FOREWORD

This booklet has been prepared for the use of Clients, Partners and Staff of HLB International member firms. It has been designed to give some general information to those contemplating doing business in Canada and it is not intended to be a comprehensive document. Federal and Provincial laws which regulate business are numerous and complex. These laws vary from province to province and are amended on a continuous basis.

It is, therefore, recommended that, before proceeding on a business endeavour, you should consult with an HLB International member firm in Canada. A list of member firms as at June 2000 in Canada is provided in this booklet and updated on our websites regularly.

The information contained in this booklet is believed to be correct at the time of preparation on June 1, 2000.

For more information on Canadian business and taxation issues, please visit the HLB Canada web site at www.hlb.ca. Our Website provides papers on business, tax and insolvency issues, as well as a variety of research materials and links. This publication and our Website, are designed to provide information of a general nature only and are not intended to provide legal advice.

ABOUT HLB INTERNATIONAL

HLB International is a worldwide organization of professional accounting firms, each providing clients with a comprehensive and personal service relating to auditing, taxation, accounting, and general and financial management advice.

Founded in 1969, HLB has member and correspondent firms in over 90 countries and ranks as the 12th largest accounting and business advisory group worldwide, with an annual fee income in excess of US $750 million, generated by more than 1,200 partners and 9,000 staff in over 420 offices.

Up to date information and general assistance on international matters can be obtained from any of the partners of HLB member firms in Canada listed at the back of this booklet, or from the HLB International Executive Office in London.

�� HLB International Executive Office

�� Spectrum House

�� 20-26 Cursitor Street

�� London, England

�� EC4A 1HY

��

Telephone�� :� 44 (0)20 7334 4783��

�Fax�� :� 44 (0)20 7405 5548 ��

��

www.hlbi.com

Peter Frost	Chief Executive	pjf@hlbi.com
Jan Nielsen -	Chairman	jcn@hlbi.com
Tom Craig	Business Risk Services	tc@hlbi.com
Jacqueline Weber-Brown	Personal Assistant to Chief Executive	jwb@hlbi.com
Kevin Chowdhay	Finance & Professional Services	kjc@hlbi.com
Sandra Dalmeijer	Communications	sd@hlbi.com

GENERAL INFORMATION

Geography

Canada is a federated country of North America, bounded on the North by the Arctic Ocean; on the east by the Atlantic Ocean; on the south by the United States; and on the west by the Pacific Ocean and Alaska. Canada is the world's second largest country, surpassed in size only by Russia. Canada has a total area of nearly 10 million sq. km (over 3.8 million sq. miles) of which in excess of 750,000 sq. km (nearly 300,000 sq. miles) is covered by bodies of fresh water such as rivers and lakes, including those portions of the Great Lakes under Canadian jurisdiction. In all, approximately 7.6% of its total area is composed of fresh water.

Canada is naturally divided into geographic regions that share similar economic factors. Eastern Canada consists of the Maritime Provinces and the Saint Lawrence lowlands. This region embraces the provinces of Newfoundland, Nova Scotia, New Brunswick, Prince Edward Island and the Gaspe Peninsula of Quebec. This region is an extension of the Appalachian Mountain system and of the Atlantic Coastal Plain. Further to the west, the Great Lakes-Saint Lawrence lowlands region in southern Quebec and Ontario includes the largest expanse of cultivable land in eastern and central Canada and most of the manufacturing industries of the nation.

The Interior Plains stretch from the western border of Ontario to the northeastern corner of British Columbia. They encompass most of Alberta, the southern half of Saskatchewan and southern third of Manitoba. This region contains the most fertile soil in Canada.

The westernmost region of Canada includes the uplifts west of the Interior Plains. In Canada, this region includes part of western Alberta, much of British Columbia, the Inuvik Region, part of the Northwest Territories, as well as all of the Yukon Territory. The eastern portion of this area includes the Rocky Mountains and related ranges. To the west of the Canadian Rockies is a region occupied by numerous mountain ranges and a vast plateau region. Deep river valleys and extensive tracts of arable land are the chief features of the plateau region, particularly in British Columbia. To the west of this plateau is another great mountain system. This system includes the Coast Mountains and various coastal ranges.

Every region of Canada has significant shifts in climate from summer to winter. Coastal areas have moderate climates due to their proximity to the water while central areas of Canada can be snow covered from December through April (substantially earlier onset and later melting in the northern regions).

Population Characteristics

Statistics Canada reports the population of Canada as of 1998 to be about 30 million with a projected total population of about 31 million by 2001.� Of the existing populiation, about 10 million are in the three cities of Toronto, Montreal and Vancouver.

Approximately three-quarters of the people of Canada inhabit a relatively narrow belt along the United States frontier, with about 62% concentrated in Quebec and Ontario. Overall, approximately 78% of the population lives in urban areas.

Political Divisions

Canada comprises ten provinces, each with a separate legislature and administration; and the Yukon and Northwest Territories. In descending order of population, the most populated provinces are: Ontario, Quebec, British Columbia, Alberta and Manitoba.

Language

The two official languages of Canada are English and French, with French being spoken mainly in Quebec where it is the official language of that Province. English is the language spoken in most of the countryand is also the generally accepted language of business. The province of New Brunswick has the largest French speaking population outside of Quebec, but French-speaking people are also found in Ontario, Manitobaand Nova Scotia.

Urban areas, such as Toronto and Vancouver contain significant populations for whom neither English nor French is a first language.

Education

Canada maintains a public education system for elementary and secondary schooling, funded and administered by each province individually. Attendance at school is compulsory beginning at age 5 or 6 and continues until the age of 15-18, depending on the province or territory.

Currency

The unit of currency in Canada is the Canadian dollar, which consists of 100 cents. Schedule I includes a table of historical exchange rates for the last 25 years with the U.S. dollarand other countries for 3 years.

Foreign Trade

The per capita foreign trade of Canada ranks among the highest of any nation in the world. The value of exports has grown from $16.82 billion in 1970 to $219.4 billion by 1994. Imports showed a comparable increase from $13.95 billion in 1970 to $202.3 billion by the mid-1990s.

Most of Canada's foreign trade is with the United States, which typically takes about four-fifths of Canada's exports and supplies more than two-thirds of its imports. The value of the Canada-United States merchandise trade is greater than between any other two countries in the world. Components of Canadian exports are increasingly manufactured items; while resource exports such as minerals, timberand grains are still important, their share of total export volume is decreasing. Leading export items to the United States are motor vehicles and motor-vehicle parts. The cross-border exchange increased particularly after Canada and the United States entered into a free-trade agreement in 1989. This agreement was superseded in 1994 when the North American Free Trade Agreement (NAFTA) was approved, which admitted Mexico into the pact and continued trade liberalization policies.

Other principal trading partners include Japan, Great Britain, Germany, China, the Netherlands, South Korea and France. Chief sources for imports are Japan, Great Britain, Germany, Mexico, France, Taiwanand China.

Government

Canada is mainly governed according to principles embodied in the Constitution Act of 1982, which gave the Canadian Government total authority over its constitution. Canada is a Federal union, with a division of powers between the central and Provincial Governments. Originally, the central Government had considerable power over the provinces, but over time the Provincial Governments have increased the scope of their authority.

The Canadian Charter of Rights and Freedoms, added by the passage of the 1982 Constitution Act to the country's constitution, guarantees to citizens "fundamental freedoms�. The Charter changed the Canadian political system by enhancing the power of the courts to make or unmake laws through judicial decisions. It also contains the so-called "notwithstanding" clause, which allows Parliament or the Provincial legislatures to designate an act operative even though it might clash with a Charter provision. Although the constitution and Charter apply uniformly throughout Canada, the province of Quebec has never formally signed the agreement.

The head of state of Canada is the Sovereign of Great Britain. In theory, the head of the national Government is the Governor-General, who represents the British Monarch. However, the Governor-General adheres to the advice of the majority in the House of Commons (the lower chamber of the legislature) in appointing the Prime Minister, who is the effective head of Government.

Central Government

The central Government of Canada exercises all powers not specifically assigned to the provinces. It has exclusive jurisdiction over administration of the public debt, currency and coinage, taxation for general purposes, organization of national defence, fiscal matters, banking, fisheries, commerce, navigation and shipping, energy policy, agriculture, postal service, census, statistics, patents, copyright, naturalization, aliens, marriage and divorce. The Provincial Governments are responsible for education, hospitals, Provincial property and civil rights, taxation for local purposes, the regulation of local commerce and the borrowing of money. In certain areas such as immigration, the Federal and Provincial Governments possess concurrent jurisdiction.

Legislature

The Canadian Parliament consists of two houses: an appointed Senate and elected House of Commons. Members of the House of Commons are elected in 295 Federal electoral districts whose boundaries are periodically adjusted to reflect population growth or redistribution. Federal elections are held at the Prime Minister's discretion, but must be called within a 5-year period; in practice, they are called about every 4 years. The Prime Minister is the leader of the majority party in the House of Commons; if no majority exists, the party with the most seats in Parliament leads a "minority government".

Judiciary

The legal system in Canada is derived from English common law, except in Quebec, where the Provincial system of civil law is based on the French Code Napoleon. The Federal judiciary is headed by the Supreme Court of Canada and is the final Canadian appellate court for all civil, criminal and constitutional cases. The next leading tribunal, the Federal Court of Canada, is divided into a Trial Division and an Appeal Division. It hears a variety of cases, notably involving tax cases and claims against the Federal Government. Provincial courts are established by each of the Provincial legislatures, and, although the names of the courts are not uniform, each province has a similar three-tiered court system. Judges of the Supreme Court, Federal Court and almost all judges of the higher Provincial courts, are appointed by the Federal Government.

Provincial and Territorial Government

The Government of each of Canada's ten provinces is in theory headed by a Lieutenant Governor, who represents the Sovereign of Great Britain and is appointed by the Governor-General on the advice of the Federal Prime Minister. The Lieutenant Governor has little actual power and in practice, the chief executive of each province is the Premier, who is responsible to its Provincial legislature. The Yukon Territory and the Northwest Territories are both governed by Federally-appointed commissioners, assisted in the Northwest Territories by a legislative assembly and in Yukon Territory by an elected council and legislature. A third territory, Nunavut, was formally created in 1999 and will have a similar governmental makeup to the other two territories.

INVESTMENT FACTORS

Government Assistance

The Governments in each of the provinces have adopted a pro-active approach to both business development and to foreign investments.

Both Federal and Provincial governments have grant and incentive programs that vary according to political and economic pressures at any given time. Governments provide assistance in the form of loans, loan guarantees, grants, cost-shared training and research programs and letters of credit. They also provide a number of other services, which assist businesses. These include business information centres, assistance with trade shows, market research, statistical information, international insurance, technological research and generous development programs.

The Business Development Corporation (BDC) extends financial assistance on a national level to new and existing businesses and produces a comprehensive Handbook entitled Assistance to Business in Canada. This guidebook covers both the Federal and Provincial programs and services availableand provides the contact numbers for detailed information on each program. The forms of assistance include loan guarantees, equity financing, training and counselling programs, management seminars, business information and libraries. The BDC has offices in each province and territory and focuses on the needs of small and medium sized businesses.

It is worthwhile to pursue both Federal and Provincial programmes. While Provincial programs are generally more specific in their nature, the application process can be less complex and the approval process may be faster.

Investing in Canada

Under the Investment Canada Act, which came into force in 1985, the establishment of a new business in Canada or the acquisition of control of an existing Canadian business by a Non-Canadian is subject to either Federal Government notification or Federal Government review. Generally, where a Non-Canadian is establishing a new business in Canada or making a small acquisition, notification is all that is required. Large acquisitions, both direct and indirect, including the acquisition of one foreign company by another where the acquired corporation has a Canadian subsidiary, are subject to a review process.

Notifiable investments simply require that the investor file a short information statement with the Government within 30 days of making the investment. Generally no further information is required. However, if the business activity is related to Canada�s cultural heritage or national identity (for example, the publishing, film, video or music industries), there may be further review. Some investments over $5 million dollars by Non-Canadians may be reviewable under the Investment Canada Act. Smaller dollar amounts may trigger a review if related to an acquisition of control or establishment of a new business (regardless of size) in culturally sensitive industries. The Federal cabinet decides if such a review is required in the public interest.

Reviewable investments require the investor to file an application for review with Investment Canada. The application must be filed prior to the investment or within 30 days of the investment if it is an indirect acquisition. If the purchase of a business must mean an early closing deadline, the Minister may approve an accelerated implementation request.

Under the Canada-U.S. Free Trade Agreement, Canada has agreed to new rules governing the acquisition of control of a Canadian business by an American. The threshold amounts have been adjusted according to a formula and can be found in the Canada-U.S. Free Trade Agreement.

Foreign Exchange Control

There are no legal constraints on a transfer of profits, royalties or fees out of Canada or on the repatriation of investment capital. The Canadian dollar floats freely on world exchange markets and is not subject to exchange controls. Banks provide complete foreign currency exchange services. There are a number of private exchange firms operating throughout the country.

Financing

The financial markets in Canada are stable, mature and accessible to everyone. There are two primary methods of financing a business: equity and debt financing. Additional sources of financing include leasing, fixed asset financing, accounts receivable financing and inventory financing. There are also extensive Government financial assistance programs (discussed earlier) available to business.

Equity

There are a number of sources of equity, with the most obvious being the individual starting the business. A limited company can obtain equity financing and still remain private if it has less than 50 shareholders and does not offer its shares to the public. Because of the cost of raising funds on a public exchange, investment dealers normally use $500,000 as the benchmark for undertaking a public issue of securities. As well, there are a number of well-established venture capital firms in Canada.

The Toronto, Montreal, Vancouver, Alberta and Winnipeg stock exchanges also provide vehicles for companies to raise capital. The Canadian exchanges are independent and as such have their own rules and regulations for listing and trading stocks. Many companies elect to raise funds on the U.S. public markets and Canadian companies are common on both the NASDAQ and New York Stock Exchange. Schwartz Levitsky Feldman has been very pro-active in assisting corporations, operating in Canada, to raise funds in the New York NASDAQ market.

