Does your employee really exist?

I'm being quite serious with this question, because I have seen many instances where that was not the case:

• One person's Social Insurance Number was rejected when input into the payroll system, and he was asked to bring in his card. He left and never returned to work.
• There was another instance where one person used another's SIN, and came into the payroll office later to say that he had finally gotten his own card. (He was fired on the spot.)

This is in addition to the other stories we've heard about false credentials, fake IDs and falsified references. Quite plainly, Canadian employers have been quite lax in who they've hired over the years. Even now, pre-screening in the hiring process is error-prone to the point of producing false positives and negatives, and human rights legislation prevents vetting at the point of application.

How then should we ensure that our prospective employees are who they say they, have the requisite qualification for the position, and are of good character as well? The best recommendation is to make all job offers contingent upon satisfying specific verification requirements before their start date. The following checklist is certainly a good start.

The basics

To start, we require:

• proof of Social Insurance Number (required for any reporting to the CRA)
• proof of name (duh!)

For the SIN, providing the card (if issued before 31 March 2014) or verification letter (if issued afterwards) will be sufficient, and a copy should be made for the employee file. For the name, I would prefer seeing an original voided cheque from a Canadian financial institution that has the person's name preprinted thereon. The latter will be useful for setting up direct deposit for the employee, which should be standard practice for all employers.

Proving identity and eligibility to work

While the basics are necessary, they are not sufficient in themselves to prove what is essential:

• identity
• address
• eligibility to work in Canada

Proof of identity

Put quite simply, having a name does not mean it belongs to the person in question without further proof. We will need ID that bears the person's photo, date of birth and signature as well. A basic list would include:

• a current driver's licence or photo ID card issued by a government agency
• a current passport
• a current secure Certificate of Indian Status card

Amazingly, this is a very short list, as not many other documents in Canada consistently carry all four elements. The Canadian Permanent Resident Card, for example, stopped showing the signature on cards issued from 4 February 2012.

Proof of address

If a person does not have a driver's licence or photo ID as noted above, an original mailed account statement from a Canadian financial institution (issued within the previous three months), or a recent notice of assessment from the CRA, should be sufficient to prove one's address. Failing those, other acceptable documents would be those listed for an Ontario Health Card application.

Eligibility to work

None of the above documents (with the exception of a Canadian passport) proves that a person is eligible to work in Canada. For that, we must consult the list of documents acceptable for applying for a Social Insurance Number. The essential documents are:

Canadian citizens  Certificate of birth or birth certificate issued by a province or territory  Certificate of Canadian Citizenship  Certificate of Registration of Birth Abroad issued before 1977

Permanent residents   Permanent resident card  Confirmation of Permanent Residence (only acceptable if used within one year of the date of becoming a permanent resident)  Record of Landing issued before June 28, 2002.

Temporary residents   Work permi  Study permit, indicating authorization to work in Canada  Visitor record, indicating authorization to work in Canada  Diplomatic identity card and a work authorization issued by Global Affairs Canada.

Proof of credentials

We also need to verify an employee`s education and (where required) professional credentials.

For Canadian schools, this can be a very fragmented process, as transcripts are only provided directly to the people that were in the courses. If you just want a verification that a degree, diploma or certificate had been obtained, this has been simplified in recent years:

• Many universities and colleges have gotten together to provide this confirmation via AuraData
• Some provide a separate service, such as the University of Toronto

For foreign schools, the candidates will have to provide original documents, with translations where required. There are services available that can be useful for verifying such credentials. They are worth checking, because it's stupid to insist only on Canadian experience where there are many examples of more superior sources available internationally. Even the management guru Peter Drucker has said so.

The information available from professional bodies will vary from one organization to another. For example, in the accounting profession in this province CPA Ontario will not provide information directly to employers, but will send to members on request:

• a letter of good standing (to student members only)
• a history of practical work experience (where available)
• education records

There is no membership card issued these days to prove that a member is in good standing, but a copy of their account profile can be obtained online and printed. Because of the CA/CGA/CMA merger (effectively in 2014, but legally sanctioned only in 2017), I would not ask for the original certificates such legacy members obtained, as that could constitute prima facie age discrimination. For example, I originally qualified as a Registered Industrial Accountant (RIA) in 1984, a year before it was reconstituted as Certified Management Accountant (CMA). Even the dumbest HR staff can do the math on that, so why give them the chance to back out of the offer (albeit on other bogus grounds)?

