Recent Developments:Business Law in OntarioVolume 1, Issue 3December 2008

FOREWORD

Welcome to the latest issue of Miller Thomson LLP’s Recent Developments in Business Law Review. This publicationis produced by Miller Thomson’s Ontario Business Lawyers and targets legal developments which may impacton your businesses. It is an off-shoot of our internal continuing education program which focuses on keepingour lawyers abreast of those developments and their practical implications. We wanted to share that with you.Our goal is to provide you with a high level snapshot of what is going on in business law in Ontario and whatthat may mean for your business.

This issue features articles covering the recent Delaware case of Schoon v. Troy Corporation, a case which couldhave a significant impact on the indemnities of directors, recently introduced legislation designed to modernizefederal non-share capital corporations, consumer product safety as well as copyright law. In addition, you willfind the latest updates regarding the recent changes to the 5th protocol to the Canada - US tax convention.

Our Ontario Business Lawyers are available to discuss any of the issues raised in the articles or any other businessrelated issues you may have.

We welcome your questions and comments on this publication and look forward to continuing to keep you aheadof the curve on the latest developments in business law.

Yours truly,

Barbara R.C Doherty Jason L. Rosen Sukesh Kamra

Table of Contents

BUSINESS & SECURITIES

Director’s Indemnities Schoon v. Troy Corporation - A Cautionary Tale 1

The Decision to Block the MacDonald, Dettwiler and Associates Ltd./ Alliant Techsystems Inc. Deal 1

Compete to Win: Report of the Canada Competition Review Panel 3

Proposed New Rule Permits Listing of Special Purpose Acquisition Corporations on the TSX 4

National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings 5

Bill C-52 and Product Safety: A Call for Recall 5

FINANCIAL SERVICES

Awakening the Giant - Trade and Investment Opportunities in India 6

The Wage Earner Protection Program Act and Recent Changes to the Bankruptcy and Insolvency Act 7

INTELLECTUAL PROPERTY & INFORMATION TECHNOLOGY

Canadian Copyright Act Amendments: Round Two 8

TAX, ESTATES & TRUSTS

Conversion Proposals for Income Trust: Planning for 2011 and Beyond 9

Canada - US Tax Treaty: Hybrid Entities 10

Canada - US Tax Treaty: New Limitation on Treaty Benefits 11

Bill C-62 - A Modernization of Federal Non-Share Capital Corporation Legislation 12

Director’s Indemnities – A Cautionary TaleThe by-laws of most corporations, both for profit and not-for-profit,typically contain indemnity provisions in favour of the directorsof the organization by which the corporation agrees to pay anycosts incurred by the director resulting from their position.

The indemnity provisions are intended to be a safeguard to protectthe directors in the event legal action is brought against thempersonally for actions taken on behalf of the corporation. Ancillaryto the indemnity, the corporation generally also agrees to advancefunds to pay any ongoing legal or other costs incurred by thedirector in the defence of the claim brought against them as andwhen such costs are incurred.

The intention of the indemnity and advancement provisions is toensure that there are no monetary repercussions resulting froma director’s decision to serve on the board of a corporation ororganization. It is in the best interest of a corporation to attract thebest candidates to sit on its board, and as a result, they want toreduce the reasons that a director would decline to serve with theorganization.

A recent case argued in Delaware, Schoon v. Troy Corporation,dealt with issues surrounding the indemnification of directors.In that case, a current and a former director of Troy Corporationwere involved in litigation with Troy resulting from actions takenby a minority owner attempting to sell its shares of Troy. Whenthey attempted to enforce their rights to indemnification andadvancement, they were informed that the other directors of Troyhad held a meeting for the purpose of amending the by-laws ofthe corporation so that the indemnity and advancement provisionswould only apply to current directors. As a result, the current director(Schoon) was included, but not the former director (Bohnen), whomSchoon had replaced on the board.

The court was asked to determine if the by-laws could be amendedretroactively to remove the indemnification and advancementobligations; and whether the right to indemnification vested andbecame enforceable at the time Bohnen agreed to serve as adirector, or when the action was commenced against him.

The court found that the amendment to the by-law could applyretroactively and had the effect of removing the indemnity andadvancement protections for all former directors. It also foundthat the right to indemnification only vested when an action wascommenced against a director. Should this decision be followedin Canada (Delaware corporate cases are generally well receivedin other jurisdictions) it would open former directors to significantpotential liability for actions taken when they were still membersof the relevant board.

BUSINESS & SECURITIESMiller Thomson AnalysisThere are a number of options to limit exposure as a director.The first is simply to ensure that the indemnification andadvancement provisions in the by-laws extend into perpetuity.Of course, this would not prevent any future board of directorsfrom amending the by-laws and removing the rights, despite thewording contained in the by-laws.

A second option is for the director to enter into a separate bilateralindemnification agreement with the corporation or organization.Such an agreement should be crafted to fit the situation in additionto the usual indemnification and advancement obligations. A non-termination clause would also be included under all circumstances,including resignation or removal of the director. Such an agreementcould not be terminated unilaterally by the corporation, removingthe risk that the indemnity could be revoked. Of course, theindemnity of the corporation is only enforceable to the extentthat the corporation remains solvent.

The third and most effective option is to ensure that the organizationhas sufficient and appropriate Directors and Officers Insurance(D&O Insurance) coverage in place. D&O Insurance remediesthe concern that the corporation may not be in a position tosatisfy its financial obligations, presuming that the premiumshave been paid regularly. There are a wide variety of coveragesavailable in the D&O market, including packages that includetailing coverage, which provides coverage for a set period of timeafter a director has left the board. Such coverage should bediscussed with your insurance broker and can be tailored tocorrespond with the relevant limitation periods. There is widediscrepancy in the terms contained in D&O policies. Any policyshould be reviewed carefully to ensure that adequate coverageis received.

Should the reasoning contained in Schoon v. Troy Corporation beadopted in Canadian jurisdictions, it could have a significantimpact on the risks associated with serving on a board of directors.The most efficient method of reducing any potential risk is toensure that appropriate Directors and Officers Insurance coverageis in place, including coverage that continues after a director hasleft the board.

Andrew S. Roth T. 519.593.3264E. aroth@millerthomson.com

The Decision to Block the ATK/MDA Deal

The Investment Canada ActThe Investment Canada Act provides a regulatory review frameworkthat allows the federal government to review foreign investmentsin Canada. An investment is reviewable if there is an acquisition

1

of control of a Canadian business and the asset value of thebusiness being acquired equals or exceeds the threshold (set outin section 14 of the statute) as well as those investments thegovernment considers “sensitive”, such as acquisitions of culturalbusinesses such as book publishing and distribution by a foreignentity. If the Minister of Industry is satisfied that a proposedinvestment is likely to be of “net benefit to Canada”, then theMinister will approve the foreign investment under the InvestmentCanada Act.

Miller Thomson AnalysisThe MDA DecisionOn May 8, 2008, the Minister of Industry, Jim Prentice, confirmedhis initial rejection of the planned $1.3-billion acquisition of theInformation Systems Business of MacDonald, Dettwiler andAssociates Ltd. (“MDA”) by U.S. based Alliant Techsystems Inc.(“ATK”). This is the first rejection of a transaction by a Ministerof Industry since the inception of the Investment Canada Act in1985. Since thousands of proposed foreign investments have beenreviewed and allowed to proceed under the Investment Canada Act,investors wonder whether this rejection signals a shift in the wayforeign investments in Canada will be treated in the future. Inorder to draw any conclusions about what the implications of thisunprecedented decision will be, it is important to remember that thedecision was very much the product of unique circumstances.

At the heart of the Minister’s decision to block the sale of satelliteand space robotics manufacturer MDA were jurisdictional questionsover the transfer of Radarsat-2, a sophisticated surveillance satellitethat was developed through a public-private partnership (“P3”)between MDA and the Canadian Space Agency. Radarsat-2’s abilityto track ships and map sea ice from space is considered essentialto protecting Canada’s Arctic sovereignty. Uncertainty as towhether U.S. ownership of the satellite could deprive Ottawa ofcontrol of the satellite and access to its data was a major factorin Minister Prentice’s decision to block the acquisition. Undoubtedly,the Minister was aware of the political ramifications of approvingthe sale of the Radarsat-2, which was developed with $445-millionof Canadian taxpayers’ money, and only months after proclaimingat its launch that the satellite would help “protect our Arcticsovereignty as international interest in the region grows.”