Debt

The primary source of debt financing in Canada is the banking system. There is an extensive network of banks, both domestic and foreign-owned, operating across the country. The largest network belongs to the five major Class A Canadian banks, but there are also some 40 to 50 foreign banks (Schedule B banks) with branches in the major centres. The domestic banks provide a full range of integrated banking services and maintain offices internationally. Trust companies, insurance companies and credit card companies also provide a limited range of banking services. The banks are now moving into services that have traditionally been the domain of other industries, including in particular the insurance industry.

Imports and Exports

Canada does not generally require licencing for imports, except for a small number of products consisting mainly of agricultural and animal produce, clothing, textiles and footwear. In addition, Canada has bilateral restraint agreements with a few low production cost countries (such as South Korea, Hong Kong, Taiwan and the People�s Republic of China) and imports of clothing and textiles from these countries are limited by quota. Export licences from these supplier countries may be required. In addition, export permits are required for a limited number of products, particularly strategic materials or items of cultural importance. Examples include electricity, petroleum, uranium and some antiques and works of art. Permits are also required for transfer of specific goods to certain restricted countries.

Importing commodities requires the completion of the proper customs forms and payment of duties and tariffs. Duties for different goods vary depending upon a number of factors. These factors change from time to time and it is, therefore, necessary to stay abreast of the current regulations. A business involved in the importing of goods on a regular basis may find it beneficial to retain a customs broker.

Canada has developed regulations that apply to foreign dumping, import quotas on certain products, packaging and labelling requirements, prohibited, offensive and controlled products.

LABOUR RELATIONS AND EMPLOYMENT STANDARDS

General

Responsibility for employment matters in Canada is divided between Federal and Provincial jurisdictions. Most employees fall under Provincial jurisdiction and are governed by various statutes enacted by Provincial legislatures. However, the Federal Government has jurisdiction over employment in federally-regulated industries such as banking, inter-provincial transportation and communications.

An employer must comply with a number of employment-related laws covering employment standards, collective bargaining, human rights, health and safety, workers compensation and pay equity. Federal laws provide that all employers collect Employment Insurance Premiums, Canada Pension Plan contributions and personal income tax deductions on behalf of the Government. The employer and the employee share payment of the employment insurance premiums and the pension contributions. The three deductions are usually deducted and submitted in a lump sum payment to Canada Customs and Revenue Agency. Self-employed individuals are responsible for their own deductions for Canada Pension Plan contributions and income tax.

Generally, a workweek is 40 hours, consisting of five 8-hour days. The minimum wage for employees over 18 years of age varies by province from $4.00 to $6.85 per hour. Employees are entitled to be paid 1 1/2 times their hourly rate for overtime and to receive at least 2 weeks� paid vacation per year. �White Collar� employees frequently do not get paid for overtime and receive up to 4 weeks of paid vacation per year.

Termination

Employees cannot be arbitrarily dismissed. Employment standards legislation sets minimum notice (or pay in lieu of notice) that employers are required to give employees whom they wish to terminate without cause. In some circumstances, the employer may also be obliged to give the employee additional severance pay. There is also a body of law, developed by the courts in wrongful dismissal actions, requiring employers to provide �reasonable notice� of termination. In most cases, senior or long-standing employees are entitled to much longer notice of termination than is specified in employment standard legislation.

Health and Safety

Employers are also required to take reasonable care for the safety of employees. Every jurisdiction has enacted laws giving both employers and employees specific health and safety obligations. In general, Provincial legislation governs workers� compensation. If the worker is injured on the job, he or she may receive payments from a Workplace Safety & Insurance Board (WSIB). This fund is generated by contributions from employers based on an industry assessment. All employers must register with the Fund and generally make monthly payments.

Retirement Income Plans

The Canada Pension Plan (Quebec Pension Plan in Quebec) is a government-operated retirement pension that provides minimal post-retirement supplemental income for Canadian workers. Employers and employees make tax-deductible contributions to this plan. Many employers provide additional funding to provide post-retirement funding for their employees.

Employers can make contributions either to a group pension plan or to a grouping of individual retirement accounts. A number of government regulations affect the design and operation of such plans. Federal and Provincial legislation generally prohibit differentiation of benefits and contributions by reference to age, sex or marital status. The private pension plan must also be approved by government pension authorities and meet certain criteria respecting funding, vesting and investments. The plan must also be submitted to Revenue Canada to permit contributions (by both employer and employee) to be tax deductible. Generally, approval by Revenue Canada also qualifies the plan for Provincial tax relief.

Individuals are entitled to receive their full pension benefits at age 65 but may elect to start receiving reduced benefits after age 60.

North American Free Trade Agreement

In 1992, Canada entered into the North American Free Trade Agreement (NAFTA) with the United States and Mexico. The NAFTA Agreement expands upon the objectives set out in the original Free Trade Agreement between Canada and the United States and provides for barrier-free access to and from Mexico. All tariffs on Canadian exports to Mexico will be phased out by the year 2002. Both the Canada-United States Free Trade Agreement and NAFTA have increasingly liberalized trade between Canada, the United States and Mexico while preserving Canadian social, health, safety and environmental standards.

IMMIGRATION

Permanent Residents

(i)�� Categories of Applicants

Canada assesses individuals applying for permanent resident status according to selection standards. One of the major classes is the independent immigrant class, which is divided into:

entrepreneurs,

investors,
self-employed persons and
independent workers.

(ii)�� The Application Procedure

Immigrants must apply for and obtain a landed immigrant visa prior to entry into Canada. Each applicant and each of his/her spouse and dependent children, must meet the medical and security requirements for admission to Canada.

(iii)�� Independent Immigrant Classes

Special regulations address the immigration of entrepreneurs, investors and self-employed persons based on perceived ability to establish business enterprises or otherwise invest in Canada.

Entrepreneur. Entrepreneurs must establish a business within 2 years to meet the condition of their admission. Qualifying entrepreneurs must have:

the financial ability, and
proven expertise

to become involved in and actively manage, a Canadian business enterprise. The entrepreneurial applicant must generally have sufficient economic resources to make an initial capital investment of at least $150,000 Cdn, supplemented by debt. Debt can be obtained from bank programs or government programs.

Entrepreneurial applications may be accompanied by business proposals that describe in detail:

the nature of the business to be undertaken,
the business and professional relationships to be established,
relevant background of applicant, and
financial resources of the applicant.

Investor. To qualify as an "investor" an individual must:

(1)�� have operated, controlled or directed a financially successful business or commercial undertaking,

(2)�� be able to demonstrate the legitimate accumulation of a net worth of a prescribed amount of $ 800,000, and

(3)�� have made a minimum investment of $400,000 to $500,000, depending on the province since applying for an immigrant visa that will contribute to the creation or continuation of employment opportunities for Canadian citizens or permanent residents other than the immigrant or the immigrant's dependants.

The investment may and generally will, be required to be irrevocable for 5 years and it must be made in an "eligible business" or "fund". An "eligible business" must be operated in Canada, having total assets not exceeding $35 million Cdn. A "fund" means a privately administered venture capital fund or a government-administered venture capital fund.

Both investors and entrepreneurs must submit a detailed application for permanent residence, together with documentation including a resume, personal financial statement and a business plan. Provinces of destination must support the application. Unlike the entrepreneurs, investors do not have to take an active role in the management of his or her investment.

Self-Employed Class. The "self-employed" or entrepreneur immigrant must have the intention and the ability to establish or purchase a business in Canada. That business must create an employment opportunity at least for the entrepreneur and make a significant contribution to the economy or the cultural or artistic life of Canada.

BUSINESS ORGANIZATIONS

The principal forms of business organization in Canada are corporations, sole proprietorships, partnerships and joint ventures. Trusts and co-operatives are used infrequently to carry on business. Both Federal and Provincial laws govern the conduct of business in Canada and in certain instances, for example with corporation statutes, there is overlapping jurisdiction.

A foreign investor has numerous options available for organizing business operations in Canada. These include operating through a Canadian branch or a Canadian subsidiary. The type of business organization chosen is an important decision as each has advantages and disadvantages regarding liability, tax treatment, reporting, documentation and legal requirements. For example, it may be easier for a Canadian subsidiary to raise capital in Canada or to qualify for Government grants and assistance.

A non-resident corporation or individual can also conduct business in Canada by means of a partnership or a joint venture arrangement. Finally, there may be situations where the most suitable way to carry on a business in Canada is through an agent or an employee.

Corporations

A corporation is a legal entity separate and distinct from its individual shareholders. Thus the debts and obligations of the corporation are liabilities of the corporation, not of the individual shareholders. Therefore, the corporation offers the advantage of limited liability. The corporation also offers perpetual existence.

A business can be incorporated, using Articles of Incorporation, under either the Federal Canada Business Corporations Act, or under any one of the ten Provincial and two territorial corporations statutes. The decision to incorporate, as a Federal or a Provincial company, depends on a number of factors, including: the nature of the business, the area of operations, the share structure desired and the reporting requirements. A Provincial corporation must establish its head office in the province in which it is incorporated. It must hold its annual meeting in the province and it cannot do business in another province unless it becomes registered in that province. Therefore, corporations that intend to operate in only one province would find it advantageous to register provincially. Corporations that plan to operate in more than one province or on a national level must comply with various extra Provincial licencing and filing requirements and would, therefore, register federally. A federally-registered corporation may locate its head office anywhere in Canada.

In addition to Federal or Provincial registration, companies may also choose to be either public or private corporations. Both public and private corporations may issue shares. A public corporation is, in general, one listed on a Canadian or prescribed stock exchange. A public company is not restricted in this manner. However, to issue securities to the public a corporation must initially file a prospectus (which includes financial disclosure) and it must comply with the reporting and disclosure requirements of the Federal and Provincial securities� authorities.

Private companies are restricted to no more than 50 shareholders and they are not permitted to sell shares to the general public. For tax purposes, private corporations are divided into Canadian-Controlled Private Corporations (CCPCs) and other private corporations. The CCPC is NOT a Canadian controlled private corporation, but rather a private corporation that is not controlled by any combination of non-residents or public corporations. This difference is important because it would categorize a corporation with 50:50 ownership between Canadian and non-resident shareholders as a CCPC and eligible for tax incentives described later.

A relatively common approach is to �takeover� an already public company, with or without inherent value, to avoid the requirement of a prospectus. These �reverse takeovers� are more common with smaller capitalization companies, often referred to as �junior corporations�.

Regardless of jurisdiction of incorporation and status as public or private, legally all corporations are essentially the same. Any corporation can include the terms �Limited/Ltd, Incorporated/Inc., or Corporation/Corp� in its name.

The various incorporating acts normally require corporations to have an annual audit. There are some exemptions to this requirement, which �smaller� corporations (most privately held corporations) can use when appropriate. The shareholders of the corporation appoint an auditor or accountant at the annual meeting. The auditor is required to examine the books and records and provide his or her opinion as to the fairness of the financial statements. The auditor�s report and the financial statements must be prepared in accordance with the Canadian Institute of Chartered Accountants� (CICA) Handbook. Public corporations have additional reporting requirements, including reporting quarterly results.

There is no standard year-end, although December 31 is common for public corporations. Many private corporations select year-ends between August and December to maximize personal tax planning options.

A corporation acts through its board of directors. Both provincially and federally-incorporated companies must have at least one director and a majority of the board of directors of the corporation must be Canadian residents. The directors are responsible for the management of the corporation�s operations and have exclusive authority over the appointment, duties and removal of the agents, officers and employees of the corporation. If a director is grossly negligent or commits a breach of trust, he can be held personally liable to the shareholders or the creditors of the corporation for resulting damages. Directors can also be held liable for unpaid taxes withheld by the corporation on payment of net salary to employees and commodity taxes collected on its sales.

Legal fees for incorporating commonly run from $500 to $1,000 and Government fees, vary depending on Provincial ($315 in Ontario) or Federal ($500) incorporation.

Nova Scotia Unlimited Liability Corporation

Nova Scotia Unlimited Liability Corporations (NSULC) are of special interest to Americans. NSULCs are regular corporations for Canadian corporate and tax purposes. However, they are entities eligible for �check the box� legislation in the U.S.

Using a NSULC permits a U.S. entity to have �flow through� tax consequences from a U.S. tax perspective while isolating Canadian tax consequences to this local entity. Americans typically place a LLC in between the American business entity and the NSULC.

Branch Office - Foreign Corporation

All foreign corporations operating in Canada must be registered or licenced to operate in each province within which they do business. In each case, the branch of a foreign corporation is registered as an extra-Provincial company under the Provincial legislation. If the corporation does not have an office in a province where it operates, it is normally necessary to appoint an attorney to represent the firm. The appointment of the attorney as the local representative is filed with the appropriate Provincial agency. Legally, the branch has no separate status from the foreign company itself; it is merely carrying on business in Canada. The foreign company would be liable to the employees and the creditors of the branch for the actions of and business contracted by, its managers and agents on behalf of the branch. A foreign company planning to invest in Canada must also comply with the terms of the Investment Canada Act.

Partnerships

At common law, a partnership is a relationship that exists between two or more persons who have agreed to combine resources with the objective of carrying on a profit-motivated business in common. A characteristic of a partnership is a sharing of profits and losses as opposed to gross revenues. Any number of individuals operating a business in common can establish a general partnership without any government approval.

The partners entering into a legally binding relationship can create General Partnerships. A general partnership is created by the partners and is routinely registered within 60 days of creation. That registration can be filed late in Ontario, but parties cannot maintain legal actions in the name of the partnership until it is registered. All General Partners share the burden of loss between each other according to the partnership agreement, but each partner bears unlimited liability to third parties for all debts. That is, in the event that the partnership assets cannot satisfy partnership creditors, creditors may elect to collect the debt from any partner they select. Naturally, partners with �deeper pockets� are usually selected first.

A limited partnership is comprised of one or more general partners who are personally liable for partnership debts and one or more limited partners who contribute capital and share in the profits or losses of the business. Limited partnerships can only be created by registering with the appropriate Provincial agency. The advantage of limited partnerships is that one or more of the partners assume complete financial responsibility for losses and most partners are limited so that they have no obligations in excess of contributions made to the partnership. The limited partners do not take a part in running the business and are not liable for the debts of the partnership. Any limited partner that becomes involved in the operations will become a general partner.

Until relatively recently, partnerships could select any fiscal year-end and that determined the period for reporting taxable income. Now, partnerships of individuals must report taxable income on a calendar year basis and non-calendar partnerships must reconcile their reporting every year. Partnerships are easy to start and the organization of the business is flexible. Profits are treated as income of the individual partner and are taxed at their respective rates.