Proof of character

Beyond the question of proving documentation, there are other fundamental questions relating to a candidate's character:

• Is there a criminal record showing convictions, not otherwise pardoned, suspended or expunged, that would raise concerns relating to past behaviour that would be abhorrent to an employer? Quebec has a checklist of offences relating to dishonesty and corruption under Schedule I of the Anti-Corruption Act; the CRA has more general provisions relating to individuals who are potentially ineligible to hold a senior position in a charity; and the provincial securities commissions have a very comprehensive list for any director or officer of a public company, as shown in Schedule A of National Instrument 41-101. The checklist an employer will use has to be necessarily proportionate to its requirements (eg, a candidate for the Finance function will most likely need to have a clean record as far as offences for financial dishonesty are concerned).
• Would a candidate's financial prudence be relevant in assessing acceptability for a position? If so, a credit report may be required to look for potential red flags.
• Are there factors or concerns in a candidate's employment history that have never made it to the public record? That is why references must always be sought and checked out. They must also provide real information: a reference available only from HR that provides just bare details such as hire and exit dates may very well cover up an adverse background. For an appropriate process, the Government of Canada has an excellent page on structured reference checks.
• Are there other factors or concerns about the candidate's personal character that may be relevant to future performance? Social media checks are happening now, and Google may reveal some rather positive - or awkward - information.

How far back do you need to go? It depends on how crucial or senior the position is, but five years is probably a safe span of time, unless something pops up that may justify going back further.

Other crucial needs?

The potential requirements an employer has may extend beyond the minimum noted above:

• If a position is situated on a First Nations reserve and the candidate asserts that he/she is Indigenous, they will need to show a Certificate of Indian Status card to prove the claim. That is necessary in order to prove the right to earn pay tax-free for working on the reserve.
• Specialist certifications, such as those for bus and truck drivers, pilots and seamen, will need to be provided if the position calls for them.
• Eligibility to obtain security clearances for access to sensitive areas will be relevant for the positions that call for it, and may well be a prerequisite before an offer is actually presented.

Does this need to be done again later?

Sadly, a person's position and circumstances will change over time. If a person obtains new educational or professional qualifications, they should have an obligation to inform the employer about such changes, through the processes outlined above, and frequent voluntary updates will only make it easier to administer.

If someone is initially hired for a low-level position and is subsequently promoted to one with more responsibility, more stringent requirements may apply with respect to character and that part of the verification process may have to be repeated before the new position is offered.

There can certainly be more requirements an employer has and, subject to the restrictions imposed under human rights legislation, appropriate steps will need to be added. This is not an easy task, so good luck!

California dreamin’…

It was surprising to note on my recent trip to California that I only once encountered anyone smoking up on cannabis, and that was in a car parked at a lookout on the Sunset Cliffs in San Diego. The only other evidence of the legalized business was a billboard in North Hollywood announcing that a business had received permission to deliver the product to your home if you lived in LA. Rather low key, compared to the hype occurring now during the great ganja gold rush leading up to its legalization in the Great White North this coming 17 October.

That has prompted me to look into what California is doing to govern this field, and how it compares and contrasts to the approach we are taking. Note that this focuses on the recreational use of it, and the rules governing medical use are totally separate.

California

The California Department of Tax and Fee Administration has a very useful guide explaining the various requirements. The State also has a centralized web portal that covers all aspects of the business and how it's regulated there.

