sub-contractors, suppliers,
etc. Mr. Deslauriers is also recognized
in mining law. He also acts in
international arbitration and has
conducted rogatory commission in
Asia and Europe.
Pierre Deslauriers can be reached at
514 397 7523 or at
[email protected].
1) Article 2726 C.C.Q.;
2) Article 2728 C.C.Q.;
3) [1994] R.D.I. 379, April 12, 1994,
Gilles Mercure S.C.J.;
4) January 11, 1991, Victor Melançon S.C.J.;
5) J.E. 2004-1508; Clément Gascon S.C.J.;
6) 2005 CANLII 669; Israël S. Mass S.C.J.,
January 14, 2005;
7) EYB 1996-2931; Wilbrod Claude Décarie S.C.J.,
March 12, 1996;
8) 2005 QCCA 441 (CANLII); 2005-04-25.
Judgment at trial rendered April 29, 2003,
Gratien Deschênes S.C.J. Roberval;
9) 2005 QCCA 441; See paragraph 69;
10) Ibid., paragraph 77; See also: 164618 Canada
Inc. v. Compagnie Montréal Trust, [1998] R.J.Q.
2926 (C.A.);
11) Ibid., paragraph 77, See also: Plâtriers Larrivée
inc. v. Raymond Chabot inc., [1996] R.J.Q. 981
(S.C.);
12) Ibid., paragraph 115.
Conclusion:
Owners should retain the following points from the Court of Appeal’s Falmec:
1. The notice of a sub-contractor’s or supplier’s contract need not stipulate the
price of the contract. The owner must inform itself of the financial evolution of
the contract denounced and make the appropriate withholdings.
2. If a price is mentioned, the sub-contractor is not limited to that price and may
adjust it for the purposes of the legal hypothec, compensating for extras and
unforeseen events.
3. At the stage of a motion for forced surrender, the courts will not determine the
quantum of the added value imparted by each component. The owner’s right of
ownership could therefore be jeopardized.
4. The components covered by the legal hypothec could greatly exceed the cost of
material and labour, and claims may warrant a legal hypothec that is difficult to
quantify on a day-to-day basis.
Falmec is a very important judgment in terms of legal hypothecs. Even if the
Superior Court issued subsequent rulings that do not appear to follow Falmec
in all respects, and notwithstanding a certain amount of dissent in the legal
community, the province’s highest court requires a greater vigilance on the part of
project owners.
Given the circumstances, owners would be wise to protect themselves by closely
monitoring progressive payments and making sure that they obtain successive
release and discharges so that they will not be faced with claims of a scope and
breadth they never would have suspected until the end of the project.
Perhaps developers should consider the simplest solution, which would be to ask
that all interveners waive their right to a legal hypothec in exchange for a labour and
material payment bond.
It would be a shame if developers were prevented from enjoying the fruits of their
investment because their project is sold by judicial sale in the months following its
inauguration!
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CONTRACT INTERPRETATION
A MILLION DOLLAR COMMA
BY DENIS PAQUIN
In the world of communications technology, everything moves fast. Competition is
fierce, and any hesitation to sign a contract today can, tomorrow, result in a missed
opportunity or have a significant impact on the financial conditions. To some extent,
this is why players in this industry use standard contracts and insert terms and
conditions that are specific to the transaction.
“The use of standard
contracts can produce a
false sense of security.
It is important to make
sure that your
“standard” reflects what
you truly desire (…)”
Recently, Rogers Communications Inc. (“Rogers”) and Aliant Inc. (“Aliant”)
entered into an agreement regarding the use of poles in order that Rogers could
extend its network and better serve its clients. In the months following the execution
of the agreement, Aliant realized that it could obtain substantially higher rates for the
right to use its poles. Was the agreement with Rogers firm for five years? In a
ruling 1 that made national headlines, the Canadian Radio-Television and
Telecommunications Commission (“CRTC”) had to deal with that issue. The CRTC
was asked to interpret the following phrase:
“… this agreement shall be effective from the date it is made and shall
continue in force for a period of five (5) years from the date it is made,
and thereafter for successive five (5) year terms, unless and until
terminated by one year prior notice in writing by either party.”
