Your Contracts: a Systematic and Disciplined Approach is Called for

March 1, 2008

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Every day, and several times a day, we enter into contracts without knowing it or without considering and controlling their effects. This bulletin provides a brief and non-exhaustive summary to help you better understand, prepare for and monitor your contractual environment.

Do you know that a contract is a meeting of minds that may be expressed and entered into in different ways (written, verbal, e-mail, filling of orders, etc.). Do you know that a contract may be amended or rights abandoned by actions, words or subsequent writings, or by failing to take action in a timely manner.

This bulletin provides practical advices before you drafting, negotiating, also advices regarding the performance and monitoring of contracts.

In summary, clarity, transparency, a mutual understanding of the goals and expectations of each party, good faith and the use of a systematic and disciplined approach will smooth the way for your contracts. Have good contracts!

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September 19, 2024

Financing Quebec’s Energy Transition: Unlocking the Potential of Flow-Through Shares

Quebec has set ambitious energy transition and industrial decarbonization targets. The shift to greener practices has to be taken in a context where our energy consumption could rapidly grow under the combined effect of a number of factors, such as the reindustrialization of our economy, population growth, transport electrification and the potential for artificial intelligence to consume vast amounts of energy. Investing in the development of energy infrastructure is therefore critically important, as an abundance of energy is key to economic prosperity. The problem is that public finances are already stretched to the limit with the need to renovate our aging infrastructure, among other things. Encouraging private equity investment is thus vital, and tax incentives can be very effective in this respect. The American example In 2022, the United States passed its Inflation Reduction Act (IRA), with the goal of stimulating investment in the renewable energy sector, in particular. More specifically, the IRA altered or created a number of tax credits to encourage private investment.1 Over the past two years, US businesses have announced a total of almost US$276 billion in new investments in clean energy generation and the capturing or elimination of carbon dioxide and other forms of industrial decarbonization, an increase of 34% on the two years previous.2 The IRA is effective in that it takes the respective situations of various energy sector stakeholders into account in a creative, flexible and pragmatic way, especially where taxation is involved. Energy project promoters often have to wait many years for their projects to generate income and profits, even though the banks and other investment funds they solicit financing from can be presumed to be operating profitable businesses. The tax losses that occur in the years during which such projects are designed and built are therefore of little interest to developers, but of immediate interest to investors. And so, a tax equity market has emerged, in which businesses subject to taxes can invest in the shares of entities set up to develop such projects so as to benefit from tax credits and faster depreciation. Typically, the entity that cashes in the investment and develops the project distributes 99% of income, losses and tax credits to investors until a predetermined return is achieved. Once that return is achieved, the investor’s share of the benefits decreases, and the developer has the option of buying out the investor’s residual share. The IRA has transformed how federal clean energy tax credits are monetized, and it is now possible to buy and sell such credits without having to make a long-term investment. For businesses, this new way of doing things is an additional and attractive way to participate in the growing tax credit market.3 In 2023, the volume of the tax equity market for American projects was around US$20 to 21 billion, up about US$18 billion from the previous year.4 It appears that the trend will continue. It is estimated that the value of the current market, which is particularly attractive to banks, is set to double to US$50 billion a year by 2025.5 The equivalent of flow-through shares The Quebec and Canadian tax deductions mechanism that most closely resembles the US tax equity market is probably flow-through shares. Through these, businesses in the mining and renewable energy sectors can transfer their mining exploration expenses and other expenses—specifically designated as eligible—to investors, who can then deduct them from their own taxable incomes.6 These businesses can thus issue shares at a higher price than they would receive for common shares to finance their exploration and development operations. Investors are willing to pay a higher price in return for the tax deductions afforded by the eligible expenses incurred by the issuing businesses, which can amount to a maximum of 120% of the equity invested in the shares.7 Investors can also claim a 15% or 30% federal tax credit. However, because tax incentives cannot be transferred, our mechanism is more rigid than the American one, and it can only be applied to mineral exploration and development expenses and certain specific expenditures related to renewable energy and energy conservation projects, such as electricity generation using renewable sources like wind, solar energy and geothermal energy.8 With ambition and innovation comes the need to take action Quebec could draw inspiration from the IRA to increase the attractiveness of flow-through shares and broaden their scope of application, thereby creating a new tool to finance the energy transition. The renewable energy sector is similar to the mining sector in many respects, not least in terms of the considerable amount of capital required to build the infrastructure needed to operate a mine or energy generation facility. The flow-through share mechanism, which is well-established and popular with investors,9 could be just as successful in our energy transition context. Making such incentives easier to transfer would also drive the emergence of a market similar to the US tax equity market. A number of Québec flagship companies, such as Hydro-Québec,10 Innergex11 and Boralex,12 are also very ambitious when it comes to developing large-scale energy projects. They face major financing challenges, as do those in the industrial decarbonization and infrastructure renewal sectors. Innovation is necessary to meet these challenges and make the transition to a more sustainable, but just as prosperous, world, and to do so in good time.13 Link Rhodium Group and MIT’s Center for Energy and Environmental Policy Research (CEEPR), Clean Investment Monitor, link Brandon Hill, How to take advantage of tax credit transferability though the Inflation Reduction Act, Thomson Reuters Institute, April 16, 2024, link Allison Good, Renewables project finance to keep pace in 2024, but tax equity rule looms, S&P Global, January 12, 2024, link Lesley Hunter and Mason Vliet, The Risk Profile of Renewable Energy Tax Equity Investments, American Council on Renewable Energy, December 2023, link Link, page in French only Link Link Prospectors & Developers Association of Canada, Flow-through shares & the mineral exploration tax credit explained, link Link Link Link The authors would like to acknowledge the participation and the work done by Sophie Poirier in this publication

