Debt capital markets in Canada: regulatory overview

A Q&A guide to debt capital markets law in Canada.

The Q&A gives an overview of legislative restrictions on selling debt securities, market activity and deals, structuring a debt securities issue, main debt capital markets/exchanges, listing debt securities, continuing obligations, advisers and documents, debt prospectus/main offering document, timetables, tax, clearing and settlement, and reform.

To compare answers across multiple jurisdictions visit the Debt Capital Markets Country Q&A tool

This Q&A is part of the global guide to debt capital markets law. For a full list of jurisdictional Q&As visit www.practicallaw.com/capitalmarketsdebt-guide.

Contents

Legislative restrictions on selling debt securities

1. What are the main restrictions on offering and selling debt securities in your jurisdiction?

Main restrictions on offering and selling debt securities

In general, the requirements for equity and debt security offerings in Canada are substantially similar. An offering of debt securities requires a prospectus, unless an exemption from the prospectus requirement applies (see Questions 13and 14). In connection with any public offering of debt securities, an issuer must file and disseminate to potential investors both a preliminary and final prospectus and obtain receipts for those prospectuses from the applicable Canadian Securities Administrator (see Question 15). Debt securities are most commonly offered by private placement (with an offering memorandum or term sheet). If using the public market, they are most commonly offered via a base shelf prospectus or a short form prospectus (see Questions 15 and 17).

Canadian securities laws permit certain limited marketing-related activities to occur between the issuance of a receipt for a preliminary prospectus and the issuance of a receipt for a final prospectus (waiting period).

The only written information that issuers and investment dealers can disseminate to potential investors during the waiting period is:

  • The preliminary prospectus.

  • A skeletal prospectus notice (identifying the securities, their price and a contact from whom they will be available for purchase).

  • Standard term sheets.

  • Marketing materials.

Each of these items must also include certain prescribed disclosures. For example, marketing materials must contain information disclosed in, or derived from, the preliminary prospectus. Issuers and dealers are also permitted to put on presentations to potential purchasers of the issuer's securities, also known as "road shows".

Restrictions for offers to the public or professional investors

Offerings of securities to certain professional investors can be effected without the use of a prospectus (see Question 14).

 

Market activity and deals

2. Outline the main market activity and deals in your jurisdiction in the past year.

Canada's debt capital market is active, with both investment grade and sub-investment grade corporate issuers, as well as government issuers, engaging in a wide range of offerings of convertible and non-convertible debt securities. The Ontario Securities Commission estimates that over CAD255 billion aggregate issuance activity and over CAD10 trillion in secondary market trading activity took place in the Canadian bond market in 2014. Of that figure, it is estimated that corporate issuances accounted for over CAD85 billion.

Canadian dollar high-yield offerings include a mix of both widely marketed issuances and targeted issuances, which are in some cases combined with equity-based products such as warrants.

Significant non-bank debt capital markets transactions in 2015 included:

  • TELUS Corporation's offering of CAD1.75 billion in senior unsecured notes.

  • Manulife's offering of CAD1 billion of subordinated debentures.

  • Canadian National Railway's offering of CAD850 million senior unsecured notes.

The Canadian high-yield debt market experienced a considerable slowdown in 2015. Offerings included Brookfield Residential Properties Inc's CAD250 million private placement of notes.

In addition, Canadian banks issue debt securities in the form of senior unsecured principal at risk notes, typically by way of supplements to their base shelf prospectuses. These notes are often linked to equities, debts, exchange traded funds, or other underlying interests and are not listed on an exchange or governed by an indenture (see Questions 3 and 15).

 

Structuring a debt securities issue

3. Are different structures used for debt securities issues to the public (retail issues) and issues to professional investors (wholesale issues)?

Irrespective of whether debt is intended to be issued to a retail or a wholesale investor, debt securities are typically issued under a trust indenture (a written agreement entered into by an issuer and indenture trustee who acts as a representative of the security holders). The use of a trust indenture and indenture trustee facilitates secondary-market trading of the debt securities issued under the trust indenture.

Less commonly, and particularly when an active secondary trading market is not anticipated, debt securities intended to be issued to professional investors by way of a private placement in reliance on securities laws exemptions are issued under a note purchase agreement. The issuer will enter into a note purchase agreement directly with the relevant professional investors.

 
4. Are trust structures used for issues of debt securities in your jurisdiction? If not, what are the main ways of structuring issues of debt securities in the debt capital markets/exchanges?

Issuances involving a trust indenture and indenture trustee are commonly used in Canada (see Question 3).

 

Main debt capital markets/exchanges

5. What are the main debt securities markets/exchanges in your jurisdiction (including any exchange-regulated market or multi-lateral trading facility (MTF))?