Rogers was convinced that it had a five-year agreement with options to renew for
successive periods of five years, which options were subject to the right each party
had to terminate the agreement on one year’s notice. Aliant, on the other hand,
believed that the second comma meant that the agreement could be terminated at any
time on one year’s notice.
After a grammatical analysis of the clause, the CRTC concluded that the presence of
the second comma effectively meant that the termination right could be exercised at
any time, including during the initial period; Aliant could therefore terminate its
agreement with Rogers, knowing that it could easily obtain rates twice as high.
According to Rogers, the CRTC erred in relying solely on a grammatical rule rather
than determining the parties’ intent. Indeed, had the parties wanted the agreement to
be terminated at any time on one year’s notice, why did the parties specify that the
agreement had a five-year term! According to an Ontario lawyer interviewed on this
subject, the CRTC merely followed a trend in Canadian courts that favoured plain
English interpretations of phrases.
Interestingly, the interpretation rules in the Civil Code of Québec include articles
1425 and 1426, which read as follows:
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1425: The common intention of the parties rather than adherence to the
literal meaning of the words shall be sought in interpreting a contract.
1426: In interpreting a contract, the nature of the contract, the circumstances in which it was formed, the interpretation which has already
been given to it by the parties or which it may have received, and usage,
are all taken into account.
Denis Paquin practices real estate law.
He specializes in two distinct areas –
commercial leasing and the sale, purchase and development of commercial
properties. Mr. Paquin has extensive
experience in all aspects of commercial
leasing, both in Quebec and in other
provinces of Canada. He has acted for
vendors and purchasers of commercial
properties and portfolios of various
types. His development expertise is
mainly sought for the development or
redevelopment of shopping malls and
power centers.
Denis Paquin can be reached at
514 397 7696 or at
[email protected].
Had a Quebec court been called upon to interpret this clause, would the ruling
have been the same? Naturally, no one can answer this question with any degree
of certainty but, irrespective of the jurisdiction, it is imperative that parties draft
their contracts as clearly as possible so that those contracts adequately reflect the
parties’ intent. It is interesting to note, moreover, that in this case, the parties did
not draft the agreement submitted to the CRTC for interpretation. The agreement
was a standard contract used by virtually all cable and telephone companies to
establish terms and conditions applicable to the use of public utility poles. This
raises another concern. In a world where documents must be produced at an
ever-brisker pace, the use of standard contracts is very common. Ask yourself
whether the standard contract that conveniently appears on your computer screen
at the mere press of a button and that you intend to use as a template to draft your
agreement has been seriously analyzed before being retained as a “standard.”
When was it last revised? Standard contracts have sometimes even been known
to refer to laws repealed years ago. Not very reassuring. The use of standard contracts can produce a false sense of security. It is important to make sure that your
“standard” reflects what you truly desire or you might very well be doing
yourself more harm than good if you use this document regularly. True, revising
means delays and delays sometimes mean more costly contracts, but the time to
revise a standard contract is not moments before it is executed by a signing
officer. Ideally, corporations should have a policy to revise standard contracts
systematically at pre-determined intervals, much in the same manner as they
review policies and maintain equipment.
Was Rogers at fault in this case? It would be easy to say “yes” looking at the
conclusions reached in the ruling. While the judgment may be startling, Rogers
acted as would any other business under the circumstances. Some might even say
that its interpretation was the right one. But if that standard contract had been
revised, perhaps the comma would have been removed before the agreement was
executed with Aliant… and life would have continued without anybody realizing
that a serious problem had just been averted.
But the debate is not over. Rogers has appealed the ruling. Its main argument is
that, in the French version of the contract, which contains a slightly different
wording, the famous comma is not there. While the English version was created
first before being translated into French, each company signed both versions
FASKEN MARTINEAU DUMOULIN LLP
1) Telecom Decision CRTC 2006-45; July 28, 2006.