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July 3, 2024

Environmental claims about a product, a service or business activities: stricter rules to combat greenwashing

Greenwashing is a form of marketing that misrepresents a product, service or practice as having positive environmental effects,1 thereby misleading consumers and preventing them from making an informed purchasing decision.2 Several initiatives have been launched around the world to counter this practice. In California, a law requires business entities to disclose information in support of environmental claims.3 In France, ads featuring environmental claims such as “carbon-neutral” and “net zero” must include a quick response (QR) code that links to the studies and data supporting such claims.4 Within the European Union, a proposal for a directive was published with a view to possibly banning generic terms like “environmentally friendly.”5 In South Korea, the Korea Fair Trade Commission proposed an amendment to its Guidelines for Review of Environment-Related Labeling and Advertising that would simplify the process of issuing fines to businesses engaged in greenwashing.6 The Parliament of Canada seemingly followed suit by tabling Bill C-597 on November 30, 2023, which introduces a provision into the Competition Act8aimed at improving the means to fight greenwashing. Amended on May 28, 2024, Bill C-59 finally received royal assent on June 20, 2024, date on which it partially came into force. Because the provision will apply to “any person,” all businesses will be subject to it, regardless of their size or legal form. Amendments to the Competition Act regarding environmental claims The Competition Act now allows9 the Commissioner of the Competition Bureau (the “Bureau”) to inquire into10 the conduct of a person who promotes 1) a product by making an environmental claim or warranty11 or 2) any business interest by making representations about the environmental benefits of a business or business activity. Claim concerning a product or service Insofar as a business or person is unable to demonstrate a product’s benefits for protecting the environment or mitigating the environmental and ecological effects of climate change, the Commissioner of Competition will be entitled to apply to a court for an order requiring such business or person to (i)cease promoting the product on the basis of a non-compliant environmental claim or warranty, (ii)publish a corrective notice and (iii)pay an administrative monetary penalty12 of up to, for a legal person, the greater of $10 million and three times the value of the benefit derived from the deceptive conduct, or, if that amount cannot be reasonably determined, 3% of the legal person’s annual worldwide gross revenue. The penalty for each subsequent offence could be as high as $15 million. A “product” within the meaning of the Competition Act may be an article (real or personal property of every description) or a service.13 This new provision expressly requires any person or business to base their environmental claims on “an adequate and proper test”.14 A “test” within the meaning of this Act consists in an analysis, verification or assessment intended to demonstrate the result or alleged effect of a product. It does not necessarily have to be a scientific method nor do the results need to meet a test of certainty, as the courts have generally interpreted the term “proper” to mean fit, apt, suitable or as required by the circumstances.15 With regard to misleading claims, the courts16 have clarified the nature of the criteria that must be considered to determine whether a particular test is “adequate and proper.” Thus, an adequate and proper test depends on the claim made as understood by the common person. The test must also meet the following criteria: It must be reflective of the risk or harm which the product is designed to prevent or assist in preventing. It must be done under controlled circumstances or in conditions which exclude external variables or take account in a measurable way for such variables. It must be conducted on more than one independent sample wherever possible (e.g., destruction testing may be an exception). The results need not be measured against a test of certainty, but must be reasonable given the nature of the harm at issue and establish that it is the product itself which causes the desired effect in a material manner. It must be performed regardless of the size of the seller’s organization or the anticipated volume of sales.17 Representations accompanying product that come from a person outside Canada are deemed to be made by the person who imports the product into Canada.18 General claims about a company’s activities While Bill C-59 was initially intended to cover only environmental statements, warranties or guarantees regarding products, the assented version of the bill provides that any representation