When Minister Prentice rejected the proposed acquisition becauseit was not “likely to be of net benefit to Canada”, he used section21 of the Investment Canada Act to substantiate his decision,which reads as follows:

21. (1) Subject to sections 22 and 23, the Minister shall,within forty-five days after the certified date referred to insubsection 18(1), send a notice to the applicant that theMinister, having taken into account any information,undertakings and representations referred to the Ministerby the Director pursuant to section 19 and the relevantfactors set out in section 20, is satisfied that the investmentis likely to be of net benefit to Canada.

(2) Subject to section 22 and 23, whereby the Minister

does not send a notice under subsection (1) within theforty-five day period referred to in that subsection, theMinister is deemed to be satisfied that the investment islikely to be of net benefit to Canada and shall send a noticeto that effect to the applicant.

Under section 21, the Minister must consider all of the informationprovided by the foreign investor as well as the factors set out insection 20, and based on these, the Minister must be satisfiedthat the foreign investment is likely to be of net benefit to Canada.

Net Benefit TestThe factors to be considered in assessing a proposed investmentare listed in section 20 of the Investment Canada Act. A prospectiveinvestor whose transaction is subject to review must address:

20. For the purposes of section 21, the factors to be takeninto account, where relevant, are

(a) the effect of the investment on the level and nature ofeconomic activity in Canada, including, without limitingthe generality of the foregoing, the effect on employment, onresource processing, on the utilization of parts, componentsand services produced in Canada and on exports from Canada;

(b) the degree and significance of participation by Canadians inthe Canadian business or new Canadian business and in anyindustry or industries in Canada of which the Canadianbusiness or new Canadian business forms or would form a part;

(c) the effect of the investment on productivity, industrial efficiency,technological development, product innovation and productvariety in Canada;

(d) the effect of the investment on competition within any industryor industries in Canada;

(e) the compatibility of the investment with national industrial,economic and cultural policies, taking into considerationindustrial, economic and cultural policy objectives enunciatedby the government or legislature of any province likely to besignificantly affected by the investment; and

(f) the contribution of the investment to Canada’s ability tocompete in world markets.

To ensure net benefit, the Minister of Industry sometimes requiresthe investor to commit to undertakings as a condition for approval.These undertakings are negotiated with reference to the factorsenumerated above. Industry Canada has recently revealed thatthere has been an increased emphasis on commitments relatedto productivity, technology transfer and efficiency. Industry Canadahas also indicated that potential improvements in the capacityand capabilities of the Canadian business, as well as the degreeof Canadian participation, have taken on more weight in thereview process.

Although these general trends are indicative of Industry Canada’spriorities, the statute itself provides no guidance as to how the netbenefit test is to be applied and what combination of factorsmust be met. This flexibility allows the Minister to ensure, ona case-by-case basis, that specific investments serve evolving

2

Canadian interests; however, the discretionary nature of the test,coupled with confidentiality provisions that prevent decisionsfrom being published, reduce predictability and transparency.Aside from the legislation and the Minister’s public remarks, itcan be difficult to determine what considerations would motivatethe Minister to make any particular decision and what factors inthe test are key to a finding of net benefit. In addition, it shouldbe noted that nothing prevents the Minister from taking intoaccount other factors that are not explicitly set out in the netbenefit test.

Reasons for the MDA RejectionIn the wake of Minister Jim Prentice’s decision to block the saleof MDA, there has been a lot of speculation about what causedhim to reject the deal. After the initial rejection under section22 of the Act, ATK was prepared to make significant undertakingsin order to have the sale approved. Nevertheless, Minister Prenticedetermined that the transaction was not of net benefit to Canada,and given the discretionary nature of the test, he disallowed the sale.

National security concerns relating to Artic sovereignty spawned bythe threat of losing control of Radarsat-2 likely played a large rolein Minister Prentice’s decision to reject the sale of MDA. Moreover,the absence of an express national security test in the Act enabledthe Minister to consider the impact of the proposed investmenton national security. Most other jurisdictions have explicit nationalsecurity tests in their foreign investment law and Canada hasconsidered amending the Investment Canada Act to include suchprovisions as well. Although previous initiatives have failed, MinisterPrentice has indicated that in the near future, the governmentwill once again examine the necessity of an explicit national securitytest. The MDA decision coupled with the Minister’s commentsregarding the development of an explicit national security testsignal that national security may be given more weight in futurereviews of foreign investment in Canada by non-state-ownedenterprises.

Some has also suggested that the decision was made in responseto general concerns about the extent of foreign takeovers ofCanadian firms. In a speech to the Canadian Space Agency onApril 11, 2008, the Minister discussed the transfer of intellectualproperty to non-Canadians saying, “Canada must retain controlover technologies that are vital to the future of our industry andthe pursuit of public policy objectives”. Whether this is a signof a new approach towards the review of investments in the hightech industries or limited to the specific context of the spaceindustry is not clear. The timing of the message and the targetaudience, however, suggest that it was a direct reference to theproposed acquisition of the MDA technology.

At a more practical level, some industry analysts have commentedon MDA’s failure to properly discuss or “lobby” the Minister on thetransaction prior to its announcement. At the very least, effectivecommunication with the government may have flagged theproblem prior to the matter being made public.

Undoubtedly, the impact of the MDA decision on foreign investmentin Canada will become clearer over time. While it is likely that therejection was an isolated response to a unique set of circumstances,foreign investors and domestic enterprises should be aware ofthe applicability of the Act in their own affairs and transactions.

Andy Chan T. 905.415.6751E. achan@millerthomson.com

and

Danielle Douek, Law Student

Compete to Win

The Competition Policy Review Panel released its report in June2008. “Compete to Win” reviews Canada’s competition andforeign investment policies and makes recommendations formaking Canada more competitive globally. The basic premise isthat greater competition is the key to increasing productivity andprosperity. The Panel found that Canadians had various concernsregarding its global competitiveness including the loss of Canadianbusiness to foreign competitors, Canada’s limited presence inmarkets other than the US, our lagging productivity and our weakinnovation. It concluded that Canada must address these issues.

A number of Canada’s competitive strengths were acknowledgedincluding its relationship with the US, its abundant naturalresources and a highly educated population. However a smallpopulation relative to land mass, small domestic market, amultitude of internal barriers and a lack of entrepreneurial ambitionare Canada’s weaknesses in the world market.

Miller Thomson AnalysisInvestment Canada ActThe Panel’s mandate was to look at the Investment Canada Act(ICA) and the Competition Act (CA). The ICA provides for federalgovernment review of foreign investments in Canada. Some ofthe specific recommendations from the Panel included (i) raisingthe ICA’s minimum review threshold to $1 billion in enterprisevalue from the current level of $295 million in gross assets; (ii)reversing the onus for showing that a particular transaction wouldbe contrary to Canada’s interest; (iii) improve transparency,predictability and timeliness; and (iv) reviewing cultural industrypolicies every five years.

Financial Services SectorThe Panel noted that allowing greater international competitionand more competition between bank and non-bank lenders wouldbenefit the financial services sector as well as the public interest.The Panel has also recommended that the Minister of Finance

3

remove the de facto ban on bank mergers subject to regulatorysafeguards in recognition that financial institutions all over theworld have merged, creating larger more powerful competitors.

Competition ActOnly minor changes to the CA were recommended by the Panel,including aligning the merger notification process to that of theUS, repealing the criminal pricing provisions and examining thethresholds triggering notification of a merger transaction. The Panelalso concluded that Canada should update its regulatory frame-work to put directors of Canadian companies on the same footingas their Delaware, US counterparts.

Public Policy Priorities for ActionThe Panel also reviewed those public policy areas which itconsidered most critical to Canada’s future competitiveness.Recommendations included reducing corporate tax rates, investingin education, fast-tracking skilled worker applications for permanentresidency, eliminating internal barriers, considering nationalsecurities regulation, addressing US trade and security concerns,modernizing the Canadian intellectual property system andestablishing an independent Canadian Competitiveness Councilto advocate for improvements to Canadian competitiveness.

Reaction to the report has been mixed. Some have said therecommendations are burdensome, controversial, unoriginal anduninspired. Most agree that the implementation of these changesin the near future, given a minority government and a possibleelection, is doubtful.

Jennifer Hewitt T. 416.595.2972E. jhewitt@millerthomson.com

Proposed New Rule Permits Listing of SPACson the TSX

The Toronto Stock Exchange (TSX) has proposed a new rule thatprovides for the use of special purpose acquisition corporations(SPACs) as a method of listing securities on the TSX. To someextent SPACs are similar to capital pooling companies (CPCs) listedon the TSX Venture Exchange, however SPACs, if the rule is adoptedby the TSX in the proposed form, will require that a minimum of$30 million be raised on the SPAC initial public offering (IPO). Indrafting the proposed rule, Part X to the TSX Company Manual (PartX), the TSX sought guidance from the SPAC listing requirementsin the United States while incorporating the TSX’s original listingrequirements and taking into consideration the size of the Canadianmarketplace.