See: Commission’s Analysis and Determination,”
paragraphs 27 through 30; See:
http://www.crtc.gc.ca/archive/eng/decisions/2006/dt
2006-45.htm
10
separately. Because of this new twist, this case will surely be in the headlines
again, in the new future. In the meantime, where contracts are signed in both
languages, one should make sure that templates and final versions are identical in
both languages. “Élémentaire, mon cher Watson!”.
SECURITY INTERESTS / TAX LAW
CAN QUEBEC REFUNDABLE TAX
BE VALIDLY HYPOTHECATED?
CREDITS STILL
SPECIAL COLLABORATION *
On August 7, 2006, the Superior Court of Montréal rendered a judgment that carried
heavy consequences for new economy companies (i.e. R&D, biotech, film, etc.) in
Quebec that are eligible for refundable tax credits. According to the Court, Quebec
refundable tax credits could not be hypothecated, which reduced the asset base that
could be used for financing.
The facts of In the matter of the bankruptcy of 111295 Canada Inc. and H.H. Davis
& Assoc. Inc. v. Royal Bank of Canada 1 are relatively simple. Please note that leave
to appeal this judgment was granted on September 14, 2006.
“The debate arose
from severe statutory
limits that apply to
the assignment of
Crown debts.”
The company, 111295 Canada Inc., filed an assignment in bankruptcy under the
Bankruptcy and Insolvency Act. The trustee, H.H. Davis & Assoc. Inc., petitioned
the Superior Court for instructions as to whom the refundable tax credits from the
Government of Canada and the Government of Quebec in its possession should be
remitted. These refundable tax credits had been hypothecated in favour of the Royal
Bank of Canada pursuant to a hypothec deed duly published in the Register of
Personal and Movable Real Rights.
The debate arose from severe statutory limits that apply to the assignment of Crown
debts. A major reason for such limits has always consisted in ensuring that any
assignment made between two taxpayers is in no way binding upon the Crown. The
judge then reviewed these statutory limits and the acts and legislative amendments
adopted over the years by the two levels of government in order to mitigate the
negative impacts of these limits on the financing of companies.
Specifically, the acts and amendments studied on the federal front were Sections 67
and 68 of the Financial Administration Act, as well as Subsections 220(6) and
220(7) of the Income Tax Act (Canada) (together, referred to as the “Federal
Legislation”). On the provincial front, it was Section 33 of the Act Respecting the
Ministère du Revenu (the “Quebec Revenue Act”) and Section 1055.2 of the
Taxation Act (Quebec) (the “QTA”) (together, referred to as the “Quebec
Legislation”).
FASKEN MARTINEAU DUMOULIN LLP
* For more information, please do not
hesitate to contact one of the lawyers
listed below:
Serge Guérette, from the Commercial
Litigation Group, practices in business
litigation, in the area of insolvency and
reorganization and, more generally, in
corporate and securities litigation.
Serge Guérette can be reached at
514 397 7461 or at
[email protected].
Paul Marcotte, from the Life Sciences
Group, primarily practices in the area of
biotechnology and in the pharmaceutical
industry.
Paul Marcotte can be reached at
514 397 5152 or at
[email protected].
Marc Novello, from the Banking &
Finance Group, specializes in the area
of financing. He represents financial
institution and investor consortiums in
corporate financings.
Marc Novello can be reached at
514 397 7581 or at
[email protected].
Jean-François Perreault, from the
Taxation Group, practices tax law and,
more particularly, tax law as it relates to
corporate and commercial law.
Jean-François Perreault can be
reached at 514 397 7460 or at
[email protected].
11
By all appearances, the legislator’s intention in passing these acts and amendments
was to facilitate the use of refundable tax credits to allow new economy companies
to finance their operations by hypothecating these credits in favour of lending
institutions. Government programs like those sponsored by Investissement Québec
have since completed these funding mechanisms.
