Canada: Project Finance Comparative Guide

1 Legal framework

1.1 Beyond general commercial and contract laws, what other specific laws and regulations govern project finance transactions in your jurisdiction?

In addition to general commercial and contract laws, typical project finance transactions involving infrastructure or project development will interact with:

• construction law and lien legislation unique to each province;
• aboriginal law and the rights of Indigenous peoples;
• significant environmental compliance requirements; and
• municipal law.

Further, Canada has comprehensive laws and regulations related to the business of banking that parties must be aware of when engaging in project finance. For example, Canada has taken steps to increase the transparency and propriety of transactions. Legislation such as the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations, the Anti-Terrorism Act, the Official Secrets Act and the Corruption of Foreign Public Officials Act – in addition to the Criminal Code and the Canada Evidence Act – contain measures designed to prevent money laundering, terrorist financing, bribery and the improper conduct of politically exposed persons.

The legal responsibilities in project finance are myriad, complex and project specific. It is incumbent on the involved parties to seek guidance from professionals with extensive knowledge in their respective fields of expertise.

1.2 Do any bilateral and/or multilateral international instruments have particular relevance for project finance transactions in your jurisdiction?

Bilateral and multilateral international instruments do not have particular relevance for project finance transactions, as compared to other commercial transactions. The relevance of such instruments will depend on the industry and asset class to which a project finance transaction relates.

Canada is a party to bilateral and multilateral instruments designed to encourage foreign investment in project finance, among other sectors. Specifically, the Canada-United States-Mexico Agreement (CUSMA) aims to establish close trading relations with Canada's North American neighbours – in part, by eliminating protectionist policies and facilitating greater ease of trade between states. In addition to CUSMA, Canada is party to many other trade agreements designed to promote economic integration and cooperation, such as:

• the World Trade Organization Agreement on Government Procurement;
• the Canada-European Union Comprehensive Economic Trade Agreement; and
• the Canada-UK Trade Continuity Agreement.

Within Canada, provincial and territorial governments are parties to a variety of interprovincial agreements, such as:

• the Agreement on Internal Trade;
• the Trade and Cooperation Agreement between Ontario and Quebec;
• the Atlantic Procurement Agreement; and
• the New West Partnership Trade Agreement.

These instruments serve to create equal access to government procurement and allow the free flow of investment and trade within Canada.

Canada has also enacted the United Nations Act and the Special Economic Measures Act, legislation that authorises the enactment of domestic regulations of the United Nations Security Council to impose sanctions and, in the absence of a Security Council resolution, to impose sanctions stemming from a decision of other international organisations.

1.3 Beyond normal governmental institutions, are there regulatory bodies that play a particular role in project finance in your jurisdiction? What powers do they have?

Regulatory bodies are present at each stage of a project finance transaction. In addition to normal government institutions – such as Public Works and Government Services Canada, the Treasury Board Secretariat of Canada and other such departments – the Canada Infrastructure Bank was established at the federal level to invest in (and attract investment from) private sector and institutional investors for projects in Canada. Additionally, most Canadian provinces have infrastructure procurement and partnership agencies that play a role, to varying degrees, in facilitating and managing project finance transactions (eg, Infrastructure Ontario, Partnerships BC).

Financial institutions are also carefully regulated in Canada, and the Office of the Superintendent of Financial Institutions is responsible for ensuring the stability and sound financial condition of these federally regulated bodies. As such, investors and parties to a project financing must be aware of the respective regulatory obligations of lenders and borrowers.

1.4 What is the government's general approach to project finance in your jurisdiction? Is PFI/PPP a preferred model in your jurisdiction?

Governments in Canada generally encourage project finance transactions and, in fact, are a main source of infrastructure investment and frequently use a public-private partnership (PPP) model to facilitate projects. PPP transactions involving transportation and healthcare projects are most common, but government involvement is prevalent across all sectors. There are various PPP models used in Canada, but the most common are the design-build-finance and the design-build-finance-maintain structures.

Centralised procurement agencies are fundamental to government involvement in PPPs and these bodies have established expertise in using PPPs to achieve value for money. As discussed, the federal government has created such an agency, the Canada Infrastructure Bank; while a majority of provinces have similar agencies. For example, Infrastructure Ontario, Partnerships BC, Saskbuilds, Alberta Infrastructure and Société québécoise des infrastructure all play an integral role in facilitating PPPs.

In addition to PPPs, several provinces have encouraged the use of project finance structures for renewable energy (solar, wind) projects. Ontario's feed-in-tariff programme was one such initiative which ran from 2006-2016, pursuant to which the province committed to purchase electricity produced by pre-qualified solar or wind projects for a period of up to 20 years.

2 Project finance market

2.1 How mature is the project finance market in your jurisdiction?

Canada's project finance market, particularly for government-backed public-private partnership (PPP) projects, is very well established and mature. Several hundred PPP projects have successfully achieved financial close, resulting in a recognised set of industry precedents and frameworks for risk allocation. Market participants and project financiers are generally aware of appropriate risk allocation based on recent transactions.

Additionally, the market is supported by Canada's ‘best-in-class' PPP institutions and long history of successful transactions. This government involvement – which contributes to a predictable procurement process and investment environment – gives comfort to project sponsors, proponents and lenders that a well-defined system is in place to facilitate the successful completion of project financings.

2.2 On what types of project and in which industries is project finance typically utilised?

In Canada, project finance transactions are most prevalent in transportation, healthcare, energy and natural resources (mining) transactions. As such, these projects tend to dominate the project finance landscape – particularly in projects with government involvement. Nevertheless, project finance has been effectively used across all industries: successful projects have been completed in sectors such as education, government services, renewable energy, information technology, justice, recreation and culture, as well as other public infrastructure projects.

2.3 What significant project financings have commenced or concluded in your jurisdiction over the last 12 months?

Canada has seen nearly four dozen projects enter pre-launch or reach financial close over the past 12 months, even with business and supply-chain interruptions stemming from the COVID-19 pandemic. Some examples are discussed below.

The largest pre-launch project in Canada over the past 12 months, the REM de l'Est Light Rail Transit project, is estimated to cost C$7.86 billion. Announced by CDPQ and the government of Quebec, the project provides a new east-end transit network consisting of 32 kilometres (km) of light rail and 23 new stations; combined with existing projects, it will create one of the largest automated transit networks in the world.

Another significant pre-launch project announced over the past 12-month period is the Ontario Line bundle of three PPPs. The Ontario Line will consist of a 16km subway with 15 stations, including six interchange stations and 17 new GO Transit connections. This line will facilitate 40 trains per hour, with only a 90-second waiting time between trains.

A notable project that reached financial close was the Coastal GasLink Pipeline at a cost of C$4.72 billion. KKR and Alberta IMC own a 65% stake in the pipeline, which was acquired from TC Energy Corporation. The project is comprised of a 670km natural gas pipeline and its associated facilities. At completion, the pipeline will have a capacity of 2.1 billion cubic feet per day, and will connect the Western Canadian Sedimentary Basin natural gas supply to the LNG Canada liquefaction and export facility in Kitimat, British Columbia.

3 Finance structures

3.1 What project financing structures are most commonly used in your jurisdiction?

The most commonly used project finance structure is a limited recourse or non-recourse financing to a special purpose vehicle (SPV) – a separate legal entity created solely for the ownership and management of a specific project. An SPV can take any properly constituted legal form, but is typically a corporation, general partnership or limited partnership. Parties may also employ a joint venture structure or other similarly unincorporated association, depending on their respective needs.