Joint Ventures

A joint venture is a business undertaking by two or more parties in which each party shares revenues and expenses. Each investor owns a direct interest in the underlying assets. A joint venture usually connotes an enterprise of a limited scope and duration. Joint ventures are NOT separate legal entities.

The Joint Venture is NOT taxed as a partnership. Each venturer reports the proportionate share of income and expenses for income tax purposes. As Canadian tax law does not recognize a joint venture, there are no formal reporting requirements for joint-venture year-ends. Technically, each participant should report joint venture income according to its own taxation year. Administratively, Canada Customs and Revenue Agency usually permits a joint venture to pick a common taxation year-end for all venturers.

Sole Proprietorships

The simplest form of business organization is the �sole proprietorship�. In this form of organization, the owner is in sole charge of the business and is responsible for its success or failure. Unless the law specifically prohibits an activity, no line of business is closed to an owner. Business is usually carried out under the owner�s name without any specific legal registration, subject of course to the normal requirements such as licence and permits. However, if the owner decides to use a name other than his or her own, the trade name chosen may be registered with the appropriate Provincial agency.

A sole proprietorship is not considered to be a legal entity under the law, but rather is an extension of the individual/entity that owns it. Therefore, the owner has possession of the business assets and is directly responsible for the debts and other liabilities incurred by the business. The owner has unlimited liability. If the business fails, all of the owner�s assets, both business and personal may be used to discharge this liability. One of the advantages of a sole proprietorship is the fact that there are fewer regulations associated with it. Most proprietorships select the fiscal period for the business to match the calendar year since income taxes are payable on income earned in the calendar year.

Trusts

Trusts are a legal vehicle used when non‑owners (Trustees) manage assets for the benefit of the beneficial owner(s) of the assets (Beneficiary). At common-law, one or more individuals (settlor) can establish a trust using a verbal or written agreement. For tax purposes, the courts have held that the parties to a trust must document in writing both the existence and terms of the trust. The terms of this document determine the rights of parties under this relationship, including disposition of income earned by the trust and distribution of the capital of the trust.

Businesses frequently use trusts to hold legal title to assets (usually real estate). Individuals more often use trusts in structuring their personal estates. Trusts created during one's lifetime are called inter-vivos trusts. Trusts arising on death are testamentary trusts. Personal trusts are commonly used for creditor protection, income tax planning and estate planning, especially in connection with family-held businesses.

Trusts can be established to run businesses but this is not common. Some professionals establish �management trusts� to enable non-professionals to earn income without incurring the administration and tax costs of corporations. This has become less popular with the introduction of a �kiddie tax� starting in 2000.

ACCOUNTING AND REPORTING REQUIREMENTS

Financial Reporting Requirements

Financial reporting requirements are basically the same for all businesses. Some additional disclosure is required for public companies and federally-incorporated businesses. Most corporations are legally required to have annual audits, but there are exemptions available to smaller corporations.

Reporting Standards

In most cases, financial statements in Canada are prepared in accordance with Generally Accepted Accounting Principles (GAAP). Although not statutory, GAAP are referred to in law and certain sources of GAAP have been given the force of law in some jurisdictions. A main, but not exclusive, source of GAAP is the handbook of recommendations of the Canadian Institute of Chartered Accountants (CICA).

Corporations

Reporting standards for corporations emanate from various sources:

� Canadian Institute of Chartered Accountants (CICA) -- the CICA is the primary standard-setting body for accounting in Canada.

� Various industry specific bodies (e.g. Banks, other financial institutions, insurance industry and Real Estate) have established industry guidelines and standards, which may differ from GAAP.

Annual financial statements of corporations not listed for public trading are NOT available for public review.

FINANCING

Securities Legislation

Businesses intending to raise financing through the issuance and sale of securities in Canada are subject to the securities laws enacted by each of the provinces and territories of Canada. There is no federal securities law or federal securities commission in Canada, unlike the United States, the United Kingdom or Australia. Regulatory standards imposed by the provincial securities administrators and the Canadian stock exchanges are generally comparable to U.S. standards.

Stock Exchanges

Starting in November of 1999, the major stock exchanges of Canada started operations according to functional rather than geographic boundaries. The new Canadian Venture Exchange will handle junior stocks (i.e. shares of small and mid-sized companies) from the former Alberta, Montreal, Toronto and Vancouver exchanges. The Venture Exchange will have administrative offices in Calgary and operations in Vancouver. The Toronto Exchange will handle all blue-chip trading Canadian corporations and the Montreal Exchange will handle futures trading.

A small Winnipeg Stock Exchange has introduced a way for Manitoba-based companies to go public and raise money, competing with established junior capital exchange. The advantages of the system will include simplicity, speed and economy -- for example using a standard prospectus. Companies must attract a minimum of 200 Manitobans, sell through exchange members and can raise between $200,000 and $500,000 in addition to at least, $100,000 to $200,000 put up by founders.

(a)�� Registration Requirements

Only registered entities may trade, underwrite or advise on securities unless that person or company is exempt from the registration requirements in the securities laws.

(b)�� Prospectus Requirements

Generally, no person or company may raise money in financing by selling units in itself unless a prospectus has been filed or the securities are those of a "reporting issuer" and have been held for a specified period of time. There are specific exemptions.

(c)�� Exemptions

Three important statutory prospectus exemptions are distributions of securities:

(i) to "prescribed institutions" which generally include chartered banks, loan corporations, trust companies, insurance companies and various levels of government in Canada, or �sophisticated investors�;

(ii) pursuant to the private placement exemption which is available where the purchaser purchases as principal and the trade is in a security which has an aggregate acquisition cost of not less than a specified amount (Cdn$150,000 in most provinces with a low of $25,000 in B.C.); and

(iii) �seed capital� offerings in which the total number of investors is limited (usually to 25 investors).� Such offerings cannot be advertised and can be shown to a limited number of potential investors (usually 50).

It is always desirable to prepare and file an Offering Memorandum. An Offering Memorandum must meet certain limited requirements and in certain circumstances give the purchaser a contractual right of action against the issuer in rescission or damages where the document contains a misrepresentation. More importantly to the issuer, the document should contain all representations and rules related to the investment in detail similar to a prospectus. That can be important in limiting the issuer�s exposure to investors that lose their investment.

(d)�� Prospectus Disclosure

A prospectus must be prepared in accordance with the regulations of the applicable province and must contain "full, true and plain disclosure of all material facts relating to the securities offered". Both the issuer and the underwriters must sign certificates to that effect at the end of the prospectus. In the event the prospectus contains a misrepresentation, the securities legislation imposes liability on the issuer and each underwriter signing the prospectus.

Issuers who receive a receipt on filing a Final prospectus become a ''reporting issuer'' in that province from the provincial securities commission. Reporting issuers are subject to rules regarding continuous disclosure and ongoing reporting requirements, including those regarding timely disclosure of material changes, preparation of certain financial information for delivery to security holders, solicitation of proxies, preparation of information circulars and insider reporting.

(e)�� Continuous Disclosure Requirements

A report published in 1970, by a committee of the Ontario Securities Commission (The Merger Report) stated that the general purpose of disclosure is to provide an equality of opportunity for all investors in the market. The object of disclosure was said to be to make available all material facts the investor needs to make an informed investment decision on a timely basis. Filing a prospectus is just the first instance of the continuous disclosure that is required pursuant to Canadian securities law.

�Periodic reporting� provisions require that, the reporting issuer disclose information through filing financial statements, annual reports, proxy circulars and insider trading reports. �Timely reporting� provisions require issuers to file information regarding material changes as they occur. Filing must include the issuance of press releases for dissemination to the investing public and material change reports with the relevant securities authority.

(f)�� Take-Over Bids

Every person acquiring 10% or more of the voting or equity securities of a reporting issuer must immediately issue a press release with certain prescribed information. Within 2 business days that person must also file a prescribed report with the securities regulators. Depending on the circumstances additional reporting or restrictions may apply.

(g)�� Insider Trading

The securities legislation prohibits any person in a "special relationship" with a "reporting issuer" from purchasing or selling "securities" of the issuer with knowledge of a "material fact or material change" with respect to the issuer that has not been "generally disclosed". Insider trading and tipping are statutory offences carrying criminal penalties. Civil remedies are also available to a purchaser and seller of securities and the issuer, where the trade involves such activity.

(h)�� Multi-Jurisdictional Disclosure System

Canadian regulators and the U.S. Securities and Exchange Commission now permit certain U.S. issuers distributions and rights offerings in Canada on the basis of disclosure documents prepared in accordance with U.S.requirements rather than requiring compliance with Canadian provincial securities legislation. Such disclosure must be reconciled to Canadian GAAP. These rules, which are referred to as the Canada/U.S. Multi-Jurisdictional Disclosure System or MJDS, apply to certain rights and exchange offers, take-over bids, issuer bids and business combinations and extend to recognition of certain home jurisdiction continuous reporting obligations.

(i)�� Takeovers (Back Door Listings)

A commonly utilized means of reactivating dormant companies or "public shells" on the stock exchanges in Canada is the process of �reverse takeovers�. In a reverse takeover, new shareholders acquire more than 50% of the shares of the listed company through newly issued treasury shares. The listed company issues treasury shares in return for assets, which could be shares of a private corporation, or business assets.

Initial Public Offerings

An initial public offering of securities (IPO) of an issuer is the conventional way of "going public" and is made by means of a prospectus which must be filed with and receipted by the relevant securities commission. While most Canadian corporations �go public� on a Canadian exchange, more and more are doing so on American exchanges. In Qu�bec, all prospectuses filed with the Qu�bec Securities Commission must be translated into French. This increases the cost and delays the timing of the offering. The process of prospectus clearance with the provincial regulatory authorities in Canada is fundamentally similar to that of the Securities and Exchange Commission.

Implementing the decision to "go public" is a complex path involving many detailed steps. These are best considered on a case-by-case basis.

Private Placements

Generally a prospectus is not required in two circumstances. One is where the purchaser of a security qualifies as a �sophisticated investor� and purchases as principal. The cost of the security to the purchaser must exceed the sophisticated investor limit of the province in which the investor resides ($150,000 in most provinces). This private placement exemption is only available if the purchase price is paid in effect by one person and will not apply to a subscription by a number of persons who form a group to meet the minimum subscription threshold. The second exemption requires that issuers neither advertise nor show the investment to more than 50 potential investors and accept no more than 25 investors.

These investors must receive substantially the same information as a prospectus would provide and is usually provided in the form of an Offering Memorandum. An issuer can only use this exemption once. In Qu�bec, there is no limit on the number of persons to whom the security may be offered, only on the number who subscribe.

GENERAL, PRIVATE AND COMMERCIAL LAW

Personal Property Security

All provinces except Quebec have adopted personal property security legislation modeled after Article 9 of the U.S. Uniform Commercial Code. Creditors can register a secured interest by the executing of and filing an underlying security instrument. The legislation provides for perfection of security interests and outlines the priority scheme to be applied as between security interests perfected under this legislation.

Qu�bec has a system of personal property security under the new Civil Code of Qu�bec.

Real Estate

(a)�� Non-Resident Ownership

Provincial governments control the sale and development of real estate. Prince Edward Island has enacted legislation that significantly restricts the amount of land that may be held by persons (whether corporations or individuals) not resident in the province. Alberta and Qu�bec have legislation, which prohibits the acquisition by non-residents of interests in certain types of real property without the prior consent of the province. In some provinces, corporations must comply with provincial licencing or registration requirements to hold land in that province.

(b)�� Land Use Planning

Although provincial governments are responsible for land-use planning, a variety of planning functions and extensive powers are delegated to the municipalities. Tighter zoning by-laws regulate virtually all aspects of the use of land and the nature of buildings thereon. Building by-laws, including building permit re�quirements and building code standards, govern such matters as building materials and standards.

INTELLECTUAL PROPERTY

Patent Law - General

Patent law in Canada has been greatly influenced by the legal systems of Great Britain and the United States. An inventor is granted the exclusive right in Canada to make, construct, use and sell an invention. An invention is defined as "any new and useful art, process, machine, manufacture or composition of matter" and any new and useful improvement thereof. Patents are granted for inventions, not for workshop improvements. An inventor must demonstrate that the invention incorporates a technological development or improvement and that it is non-obvious.

A patent will not be granted if the invention was published anywhere in the world more than two years before the application was filed in Canada. Inventors usually employ registered patent agents to file the application. The government levies periodic fees, called maintenance fees, to keep the patent in force.

In Canada, the first person to file an application for a qualifying invention will be granted a patent is valid for 20 years from the date granted. In the U.S., on the other hand, the person having the right to file is the first to invent, rather than file. Qualifying inventions must have "absolute novelty" and not have been disclosed or made available to the public more than 1 year before a patent application is filed in Canada.

Canada has entered into treaties with many other countries. The treaties enable a person who files a patent in Canada to file, within 1 year, in the treaty countries as well. Such filings involve the payment of fees in the other countries.

Copyrights

A copyright is an owner�s exclusive right to the publication or sale of the rights to a literary, dramatic, musical or artistic work. Upon creation, every such work is protected by copyright. The term of a copyright for written works is the life of the author plus 50 years; for sound recordings and photographs it is 50 years from the date of the original plate or negative. The Act provides explicit protection for computer programs.

Certain remedies are available only if the author can prove actual knowledge on the part of the infringing party of the existence of the copyright. However, actual knowledge is deemed to exist if the author has registered the work. Infringement includes the production or reproduction of a copyrighted work or any substantial part thereof and the knowing distribution or offering of the same to the public. Remedies for infringement are cumulative and include damages, an accounting of profits, delivery of any infringing material and injunctive relief. Criminal sanctions are also available in limited circumstances.

The usual term of protection of a copyrighted work is the life of the author and 50 years after his or her death.

The Copyright Act does not protect items that could be protected under the Industrial Protection Act. Registration of copyright with the Federal Government is optional.

Trademarks

A trademark is a distinctive word, name, symbol or device used by a manufacturer or merchant to distinguish a product or service from those of the competition. Generally businesses create their right to trade marks by use rather than registration. The extent of protection available to the owner of an unregistered trademark may be limited geo�graphically to the area in which the trademark enjoys some notoriety. In respect of a regis�tered trademark, there is exclusive protection across Canada. In addition, broader remedies are available where there has been an improper use of a registered trademark as opposed to an unregistered one.