Main debt markets/exchanges

Most debt securities in Canada are not listed on a securities exchange but trade over-the-counter through alternative trading systems, such as:

There are two principal stock exchanges in Canada, both of which list debt as well as equity securities:

  • Toronto Stock Exchange (TSX)

  • TSX Venture Exchange (TSXV).

Issuers seeking to list on either the TSX or the TSXV must complete a listing application and meet various listing requirements. Listing requirements for the TSX and TSXV are sector and development-stage specific.

The TSX lists more established issuers who comply with more stringent listing requirements. The TSXV lists companies that are at a more junior stage of development. Issuers initially listed on the TSXV can eventually graduate to the TSX once they are able to satisfy the TSX's listing requirements (see www.tmx.com/en/index.html)

Also see table, Stock exchanges and regulatory authorities by jurisdiction.

Approximate total issuance on each market

As of February 2016, there were approximately 110 issuers with debt securities listed on the TSX and approximately 20 issuers with debt securities listed on the TSXV.

 
6. What legislation applies to the debt securities markets/exchanges in your jurisdiction? Who are the main regulators of the debt capital markets?

Regulatory bodies

Each of Canada's ten provinces and three territories has its own securities legislation and securities regulatory authority (see below, Legislative framework). Canada's two principal stock exchanges, the TSX and the TSXV, establish and enforce rules and policies that regulate the ongoing conduct of listed companies (see Question 5, Main debt markets/exchanges). Securities regulation requires firms that are registered as a dealer or an underwriter in respect of any type of security (investment dealers) to apply and be accepted for membership with the Investment Industry Regulatory Organization of Canada (IIROC), a national self-regulatory organisation responsible for overseeing and regulating investment dealers in Canada. IIROC regulates investment dealers by setting and enforcing rules regarding their financial conduct, proficiency and business as well as the activity of those investment dealers on Canadian securities marketplaces through market integrity rules.

Legislative framework

Canada has a federal system of government with power divided between Canada's federal government and its ten provincial and three territorial governments. Securities legislation is governed at the provincial or territorial level. Therefore, each of the provinces and territories has its own legislative scheme for regulating the securities market within its own jurisdiction, including its own securities commission or regulatory authority for administering and enforcing that legislation (which co-ordinate their efforts under the Canadian Securities Administrators umbrella organisation). Securities regulatory requirements in Canada vary from jurisdiction to jurisdiction, although many are substantially similar across jurisdictions. Additionally, Canadian provincial and territorial corporate statutes regulate indenture trustees and trust indentures (see Question 3).

Despite the decentralised nature of securities legislation, the provincial and territorial securities commissions generally harmonise their rule-making so that in the substantial majority of cases, they make identical or nearly identical rules. These identical cross-jurisdictional rules take the form of national instruments. In a few cases, only some of the provincial securities commissions co-operate to harmonise a rule (multilateral instruments). The Canadian Securities Administrators also develop and publish non-statutory instruments such as policies, notices and communiqués. While these instruments are non-binding, they provide additional information about how regulators interpret the provisions of legislation or rules as well as guidance to market participants concerning the exercise of regulatory discretion.

Most significantly, the Canadian federal government and several provincial governments, including Ontario and British Columbia (two of the largest markets), have taken steps to implement a single securities regulator, the Cooperative Capital Markets Regulatory System (CCMR). The CCMR has released and received comments on consultation drafts of the uniform provincial capital markets legislation and complementary federal legislation proposed for enactment. The participating jurisdictions have targeted autumn 2016 as the implementation date for the CCMR; however, it is expected that this target will not be met.

 

Listing debt securities

7. What are the main listing requirements for bonds and notes issued under programmes?

Main requirements

An issuer seeking to list on either the TSX or TSXV must complete a listing application form and provide supporting data demonstrating that the issuer fulfils the applicable minimum listing requirements. Generally speaking, to be listed on a Canadian stock exchange, an issuer must:

  • Demonstrate successful operation of its business, management experience and expertise.

  • Enter into a listing agreement with the TSX in which it formally agrees to comply with the TSX's requirements for maintaining a listing.

  • Ensure each director, officer, promoter and other insider completes a personal information form and consent for disclosure of criminal record information form (PIF). The TSX will conduct a background check of each director, officer, promoter and insider based on the information provided in the PIF.

While the minimum listing requirements of the TSX and TSXV specifically contemplate the listing of equity securities, the stock exchanges also consider debt securities for listing.

The stock exchanges have the discretion to refuse a listing application after examining an application on its merits and can refuse to grant an application even though the issuer has otherwise met the minimum listing requirements.

Foreign issuers. While there are few additional management or financial requirements for international issuers seeking to list in Canada, as a practical matter, international issuers must be able to demonstrate their ability to satisfy all of their ongoing reporting and general public company obligations in Canada. It is also generally recommended that international issuers have some presence in Canada with respect to performing administrative, regulatory reporting and investor relations functions. This can be satisfied by having a member of the board of directors or management, an employee or a consultant of the issuer situated in Canada.