The financing structure of an SPV borrower (or multiple SPVs) and their associated agreements can be highly complex. Typically, the SPV borrower will enter into a project agreement with a government entity or an off-take agreement with a private or government offtaker. The SPV borrower will enter into dropdown contracts with a construction contractor and, where applicable, an operations and maintenance provider to fully pass down all design, construction, operation and maintenance risk associated with the project. These structures are often necessary because financing and repayment terms are generally structured on a non-recourse basis based on projected future cash flows.

3.2 What are the advantages and disadvantages of these different types of structures?

Different project finance structures are more or less advantageous, depending on the specific transaction in question. Sponsors and proponents are principally concerned with the allocation of risk and the availability and cost of credit, so SPVs are generally considered the most beneficial form of project finance structure. This rationale is because SPVs allow project proponents to isolate themselves from liability while contributing financial and human capital via certain guarantees and contracts.

Conversely, lenders are primarily concerned with:

• the allocation of risk;
• the viability of a project; and
• the protection of their capital in the event of a default.

Therefore, lenders may prefer to have a project exist within an existing corporate structure with a stronger credit profile. Lenders may be furthermore concerned with the organisational capacity of a newly formed SPV. On the other hand, SPVs are also beneficial to secured creditors because SPVs will generally be bankruptcy remote and isolate a project and its assets from other creditors outside of the project.

3.3 What other factors should parties bear in mind when deciding on a project financing structure?

A non-recourse structure with an SPV is workable only where at least two conditions are met:

• All development and operation risks must be adequately passed down to contractors with appropriate balance sheets (or guarantees); and
• The credit risk of the project offtaker or client must be excellent.

Failing these two requirements (either retained risk at the borrower or a weak offtaker), a non-recourse structure will likely not be financeable and project finance lenders will require additional security or guarantees, or in the extreme a corporate lending structure.

4 Industry players and ownership requirements

4.1 Who are the key players in project financings in your jurisdiction? Do any restrictions apply in this regard (eg, foreign ownership)?

The key players in Canadian project financings are:

• project sponsors;
• proponents;
• lenders;
• contractors;
• other professionals; and
• government.

Parties providing capital, through equity or debt, are essential to a project finance transaction. Each project will have a proponent and/or sponsors that hold equity and in turn will obtain various forms of financing; this financing will include senior, subordinate or mezzanine and takeout lenders. Depending on the type of project, the experience of the proponents and the lenders' risk profile, funding can be sought from:

• banks;
• pension plans;
• insurance companies;
• real estate investment funds;
• venture capital; and
• government.

If public debt is issued, a rating agency will also be required to rate the debt instruments. In addition to debt and equity holders, many other players are integral to project finance: contractors, operators, engineers, insurance consultants and lawyers all play a critical role from the initial structuring of a project through to its final completion.

Restrictions on foreign investment or ownership are generally limited, subject to certain legal and regulatory oversight and bilateral or multilateral agreements to which Canada is a party. Foreign investment is generally encouraged, though the federal Investment Canada Act necessitates a review of certain acquisitions or establishment of Canadian businesses by non-Canadians. In recent years, pressure has been mounting to apply even greater scrutiny to foreign interests owning key Canadian businesses and projects, particularly in the natural resource sector.

4.2 What role does the state play in project financings in your jurisdiction?

Governments in Canada:

• provide a stable regulatory environment;
• invest heavily in infrastructure; and
• increasingly participate in project finance as a partner.

Federal and provincial governments in Canada have long recognised the value of project finance in delivering public assets and services. Public-private partnerships (PPPs) are popular tools for governments to find new ways to derive value for money for taxpayers when sourcing new projects. As such, Canada has become one of the world's most active PPP markets. Presently, there are several hundred projects in various stages of the procurement or development process, with a total market value of nearly C$140 billion.

4.3 Does your jurisdiction have nationalisation or expropriation laws in place? If so, what are the implications in the project finance context?

Canada generally recognises the role of free enterprise and strong property rights in producing jobs and growing the economy. However, while rare, certain nationalisation measures have previously occurred where public policy concerns have arisen. Much more common is expropriation, which is legislated at the federal level in the Expropriation Act, and at the respective provincial and municipal levels of government. Most often, it is the municipalities, incorporated under the provincial governments, that engage in acts of expropriation. This process typically occurs in the context of government-backed infrastructure projects that seek to create or expand public service delivery. Transportation projects – such as roadway expansions, underpasses or rail systems – are the most common causes of expropriation, as vast tracts of land can be affected by construction and the risk of affecting private property is higher.

Government willingness to expropriate land for certain projects may be necessary in the context of project finance, but the process can be complex. Landowners subject to expropriation have legal recourse and, where reasonable objections exist, the resulting litigation can pose a risk to transactions and their expedient completion. Given the extensive financing and construction costs contingent on precise project timelines, the financial viability of projects can change in the face of a lengthy expropriation process. Jurisdictional requirements vary throughout Canada, and the respective obligations facing government and the private sector require a deft and tactful approach.

5 Regulatory and documentary requirements

5.1 What regulatory approvals are typically required for project financings in your jurisdiction? How are these typically obtained and what fees are payable?

Canada has a complex regulatory framework that must be closely analysed in light of individual project requirements and adhered to where applicable. The types of approvals, the method in which they are obtained and the fees payable are dependent on the sector in which the project financing takes place. Certain regulated areas that will generally attract regulatory oversight (and subsequent approvals) include:

• telecommunications;
• health and safety;
• mining;
• heritage;
• transportation;
• energy generation and transmission;
• natural resource extraction and development;
• immigration;
• trade and importation; and
• foreign investment.

Those involved in a project finance deal – specifically, the professionals retained or hired to navigate such regulatory environments – must possess extensive knowledge of working with federal and provincial governments to ensure that all necessary approvals are obtained.

5.2 What licences are typically required for project financings in your jurisdiction? How are these typically obtained and what fees are payable?

Licensing requirements are similarly varied and will depend on the nature of a specific project and its respective industry. However, licences are particularly relevant to project finance in Canada, given the abundance of natural resource extraction and development projects, which are subject to stringent regulation and licensing requirements. Such projects often involve obtaining necessary licences from local Indigenous communities and environmental licences from government. Failure to secure proper permission on such issues can have serious effects on the successful completion of a project. For example, Indigenous communities may possess mineral rights in an area where a natural resource project is supposed to occur. If the appropriate licences are not acquired, the project may not be allowed to proceed or could be held up by litigation.

In addition to industry-specific obligations, professionals engaged in a project are typically subject to some degree of regulation and must meet the necessary licensing conditions of their profession. For example, licences will almost always be required for lenders, contractors, operators, architects, engineers, lawyers and all other parties within a regulated sector. Self-regulating professions are typically governed by provincial legislation and associations. Such professionals are also expected to be well versed in any applicable building codes and the usual municipal land use, planning and zoning requirements necessary for a project. Fees payable for licensing requirements are generally administrative in nature, but will vary depending on the type of licence required.

5.3 What documentation is typically involved in a project financing in your jurisdiction?

There is no specific standard of necessary documents, but key components can be broadly sorted by:

• the project contracts;
• equity arrangements among project developers; and
• loan and security documents.

Project contracts typically include:

• a project agreement or other contract between the borrower and a government entity or private project sponsor, which will form the source of the revenue for the project;
• ‘dropdown' contracts pursuant to which the performance obligations of the borrower will be fully passed down to contractors, such as a design-build agreement or construction contract on the one hand and an operations and maintenance agreement or a services agreement on the other; and
• an interface agreement between the construction contractor and the service provider.

Equity arrangements will typically include an equity contribution agreement and letters of credit to secure the obligation of each equity provider to invest the requisite equity. Typical unanimous shareholder agreements, partnership agreements, transfer restriction agreements and other such agreements will also be entered into by the equity providers.

