Franchisors and parent companies supplying goods for sale in Canada should begin to evaluate and address the ethical standards of their supply chains. Bill S-211, An Act to enact the Fighting Against Forced Labour and Child Labour in Supply Chains Act and to amend the Customs Tariff (the “Act”) will impose annual reporting obligations on Canadian businesses and their foreign parent companies to prove that they are preventing and reducing the risk of forced or child labour from being used at any step in their supply chain. The Act is expected to come into force on January 1^st, 2024.

Brief Overview of the Act

This legislation applies to both private entities and government institutions. Those subject to its provisions will be obligated to provide annual reports to the Minister of Public Safety and Emergency Preparedness, due on May 31^st each year, commencing in 2024. Of particular note, Section 11(3) specifies the mandatory contents of these reports:

• The entity’s structure, activities and supply chains;
• Its policies and due diligence processes in relation to forced and child labour;
• The parts of its business and supply chains that carry a risk of forced or child labour being used and the steps it has taken to assess and manage that risk;
• Any measures taken to remediate any forced or child labour;
• Any measures taken to remediate the loss of income to the most vulnerable families that result from its measures taken to eliminate the use of forced or child labour;
• The training provided to employees on forced and child labour; and,
• How the entity assesses its effectiveness in ensuring that forced and child labour are not being used in its business and supply chains.

Primary Aims of the Act

The overarching objective of the Act is to prevent goods that have been produced in connection with forced or child labour from entering the Canadian marketplace. The Act will impose the following measures in order to achieve this objective:

• Supply Chain Transparency. The reporting obligations require companies to disclose information about their supply chains, including the measures they have taken to ensure there is no forced or child labour present at any point.
• Due Diligence. Companies whose goods are sold in Canada will now have a legislated responsibility to mitigate any risks of human rights abuses within their supply chains. Documenting this due diligence process is of utmost importance.
• Public Reporting. The Act strives to provide Canadian consumers with an opportunity to make educated purchases that align with their ethical standards. Therefore, the reporting obligations require that the reports be published on a registry on the Public Safety Canada website, as well as in a prominent location on the reporting entity’s website.
• Penalties for Non-Compliance. Failure to comply with the required ethical standards may result in being found guilty of an offence punishable by summary conviction, as well as a fine of up to $250,000. This liability can also be extended to the Directors, Officers and agents of the company.

Impact on Subsidiaries and Franchise Systems Doing Business in Canada

Many franchisors oblige their Canadian franchisees to source products from the franchisor or designated suppliers. Similarly, most parent companies directly supply their Canadian subsidiary retailers with the goods they are to sell. As a result, such franchisors and parent companies that meet the threshold of $40 million in revenue, $20 million in assets or the employment of an average of 250 employees, are required to ensure that their supply chain has not violated the Act by employing prohibited persons. In light of the Act’s enforcement, these processes may require significant restructuring, impacting not only Canadian incorporated companies but also entities exercising control over Canadian companies.[1]

Here’s how the Act will affect franchise systems and retail chains that operate in Canada: :

• Compliance Burden. Companies that are deemed to control Canadian companies will be captured by the Act. There is no question that a parent-subsidiary relationship will be captured by this and for the purposes of the Act, franchisors that have mandatory supplier requirements in their franchise agreements will also likely be captured. Parent companies and franchisors both must ensure compliance prior to the first report in May 2024. The Act allows any controlling entity to submit a joint report with the Canadian company.

• Brand Reputation. The public reporting requirement will result in the public learning about a business system’s supply chain, which parent companies and franchisors consider proprietary and confidential. It will be important to keep this in mind when drafting the reports, to retain as much control over the franchise system’s brand perception as possible.

• Competitive Advantage. Many systems will find that it is difficult to comply with the Act without drastically changing their product or the price at which the product is sold. Striking a balance between offering ethically sourced products, while maintaining the product’s current price and quality will be attractive to consumers, and will be a new factor that sets brands apart.
• Global Alignment. Franchise systems and retail chains that currently operate in countries where similar legislation is already in place, as described in the following section, will find that they can adapt the Canadian arm of their business to align with those strategies. This will result in a more globally uniform strategy.

Following International Trends

At the forefront, the Act is part of a broader global trend where countries are implementing legislation to combat modern slavery, human trafficking, and unethical labour practices in their supply chains. In doing so, Canada is joining the United Kingdom (UK), Australia, and the European Union (EU), which have already enacted or proposed similar measures. Franchise systems operating in any of these regions should already have processes in place that allow for compliance with ethical sourcing standards.

In 2015, the UK also enacted legislation entitled the UK Modern Slavery Act, to combat modern slavery in supply chains. The legislation was accompanied by a Guide entitled Transparency in Supply Chains: a practical guide. Given the absence of regulations at this time as to how the Act will apply to corporations doing business in Canada, the UK Guide can provide valuable insight.  Its appendices include examples on how to structure the reports, what should be included in the reports and the changes that should be made to internal operations to ensure due diligence.

The new Canadian legislation will broaden the scope of some existing regulations implemented in Europe. The Act introduces a stricter applicability threshold than legislation enacted in certain European countries, as it applies to companies doing business in Canada. This heightened criterion should warrant particular attention from smaller enterprises based in countries such as France and Germany.

As of January 2024, the German legislation exclusively pertains to companies with a workforce exceeding 1,000 employees in Germany. Similarly, the French legislation extends its reach to companies with more than 5,000 employees in France or 10,000 employees globally. For French and German companies falling below these employee thresholds but maintaining a presence in Canada, a comprehensive assessment of their supply chains is imperative.