The judge devoted a large part of his ruling to showing that the Federal Legislation
and the Quebec Legislation provided only for the assignment of Crown debt and
nothing else. With the entry into force of the Civil Code of Québec in 1994, a new
security interest regime was introduced––that is to say, prior claims and
hypothecs––which eliminated the assignment of claims for security purposes under
the former Civil Code of Lower Canada.
From the judge’s point of view, because a hypothec is not an assignment, it was
therefore not affected by the provisions of the Federal Legislation that restricted the
assignment of Crown debts. Because the hypothec granted to the Royal Bank
otherwise met all the conditions for its validity and enforceability under the Quebec
civil law, the trustee therefore had to remit the Federal tax refunds it had received to
the Bank.
The same conclusion was not, however, possible for the Quebec refundable tax
credits. The Court noted, in fact, that Section 33 of the Quebec Revenue Act
provides that not only are Crown debts inalienable, they are also unseizable. Now as
to Section 1055.2 of the QTA, it provides for an exception to the inalienable nature
of claims, but does not change their unseizable nature. The judge reiterated the clear
terms of Section 2668 of the Civil Code of Québec: property exempt from seizure
may not be hypothecated. Therefore, he declared that the hypothec on Quebec
refundable tax credits was inopposable to the trustee, who in turn could remit these
amounts to the body of creditors.
This legal decision not only jeopardizes the future granting of hypothecs on Quebec
refundable tax credits, but also invalidates or renders inopposable any such hypothec
granted since March 9, 1999, which is the date Section 1055.2 of the QTA came into
force. It is easy to envision the considerable impact this decision had on the
banking community and new economy businesses.
Not surprisingly, this matter was brought to the attention of the ministère des
Finances of Quebec during the 2006 Roundtable Conference of the Association de
planification fiscale et financière held at the beginning of October. Consequently, it
does not come as a shock that, on October 16, this same ministère published the
latest Information Bulletin /2006-3, which announced that tax legislation would be
amended in order to allow a corporation to hypothecate the entitlement to an amount
payable to it under the QTA.
It also announces that this amendment will apply retroactively to the entry into force
of Section 1055.2 of the QTA, i.e. March 9, 1999, but it will not apply retroactively
to amounts owed by the State and being the object of proceedings pending before a
court on the date of the publication of the Information Bulletin /2006-3.
1) 111295 Canada inc. (Syndic de), 2006 QCCS 4455
(CanLII); C.S.M.: 500-11-025249-059, August 7,
2006, Joël Silcoff, J.S.C.; See:
www.canlii.org/qc/cas/qccs/2006/2006qccs4455.
html;
Leave to appeal granted September 14, 2006
(C.A.M. 500-09-017021-064).
FASKEN MARTINEAU DUMOULIN LLP
12
By so acting, the Quebec legislator seems to be reiterating its tax policy, which aims
to facilitate the financing of new economy businesses through moveable hypothecs
on Quebec refundable tax credits.
TAX LAW / TRUSTS
QUEBEC TRUSTS:
RETROACTIVELY
GOVERNMENT AMENDS RULES
BY HUGO PATENAUDE
On June 9, 2006, the National Assembly adopted Bill 15,1 which came into force on
June 13. This act aims, among other things, to close a loophole in the Taxation Act 2
(Quebec) that allowed beneficiaries of Quebec trusts to avoid paying income taxes
to the Quebec government if they resided outside of the province.
“From now on, these
amounts may no longer
be deducted from the
taxable income of trusts
for the purposes of
the Quebec income
tax returns.”
This amendment to the Taxation Act (Quebec) will affect some 150 of the 40,000
private trusts in Quebec, which roughly represents $500 million, plus interest, in
taxes. According to the Quebec Minister of Revenue, Mr. Bergman, the targeted
trusts were using a form of aggressive tax planning. However, the Minister states
that, although this planning constitutes unacceptable “tax avoidance,” it was not
fraudulent.3 Tax experts were merely taking advantage of certain discrepancies
between the federal and Quebec tax acts, as well as the vagueness of the latter, so
that their clients could avoid paying tax to the Quebec government.