In a simple short-to-medium term project financing, the finance documents will typically consist of a credit agreement, security documents and other ancillary documents. Long-term project financings will typically be financed by bonds and will involve a trust indenture. More complex project financings will involve a hybrid project financing solution consisting of:

• bank debt (credit agreement);
• bonds (trust indenture); and
• a common terms and intercreditor agreement governing the relationship of the two classes of creditors.

5.4 What registration or filing requirements apply for project financing documents to be valid and enforceable?

In Canada, the validity and enforceability of project financing documents are determined in accordance with the law of contracts. For a contract to be valid, certain elements must be present:

• offer and acceptance;
• consideration;
• capacity;
• consent; and
• a lawful purpose.

So long as these elements are present and evidenced by the conduct of the parties and their respective agreements, project financing documents will be valid and enforceable. Additional registration or filing requirements and entitlements are pertinent to perfecting security interests in personal property.

5.5 Is force majeure understood as a legal concept in your jurisdiction?

Yes, force majeure is an understood legal concept and a force majeure clause is a standard inclusion in Canadian project finance agreements. This topic has been particularly salient in light of the COVID-19 pandemic, and increased attention has been paid to such provisions and the extent to which they are enforceable. Typically, contemplated force majeure events include, but are not necessarily limited to:

• certain weather events;
• insurrection or war;
• discovery of heritage artefacts;
• property damage beyond the parties' control; and
• most topically, pandemics.

Force majeure clauses typically define:

• triggering events;
• what occurs after a triggering event;
• the circumstances in which a party can suspend performance; and
• whether any obligations will change based on the period of time that the force majeure lasts.

Most Canadian jurisdictions understand that there is always a necessary degree of risk sharing between parties with respect to force majeure events. However, given the spectrum of possible outcomes in such events, the proper allocation of risk or effective mitigation of such risk is practically impossible. Therefore, most Canadian jurisdictions distinguish between catastrophic force majeure events and lesser events which can be mitigated through remediation, project extensions, insurance or other means.

6 Security/guarantees

6.1 What types of security interests and guarantees are available in your jurisdiction? Which are most commonly used and which are recommended (if different)? In particular, is the concept of a security trustee recognised (and if not, how are guarantees or security taken for multiple lenders)?

Personal property is generally available to secure lending (including project finance), subject to certain contractual or legal limitations. Security in personal property is most commonly taken under the respective provincial Personal Property Security Acts (PPSA), which govern the creation, perfection and enforcement of security interests. The legislation includes, among other classes of property:

• consumer goods;
• equipment and inventory;
• documents of title;
• securities;
• cash; and
• certain intangibles.

A notable exception is the province of Quebec, which is a civil law jurisdiction and operates under a civil code.

Federally, the Bank Act establishes a separate security framework available to chartered banks for certain classes of security interests. Separate federal legislation also regulates interests in:

• intellectual property;
• railways;
• federal property;
• deemed trusts; and
• certain matters relating to Indigenous peoples.

Interest in land, other than interests arising under a licence, are expressly excluded.

In the context of a project finance involving a special purpose vehicle (SPV), lenders will typically seek a general security agreement (or a deed of hypothec under Quebec's Civil Code) over the assets, property and rights of the SPV. While general security agreements could apply to all property of the debtor, they are not the preferred instrument for taking security interests over real property or land (see question 6.3). Accordingly, collateral that is subject to general security agreements is typically limited to personal property of the debtor. Where the project entity is not an SPV or lenders are otherwise prevented from seeking general security, it will be necessary to enter into specific security agreements for the identified collateral. In Canada, the concept of a security trustee is recognised and agents are frequently employed in syndicated lending.

If real property is part of the collateral, the borrower may be required to enter into a mortgage or debenture in favour of the lenders, together with direct agreements with other parties that may have interest in the land. The real property charge or mortgage must be registered in the land titles system of the province or territory in which the property is located.

In rare cases, a partial or full guarantee of the project finance debt may be provided in non-recourse project financing structures.

6.2 What are the formal, documentary and procedural requirements for perfecting these different types of security interests?

Each Canadian jurisdiction has its own PPSA (or the Civil Code, in Quebec), with a specific set of rules governing the perfection of security interests. While there are subtle differences between the jurisdictions with respect to documentary and procedural requirements, in all jurisdictions a security interest in personal property is most commonly perfected by registration (ie, filing a financing statement in the appropriate provincial personal property registry). Generally, and subject to conflicts of law rules governing personal property security interests, the proper place of registration for the purposes of perfection is in:

• the provincial or territorial jurisdiction in which the collateral is located for tangible property; and
• the jurisdiction where the debtor is located or organised, for intangible property.

Notwithstanding that registration of a financing statement will perfect a security interest in all forms of collateral to which the relevant PPSA applies, perfection by possession of certain types of collateral (eg, chattel paper, instruments, money and negotiable instruments) and perfection by control of investment property confer additional protection on the secured party.

For certain forms of personal property, additional steps may be required under the relevant provincial legislation in order to perfect security. For example, any financing statement registered against equipment situated in the province of Alberta that is ‘serial number goods' will require a description of such equipment by serial number in such financing statement in order for the underlying security interest to be perfected.

There are some types of collateral to which the relevant PPSA does not apply. It is therefore important for parties to understand the rules governing personal property security interests for specific types of collateral. As noted above and below, a security interest in real property must be registered in the land titles system for it to be effective against third parties.

6.3 Can security be taken over property, plant and equipment in your jurisdiction? If so, how?

Plant and equipment are considered personal property and security can be taken in the same manner as described above: by virtue of a security agreement and registration of a financing statement.

Security can also be taken in real property, including buildings and land, but such security is not governed by the PPSA regime. Rather, security is taken through:

• a mortgage of land;
• a mortgage of lease;
• a debenture; or
• if the real property is in Quebec, a deed of immovable hypothec.

Security over real property is registered in the land registry system of the jurisdiction in which it is located. ‘Real property' is broadly defined, but is understood to mean land, buildings and improvements which are constructed on, or attached to, the land. It can also include various rights and interests, such as mineral or strata rights.

6.4 Can security be taken over cash (including bank accounts generally) and receivables in your jurisdiction? If so, how? In particular what types of notice and control (if any) are required?

The PPSAs and Quebec's Civil Code allow for security to be taken over deposit accounts and receivables in Canada. In PPSA jurisdictions, security interests in bank accounts can be perfected by registering a PPSA financing statement where the debtor is located or organised. With physical cash, traceability is a consideration, as property must be sufficiently identifiable in order for attachment to occur; it is more straightforward with deposit accounts.

No PPSA jurisdiction has adopted control as a means of perfecting security in deposit accounts. Under Quebec's Civil Code, however, it is possible to perfect monetary claims by effecting control. When the creditor is not the account bank, control is obtained by entering into an agreement with the debtor and the institution that controls the account or by becoming the account holder.

With respect to receivables, perfection is effected under the PPSAs and Quebec's Civil Code in a similar manner to other property, and no notice is required to create a security interest. However, debtors for the receivables are obliged to pay the secured party directly only after receiving notice. As such, if the secured party expects to collect repayment, notice is constructively required. Under federal legislation, subject to exceptions, receivables owed by the government can only be assigned absolutely and with appropriate notice. Similar legislation exists in certain provincial jurisdictions.

6.5 Is it possible to take security over major licences (particularly in the extractive industry sector)?

For licences and other types of specially regulated property, approval is typically required by government authorities for the creation and enforcement of security interests. Licences and permits issued by government are subject to specific laws and regulations requiring varying degrees of notice, consent or explicit approval.

6.6 What charges, fees and taxes (including notary and similar fees) arise from the perfection of a security interest or the taking of a guarantee?