The State requires the holding of various tax permits and commercial licences that depend on the activity being undertaken:

Activity	Seller’s permit	Cannabis tax permit	Type of licence	Issuing agency
Collective/cooperative	Yes (Refer to Collectives and Cooperatives Fact Sheet for further details)
Cultivator	Yes		Cultivator	California Department of Food and Agriculture
Distributor	Yes	Yes	Distributor	Bureau of Cannabis Control, California Department of Consumer Affairs
Manufacturer	Yes		Manufacturer	California Department of Public Health
Microbusiness (ie, a combined business that is engaged in cultivation, manufacturing, distribution and retail sales)	Yes	Yes	Microbusiness	BCC/CDCA
Nursery	Yes		Cultivator	CDFA
Processor	Yes		Cultivator	CDFA
Retailer/dispensary	Yes		Retail	BCC/CDCA
Testing facility	Maybe (Although not allowed to sell cannabis or cannabis products, they must hold a permit if they wish to sell any other types of tangible personal property, such as testing kits)		Testing laboratory	BCC/CDCA

However, a seller's permit is not required if no tangible personal property is sold in California, but the commercial licensing rules require that a certification letter must be issued by the CDTFA to the relevant licensing agency to confirm that that is truly the case.

In addition, the tax structure consists of an excise tax and a cultivation tax.

• The excise tax is on retail purchasers of cannabis and cannabis products, and is 15%, based on the average retail price being realized. In an arm's-length transaction, that is the price charged at the cash register. in a non-arm's-length transaction, a markup would be applied to arrive at what would otherwise be the retail price. California sales and use tax is charged on the selling price including excise tax.
• The cultivation tax is imposed on the category and weight of cannabis that is sold or transferred to a manufacturer or distributor:

Category	USD/oz	USD/g	Equivalent CAD/g
Cannabis flowers (including dry cannabis plant)	9.25	0.326284	0.429322
Cannabis leaves	2.75	0.097003	0.127636
Fresh cannabis plant (weighed within two hours of harvesting)	1.29	0.045503	0.059873

I've presumed an exchange of CAD 1.00 = USD 0.76 in the above calculations.

Canada

Health Canada has established classes of licences for the following:

Licence	Activity	Allowing for
Standard cultivation	Growing in an area greater than 200 m2	Plants (dried or fresh); seeds
Micro-cultivation	Growing in an area less than 200 m2	Plants (dried or fresh); seeds
Nursery	Growing for starting material (ie, plants and seeds)	In areas up to 50 m2
Standard processing	Making cannabis products on a large scale (ie, greater than 600kg/year of dried cannabis)	Manufacturing
Micro-processing	Making cannabis products on a lesser scale	Manufacturing
Sale for medical purposes	Selling cannabis for medical purposes	Selling to registered clients
Analytical testing	Testing of cannabis	Any type of testing
Research	Research of cannabis	Research and development

In conjunction with this, there will be a Cannabis Licensing and Tracking System in effect, that will track all balances of, and changes to, inventories of licence holders, together with transaction counts and quantities by province and territory. The monthly reporting looks rather daunting, and I hope they will accept flat file transfers for that purpose. Manual entry would be brutal!

In addition, the Canada Revenue Agency has a separate registration framework for collecting the following excise duties:

• a flat-rate duty imposed at the time of packaging
• an ad valorem duty of 2.5% imposed at the time of delivery; and
• an additional duty (expected to be 7.5%) on delivery that will be remitted to participating provinces

The various rates of flat-rate duty are:

Cannabis product	Flat rate duty (CAD)	Flat rate + additional duties (CAD)
Flowering material (flower) included in the cannabis product or used in the production of the cannabis product	0.25/g	1.00/g
Non-flowering material (trim) included in the cannabis product or used in the production of the cannabis product (this includes flowering material that is industrial hemp by-product)	0.075/g	0.30/g
Seed included in the cannabis product or used in the production of the cannabis product	0.25 per viable seed	1.00 per viable seed
Plants included in the cannabis product or used in the production of the cannabis product	0.25 per vegetative cannabis plant	1.00 per vegetative cannabis plant

The actual liability will be the higher of the flat-rate duty or the total of the ad valorem duties. Of course, GST/HST is chargeable on the total selling price including excise duty.