Quebec’s somewhat unique fiscal environment actually enabled this practice. The
Income Tax Act (Canada) 4 and the Taxation Act (Quebec) make provisions for two
separate and autonomous tax regimes. In the past, in both cases, a choice could be
made by virtue of which either the trust or the beneficiary had to pay taxes from the
income realized by the trust. The method consisted in choosing to have the trust
taxed under the federal tax system, or to have the beneficiary taxed pursuant to the
Quebec income tax return filed by the trust. This strategy had several consequences.
The trust, for its part, paid federal taxes. The Quebec government did not collect any
taxes because, according to the information it received from the trust, the income
distributed to the beneficiary would be taxed in the beneficiary’s hands. The beneficiary, in turn, paid no taxes at the federal level because the trust was taxed on this
income, and the beneficiary did not pay any taxes in his or her province of residence
(outside Quebec) because provincial taxes in other provinces are computed based on
the federal tax owed, which in this case was zero. Clearly, the Quebec government
could not tax a resident of another province, since its territorial jurisdiction is
limited to those residing in the province. In the end, no provincial tax was paid on
the income earned by the trust and distributed to its beneficiary.
FASKEN MARTINEAU DUMOULIN LLP
13
Bill 15 puts an end to this practice. It forces Quebec trusts to declare, when filing
their Quebec income tax returns, the amounts for which beneficiaries opted to pay
taxes under the Income Tax Act (Canada). From now on, these amounts may no
longer be deducted from the taxable income of trusts for the purposes of the Quebec
income tax returns. This means that, if the trusts choose to be taxed in accordance
with federal legislation, the amounts thus assessed will be automatically taken into
account when the Quebec income tax return is filed, and trusts will also have to pay
provincial taxes in Quebec. There are no longer two separate choices, but rather one
choice made at the federal level that is transposed at the provincial level.
Hugo Patenaude specializes in
taxation, trust law and wealth
management. As part of his practice,
he offers a broad range of tax services
relating to estate planning, will
planning, income splitting, asset
protection, charities, and wealth
creation and preservation.
Hugo Patenaude can be reached at
514 397 5172 or at
[email protected].
It is important to note that Bill 15 will be applied retroactively, contrary to the
general rule that dictates that a legislative measure apply only from the day it goes
into effect or the date on which it is announced, as the case may. According to
Minister Bergman, this is justified by the fact that this practice “[TRANSLATION]
goes against the tax policy that was well established by the Minister of Finance in
1998–1999, and well established in the Budget Bill that was tabled in 1999 by the
Minister of Finance at the time.” For the trusts in question, the new rule will apply
retroactively to all taxation years that are not statute barred, including those ended
before May 9, 2006, this being the date on which Bill 15 was introduced. The
period of limitation for these operations is three years, as they are not considered to
be fraudulent, according to statements made by the Minister.
The same day that Bill 15 was adopted, Minister Bergman brought forward a last
minute amendment to render inoperative all transactions effected after May 9, 2006
that seek to revise previous income tax returns. The objective of these amendments
is to ensure that trusts do not escape the application of this act due to steps taken
after Bill 15 was tabled, changes made to the transactions conducted between the
parties or the fiscal stance they adopted. Four separate measures have been taken in
this respect:
• Any revisions made to previous federal income tax statements after May 9,
2006, will not be taken into account when applying this new act or
determining the amount claimed by the ministère du Revenu.
• If, on its federal or provincial income tax return submitted before May 10,
2006, a trust declared itself to be a resident of Quebec, it will be deemed to
have resided in Quebec for that tax year.
• No changes to the trust or to its transactions and operations are enforceable
against the ministère if they took place after May 9, 2006. This applies
whether the change was an amendment, adjustment, cancellation or resolution
made to the trust or to its operations and transactions.