In order to be registrable a trademark must be neither clearly descriptive nor deceptively misdescriptive of:

the character or quality of the goods or services, or
the persons employed in their production, or
their place of origin.

Furthermore, a trademark must not be simply the name of the ware or service in another language, primarily merely the name or surname of an individual who is living or who has died within the past 30 years, nor likely to cause confusion with a trademark enjoying prior rights.

In order to register a trademark, the applicant must claim to have used or made known the trademark in Canada, have registered and used the trademark in another country adhering to the Paris Convention, or propose to use the trademark in Canada.

A trademark is registered for 15 years and may be renewed for further 15-year periods. Infringement of a trademark, which may lead to both civil and criminal liability, occurs when there is a sale, distribution or advertisement of wares or services in association with a confusing trademark or trade name. Infringement also occurs where a person uses a registered mark in a manner likely to have the effect of depreciating the goodwill attached to it.

A trademark registration will be invalid if, at the time, proceedings questioning the validity of the trade mark are commenced, the mark has lost its distinctiveness and, therefore, cannot be said to identify in the minds of the public the particular source of the goods or service. Formerly, the most common means of losing distinctiveness was the licencing of the trademark without registering such licence. However, the requirement for the registration of licenced users of marks has been abolished in Canada. Trademark licencing in Canada now requires the licencor/owner of the mark to maintain direct or indirect control over the char�acter or quality of the wares or services in respect of which the mark is licenced.

Use of a trademark in a competing business may also give rise to an action either at common law or pursuant to statute for passing off or unfair competition.

Industrial Designs

The federal Industrial Design Act grants exclusive rights with respect to a registered industrial design within Canada for the duration of its registration. Industrial design is defined as "features of shape, configuration, pattern or ornament and any combination of those features that, in a finished article, appeal to and are judged solely by the eye".

Registration requires the filing of a photograph or a description and drawing of the design and a declaration that the design was not being used and had not been used, to the applicant's knowledge, by any other person at the time that the applicant adopted it. A valid registration requires absolute novelty -- namely the design should neither be found to be identical with some other design already registered nor to so closely resemble some other design as to be confused with it. Initial application must be made within one year of the publication of the design in Canada and may be made by the author, the author's successor in title or the person for whom the author created the work.

The exclusive rights conveyed by the registration of an industrial design are valid for five years and may be renewed for a further period of five years, to a limit of ten years in total. The infringement of a registered industrial design may give rise to both civil and penal remedies. In the absence of marking of the object with the notice provided by statute, only injunctive relief is available. Infringement includes the unauthorized use of an exact copy, an obvious imitation or a fraudulent imitation, the application of the design or an imitation thereof to another article for purposes of sale, exposure for sale or use of the article and the publishing, selling or exposing for sale or use of any such article. It is not, however, an infringement to apply a design similar or identical to that which has been registered to a substantially different article or in a new or novel manner.

Bankruptcy Law

In Canada, insolvency regimes can be divided into two general categories: liquidation regimes and reorganization regimes. Liquidation regimes have one primary purpose, which is the realization of all of the assets of the insolvent entity by the insolvency representative for the benefit of its creditors. The relevant liquidation regime depends in part upon the type of corporation in question.

In contrast, reorganization schemes such as proposal, arrangement and reorganization provisions are intended to allow an insolvent entity time to develop a plan for the continued existence of its business, which might involve the compromise of the existing claims of its creditors, or the provision for a particular body to take control of a troubled organization. The six bankruptcy regimes that fall within these two categories are described as follows.

LIQUIDATION REGIMES

Bankruptcy and Insolvency Act

Liquidation/bankruptcy under the Bankruptcy and Insolvency Act (Canada) (BIA) applies to almost any type of entity including individuals, partnerships, associations and corporations. The BIAdefines "corporations" to include not only any company incorporated and authorized to do business by or under a federal or provincial Act, but any incorporated company that has an office in or carries on business in or has assets in Canada. The definition does not include certain entities in the financial services sector such as banks, savings banks, insurance companies, trust companies, loan companies or railway companies, although holding companies of such entities are subject to the BIA.

Among other things, the BIAallows the trustee in bankruptcy to realize the assets of the bankrupt, determine the propriety of claims against the estate and distribute the proceeds. Secured creditors are generally not affected by this proceeding and can, therefore, proceed to exercise their rights. Generally, a trustee takes the property of the bankrupt, subject to the existing rights of third parties. For example, contractual rights of termination are binding on a trustee. Set-off is permitted. A trustee can, however, disclaim any lease under which a bankrupt is a tenant.

The trustee is able to challenge payments or transfers of property that have taken place within defined periods prior to the liquidation if they have had the effect of defeating or prejudicing the claims of creditors. Recently provisions have been added to facilitate multi-jurisdictional insolvencies and with respect to the insolvency of securities brokers.

Winding-up and Restructuring Act

Liquidation provisions under the Winding-up and Restructuring Act (Canada) (WURA) apply to federal or foreign banks, federal or provincial loan or trust companies and federal, provincial or foreign insurance corporations carrying on operations in Canada. Although the WURA can apply to "trading companies" (except for corporations incorporated under the CBCA), non-financial institution corporations are generally liquidated under the BIA which operates similarly to the WURA.

Receivership

Liquidation under a court-administered receivership applies where a provincial court has been given jurisdiction under a specific provincial Act to appoint a receiver to realize the assets of a business corporation for the benefit of its creditors. This process is used when there are shareholders disputes, environmental problems, international problems or many conflicting interests.

REORGANIZATION REGIMES

Bankruptcy and Insolvency Act (Canada)

The reorganization of creditor claims under the proposal provisions of the BIA applies to the same types of corporations to which the BIA liquidation provisions apply. Under the Act, a company may give notice of intention to file a proposal which effects a 30-day stay period against all creditors, except secured creditors who have taken possession of their security or given notice of their intention to enforce their security at least 10 days before the first filing of a notice or proposal. During the stay period a trustee monitors the business while the debtor attempts to negotiate an acceptable proposal with its creditors. If a proposal is not filed within the allowed time, (initially 30 days but the debtor may apply for extensions of up to 6 months) the debtor will be deemed to have made an assignment in bankruptcy.

The proposal may be made to both secured and unsecured creditors. Creditors with proven claims are entitled to vote on the proposal and are divided into classes based on commonality of interest, with all of the unsecured creditors normally comprising one class. The approval of a proposal by a particular class requires a favourable vote by creditors representing a majority in number and two-thirds in value of those voting. If the creditors accept the proposal, it is submitted to the court for approval. If the creditors reject the proposal, the debtor is automatically bankrupt.

Subject to certain exceptions for eligible financial contracts, the Act provides that contractual terms providing for the termination, amendment or acceleration of payment under a contract simply by reason that a person is insolvent or has filed a notice of intention or a proposal will be unenforceable. Similar clauses in leases of real property or licencing agreements, which are triggered by the non-payment of rent or royalties, will also be unenforceable. Any further supply of goods and services may, however, be on a cash basis and unsecured unpaid suppliers are given the right, in certain circumstances, to reclaim goods within 30 days of delivering them to a bankrupt or insolvent company.

Companies� Creditors Arrangements Act

Reorganization of creditor claims under the Companies� Creditors Arrangements Act (Canada) (CCAA) currently applies to companies with outstanding debt instruments under a trust deed and permits a financially troubled company to continue its business through reorganization by providing for a stay of proceedings during the reorganization period. Banks, insurance companies railways and federal loan and trust corporations are not subject to the CCAA, although provincial loan and trust corporations might be. In order to take advantage of the CCAA, aggregate claims against the corporation must exceed $5 million Cdn.

In response to an application by any eligible CCAA debtor company, creditor, trustee in bankruptcy or liquidator, a court may grant an order staying the creditors of the company and directing that the company file a plan of arrangement and have a meeting of the creditors to consider and vote on the terms of the plan. Unlike the BIA provisions where the process is automatic, the decision to gain relief in CCAA proceedings in discretionary and may be denied by a court. In particular, a court may deny the initial application where support by the creditors is slim and there appears to be no chance that a plan will be successful. In order to succeed, the debtor company�s plan of arrangement must be approved by a majority in number representing three-fourths in value of the creditors in each class. What constitutes a class is open to some interpretation, as the CCAA gives little guidance as to classification, but classes are generally made up of like creditors.

The court is also given complete discretion as to whether to grant a stay, the scope of the stay and the time period in which the stay is in effect. In particular, the courts must be satisfied that a stay is in the best interest of the debtor and creditors. Once a stay is granted, it applies to both secured and unsecured creditors and usually prevents the termination of contracts between the debtor and other parties, although eligible financial contracts are exempted. With the support of major creditors, a stay may also be extended.

Canada Deposit Insurance Corporation Act

Reorganization of financial institutions involves a special procedure under the Canada Deposit Insurance Corporation Act (CDICA). It involves provisions to facilitate the restructuring of banks and federal trust and loan companies whose deposits are insured by the Canadian Deposit Insurance Corporation (CDIC). Bank insolvencies are, however, a rare occurrence in Canada.

TAXATION

In addition to Federal and Provincial income taxes, there exists a Federal Goods and Services Tax (GST), Provincial sales taxes, {and in some instances these taxes are combined into a harmonized sales tax (HST)} and various municipal taxes. Canada Customs and Revenue Agency (CCRA) administers both the Federal income tax, the GST and HST taxes. Where a province administers tax, the respective Provincial Ministries of Revenue are responsible.

Income Tax - Overview

Taxation in Canada is complex. Created as a temporary measure to fund the costs of World War I, Canada's income tax system has significant impact as a permanent feature of the country's economy. The tax system collects massive funds and controls funding incentives for many areas of society such as old age security payments (social security). The Income Tax Act is a key vehicle for motivating taxpayers to engage in activities that the Government perceives to be socially advantageous. This chapter gives readers an introduction to factors affecting the Government's collection of revenue.

Both Federal and Provincial Governments levy income tax. The basis for Federal and Provincial taxation are very similar. Provincial taxes are NOT deductible in calculating Federal taxable income.

The Income Tax Act levies tax on "persons," which by definition includes corporations, individuals and trusts. The system requires individuals, corporations and trusts with taxable income to file returns and pay tax. Partnerships must file information returns but are not taxed directly; rather partners are taxed on their share of a partnership�s income.

The key basis for taxation is residency. In contrast to the United States for example, the Income Tax Act levies income tax on individuals based on residency, not citizenship. Residents of Canada are taxed on their world income, whether the source is inside or outside Canada. Non-residents are taxable in Canada only to the extent of Canadian source income. Non-residents are also taxed on gains from the disposition of certain properties with a �Canadian Connection�, such as land in Canada. Non-residents are taxed at the same rates as residents on active income and capital gains � but are not entitled to any incentives to reduce taxes payable. Passive income earned by non-residents is subject to a flat withholding tax deducted and remitted by the Canadian payer. The nature of the income and the terms of any tax treaty between Canada and the non-resident�s home country determine the rate of withholding tax.

Types of Income

The Income Tax Act (Act) categorizes types of income subject to tax as being from the following sources:

� Business

� Employment (individuals only)

� Property

� Taxable Capital Gains

� Certain other types of income (e.g. alimony).

There are three key concepts involved in computing a taxpayer's tax liability.

� business income for accounting purposes,

� income for tax purposes, and

� taxable income.

Businesses incorporated or otherwise, first calculate their income or loss from business or property using GAAP. Statutes dictate adjustment of certain items in computing income for tax purposes to accounting income (for example, depreciation for tax purposes).

Property income includes most rental income, as well as interest and dividend income. The location of rental property usually determines the country of source of rental income. The payer�s residence generally determines the source of interest and dividend income.

Taxpayers determine each source of income separately, but aggregate them with other income of the same calendar year to compute income for tax purposes. The Act restricts both the nature of deductions permitted in arriving at each type of income and the extent to which losses may transfer between groups.

Permitted deductions, such as losses carried over from other years, can reduce income for tax purposes to arrive at "taxable income." The following section explains Canadian concepts used to compute taxable income.

Determination of Taxable Income

The starting point for the calculation of taxable income for a business is financial statement income, as calculated in accordance with Generally Accepted Accounting Principles (GAAP). There are numerous special rules and limitations that require adjustments to the calculation when computing taxable income as opposed to income for financial statement purposes. The computation of net income for tax purposes is usually the same whether the taxpayer is a corporation, an individual or a trust. Income tax payable is calculated as a percentage of "taxable income."

Entering and Leaving Canada

Because the Canadian system of personal taxes is based on residence, it attempts to tax increases in wealth that represent capital gains on the increases in wealth that occur while an individual is resident in Canada. Therefore, when a non-resident becomes a resident in Canada, he or she is considered as having acquired all capital property on that date at its Fair Market Value. This means that any disposal while in Canada will result in taxation on any gains, measured in Canadian dollars, accrued since arrival in Canada. As in all other areas, this area is subject to self-reporting and in the case of audit, taxpayers would have to have objective support for their positions.

With some exceptions for individuals only in Canada for a few years*, when an individual ceases to be to a resident in Canada, he or she is deemed to have disposed of and immediately reacquired virtually all his or her property at fair market value. The accrued capital gains earned during the period of residence will, therefore, be taxed in Canada. The only assets exempt from this rule are Canadian real estate, capital property or inventory used in a business in Canada and some pension and similar rights. (* Taxpayers in Canada less than 60 months in the previous 10 years are exempt in respect of property they owned when they last arrived or inherited during their time in Canada)[S.218.1(4)(b)(v)]

Canadian assets exempt above from the deemed disposition rules, give rise to income or gains taxable in Canada even when earned by a non-resident. Therefore, there is no need for a deemed acquisition on arrival or a deemed disposal on departure.

To increase the ability to monitor compliance in this area, there are new reporting requirements for departing individuals, including trusts. Individuals who have more than $25,000 in assets are required to report all property owned by them at the time of cessation of residency in a prescribed form to accompany their income tax return for that year.

Residence of Persons

For Canadian tax purposes, a person includes an individual, a trust, a partnership and a corporation. The Tax Act does not define the term "resident".