Registration will be required from all commercial producers, and packagers will also have to secure an additional registration in order to receive excise stamps for application to their manufactured product. Particulars of both schemes can be found here and here. It should be noted that the required documentation to support the producer registration is quite extensive, incorporating detailed background of all directors, officers, other key personnel and the various facilities connected to the operation. The Health Canada applications also require this, as well as security clearances of all personnel concerned.

Summary

It appears that California has found more tax room to exploit in this field, compared to what current Canadian initiatives have gone towards, and there appears to have been little controversy as a result. Could this mean that we have underpriced the market here, or does this mean that producers will be getting profits that are unduly high? This merits further study, given the frenzy that venture capitalists have been in this year to get into the field. Stay tuned.

Welcome changes to the refundable dividend tax rules

I promised in my last post that I would visit the changes proposed in the 2018 federal budget with respect to the account for refundable dividend tax on hand (RDTOH), and here is the result. There are some very provisions coming into effect that will really bring some needed integration and antiabuse provisions in this field for Canadian-controlled private corporations (CCPCs).

The changes will affect certain key forms that need to be filed:

• T2 Schedule 3, which reconciles dividends received, taxable dividends paid, and Part IV tax calculations;
• T2 Schedule 53, which reconciles the flows within the Generate Rate Income Pool (GRIP) that determine what can be paid as eligible dividends reported on the T5 return;
• T2 Schedule 54, which reconciles the flows within the Low Rate Income Pool (LRIP) that determine what can be paid as non-eligible dividends similarly reported; and
• page 7 of the T2 return, concerning the determination of RDTOH and dividend refunds for the year.

This is important, as eligible dividends paid from GRIP, because of the "gross-up and credit" system of reporting taxable dividends, are more or less accounted for on the individual T1 returns with minimal impact on the overall tax collected when you add the effects of personal and corporate taxes together. Non-eligible dividends paid from LRIP will result in being effectively marginally taxed at the personal level. Until now, if there were balances in both pools there was no rule governing which pool had to be drawn upon first for paying dividends to shareholders.

The changes

Beginning with the first taxation year after 2018, the RDTOH will be divided into two accounts:

1. The current account will be designated as "non-eligible RDTOH".
2. A new account, to be known as "eligible RDTOH", will be created.
3. Where a corporation is a CCPC throughout that first year, an opening balance will be created for eligible RDTOH equal to the lesser of a) its RDTOH at the end of the previous year, and b) 38⅓% of its GRIP at the same date. An anti-avoidance provision will be in effect to prevent any manipulation concerning the opening balance.
4. Otherwise, additions to eligible RDTOH will arise from Part IV tax on "eligible portfolio dividends", which are dividends received from a) corporations with which the corporation is not connected under ITA s. 186(4), and b) connected corporations paying dividends from their own eligible RDTOH accounts.

Why is that necessary? It is because of the rules that will also come into force with respect to obtaining dividend refunds relating to Part IV tax and the refundable portion of Part I tax paid in previous years that had already flowed into the RDTOH:

1. If a corporation pays an eligible dividend, it will not be able to obtain a dividend refund unless it has a positive balance for eligible RDTOH.
2. If it pays a non-eligible dividend, it will obtain a dividend refund as long as there is a positive balance in either RDTOH account.
3. The non-eligible RDTOH account must be depleted before a dividend refund can be obtained with respect to its eligible RDTOH account.

 Why does this matter?

This is related to Ottawa's efforts to ensure that passive income within corporations is properly taxed when it flows back to individual shareholders. The current régime which provided for a single RDTOH pool was inconsistent with that goal, so it had to be dividend to ensure that taxation was occurring properly with respect to each source of investment income occurring for the corporation. This change was both necessary and desirable.

Penalties will still exist for eligible dividends paid that are in excess of available GRIP for the year, reported as Part III.1 tax on T2 Schedule 55. Therefore, several different sets of forecast and other calculation scenarios will be necessary before directors decide to declare any relevant dividends. Another reason to have a very good CFO at your side.