In addition to the Canadian Act, the EU has proposed a regulation with the potential to impose the same applicability threshold of 250 employees, entitled “Regulation of the European Parliament and of the Council on prohibiting products made with forced labour on the Union market”. In October 2023, a joint report on the proposed regulation between the Committee on the Internal Market and Consumer Protection (IMCO) and the Committee on the International Trade (INTA) was confirmed in the European Parliament as their position in the November trilogue negotiations. If adopted, the regulation will halt all import and export of goods manufactured through forced labour at the EU’s borders. The regulation is currently awaiting the parliament’s position in the first reading and may not be in force for a few years, but given their stringent similarities, adaptation to the Canadian Act can result in advanced preparedness.

Preparing for Compliance

Business systems have a range of strategic measures to choose from to proactively prepare for the impending reporting obligations, which are set to become due in May 2024. These actions will empower them to navigate the regulatory landscape effectively:

• Supply Chain Review. Conduct a review of all supply chains and invest in due diligence procedures. This entails extending the scrutiny beyond immediate suppliers and delving deeper into the supply chain hierarchy to address potential issues. It will be important to be able to prove these steps have been taken through documentation.
• Collaboration with Stakeholders. Where appropriate, work with a local non-governmental organization or any other relevant stakeholder to establish effective strategies for addressing and rectifying any instances of forced labour. Genuine efforts to eradicate human rights violations within the supply chain will not only enhance ethical compliance but also demonstrate a commitment to responsible business practices.
• Supplier Contract Termination. Where it is not possible to directly address a human rights violation, explore how to terminate the supplier contract as soon as possible.
• Integration of Ethical Business Practices. Consider integrating ethical business operations into the brand’s image sooner rather than later. This proactive approach aligns the brand with evolving consumer preferences and demonstrates a commitment to responsible and sustainable operations.
• Franchise Agreement Review. Conduct a review of franchise agreements with Canadian franchisees to adjust any supplier provisions accordingly. Limiting the level of control over Canadian franchisee’s supply chain may assist in alleviating liability, should compliance become an issue.
• Use existing resources. It is important to note that tools currently exist to help socially-conscious consumers make informed purchasing decisions. As an example, KnowTheChain.com offers benchmarks and assessments evaluating and scoring companies on their efforts to address and combat forced labour. By following the structure of these reports, your company may gain a better understanding of what forced and child labour look like in today’s world.
• Starting early. By taking action on the above in advance of enactment, issues can be addressed earlier and more notice can be provided to third parties, if need be. This will also allow for further research to be conducted on entering agreements with suppliers who comply with the Act.

Bill S-211 represents a significant step towards greater transparency and ethical sourcing within supply chains in Canada. While it imposes new obligations on companies selling imported goods, it also offers the opportunity for businesses to demonstrate their commitment to socially responsible business practices. However, the consequences of non-compliance are alarming, not only from a legal standpoint, but also in terms of business impact.

For large franchisors with foreign suppliers, especially from high-risk countries that are well known for using child labour, such as Brazil, China, Vietnam and others, the legislation will require a significant overhaul of their specific supply chains in order to ensure compliance and that the franchisor has robust policies to demonstrate as such. Maintaining transparency within franchisor-franchisee relationships will also be crucial, as franchisees will now have an additional business obligation starting in May 2024.

In the realm of large luxury brands collaborating with foreign manufacturers, there is a growing consumer concern for ethically produced goods both in Canada and across Europe. As reporting obligations loom, there is a potential revelation that some luxury brands employ similar sourcing methods as those associated with the production of “fast fashion” items. The ramifications of such exposure pose a significant threat to brand equity, erode customer trust, and diminish the overall value of a luxury brand. It is conducive for these brands to proactively address and rectify any indications of unethical sourcing well in advance of impending reporting obligations to safeguard their reputation and maintain the trust of their increasingly discerning clientele.

How We Can Help

At Sotos LLP, we understand the importance of adhering to strict legislation and can provide you with tailored solutions for successful compliance. As franchising experts, we can help you navigate the nuanced issues your system may face, while preserving your brand reputation and long-term business goals. Although these upcoming reporting obligations seem daunting, we can use them as a tool for enhancing your supply chain strategy with efficiency.

John Sotos, Sotos LLP

John Sotos is the founding partner of Sotos LLP and a dean of the franchising, licensing and distribution bar. John has been recognized by Chambers Canada, Canadian Legal LEXPERT Directory, Who’s Who Legal, and Best Lawyers in Canada as a leading Canadian franchise law practitioner. John can be reached directly at 416.977.9806 or jsotos@sotos.ca if you would like to discuss this or any other topic relating to the operation of your business.

[1] Act at section 9: This Part applies to any entity

• • (a) producing, selling or distributing goods in Canada or elsewhere;
  • (b) importing into Canada goods produced outside Canada; or
  • (c) controlling an entity engaged in any activity described in paragraph (a) or (b).

The post Conscious Compliance: The Role of Foreign Corporations in Canada’s Fight Against Modern Slavery appeared first on Sotos LLP.

• Effective January 22, 2024, every privately held corporation registered under the CBCA must prepare and maintain a register of individuals with significant control over the corporation (“ISC Register”) and file that information with Corporations Canada. Federal private corporations should begin to review existing corporate records and procedures to prepare for the new information reporting requirements.

• Effective January 1, 2023, every privately held corporation registered under the OBCA must prepare and maintain an ISC Register. Ontario private corporations should begin to review existing corporate records and procedures to prepare for the new information reporting requirements.

• Effective October 19, 2021, Ontario-registered corporations must file their mandatory annual returns using the Ontario Business Registry (“OBR”). They can no longer file their annual returns through the Canada Revenue Agency using their corporate accountant.

