LEASING LAW By Alexis Levine Equipment Financing in Canada: A Primer E ers. Much of the Canadian regime is very similar to the U.S. approach, owing to similar market practice, and in particular because all Canadian provinces and territories other than Quebec have adopted a Personal Property Security Act that is largely based on the 1972 version of Article 9 of the Uniform Commercial Code . However, there are a number of traps for the unwary or uninitiated who engage in equipment financing in Canada. A nonexhaustive list of issues is summarized below. In this article, equipment lessors and lenders taking security against equipment are referred to as “financiers” for ease of reference. might have to Canada and the absence of any agency relationship between the financier and a Canadian entity. risk to the Canadian customer. How-ever, for relatively unsophisticated cus-tomers, these risks can be difficult to address, and the financier is typically in a better position to manage them with currency hedges and reserves. It is also important to remember that Canadian courts will only award judgments in Canadian currency. Accordingly, a currency indemnity should be added to any cross-border financing documentation. QUIPMENT FINANCING IN CANADA can be deceptively familiar to U.S.–based cross-border equipment lessors and financi-Tax Issues Canadian withholding tax applies to payments of rent (subject to certain ex-ceptions for aircraft leases and rolling stock) and payments to nonresidents for services. Accordingly, holding title as a cross-border lessor of equipment is typically avoided. Financiers will also have to consider whether they will be subject to income tax in Canada. This can be a complex question, but the short test is wheth-er the foreign person is “carrying on business” in Canada. Merely holding Canadian debt secured by equipment should not give rise to such a liability, but a complete analysis will depend on any other connections the financier Currency Issues Canadian customers will typically generate revenue in Canadian dollars; however, many cross-border financi-ers will incur their own costs in U.S. dollars. The result is an exposure to currency risk either by the financier (where the transaction is denomi-nated in Canadian dollars) or by the Canadian customer (where the trans-action is denominated in U.S. dollars). The temptation will often be for a cross-border financier to denominate the lease in U.S. dollars and leave the The Title Question The question of whether to hold title to equipment in Canada is a complex one that involves several commercial factors. For a pure cross-border trans-action in which the financier does not have a Canadian affiliate, holding title as lessor is unworkable for the tax rea-sons noted previously. There are some additional considerations about title to keep in mind for financiers for whom tax issues do not preclude holding title. On the one hand, there are a num-ber of advantages to holding title in Canada. In particular, a financier with title to equipment (rather than a secured lender) may defeat, or at least have a stronger claim against, certain kinds of creditors of a debtor, such as a governmental authority with a tax lien or deemed trust, banks holding Bank Act security, unpaid landlords exercis-ing distress rights or certain pension creditors. These creditors might other-wise enjoy super-priority status ahead of a secured financier; title either de-feats or weakens their claim. On the other hand, holding title in Canada can carry some risks. In par-“There are a number of traps for the unwary or uninitiated who engage in equipment financing in Canada.” 44 JANUARY/FEBRUARY 2017 EQUIPMENT LEASING & FINANCE MAGAZINE JELICAVIDENOVIC/ SHUUTERSTOCK