Miller Thomson AnalysisOverview of SPACsA SPAC is a publicly-traded shell company which uses the equityraised from its IPO to later acquire an operating business. The SPACis set up by a small group of securityholders (Founders) each holdingat least a 10 per cent equity interest in the SPAC, purchased inadvance of the IPO, often at a nominal rate. The SPAC must thenraise IPO proceeds of at least $30 million, with a minimum priceof $5.00 per security. The securities issued in the IPO must havea conversion right and liquidation distribution feature, both ofwhich are described below.

In order to protect the capital invested by the public investors, atleast 90 percent of the IPO proceeds must be placed in trust witha trustee unrelated to the transaction and acceptable to the TSX.In addition, 50 per cent of the underwriter’s commission in respectof the IPO must also be deferred and placed in trust pendingacquisition of an operating business.

The acquisition of an operating business, also known as thequalifying transaction (QT), must be accomplished within threeyears from the date of closing of the distribution under the IPOprospectus. The QT must be approved by a majority of securityholders, excluding the Founders. In seeking securityholder approval,the SPAC must provide the securityholders with prospectus-leveldisclosure relating to the QT. In addition, the QT must representat least 80 per cent of the value of the IPO proceeds in trust.

Conversion Right and Liquidation Distribution FeatureIf the proposed QT is completed, the conversion right enablesthe public securityholders who vote against it to exchange theirsecurities for a pro rata portion of the proceeds held in the trust.While Part X does not currently contemplate setting a maximumthreshold amount for conversion rights, a SPAC may opt to imposesuch limits or conditions. If a SPAC elects to impose such terms,it must be disclosed in the IPO prospectus and information circular.

If a QT is not completed within the required time, the liquidationdistribution feature provides for the return of a pro rata portionof the proceeds held in trust to securityholders. Founders willnot be permitted to participate in either the liquidation distributionor the conversion feature.

ConclusionThe thirty day public comment period on Part X expired onSeptember 15, 2008. Upon receiving the necessary approval by theOntario Securities Commission, SPACs will be available in Canada,providing investors with an additional outlet for raising capital.

Kimberly Muio T. 416.595.2653E. kmuio@millerthomson.com

4

National Instrument 52-109 Certificationof Disclosure in Issuers’ Annual andInterim Filings

On August 15, 2008, the Canadian Securities Administratorspublished National Instrument 52-109 Certification of Disclosurein Issuers’ Annual and Interim Filings (NI 52-109), which repealedMultilateral Instrument 52-109 Certification of Disclosure inIssuers’ Annual and Interim Filings. NI 52-109 applies to annualand interim filings for all reporting issuers (other than investmentfunds) for financial periods ending on or after December 15, 2008.

NI 52-109 is meant to improve the quality and reliability ofreporting issuers’ annual and interim disclosure, and to help tomaintain and enhance investor confidence in the integrity ofcapital markets.

Miller Thomson AnalysisDC&P and ICFRThe new instrument requires non-venture issuers to establish andmaintain DC&P and ICFR. DC&P are disclosure controls andprocedures that are designed to (i) provide reasonable assurancethat information to be disclosed in annual filings, interim filingsor other reports are filed, recorded, processed, summarized andreported on time and (ii) ensure that information in annual filings,interim filings or other reports filed or submitted is collected andcommunicated to management. ICFR is a process of internalcontrol over financial reporting designed by certifying officers toprovide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for externalpurposes.

Management Discussion and Analysis (MD&A) DisclosureIf there is a material weakness in the issuer’s DC&P or ICFR,NI 52-109 requires the issuer to disclose the following in itsannual or interim MD&A:

• a description of the material weakness;

• the impact of the material weakness on the issuer’s financialreporting and its ICFR; and

• the issuer’s current plans, if any, or any actions alreadyundertaken, for remediating the material weakness.

CEO/CFO CertificationNI 52-109 also expands on the CEO/CFO certification requirementsand an issuer’s CEO and CFO must personally certify that:

• the issuer’s annual filings and interim filings do not containany misrepresentations;

• the financial statements and other financial information inthe annual filings and interim filings fairly present thefinancial condition, results of operations and cash flowsof the issuer;

• they have designed DC&P and ICFR, or caused them tobe designed under their supervision;

• they have caused the issuer to disclose in its MD&A anychange in the issuer’s ICFR that has materially affect-ed the issuer’s ICFR; and

• on an annual basis they have evaluated the effective-ness of the issuer’s DC&P and ICFR and caused theissuer to disclose their conclusions about the effective-ness of DC&P and ICFR in the issuer’s MD&A.

Control FrameworkNI 52-109 requires an issuer to use a control framework in thedesign of its ICFR. Companion Policy 52-109 provides that thecontrol framework should be established by a body or groupthat has followed due-process procedures, including the broaddistribution of the framework for public comment.

Venture IssuersThe new instrument provides that venture issuers are not requiredto include representations in their certificates relating to DC&Pand ICFR. In addition, venture issuers are not required to discusschanges in ICFR or the certifying officers’ conclusions about theeffectiveness of DC&P or ICFR in their annual or interim MD&A.

ExemptionsThere are exemptions under NI 52-109 available for:

• issuers that comply with the SEC’s certification andinternal control requirements;

• certain foreign issuers that qualify under and comply withsections 5.4 and 5.5 of National Instrument 71-102;

• exchangeable securities issuers that qualify under andcomply with subsection 13.3(2) of NI 51-102; and

• credit support issuers that qualify under and comply withsubsection 13.4(2) of NI 51-102.

Virginia Huang T. 416.595.2987E. vhuang@millerthomson.com

Bill C-52 and Product Safety: A Call for Recall

On April 8, 2008, the Minister of Health introduced Bill C-52in the House of Commons. Bill C-52, which passed its secondreading in May, will repeal Part I of the Hazardous Products Act(the HPA), the current Act governing this area, and will create theCanada Consumer Product Safety Act (the CCPSA). The followingbriefly outlines the purpose and key features of Bill C-52, andexamines its potential implications for business practice in theconsumer product industry.

Background Bill C-52 was introduced as part of Prime Minister Stephen Harper’s$133 Million dollar “Food and Consumer Action Plan” (the Plan).

5

The Plan, which features Bill C-52 and its companion Bill, BillC-51 (which will amend the Food and Drugs Act) was created inresponse to the increase in consumer product recall in recent years.As an illustration, while there were 32 product recalls in Canadain 2006, there were 90 such recalls in 2007. In addition, Bill C-52is a recognition of the growing number of products that moveacross borders in the increasing global marketplace, the need forgovernments both within the country and foreign governments toshare information regarding unsafe or dangerous products, and theneed to create a regulatory system regarding consumer products thatis complementary to the regulatory system regarding the environment.

ApplicationBroadly stated, the purpose of the CCPSA is to create a new, moreeffective system to regulate food and consumer products whichpose, or may reasonably be expected to pose a danger to humanhealth and safety. “Consumer products” are defined in the proposedAct as: a product, including its components, parts or accessories,that can reasonably be expected to be obtained by an individualto be used for non-commercial purposes, including for domestic,recreational and sports purposes, and includes its packaging.It is important to note that certain consumer products regulatedby other existing acts are exempt from the application of the CCPSA(as set out in Section 4 of the draft act).

Key Features Essentially, the proposed CCPSA will: (i) allow the federal government to become more involved in providing safety guidelinesfor new products during their developmental stage; (ii) provide formore effective governmental oversight by imposing the prohibitionof certain listed products, increased record-keeping and reportingrequirements on those who manufacture, import and advertiseconsumer products, and by giving the Minister of Health morepower to inspect and test products; (iii) enable the federalgovernment to issue mandatory recall orders for unsafe productsonce dangers associated with them have been identified; and(iv) create a system of criminal and administrative monetarypenalties to enforce compliance.

Miller Thomson AnalysisThe implications of the proposed Act for businesses in the consumerproduct industry may prove to be significant. The allowance for moregovernmental, regulatory oversight and the ability to issue mandatoryrecall orders will require consumer product importers, marketersand producers to be more accountable to the buyer with respectto the quality of their product or face the consequences of a muchmore comprehensive penalty regime than imposed under the HPA.