made regarding the benefits of a business or business activity for protecting or restoring the environment or mitigating the environmental and ecological causes or effects of climate change are subject to a Bureau inquiry.19 As an example cited by the Bureau, a company’s claims about being “carbon neutral” or that it commits to becoming so within a certain number of years20 would constitute “representations of the benefits of a business or business activity in mitigating the causes of climate change.” The company making such claims must be able to demonstrate that they are based on “adequate and proper substantiation” obtained using an “internationally recognized methodology”.21 The Competition Act does not specify which internationally recognized methods may be used for this purpose. Should the substantiation the company uses be inadequate, improper or obtained using a method that is not recognized internationally, it will be subject to the same consequences as those mentioned in the previous section.22 Regardless of whether the claims concern a product or service or a business activity, the persons concerned are allowed to defend themselves under the Competition Act by establishing that they exercised due diligence.23 What impact will these amendments really have? Notwithstanding the proposed legislative amendment, the Competition Act already covers false or misleading representations with respect to green advertising.24 The current provisions already prohibit making representations to the public that are false or misleading in a material respect.25 In recent years, several complaints of greenwashing have been lodged with the Bureau on that basis, prompting it to open a number of investigations. Some have led to major settlements involving companies having made representations regarding their products.26/27/28/29 In all of these cases, the heavy burden of establishing that the business’s environmental claim was false or misleading fell on the Bureau. The proposed amendments to the Competition Act would change this by shifting the burden of proof onto businesses. The onus would therefore be on them to demonstrate that their product benefits the environment in some way or mitigates the environmental and ecological effects of climate change or that its claims are based on adequate and proper substantiation obtained using an internationally recognized method. These new legislative provisions now confirm what was already a general standard since 1999, and they ease the Bureau’s burden of proof. In addition to the Competition Act, other laws applicable in Quebec provide a general framework for greenwashing, such as the Consumer Protection Act.30Under this Act, no merchant, manufacturer or advertiser may, by any means whatsoever, make false or misleading claims to a consumer, which implicitly includes greenwashing.31 To determine whether a representation constitutes a prohibited practice, the general impression it gives, and, as the case may be, the literal meaning of the terms used therein must be taken into account. In particular, it is prohibited to falsely ascribe particular advantages to a product or service, or to claim that a product has a particular feature or ascribe certain characteristics of performance to it.33 Offences are subject to criminal34 and civil35 penalties. Private remedies Another new measure to combat greenwashing in the Competition Act is the possibility for any person (individual, organization, competitor, etc.) to apply directly to the Competition Tribunal for an order against a business making environmental claims or representations about a product, service or activities without adequate substantiation.36 In the first version of Bill C-59, only the Commissioner of Competition could institute such proceedings before the Tribunal.37 However, the Competition Tribunal must first give leave to make such an application.38 The Tribunal’s power to give leave is largely discretionary, meaning that the Tribunal may grant it if it deems that it is in the public interest to do so.39 This new measure will come into force in one year on June 20, 2025.40 Best practices It is crucial for a company to adopt and display a realistic image of its environmental impact based on credible data and facts. Making sure that claims are legally compliant is not all that’s at stake. A business’s failure to do the above is likely to seriously harm not only its reputation, but also its relationship with its stakeholders. Thus, before claiming to be “green,” businesses must consider the following questions. Are the real motivations behind the business’s sustainability commitments clear, legitimate and convincing? Is sustainable development an integral part of the business strategy? Is it applied when addressing key business issues and taking new actions? Does the company have a sustainable development policy that is credible and based on relevant