None of these changes affect the existing rules concerning the capital dividend account, out of which tax-free capital dividends can be paid, but it is still necessary to maintain up-to-date calculations as to what the eligible balance is. The relevant forms for this exercise are T2 Schedule 89 and T2054, mailed together to the office stated in the instructions, on or before the date the dividend is first paid or payable.. The corporation's auditors should have already compiled the necessary information, if it is not already available internally.

The passive income controversy (cont'd)

Bill Morneau finally brought down his budget last Tuesday. While the flavour du jour is gender-based analysis, you had to dig (as per usual) to find out what Finance is doing to really improve the Income Tax Act, among other laws. They have come up with an interesting resolution to the taxation of passive income in CCPCs that I discussed earlier here and here, as well as doing a needed correction to the handling of refundable dividend taxes on hand. I'll deal with the latter matter in a subsequent post.

The Budget (and the real document)

The public version, which most commentators appear to have focused on, is an interesting PR exercise as usual:




However, to see what is really going on, you always have to read this:

 What they're doing with the Small Business Deduction

Where they start discussing their proposal for limiting the availability of the small business deduction (SBD) to CCPCs (at pp. 17-20 and pp. 53-55), you discover that this is really a multiple-factor calculation. The basic formula is:

 $  ABL = BL - max(A,B)  $

where:

• ABL = adjusted business limit to what can be claimed for the small business deduction
• BL = the business limit otherwise available
• A = limitation with respect to taxable capital employed in Canada (a concept borrowed from the Part I.3 tax on large corporations), which is already in effect as ITA 125(5.1)
• B = limitation with respect to adjusted aggregate investment income (ie, passive income) for the year (being the figure from the T2 Schedule 7 with some adjustments)

The very brief summary of the impact is that:

• if a CCPC's taxable capital is less than CAD 10 million, and its passive income is less than CAD 50,000, it will continue to have full access to its business limit
• if either its taxable capital is greater than CAD 15 million, or its passive income is greater than CAD 150,000, it will have no access to the small business deduction
• there is a transitional phase where the above calculation comes into play; it is effectively a percentage reduction of what the dollar amount would otherwise be

The charts that illustrate the impact (as shown in p. 74 of the Budget and pp. 18-19 of the Tax Measures) are very poorly done, as they fragment the extent of its impact. Some commentators have said that these limitations are straight-line calculations, but they are wrong. Both limitations are curvilinear in nature as shown in the following.

The taxable capital limitation

The limitation with respect to a CCPC's taxable capital employed in Canada is:

$ \left[ \frac{0.00225(C-10,000,000)}{11,250} \right],  10,000,000 \leq C \leq 15,000,000 $

where C is such taxable capital, and the business limit after reduction for this limitation is:

The passive income limitation

The limitation with respect to a CCPC''s passive income for the year is

$ \left[ \frac{BL}{500,000} - 5(E-50,000) \right],  50,000 \leq E \leq 150,000$

where E is the adjusted aggregate investment income for the year.



Further testing proved that these calculations are effectively percentage reductions to what otherwise would be the business limit to which a CCPC would be entitled.

This also begs the question as to what to expect when the two curves intersect - as that could happen - and this is something that the wizards at Finance decided not to try to visualize. I tried to summarize this in a single formula, but that was not a practical solution. Through the tried-and-true "brute force" technique, I compiled a dataset of calculated datapoints and have constructed a chart of my own, which proves to be revealing:


You can see that the curve has a definite peak, either side of which tapers down to eventual ineligibility for the small business deduction. That may be worth investigating further, in order to help out with any necessary tax planning such corporations may need to undertake.

I like this solution, but do object to the way it's being advertised. CPA Canada has described it as being "much simpler than what was originally proposed," but no-one has mentioned its integration with the taxable capital limitation in any detail yet, but it represents a very significant expansion. If this goes through in its proposed form, it will essentially expand this anti-abuse provision, because much of the work that CCPCs and their tax advisers have done over the years in making sure that their taxable income is low enough to fully qualify for the small business deduction will become useless, as it's much more difficult to fudge passive income and capital employed. This is to be welcomed, together with last year's exclusion of personal services business income (as now shown on line 520 of Schedule 7) from the SBD and the new SBD denial rules.