However, some critics of the proposed Act believe that it does notgo far enough to protect the consumer. They note that the CCPSAdoes not impose product testing as a condition of market entry,but applies only on suspicion of a health concern. In addition,it has been pointed out that although significant financial penaltiescurrently exist under the HPA as well, it has fallen far short ofensuring compliance. Thus, it remains to be seen how the CCPSA

will differ. Finally, critics of the proposed Act refer to the factthat the CCPSA does not remedy the issue of lack of personnelto carry out product inspections that currently exists under the HPA.

Only time will tell if the proposed Canada Consumer ProductSafety Act and more generally, the Consumer Action Plan will beeffective in increasing consumer product safety. However, thosein the consumer product industry may want to rethink their currentsystem for quality control before Bill C-52 becomes law.

Sarah Lowy T. 416.595.8679E. slowy@millerthomson.com

Awakening the Giant – Trade and InvestmentOpportunities with India

Investing in the Indian market has received a lot of attention inrecent years. It has been identified by Canadian companies involvedin a wide spectrum of industry areas, and by the government ofCanada, as a region that presents tremendous opportunity over thenext decade. While there are significant opportunities for Canadiancompanies looking to invest in India, there are also significanthurdles to overcome and considerations to be aware of.

Why India?India’s population is currently in excess of one billion. Of thattotal population, approximately 81 per cent are under the ageof 45. India’s GDP has grown at approximately 8 per cent onaverage for the last four years. This is expected to exceed 9 percent in 2008. Conversely, inflation has been reduced dramaticallyfrom an average of 10 per cent in the 1990s to approximately 4.5per cent in 2008. Its foreign exchange reserve has multipliedfrom $6 billion in 1991 to approximately $290 billion in 2008and its account deficit has improved from a deficit of 2 per centof GDP in 1996 to a surplus of 2 per cent in 2006.

In terms of the regulatory environment, while there are still delaysand bureaucracy to contend with, the government has since 1991,after extensive reform, adopted a non-interventionist approachthat allows for an open economy with extensive participation ofthe private sector.

Miller Thomson AnalysisConsiderations for Canadian companies The booming economyWhile the Indian economy has been the fastest growing in the

FINANCIAL SERVICES

6

world for in excess of four years and has exhibited unprecedentedgrowth, there are concerns that the economy may “overheat” andbe subject to inflationary pressures. That coupled with reducinglevels of credit funded consumption, increasing costs of capitaland tightened monetary policy has created concern for the shortto medium term future of the economy.

Labor standards and infrastructureAs there is an increase in exposure to global labor standards andworkforce productivity, there is likely to be a need for more socialbalance in the medium long term. This will require significantfunding which is expected to come from increased taxation.India is also lacking in terms of infrastructure. By 2013, Indiawill need a network of approximately 13,000 kilometers worth ofroads and highways. Airports and ports require major overhaulssuch as in the major cities of Delhi and Mumbai, plus expansionof existing facilities such as those in Bangalore and Chennai.This lack of infrastructure, together with power shortages, cangreatly increase the costs of production and generally of doingbusiness in India. While some of the current projects may alleviatethe issue in the medium term, deficiencies in infrastructure canadd between 60 per cent -130 per cent to the costs of productionof goods and the delivery of services.

Credit defaultsIndian companies have a history of payment defaults and generallyhave poorer credit and rating agency ratings than their NorthAmerican counterparts. As a Canadian joint venturer or investor,this is of concern as it may not only impact your credit rating butwhere your Indian joint venturer is responsible for maintainingoperations in India, late payments and defaults may severelyjeopardise the viability of those operations.

Access to Justice Lastly, the court system in India can be slow, costly and not alwayslead to the outcome that you would expect had the matter beenbrought before a Canadian court. In 1999, there were approximately12.3 million cases. By 2006, this number reached nearly 16million, representing a leap of 28 per cent in seven years. Further,arbitration and other alternative dispute resolution mechanismsare still in their infancy in India and subject to many of the sameissues as the court system.

It is advisable therefore to be able to have your matter heard outsideof India if there is disagreement between the parties. The bestway to ensure this is to agree with your Indian counterpart fromthe outset on international arbitration and to ensure that yourjoint venture agreement (or other business agreements) properlydocuments such agreement. International arbitration is widelyrecognized as being efficient provided the locus of arbitrationis in an “arbitration friendly” jurisdiction. Possible venues includeSingapore, London, Paris, Stockholm and New York. Lack ofplanning may however lead to increased costs and delays. Worsestill, a poorly drafted arbitration clause may also lead to courtsintervening notwithstanding agreement between the parties.

The FIPPATo stimulate trade between Canada and India and offer investorprotection to alleviate some of the obstacles described above,in June 2007, Canada and India concluded negotiations on theForeign Investment Promotion and Protection Agreement (FIPPA).As stated by Foreign Affairs and International Trade Canada,“[t]hrough the establishment of a framework of legally bindingrights and obligations, this agreement will provide greater predictability and certainty for investors considering investmentopportunities in each of our respective markets.” The FIPPA isthought to be the pre-cursor to a full free trade agreement whichshould result in significantly greater trade and investment betweenthe two countries.

Deepesh Daya T. 416.595.8553E. ddaya@millerthomson.com

The WEPPA and Recent Changes to the BIA

On July 7, 2008, the Wage Earner Protection Program Act (WEPPA)and certain changes to the Bankruptcy and Insolvency Act (BIA)came into force.

The WEPPA establishes the Wage Earner Protection Program(the Program). The Program is administered by the federalgovernment and is designed to protect the wages of employeeswhose employment is terminated as a result of a bankruptcy orreceivership. The term “wages” is defined to include salary andvacation pay but not severance or termination pay. The amountpayable to an individual for wages under the Program is cappedat $3,000 and those wages must have been earned during thesix months immediately preceding the employer’s bankruptcy orreceivership. Eligibility is further limited to those individualswho were not officers, directors or who had a controlling interestin the business of the employer.

Miller Thomson AnalysisUnder the WEPPA, trustees in bankruptcy and receivers arerequired to perform various duties including:

(a) identifying employees who are owed wages for the six monthsimmediately preceding the employer’s bankruptcy orreceivership;

(b) determining the amount those employees are owed; and

(c) informing employees about the existence of the Programand its features.

Another significant feature of the WEPPA is that unpaid wageclaims are granted a super-priority charge on all current assetsof the insolvent employer. That charge is limited to a maximumof $2,000 per employee. Previously, employees of a bankrupt

7

employer were only entitled to a preferred claim for the sameamount under the BIA. If the government pays out under theProgram it becomes subrogated to the rights of the employeevis-à-vis the employer. A trustee in bankruptcy or receiver whodisposes of current assets covered by this super-priority chargeis liable for the amount realized on the disposition of those assets.

The WEPPA also provides for a super-priority for unpaid pensioncontributions (normal pre-filing contributions and not unfundedpension liabilities). Unpaid pension contributions are grantedsuper-priority charge on all assets of the insolvent employer.Unlike the super-priority charge for unpaid wages, there is no peremployee limit on the charge for unpaid pension contributions.Previously, unpaid pension contributions constituted unsecuredclaims in an employer’s bankrupt estate. As with unpaid wageclaims, a trustee in bankruptcy or receiver who disposes of assetscovered by this security is liable for the amount realized on thedisposition of those assets.

In order to protect against the potential pitfalls of the WEPPA andBIA amendments, lenders would do well to consider a range ofsafeguards, including:

(a) requiring additional security to take into account the additionalrisk posed by the super-priority charges;

(b) enhanced monitoring to ensure the borrower is meeting itspayroll and pension obligations;

(c) incorporating retention of title clauses into equipment financingagreements to avoid a super-priority charge in respect of unpaidpension contributions; and

(d) entering into intercreditor agreements with other secured lendersto pool the potential risk associated with super-priority charges.

Ryan T. Sills T. 519.931.3514E. rsills@millerthomson.com

Canadian Copyright Act Amendments:Round TwoCopyright is often considered less important than other intellectualproperty rights in the course of business discussions. Despite thistrend, the importance of copyright in a business setting can besignificant, particularly because copyright may be utilized to protect awide variety of assets – from software code to artistic works.

Moreover, the right itself and the term of the protection arenoteworthy. In general, copyright grants an owner the sole rightto: produce or reproduce a work; to perform a work in public; to

publish a work; and to prevent others from copying a work withoutpermission. The term of copyright may differ, but for most subjectmatter the right extends for the life of the author plus an additionalfifty years.

Recent case law focusing on copyright issues provides guidanceregarding the development of copyright law in Canada and thescope of copyright. The Supreme Court of Canada in CCH CanadianLtd. v. Law Society of Upper Canada held that a work must beoriginal. To be original, a work must be “more than a mere copyof another work,” it must also express an idea in a manner thatexemplifies an “exercise of skill and judgement” and that involves“intellectual effort.”