issues? Was it developed collaboratively with and approved by its Board of Directors? Has the company set specific, clear, measurable and achievable objectives and targets? Considerations for public companies As concerns public companies subject to continuous disclosure obligations under Canadian securities legislation (“reporting issuers”), these considerations are set against a backdrop of increasing pressure from investors, including institutional investors, and others for greater transparency on climate-related issues. Although climate-related disclosure requirements for Canadian reporting issuers are still relatively limited, many issuers choose to voluntarily disclose such information, for example in sustainability reports. Reporting issuers must pay particular attention to their communications, which could constitute greenwashing within the meaning of the Competition Act and give rise to the penalties and other consequences mentioned above. This is another risk to add to reporting issuers’ liability in the secondary market for misrepresentation and failure to make disclosures within prescribed time limits. As far as climate issues are concerned, the risk arises in particular from overestimating or inadequately disclosing how activities contribute to protecting the environment or how they mitigate the environmental and ecological effects of climate change. The current move towards standardized methodologies and frameworks and the forthcoming adoption of binding rules on climate-related disclosures should help to limit greenwashing in this context. In the meantime, reporting issuers can reduce the risk of greenwashing by following a well-established international methodology and by including disclaimers for forward-looking statements adapted to the risks and uncertainties inherent to the climate-related information they provide. Conclusion The new provisions of the Competition Act are already having an impact. As a precaution, some companies have removed ads, promotional documents and websites containing claims that certain activities were undertaken specifically to mitigate the causes of climate change. Parliament’s message could not be clearer: Shifting the burden of proof onto businesses means closing the door on an era when products, services and business activities could be marketed as green in the absence of tangible evidence. Definition of the Autorité des marchés financiers: 8 questions and answers about carbon credits and related concepts | AMF (lautorite.qc.ca). Definition of the Competition Bureau: Environmental claims and greenwashing (canada.ca). Assembly Bill No. 1305: Voluntary carbon market disclosures, California, 2023. Read it here: Bill Text – AB-1305 Voluntary carbon market disclosures. Décret no 2022-539 du 13 avril 2022 relatif à la compensation carbone et aux allégations de neutralité carbone dans la publicité, Journal officiel de la République française, 2022. Read it here: Légifrance – Publications officielles – Journal officiel – JORF n° 0088 du 14/04/2022 (legifrance.gouv.fr). Proposal for a Directive of the European Parliament and of the Council amending Directives 2005/29/EC and 2011/83/EU as regards empowering consumers for the green transition through better protection against unfair practices and better information, Council of the European Union, Brussels, 2022. Read it here: pdf(europa.eu). Read it here: KFTC Proposes Amendment to Review Guidelines Regarding Greenwashing – Kim & Chang (kimchang.com). An Act to implement certain provisions of the fall economic statement tabled in Parliament on November 21, 2023 and certain provisions of the budget tabled in Parliament on March 28, 2023, 44th Parliament, 1st Session. Read it here: Government Bill (House of Commons) C-59 (44-1) – First Reading – Fall Economic Statement Implementation Act, 2023 – Parliament of Canada. The Bill is currently at second reading in the House of Commons. R.S.C. 1985, c. C-34. These provisions came into force on June 20, 2024. This power to make inquiry would be available, as the Competition Act already provides, upon receipt of a complaint signed by six persons who are not less than 18 years of age or in any situation where the Commissioner has reason to believe that a person has contravened section 74.01 of the Competition Act (see R.S.C. 1985, c. C-34, ss. 9 and 10). An Act to implement certain provisions of the fall economic statement tabled in Parliament on November 21, 2023 and certain provisions of the budget tabled in Parliament on March 28, 2023, 44th Parliament, 1st Session, section 236. Read it here: Government Bill (House of Commons) C-59 (44-1) – First Reading – Fall Economic Statement Implementation Act, 2023 – Parliament of Canada; section 236 of this Act adds paragraphs b.1 and b.2 to subsection 74.01(1) of the Competition Act. Competition Act, R.S.C. 1985, c. C-34, article 74.1. Competition Act, R.S.C. 1985, c. C-34, subsection 2(1). An Act to implement certain provisions of the fall economic statement tabled in Parliament on November 21, 2023 and certain provisions of the budget tabled in Parliament on March 28, 2023, 44th Parliament, 1st Session, para. 236(1). Read it here: Government Bill (House of Commons) C-59 (44-1) – First Reading – Fall Economic Statement Implementation Act, 2023 – Parliament of Canada The Commissioner of Competition v. Imperial Brush Co. Ltd. and Kel Kem Ltd. (c.o.b. as Imperial Manufacturing Group), 2008 CACT 2, paras. 