1. Meeting the New Individuals with Significant Control Disclosure Requirements

• Registered shareholdings;
• Beneficial ownership;
• Direct or indirect control over shares;
• Direct or indirect influence that, if exercised, would result in control-in-fact of the corporation; and
• Interests or rights prescribed by regulations under the CBCA or OBCA, as applicable.

1. The name and date of birth of each individual with significant control;
2. The country (or countries) where the individual with significant control of the corporation is considered a resident for income tax purposes;
3. The address for service of each individual with significant control of the corporation;
   1. In the context of federal corporations, due to proposed legislation under Bill C-42 that would make some personal information from the register public, a preferred address for service should be provided. If no address for service is provided, Corporate Canada may make the individual’s residential address public in its place.
4. The day on which each individual became or ceased to be an individual with significant control;
5. A description of how each individual qualifies as an individual with significant control including, as applicable, a description of their interests and rights in respect of the corporation’s shares; and
6. A description of the steps that the corporation has taken during its financial year to ensure that:
   1. It has identified all individuals with significant control over the corporation; and
   2. The information in the register is accurate, complete, and current.

2. Meeting the New Annual Filing Requirements

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The submission highlights the urgent need for the modernization of Canada’s competition laws to bring it in line with other developed nations and safeguard the integrity of the market and consumer interests. It offers valuable insights into the ongoing discussions on the future of competition law in Canada, emphasizing the importance of private enforcement and compensation for victims of anticompetitive conduct.

The post Charting the Future of Competition Policy in Canada appeared first on Sotos LLP.

What is Greenwashing?

Greenwashing is when a company promotes its products or services as being environmentally conscious for marketing purposes, while in practice they are not actually taking any notable sustainability efforts.[2] It is essentially a situation where an organization spends more time and money on marketing itself as environmentally friendly than on actually minimizing its environmental impact.  It is a deceitful marketing gimmick which misleads consumers who prefer to buy goods and services from environmentally conscious brands. This issue of greenwashing is quickly becoming a priority for enforcement agencies, notably Canada’s Competition Bureau. (“Bureau”)

Greenwashing is problematic not only because it is ethically wrong and illegal but because it has created a situation where many consumers do not actually believe companies when they make claims about their sustainability practices.  This has created a world where companies big and small are afraid to tell society what they are doing to combat environmental issues for the fear people will say their actions are not enough, or people just will not believe them.

Why does Greenwashing occur?

Greenwashing can occur for a variety of reasons. One of these reasons stems from the fact that many CEOs and Corporate Boards are not as engaged with sustainability strategies as they should be.  While 90 percent of corporate executives think sustainability is important, only 60 percent of companies have a sustainability strategy.[3]  Fewer still have anyone in a leadership role responsible for this activity.  Often, companies adopt the sustainability bandwagon but do not support their marketing with leadership and budgets.

How is Greenwashing Challenged?

Aside from Consumer and Competitor activities, greenwashing has become an increased priority for enforcement agencies in Canada, notably the Bureau.  One of the very few areas where the Bureau has been effective has been in its pursuit of misleading advertising claims by investigating and prosecuting deceptive marketing practices, to ensure consumers receive truthful information allowing them to make informed buying decisions.[4]  The Competition Act prohibits businesses from making a materially false/misleading representation to the public in order to promote the supply or use of a product/service or a business interest.  In assessing whether a representation is deemed to be “material,” the Bureau looks to see if the representation could influence consumer behaviour, such as influencing them to buy or use the advertised products or services.[5]

The Bureau has sent a clear message to the business community that it has a significant role to play in Canada’s transition to a greener economy and in achieving growth goals, and that greenwashing is a high enforcement priority.  As a result, while the Bureau may not have the resources to deal with every potentially offside advertisement, businesses can expect to see increased scrutiny and higher risks in potentially misleading claims.

Past Examples of Bureau Greenwashing Enforcement

Keurig Canada:

In 2019, Ecojustice, Canada’s largest environmental law charity, applied to the Bureau triggering an inquiry regarding claims made by Keurig Canada (“Keurig”) that its coffee pods are recyclable.  Keurig had just modified their single use coffee pods to be made from a recyclable plastic, a modification that presumably would have involved significant cost increases regarding their technological and manufacturing processes.  To market this positive performance change, Keurig promotes via its website, social media, and on its packaging that their single-use coffee pods were recyclable, when consumers followed the instructions to move the metallic lid and empty the pod.[6]

The Bureau investigated these claims and determined Keurig’s assertions regarding the recyclability of its single-use coffee pods were false or misleading in municipalities that did not accept them for recycling.  The Bureau found that, outside the provinces of British Columbia and Quebec, K-Cup pods are currently not widely accepted in municipal recycling programs.[7] In other words, the Bureau found that these claims were false or misleading because they claimed to have more environmental truth benefits than they had.  The Bureau also concluded that Keurig’s claims about the steps involved to prepare the pods for recycling are false or misleading in certain municipalities. Keurig’s claims gave the impression that consumers can prepare the pods for recycling by simply peeling the lid off and emptying out the coffee grounds, but some local recycling programs require additional steps to recycle the pods.  Keurig voluntarily settled this claim for $3 million. [8] Additionally, at least one class action has been commenced against Keurig, with respect to its K-Cup or Keurig Coffee machines since Keurig began making these false misrepresentations on April 15, 2016.[9]

Royal Bank of Canada:

In October 2022, the Bureau decided to investigate charges of misleading advertising against the Royal Bank of Canada (“RBC”).  The claim accuses RBC of touting its commitments to climate action while continuing to finance fossil fuel development.  It is an inquiry by the Bureau “seeking to determine the facts relating to allegations that RBC has contravened the Competition Act by making false or misleading environmental representations.[10]” The inquiry and investigation by the Bureau are still underway.