Additional judicial commentary focuses on the role of balancebetween a copyright user and a copyright owner, which ultimatelyaffects the scope of copyright. Copyright law sets strict prohibitionsupon the ways in which copyright may be utilized by a non-owner.However, the Court states that these limitations should not beover-exerted so as to impose restrictions upon a user that are notsupported by the copyright. An analogy of a scale, which shouldnot be tipped in favour of either party, is utilized by the Courtto represent this relationship.

Beyond common law changes to copyright, attempts to introducestatutory amendment to copyright law have also been launched.A first attempt at amending Canadian copyright laws was launchedin a report prepared in May 2004 by the Standing Committee onCanadian Heritage. The proposed changes set out in the reportwere met by a wall of criticism from academics and industry.Yet, in spite of this, the Committee remained unanimous regardingits proposed changes, choosing to re-table the report in November2004. Due to government changes in Canada the report wasultimately abandoned.

Miller Thomson AnalysisSo now the Harper government is taking its turn at proposingmodifications to Canada’s Copyright Act in the form of Bill C-61.Initially introduced on June 12, 2008, Bill C-61 has drawnconsiderable commentary due to the significant changes it proposes.Some of these changes codify aspects of recent jurisprudence,while others draw copyright into new territories either by extendingcopyright protection to new subject matter, or by strengtheningthe role of copyright in previously protected works. The followinghighlights some of the modifications suggested in Bill C-61.

• Personal Use Exception – Section 80 of the presentCopyright Act offers a personal use exception for copyingmusic rendered outdated due to technological changesin the music recording industry. Bill C-61 both updatesand expands the personal use exception to encompasscurrent technologies including music as well as othermediums, such as copies of movies and television programs.The Bill further proposes amendments that permit PVRcopying of content for personal viewing at a later time.

INTELLECTUAL PROPERTY &INFORMATION TECHNOLOGY

8

• Lessons & Educational Institutions – Bill C-61 furtherintroduces lessons taught at educational institutionsinto the ambit of copyright protection. This addition tocopyrightable subject matter causes the copying of lessonsto be an infringement of copyright. Additionally, the Billextends to educational institutions the right to copy contentfrom the Internet for the purpose of use in a lesson.

• Performers’ Performances – Bill C-61 proposes severaladditions and modifications to the Copyright Act that arerelevant to “performers’ performances.” The effect of thischange is evident in the very phrase applied in Bill C-61to describe this class of rights – whereas the CopyrightAct references a “performer’s performance” Bill C-61applies the term “performers’ performances.” This changeevidences an acknowledgment that in the present-daysociety, the right is likely to extend to multiple performers.

• Moral Rights – Bill C-61 expressly expands the scope ofmoral rights from “work” into the realm of performers’performances. This proposed amendment encompasseslive aural performances as well as performances fixed ina sound recording. Additionally, the Bill includes clausesthat specifically address infringement of moral rights.

• Technological Means of Protection – Bill C-61 proposes theinclusion of a section of clauses directed at “TechnologicalMeasures and Rights Management Information.” Thisamendment has been identified as the Canadian version ofthe US Digital Millennium Copyright Act. In basic terms, thissection sanctions the implementation of technological measuresto protect copyright (such as encryption, scrambling, etc.)and restricts the circumvention of such measures.

• Internet Service Providers – Bill C-61 proposes to offerprotection from infringement challenges to providers ofInternet services and digital networks. Merely providingaccess to, or caching, a work does not implicate any providerof an Internet service or a digital network as an infringer.

• Contractual Provisions – Bill C-61 proposes to extendreliance upon contractual terms to provide a means ofoverriding aspects of copyright. The Bill expressly permitscontractual provisions to prevail in the context of copyrightfor photos, downloading music, and downloading worksfrom the Internet.

Karen Durell T. 416.595.7913E. kdurell@millerthomson.com

Conversion Proposals for Income Trusts:Planning for 2011 and Beyond

On July 14, 2008, the Minister of Finance (Canada) (the Minister)released the long-awaited draft conversion rules (the ConversionProposals) to allow income trusts to convert into corporations ona tax-deferred basis. The Conversion Proposals generally applyto conversions that occur on or after July 14, 2008 and before2013. Certain Conversion Proposals apply to conversions thatoccur on or after December 20, 2007 to accommodate incometrusts that have already gone ahead and converted into corporations.Income trusts that are subject to the specified investment flow-through (SIFT) rules (referred to as SIFT trusts) under the IncomeTax Act (Canada) (the ITA), and that do not convert to corporations,will have to pay tax at combined federal/provincial corporate taxrates on certain distributions of Canadian source income, includingincome from a business carried on in Canada and income (otherthan taxable dividends) and taxable capital gains from non-portfolioproperty as described below, starting in 2011.

Generally, an income trust will be a “SIFT trust” if it meets allof the following conditions: (i) the trust is resident in Canada(the residence test), (ii) equity and/or debt securities of the trustare listed or traded on a stock exchange or other public market(the public trading test), and (iii) the trust holds one or morenon-portfolio properties (the property test). The draft legislativeproposals released on July 14, 2008 include a proposedamendment to exclude certain debt securities held by personsor partnerships not affiliated with the income trust in applyingthe public trading test.

For purposes of applying the property test, non-portfolio propertyincludes, among other things, (i) securities of trusts resident inCanada, corporations resident in Canada, Canadian residentpartnerships (within the meaning of the ITA), and non-residentpersons or partnerships that are not “Canadian resident partnerships” if the principal source of income of such entitiesis one or any combination of sources in Canada, that are held bythe trust in a taxation year and that have a total fair market value(FMV) greater than 10 per cent of the equity value of such entity,or that together with all securities that the trust holds of entitiesaffiliated with such entity, have a total FMV greater than 50 per centof the equity value of the trust, (ii) Canadian real, immovable orresource property (as defined in the ITA), if at any time in thetaxation year, the total FMV of such properties held by the trustis greater than 50 per cent of the equity value of the trust, and(iii) property that the trust, or person or partnership with whomthe trust does not deal at arm’s length, uses in the course ofcarrying on business in Canada.

TAX, ESTATES & TRUSTS

9

Miller Thomson AnalysisConversion ProposalsThe Conversion Proposals include two main alternatives forconversion of an income trust into a corporation on a tax-deferredbasis. We note that the Conversion Proposals are currently in draftform and may be subject to further amendments before they areenacted.

Distribution AlternativeUnder the first alternative (the Distribution Alternative), an incometrust can convert into a corporation by distributing all of its property,which must consist only of shares of a taxable Canadian corporation,to the unitholders on its winding-up on a tax-deferred basis.The Distribution Alternative may also be used in respect oftrust-on-trust structures (the so-called second-generation incometrust structures) where the income trust is the sole beneficiaryof a sub-trust which in turn owns property. The distributionmechanism for a trust-on-trust structure requires that the sub-trustdistribute all of its property, which must consist only of shares ofa taxable Canadian corporation, to the income trust by winding-upon a tax-deferred basis. The income trust can then convert intoa corporation by distributing the shares received from sub-trustto its unitholders on a tax-deferred wind-up of income trust.

Income trusts that do not have a trust-on-corporation structure(the so-called first-generation income trust structures) will haveto reorganize in order to be able to convert into a corporation underthe “Distribution Alternative.” Depending on the circumstances,it may not always be possible for an income trust to reorganizein such a manner for tax and/or non-tax related reasons. Anotherdisadvantage of the Distribution Alternative is that it does notpreserve the tax attributes of an income trust which are lost onits winding-up.

Unit-for-Share Exchange AlternativeUnder the second alternative (the Unit-for-Share ExchangeAlternative), an income trust can convert into a corporation byhaving its unitholders exchange all of their units of income trustfor shares of a taxable Canadian corporation which then becomesthe sole shareholder of an income trust. The exchange mechanismis modelled on the existing share-for-share exchange mechanismin section 85.1 of the ITA but with some important differences.Additional steps are required after the unit-for-share exchange inorder to eliminate the income trust (and sub-trust if applicable).Income trust (and sub-trust if applicable) may be eliminated byusing the Distribution Alternative described above. Alternatively,income trust (and sub-trust if applicable) may be eliminatedunder proposed winding-up rules modelled on existing winding-uprules in subsection 88(1) of the ITA which preserve the tax attributesof an income trust.

To Convert or Not to ConvertThe conversion into a corporation may be appropriate for largeincome trusts that are able to sustain a high-level of distributionsbut may not be viable for small and medium size income trusts.