PPSA document registrations require modest administrative fees in each jurisdiction. These fees range from C$1.50 to C$26 per year, with additional costs for recurring time periods. Additionally, a similarly modest tax is paid upon registering real property in certain Canadian jurisdictions. However, stamp taxes or duties are not payable as a result of perfecting security interests. In Quebec, if a notarial deed of hypothec is used, a small fee will be charged for execution.

6.7 What are the respective obligations and liabilities of the parties under security documents?

Security documents will often contain representations, warranties and covenants by the debtor, in each case specifically relating to the collateral and the security interest created under such documents. Common representations and warranties given by the debtor include:

• ownership of the collateral;
• the absence of any liens other than those permitted by the finance agreements;
• locations of collateral; and
• the absence of any notices of claim or other proceedings received from third parties in connection with the collateral.

Typical covenants include:

• a negative pledge;
• prohibitions on disposition of collateral or other assets;
• protection of the collateral against damage (including the maintenance of insurance, if appropriate);
• delivery by the debtor to the lenders of any new collateral (eg, new share certificates); and
• notices of changes to the collateral's or the debtor's location (as jurisdictional changes could impact on the perfection of the secured party's security interest).

Security agreements in project finance transactions will also often include rights of the lenders and their agents to access and inspect the collateral.

Security agreements may also seek to clarify the extent of the secured party's rights in the collateral, such as the secured party's ability to directly collect from or contact the borrower's account debtors. Security agreements will also typically include specific lender remedies regarding the collateral where an event of default has occurred or is continuing, although there are certain provisions in the PPSAs which could limit secured parties' enforcement rights and which cannot be varied by contract (eg, the duty of secured parties to use reasonable care in the custody and preservation of the collateral).

6.8 In the event of default, what options are available to enforce a security interest or guarantee? Is self-help available in your jurisdiction in connection with the enforcement of security or must enforcement action be pursued through the courts?

In the event of default, self-help is available to secured creditors and possession and control of collateral personal property can be taken either individually or through a private receiver. Under Canadian legislation, enforcement of security interests occurs by providing the debtor with the prescribed notice as to whether assets will be seized and sold, or whether the creditor will take possession of the assets to satisfy the debt. The appropriate notice periods are set out in the PPSAs and Quebec's Civil Code. If there is a concern for the safety of collateral, creditors can seek the appointment of an interim receiver by the court.

Real property security interests are enforced in a similar manner to personal property. Debt can be discharged by the sale of property in accordance with mortgage documents or, alternatively, it can be foreclosed upon. Additionally, real property can be held with any resulting revenues used to satisfy outstanding claims. Courts will not intervene in such a sale if done in accordance with a mortgage agreement, but the required time period for notices is set by provincial statute. However, while sales in accordance with mortgage documents do not require judicial intervention, foreclosure actions require a court order.

6.9 What other considerations should be borne in mind when perfecting a security interest or taking the benefit of a guarantee in your jurisdiction?

Where registration is used to perfect security interests, secured parties must ensure that there are no errors in the debtor name as it appears on the financing statement; otherwise the security may remain unperfected and jeopardise such secured parties' position relative to other creditors. However, not all registration errors will result in an unperfected security interest. The general rule is that a security interest will be perfected as long as a reasonable person would not likely be materially misled by an error or omission. In addition, even material errors can be corrected without affecting continuous perfection if a financing change statement is filed correcting the debtor name and there are no intervening registrations between the initial registration with the error and registration of the correction.

While registration is the most common form of perfection of security interests in personal property, each of the personal property laws in the provinces and territories does include further protection for secured parties by way of possession for investment property. Under each of the PPSAs and Security Transfer Acts (and the Civil Code, for Quebec), where a secured party has taken ‘control' (as such term is understood under the relevant Security Transfer Acts or the Quebec Civil Code, and which includes physical possession of any certificates representing the investment property) of investment property, such secured party's security interest in such investment property will have priority over any other security interest, in each case to which the relevant PPSA or Civil Code applies. Accordingly, where the collateral in a project finance transaction includes investment property, the lenders may require ‘control' over such investment property, whether by way of:

• physical possession of certificated securities (eg, share or unit certificates); or
• a control agreement for uncertificated securities (eg, securities accounts or securities entitlements).

6.10 What other protections are available to a lender to safeguard its position in connection with security or guarantees?

In addition to taking security through a general security agreement or otherwise obtaining guarantees, lenders can safeguard their funds through other means during the financing process. Lenders can use:

• general assignments of accounts receivable;
• share pledges;
• promissory notes;
• bankers' acceptances;
• debentures; or
• security specific to individual assets such as inventory.

The specific circumstances of a project will determine the type of instrument(s) used.

6.11 Are direct agreements with contractual counterparties well understood in your jurisdiction?

Direct agreements with contractual counterparties are well understood in Canada as an important feature of project finance. Government sponsors that regularly procure infrastructure using project finance structures have established standard form direct agreements that are accepted in the market. Direct agreements aim to protect lenders against default of the main construction contract, long-term supply contract, concession agreement or other similar agreement. Direct agreements are employed in addition to, or as an alternative to, security interests. Even though most lending is done on a secured basis in project finance, parties will still focus on the contractual relations between project stakeholders and seek to limit downside risk where possible.

7 Bankruptcy

7.1 How (if at all) do bankruptcy proceedings impact on the enforcement of security by a creditor?

Canada's bankruptcy and insolvency regime is governed by two federal statutes: the Bankruptcy and Insolvency Act (BIA) and the Companies' Creditors Arrangement Act (CCAA) (for larger restructurings). However, Canada's provinces have jurisdiction over property and civil rights, including:

• granting and enforcing security; and
• determining creditor priorities (through either PPSA legislation in the common law provinces or the Civil Code in Quebec).

Under the BIA and the CCAA, a secured creditor's right to enforce its security in restructuring or receivership proceedings is stayed in order to give the debtor an opportunity to prepare a compromise of creditor claims and to avoid a multiplicity of proceedings while putting all like creditors on equal footing. The BIA includes restructuring mechanisms, such as filing of a proposal or notice of intention, where the stay automatically applies. However, the stay does not apply:

• in orderly liquidation proceedings under the BIA; or
• if the creditor has given notice to enforce the security more than 10 days before the proposal or notice of intention.

Under the CCAA, the court has discretion to grant a stay of all creditor claims and to determine the scope of the stay. Creditors may also apply to the courts to have the stay lifted; in such case the courts will consider, among other things:

• the relative prejudice to the parties;
• the merits of the proposed action; and
• the good faith and due diligence of the debtor.

7.2 In what circumstances can antecedent transactions be unwound for preference? What other similar measures apply in this regard?

Canadian insolvency law provides for remedies if:

• an antecedent transaction results in a preference for one creditor over another; or
• the consideration received by the debtor is conspicuously less than fair market value of the property transferred or services rendered.

As the bankruptcy legislation aims to put creditors upon equal footing, the review of these transactions is intended to ensure the rateable division of property among creditors if a bankruptcy occurs.

A trustee or monitor (court officer supervising the insolvency proceeding) may seek to avoid a transaction for preference if:

• it occurred within the prescribed time period;
• the debtor was insolvent on the date of the transaction; and
• the creditor received a preference because of the transaction.

Once these criteria are established, the onus shifts to the debtor to prove that it did not intend to give a preference. Similarly, a transaction may be avoided as a transfer at undervalue if:

• it occurred within the prescribed time period;
• the debtor was insolvent at the time of the transaction or was rendered insolvent by the transaction; and
• the debtor intended to defraud, defeat or delay a creditor.

Where those criteria are met, the court may declare the transaction or transfer void as against the trustee or, in Quebec, may not be set up against the trustee.