• For a tax year covered by Bill 15, all transactions or operations relating to the
makeup of the trust or to its transactions and operations are deemed to have
been carried out for a bona fide reason, and not for the purpose of obtaining
tax benefits.
In order to compute the tax owed for income tax years prior to June 6, 2006, the
ministère du Revenu will work from the income tax returns filed, in whatever
condition they were on that date.
FASKEN MARTINEAU DUMOULIN LLP
14
This amendment to Quebec legislation is apparently in keeping with the tax policy
that was announced by the Minister of Finance in March 1998. The policy sought to
circumvent the tax avoidance made possible by the double designation of amounts
(federal and provincial) under which trusts chose to pay taxes. From that moment
on, designations made by trusts for the application of federal income taxes were
considered to have been made for the application of provincial income tax. Certain
“imprecisions” seem to have remained following the 1998–1999 budget. According
to statements made by the Minister, Bill 15 “clarifies” these “imprecisions”. This is
the second attempt to force trusts to pay their fair share of income taxes, and to
prevent tax avoidance through the use of such trusts.
The first change in 2002 targeted beneficiaries residing in Quebec that had sufficient
interest, according to established standards, in a Canadian trust residing outside
Quebec (designated beneficiaries). These Quebec residents transferred their assets to
a Canadian trust outside of Quebec so that the revenue generated would be taxed in
the trust’s province of residence, ideally at a lower rate than that levied in Quebec.
Albertan trusts were very popular at the time. Since the federal and provincial tax
had already been paid, this money could be repatriated without the Quebec
beneficiary being taxed. Starting in 2002, legislation no longer granted the
designated beneficiary the choice of having the trust deduct its own taxes. This
forced all designated beneficiaries of Canadian trusts outside Quebec to pay Quebec
taxes on amounts received, regardless of the choice made. The beneficiary could
nevertheless keep track of the provincial taxes that were paid by the trust in another
province by deducting it from the amount the beneficiary had to pay to Quebec.
It is rather peculiar that, despite the in-depth revision of the rules relating to the
taxation of trusts which began in 1998, it took eight years before authorities found
this so-called loophole.
In short, Bill 15 only affects a small number of trusts that meet the required criteria
and that have adopted tax planning that allows them to avoid paying Quebec income
taxes. This bill has been tabled to, in the words of the Minister, make up for an
“imprecision” in the Quebec act that did not prevent different choices from being
made for federal and provincial purposes, a situation that is unique to Quebec. The
Minister of Finance has therefore seen to it that trusts are no longer a means of
avoiding provincial income tax, whether by Quebec residents that are beneficiaries
of a trust outside of Quebec, or by beneficiaries of a Quebec trust that reside outside
of the province.
1) Bill 15, An Act to amend the Taxation Act and
other legislative provisions, and becoming S.Q.
2006, c. 13;
2) R.S.Q., c. I-3;
3) Press briefing of Mr. Lawrence S. Bergman,
Minister of Revenue, May 30, 2006;
4) R.S.C. (1985), c. 1 (5th Suppl.).
Some of these new legislative provisions raise several legal questions as to their
validity and opposability. This situation is significant because a number of
taxpayers affected by these new legislative provisions intend to challenge their
validity in court.
FASKEN MARTINEAU DUMOULIN LLP
15
ABORIGINAL / ENERGY AND NATURAL RESOURCES
NATURAL RESOURCE DEVELOPMENT WITH
ABORIGINAL PEOPLE: TOOLS FOR CONSULTATION
BY ANNE DROST AND GAËL C. GRAVENOR
1) Consultation: The Need for a Fair and Transparent Process
“As developers have
the vested interest in
the project, they are
often in a better position
than the Crown to
provide the required
information to the
affected Aboriginal
group.”
As ruled by the Supreme Court of Canada in the 2004 trilogy of Haida Nation, Taku
River and Mikisew Cree cases,1 the Crown has a duty to consult Aboriginal people
when it has knowledge of the existence of an aboriginal right or title and
contemplates conduct that might adversely affect it. For instance, areas that need to
be accessed in order to develop natural resources are often adjacent to Aboriginal
communities or on their traditional lands and accessing such areas may hinder
their rights.