These trusts should consider other alternatives such as an assetsale, a privatization transaction or mergers with other incometrusts to reach a size that is more appropriate for conversion intoa corporation.

The decision to convert or not to convert into a corporation andthe timing of any such conversion requires an analysis of variousfactors that is beyond the scope of this article. Miller Thomsonhas the tax expertise to provide advice to income trusts (includingreal estate investment trusts (REITs)) with respect to conversion,reorganization, sale, merger and privatization transactions, andto assist them in planning for 2011 and beyond.

Lyne M. Gaulin T. 416.595.8590E. lgaulin@millerthomson.com

Canada-US Tax Treaty: Hybrid Entities

The Fifth Protocol to the Canada-United States Income TaxConvention (Treaty) has been ratified by Parliament and isexpected to be ratified by year-end in the United States. TheFifth Protocol includes new rules that clarify the tax treatmentof “hybrid” entities under the Treaty. Hybrids are entities thatare treated as taxable in one contracting state and “fiscallytransparent” (i.e. liability for tax does not apply at the entitylevel, but rather “flows-through” to the owners, members orpartners thereof) in the other. Historically, hybrids have beenused to obtain tax efficient results from cross-border struc-tures. Cross-border structures involving entities such as USlimited liability companies (LLCs) or Canadian unlimited lia-bility companies (ULCs) may be affected once the FifthProtocol comes into effect. If the Fifth Protocol is fully ratifiedin 2008, the new rules affecting hybrids will apply as ofJanuary 1, 2010; although the application of other new partsof the Treaty introduced by the Fifth Protocol (i.e. limitation ofbenefits provisions) may accelerate the date by which an enti-ty will need to take corrective action. This date could be asearly as January 1, 2009.

Miller Thomson AnalysisLLCsLLCs are treated as corporations for Canadian tax purposes, butmay be treated as fiscally transparent in the United States. Asa result of this discrepancy, LLCs do not presently enjoy benefitsunder the Treaty. However, with the addition of paragraph 6 toArticle IV of the Treaty, the Fifth Protocol will extend treaty benefitsto US residents that derive income in Canada through an LLC,provided certain residency and other qualifying conditions aremet. Going forward, income, profit or gain will be “derived by”a resident of either Canada or the United States if, under the

10

laws of either contracting state in which the owner is resident,such amounts are derived through an entity that is not a residentof the state of source, the receiving entity is fiscally transparentunder the laws of the state of residence and the tax treatmentattaching to the amounts is the same as if derived directly bythe owner.

ULCsCanadian ULCs (e.g. Nova Scotia ULC, Alberta ULC and BritishColumbia ULC) are considered taxable in Canada, but are treatedas fiscally transparent in the United States. ULCs have beencommonly used by US residents as operating companies infinancing structures and as holding companies because they are“disregarded” for US tax purposes. Under new paragraph 7 ofArticle IV of the Treaty introduced by the Fifth Protocol, income,profit or gain will not be considered to be “derived by” a residentof a contracting state if such amounts are considered to havebeen received from a hybrid entity resident in the state of sourcethat is fiscally transparent under the laws of the recipient’s stateof residence (or home state) and the tax treatment of such amountsunder the laws of the home state would be different if the hybridentity was not considered fiscally transparent under the laws ofthe home state. These new rules will eliminate the treaty benefits(i.e. reduced withholding rate on dividends) presently attachingto distributions made, for example, by a Canadian ULC to a USparent corporation. This will significantly affect the inboundstructures of US residents coming into Canada. With that said,there are a number of solutions that address the problem thata Canadian ULC may pose to an existing cross-border structure,including:

1. Interposing a particular type of corporation between theCanadian ULC and its US parent;

2. Converting the Canadian ULC into a corporation for US taxpurposes;

3. Liquidating the Canadian ULC to become a branch of itsUS parent;

4. Reducing Canadian business activities in the ULC andincreasing business activities in a Canadian branch; and

5. Maximizing distributions from the Canadian ULC prior to theeffective date of the new hybrid rules in the Treaty.

The applicability and effectiveness of these solutions will dependon the particular tax considerations of the Canadian ULC and itsUS parent. A careful review of an existing cross-border structureis required to determine which solution may work best in thecircumstances.

The foregoing comments are of a general nature and do notaddress all of the issues that should be considered in light ofthe Fifth Protocol. Please contact a member of our Tax Groupfor further information on how the new rules introduced to theTreaty by the Fifth Protocol may affect cross-border structurescurrently in place.

James A. Fraser T. 416.595.8594E. jfraser@millerthomson.com

and

James A. Hutchinson T. 416.597.4381E. jhutchinson@millerthomson.com

Canada-US Tax Treaty: New Limitation onTreaty Benefits

A new rendition of the Canada-US income tax convention (theCanada-US Treaty) is set to become effective beginning in 2009.The revisions are set out in the 5th Protocol to the Canada-USTreaty and introduce a concept new to the Canadian tax system:a “Limitations on Benefits” provision.

The new Limitation on Benefits article aims to combat the perceivedmischief of “treaty shopping.” Treaty shopping occurs when acorporation or other entity is established in a treaty country and themain purpose of establishing that entity is to gain access to treatybenefits. The Limitations on Benefits provision must be consideredwhen, instead of a direct relationship between a Canadian entityand a third country entity or a US entity and a third country entity,there are entities in the US, Canada and the third country, andbenefits under the Canada-US Treaty are being derived.

Miller Thomson AnalysisThe existing Canada-US Treaty includes a form of Limitations onBenefits provision, however it is enforceable only by the US.The new Limitations on Benefits provision will be reciprocal(enforceable by both the US and by Canada). As this is Canada’sfirst bilateral Limitations on Benefits provision, there is considerableuncertainty as to how the Canada Revenue Agency will administerthe provision and the types of structures that will be affected.

If the Limitation on Benefits provision applies, Canada-US Treatybenefits, including:

• 5 per cent withholding tax on cross-border dividends;

• 0 per cent withholding tax on cross-border interest; and

• 10 per cent withholding tax on cross-border royalty payments

will be denied; all such cross-border payments between Canadaand the US will be subject to 30 per cent US withholding tax or25 per cent Canadian withholding tax.

Qualifying Persons TestUnder the new Limitations on Benefits provision, if an entity is a“Qualifying Person,” that entity is entitled to all the benefits of

11

the Convention. If an entity is not a Qualifying Person, limitedtreaty benefits may be available if one of two tests are met.

“Qualifying Persons” are residents of either Canada or the USincluding:

• natural persons

• government entities;

• estates;

• not-for-profit organizations;

• publicly traded entities (or entities controlled by them)if certain tests are met; and

• private corporations if certain tests are met;

In each case, particular criteria must be satisfied. To qualify asa Qualifying Person, a publicly traded company or trust musthave its principal class of shares or units primarily and regularlytraded on a recognized Canadian or US stock exchange (a listingon a foreign stock exchange will not satisfy the test). As well, apublic company or trust will not be a Qualifying Person if a“disproportionate class” of shares or units is not regularly traded.A disproportionate class is one that entitles the holder to a largerportion of income, profits or gain of the corporation or trust.

For private corporations, at least 50 per cent of votes and valuemust be owned by Qualifying Persons. Further, expenses deductiblefrom gross income that are paid or payable to persons that arenot Qualifying Persons cannot exceed 50 per cent of gross income.

“Active Business” and “Derivative Benefits” Tests for Non-Qualifying Persons

If an entity is not a Qualifying Person, limited benefits under theCanada-US Treaty may still be available if either the “Active Tradeor Business” test or the “Derivative Benefits” test is met.

Under the Active Trade or Business test, the benefits of theCanada-US Treaty will be applicable to a resident of contractingstate engaged in active conduct of trade or business in that state,but only with respect to items of income connected or incidentalto such trade or business. The test requires that the activity besubstantial in relation to the other contracting state.

Under the Derivative Benefits test, a resident of Canada or theUS will be entitled to limited treaty benefits if the owner of theresident would be entitled to the same benefits had the incomebeen earned directly by that owner. The test is a technical oneand includes the condition that the third-country owner wouldbe eligible for treaty-reduced rates at least as low as the ratesunder the Canada-US Treaty. If there is interest being paidcross-border between Canada and the US, the third-country ownerwill fail the Derivative Benefits test, as neither Canada nor theUS has 0 per cent withholding on interest in any of its other treaties.

Required Review The Limitation on Benefits provision of the Canada-US Treatywill likely come into force on January 1, 2009. There is nograndfathering contemplated, thus both proposed and existingstructures must be reviewed before the end of 2008 to ensurethat benefits under the Canada-US Treaty will not be denied oncross-border payments made after the end of 2008.

