Alexis Levine 2017-01-20 04:28:35
EQUIPMENT FINANCING IN CANADA can be deceptively familiar to U.S.–based cross-border equipment lessors and financiers. 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.
Tax Issues
Canadian withholding tax applies to payments of rent (subject to certain exceptions 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 whether 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 might have to Canada and the absence of any agency relationship between the financier and a Canadian entity.
“There are a number of traps for the unwary or uninitiated who engage in equipment financing in Canada.”
Currency Issues
Canadian customers will typically generate revenue in Canadian dollars; however, many cross-border financiers 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 denominated in Canadian dollars) or by the Canadian customer (where the transaction 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 risk to the Canadian customer. However, for relatively unsophisticated customers, 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.
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 transaction in which the financier does not have a Canadian affiliate, holding title as lessor is unworkable for the tax reasons 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 number 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 exercising distress rights or certain pension creditors. These creditors might otherwise enjoy super-priority status ahead of a secured financier; title either defeats or weakens their claim.
On the other hand, holding title in Canada can carry some risks. In particular, for motor vehicles there is the risk of being held vicariously liable for damage caused by the end-user of the leased equipment. The analysis of whether a vehicle lessor could be vicariously liable is subject to complex and sometimes unclear rules that vary by jurisdiction and will depend on several factors, including whether the transaction is structured as a conditional sale or with a purchase option and whether the damage in question is property damage or bodily injury. Statutory caps on liability will also apply in certain jurisdictions for motor vehicle matters.
The takeaway is that there are some risks to holding title to vehicles that may outweigh the commercial advantages. These risks can oft en be off set with insurance and will, of course, depend on the nature of the equipment in question. There will also be tax implications to holding title, which will depend on the circumstances of the financier.
A final point on motor vehicle title: Canadian jurisdictions’ motor vehicle title registries are not relevant for security-taking purposes, which can considerably simplify the process of taking security over vehicles. However, registration of a serial number when taking security over vehicles, trailers or watercraft is still important in most Canadian jurisdictions.
Miscellaneous Issues
Canada’s personal property security regimes are similar to Article 9 of the UCC, as noted, but there are a number of important differences, which are well documented elsewhere and so will not be repeated here.
Canadian jurisdictions also have anti-assignment overrides (similar to those contained in Article 9 of the UCC, which render a prohibition on assignment of a contract to be ineffective against the assignee). However, in Canada such overrides only apply to the assignment of accounts and chattel paper and not to other contract rights. They also do not apply to assignments of partial interests, and they allow the obligor under the account or chattel paper to claim damages from the assignor for any actual loss or damage caused by a breach of the anti-assignment clause (which can raise credit issues).
Finally, for financiers looking to sell or syndicate their paper, Canadian securitizations benefit from fairly clear Canadian “true sale” and recharacterization rules that allow for fairly confident assessments of whether a structured finance transaction is a “true sale” under Canadian law. Canadian securitizations will of course be subject to a number of structural and tax considerations.
Alexis Levine is Partner, Blake, Cassels & Graydon LLP (Toronto).
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