Individuals

Individuals evaluating whether or not they ordinarily reside in Canada must rely heavily on the results of court cases. The courts have generally held that an individual is a resident of Canada for tax purposes if Canada is where the individual regularly lives in the �settled routine of his life�. Canada does not have the concept of �domicile� as distinct from residence. The courts will often look at a number of factors in making this determination, including the location of the individual�s dwelling place, spouse and dependants, personal property, social ties, banking relations and the existence or lack of existence of a residence in another country.

Part-Year Residents

An individual whose residency status changes during the year is a "part-year resident." A part-year resident is subject to tax in Canada on a worldwide basis only for the period of residence. If a person is resident in Canada for only part of the year, he or she will pay tax as a resident for that part of the year, with prorating of the various standard deductions and tax credits. For that portion of the year in which the individual was not resident, the taxpayer is only subject to Canadian tax on Canadian source income.

Individuals must "ordinarily reside" in Canada to be a resident for income tax purposes. In addition to ordinary residents, the Act considers an individual who spends more than 183 days in Canada during a given year to be a �sojourner�. Canada taxes sojourners as residents for that entire year. In determining possible dual residence, most Canadian tax treaties have �tie-beaker rules� so that individuals are considered resident in only one country.

Short-term Residents

Individuals who become residents for tax purposes in Canada but subsequently leave Canada may be eligible for some relief from the rules that tax unrealized increases in wealth on departure. Simplistically, individuals who have been in Canada less than 60 months do not have to pay tax on increases in value of assets they held prior to arriving in Canada. This treatment is also extended to assets inherited from abroad while living in Canada.

Such short-term residents can still have problems, especially with corporate shareholdings. Consider an individual who owned shares of Employerco when NewEmployerCo acquires Employerco. The exchange of shares will be tax-deferred to the individual, but the shares of NewEmployerco were NOT owned when the individual immigrated to Canada. Thus, the individual would be taxed on any increase in value of the shares of NewEmployerco even though the individual was in Canada less than 60 months and owned the original shares on arrival in Canada.

Corporations

Corporations are defined to be any incorporated company and for tax purposes are further delineated as resident and non-resident. Corporations can be resident by legislation or fact. All new corporations incorporated in Canada since 1966 are legislated residents.

For corporations not incorporated in Canada, deciding factors include the location of business activities and location of central management. Canadian courts follow the rulings of UK courts that a corporation is resident according to the country where its real business is carried on and that its real business is carried on where its "central management and control" actually abide. In most cases, the central management and control will be located where the board of directors of the corporation meets and carries out its responsibilities. It is important to note, however, that de facto control or factual control is the determining factor. Legal control, based on the percentage of voting common shares is not considered in this situation. Relevant facts to establish where central management and control are exercised include where the effective decision-making, relating to the activities of the corporation, takes place. The courts have considered factors such as the place of incorporation, the country of operation, the residence of shareholders, the place where books are kept and bank accounts opened and the place where shareholders meet.

Canadian Trusts

Canada determines the residence of the trust based on factual tests. The residence of the majority of the trustees usually determines the residence of a trust. However, while some judicial doctrines favour the residence of the majority of trustees, other doctrines heavily weigh such factors as where the important decisions with respect to the trust are made.

While the concept of a �Protector� is not used in Canadian trusts, it is a role some foreign jurisdictions use to provide assistance to the trustees in their decision-making. Some authors believe the term comes from English legislation enacted in 1833. [Fines and Recoveries Act] Since Canadian courts have not considered the issue, there is significant uncertainty about the implications flowing from having a �Protector� for the trust. While not unanimous, a number of authors believe that Canada Customs and Revenue Agency might successfully take the view that a protector with substantial powers is really the trustee. Clearly, the more powers given to the Protector, the more likely might be that outcome. At least one author has reported that anything more than an obligation to consult could create a problem. A Protector resident in Canada could, therefore, result in the trust being resident in Canada and thus subject to Canadian income tax.

Most trusts that are not resident in Canada will generally only be taxable in Canada on Canadian source income.

Foreign Trusts Resident in Canada

Income earned by a non-resident trust is not normally subject to Canadian tax. Canada Customs and Revenue Agency has become very concerned about tax avoidance using offshore trusts. In addition to trusts resident in Canada by Common Law criteria, as outlined in the introductory section, some offshore trusts are deemed to be resident in Canada by tax legislation. Targeted non-resident trusts are those that meet a two-part test having:

at least one Canadian beneficiary (current or future potential & including non-arms length trust or corporation), and
acquired property from a Canadian beneficiary (or defined relatives), or former defined former resident persons.

Then if distributions are at the exercise, or lack of exercise, of discretion of any individual the trust is deemed to be a Canadian resident with its income subject to Canadian income tax.

Corporations

Resident corporations are taxed on all of their income, from outside as well as from within Canada, while non-resident corporations are taxed on their Canadian source income.

Canadian-Controlled Private Corporations (CCPCs) are entitled to a number of incentives, including a lower income tax rate on business income and higher tax credit rates on research and development expenses. Both of these incentives are phased out after threshold levels are exceeded. All corporations are entitled to incentives for specific activities, such as manufacturing and production, research and development and other targeted areas that vary over time; most inter-corporate dividends are not subject to tax.

All resident corporations are taxed on three general sources of income: �Business�, �Property� and �Taxable Capital Gains�. Business income normally involves a certain amount of activity, while property income is passive income such as interest, dividends, rents and royalties.

The tax rates that apply to most corporations, including Provincial taxes of 5-17%, are usually between 41 to 44% for business income and approximately 51% for passive income (i.e. income from property). Canadian-Controlled Private Corporations in Ontario pay approximately 22% on the first $200,000 of their active business income. Incentives for manufacturing and processing (up to 9%), or research and development, can reduce the effective rates of income tax on corporate income.

Groups

Every corporation must file a tax return. There is no provision for consolidating tax returns in a group. There is no expedient way of efficiently utilizing corporate losses within a group, regardless of the percentage shareholdings.

Branch Profits Tax

If a non-resident corporation carries on business in Canada directly through a branch, it will be subject to tax on income earned by the branch. As a general rule, a company soliciting business in Canada, with someone in Canada to accept that business, will be regarded as carrying on business in Canada. By contrast, a company with no resident employee or agent to make business decisions may not be carrying on business in Canada. Many Canadian tax treaties specifically address when certain activities constitute carrying on business in Canada.

With few exceptions, non-resident corporations are taxed on their income in essentially the same way, as are resident corporations. Therefore, a branch is responsible for filing Canadian corporate returns and paying regular Canadian income tax for any periods in which it carries on business in Canada.

A key difference between a branch and subsidiary follows from a recent tax case. Branches cannot deduct management fees from head office, even for services provided, in computing income subject to income tax in Canada. A subsidiary can deduct such charges to the extent that they are reasonable in the circumstances.

�Carrying on business in Canada� is given a very wide definition, which includes producing, manufacturing, packing or improving anything in Canada, as well as offering anything for sale in Canada through an agent.

In the absence of other legislation, foreign corporations would have an incentive to operate Canadian operations as unincorporated branches. Unincorporated branches do not pay dividends and, therefore, would not be subject to Canadian withholding taxes on dividends.

To compensate for this, Canada imposes a further "branch tax" on after tax profits that are not reinvested in Canada. The branch tax rate is 25% for non-treaty partners, which is equal to the standard withholding rate on dividends. The Act [219.2] automatically reduces the Branch Tax rate to the reduced withholding rates appropriate for dividends in any Double Taxation treaty.

Individuals

In most contexts, individuals are subject to the same rules and regulations as other taxpayers. There is a fundamental distinction in the taxation of individuals between residents and non-residents of Canada. Residents are subject to tax on their income from any source; non-residents are only subject to tax on their Canadian-source income.

Canadian individual's tax liability is a function of their taxable income, tax rates and available tax credits. Each person is taxed individually. That is, spouses cannot file joint returns and corporations may not file consolidated returns.

The Canadian courts follow a UK court decision that held that taxpayers are entitled to organize their affairs in any legitimate way to minimize income tax.

The Canadian tax system uses a scale of graduated tax rates which taxes higher incomes at greater rates starting at approximately 26% and rising fairly quickly to maximums of 46% to 52%, depending upon the province of residence at December 31.

Because of graduated tax rates, there is an absolute advantage to the "splitting" of available income between individuals at different marginal rates. The Government has created significant amounts of legislation to prevent individuals within the family unit from realizing any advantage in this area. Such planning opportunities exist, but are limited for Canadian residents. Individuals planning to move to Canada may achieve significant tax savings through pre-arrival planning.

Individuals are entitled to non-refundable tax credits (i.e. tax credits which reduce taxes payable but which can not trigger a refund) in respect of:

v medical expenses for family members,

v Charitable donations,

v being over the age of 65 years,

v supporting a spouse,

v supporting an infirm dependant,

v virtually all post-secondary school tuition fees paid for taxpayer or dependant, and

v an education allowance based on number of months in post-high school full-time attendance (this is available regardless of age or length of attendance).

Individuals benefit from the same tax treaties as corporations. However, some Canadian residents will end up paying at least some double taxation while living in Canada. Canadian residents paying U.S. tax by virtue of citizenship - on investment income for example, will not receive a credit in respect of U.S. taxes paid except to the extent that a Canadian resident would have paid tax on that same income. This can create a significant tax bill, for example when a U.S. citizen living in Canada earns capital gains on American stocks. Non-American citizens resident in Canada would not pay any tax on those gains and so Canada does not provide a foreign tax credit. The U.S. considers these U.S. gains by a U.S. citizen and thus provides no foreign tax credit for Canadian taxes paid. A lower percentage issue is the fact that the foreign tax credit available to Americans is limited to 90% of the tax liability. This limitation effectively adds almost 3% in addition to the Canadian tax bill for many U.S. citizens earning more than $76,000 USD earned income.

Principal Residence

Canada has a �principal residence exemption� so that the gain on disposition from a Principal Residence is not subject to capital gains tax. Each family unit (husband, wife and children under the age of 18 years) can designate one residence each year � and can alternate in different years between different residences. For example, if a family had a city home and a country house for 8 overlapping years, the family could elect the city home as a principal residence for 5 years and the country home for 3 years. In this example, 5/8 of the any gain on the city house would be exempt from tax and 3/8 of the country home would be exempt. However, to be eligible for this exemption, the family must reside in each residence regularly. Foreign residences qualify provided the property was not rented to someone else and the family spent some time in the foreign residence after immigration to Canada.

Pension

Any amounts, whether annual instalments or lump sum payment, individuals receive AFTER moving to Canada are taxable in Canada. In Canada, you will get a foreign tax credit for any foreign taxes paid, but this system of claiming a foreign tax credit ensures that you pay the higher rate payable in either country. Many individuals would benefit from ensuring lump sum payments are received BEFORE immigration to Canada.

Employment Income

Employment income results from remuneration. Remuneration includes salary, wages, director's fees and most employee benefits. The statutes quantify the value of some benefits, for example low interest loans and the use of a company owned car. The facts determine the value of other benefits. The courts frequently settle disputes on such valuations. Employees are then taxable on the value of such benefits as if the benefits had been part of normal cash-paid salary. The cost of most of such benefits -- other than defined items such as some stock incentive programs, costs of �luxury� cars and some clubs -- is deductible in computing the taxable income of the employer.

Employers are obliged to withhold a portion of salary payable and remit that amount to Canada Customs and Revenue Agency on behalf of the employee. That amount represents taxes paid by the individual. Where possible, employers should increase source withholdings to reflect the value of benefits-in-kind.

Stock Options

Stock options in private Canadian-Controlled Private Corporations (CCPC) are treated differently than other stock options. Options exercised for shares in a CCPC trigger a taxable event only when the shares are sold. The amount between the value when exercised and exercise price becomes employment income and any increase in value after the exercise date is a capital gain. This treatment to a limited extent is also available for options in public corporations. A key limitation to avoid immediate abuse is that the exercise price cannot be less than the value of the shares at the time the option was granted. Another significant limitation is that only $100,000 per year of cost (i.e. not gain) is eligible for deferral.

Partnerships

A partnership is not taxed directly.� Income is calculated for tax purposes at the partnership level, but is reported by the individual partners. (See Income Tax - Individuals). Partners are taxed on their share of the partnerships sources of income, whether or not there has been any distribution of profits. Losses of the partnership also flow through to the partners, in proportion to their agreed allocation of profits.

Limited partnerships are taxed in the same way as general partnerships. However, there are restrictions on the ability of limited partners to utilize losses realized by the limited partnership. A limited partner may normally only claim losses and tax credits to the extent of his or her amount �at risk� in the partnership, usually the amount of the actual investment in the partnership.

A non-resident partner's share of business profits from a business carried on by the partnership in Canada will be subject to tax. Where the non-resident partners are corporations they will be subject to tax on branch profits. Where a partner resides in a treaty jurisdiction, the business profits will be taxable in Canada only if they are attributable to a permanent establishment of the partnership in Canada and not exempt by a Double taxation treaty.

Unlike some other jurisdictions, Canadian revenue authorities do not under any circumstances treat partnerships as corporations.

Trust

Unlike partnerships, trusts are taxed directly. The basic calculation of income is similar to that which applies for individuals with one important difference. Trusts receive a deduction in computing taxable income for income transferred to beneficiaries. In most circumstances, to the extent income is distributed, the trust acts as a conduit and the beneficiaries will pay tax directly on the income earned by the trust but distributed to them.

Also unlike partnerships, trust losses cannot be allocated to beneficiaries and claimed as deductions. Instead, these losses are carried forward, to be used against future trust income. New rules permit trusts to offset current income against prior losses even though they have previously distributed that income to beneficiaries.

There are complex rules to decrease the potential tax savings using Inter-Vivos trusts that can be derived by Canadian residents. One level of rules addresses the residence status of trusts since only trusts resident, deemed for tax purposes or actual, in Canada pay tax on their worldwide income. Another level of rules prevents taxpayers from moving what would otherwise be their personal income into a trust.

Integral to these anti-avoidance rules is the fact that inter-vivos trusts pay tax at a flat rate equal to the highest marginal rate applicable to individuals. In addition, similar conceptually to the �Grantor Trust� rules in the U.S., if the settlor of a trust retains control of the trust, the Taxation authorities can ignore the trust for tax purposes. The creator of such trusts may have to pay tax on all trust income.