Leela Hemmings T. 416.595.8623E. lhemmings@millerthomson.com

Bill C-62 – A Modernization of FederalNon-Share Capital Corporation Legislation

Bill C-62, An Act respecting not-for-profit corporations and certainother corporations (the New Act), received first reading on June13, 2008. It is substantially similar to Bill C-21, which died onthe order paper when parliament was dissolved in November2005. Unfortunately, like Bill C-21, the New Act also died on theorder paper when parliament was dissolved in September 2008and a federal election was called.

The New Act represents the first significant change to federalnon-share capital corporation legislation in many generations.This new legislation tracks conceptually with business corporationlegislation and is modeled significantly on the Canada BusinessCorporations Act. However, as will be discussed in further detailbelow, many of the concepts taken from the business corporationcontext do not make sense when applied to non-share capitalcorporations, which are typically not-for-profit organizations andcharities. Highlighted below are some of the more significantchanges introduced in the New Act.

Miller Thomson AnalysisIncorporation as of rightThe New Act introduces incorporation as of right to the non-sharecapital environment. Under the current regime governed by theCanada Corporations Act (the CCA), a minimum of three applicantswishing to incorporate must apply, with accompanying by-laws,to the Minister of Industry for a charter creating a “body corporate”in order to carry on certain objects specified in the application.Under the current system, incorporation can take two to four weeksbecause an Industry Canada examiner reviews the entire applicationfor compliance with the CCA and Industry Canada policy. Muchlike existing business corporation legislation, the New Act introducesthe concept of incorporation as of right for non-share capitalcorporations. Incorporation will be granted as of right once theappropriate documents and fees are submitted, thus foregoing theneed for ministerial review of the application or by-laws. This changeshould reduce the time it takes to incorporate non-share capitalcorporations.

12

Under the New Act, although the purpose of a corporation mustbe stated in the articles of incorporation, a corporation will havethe capacity, rights, powers and privileges of a natural person.This is a departure from the CCA under which a corporation onlyhas the powers listed in the statute and the corporation's governingdocuments. Under the New Act a corporation and its directorswill have powers immediately upon incorporation, even prior tothe passing of the corporate by-laws. The New Act also removesthe need for a corporate seal.

Continuance RequirementIf enacted, the New Act will repeal the CCA in its entirety. All federalnon-share capital corporations will be established under the NewAct. Existing corporations subject to Part II of the CCA will berequired to bring their corporate documentation into compliance withthe New Act. This will require the filing of articles of continuance,as well as possible amendments to corporate by-laws, to ensurethat the corporation conforms with the requirements of the NewAct and obtains the benefits of its new provisions. Existing CCAcorporations must complete the continuance procedure withinthree years of the coming into force of the New Act, otherwisethey could be dissolved.

Soliciting versus Non-Soliciting CorporationsThe New Act creates new distinctions between different typesof corporations. One such distinction is based on whether acorporation falls within the definition of a “Soliciting Corporation.”A soliciting corporation is essentially a corporation that has, withinthe prescribed period, received income in excess of the prescribedamount in the form of:

(a) donations or gifts of money or other property from a personwho is not a member, director, officer or employee of thecorporation, or someone who is related to such a person; or

(b) grants or similar financial assistance from the federal, provincialor municipal government.

The prescribed period under the New Act, as currently drafted, isthree years and the prescribed amount is $10,000. The definitionrequires more than mere solicitations to the public for funds.This is an important determination as it will impact on the corporation’s obligations and permitted actions. As well, solicitingcorporations will be required to provide in their constatingdocuments that, on dissolution, any remaining property will betransferred to qualified donees (which are essentially Canadianregistered charities).

DirectorsCorporations that are not soliciting corporations are permitted tohave one director. Soliciting corporations must have at leastthree directors.

Part II of the CCA does not contain any standards for the actionsof directors. The New Act provides that directors must act honestlyand in good faith with a view to the best interests of the corporation,and must exercise the care, diligence and skill that a reasonablyprudent person would exercise in comparable circumstances.

The New Act also provides that a director is not liable if thedirector has exercised such care, in good faith, when relying uponthe financial statements of the corporation or on professional advice.

MembersThe New Act gives non-members certain voting rights, includingthe right to vote on proposed amendments to membership classesand rights, a sale of assets, amalgamation and dissolution. This willbe problematic where an existing CCA corporation has non-votingmembers (which are typically honorary members) and does notwant these members to gain voting rights upon continuance underthe New Act. Granting non-voting members rights effectively givesthis class of members the authority to prevent change even whenapproval of all other voting classes has been obtained. This isparticularly problematic where non-voting members are numericallyinsignificant.

The New Act also introduces an oppression remedy and derivativeaction remedy to the non-share capital corporation context. Thischange is particularly problematic in this context. While theseremedies may be appropriate in the business corporations’ contextwhere shareholders have property and ownership interests toprotect, such remedies are not appropriate in the non-share capitalenvironment where organizations are typically run as not-for-profitsand charities. The New Act provides a faith-based defence withrespect to the use of these new remedies.

Auditing RequirementsAnother distinction between corporations introduced in the New Actis the concept of a “Designated Corporation and a Non-designatedCorporation”. Designated corporations must appoint a publicaccountant and are subject to a higher level of financial review.A designated corporation means:

(a) a soliciting corporation that has gross annual revenues forits last completed financial year that are equal to or lessthan $50,000, or that is deemed to have such revenues; and

(b) a non-soliciting corporation that has gross annual revenuesfor its last completed financial year that are equal to or lessthan $1,000,000.

Members of a designated corporation may resolve not to appointan auditor.

ConclusionWhile the New Act has died on the order paper, we are hopefulthat it will be revived after the election when the new governmentis formed. Certain members of the Charities and Not-for-Profitgroup of Miller Thomson LLP were in the midst of making submissions to the Minister regarding the New Act’s moreproblematic provisions when the New Act died. These efforts willcontinue if and when the legislation is revived.