The extent of the duty to consult will be directly proportionate to the strength of the
evidence supporting the existence of the right or title and the seriousness of the
potentially adverse effect upon the right or title claimed.
The trilogy cases have been followed in Quebec in a recent case concerning
Kruger’s forestry operations on Île René-Levasseur, an area claimed by the Innu
First Nation of Betsiamites,2 and, this past summer, in an Ontario case regarding
mining exploration.3
Anne Drost practices in Real Estate Law,
with a special emphasis on land use
planning and development, and a
developing practice in Aboriginal Law.
Serving both public and private sector
clients, she has experience in regulatory
aspects of real estate development
projects, drafting municipal planning
by-laws, zoning amendments and public
consultations. In Aboriginal Law, she is
currently involved in negotiations with the
Crees of Quebec, acting on behalf of
the federal government, regarding treaty
implementation and regional Cree
governance.
Anne Drost may be reached at
514 397 4334 or at
[email protected].
In this context, natural resource developers, in particular in the mining, forestry, and
oil and gas sectors, must be well advised in their dealings with Aboriginal people.
Indeed, while the ultimate burden of ensuring that legitimate consultation occurs
remains with the Crown, certain procedures may be delegated to the natural resource
developer, particularly in the context of an environmental review process.
Once it is established that consultation of an Aboriginal group is required in a
particular case, and such consultation will involve the natural resource developer, it
is critical that the developer ensure that the process of consultation is fair and
transparent and conducted seriously. Otherwise, certain sanctions may ensue such as
the imposition of safeguard orders by courts to prevent natural resource activities.4
2) Tools for Consultation
In order to build the relationship with an Aboriginal group, developers may look at
different types of agreements, the nature of which may vary according to the group
involved and the stage of advancement of the negotiations. In effect, the best
evidence that effective consultation has taken place and an ideal outcome of
consultations is the execution of an agreement.
As a general rule, three stages of relationship building have been identified, to which
various forms of agreements are associated.
FASKEN MARTINEAU DUMOULIN LLP
Gaël C. Gravenor practices
Environmental, Energy and Natural
Resources Law. He provides advice in
business transactions that involve
aboriginal and environmental issues. He
advises clients on compliance with
environmental legislation and regulations,
and the obtaining of environmental
authorizations and permits. He also
practises Energy Law and helps clients
wheel energy over the Hydro-Québec
electricity transmission system.
•
Stage 1: “Cultivating the relationship”: At this stage of early consultation, the
developer and the Aboriginal people are being introduced to each other.
Through consultation and negotiation agreements, the parties develop the
framework in which consultation and, eventually, accommodation take place
in order to instill trust. In a consultation agreement, a communication
protocol may be established whereby the nature and timing of information to
be shared is laid out. Access and road use agreements may also be agreed
upon. In negotiation agreements, parties may agree on non-binding term
sheets or memoranda of understanding that serve to outline the principal terms
of the final agreement. They serve to clarify the parties’ positions without
imposing any obligations and they demonstrate to the concerned constituents
that initial steps are being taken regarding the project.
•
Stage 2: “Cementing the relationship”: At this stage, the agreements are more
substantive. In bipartite or tripartite impact and benefit agreements, the
Aboriginal people confirm the support for the specific project and access to a
specified region and its resources and, in consideration, receive socioeconomic benefits, such as financial support for the establishment of
infrastructure (buildings, roads, sewer systems, etc.) or business development,
employment and training throughout the life of the project or even a share in
the benefits. Further, such impact and benefit agreements may provide for the
protection of the environment. Also, at this stage, the parties may enter into
settlement agreements whereby historical grievances are resolved.