122 et seq. Competition Act, R.S.C. 1985, c. C-34, section 74.09: “courts” means the Competition Tribunal, the Federal Court and the superior court of a province. The Commissioner of Competition v. Imperial Brush Co. Ltd. and Kel Kem Ltd. (c.o.b. as Imperial Manufacturing Group), 2008 CACT 2. Competition Act, R.S.C. 1985, c. C-34, subsections 74.03(1) and (2). An Act to implement certain provisions of the fall economic statement tabled in Parliament on November 21, 2023 and certain provisions of the budget tabled in Parliament on March 28, 2023, 44th Parliament, 1st Session, section 236. Read it here: Government Bill (House of Commons) C-59 (44-1) – First Reading – Fall Economic Statement Implementation Act, 2023 – Parliament of Canada; paragraph b.2 of section 74.01 of the Competition Act was added by amendment adopted on May 28, 2024. Letter from Anthony Durocher and Bradley Callaghan to the Honourable Pamela Wallin dated May 31, 2024. Read it here: BANC_Follow-up_CompetitionBureau_e.pdf (sencanada.ca). An Act to implement certain provisions of the fall economic statement tabled in Parliament on November 21, 2023 and certain provisions of the budget tabled in Parliament on March 28, 2023, 44th Parliament, 1st Session, section 236. Read it here: Government Bill (House of Commons) C-59 (44-1) – First Reading – Fall Economic Statement Implementation Act, 2023 – Parliament of Canada. Competition Act, R.S.C. 1985, c. C-34, article 74.1. Competition Act, subsection 74.1(3). Louis-Philippe Lampron, “L’encadrement juridique de la publicité écologique fausse ou trompeuse au Canada : une nécessité pour la réalisation du potentiel de la consommation écologique?” Revue de Droit de l’Université de Sherbrooke, Vol. 35, No. 2, 2005, p. 474. Read it here: A:\lampron.wpd (usherbrooke.ca). Competition Act, R.S.C. 1985, c. C-34, paragraph 74.01(1)(a). Amanda Stephenson, Des groupes écologistes misent sur la Loi sur la concurrence(Environmental groups banking on the Competition Act), October 1, 2023, La Presse. Read it here: Des groupes écologistes misent sur la Loi sur la concurrence | La Presse. Brenna Owen, Un groupe accuse Lululemon d’« écoblanchiment » et demande une enquête (A group accuses Lululemon of “greenwashing” and calls for an investigation) February 13, 2024, La Presse. Read it here: Un groupe accuse Lululemon d’« écoblanchiment » et demande une enquête | La Presse. Martin Vallières, “Gare aux tromperies écologiques” (Beware of greenwashing), January 26, 2022, La Presse. Read it here: Écoblanchiment | Gare aux tromperies écologiques | La Presse; Keurig Canada to pay $3 million penalty to settle Competition Bureau’s concerns over coffee pod recycling claims – Canada.ca. The Commissioner of Competition v. Volkswagen Group Canada Inc. and Audi Canada Inc., 2018 Competition Tribunal 13. Consumer Protection Act, CQLR c. P-40.1, ss. 219, 220 and 221. Definition of the Competition Bureau: Environmental claims and greenwashing (canada.ca). Richard v. Time Inc., 2012 SCC 8, paras. 46 to 57. Consumer Protection Act, CQLR c. P-40.1, ss. 220 and 221. Consumer Protection Act, CQLR c P-40.1, ss. 277 to 279: Fines range from $600 to $15 000 in the case of a natural person and $2 000 to $100 000 in the case of a legal person. Offenders convicted a second time are liable to fines twice as high as those prescribed. Id. at ss. 271 to 276: Consumers may request that the contract be annulled, that the merchant’s obligation be performed or that their obligation be reduced, among other things. For civil matters only; An Act to implement certain provisions of the fall economic statement tabled in Parliament on November 21, 2023 and certain provisions of the budget tabled in Parliament on March 28, 2023, 44th Parliament, 1st Session, subsection 254(1). See subsection 103.1(1) of the Competition Act, R.S.C. 1985, c. C-34, effective before June 20, 2024. An Act to implement certain provisions of the fall economic statement tabled in Parliament on November 21, 2023 and certain provisions of the budget tabled in Parliament on March 28, 2023, 44th Parliament, 1st Session, subsection 254(1). Id. at 254(4). An Act to implement certain provisions of the fall economic statement tabled in Parliament on November 21, 2023 and certain provisions of the budget tabled in Parliament on March 28, 2023, 44th Parliament, 1st Session, section 272.