Beyond these federal remedies, most provinces have fraudulent preference and/or conveyance legislation (in Quebec, the Paulian action) that co-exist with the BIA and CCAA provisions.

8 Project contracts

8.1 Are project contracts in your jurisdiction typically governed by local law?

Canadian courts generally respect parties' choice of law in contracts, as long as the choices meet certain criteria. In practice, project contracts are nearly always governed by the laws of the jurisdiction in which the project takes place. However, it is not unusual for the finance documents to be governed by a law different from the governing law of the project contracts (eg, the borrower's jurisdiction of organisation will frequently be the governing law of choice for the finance documents, regardless of where the project is taking place).

8.2 What remedies are available to a project company for breach of the project contract?

In Canada, the most common remedy available for a breach of contract is a claim for damages, which arises as a right of the non-breaching party. Generally, the damages that are awarded by the courts in respect of such claims will be in an amount to place the innocent party in a ‘no better, no worse' position than it would have been in had the breach not occurred. If the project contract expressly includes payment of liquidated damages, the court will enforce such provisions, provided that the liquidated damages are a genuine pre-estimate of losses and cannot be characterised as a penalty.

The non-breaching party's claim for damages may be limited in a number of ways. Canadian courts rarely award punitive damages and often the terms of the commercial contract itself will limit the types of losses that can be claimed. In project contracts, special, indirect, incidental, punitive, exemplary or consequential damages – including loss of profit, loss of use and claims for such damages from third parties – are almost always excluded. The project contract may also include limitations on liability, effectively ‘capping' the breaching party's liability for claims under the contract. In addition, the non-breaching party's duty to mitigate could further limit claims for damages, although the onus is on the defendant to show that the plaintiff did not reasonably mitigate its losses.

Also potentially available to the non-breaching party are equitable remedies, including specific performance and injunction. However, such remedies are available only if monetary damages are not adequate to compensate the innocent party for its losses, and are awarded at the discretion of the courts. Accordingly, equitable remedies are rarely exercised in a project finance context.

8.3 Are liquidated damages provisions in project contracts enforceable?

Liquidated damages provisions are common inclusions in project contracts and are generally enforceable. Canadian courts are generally willing to enforce such provisions, but in some circumstances the courts may refuse to enforce liquidated damages provisions if the offending party would be unfairly penalised and pay a disproportionate amount in damages relative to the loss (ie, the damages would be more appropriately characterised as a penalty). Figures negotiated in advance are more likely to be considered genuine pre-estimates of loss, particularly if both parties are commercially sophisticated and both had the opportunity to discuss terms and reach an agreement. In contrast, imposed terms that were not discussed ahead of time are more likely to be set aside by a court.

8.4 Are there any public policy considerations which need to be taken into account when assessing the enforceability of project contracts?

Canadian courts can set aside contracts or contractual provisions in certain circumstances, particularly when the impugned portion of the contract is deemed contrary to public policy. This can occur where a contract would damage public services or unfairly disadvantage consumers, companies or trade. Given the number of parties in a project financing and the degree of scrutiny in a typical transaction, it would be uncommon to see such provisions, particularly where government is involved in the project. Nevertheless, it is possible that terms of an agreement or contract could contain clauses contrary to the public interest. For example, the terms of a settlement agreement cannot prevent a party from reporting criminal activity. Such language would be deemed void and unenforceable.

9 Project risk

9.1 What risks typically arise in project financings in your jurisdiction and how are these best mitigated?

Project finance in Canada encounters the same construction, operating, regulatory and economic risks inherent to projects in all jurisdictions, including the most common risks relating to:

• technical risk and operational risk;
• project default;
• delays and cost overruns;
• environmental risk; and
• supervening events.

To mitigate such risks, projects should include:

• experienced contractors, operators, funders and advisers;
• cash reserves for debt servicing and maintenance of operating funds;
• comprehensive lender security, including direct agreements and step-in rights;
• adequate performance security from subcontractors, including surety bonding; and
• comprehensive insurance coverage to cover risks for which relief is not available under the project contract.

One risk that may be unique to the Canadian market is the interface with key Indigenous stakeholder groups. Given the prevalence of project financing in natural resource development, transportation and public service delivery, many projects must adhere to Indigenous rights and work with local communities in developing and financing projects. Coordination with Indigenous stakeholders can sometimes be prolonged and require various governmental approvals, which could impact on project costs, project schedule and ultimately successful project completion. To ensure compliance with Indigenous rights, parties should involve potential affected Indigenous groups early in the project. Canadian law and treaty obligations must also be carefully considered, particularly in the context of public-private partnerships (PPPs) and projects with other government involvement.

9.2 How significant is political risk in project financings in your jurisdiction? How is this best mitigated?

Political risk represents a minimal threat to project finance in Canada. The federal and provincial governments generally recognise the benefits of project financing on infrastructure, employment and overall health of an economy, and often participate as partners in large-scale infrastructure projects through the PPP model. In addition, a number of provincial jurisdictions have instituted specialised procurement agencies to help ensure that:

• the process is free from political biases; and
• the best-priced and most innovative private parties are awarded the project contract.

Nevertheless, new governments may have different fiscal priorities and may elect to divert funding which would otherwise be allocated to infrastructure projects towards other major platform commitments. While early termination by a government could happen at any stage of a project, project companies and lenders will have the most to lose where a project has already started and is in progress. Private parties can best mitigate this uncontrollable risk by including:

• direct agreements between the procuring government and lenders; and
• clear and defined breakage and make-whole clauses in project contracts.

10 Insurance

10.1 What types of insurance arrangements are typically put in place for project financings in your jurisdiction?

There is no standard or universal insurance coverage for a project finance in Canada, and insurance arrangements will be informed by both:

• the nature of the project; and
• any contractual relief for risks that are available to the contractor under its project contract.

Typically, the owner of a project or a project's lenders will dictate the minimum insurance that is required to maintained by the borrower and/or its subcontractors. Owners and lenders will be primarily concerned with protection of the project's property and assets, and therefore certain coverage is almost universally required regardless of the project, including:

• commercial general liability insurance;
• property insurance;
• builder's risk insurance; and
• environmental or pollution insurance.

In addition to the required insurance, prudent contractors will secure additional insurance coverage, as more particularly discussed below.

Lenders and project owners will want to be named as a loss payee in connection with all policies of property insurance and as an additional insured under all liability insurance. Some lenders may also require a specific assignment of insurance proceeds. Lenders will also expect that all insurance policies contain specific provisions, including:

• prior notice of termination or modification of the insurance policy; and
• the standard Insurance Bureau of Canada mortgagee clause or other non-vitiation language.

The project contracts and the finance agreements may also have requirements with respect to the insurers themselves – for example, that they:

• be licensed to provide insurance in Canada and the relevant province; and
• meet a minimum required credit rating threshold.

10.2 If local insurance is required, can local insurers assign offshore reinsurance contracts in your jurisdiction?

Under the Insurance Companies Act and applicable provincial legislation, local insurers can generally assign offshore reinsurance contracts for projects in Canada.

10.3 What other forms of insurance feature in the project finance market in your jurisdiction?

Many contractors will obtain other types of insurance in addition to those that are expressly required by the project contracts and finance agreements. These types of insurance coverage commonly include:

• umbrella or excess liability insurance;
• sub-guard insurance;
• wrap-up liability insurance;
• comprehensive crime insurance;
• workers' compensation insurance;
• business interruption insurance;
• delay in start-up insurance;
• non-owned automobile insurance; and
• professional liability insurance.

Depending on the type of project, contractors may also secure coverage for marine cargo or aircraft and watercraft liability insurance.

