CANADA Law and Practice Contributed by: Scott Hyman, Anthony Spadaro and David Wilson, Davies Ward Phillips & Vineberg LLP
7. Lender Liability 7.1 Equitable Subordination Rules The US concept of the “doctrine of equitable subordination” allows a court to subordinate the claim(s) of a creditor owing to its inequita- ble conduct. Inequitable conduct most often involves persons who have breached their duties to the debtor. While equitable subordination is expressly permitted under the US federal bank- ruptcy code, it is not similarly included in Cana- dian insolvency legislation, and its applicability in Canada is uncertain. To date, the doctrine of equitable subordination has been applied inconsistently in certain lower Canadian courts, and has been considered by the Supreme Court of Canada twice; in both cases, the Court declined to determine whether the doctrine should be applied in Canada. In U.S. Steel Canada Inc., Re, 2016 ONCA 662, the Ontario Court of Appeal held that there is no jurisdiction for a Canadian court to apply the doctrine of equitable subordination under the Companies’ Creditors Arrangement Act (Can- ada), which is the most common restructuring legislation used by companies in Canada. The Court did, however, leave open the possibility that Canadian courts may have jurisdiction to apply equitable subordination under the BIA. Leave to appeal the U.S. Steel decision to the Supreme Court was granted but was discontin- ued in July 2017, prior to the hearing. As a result, the availability of the doctrine of equitable sub- ordination in Canada remains unclear. 7.2 Claw-Back Risk Canada does not have general claw-back rules, but lenders should be aware of voidable transac- tion issues (see 5.6 Other Restrictions ).
The Bank Act (Canada) contains prohibitions on tied-selling that prevent a bank that is licensed to operate in Canada from tying its willingness to provide financial services to a client to the agreement of such client to accept other finan- cial products and services offered by the bank. However, a bank is permitted to offer services on preferential terms as an inducement if the client is willing to accept other products and services from the bank. 8. Tax Issues 8.1 Stamp Taxes Canada does not have stamp tax. 8.2 Withholding Tax/Qualifying Lender Concepts Interest payments made by a Canadian resident borrower to a foreign lender are generally not subject to withholding tax if the borrower and lender deal at arm’s length. This helps Canadi- an borrowers more easily access foreign capital markets. Non-arm’s length interest and participating debt interest are subject to withholding tax at 25%, unless an applicable tax treaty reduces or elimi- nates such withholding tax. The Canada–US tax treaty is Canada’s only treaty that generally exempts non-arm’s length interest from with- holding tax. 8.3 Thin-Capitalisation Rules Where “specified non-resident shareholders” use debt to finance a Canadian corporation, Canada’s thin-capitalisation rules apply to limit the deductibility of interest paid by the Cana- dian corporation to specified non-residents based on a mechanical debt-to-equity ratio of 1.5:1. “specified non-resident shareholder” is a
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