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May 2, 2024

Uncovering the intricacies of sports infrastructure financing

Two Montréal landmarks have proudly hosted some of the city’s most memorable sporting events. The Olympic Stadium (Figure 1) and the IGA Stadium, which have been and remain quintessential in our sporting history, are in need of renovations so that sports fans can continue to “raise the roof” for years to come. Figure 1: The Olympic Stadium: A prominent feature of the Montréal skyline. These stadiums may be iconic, but the issues with their roofing systems—or lack thereof—have plagued the Montréal news for over 30 years. It is estimated that installing a retractable roof over the centre court at IGA stadium could cost $70 million, and replacing the Olympic Stadium’s roof and support ring, no less than $870 million.1 These projects may be considered priorities,2 but the skyrocketing construction and renovation costs are already causing a stir.3 And to make matters worse, the problem will not be solved definitively, as the lifespan of the new Olympic Stadium roof is estimated at 50 years.4 These projects are just the tip of the iceberg when it comes to our sports infrastructure. According to the Minister responsible for Sport, Recreation and Outdoors, Isabelle Charest, “This is a huge endeavour. A good part of the infrastructure could use some work and revamping. And in some cases, we need new infrastructure, period.”5 In other words, the needs are varied and many. Investing in charming small, local skating rinks, multi-purpose municipal sports facilities and even towering stadiums used by professional sports leagues is essential to fostering physical well-being and keeping the population healthy ... or simply entertained. Mindful of the importance of physical activity as well as voters’ appreciation for sports, the Quebec government invested $300 million in the Programme d’aide financière aux infrastructures récréatives, sportives et de plein air (PAFIRSPA, financial aid program for recreational, sporting and outdoor activity infrastructure).6 One component of this program provides financing for up to two-thirds of the cost of renovating, upgrading, building or developing sports and recreational facilities, up to a maximum amount of $20 million per project. Applicants seeking financing from the program had to submit their applications by December 5, 2023. While the PAFIRSPA may seem ambitious, the projects it covers are obviously far less expensive than modern professional sports arenas, which have become true engineering and technological marvels over the years. The cost of building Tottenham Hotspur Stadium in London in 2019, for instance, has been estimated at £1.1 billion,7 which itself is a pittance compared to the US$5.5 billion needed to build the SoFi Stadium in Los Angeles, where the football teams Rams and the Chargers have been playing since 2023.8 As in most situations, money matters when it comes to sports infrastructure. A winning financing strategy is not everything—it’s the only thing. In this first instalment of our series of articles on sports law, we will focus on sports infrastructure financing and examine what lies beneath the surface, as we begin to uncover the challenges, strategies and issues. The Rules of the Game Sports infrastructure financing lies at the crossroads of the entertainment business and the public interest, and it differs from other types of financing in a number of ways. On one hand, the public’s ever-growing appetite for sporting events over the years has spawned numerous colossal projects requiring financing packages similar to those for public or industrial infrastructure projects of the same scale. On the other, the economic benefits and social impact of projects of various sizes often warrant the use of public funds, and the involvement of local communities may be imperative in the case of facilities where utility takes precedence over profitability. In addition, a wide range of financing mechanisms can be used, depending not only on the sums involved, but also on the identity of the infrastructure owners. For the purposes of this article, we will consider financing in relation to three types of ownership: (i) wholly private, (ii) public and private, and (iii) wholly public. We will be taking a closer look at specific financing options and associated issues in our next sports law article. Wholly Private Ownership Financing This refers to infrastructure owned by a private entity and operated by a private administrator, which may or may not be the same entity. One example is the Bell Centre (Figure 3), privately owned by Groupe CH, which is in turn owned by the Molson family and other investors. Figure 3: The 2022 National Hockey League Draft was held at the Bell Centre. This type of ownership usually involves wholly private financing, with the owner injecting the funds required to carry out the desired work. According to media reports, the owner of the Bell Centre invested $100 million in 2015 to renovate it.9 This amount came from Groupe CH and its investors alone. Needless to say, with this type of ownership, any kind of financing is possible, including shareholder equity investment, the issuance of bonds to private subscribers and all forms of bank debt. Combining several of these options is not at all uncommon. In the case of debt financing in particular, making lenders feel as comfortable as possible can be a challenge, and the magnitude of this challenge will depend on the amounts involved. Just how profitable a project will be hinges on whether it can be completed at the agreed-upon cost and whether it will be a commercial success once completed. Generally speaking, using a project’s assets as collateral will not be enough to get lenders on board, and they will require other forms of security, such as shareholder guarantees, fixed-price or capped construction contracts, or the involvement of subordinated lenders. When economic spinoffs are expected to benefit the community, public authorities can also be called upon to guarantee part of the loan repayment or offer various forms of public funding, including forgivable loans, thus reducing the risk assumed by lenders. Efforts to reduce the risk incurred by lenders should, in theory, result in significantly lower financial costs, or in some cases, in obtaining the required financing. Other projects rely on government procurement. Olympique Lyonnais became the first French professional soccer club to be listed on the stock exchange in 2007, when the club’s shares were put up for sale on the Euronext market in Paris. The funds raised in this way were put towards the club’s development projects, including the financing of its new stadium, which opened in January 2016. This financing package consisted of a combination of equity (including proceeds from stock issues), bank loans, traditional bonds and mandatory convertibles.10 Other supplementary yet substantial financing arrangements, such as naming rights agreements, may be used to enhance financing packages. Under such an agreement, a company can acquire naming rights to an arena for a predetermined period, generally between 3 and 20 years, in consideration of a substantial sum of money. In 2017, Scotiabank agreed to pay $800 million over 20 years to rename the building