CANADA Trends and Developments Contributed by: Grant McGlaughlin, Sean Stevens and Claire Gowdy, Fasken
interests whose value is primarily attributable to real property in Canada. Trends for Energy, Infrastructure and Resource Projects Two important and recent trends affecting Canadian energy and infrastructure investments and transac - tions are the increasing number of deals in sectors involving private equity and other financial buyers and the increasing number of major projects and transac - tions involving Canadian indigenous groups. In some high-profile cases, the two trends are evident in the same transaction. Private equity interest and deal flow in Canada are increasing, with private equity investment focusing on opportunities in the Canadian energy and infra - structure sectors. Given the status and importance in Canada of indigenous rights and title affecting many of these sectors and projects, major transactions or projects in Canada increasingly consider or involve First Nations, or groups of First Nations, often as a minority interest in the business or transaction struc - ture, with the intent of aligning business, reconciliation and other interests. The two trends are combining to create unique opportunities and arrangements in Can - ada, including transaction and business structures involving private equity/indigenous co-ownership and business models. Employee Stock Options Stock options have historically been used by pri - vate equity firms in Canada as an effective means of incentivising management teams. In Canada, stock options are considered part of employment income, and taxed accordingly. Further, they are taxed at the time of exercise rather than at the time of grant. Given these attributes, stock option plans have been widely used within portfolio companies. Under the current stock option rules, a taxable ben - efit is added to the employee’s income at the time of exercise, to the extent the fair market value of the underlying shares exceeds the exercise price speci - fied in the option agreement. However, the employee is entitled to claim a deduction in the amount of 50% of the taxable benefit provided that at the time of the grant, the options are not “in the money” and, gener -
ally, common shares are issued upon the exercise of the options. That being said, employees of certain corporations are subject to a CAD200,000 annual vesting limit (based on the fair market value of the underlying shares at the time the options are granted) regarding the eligibility of their employee stock options granted on or after 1 July 2021, to the 50% deduction described above. This limit was enacted by the Canadian government to prevent executives of large, mature companies from taking advantage of the rules as a preferred form of compensation instead of achieving the policy objec - tive of supporting younger and growing Canadian businesses. More specifically, this vesting limit does not apply to employee stock options granted by either Canadian-controlled private corporations (CCPCs) (very generally, Canadian private corporations that are not controlled by one or more non-resident per - sons and/or public corporations), and non-CCPCs that have gross revenue of CAD500 million or less as reported in their most recent financial statements, or in their group consolidated financial statements if reported on a group basis. CBCA Disclosure of Beneficial Ownership Companies governed by the federal business statute in Canada – the Canada Business Corporations Act (CBCA) – are required to maintain a detailed share - holder register that reflects all individual sharehold - ers having significant direct or indirect control over a corporation. The CBCA requires private corporations to include information about individuals who hold “sig - nificant control” over a corporation. The number of shares held by an individual is deemed “significant” if it (i) carries 25% or more of the voting rights attached to all of the corporation’s outstanding shares, or (ii) is equal to 25% or more of all of the corporation’s outstanding shares measured by fair market value. Practically speaking, private equity funds often hold controlling positions (in terms of percentage owned de jure or de facto through shareholder arrangements) in their portfolio companies governed by the CBCA and should therefore be prepared to provide additional information about their controlling interests.
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