11 Tax

11.1 What taxes, royalties and similar charges are levied in the project finance context in your jurisdiction?

Taxes in Canada are primarily imposed by the federal and provincial levels of government, with certain additional taxes imposed by municipal and local governments.

Corporate income tax rates depend on the location, size and sector of the relevant business. Currently, the federal corporate income tax rate after reductions is generally 15%. The general provincial corporate income tax rates range from 8% to 16%. Lower rates may apply to certain income earned by ‘Canadian-controlled private corporations' or to income earned in particular sectors (eg, manufacturing and processing).

Subject to any relief provided by bilateral or multilateral treaties, non-resident corporations carrying on business in Canada are generally required to pay tax on income attributable to their Canadian businesses. In addition to basic corporate income taxes, foreign corporations that carry on business in Canada are generally subject to a 25% federal branch profits tax levied on the after-tax profits earned in Canada that are not invested in qualifying Canadian assets (such branch profit rate is frequently reduced under one of Canada's bilateral tax treaties).

The federal government imposes a multi-stage value added tax – known as goods and services tax (GST) – levied at a rate of 5%, which applies to domestic supplies of most types of property and services in Canada. Certain provinces have chosen to harmonise their provincial sales taxes with the GST, resulting in a combined sales tax referred to as the harmonised sales tax. Certain other provinces maintain their own separate sales or value-added taxes (or choose not to levy such taxes).

The federal government and certain provinces levy capital taxes on prescribed financial institutions. Additionally, companies may need to pay various other taxes, including:

• payroll and health taxes;
• realty and land transfer taxes; and
• withholding taxes in respect of amounts otherwise payable to certain non-resident and Canadian-resident recipients.

11.2 Are any exemptions or incentives available to encourage project finance in your jurisdiction?

The federal and provincial governments regularly amend tax laws or otherwise offer exemptions and incentives to influence public policy and implement their agendas. For example, the government of Canada currently makes manufacturing and clean energy projects more fiscally attractive by providing various income tax incentives. Such incentives include the accelerated depreciation for tax purposes of certain manufacturing and renewable energy equipment, in many instances permitting a full deduction for such capital equipment in the year of acquisition.

At the provincial and local level, governments often employ creative tax incentives and solutions to attract businesses and investment in the project finance context. For example, ‘tax increment financing' is sometimes used to encourage infrastructure development by forgoing immediate taxation on the expectation of increased future revenues. Frequently, projects will solicit financial buy-in from federal, provincial and municipal governments, which can use a combination of direct funding, such as grants, and tax incentives to persuade business to invest in a specific jurisdiction.

Canada has a robust bilateral network of tax treaties to limit the incidence of double taxation and facilitate cross-border investment. Canada generally follows the Organization of Economic Cooperation and Development Model Tax Convention and has a particularly robust tax treaty with the United States. Canada has also ratified the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, which modifies the interpretation of many of its bilateral tax treaties (excluding its bilateral tax treaty with the United States).

11.3 What strategies might parties consider to mitigate their tax liabilities in the project finance context?

Tax strategies are highly dependent on the project sponsors and proponents and their respective corporate structure. Special purpose vehicles (SPVs) are the preferred structure for project finance transactions, in large measure because such vehicles permit investors to insulate liability and allocate risk. However, SPVs also provide certain tax benefits, depending on the specific project circumstances. For example, SPVs constituted as a corporation can generally be sold as a separate legal entity, which may permit a seller to avail of certain tax benefits inherent in a share sale, as compared to selling corporate assets as a going concern or on a liquidation basis.

Depending on the circumstances, however, there may be tax benefits to structuring a project outside of a corporate SPV. Because Canada does not permit consolidated corporate income tax filing, losses incurred by a corporate SPV can generally be monetised only once the SPV starts to generate taxable revenue. Accordingly, if a project is expected to incur significant start-up costs, sponsors may prefer to apply those costs against existing income streams rather than waiting to apply the savings to future taxable revenue earned by the SPV. For this reason, SPVs are frequently constituted as limited partnerships that generally permit losses earned by the partnership to be allocated to the members of the partnership (subject to certain limitations).

Certain US-resident investors will invest in Canada through ‘unlimited liability companies' formed under the laws of particular Canadian provinces to engage certain US tax treatment, the details of which are beyond the scope of this Q&A.

In certain circumstances, depending on the nature of the project, collaboration with governments may facilitate tax savings. By partnering with federal, provincial, municipal or indigenous governments or agencies, either through direct funding or in a public-private partnership model, the ability to employ tax mitigation strategies dramatically increases. The tax implications of such structuring decisions are many, and identifying them is a fact-driven exercise that requires experienced legal and tax professionals.

12 Governing law and jurisdiction

12.1 What law typically governs project finance agreements in your jurisdiction? Do any specific requirements apply in this regard?

Choice of law clauses are generally respected and upheld by Canadian courts, provided that such choice is bona fide, legal and not contrary to public policy. Where there is no governing law clause in a contract, the Canadian courts may choose the law that has the closest and most substantial connection with the parties or the project.

Unlike project documents, which are usually governed by the laws of the jurisdiction in which the project is taking place, it is not uncommon for the related finance agreements to be governed by the laws of a different jurisdiction. Parties may negotiate the choice of governing law in the finance documents, particularly if the law of one jurisdiction is more favourable than another. Due in large part to local rules and procedures around the enforcement of security interests and other lender remedies, lenders generally prefer that the governing law of the finance agreements be the law of the jurisdiction in which the borrower is organised.

12.2 Is a choice of foreign law or jurisdiction valid and enforceable? In the case of a choice of foreign law of jurisdiction, will any provisions of local law have mandatory application? Are submission to jurisdiction provisions that operate in favour of one party only enforceable?

Generally, Canadian courts will apply foreign laws in accordance with the parties' choice of such law, provided that:

• the choice of foreign law is bona fide;
• the contract is legal; and
• there is no reason for avoiding the choice on the grounds of policy.

However, notwithstanding the parties' choice of law, courts will:

• apply local law to matters which would be characterised as procedural under such local laws;
• apply provisions of local law which have overriding effect;
• not apply the chosen foreign law if such application:
• • would be characterised under local law as the direct or indirect enforcement of foreign revenue, expropriatory, penal or other public law; or
  • would be contrary to public policy; and
• not enforce the performance of any obligation that is illegal under the laws of any jurisdiction in which the obligation is to be performed.

In addition, Quebec courts will not apply foreign laws with respect to rules governing conflicts of laws.

Courts will recognise a submission to the non-exclusive jurisdiction of a foreign court as valid, provided that any provisions dealing with service or process are duly complied with. However, exclusive jurisdiction clauses may not be enforced if a party can demonstrate a ‘strong cause' for an alternate forum, such as:

• the convenience of the forum;
• the governing law agreed upon by the parties;
• the strength of jurisdictional connections of the parties; and
• whether there are public policy reasons to deny the forum.

12.3 Are waivers of immunity enforceable in your jurisdiction?

In Canada, property of a foreign state is exempt from, among other things, execution, seizure and forfeiture, except in certain prescribed circumstances, such as the explicit or implicit waiver of immunity. Under the federal State Immunity Act, waivers of state immunity are enforceable in Canada. Such a waiver requires proof that a foreign state:

• explicitly submits to the jurisdiction of the court;
• initiates the proceedings; or
• intervenes or takes any step in the proceedings.

Foreign states are not immune from commercial proceedings, however; and while certain jurisprudence indicates that arbitration agreements may constitute an express waiver of immunity, this issue has not been definitively settled by the courts.

12.4 Will foreign judgments or arbitral awards be enforced in your jurisdiction? If so, how?

In general, a Canadian court will give a judgment based upon a final, conclusive and subsisting in personam judgment of a foreign court for a sum certain, without reconsideration of the merits.