Other Sustainability Legislation:

The Consumer Packing and Labelling Act contains prohibitions against making false or misleading representations.[11] The Trademark Act carries a prohibition against making materially false and misleading statements about the character, quality, quantity, composition, origin, production or performance of goods and services.[12] The Canadian Advertising Standards Code states that Advertisements must not contain inaccurate, deceptive, or otherwise misleading claims, statements, illustrations or representations.  All representations must be supported by competent and reliable evidence.[13]

Key Takeaways:

Companies, including franchisors and franchisees should not refrain from enhancing their products and services that are consistent with sustainability.  In doing so, however, they must exercise caution in the scope and scale of their marketing activities.  Businesses making environmental claims should avoid bold, broad statements, and instead ensure they make claims which are specific and accurate. The following best practices should be followed, as highlighted by the Bureau.[14]

• Make sure your claims are truthful and are not misleading;
• Make sure they are specific claims that are substantiated and verifiable;
• Make sure they are not claims that either result in a misrepresentation, or an extreme exaggeration of the environmental benefits of your product; and
• Do not imply your product is endorsed by a third-party environmental organization if it is not.

At Sotos LLP, we advise franchisors and franchisees on all aspects of their business including their sustainability strategies. We would be happy to provide tailored advice on the applicable regulations and codes in place in the jurisdictions you are operating in and how they apply to your products or services.

John Sotos, Sotos LLP

John Sotos is the founding partner of Sotos LLP and a dean of the franchising, licensing and distribution bar. John has been recognized by Chambers Canada, Canadian Legal LEXPERT Directory, Who’s Who Legal, and Best Lawyers in Canada as a leading Canadian franchise law practitioner. John can be reached directly at 416.977.9806 or jsotos@sotos.ca if you would like to discuss this or any other topic relating to the operation of your business.

Don Houston, Sotos LLP

Don is one of our articling students for the 2022-2023 term.

[1] “Green Industry Analysis 2020- Costs & Trends” Franchise Help 2020, Online: https://www.franchisehelp.com/industry-reports/green-industry-analysis-2020-cost-trends/
[2] Carlyann Edwards, “What is Greenwashing” Business News Daily, August 5^th 2022. Online: https://www.businessnewsdaily.com/10946-greenwashing.html
[3]      Talal Rafi, “Why Sustainability is Crucial for Corporate Strategy,” Race to Resilience. June 16^th, 2022. Online: https://climatechampions.unfccc.int/why-sustainability-is-crucial-for-corporate-strategy/#:~:text=90%25%20of%20executives%20believe%20sustainability,consumer%20demand%2C%20and%20regulatory%20requirements.
[4]     “Misleading Representations and Deceptive Marketing Practices” Government of Canada. Online: https://ised-isde.canada.ca/site/competition-bureau-canada/en/deceptive-marketing-practices/types-deceptive-marketing-practices/misleading-representations-and-deceptive-marketing-practices
[5] “False or Misleading Representations” Government of Canada. Online: https://ised-isde.canada.ca/site/competition-bureau-canada/en/deceptive-marketing-practices/types-deceptive-marketing-practices/false-or-misleading-representations
[6] Mia Rabson, “Keurig to pay $3 million fine for false, misleading claims on recycling of its K-CUPSs” Toronto Star. January 6^th, 2022. Online: https://www.thestar.com/politics/2022/01/06/keurig-to-pay-3-million-fine-for-false-misleading-claims-on-recycling-of-its-k-cups.html
[7] “Keurig to pay $3 million penalty to settle Competition Bureau’s concerns over coffee pod recycling claims” Government of Canada. January, 6^th 2022. Online: https://www.canada.ca/en/competition-bureau/news/2022/01/keurig-canada-to-pay-3-million-penalty-to-settle-competition-bureaus-concerns-over-coffee-pod-recycling-claims.html
[8] Ibid
[9] “Keurig K- Cups” Sotos Class Actions. Online: https://www.sotosclassactions.com/cases/keurig-k-cups/
[10] James Bradshaw, “Competition Bureau launches inquiry into RBC’s green advertising” The Globe and Mail. October 11^th, 2022. Online: https://www.theglobeandmail.com/business/article-rbc-green-advertising-competition-bureau/
[11] Consumer Packaging and Labelling Act, R.S.C., 1985, c. C-38
[12] Trademarks Act, R.S.C., 1985, C. T-13
[13] The Canadian Code of Advertising Standards, Ad Standards. 1963. Online: https://adstandards.ca/code/the-code-online/
[14] “Environmental Claims and Greenwashing” Government of Canada. Online: https://ised-isde.canada.ca/site/competition-bureau-canada/en/how-we-foster-competition/education-and-outreach/publications/environmental-claims-and-greenwashing

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You can read our submission here.

In brief, we are proposing a private right of action to courts for abuse of dominance. This has already worked in the US and the EU. It’s being used in the UK, Australia, New Zealand, South Korea, Argentina, and Saudi Arabia. By adding three words to the Competition Act, Minister Champagne can increase innovation, protect small towns, and allow billions of dollars in compensation to be recovered by consumers who have been wronged. We urge Minister Champagne to adopt these changes.

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1. New Financing Amounts

The maximum loan amount for a borrower has been increased from $1 to $1.15 million,  which includes:

• $1 million for term loans of which a maximum of $500,000 is comprised of (1) equipment and leasehold improvements of up to $350,000; and (2) $150,000 for intangible assets and working capital costs.

and

• $150,000 for lines of credit for working capital costs. This would be over and above the $150,000 that can be used for working capital costs under the term loan product (above).