•
Stage 3: “Growing the relationship”: At this final stage, business structures
may be devised where Aboriginal people are interested in participating more
directly in the business as stakeholders. These agreements may take the form
of joint ventures, business partnership agreements, trust agreements, agency
agreements or the creation of a new corporate entity, and they align both
parties’ interests in relation to the project. One major advantage of this type of
agreement is that it facilitates the obtaining of regulatory approvals.
Gaël C. Gravenor may be reached at
514 397 7524 or at
[email protected].
1) Haida Nation v. British Columbia, [2004] S.C.R.
511; Taku River Flingit First Nation v Ringstad,
[2004] 3 S.C.R. 550; Mikisew Cree First Nation v.
Canada, [2005] S.C.C. 69;
2) Kruger Inc. v. Betsiamites (QCA 500-09-015773054) (500-17-022878-048) 28 April 2006;
3) Platinex Inc. v. Kitchenuhmaykoosib Inninuwug
First Nations, Ontario Superior Court #06-0271,
July 28, 2006. See : Fasken Martineau Aboriginal
Bulletin - August 2006 - Ontario Court Restrains
Mining Exploration as a Result of Failure of the
Province to Consult with First Nation;
4) Supra note 2, overturning a Superior Court
decision granting the Betsiamites a safeguard
order to block forestry operations until proper
consultation was conducted. (See Fasken
Martineau Aboriginal Bulletin May 2006 - The
Kruger Case – www.fasken.com);
5) See http://www.autochtones.gouv.qc.ca/publications_documentation/publications/guide-interimaire_en.pdf;
6) See http://www.mrnf.gouv.qc.ca/english/publications/forest/politique-consultation-a.pdf
(February 2003).
16
The Government of Quebec has recently prepared an Interim Guide for Consulting
the Aboriginal Communities that sets out certain parameters for adequate
consultation and principles to guide the consultation process. Although primarily
directed to government departments and Crown corporations, the guide refers to the
role of third parties, namely the project proponent in the process, and it provides
useful basic information.5
The forestry sector has its own consultation policy. Under the Consultation Policy
on Quebec's Priorities for the Management and Development of the Forest
Environment, consultation may vary based on the distinctive values and culture of
the affected Aboriginal group. Further, under this policy, the Ministry of Natural
Resources determines, in concert with the Aboriginal communities, the persons or
organizations that should be privileged for the holding of consultations.6
3) Tips for Natural Resource Developers
As developers have the vested interest in the project, they are often in a better
position than the Crown to provide the required information to the affected
FASKEN MARTINEAU DUMOULIN LLP
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17
Aboriginal group. From the point of view of Aboriginal people who may wish to
partner up with a natural resource developer, it will be important to secure the
necessary resources to conduct proper due diligence in relation to the private
developer. Natural resource developers may need to be prepared to grant a direct
benefit to Aboriginal people.
Developers should pay particular attention to the issue as to whether the
consultations are “with” or “without prejudice”. If there is a challenge against the
process, only the consultations carried out “with prejudice” may be used as evidence
that the obligation to consult was met, therefore, it is preferable that most (if not all)
of the meetings take place on such basis.
Environmental issues are often at the heart of discussions surrounding resource
development projects and are often of great concern to Aboriginal groups who need
to protect their constitutionally-protected rights, like hunting and fishing and more,
generally principles of environmental stewardship, economic sustainability and
self-determination. Through the various types of agreements described above,
private developers may engage Aboriginal people in the various aspects of
environmental protection.
4) Conclusion
Areas that need to be accessed in order to develop natural resources are often
adjacent to Aboriginal communities or on their traditional lands.
Although private developers do not have a legal duty to consult with Aboriginal
groups, it is the private party who bears the commercial risk if the Crown fails to
adequately consult with the Aboriginal groups. Therefore, developers are well
advised to take an active role in assisting the Crown to carry out its duty to consult;
otherwise, the project may fail.
Early consultation with Aboriginal groups saves time and uncertainty, especially
with respect to permits and licenses. It also serves to protect project investments and
paves the way to stronger working relationships.
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