However, under the common law provinces:

• an action to enforce the foreign judgment must be commenced in the Canadian courts within any applicable limitation period;
• the court has discretion to stay or decline to hear an action on the foreign judgment if such judgment is under appeal or there is another subsisting judgment in any jurisdiction relating to the same cause of action as the foreign judgment;
• the judgment will be rendered only in Canadian dollars; and
• an action in the Canadian court may be affected by bankruptcy, insolvency or other similar laws affecting the enforcement of creditors' rights generally.

In addition, a Quebec court will not enforce a foreign judgment in circumstances where:

• the foreign court had no jurisdiction under the Civil Code of Quebec;
• the foreign judgment is subject to ordinary remedy or is not final or enforceable in the foreign jurisdiction;
• the foreign judgment was rendered in contravention of the fundamental principles of procedure;
• a dispute between the same parties, based on the same facts and having the same object:
• • has given rise to a decision rendered in the province of Quebec, whether such decision has acquired the authority of a final judgement (res judicata) or not;
  • is pending before a Quebec court of first instance; or
  • has been decided in a jurisdiction other than the province of Quebec and the applicable foreign jurisdiction, and the decision of such jurisdiction meets the necessary conditions for recognition in the province of Quebec;
• the outcome of the foreign judgment is manifestly inconsistent with public order as understood in international relations; or
• the foreign judgment enforces obligations arising from taxation laws of a foreign jurisdiction and there is no reciprocity.

13 Foreign investment

13.1 What taxes and other charges are levied on foreign investors in the project finance context in your jurisdiction?

Foreign investment is generally encouraged in Canada. However, non-resident investors have particular Canadian tax considerations, some of which are summarised in this section and further below.

Non-residents capitalising Canadian subsidiaries will need to be mindful of Canada's so-called ‘thin capitalisation' regime. If a Canadian subsidiary borrows from its non-resident parent or from other specified non-residents, the ability of the subsidiary to deduct interest is subject to certain limitations imposed under the thin capitalisation rules. The thin capitalisation rules provide that interest on indebtedness payable to specified non-residents is not deductible to the extent that the aggregate amount of such indebtedness exceeds 1.5 times the ‘equity amount' of the subsidiary. In addition, such denied interest may be recharacterised as a dividend for Canadian tax purposes and be subject to non-resident withholding tax (as described below). Somewhat analogous thin capitalisation restrictions apply in respect of investments by non-resident investors in Canadian partnerships or through their Canadian branches.

Transfers of goods or services between a Canadian business and a non-arm's length non-resident must generally be effected at an arm's-length price and on arm's-length terms and conditions. Where the terms and conditions of such transactions are not reflective of those that would be agreed to by parties dealing with one another at arm's length, the Canadian tax authorities may recharacterise the transaction as having been effected at an arm's-length price pursuant to the Canadian transfer pricing rules, resulting in potentially adverse tax consequences for both the Canadian corporation and the non-resident.

Non-residents are generally subject to Canadian taxation only in respect of the disposition of capital property that constitutes ‘taxable Canadian property' for the purposes of the Income Tax Act (Canada). ‘Taxable Canadian property' captures certain property with a strong connection to Canada, including:

• real property situated in Canada;
• certain property used in carrying on business in Canada through a Canadian permanent establishment; and
• shares of a Canadian company whose value is derived principally from real property situated in Canada.

As noted in question 13.1, a non-resident carrying on business in Canada through a branch or a partnership could be liable for additional ‘branch profits' taxes.

Non-residents providing services in Canada (either directly or through a partnership) may be subject to withholding taxes in respect of such activity. Accordingly, many non-residents form a Canadian-resident subsidiary to render services in Canada to avoid such withholding taxes.

13.2 Are any incentives available to encourage foreign investment in the project finance context?

The federal government offers various programmes that may apply in the project finance context, depending on the specific project. In terms of monetary incentives, the Scientific Research and Experimental Development tax incentive programme, the Accelerated Investment Incentive enhanced capital cost allowance and the Strategic Innovation Fund are available for investors. Regarding the Strategic Innovation Fund, five streams are available:

• research and development support;
• growth and expansion facilitation;
• industrial research and development;
• technology demonstration advancement; and
• national innovation ecosystems support.

Federal agencies such as Export Development Canada, Business Development Canada and the Consider Canada City Alliance are available, and will work with foreign investors to facilitate opportunities.

Additional financial incentives offered by the federal government are currently open to all businesses operating in Canada. These programmes may or may not apply to a project involving foreign investment, depending on the project structure. Currently advertised federal incentives for all investors include:

• the Energy Innovation Program;
• the Clean Growth in Natural Resource Sectors Program;
• the Cyber-Security and Critical Infrastructure Program;
• the Oil and Gas Clean Tech Program; and
• the Green Infrastructure Phase II.

In addition, provincial and municipal programmes may provide specific incentives to attract foreign investment.

13.3 What restrictions and requirements apply with regard to the remission of foreign exchange? Are local companies permitted to maintain offshore bank accounts?

Canada does not generally impose restrictions on foreign exchange remittances, which can be facilitated by banks, credit unions, money transfer businesses, cheque cashing businesses and currency exchanges, among others.

Canadian companies are generally permitted by Canadian law to maintain offshore bank accounts. However, Canadian-resident taxpayers must generally report and pay tax on their worldwide income, including income earned in offshore accounts. Such taxpayers are also, in most circumstances, required to report information about such accounts to the Canadian tax authorities.

See question 13.6 for a discussion of withholding taxes that apply in respect of certain cross-border payments.

13.4 What restrictions and requirements apply with regard to the import of plant and machinery?

The importation of goods into Canada, including plant and machinery, is regulated by the federal government, as are the taxes payable on said importation. Global Affairs Canada and the Canada Border Services Agency regulate importation policies and the flow of trade into Canada; and the Canada Revenue Agency handles tax matters. Canada generally allows the importation of goods into the country, subject to explicit prohibitions, duties and tariffs under the Customs Tariff, the Special Import Measures Act, the Export and Import Permits Act and other associated legislation.

It would be unusual for any goods associated with project finance to be restricted from entry into Canada. However, certain import taxes will apply, which will vary depending on the type of equipment and project. Additionally, importers must ensure that Canadian health and safety standards, among other requirements, are followed with respect to imported goods.

13.5 What restrictions and requirements apply with regard to foreign workers and experts?

The rights of temporary foreign workers are regulated and protected in Canada. Under the Immigration and Refugee Protection Act, all foreign workers, subject to specific exemptions, require a work permit to work in Canada in an activity for which wages are paid or commission is earned. Additionally, the government of Canada mandates that:

• employment contracts must be signed with foreign workers; and
• employers must ensure that suitable and affordable accommodation is afforded to persons hired in low-wage positions under certain specific immigration programmes that apply to specific sectors.

Foreign workers are also permitted to change employment at any time, provided that the foreign national holds an open work permit or a new work permit is obtained.

Employers that hire foreign workers must comply with the employment conditions as agreed between the company and the foreign worker, including:

• paying salary and benefits; and
• ensuring that a safe workplace environment is provided without discrimination.

Employers must not:

• force foreign workers to perform duties that are not part of their scope of work or that they were not trained for;
• force employees to work while sick or injured;
• take away identification or any work documentation; or
• charge employees for any hiring costs.

Employers cannot threaten foreign workers with deportation or change of their immigration status. Immigration, Refugee and Citizenship Canada is the federal authority in charge of the admission and removal of foreign nationals in Canada, and not employers.

13.6 Is your jurisdiction party to bilateral investment and withholding tax treaties which might facilitate foreign investment?