Amanda J. Stacey T. 416.595.8169E. astacey@millerthomson.com

13

Toronto / Markham

Business & Securities

Jennifer Bishop 416.595.8502jbishop@millerthomson.com

Paul E. Brace 905.415.6703pbrace@millerthomson.com

David B. Buchanan 416.595.2665dbuchanan@millerthomson.com

Andy Chan 905.415.6751achan@millerthomson.com

Barbara R.C. Doherty 416.595.8621bdoherty@millerthomson.com

Eamonn J. Flaherty 905.415.6795eflaherty@millerthomson.com

Beryl B. Green 416.595.8627bgreen@millerthomson.com

Michelle Greenwood 416.595.2952mgreenwood@millerthomson.com

Jennifer Hewitt 416.595.2972jhewitt@millerthomson.com

Jay M. Hoffman 416.595.8508jhoffman@millerthomson.com

Virginia Huang 416.595.2987vhuang@millerthomson.com

James M. Klotz 416.597.4373jmklotz@millerthomson.com

Sarah Lowy 416.595.8679slowy@millerthomson.com

Ian Mak 416.595.2955imak@millerthomson.com

Kimberly Muio 416.595.2653kmuio@millerthomson.com

Michael J. Pace 416.595.8533mpace@millerthomson.com

James A. Proskurniak 416.595.8598jproskurniak@millerthomson.com

Jason Rosen 416.595.2644jrosen@millerthomson.com

Max Spearn 416.595.2974mspearn@millerthomson.com

Robert M. Stewart 416.595.2963rstewart@millerthomson.com

David Tsubouchi 905.415.6716dtsubouchi@millerthomson.com

John Turner,P.C., C.C., Q.C. 416.595.8607jturner@millerthomson.com

Steven L.Wesfield 416.595.8606swesfield@millerthomson.com

Judson D. Whiteside 905.415.6701jwhiteside@millerthomson.com

Financial Services

Jennifer E. Babe 416.595.8555jbabe@millerthomson.com

Jeffrey C. Carhart 416.595.8615jcarhart@millerthomson.com

Anthony K. Crossley 416.595.8689acrossley@millerthomson.com

Deepesh Daya 416.595.8553ddaya@millerthomson.com

Maurice V. R. Fleming 416.595.8686mfleming@millerthomson.com

Jennifer Hewitt 416.595.2972jhewitt@millerthomson.com

Elizabeth Hutchison 416.595.8190ehutchison@millerthomson.com

Richard D. Leblanc 416.595.8657rleblanc@millerthomson.com

Joseph Marin 416.595.8579jmarin@millerthomson.com

Craig A. Mills 416.595.8596cmills@millerthomson.com

Nora F. Osbaldeston 416.595.8680nosbaldeston@millerthomson.com

Eric Sherkin 416.595.8599esherkin@millerthomson.com

Robert Shipcott 416.595.8628rshipcott@millerthomson.com

Tom Tower 416.595.8674ttower@millerthomson.com

Intellectual Property & Information Technology

William Bankiner 416.595.8597wbankiner@millerthomson.com

Anil Bhole 416.595.2645abhole@millerthomson.com

C. Donald Brown 416.595.8540cdbrown@millerthomson.com

Roxanne Chow 416.595.2649rchow@millerthomson.com

Anthony de Fazekas 416.595.8603adefazekas@millerthomson.com

Karen Durell 416.595.7913kdurell@millerthomson.com

M. Stephen Georgas 416.595.8558mgeorgas@millerthomson.com

Eugene J.A. Gierczak 416.596.2132egierczak@millerthomson.com

Eduardo Krupnik 416.595.8524ekrupnik@millerthomson.com

J. Fraser Mann 416.595.8195fmann@millerthomson.com

Lou H. Milrad 416.595.7926lmilrad@millerthomson.com

Andrew J. Sprague 416.595.8556asprague@millerthomson.com

Elisabeth Symons 416.595.8575esymons@millerthomson.com

Tax, Estates & Trusts

Dalton Albrecht 416.595.4360dalbrecht@millerthomson.com

Elena Balkos 416.595.2965ebalkos@millerthomson.com

Rachel Blumenfeld 416.596.2105rblumenfeld@millerthomson.com

John M. Campbell 416.595.8548jcampbell@millerthomson.com

Donald Carr, O.Ont., Q.C., L.H.D. 416.595.8506dcarr@millerthomson.com

David W. Chodikoff 416.595.8626dchodikoff@millerthomson.com

Gordon Cooper, Q.C. 416.595.8198gcooper@millerthomson.com

Gerald D. Courage 416.595.8163gcourage@millerthomson.com

Arthur B.C. Drache, C.M., Q.C. 416.595.8681adrache@millerthomson.com

James A. Fraser 416.595.8594jafraser@millerthomson.com

Lyne M. Gaulin. 416.595.8590lgaulin@millerthomson.com

Matthew Getzler 416.597.4374mgetzler@millerthomson.com

Robert Fuller, Q.C. 416.595.8514rfuller@millerthomson.com

Robert B. Hayhoe 416.595.8514rhayhoe@millerthomson.com

Leela Hemmings 416.595.8623lhemmings@millerthomson.com

James A. Hutchinson 416.597.4381jhutchinson@millerthomson.com

Hugh M. Kelly, Q.C. 416.595.8176hkelly@millerthomson.com

Kate Lazier 416.595.8197klazier@millerthomson.com

Susan M. Manwaring 416.595.8583smanwaring@millerthomson.com

Krystle Ng-A-Mann 416.595.2962kngamann@millerthomson.com

Alon Ossip 905.415.6727aossip@millerthomson.com

Rosanne T. Rocchi 416.595.8532rrocchi@millerthomson.com

Martin J. Rochwerg 416.596.2116mrochwerg@millerthomson.com

Amanda Stacey 416.595.8169astacey@millerthomson.com

Andrew Valentine 416.595.2980avalentine@millerthomson.com

Katherine Xilinas 416.595.8165kxilinas@millerthomson.com

Southwestern OntarioBusiness Law

Aaron E. Atcheson 519.931.3526aatcheson@millerthomson.com

Robert R. Berry 519.780.4636rberry@millerthomson.com

David Borges 519.593.3214dborges@millerthomson.com

Frank O. Brewster, Q.C. 519.780.4618fbrewster@millerthomson.com

Stephen R. Cameron 519.593.3207scameron@millerthomson.com

William S. Dahms 519.593.3211wdahms@millerthomson.com

Jeffrey D. Elliott 519.931.3505jelliott@millerthomson.com

Scott J. Galajda 519.780.4615sgalajda@millerthomson.com

Peter A. Gifford, Q.C. 519.780.4626pgifford@millerthomson.com

Angus Gordon 519.780.4631agordon@millerthomson.com

A. Duncan Grace 519.931.3507dgrace@millerthomson.com

Lorelei Graham 519.780.4601lgraham@millerthomson.com

Andrew Graham 519.593.2398agraham@millerthomson.com

Douglas Graham 519.593.2399dgraham@millerthomson.com

Trevor Grant 519.593.3285tgrant@millerthomson.com

John J. Griggs 519.593.3231jgriggs@millerthomson.com

F. Glenn Jones 519.931.3512gjones@millerthomson.com

Gregory P. Hanmer 519.593.3233ghanmer@millerthomson.com

Tiffany K. Koch 519.931.3512tkoch@millerthomson.com

Dwayne K. Kuiper 519.593.3243dkuiper@millerthomson.com

Jean Leonard 519.593.3246jleonard@millerthomson.com

Thomas W.R. Manes 519.780.4614tmanes@millerthomson.com

J. Jamieson K. Martin 519.593.3247jjkmartin@millerthomson.com

Richard G. Meunier, Q.C., 519.593.3251rmeunier@millerthomson.com

Alissa K. Mitchell 519.931.3501amitchell@millerthomson.com

Robin-Lee A. Norris 519.780.4638rnorris@millerthomson.com

Steven J. O’Melia 519.593.3289someila@millerthomson.com

Alessandra Prioreschi 519.593.3272aprioreschi@millerthomson.com

James Rhodes 519.593.2403jrhodes@millerthomson.com

Andrew S. Roth 519.593.3264aroth@millerthomson.com

Karyn Sales 519.780.4655ksales@millerthomson.com

Daniel Schmidt 519.593.3276dschmidt@millerthomson.com

Eric N. Schneider 519.593.3200eschneider@millerthomson.com

Daryl W. Schnurr 519.593.3226dschnurr@millerthomson.com

David Schnurr 519.593.3287daschnurr@millerthomson.com

Kristina Shaw 519.931.3511kshaw@millerthomson.com

Ryan T. Sills 519.931.3514rsills@millerthomson.com

Heather Tanner 519.780.4603htanner@millerthomson.com

Anthony G.L. Van Klink 519.931.3509avanklink@millerthomson.com

Robert L. Warren 519.593.3265rwarren@millerthomson.com

Ian C. Wismer 519.593.3232iwismer@millerthomson.com

This newsletter is provided as an information service to our clientsand is a summary of current legal issues. These articles arenot meant as legal opinions and readers are cautioned not toact on information provided in this newsletter without seekingspecific legal advice with respect to their unique circumstances.Miller Thomson LLP uses your contact information to send youinformation on legal topics that may be of interest to you. It doesnot share your personal information outside the firm, except withsubcontractors who have agreed to abide by its privacy policy andother rules.

© Miller Thomson LLP, 2008 All Rights Reserved. All IntellectualProperty Rights including copyright in this publication are owned byMiller Thomson LLP. This publication may be reproduced anddistributed the form or content. Any other form of reproduction ordistribution requires the prior written consent of Miller Thomson LLP

which may be requested from the editor atnewsletters@millerthomson.com.

TORONTO40 King Street West, Suite 5800Scotia Plaza P.O. box 1011Toronto, ON, Canada M5H 3S1T: 416.595.8500F: 416.595.8695

VANCOUVER1000-840 Howe StreetVancouver, BC, Canada V6Z 2M1T: 604.687.2242F: 604.643.1200

CALGARY3000, 700 - 9th Avenue S. W.Calgary, AB, Canada T2P 3V4T: 430.298.2400F: 403.262.0007

EDMONTON1055 - 102 StreetEdmonton, AB, Canada T5J 4G8T: 780.429.1751F: 780.424.5866

LONDON255 Queens Avenue, Suite 2010London, ON, Canada N6A 5R8T: 519.931.3500F: 519.858.8511

KITCHENER-WATERLOO295 Hagey Blvd., Suite 300Accelerator BuildingWaterloo, ON, Canada N2L 6R5T: 519.579.3660F: 519.743.2540

GUELPH100 Stone Road West, Suite 301AgriCentreGuelph, ON, Canada N1G 5L3T: 519.822.4680F: 519.822.1583

MARKHAM600 - 60 Columbia WayMarkham, ON, Canada L3R 0C9T: 905.415.6700F: 905.415.6777

MONTRÉAL1155 René-Lévesque Blvd. WestCIBC TowerMontréal, QC, Canada H3B 3S6T: 514.875.5210F: 514.875.4308

www.millerthomson.com