2. Term Loans

The amendments include two new financing classes – intangible assets and working capital costs can now be financed as term loans.  Intangible assets are defined as non-monetary assets without physical substance that can be sold, transferred, licensed, rented or exchanged or that arise from a contractual or other legal right.  This includes franchise fees, goodwill, incorporation costs and permits and licenses.

Maximum Loan Term

All term loans used to finance real property, leasehold improvements, equipment and intangible assets and working capital costs can now be made for a maximum of 15 years.  Equipment and leasehold improvement loans that are already registered (or disbursed and not registered) can be amended to the new 15 year term.

Appraisal of Eligible Expenditures

The time period to finance expenditures or commitments for any term loan has been increased from 180 days to 365 days prior to the date the term loan is approved.  If the lender is required to obtain an appraisal to finance a term loan, the date that the appraisal is made has been changed from 180 days before the term loan is approved to 365 days before the term loan is disbursed.

Security

For real property and equipment term loans, lenders must continue to take security in the assets financed.  Lenders must take security in any assets of the small business for the value of the loan for the following items:  leasehold improvement, computer software, website, intangible assets and working capital costs.

3. Line of Credit

Eligible businesses can now access a line of credit to be used for working capital costs (costs necessary to cover the day-to-day operating expenses of the business). Examples include: inventory, expenses related to the creation and development of software and websites, printed materials, professional fees (e.g. legal, accounting, appraisal), research and development costs, payroll and rent.  The line of credit may be used to pay for ongoing expenditures or commitments that arise or were invoiced no more than 365 days prior to the date that the line of credit was authorized. Lenders will be required to take security in any assets of the small business for the authorized amount of the line of credit.

Term and Renewal

The maximum term for the line of credit is 5 years beginning on the day after the line of credit is opened by the lender.  Prior to the end of the 5 year term, borrowers will have the following 3 options:

1. Re-register the line of credit for a new period of 5 years. In this case, a new registration form and a registration fee of 2% on the renewed authorized line of credit amount must be submitted to the CSBFP.
2. Borrowers can also convert the line of credit amount to a CSBFP term loan with a maximum 10-year CSBFP coverage. Any such term loan would need to meet the following conditions:

• • The interest rate must not be greater than the prime rate plus 5%;
  • The terms of the loan conversion must be set out in a document signed by the lender and the borrower and that provides a minimum of one principal and interest payment each year, with the first payment scheduled to be made within one year of the date of the conversion; and
  • The borrower and lender must enter into an agreement to repay the balance of the line of credit with a conventional loan.

3. The borrower and lender may enter into an agreement to repay the balance of the line of credit with a conventional loan.

Claim Process Documents and CSBFP Liability

Lenders must submit an attestation form signed by the borrower at the time the line of credit is registered stating that (1) the line of credit is to be used to pay for working capital costs of the day-to-day operational expenses of the small business, and (2) the expenses paid through the line of credit did not arise (and were not invoiced) more than 365 days before the line of credit was authorized.

The CSBFP’s liability for lines of credit for a lender is limited to 15% of the total amount of the lines of credit authorized and registered by that lender, separate and apart from a lender’s liability calculation for its registered term loans.

.   .   .

As noted above, one of the most significant changes for franchisees and franchisors is that franchise fees can now be financed under the CSBFP.  Prior to these changes, franchise fees were ineligible for financing under the program and had to be paid for out-of-pocket or through other credit products offered by financial institutions.

At Sotos LLP, we advise franchisors on all aspects of their franchise sales process including how to inform prospective franchisees on the availability of financing. We also help franchisors establish lending programs offered by preferred financial institutions to their prospective franchisees. We also assist prospective franchisees in their purchases of franchises. We would be happy to assist to provide tailored advice relating to the changes created to this important financing program. Please contact Anna Thompson-Amadei (athompson-amadei@sotos.ca) or John Yiokaris (jyiokaris@sotos.ca).

[1] https://ised-isde.canada.ca/site/canada-small-business-financing-program/en/find-loan-your-small-business/about-program/helping-small-businesses-get-loans
[2] https://ised-isde.canada.ca/site/canada-small-business-financing-program/en/documentation-centre/bulletins/2022-changes-canada-small-business-financing-program

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Overview 

Mainly due to the increase in work-from-home and remote communications, electronic signatures (“e-signatures”) have been adopted by both provincial and federal legislation to be legally binding in Canada. Save for a few exceptions outlined below, you can feel free to sign a document electronically without compromising its legal validity.

This article outlines the regulation of e-signatures provincially, federally, and in reaction to the COVID-19 pandemic.

Provincial Legislation

Almost all provinces have enacted legislation that follows the Uniform Electronic Commerce Act, which acts as a legal framework to create a uniform system across the country in relation to the digitization of commerce.

Ontario’s legislation, the Electronic Commerce Act (“ECA”) directs that by default, e-signatures are legally binding. The ECA explicitly and clearly sets out the validity of e-signatures. Specifically, it states: “a legal requirement that a document be signed is satisfied by an electronic signature.”[1]. In further detail, it also directs that if a contract does not mention anything about requiring an original or “wet” signature (pen-on-paper signature), using an e-signature is perfectly acceptable. However, if you do not want to accept the other party’s e-signature, you have the right to include language in the contract that only wet signatures will be binding.

What qualifies as an e-signature under the ECA?

The guidelines around what qualifies as an e-signature under the ECA are broad and encompassing. The ECA is encouraging of the use of e-signatures and accepts them in many forms. As long as they fit within the Act’s definition: “electronic information that a person creates in order to sign a document…that is in, attached to or associated with the document”, they will be considered an e-signature for the purposes of the ECA.