This area is becoming rather exciting now. Let's see what happens next.

The screws are being turned...

Ontario is reforming its labour laws once more, and this time there are some real changes to take note of. Here are what I think are the most significant ones that are happening to the Employment Standards Act, 2000. I've organized them according to when they come in force.

On Royal Assent (27 November 2017)

The following provision came into effect immediately:

5.1 (1) An employer shall not treat, for the purposes of this Act, a person who is an employee of the employer as if the person were not an employee under this Act.

(2) Subject to subsection 122 (4), if, during the course of an employment standards officer’s investigation or inspection or in any proceeding under this Act, other than a prosecution, an employer or alleged employer claims that a person is not an employee, the burden of proof that the person is not an employee lies upon the employer or alleged employer.

This is huge, for two immediate reasons:

• this will force an employer to document, before engaging a worker, the reasons why the work is being done by an independent contractor instead of an employee
• as the Canada Revenue Agency, in its payroll audits, follows provincial law in determining who an employee is, their work has gotten much easier as they can now demand to see such documentation to satisfy themselves as to such status

This gets better over the coming months.

1 January 2018

The following definition in s. 1(1) is amended to read:

“employee” includes, 

(a) a person, including an officer of a corporation, who performs work for an employer for wages,
(b) a person who supplies services to an employer for wages,
(c) a person who receives training from a person who is an employer, if the skill in which the person is being trained is a skill used by the employer’s employees, or
(d) a person who is a homeworker,

and includes a person who was an employee;

The portion in bold replaces the current provision relating to interns and other trainees, and it looks like it removes any remaining excuses employers might have to say that training doesn't count for being paid.

1 April 2018

The following definition is added to s. 1(1):

“difference in employment status”, in respect of one or more employees, means,

(a) a difference in the number of hours regularly worked by the employees; or
(b) a difference in the term of their employment, including a difference in permanent, temporary, seasonal or casual status;

Why is this important? It's because of the new provisions that have been inserted into Part XII concerning equal pay for equal work:

41.2 In this Part, “substantially the same” means substantially the same but not necessarily identical.

 ...

42.1 (1) No employer shall pay an employee at a rate of pay less than the rate paid to another employee of the employer because of a difference in employment status when,
(a) they perform substantially the same kind of work in the same establishment;
(b) their performance requires substantially the same skill, effort and responsibility; and
(c) their work is performed under similar working conditions.

(2) Subsection (1) does not apply when the difference in the rate of pay is made on the basis of,
(a) a seniority system;
(b) a merit system;
(c) a system that measures earnings by quantity or quality of production; or
(d) any other factor other than sex or employment status.

(3) No employer shall reduce the rate of pay of an employee in order to comply with subsection (1).

(4) No trade union or other organization shall cause or attempt to cause an employer to contravene subsection (1).

(5) If an employment standards officer finds that an employer has contravened subsection (1), the officer may determine the amount owing to an employee as a result of the contravention and that amount shall be deemed to be unpaid wages for that employee.

(6) An employee who believes that their rate of pay does not comply with subsection (1) may request a review of their rate of pay from the employee’s employer, and the employer shall,
(a) adjust the employee’s pay accordingly; or
(b) if the employer disagrees with the employee’s belief, provide a written response to the employee setting out the reasons for the disagreement.

(7) If a collective agreement that is in effect on April 1, 2018 contains a provision that permits differences in pay based on employment status and there is a conflict between the provision of the collective agreement and subsection (1), the provision of the collective agreement prevails.

(8) Subsection (7) ceases to apply on the earlier of the date the collective agreement expires and January 1, 2020.

Similar provisions have also been inserted to prevent the use of employment agencies to try to make an end run around these prohibitions.

What does this mean? Quite simply, too many employers were claiming that anyone who was not a permanent full-time employee could therefore be hired at a discount. This was, frankly, abusive behaviour on their part which the law has sought to punish in recent times in both the legislature and the courts. I can also see the need to express all compensation in terms of specified hours per pay period for each employee, in order to determine an hourly rate in order to show that compliance is being achieved across all such classifications of employees, whether full-time, part-time, seasonal or casual. While I disagree with the present régime at Queen's Park on many things, this time I think they got it right.