Where an Inter-Vivos trust has non-resident beneficiaries, distributions from certain kinds of income (income from carrying on business in Canada, real estate and resource income and, gains) can be subject to withholding tax.

A testamentary trust, which is created by will, is taxed as a separate individual on which incremental rates are applied. Therefore, initial income earned by a trust is taxed at the low rates applicable to individuals, while higher levels of income are subject to tax at the higher individual rates. Trustees can later pay these tax-paid funds to the beneficiaries without creating further tax liability. This allows for the spreading of taxable income over an additional graduated rate scale, which results in potential tax savings. In a tax system that usually prevents access to additional low marginal rates, family units can save over $7,000 each year for each testamentary trust created by a will. Such savings are subject to specific anti-avoidance rules but are generally not difficult to achieve.

Immigrants

Australia, Canada and Denmark are the only countries that tax individuals resident in the country on any increases of wealth during the period of residence even if the increase in wealth has not been realized. In addition, there is NO inflation adjustment for capital gains. If someone purchased a property in 1972 for $1,000 and sold it today for $2,500, that person would pay tax on a $1,500 gain, even though in inflation adjusted dollars they had suffered a loss.

On immigration, Canada will artificially adjust your tax cost base to the fair market value, expressed in Canadian dollars, of all of your property as of the date that you immigrate to Canada. Canada will tax the immigrants on any increase in value, as determined in Canadian dollars, over that value in Canadian dollars at the time of disposition (subject to some exemptions for individuals resident for less than five years).

This system works well except where individuals remain exposed to tax on the same property in their former country. This happens most frequently when owning real estate or coming from the United States.

Real Estate - Ownership

Absent any planning actions, an immigrant acquires a rental property at its current value in Canadian dollars. When the immigrant sells it, he/she will pay Canadian tax on the increase in value, in Canadian dollars, since the move to Canada. Tax treaties will not reduce taxes to the extent the gain relates to foreign exchange changes, since host countries will compute taxable income in the local currency, without any exchange component.

The exposure on a future sale of a principal residence is limited to:

- any appreciation in value of the property after the date of arrival. To the extent that a Canadian resident becomes liable for foreign tax, much of that will be available as a foreign tax credit in most circumstances.

- Consider an example of a person immigrating from England, followed by a drop in the Canadian dollar. Assume a property was worth �400,000, which could be worth $1 million Cdn. If the Canadian dollar continues to weaken, in the future, the house could still be worth �400,000, which might be worth say $1,100,000 Cdn. The owner would be responsible for a gain of $100,000 Cdn on the Canadian tax return. Inherently, the system assumes that the resident will convert the foreign currency into Canadian dollars and that any decision to retain funds in a foreign currency is a separate investment decision.

Rental Property � Annual Income

A tax treaty may be relevant because both the country in which the real estate is located and Canada will likely subject the rental income to income tax. Tax treaties give one country priority in collecting income tax on any given type of transaction. The treaty will give the country in which the real estate is located priority on collecting tax both on annual rental income earned from real estate and on any gain from selling that real estate. Canada will determine the normal Canadian tax on the rental income providing a credit for some or all of the foreign tax against Canadian tax. The effect of the treaty is to ensure that whenever an item is potentially subject to tax in both countries, you will pay the tax computed at the rate of the country using the higher taxation rate.

Immigrant Trust

Canada specifically contemplates wealthy immigrants establishing trusts prior to their becoming Canadian residents for tax purposes. If properly structured, an offshore trust set up for the benefit of, say, an immigrant's family can be effectively used temporarily to shelter income and gains earned by the trust (and which are accumulated in the trust) from Canadian tax.

Properly structured immigration trusts are exempt from Canadian tax for the first 60 months after the immigrant�s arrival. However, that usually translates into 4 years of protection since the trusts must qualify at December 31 of each year. For example, an immigrant settling a trust and becoming a resident of Canada in December would be exempt for that calendar year and only for the next four taxation years.

After this initial period, the immigrant trust may be deemed to be a resident of Canada and, therefore, subject to Canadian tax on its passive income, whether or not that income is actually repatriated.

Capital Transactions

�

Property is generally capital property if it is held in the course of carrying on business or not acquired solely for generating a profit on resale. Only two-thirds of capital gains are "taxable capital gains." The portion of capital gains subject to tax is the same for all taxpayers, both resident and non-resident. Two-thirds of capital losses in excess of capital gains make up "allowable capital losses." Any taxable capital gains are subject to the normal rate of income tax.

There are no statutory conditions, such as a minimum holding period, which determine whether or not a transaction is a capital transaction. The analogy used is the difference between getting fruit falling from the tree and shaking the tree to make the fruit fall. If you intend from the outset to "shake the tree," the gain from the transaction will be regular income for tax purposes. If you are prepared to wait for the "fruit to fall," the gain will be capital.

However, the Courts have frequently held that the acquisition and disposition at a gain, even if resulting from an isolated transaction, can yield ordinary income rather than a capital gain. This is true even if the taxpayer holds the property for an extended amount of time, if the main intention was to acquire the property for resale. For the gain on disposition to be a capital gain, the intention at the time of acquisition must be for the purpose of earning income during the period of ownership. Therefore, for example, it is rare at best to get capital gains treatment when selling vacant land or gold bullion.

Generally, subject to some restrictions (e.g. where two residences are owned at the same time), no income from any gain on a disposition of a principal residence per family unit is taxable. This is true regardless of the number of residences owned sequentially or whether or not the taxpayer reinvests any portion of the proceeds in another residence.

Dividends

Paid to Corporations

Taxation of dividends is usually afforded special treatment. Most dividends received by Canadian corporations from other Canadian corporations are not subject to corporate income tax. There are numerous anti-avoidance rules, but some dividends received from foreign subsidiaries from tax paid active business profits can also be received without further incidence of Canadian corporate income tax.

Paid to Individuals

Corporate dividends paid to individuals include an imputed amount to reflect a portion of the corporate taxes paid on income. Resident individuals and trusts, therefore, pay tax on a �grossed-up� amount that includes the cash amount of the dividend and an amount to reflect corporate taxes. Individuals are then entitled to a tax-credit in respect of a portion of corporate taxes. The system does not deliver full relief to individuals except when a private corporation pays dividends from active business income taxed at the lowest rate for such corporations.

The dividend tax credit enables an individual to receive up to approximately $22,000 of dividends a year without any personal income tax and reduces the top tax rate of approximately 50% to about 33%.

Exchanges of Property

Barter transactions do not provide taxpayers with any right to defer tax on any related income or capital gains. All barter transactions (including �like kind exchanges�) are subject to the same income tax consequences as any cash transactions.

There are provisions to defer tax arising from some dispositions, whether barter or cash, of business property. Taxpayers may elect to defer tax on such gains to the extent that the gain is used to purchase replacement property to be used in a business in Canada. Taxpayers may not claim this deferral for real estate rental property even if the rental activity constitutes a business.

Taxpayers may use allowable capital losses only to reduce taxable capital gains. Any excess of current losses over current gains is available to be carried back three years and forward indefinitely.

Some capital losses related to investments in qualifying Canadian corporations are �Allowable Business Investment Losses�. These can be used to reduce any income, i.e. they are not restricted to reducing capital gains.

Foreign-Exchange Gains and Losses

The nature of a foreign-exchange gain or loss is determined by the underlying transaction:

� gains related to inventory, for example, are income, and

� gains related to borrowing or fixed assets are generally capital.

Taxpayers recognize income gains on an accrual basis and pay tax on capital gains or losses when realized.

Deductibility of Expenses

The Act specifically states that taxpayers must make expenditures with a reasonable expectation of creating or increasing taxable profit from some source for the expenses to be deductible for tax purposes.

With respect to transactions with non-arms-length persons who are non-residents, there are also strict rules to ensure the Canadian taxes are not artificially reduced or eliminated. For example, Canada Customs and Revenue Agency would normally scrutinize transfer-pricing arrangements to ensure that a Canadian importer does not overpay on its inventory purchases. Similarly, it frequently reviews management/administration fees to ensure that such charges do not exceed fair market value.

Entertainment

In addition to the general restriction on reasonability, the Act places additional restrictions on the deductibility of expenses related to business meals and other entertainment. The restrictions apply to "amount(s) paid or payable in respect of human consumption of food and beverages or the enjoyment of entertainment." The wording in the Act refers to an expenditure, which includes not only expenses, but also capital expenditures.

The restriction to 50% of amounts expended presumably reflects the perception that all business meals and entertainment expenses contain at least some portion of a personal element of benefit.

Interest Expense

Deductibility of interest depends on the reason for the specific expense. To be tax deductible, interest incurred must be:

i) paid or payable within the year;

ii) paid under a legal obligation to pay;

iii)�� paid on money borrowed to earn income from a business or property;

iv) limited to a reasonable amount,

v) not subject to specific restrictions.

Interest incurred is NOT deductible under several circumstances identified by CCRA:

� Charges on overdue taxes are not deductible because it is not related to earning of income;

� Most carrying costs in respect of holding bare land or constructing or renovating buildings is subject to additional restrictions and is not deductible but must be added to cost of the asset;

� Related borrowings with the proceeds re-loaned interest-free or at less than a reasonable rate are not deductible;

� When a reasonable interest rate is not established at the time the money was loaned. E.g. when the borrower does not use the funds to earn income such as where funds are loaned at no interest to the borrower's corporation;

� When the loan is incurred to realize only capital gains and not regular income.

Canada Customs and Revenue Agency perceives that some funding arrangements more properly reflect an equity investment rather than debt. The Courts and Canada Customs and Revenue Agency consider as interest:

� amounts accrued on a day-to-day basis;

� compensation for the use of borrowed money;

� compensation calculated on a principal amount.

Compensation arrangements based on cash flow, revenue or profits are, therefore, not interest for Canadian tax purposes. The Courts have recently held that such payments on "participating loans" are not interest and must be amortized over five years.

Tax Depreciation - Capital Cost Allowance

Taxpayers may not deduct �capital expenditures� in full in computing income for tax purposes in the year they make the expenditures. Instead, most capital expenditures must be deducted from income over a period of several years. The annual deductions, which may be claimed, will eventually result in the entire cost of capital assets being allowed as a deduction to the taxpayer. These deductions are known as �capital cost allowances� (CCA).

Each pool or class of depreciable property has a �depreciation rate� prescribed by regulation. The percentage of the capital cost permitted each year is a function both of the expected useful life of the asset and areas of the economy the Government wishes to encourage. The prescribed rate multiplied by the undepreciated capital cost of property in the class after additions, deductions and adjustments for the year gives the tax deduction or CCA claim available for that class for the year.

The company is not obliged to claim the maximum capital cost allowance available in any year, but rather may claim any amount it wishes up to the maximum amount. Amounts not claimed in a particular year remain as part of the undepreciated capital cost of the class for use in future years at the applicable rate. Sample CCA rates are:

Asset Type	% Deductible	Basis
Computer application Software	100	DB
Manufacturing Equipment	30	DB
Office Furniture	20	DB
Buildings	4	DB
Leasehold Improvements (over term of lease and first renewal)	Term of Lease(s)	SL

* DB = Declining Balance�� SL = Straight Line

CCA claims on most assets in the year of acquisition are restricted to 50% of the amount otherwise deductible. There is some relief from this �half-year� rule for acquisitions from related parties and for some assets deductible on a straight-line basis.

LIMITATIONS ON COMMON DEDUCTIONS

Interest Deductibility

Corporations have a restricted right to deduct interest expense incurred to redeem shares or pay dividends. A corporation may not deduct the costs of borrowings for dividend payments or redemptions for amounts that exceed retained earnings and paid-up capital. [1996 CMTC Q.1, ref. 20(1)(c, 20.1]

Special restrictions apply to interest paid to related non-residents. In the absence of these restrictions, foreign owners could make Canadian investments with debt rather than equity. The interest arising on this "excess" debt would unduly reduce local profits and Canadian income tax.

"Thin Capitalization" rules apply when debt to specified non-residents exceeds three times the tax equity. Specified non-residents include non-resident shareholders and related parties, who together own at least 25% of the issued shares of any class of shares of the corporation. Interest on the excess debt is not tax deductible. The debt to equity ratio will be calculated on an averaged monthly basis.

Bonuses

In addition to base salary, it is common practice for corporations to compensate senior employees with additional amounts at the end of corporate year. Quantifying bonuses plays a key part in minimizing taxes payable by private corporations. Bonuses are subject to the normal requirements for withholding. Canada Customs and Revenue Agency administratively considers any bonus determined for resident active shareholders to be reasonable and, therefore, deductible in computing the corporation�s taxable income. That is, unlike the U.S. and other jurisdictions, as long a shareholder is active in the business there is no predetermined limitation on the deductibility of bonuses paid. This is a key concept in minimizing the combined total of corporate and personal tax ultimately payable on corporate earnings.

Non-active shareholders must remove after-tax profits as dividends rather than bonuses.

Capital Tax

Most Provinces levy a capital tax ranging from 0.3% to 1.5% on invested capital, depending upon the province where the capital is employed. The definition of invested capital is not the same in all Provinces, but generally includes shareholder equity and corporate debt. There is also a Federal "Large Corporations Tax" which operates in a similar manner to the Provincial capital taxes and applies to corporations who utilize more than $10 million of capital in Canada.

Employment Related Deductions

The Act severely limits the ability of employees to take deductions against employment income. With few legislated exemptions, employees are not permitted to use personal expenditures to reduce their taxable employment income. Employees most commonly claim deductions relating to their costs for supplying a car or office as an explicit condition of employment.

Some commission employees may deduct any expenses reasonably incurred to earn commission income, however, commission employees may not deduct expenses in excess of the commission income. Canada Customs and Revenue Agency has been successful in disallowing expenses claimed by commission salespeople who were not required as a condition of employment to incur these expenses.

Home-in-Office

Individuals are restricted in deducting the costs related to an office in their home. The site must be either a principal place of business or be used regularly for meeting clients, customers or patients. Taxpayers may claim expenses only if the space is used exclusively and on a regular or continuous basis for earning business income.

When expenses qualify, the deduction is limited to the income earned from the business in that location. Taxpayers may carry forward to future taxation years any deductions in excess of income.