What are the exceptions?

The ECA sets out several exceptions to the default rule that e-signatures are legally binding. Firstly, as stated above, a party may choose not to accept an e-signature by stating so in the contract. The ECA states that there is nothing in the Act that requires a person to consent to or abide by the use of electronic information and documents[2]. It also includes the provision that electronic information is acceptable unless the parties agree otherwise[3].

Further, the ECA also lists explicit documents to which the Act does not apply. These documents may still accept e-signatures as binding, but they are governed by their relevant statutes:

1. Wills and codicils.
2. Trusts created by wills or codicils.
3. Powers of attorney, to the extent that they are in respect of an individual’s financial affairs or personal care.
4. Negotiable instruments.
5. Documents that are prescribed or belong to a prescribed class.
6. Documents of title, except for contracts for carriage of goods.

Federal Legislation 

The Personal Information Protection and Electronic Documents Act (“PIPEDA”) sets the standards for electronic documents and signatures at the federal level.  In section 26(2)(b), the Governor in Council is given the right to remove PIPEDA’s legal authority wherever provincial legislation exists that covers substantially the same issues.  For this reason, the ECA and other provincial legislation govern the majority of the law around using e-signatures.

When does PIPEDA apply?

In relation to e-signatures, PIPEDA is brief and specific. As listed below, several sections of the Act explicitly state the types of documents it applies to. At part 2 of the Act, it sets out a narrow range of documents that PIPEDA as a whole applies to. These documents and are limited to the federal law and provisions under the Federal Real Property and Federal Immovables Act, the Canada Labour Code, and the Federal Real Property Regulations[4].

Additionally, it is explained that an e-signature satisfies the federal requirement for a signature under all federal statutes, so long as those statutes allow for the application of PIPEDA[5]. For example, the language and regulations on secure electronic signatures as set out in PIPEDA are also adopted in the Canadian Business Corporations Act to regulate the use of electronic signatures in federally incorporated businesses.

What constitutes an e-signature under PIPEDA?

PIPEDA has a stricter acceptance of e-signatures than the ECA. In order to avoid fraudulent or forged e-signatures, PIPEDA sometimes requires a “secure electronic signature”. This is defined at section 31(1) as “an electronic signature that results from the application of a technology or process prescribed by regulations”. Through the use of algorithms and blockchain technology, these e-signatures authenticate the validity and origin of a signature.

Some of the factors that make up a secure electronic signature include:

• a “unique to the person” electronic signature;
• the technology used being under sole control of the person signing;
• the technology or process being identifiable to the person signing; and,
• it is evident whether or not the electronic document has been changed since the electronic signature was incorporated.

This type of signature is required in:

• Documents as evidence (Section 36);
• Seals if required under a provision in Schedules 2 or 3(Section 39);
• Statements made under oath (Section 44);
• Statements declaring truth (Section 45); and,
• Witnessed signatures (Section 46).

COVID-19 Impact 

When the pandemic began, the Canadian legislature enacted the Alternative Filing Methods for Business Act (“AFMBA”) to mitigate the projected issues that remote working would cause. The concerns that were targeted in this Act stem from the Emergency Management and Civil Protection Act. The AFMBA’s purpose included permitting electronic signatures in respect of certain documents under the discretion of the Minister, Director, or Registrar of the relevant business statute[6].

The AFMBA widened the scope for the legal validity of e-signatures, resulting in a more efficient and accessible way of carrying on business during, and eventually after the pandemic.

In addition to this development, the onset of COVID-19 pushed the Canada Revenue Agency to announce that e-signatures met the signature requirements under the Income Tax Act on March 28, 2020.

Signing on the Dotted Line

The ability to draft, sign and send a legally binding document without touching pen to paper has become a routine that not long ago would have been considered a luxury. As a result of the digitization of today’s commerce, e-signatures are providing a more efficient and accessible way of conducting business. Save for the exceptions listed in this article, you should feel just as confident to forget the pen and sign a legal document with your e-signature as you would by hand.

John Yiokaris, Sotos LLP

John is a partner with Sotos LLP in Toronto, Canada’s largest franchise law firm. He has been recognized by Chambers Canada, LEXPERT, Who’s Who Legal, and Best Lawyers Canada as a leading Canadian franchise law practitioner.

[1] Electronic Commerce Act at section 11(1).
[2] Ibid at section 3(1).
[3] Ibid at section 19(2).
[4] Personal Information Protection and Electronic Documents Act at sections 2 and 3.
[5] Ibid at section 43.
[6] Alternative Filing Methods for Business Act at section 3.

The post The Legal Validity of e-signatures: Updates on Ditching the Pen appeared first on Sotos LLP.

In so doing, the federal government has created a unique and new form of savings account.

The FHSA is the only entirely tax-free savings account to which Canadians have access. The other savings plans each impose taxes at some point along the process. The Registered Retirement Savings Plan (“RRSP”) treats withdrawn amounts as taxable income. While the Tax Free Savings Account (“TFSA”) does not tax withdrawals, contributions are not tax-deductible, meaning contributors must first pay income tax on the amount before contributing to a TFSA.

The FHSA is the best of both the RRSP and TFSA: contributions to the account are tax-deductible, and withdrawals tax exempt. Accordingly, the FHSA is tagged as Canada’s first “tax-free in, tax-free out” savings plan.

This article will explain what we know so far about the FHSA and explore some ways Canadians can take advantage.

Timeline: The FHSA is scheduled to become available to Canadians in 2023. While the federal government is working with banks on facilitating its rollout, certain elements of the savings plan may be subject to change. The first draft legislation is expected by the end of July, followed by a 60-day period reserved for input from industry experts. The second draft will be tabled in the fall, and may receive royal assent at the end of the year.