Canada is a party to a number of bilateral international tax treaties including, in particular, with the United States and its other significant trading partners. Canada generally follows the Organisation for Economic Co-operation and Development Model Tax Convention on Income and on Capital, reducing instances of cross-border double taxation, among other issues. Canada is also a party to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, which modifies the interpretation of many of Canada's bilateral tax treaties.

Canada's withholding tax rate on various cross-border payments to non-residents (eg, dividends, royalties, rent, non-arm's length interest) is generally 25%, but may be lowered by an operative bilateral tax treaty.

In the context of financial institutions or other lenders, there is generally no obligation to withhold tax on interest payments from a Canadian debtor to domestic lenders. Similarly, conventional interest payments made by a Canadian-resident borrower to an arm's-length lender are also generally not subject to Canadian withholding tax. Conventional interest payments made by a Canadian-resident borrower to a US-resident borrower that is eligible for benefits under the Canada-US Tax Convention (1980), as amended, are generally not subject to withholding tax, even if the parties do not deal with each other at arm's length.

Partial withholding tax relief under Canada's tax treaties is also generally available in respect of dividends and royalties.

Certain measures under the Canada-US Tax Convention may deny certain treaty benefits in respect of amounts paid or received by certain hybrid entities, including certain Canadian unlimited liability companies and certain US limited liability companies.

14 Environmental, social and ethical issues

14.1 What is the applicable environmental regime in your jurisdiction and what specific implications does this have for project financings?

Canada's system of government is divided between a federal government and separate provincial and territorial governments. Municipal authority is derived from the provinces. Having enacted environmental regulation at all levels of government, a number of authorities are responsible for the administration of environmental laws, with often overlapping jurisdiction. Therefore, no one project will be regulated in the same manner, and projects may encounter jurisdictional issues, assessment processes, warranties, indemnifications, reports and remediation issues. In particular, Environmental Protection Acts have been legislated throughout each jurisdiction, and there are ministries and departments responsible for environmental administration. Additionally, environmental protection is a key responsibility and consideration of other ministries, such as Fisheries and Oceans Canada, Natural Resources Canada, Agriculture and Agri-Food Canada and Crown-Indigenous Relations and Northern Affairs Canada. Similar departmental structures are present at the provincial level, though areas of responsibility are adapted for their respective constitutional authority.

At the federal level, the Greenhouse Gas Pollution Pricing Act (2018) sets a minimum national standard for greenhouse gas (GHG) pricing in an attempt to reduce emissions and fulfil Canada's commitments under the 2015 Paris Agreement. The accompanying Greenhouse Gas Offset Credit System Regulations provide the legal framework for the Federal Greenhouse Gas Offset System, which aims to encourage the cost-effective removal and reduction of domestic GHGs from the environment.

Given the extensive oversight of environmental issues and the remediation obligations for contamination or hazardous materials introduced or found on project sites, proper diligence on pre-existing soil conditions, geotechnical matters and required permits, licences and approvals will be paramount. Lenders will be particularly sensitive to environmental issues and will often require Phase I and Phase II environmental assessment reports as a condition for closing. They will also require covenants for borrowers to comply with all applicable environmental laws and regulations, and to obtain and comply with related permits and licences.

14.2 What is the applicable health and safety regime in your jurisdiction and what specific implications does this have for project financings?

Occupational health and safety (OHS) is legislated at both provincial and federal levels of government and imposes significant responsibilities on infrastructure and development projects. Most OHS legislation requires employers to "take every precaution reasonable in the circumstances for the protection of a worker". Thus, employers are expected to take steps that are objectively reasonable in the circumstances by taking into account available sources of outside information, industry standards and other legislation. What steps are required will vary on a case-by-case basis and may vary over time as expert and public knowledge of hazards change. Other related health and safety laws with which employers must comply include labour laws, workplace insurance laws and the Human Rights Code.

The consequences for not complying with applicable OHS legislation are severe, including in some cases imprisonment of individuals. Accordingly, project contracts and finance agreements will include strict compliance with OHS laws and regulations, and will often include the obligation to deliver, maintain and comply with construction safety manuals, which manuals have been approved in advance by the project owner.

14.3 What social and ethical issues should be borne in mind in the project finance context?

In project finance, as in all sectors, there is an increasing awareness of the need for a ‘triple bottom-line' approach to business – that is, ensuring that investment simultaneously contributes to ‘people, planet and profit'. Among the most relevant in the Canadian context is the matter of reconciliation with the Indigenous peoples of Canada. A long history of colonialism has contributed to systemic socio-economic issues, and a key question is how investors and Indigenous peoples can leverage growth and investment – particularly with respect to infrastructure and natural resource projects where interests intersect. Of course, there are often competing interests and ideas on the correct path forward between stakeholders; and the relationship between Indigenous communities, government and industry is a live issue that will continue to dominate political and economic discussions in the years to come.

Another key component of a triple bottom-line approach is the need to embrace sustainability economics and combat the urgent threat posed by climate change. Project finance must be central to the conversation on climate change, as transactions can lead to significant impacts on the natural environment while shaping domestic industry and service delivery. In the coming years, negative externalities will be increasingly accounted for across the economy, and it is highly likely that investors and financial institutions will face a changing economic calculus in certain industries.

15 Trends and predictions

15.1 How would you describe the current project finance landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?

Project finance transactions were not immune to the impacts of COVID-19, with the slowing down of construction schedules, stresses on global supply chains and financial market volatility. We expect that new project risks introduced by the pandemic, such as increased commodity prices and extremely low interest rates, will be top of mind for project developers and financiers in the short to medium term.

In a post-pandemic world, governments will look to infrastructure projects to stimulate the economy; and indeed, the federal and various provincial governments have recently announced that infrastructure spending will be an important part of their pandemic recovery strategy. We expect that there will be heightened activity in government-procured projects announced in the next couple of years, with all stakeholders taking a closer look at risk allocation models to address future pandemics and epidemics.

One sector experiencing heightened interest is renewable energy. This trend will likely continue its growth domestically and abroad in the coming years, as plunging production costs and increased government support continue to drive investors towards renewables. Projects producing solar, wind, hydroelectric and nuclear energy are significant opportunities and represent strong potential for the project finance market.

The proliferation and rapid advancement of technology – specifically artificial intelligence and the Internet of Things – have placed cybersecurity at the top of national security concerns. Not only will projects likely be reviewed based on privacy and their effects on end users, but governments are sure to apply even greater scrutiny to the structure of deals, the parties that comprise them and their ultimate impact on the national interest.

16 Tips and traps

16.1 What are your top tips for the smooth conclusion of a project financing in your jurisdiction and what potential sticking points would you highlight?

One of the most important actions that parties to a project can take is rigorous diligence at the early stages of the project procurement process. Because project success depends on the right allocation of risks between the owner, the project company, its subcontractors and lenders, it is critical that those risks be identified early. These risks include:

• the financial strength, skills and experience of the developers and subcontractors;
• the pre-existing condition of the lands and existing infrastructure (particularly for brownfield projects);
• environmental and geotechnical considerations;
• sources of funding for the project;
• the target project schedule; and
• relief for supervening events.

Those risks will inform all aspects of the project finance structure, including:

• design;
• project schedule;
• scope of insurance coverage;
• economic terms of the finance agreements; and
• performance security requirements.

Without the proper diligence at the start of the project, any risks inherent in the project could become sticking points as the parties progress to structuring, closing and completing the project finance transaction.

Co-Authors:
Jeremiah Kopp (Articling Student)
Andrew Stirling (Tax)
Emile Catimel-Marchand (Insolvency)
Victor Kim (Employment)
Douglas Zorrilla (Business Immigration)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.