that houses the Toronto Maple Leafs hockey club the “Scotiabank Arena.”11 In addition to renaming facilities, it is possible to sell perimeter advertising or solicit individual donors to purchase a plaque bearing their name at the entrance to a field, in rows or in the bleachers. Read our latest bulletin on this topic Promoters’ financial models are routinely enhanced by other creative revenue streams, including catering concessions, box rental agreements or preferred memberships, parking spaces, boutiques and advertising. Other sources of income include leasing agreements for various uses of the facilities. Some manufacturers in the sports field construction industry even offer financing packages whereby the purchase and installation can be paid for in monthly, quarterly or annual installments, thus reducing the amount of debt or investment required. Signing the relevant contracts before building or renovating the facilities improves the financing package for the project and increases its chances of success. Public ownership financing Ownership of infrastructure by a public entity, regardless of whether it is operated by a private entity or not, can have a significant bearing on the options available and the type of financing selected. Public and private ownership involves an owner from the public sector and a private administrator. The Videotron Centre in Québec City (Figure 4), home of the Québec Remparts hockey club of the Quebec Maritimes Junior Hockey League, is an example of this type of ownership. It is owned by Québec City and managed by Quebecor Media. Figure 4: The Videotron Centre in Québec City, inaugurated on September 8, 2015. Generally speaking, infrastructure owned and operated in this way is financed jointly using public and private funds. Although the Videotron Centre has not required major renovation work so far, the initial construction of the stadium is an example of public-private financing. It cost a total of $370 million to build. A sum of $185 million came from the Quebec government, and $15.4 million from J’ai ma place, an organization set up specifically to finance the Videotron Centre using funds from the Quebec population. Québec City provided the remaining $169.6 million, which included the $33 million that Quebecor Media paid in 2015 to acquire naming rights (which was transferred to its subsidiary Videotron for an undisclosed sum), $50 million in cash and $86.3 million in the form of a bank loan. Public ownership means that the sports infrastructure is owned and administered by one or more public entities. In such cases, standard-sized infrastructure can generally be financed entirely using public funds. This is where Quebec’s PAFIRSPA, mentioned above, comes in. For more costly projects, including a public entity in the ownership group—be it public and private or wholly public—opens the door to a range of options. In the United States, this includes using municipal taxes or issuing municipal bonds to finance infrastructure. Construction of the Barclays Center in Brooklyn, New York, which began in 2010 and was completed in 2012, was financed in part by tax-exempt municipal bonds issued by the Brooklyn Arena Local Development Corporation, an entity formed by an agency of the State of New York for financing purposes.12 Nearly 500 million U.S. dollars were raised, covering a significant portion of the arena’s construction costs, as part of a larger redevelopment effort known as Pacific Park Brooklyn (formerly Atlantic Yards). The Barclays Center is now home to the Brooklyn Nets basketball team of the National Basketball Association. We will conclude our overview with a few words on public-private partnerships (PPPs), which are particularly well suited to high-cost infrastructure projects. Under a PPP, the government or another public entity partners with a private company to develop a public infrastructure or services project. PPPs combine the resources, expertise and capabilities of the public and private sectors to deliver projects that benefit the community. PPPs take many different forms and can cover a wide range of activities, from project design and construction to operation and, in some cases, financing. In the design-build-finance (DBF) model, for example, the PPP includes the design, construction and financing of the infrastructure. Bidders participating in the call for proposals must include a project financing package in their proposal. The private company ultimately selected for the project will be responsible for both the design and construction, as well as the initial or ongoing financing of the project. Bidders must therefore negotiate with financial institutions before being awarded the construction contract in order to include a financing package in their proposal. These financial institutions will then closely monitor how the loaned funds are used and how the project is managed. The private company selected at the end of the call for proposals must therefore make undertakings both to the public authority and to its lenders concerning deadlines, construction costs and financing costs as soon as the contract is awarded. This is why the DBF model generally allows for greater efficiency in executing projects, certainty over construction costs and better management of financial risks. One example is the Stade de France, a stadium that can accommodate 81,338 spectators in a football or rugby configuration and was built for the 1998 FIFA World Cup in France. It is located in Saint-Denis, Seine-Saint-Denis, and is owned by the French government, which awarded a 30-year concession contract expiring in 2025 to the Vinci-Bouygues consortium, as part of a scheme almost identical to today’s PPP schemes. Conclusion The investments required for certain multipurpose amphitheatres and other sports facilities are comparable to those for transport infrastructure, energy projects or industrial plants. This, of course, means that sports infrastructure projects can also rely on a similar set of financing packages, along with a few additional ones specific to sports, such as sponsorship advertising in all its forms. Public authorities are more likely to get involved in projects that include ownership by a public entity or have a major social impact. This opens the door to a wide range of financing packages, tailored to each project’s specific needs. Having now covered the basics, we look forward to examining some of these packages in greater detail in future articles. Zacharie Goudreault, Le toit fixe proposé pour le Stade olympique déchire les experts, link TVA Sports, Stade IGA : le toit doit être une priorité pour Montréal selon Legault, Le journal de Québec, August 13, 2023, link Philippe Teisceira-Lessard, Le cauchemar continue, La Presse, July 27, 2023, link Goudreault, op. cit. Gabriel Côté, Québec investit 300 M$ pour les infrastructures sportives, Le journal de Québec, June 19, 2023, link link link Christopher Palmeri, Rams Owner Stan Kroenke Debuts His $5.5 Billion Dream Stadium, Bloomberg, September 10, 2020, link Maxime Bergeron, 100 millions investis au Centre Bell, La Presse, October 14, 2015, link Bouclage du financement du stade des Lumières, Décideurs, August 7, 2013, link link; Pete Evans, Scotiabank pays big for arena naming rights, but did it break the bank?, CBC News, September 4, 2017, link link