Eligibility: Those eligible to open a FHSA are Canadian residents above the age of 17 who have not lived in a home they owned in the year, or preceding 4 years, that the FHSA was opened.

Lifespan: The FHSA must be closed or used within 15 years from the date of opening. On expiry of the 15 years, any unused funds may be transferred into an RRSP without impacting that year’s RRSP contribution limit.

Contribution Limits: The annual contribution limit is $8,000, up to a lifetime total of $40,000 for an individual. On the purchase of a home by a couple, each can use their respective FHSA, combining for up to $80,000 plus investment income. Unlike an RRSP, whose contribution limit is tied to a taxpayer’s earned income for the preceding tax year, contributions to a FHSA can be made regardless of a taxpayer’s income.

Withdrawals: FHSA withdrawals are only tax exempt if such withdrawal is for the purchase of a qualifying home. To use it, the account holder would present the purchase agreement of a house to the bank holding the FHSA, then the bank would release the amount of funds requested by the account holder, tax-free. Withdrawals from the FHSA for any non-qualifying purpose will be taxable as income.

Relationship to the Home Buyer’s Plan: RRSP account holders are able to use the Home Buyer’s Plan (“HBP”) to withdraw funds from their RRSP account for the purpose of a home purchase, subject to repaying the amount back into the RRSP over 15 years. The FHSA is an alternative to the HBP – only one may be used on a home purchase at a time.

Rollover: If the FHSA is not used for the purchase of a qualifying home within the 15 years of its inception, the total value of the FHSA can be transferred to an RRSP without impacting the contribution limits of the RRSP. For example, if a Canadian has $45,000 in a FHSA at the end of 15 years, and an RRSP contribution limit of $27,000 for that year, the entire $45,000 may be transferred into the RRSP without effecting the RRSP’s contribution limit. Once a transfer has been made to the RRSP any withdrawals will be taxed as if the FHSA contributions were made originally to the RRSP. In other words, those withdrawals are treated the same way as withdrawals of any funds originally contributed directly to the RRSP.

Investment: Contributions to a FHSA can be invested in securities, the income from which receives the same tax treatment as the principal contribution upon the withdrawal of funds or rollover to the RRSP.

Summary: Canadians should be thrilled at the prospect of saving more of their hard-earned dollars. The FHSA alone will not solve the issue of housing affordability, but it is an invaluable savings tool nonetheless. Eligible Canadians should strongly consider opening a FHSA when able, and prioritize maximizing their annual contributions. Whether maximizing the FHSA should take priority over maximizing your TFSA depends upon the individual. While some may value the flexibility of withdrawing from a TFSA for access to cash in a pinch, the FHSA offers multiple advantages in its own right.

Unlike the TFSA, contributing to the FHSA lowers taxable income, which makes it arguably a better investment than the TFSA – even if such investments are not readily accessible. Since any unused funds may be transferred into an RRSP upon the expiry of the FHSA’s lifespan, the account holder can accelerate savings goals by more than $40,000, completely tax-free, up to the point of withdrawal from the RRSP.

No matter how one uses it, and regardless of the final shape it takes, the FHSA is a welcomed savings alternative to Canadians – the first truly “tax-free in, tax-free out” account of its kind.

The post Canadians’ Saving(s) Grace – Introducing the FHSA appeared first on Sotos LLP.

This package shed some light on uncertainties regarding unenacted trust beneficiary reporting rules announced in 2018 that were originally intended to apply for taxation years of trusts that ended after December 30, 2021. After some confusion regarding its implications for the current year, the Canada Revenue Agency (CRA) has since clarified that the proposed changes to trust reporting will apply to taxation years of trusts that end after December 30, 2022, but the exact date these changes will come into effect has not yet been specified. If the legislation is enacted as and when currently predicted, the first T3 tax returns in which additional disclosures would have to be reported to the CRA are those to be filed in early 2023 for the 2022 taxation year. For now, trustees and others engaged in trust tax compliance have another year to collect the required personal information on beneficiaries and other required persons.

Current Trust Reporting Requirements (as of March 2022)

At present, a trust that does not earn income or make distributions in a year is generally not required to file an annual (T3) return of income. A trust is required to file a T3 return if the trust has tax payable or it distributes all or part of its income or capital to its beneficiaries. Even if a trust is required to file a return of income for a year, there is no requirement for the trust to report the identity of all its beneficiaries.

Given the above, the Government perceives that there are gaps in the information they currently collect with respect to trusts and seeks to close such gaps. Budget 2017 announced the Government’s intention to examine ways to expand information collected with respect to trusts.

Proposed Federal Trust Filing and Reporting Measures

The draft amendments to the Income Tax Act (ITA) and related regulations were first released in July 2018, and provided that:

1. trusts resident in Canada will be required to file a tax return every year regardless of whether the trust has tax payable or distributes a portion of its income,
2. trusts resident in Canada and non-resident trusts that are required to file a return will be required to list each person who at any time in the year was a trustee, beneficiary or settlor or had the ability to exert control over trustee decisions over the allocation of trust income or capital, and to provide certain personal information about those persons (name, address, date of birth (for individuals), the jurisdiction of residence and social insurance number or other applicable taxpayer identification number) (“Beneficial Ownership and Control Information”),
3. new penalties will be introduced for failure to file a return containing trust Beneficial Ownership and Control Information — including, notably, a penalty of no less than 5% of the highest fair market value of the trust property during the year where the failure to file was done knowingly, or due to gross negligence.