Tax Treaties Co-ordinating with Canadian Tax Rules

Canada has entered into agreements with most non-�tax haven� jurisdictions to eliminate or avoid double taxation. Most of these are similar in form to the OECD Model Double Taxation Convention on Income and Capital. In most cases, the terms of any treaty govern any conflict with local tax law. The status of Canadian Tax Treaties is shown in Schedule II.

Double taxation is usually avoided by one of two approaches. The first approach is to limit the tax liability for certain types of income to the country of residence of the taxpayer (e.g. capital gains on publicly-traded shares). The second is to permit the foreign country to tax gains earned in that country, but permit a credit against taxes otherwise payable in the country of residence (e.g. gains on real estate). The credit cannot be more than the amount of Canadian income tax due on that same income, thus ensuring that the taxpayer pays the highest rate of tax applicable in either country.

In addition, Canadian corporations can often receive dividends, free of any further Canadian tax, from the business profits of foreign companies that are at least 10%-owned by the Canadian company.

Unused credits from current non-business income cannot be used in reducing the taxes payable of other years. The following anti-avoidance rules are designed to ensure that the treaties are applied appropriately:

� Similar to the U.S. reporting rules, non-resident corporations must now disclose their reliance on a treaty-based exemption to claim protection from Canadian tax on Canadian source income. This will affect hundreds of thousands of foreign sales agents and consultants, particularly in the United States, who pay no Canadian tax because they have no permanent establishment in Canada.

� Losses from �treaty-protected� Canadian businesses of non-residents cannot be used to shelter Canadian taxable income.

� Foreign taxes paid on �treaty-protected� foreign income earned by Canadians cannot reduce Canadian tax liabilities on other income.

� Dual resident individuals cannot avoid Canadian non-resident tax.

Transfer Pricing

Canada has recently updated its compliance requirements in the area of transfer pricing. The government is seriously concerned about the diversion of taxable income from Canada to lower tax rate jurisdictions. The government has introduced new documentation requirements to ensure taxpayer compliance and facilitate administration with CCRA. CCRA has formally stated that it intends to devote more resources to the verification of cross- border transactions by multi-national enterprises. CCRA has made it quite clear in conversations with us that in enforcing this new legislation they will target not only large multi-national operations, but also all taxpayers involved in cross-border transactions with non-arms-length parties, regardless of size. Any such taxpayers are subject to increased audit risk.

The amendments alter the �reasonable in the circumstances� test that previously governed intercompany transactions. The new rules provide for significant penalties where a taxpayer fails to make reasonable efforts to determine and use arms-length transfer prices. There is also a requirement for taxpayers to contemporaneously document their transfer pricing transactions, as well as the steps taken to ensure that the terms and conditions of those transactions satisfy the arms-length principle.

CCRA has adopted the Organization for Economic Co-operation and Development (OECD) guidelines for transfer pricing. For tangible property this involves traditional transaction methods such as, the comparable uncontrolled price (CUP) method, the resale price method (RPM), the cost plus method (COST PLUS) and other methods. No priority is given to any particular method, except that the CUP method is normally applied if reasonable comparable transactions are available.

There are special reporting rules for corporations that, at any time in a taxation year, were resident in Canada or carried on business in Canada and had transactions with non-resident related parties, which in total for the year exceed $1 million. To enable CCRA to better enforce transfer pricing, such corporations are required to file an annual information return (T106) for the year in prescribed form and containing prescribed information. These compliance requirements apply to corporations, individuals, trusts and partnerships.

The primary means to encourage taxpayers to comply with the requirements to properly document their intercompany pricing is the penalty provision. The penalty is generally 10% of the transfer pricing income and capital adjustments that relate to transactions for which a taxpayer has failed to make reasonable efforts to use arms-length transfer prices.

The corporate tax return must contain prescribed information regarding transactions with non-resident non-arms-length persons. Partnerships, individuals and trusts are subject to these filing requirements. You should anticipate Revenue Canada paying serious attention to the information on these returns.

Steps you should take:

Identify potential non-arms-length non-resident transfer pricing issues such as:

o Sale and purchase of goods, services and intangibles;

o Cost-contribution arrangements-cost-sharing

o Rentals and royalties paid or received;

o Terms and conditions regarding the transaction;

o Warranty arrangements.

Review supporting documentation to support transfer price used with a professional.

Discuss alternative TP methods with professionals such as those at an HLB member firm who are familiar with the legislation.

Low or Non-Interest Bearing Loans to Non-Residents

Canadian corporations making low or non-interest bearing loans for more than one year to non-residents are deemed to earn interest at a reasonable rate except where the loan was:

� Canadian withholding tax had been paid on the loan [S.17(7)], or

� To a wholly owned subsidiary to finance its business [S.17(8)].

This rule also applies to:

� All amounts owing for more than 1 year, not just loans *,

� Amounts received indirectly by the non-resident (e.g. Canadian company financed the non-resident through a bank or a related company), and

� Amounts owing by the non-resident to a trust or partnership in which the company is a beneficiary or partner.

*Exclude only accounts payable and similar amounts arising from the active business of the wholly owned subsidiary.

As a result, Canadian companies should review all amounts owing by non-residents for more than 1 year to ensure there will be no �deemed interest� earned.

Other International Issues

� Certain mergers of foreign corporations owned by Canadians can be done on a tax-deferred basis.

� Measures have been introduced to extend the current rules preventing the avoidance of tax in the following situations:

� Conversion of taxable surplus to tax-free gains by non-resident shareholders of Canadian corporations through non-arms-length sales of shares.

� Conversion of taxable capital gains to non-taxable dividends by non-resident shareholders through the sale of the non-resident corporation to a Canadian company immediately prior to the immigration of the non-resident to Canada.

� Trading of unused foreign tax credits through short-term acquisitions of foreign securities has been eliminated.

Transactions with Related Persons

Related persons are deemed to conduct all purchase and sale transactions at fair market value for income tax purposes (subject to exemptions for transfers between spouses). Gifts are considered sales for income tax purposes. Gifts have a deemed tax cost to the recipient equal to its fair market value on the date received. Therefore, even making gifts can have income tax consequences and require tax planning.

Disposing of cash for its face value results in no gain. Therefore gifts of cash of any amount have no income tax consequences.

Canada Customs and Revenue Agency may chose to adjust only one side of any non-fair market value transaction that it finds offensive. Taxpayers who ignore these rules can be subject to double taxation at the discretion of Revenue Canada.

For example, assume a taxpayer reports the non-arms-length sale of property worth $100 at $25. The purchaser in this case would have a cost base of the $25 actually paid. Canada Customs and Revenue Agency can adjust only the seller's proceeds to $100 for tax purposes. The purchaser would still have a tax cost base of $25. The original seller, therefore, pays tax immediately on the additional $75 gain. When the purchaser resells this property, s/he will pay tax on this same $75 gain.

Even for non-income-generating properties, gifting, therefore, has different tax consequences than the purchase of an asset at a bargain price. If the donor wishes to sell the property below market value it is preferable to gift the cash required for a market value.

To maximize income in low tax jurisdictions, taxpayers have advanced funds at no interest to related corporations. Taxpayers pay tax on a theoretical amount of interest that they should have received. Some taxpayers had been successful in avoiding that income tax on fictional income by maintaining indebtedness that was not debt. Now for virtually all amounts owing, other than to a subsidiary for business activities, Canadian taxpayers will pay tax on the �deemed interest�.

General Anti-Avoidance Rule

Canada Customs and Revenue Agency has, under the General Anti-Avoidance Rule (GAAR), very broad discretion to adjust taxes payable. The tax authorities use the GAAR when they consider a taxpayer to have "misused or abused" the income tax legislation. GAAR cannot be applied when a taxpayer demonstrates that transactions were undertaken or arranged primarily for bona fide non-tax purposes or the transaction(s) would not result directly or indirectly in a misuse or abuse of the provisions of the Act as a whole.

If the authorities consider a transaction to be an avoidance transaction resulting in a tax benefit, the GAAR determination will deny the taxpayer benefit from the avoidance transaction. The term "tax benefit" is defined in the Tax Act to mean a reduction, avoidance or deferral of tax or other amounts payable or an increase in a refund of tax or other amount.

ADMINISTRATION

Foreign Property Holdings (Foreign Income Verification Rule)

Canadian resident individuals, including trusts and most corporations holding �specified foreign property� which cost more than $100,000 Cdn, are required to file Form T1135. Partnerships also are reporting entities, unless 90% or more of their income or loss for the particular fiscal period would be attributable to non-residents of Canada.

Unless defined otherwise, most property is Specified Foreign Property. Specified foreign property does not include:

� property used or held exclusively in the course of carrying on an active business;

� personal-use property (i.e., property used primarily for personal use and enjoyment, such as a vacation property used primarily as a personal residence);

� an interest in a U.S. Individual Retirement Account (IRA);

� shares of the capital stock, or indebtedness, of a non-resident trust that is a foreign affiliate;

� an interest in a non-resident trust that neither the taxpayer nor a person related to the taxpayer had to pay for in any way;

� an interest in a non-resident trust principally providing superannuation, pension, retirement or employee benefits primarily to non-resident beneficiaries, that does not pay income tax in the taxing jurisdiction where it is resident; or

� an interest in, or a right to acquire any of the above-noted excluded foreign property.

Loans and transfers to foreign trusts

Taxpayers that have transferred or loaned funds or property to a foreign-based trust at any time before the end of the trust�s taxation year have special reporting requirements. Such taxpayer must file Form T1141 by the filing due date for the taxpayer�s income tax return for the particular year that includes the end of the trust�s taxation year before which the transfer was made, or during which the non-resident trust was indebted to the taxpayer.

Distributions by and loans from foreign trusts

Beneficiaries of most non-resident trusts will also be required to file an information return for the year in which they receive a distribution from the trust. Recipients of funds or property from or persons indebted to, a foreign-based trust, must file Form T1142. The filing is due no later than the taxpayer�s income tax return for the particular taxation year during which any such distribution was received, or during which the taxpayer was indebted at any time to the foreign-based trust. Individuals are exempt from this obligation for their first year in Canada. [S.233.7]

In any given year, a trust may earn income, which it retains or distributes. The retained income becomes part of the capital of the trust. Individuals receiving distributions of income from non-resident trusts are responsible for reporting that income on their personal tax returns. Individuals receiving capital distributions need NOT pay tax on the amounts received from the trust. [104(13)]

For example, on March 31, 2000, an individual receives a distribution of funds from a foreign-based trust. The taxpayer individual is required to file Form T1142 by his or her filing due date for 2000, being either April 30, 2001 or June 15, 2001, if either the taxpayer individual or his or her spouse is self-employed in 2000.

Interests in foreign affiliates

Taxpayers who own shares of foreign affiliates are required to file an annual information return each year. For controlled foreign affiliates, Form T1134-B is applicable, while Form T1134-A is applicable for foreign affiliates that are not controlled foreign affiliates. These rules are extremely complex and professional advice is recommended.

Forms T1134-A and T1134-B are required to be filed on or before 15 months after the end of the taxation year in respect of which they are filed.

Reporting Periods

Taxpayers must compute and report taxable income annually.

Individuals with taxes payable, sole proprietors, partnerships of individuals and inter-vivos trusts are required to prepare and file income tax returns based on the calendar year. Corporations and testamentary trusts may choose any year-end. The only limitation is that the first year-end must be within 53 weeks of the date of incorporation, or death, respectively. Subsequent year-ends remain unchanged unless advance permission is received from Canada Customs and Revenue Agency.

Type of Taxpayer	Requirement to File	Normal Taxation Year end	FilingDeadline
Corporation	Absolute requirement.� All corporations must file	Elected	6 months after year-end
Individual	Any taxes payable	December 31	April 30 of next year
Deceased Persons	Any taxes payable		Later of 6 months after death and April 30 of next year
Estate	Any income	Elected	90 days after year-end
Inter-Vivos Trust	Any income	December 31	90 days after year-end
Partnership	Every Canadian partnership	December 31	March 31 of next year *
Non-Resident	Employed in Canada or carries on business in Canada	Depends on Entity	Same as comparable Canadian resident entity

*Administrative relief is available if there are less than 5 partners. However, if the Partnership reporting is not filed, CCRA can go back indefinitely and reassess taxes payable.

There are no provisions for filing extensions. Late filed returns may be subject to penalties, primarily based on taxes owing and unpaid at the filing date.

Filing Obligations

Taxpayers who do not meet the relevant reporting deadline are subject to significant financial costs. The magnitude of these costs is intended to encourage compliance with the self-assessing system. Taxpayers who do not comply:

v will be liable for penalties if the tax return is not filed before the deadline. Penalties are based on taxes unpaid at the deadline.

For the First offence, the penalties are:

v minimum penalty of 5% for late filing [S.162], and

v a supplemental penalty of 1% for every complete month (up to 12 months) that the return is late (i.e. it is possible to accumulate 17% of penalties).

For subsequent offences, the penalties are:

v 10% of the unpaid taxes, plus

v 2% of the unpaid tax per month, not exceeding 20 months of default, plus

v interest is due on outstanding income taxes, instalments of income taxes and penalties. The interest rate on those taxes compounds daily. The rate changes quarterly based on government�s cost of funds measured by Treasury Bill yield rates. (See table for prescribed rates), plus

v are liable for a penalty for late or unpaid instalments. The penalty is 50% of the amount that total interest payable exceeds interest on 25% of installments [S.163.1].

Payment of Taxes

Corporations make monthly instalments of taxes payable. Corporations may base instalments on either the prior year's taxes or the current year's expected taxes. If the tax payable at year-end exceeds the instalment payments, the excess must be paid on time to avoid incurring interest. Tax is payable within 3 months of the year-end for Canadian-controlled private corporations or within 2 months of the year-end for other corporations.

Most individuals with income not subject to withholding tax are required to make quarterly instalments on the 15th of March, June, September and December. Any income in excess of the instalments is due by the CCRA on April 30 of the following year.

Late or deficient instalments are subject to non-deductible interest charges, compounded daily. The interest rate charged by CCRA on underpaid taxes is 4% above the prescribed rate, which is set every quarter and based on Treasury Bill interest rates of the previous quarter. Interest paid to the CCRA on over instalments is 2% above the prescribed rates. Provinces set their own rates on taxes they collect.

When a taxpayer has not paid the full amount of his tax payable, Revenue Canada charges interest on the deficiency from the day on which payment should have been made until the date of payment. Taxpayers can receive interest on overpayments of taxes; however, the starting date for interest payable to individuals is usually 45 days after the filing deadline.