Stay tuned. I'm sure there's going to be a lot of fun seeing this come into force.

Better ideas they could have used earlier

My earlier post on how governments should not consult may have been somewhat wordy, but it's time to revisit the subject now that some more sober thought is starting to be published.

The Fall Economic Statement expanded on the subject, specifically at pp. 46-56:



And last week the Parliamentary Budget Officer weighed in with its analysis of the issue:



The concern I have is that both of these documents carry useful data that should have been included in the original consultation paper. Analysis of how many Canadian-controlled private corporations (CCPCs) would not have to worry about the changes would have forestalled many emotional outbursts that were sure to have been included in the 21,000 submissions that were received. Consultations only truly work when the big picture is given a chance to be presented—theoretical examples such as the ones originally given don't properly give the target audience a chance to discuss the issues in a thoughtful and logical way.

I suspect I'll be coming back to this matter from time to time, in order to keep everyone up to date.

This will have lenders worried

One of the consequences of having experience is that you can remember when things had been brutal when a company was going through financial problems. Back in the 1980s, the secured lenders were rather cavalier about how they went in to scoop assets from a debtor in collecting on their collateral, and they didn't care if anyone got stuck with remaining debts afterwards. There were too many stories I knew of back then, and I actually had to go in and work at one company that had been on the brink of shutting down before it was saved by an acquirer.

One of the more abrupt scenarios was if you were in business in Québec, where the Code of Civil Procedure allowed seizures to be undertaken by secured lenders without notice. This only changed when the federal Bankruptcy and Insolvency Act was amended in 1992 to provide a ten-day notice period before such action, which brought that province into line with the rule already in place in the common-law provinces.

Other examples of bad behaviour exist to the present day. The most egregious I've seen is when a secured lender seizes collateral before a debtor collapses, and realizes, at any price, quick proceeds by power of sale. It was standard practice that the creditor would just scoop the proceeds, and that was that.

According to the courts, that is not acceptable behaviour in the following circumstances:

• The creditor is now required to take reasonable precautions to obtain a fair market value on the property, and, should the proceeds exceed the amount due, return the difference to the debtor.
• It the debtor has unremitted balances of Tax/CPP/EI source deductions and/or GST/HST, and the debtor does not have sufficient funds to pay them, the CRA will now go after the lender for any amounts owing

 The first principle arose from the English case of Cuckmere Brick Co Ltd v Mutual Finance Ltd, where Salmon LJ stated:

I accordingly conclude, both on principle and authority, that a mortgagee in exercising his power of sale does owe a duty to take reasonable precaution to obtain the true market value of the mortgaged property at the date on which he decides to sell it. No doubt in deciding whether he has fallen short of that duty, the facts must be looked at broadly and he will not be adjudged to be in default unless he is plainly on the wrong side of the line.

Canadian courts have adopted a similar approach.

The latter is a consequence of jurisprudence that has only arisen in recent years, and is neatly summarized in a case decided by the Federal Court of Appeal this past summer. While such debts may (with the exception of source deductions) rank only with other unsecured creditors at the time of bankruptcy, any move to realize upon security before that point will have massive consequences, as noted here:

• A creditor is obliged to pay proceeds from a tax debtor’s assets to the Crown whether or not that creditor is aware the debtor hasn’t remitted its taxes.
• The creditor can be personally liable for the debtor’s GST/HST arrears
• The Crown will now be more aggressively inclined to pursue creditors post-bankruptcy to recover amounts obtained from the debtor’s assets in pre-bankruptcy actions.
• This will not be available with respect to certain "prescribed security interests" (generally involving real estate), but the amount of the interest must be reduced by any collateral being held as well as any payments that have been made, and the exemption will not apply where a deemed trust amount has arisen before an interest has been registered.

This will force lenders to get more documentation and assurance that debtors do not have issues that may complicated efforts to protect their security. It appears accountants will have a bit more on their plate to work on.