Pursuant to the draft legislation released on February 4, 2022 (see sections 14-18), disclosure of Beneficial Ownership and Control Information on a T3 return is not required if the information is subject to solicitor-client privilege.

The draft legislation also provides that bare trusts, which are arrangements under which a trust can reasonably be considered to act as agent for all the beneficiaries under the trust with respect to all dealings with all of the trust’s property, are now explicitly subject to the new trust filing and reporting measures. Previously, bare trusts were generally not required to file T3 returns.

For more information please reach out to a member of our team.

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Key Takeaways

1. “Individuals with Significant Control” Must Be Disclosed – Starting January 1, 2023, privately-held Ontario corporations will be required to create and maintain a register of “individuals with significant control” (ISCs) over those corporations. Ontario private corporations should begin to review existing corporate records and procedures to prepare themselves and their shareholders for the new information reporting requirement.
2. Annual Returns Must Be Filed with the Ontario Business Registry (OBR) – Effective October 19, 2021, Ontario Corporations must file their Annual Returns using the Ontario Business Registry. They can no longer file through the Canadian Revenue Agency as part of their T2 Corporation Income Tax Return. Affected corporations should ensure they have their company key to file their Ontario CIA return directly through the OBR or arrange for an intermediary who can file without a company key.

Disclosure Update

On January 1, 2023, amendments to the Ontario Business Corporations Act (OBCA) addressing continuing disclosure requirements for privately-held Ontario corporations will come into effect. From that date forward, Ontario corporations will be required to create and maintain a register of ISCs. Although new to Ontario, similar recordkeeping requirements have previously been adopted federally and in many other Canadian jurisdictions to address tax evasion and financial crime concerns.

Who is an Individual with Significant Control?

A person will be considered an ISC requiring disclosure if the person:

• is the registered or beneficial owner of, or has direct or indirect control or direction over, a “significant number of shares”.
• has any direct or indirect influence that, if exercised, would result in “control in fact” of the corporation.
• is an individual to whom prescribed circumstances apply.[1]

A “significant number of shares” is defined as owning, controlling, or directing 25% or more of the voting rights attached to the corporation’s outstanding voting shares or 25% or more of all of the corporation’s outstanding shares based on the fair market value of the shares.[2]

The phrase “control in fact” is determined by considering all relevant factors in the circumstances; however, the legislation does not state those relevant factors.[3]

Two or more individuals may be connected through their interest in the corporation so as to be considered to be a single ISC, requiring the details of both to be included on the register.[4] This is because an individual meets the definition of ISC if they own or control a significant number of shares with one or more individuals. For example, an individual may individually own less than 25% of a corporation’s shares, but has an agreement with other shareholders to vote o the shares the same way.  If this group of individuals collectively owns 25% or more of a corporation’s shares, each member of the group is considered an ISC and needs to be recorded in the register.

What Must be Disclosed in the Register?

There is no proscribed form for the register. It can be created as a logbook, database or spreadsheet. For each ISC, the register of ISCs must include;

• name,
• date of birth,
• address,
• country (or countries) where the ISC is considered a resident for tax purposes,
• the date when control started (for example, when the ISC purchased 25% or more of the corporation’s shares),
• the date when control ended,
• a description of how the ISC has significant control (for example, a description of their interests and rights in respect of shares of the corporation),
• a description of each step taken to identify all ISCs.[5]

New information is required to be recorded in the register within 15 days of the corporation becoming aware of it. This register should be kept with the corporation’s minute books at the registered officer or at another place in Ontario designated by the directors.

The corporation, officers, directors and shareholders could all be found guilty of offences for failure to uphold their new disclosure obligations. Corporations that fail to uphold their record-keeping and disclosure requirements in regard to ISCs are guilty of an offence and could be liable to multiple fines of $5,000. Directors and Officers who knowingly authorize, permit or acquiesce in the contravention of the corporation’s disclosure requirements, or in the recording or provision of false or misleading information are guilty of an offence and could be liable for fines of up to $200,000 or imprisonment up to 6 months, or both. Shareholders who fail to meet their disclosure obligations may likewise be found guilty of an offence and could be liable for similar fines.

Annual Returns Update

Filing Annual Returns with the OBR

On October 19, 2021, Ontario launched the OBR. The OBR is intended to provide instant, 24-hour fulfillment of search and registration requests.

This is a major change from the previous registry system in which, for over 20 years, Ontario corporations were required to file a Corporations Information Act Annual Return (CIA return) with the Canada Revenue Agency (CRA). Accountants would routinely complete and file the CIA returns with the CRA on behalf of their clients – but this is no longer possible under the new system.  Commencing October 19, 2021, corporations must file their CIA returns directly online using the OBR or through an authorized third-party service provider (they can no longer be filed through the CRA).

To access the OBR, corporations must have a company key. For new corporations, a company key is automatically assigned through the OBR when businesses and not-for-profit corporations are incorporated or when non-Canadian corporations file an Initial Return for an Extra-Provincial Corporation. For pre-existing corporations in Ontario, a company key must be requested through the OBR, which will be mailed to the corporation’s registered address.

Note that corporations may still use intermediaries, such as lawyers and authorized service providers, to file their CIA returns and otherwise transact on the OBR. Law firms, through authorized service providers, are able to file documents on the OBR without a company key. If you do not have a company key and do not have much time to wait for one to come in the mail, you may need to request your law firm to submit the required documents on the OBR for you.

For more information on these or other corporate responsibilities please reach out to a member of our team.

[1] OBCA s 1.1(2)

[2] OBCA s 1.1(1)

[3] OBCA s 1.1(5)

[4] OBCA s 1.1(4)

[5] OBCA s 140.2

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