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April 26, 2024

New rules will make it easier to transfer family businesses

The 2023 Federal Budget (the “Budget”), tabled on March 28, 2023, proposes amendments to certain provisions of the Income Tax Act (ITA) that would make “genuine” intergenerational business transfers no longer subject to the anti-avoidance rules of section 84.1 and allow the transferor to benefit from their capital gains exemption. To do so, the Budget establishes new general conditions that the parties must meet, as well as specific conditions that apply to “immediate” transfers, or those made over a period of no more than 36 months, and “gradual” transfers, or those that take five to ten years to complete. The general conditions that the parties must meet when disposing of a company may be summarized as follows: The vendor must be an individual other than a trust. Immediately prior to the transfer, the vendor, alone or with their spouse, must control the currently operating company. At the time of the transfer, the purchasing company must be controlled by one or more of the vendor’s children, who must be at least 18 years of age. The notion of “child” also includes stepchildren, grandchildren and nieces and nephews. The shares of the company being transferred must be qualified small business corporation (QSBC) shares or shares of the capital stock of a family-farm or family-fishing corporation (QFFP). The specific conditions relate to the transfer of control, economic interests and management of the company, and vary from case to case. FOR AN IMMEDIATE TRANSFER (36-MONTH TEST) In the case of immediate transfers, de jure control (being the holding of the majority of shares having voting rights), and de facto control (which includes the economic influence making effective control of the company likely), must be transferred at the time of sale. Voting and participating shares not transferred to the purchasing company at the time of sale must be transferred within the following 36 months, such that after this period, the transferor may hold only preferred shares, that is, non-voting or non-participating shares for an indefinite period (vs 10 years in the case of a gradual transfer). Also, the child, or at least one member of the group of children, must participate in the family business on a regular, significant and continuous basis for a minimum period of at least 36 months after the transfer is made. Lastly, the transferor must take reasonable steps to transfer the business’s administration and know-how and completely cease to manage the business before the 36th month after the transfer was made. FOR A GRADUAL TRANSFER (FIVE–TO–TEN–YEAR TEST) If the transfer is gradual, only de jure control must be transferred at the time of disposition. The balance of the voting and participating shares not transferred at the time of disposition must be transferred within 36 months of the first transfer. However, under the rules respecting gradual transfers, the transferor will only be bound to transfer de facto control of the business within 10 years of the initial transfer. In the case of a transfer of economic interests, the vendor is expected to significantly reduce the value of the equity and advance they have invested in the business within 10 years of the initial sale. The same requirement for a child’s active participation in the company and transfer of the management of the business apply, but this time for a period of 60 months after acquisition. PREVIOUS RULES (Bill C-208) The provisions of the 2023 Federal Budget have the effect of setting aside certain requirements of Bill C-208 applicable to the realization of a capital gain. Under Bill C-208, for the transferor to benefit from their capital gains exemption, the operating company and the purchasing company could not be amalgamated within 60 months of the sale. The bill also required that an independent assessment of the fair market value of the company’s shares be filed with the Canada Revenue Agency, along with an affidavit signed by the vendor. However, as of January 1, 2024, these criteria are no longer applicable. An assessment will no longer be required, although under section 69 of the ITA, the transfer will still have to be made at fair market value. The 2023 budget (reinforced by the 2024 Federal Budget) also introduces new rules for the alternative minimum tax, a temporary tax that the transferor in an intergenerational business transfer often has to pay. To avoid having this temporary tax becoming permanent, it’s important to understand the subtleties of these new rules. Our team of tax professionals will be happy to help you and answer any questions you may have about these new legislative changes.

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