Assessments, Reassessments and Appeals

The Minister of National Revenue must make an initial assessment of taxes within a reasonable time, but the statutes do not define what is reasonable. In all cases where there is tax payable, the minister issues a dated Notice of Assessment. If there is no tax payable the minister issues a Notification of No Tax Payable. All taxpayers have 90 days from the date of the mailing of the Notice of Assessment to formally object. Individuals have the later of 90 days, from the date of the mailing of the Notice of Assessment and the filing deadline for the next year's return, whichever is later.

The Minister of National Revenue may reassess individuals and Canadian controlled corporations for up to 3 years after the mailing date of the original Notice of Assessment or Notification of Taxes Payable. The minister may assess non-Canadian controlled corporations for up to 4 years from the assessment date. These limitations apply to matters of interpretation, calculation etc. There are no limitations with respect to fraud or misrepresentation.

CANADIAN FEDERAL ESTATE AND GIFT TAXES

Canada currently has no estate or gift taxes. There are no Federal estate taxes payable on the transfer of wealth from one generation to the next. Certain provinces impose probate taxes on assets of the estate. For example, the provinces of Ontario and British Columbia impose probate taxes of about 1.5% of the probated estate.

The Canadian income tax system attempts to tax increases in wealth. For Canadian purposes, when capital property is gifted or bequeathed it is deemed disposed for proceeds equal to Fair Market Value. The resultant gain, if any, is subject to income tax payable by the donor or estate of the deceased. Thus, the Income Tax Act taxes these increases in wealth as a part of the regular income tax system. The beneficiaries are usually considered to have received the assets at the same tax value as the �proceeds� to the donor.

This system differs from an estate tax, as there is no tax on:

v cash or near cash assets, or

v the absolute value of most assets (i.e. only the increase in value is taxed since the asset was last subject to income tax is taxable).

NON-RESIDENTS � INCOME TAX CONSIDERATIONS

Real Estate

Canadian taxes non-residents on gains from certain Canadian properties. Some tax treaties reduce the scope of Canadian properties subject to income tax. Canadian real estate is virtually always subject to Canadian tax. Given that title to real estate cannot be transferred without action by a government office, the control of income tax on real estate is tightly controlled at the transfer of title stage.

Unless all income taxes are paid, a purchaser will NOT be able to obtain legal title to the property. To expedite transactions, non-residents planning to dispose of realestate andother property subject to Canadian tax, can obtain a �clearance certificate� from the Minister of National Revenue. The certificate, also provided to the prospective purchaser, verifies that the non-resident vendor has made arrangements for the payment of any income tax. Without this certificate, the purchaser may be required to remit a portion of the proceeds to the Receiver General (government).

Because of this control, CCRA need not exert effort to enforce compliance of the rental property rules for non-residents. Non-residents must pay 25% of gross rents as Canadian tax UNLESS they elect to file a Canadian return on the rental income and pay on the net income.� Owners have only 24 months to make this election and file the return. Consider an owner of rental property for many years who has not filed annual returns who now wishes to sell the property. This owner will NOT be entitled to a clearance certificate until payment for all arrears of taxes have been made. Tax arrears will be on the gross rent for all but the most recent 2 years!

The filing of the tax return does NOT reduce the obligation for tenants to withhold 25% of gross rents paid to the landlord. Landlords can obtain the right to have tenants reduce withholding taxes to a level reflecting net income if they file an annual election. This election must be filed before January 1 each year, or the acquisition date of a newly acquired property. The election is an undertaking to file an income tax return on a timely basis and requires a Canadian resident to co-elect. The Canadian will become liable for the amount by which withholding taxes have been reduced if the tax return has not been filed on time. (Form NR6)

Employing Canadians

To assist in the assessment and collection of taxes, any person paying a Canadian resident salary/wages in a calendar year must withhold a portion of the salaries and remit that to the government. In addition, such employers must also complete and provide appropriate information returns to the employee and to CCRA by the end of February of the following calendar year. Non-resident employers have the same obligation and must obtain a business number from CCRA to facilitate tracking of the withholdings and reporting.

Canadian treaties frequently exempt the wages if the total wages are less than a threshold level. Some treaties increase this threshold for selected types of individuals (e.g. artists and athletes). Individuals should consult their advisers about specific treaty exemptions.

Permanent Establishments

Non-residents are only responsible for Canadian tax on business income to the extent that the business is carried on in Canada. Most treaties restrict Canada�s right to tax business income of non-residents unless the non-residents carry on business income through a Permanent Establishment in Canada.

While there are some explicit characteristics of what is or what is not a Permanent Establishment, there are a number of subjective areas. The Canadian tax courts recently considered a case of a consultant in Canada over 2 calendar years including over 300 days in one of the two years.

In finding that the individual did NOT have a Permanent Establishment in Canada and was therefore not subject to Canadian income tax, the court considered:

� Actual use made of client�s premises,

� Legal right to exercise control over the premises and the

� Degree that the premises were �objectively identified� with the non-resident�s business.

The Federal Court of Appeal�s decision confirms that carrying on business by way of a fixed base or permanent establishment in Canada requires some degree of control by the non-resident service provider and some degree of identification with the non-resident service provider�s business. The duration of time in Canada is not relevant.

[Queen v Dudney 2000 F.T.R. 22892]

Individuals

The source of a taxpayer�s compensation is the country where the taxpayer performs services. This is true regardless of the country of residence or nationality of the employer, employee or the place of payment. Therefore, normally, non-residents performing services in Canada will be either an employee earning Canadian source employment income, or engaged in a trade or business. Such individuals usually must file Canadian income tax returns on this Canadian source income.

Filing Canadian Tax Returns

Any non-residents with capital gains on "taxable Canadian Property" must also file income tax returns. In addition, non-residents earning rental income are usually advised to elect to file a tax return so that they can pay Canadian tax only on the rental profits rather than on gross rental income.

Withholding of Tax

Canada imposes income taxes on the worldwide income of Canadian residents and generally on income derived from sources in Canada by non-residents of Canada. An individual who is a non-resident of Canada is subject to tax under two general classifications. The first classification imposes tax on taxable income earned in Canada, which includes income relating to employment performed in Canada, business carried on in Canada and capital gains from the disposition of taxable Canadian property. This income is taxed at the tax rates that apply to Canadian residents. The second classification imposes tax on certain other types of Canadian source income including income from investments (dividends, interest, rent, royalties and annuities). This income is subject to Canadian withholding tax, which is remitted to the Receiver General by the payer, who becomes liable for the tax whether or not it is withheld, on behalf of the non-resident.

Withholding tax issues relate to two Government concerns:

time value of money, and
security of collection.

A related concern is the cost-effectiveness of collection procedures.

The Government addresses these matters by requiring, where possible, that payers withhold an estimate of the payees' taxes. This approach is used in most circumstances where the recipient is not entitled to significant, or any, deductions. This approach is used not only for non-residents but also for employees.

The legislative withholding tax rate for most payments to non-residents is 25%. Most treaties lower the withholding amount on many types of income with the lowest (5%) withholding being on dividends paid to U.S. parent corporations.

OTHER REVENUE LAWS

Payroll Taxes

Health Levies

Currently Ontario, Quebec, Manitoba and Newfoundland impose a levy on employers to fund provincially-funded health insurance programmes. In Ontario, there is no tax on the first $ 400,000 of total wages and thereafter the rate is 1.95% of all salaries paid, with no upper limit (i.e. all of a $1,000,000 bonus is part of the Health Care Levy computation). The Quebec Health Services Fund tax is based on non-employment income such as business or property income, capital gains, etc. In Quebec, the maximum tax is $1,000 reached at $125,000 non-employment income.

Quebec has recently introduced changes to extend its tax base by including the payroll of employees in other provinces who provide services to Quebec companies that could otherwise have been provided by Quebec residents. This raises the possibility of double taxation when dealing with Quebec.

Canada Pension Plan

Both employees and those earning business income must make Contributions to the Canada Pension Plan (or in Quebec, the Quebec Pension Plan).

Employees contribute to this government-controlled pension and employers match the employees� contributions. The government links contributions to income levels and upwardly adjusts the maximum annually. Contributions in 2000 are at the rate of 3.9% of salary over $3,500 to a maximum of $37,600 per year. For employees the cost is approximately $1,330 per year, which is withheld at source from employees� pay cheques.

The employer�s portion is another $1,330. Self-employed individuals are responsible for both the employee�s and employer�s contributions, making the maximum contribution about $2,660. The contribution rates and total contributions are scheduled to increase annually until 2003 when the rates hit their scheduled peak. The combined contribution amounts are

scheduled to be approximately:

Year	Maximum
2001	�� $� 2,900
2002	�� $� 3,200
2003	�� $� 3,400

Employers claim a deduction in computing their taxable income. Individuals receive a tax-credit for premiums paid personally.

Individuals are entitled to receive their full pension benefits at age 65, but may elect to start receiving reduced benefits after age 60.

Non-resident employers who do not have a permanent establishment in Canada are not required to withhold CPP from employees. There is also relief available for employees who are covered by a Social Security Agreement (as are individuals from the United States). Employers of such individuals can obtain relief from their obligation to withhold CPP by providing to Revenue Canada a certificate of coverage proving the individual is covered by social security in the home state. This can be significant because while employees recover the CPP withheld in excess of requirements, employers do not recover their share of the excess contributions.

{Form CPT56}

Employment Insurance Plan

Employees must pay employment insurance (EI) premiums. These are deducted at source by the employer and remitted together with source withholdings of tax. The employee�s share ranges up to approximately $1,150 per year. Employers contribute 140% of amounts withheld from employees� pay. Employees� entitlement to receive benefits varies regionally, with stricter requirements in areas of higher employment.

Corporate employers need not pay EI in respect of shareholders who own more than 40% of the corporation.

Workplace Safety & Insurance Board

Each province has a Workplace Safety & Insurance Board (WSIB). The Ontario workers' compensation system is a no-fault system in which injured workers forego the right to sue their employer. In return, employers assume collective liability for the costs of workplace accidents and diseases. The WSIB provides compensation to workers who sustain injuries arising out of and in the course of employment, or who contract an occupational disease. The WSIB funds its operations from charges to employers and does not receive Government funding or other financial assistance.

Compensation includes payment for loss of wages and loss of enjoyment of life that may result from the injury or occupational disease. The WSIB provides future economic loss and/or non-economic loss benefits for permanent injuries, payment of health care expenses, medical and vocational rehabilitation services, retraining programs and survivor benefits in the case of a work-related fatality.

In Ontario for example, the maximum assessable earnings ceiling in 2000 is $59,300. The assessment rates vary by industry and are influenced by the claims made by workers in that category. Currently, sample assessment rates per $100 of salary are:

Financial and legal services�� $�� .21

Restaurants�� $�� 1.88

Construction (homes)�� $� 12.94

For all rate groups, the average 2000 premium is approximately $2.29 per $100.

Employers Withholding Obligations

There are three categories of employers for source deductions. You will be assessed stiff penalties and interest if you do not remit according to the timing requirements of your category. The penalty for being late the first time in a year may be 10% of the amount that should have been remitted plus an additional 1% per month.

Any subsequent lateness is subject to a 20% penalty plus an additional 2% per month.� Interest is charged not only on the late amount, but also on the penalty itself once the penalty has been assessed.� The interest rate charged by Revenue Canada fluctuates quarterly. (See Schedule)

TYPES OFREMITTER	TOTAL AMOUNT OF MONTHLY REMITTANCES	RENUMERATION PAID	DUE DATE
Regular	< $15,000	All monthly	15^th of the month following
Accelerated Remitter (Threshold 1)	*�� $15,000 & �� < $50,000	1st 15 days of the month 16th to end of month	25th day of same month 10th day of following month
Accelerated Remitter (Threshold 2)	*�� $50,000	1st - 7th 8th - 14th 15 - 21st 22 - end	3 days after the last day in the period

*�Based on the second preceding calendar year before the current calendar year (i.e. 1998 determines 2000). While all remitters are entitled to make payment through Canadian financial institutions or by mail, Threshold 2 employers must make payment through a Canadian financial institution. Any payments otherwise falling due on a Saturday, Sunday or holiday are due on the next business day.

Goods and Services Tax

The Goods and Services Tax (GST) is a value added tax applied to each stage of a products process at a rate of 7%. Taxes paid by registered businesses in most sectors of the economy are refundable. In effect, the end consumer, usually an individual or an unregistered business, will ultimately pay the tax. The tax applies to most products and services including goods imported from other countries. Goods and services which are exported are generally �zero rated� and, therefore, no GST is payable in respect of such sales, but the supplier gets a refund of any GST they have paid on their expenses. There is a third classification -- �Exempt�. Businesses providing exempt services do not charge GST on their sale, but unfortunately they are not entitled to recover the GST they pay on their expenditure. They are considered end-users. Financial institutions and grocery stores are common examples of exempt businesses.

Provincial Sales Taxes

All provinces except Alberta, Yukon and the Northwest Territories levy a consumption or sales tax on purchasers or importers of goods (generally tangible personal property) and specified services. The rate of tax varies by Province and within a Province some items may be exempt or subject to a higher levy. Some Provinces also impose special taxes on the resource sector. The taxes generally apply to both new and used goods. The provinces of New Brunswick, Nova Scotia and Newfoundland have recently �harmonized� their Provincial sales taxes with the GST.

Other Taxes

Many jurisdictions in Canada levy taxes that can include:

v property taxes on the value of both residential and commercial land and building improvement;

v business taxes levied by most municipalities; and

v land transfer taxes, which are assessed, on the exchange of real estate.

Schedule I - Average Annual Exchange Rates

Canada- U.S. Exchange Rates

Year	$1 U.S. =
1973	1.0002
1974	0.9779
1975	1.0172
1976	0.9860
1977	1.0635
1978	1.1407
1979	1.1714
1980	1.1692
1981	1.1989
1982	1.2337
1983	1.2324
1984	1.2951
1985	1.3655
1986	1.3895
1987	1.3260
1988	1.2307
1989	1.1840
1990	1.1668
1991	1.1457
1992	1.2087
1993	1.2901
1994	1.3659
1995	1.3726
1996	1.3636
1997	1.3843
1998	1.4831
1999	1.4858