Minimum size requirements

There are two levels of financial standards recognised by the TSX:

  • Issuers that are established with strong balance sheets and meet prescribed levels of prior year pre-tax profitability and cashflow (exempt issuers).

  • Issuers that are smaller with lower levels of net tangible assets, cashflow or profit (non-exempt issuers). Non-exempt issuers are subject to closer oversight by the TSX and must evidence sponsorship of their listing application by a participating organisation of the TSX.

The TSXV also recognises two levels of financial standards:

  • "Tier 1", which is reserved for issuers that are more advanced and which have more significant financial resources.

  • "Tier 2", where the majority of the TSXV's issuers trade.

See: www.tmx.com; ttp://tmx.complinet.com/en/tsx_manual.html; http://www.tsx.com/listings/tsx-and-tsxv-issuer-resources/tsx-venture-exchange-issuer-resources; and http://www.tsx.com/listings/listing-with-us/listing-guides.

Trading record and accounts

The TSX does not impose trading record and account requirements on issuers seeking to list debt securities. An issuer seeking a listing on the TSX or the TSXV must have adequate working capital and an appropriate capital structure for carrying out its business purpose for a sufficient period of time.

Minimum denomination

Typically, listed bonds are issued in minimum denominations of CAD1,000 and are quoted for trading on the basis of a CAD100 principal amount.

 
8. Are there different/additional listing requirements for other types of securities?

For issuers with equity securities listed on the TSX, the minimum public distribution requirements for a supplemental listing of debt securities are the same as the minimum requirements for the original equity listing. However, the TSX will give consideration to listing debt securities that do not meet these requirements if the market value of such securities outstanding is at least CAD2 million and:

  • If the securities are convertible into equity securities, the equity securities meet the minimum public distribution requirements for the original equity listing.

  • If the securities are not convertible into equity securities, the listed issuer is an exempt issuer (see Question 7, Minimum size requirements).

The TSXV will generally require that the following conditions are met:

  • A minimum of 75 board lots (CAD1,000 in principal amount) of debt securities be outstanding.

  • A minimum of CAD200,000 principal amount of debt securities be outstanding in the public float.

 

Continuing obligations: debt securities

9. What are the main areas of continuing obligations applicable to companies with listed debt securities and the legislation that applies?

Issuers with listed debt securities will generally be "reporting issuers" in Canada and therefore are subject to ongoing reporting obligations, known as continuous disclosure obligations. National Instrument 51-102 - Continuous Disclosure Obligations (NI 51-102) and the applicable stock exchange rules are the main sources of the ongoing disclosure obligations for reporting issuers. These disclosure obligations fall into two broad categories:

  • Timely disclosure.

  • Periodic disclosure

Timely disclosure

Timely disclosure filings include:

  • Material change reports. Immediate disclosure, by press release, must be made of all material changes in the affairs of an issuer (NI 51-102). A material change is a change in the business, operations or capital of a reporting issuer that would reasonably be expected to have a significant effect on the market price or value of any of the securities of the reporting issuer, or a decision by the board of directors or senior management to implement such a change. Material changes must also be disclosed by the filing of a material change report disclosing the nature and substance of the change within ten days of the material change, subject to limited confidentiality in certain circumstances.

  • Material contracts/documents affecting security holder rights. Documents affecting the rights of security holders and, subject to certain exceptions, material contracts entered into by an issuer must be filed (NI 51-102).

  • Business acquisition reports. Business acquisition reports by an issuer must be filed in respect of all significant acquisitions, including historical and pro forma financial statements in respect of the acquired business (NI 51-102).

Periodic disclosure

Periodic disclosures include:

  • Annual information form (AIF) . An issuer's AIF is an annual filing intended to provide background information to investors about the nature of the issuer and its business operations and prospects. An issuer listed on the TSX is required to file an AIF.

  • Annual and interim financial statements. Issuers must file audited annual financial statements for each completed financial year, together with comparative financial statements relating to the preceding financial year (NI 51-102). Issuers must also file standalone, unaudited year-to-date interim financial reports on a quarterly basis (except in respect of the fourth quarter), which must include a comparative statement to the end of the corresponding period in the previous financial year.

  • Management discussion and analysis (MD&A) . MD&A is supplemental analysis and explanation which accompanies but does not form part of the financial statements, and must be filed concurrently with a reporting issuer's interim and annual financial statements. MD&A requires management of a corporation to explain in narrative form the corporation's financial condition and future prospects.

  • Annual and interim certification of disclosure. The Chief Executive Officer and Chief Financial Officer of an issuer must certify the disclosure contained in the issuer's annual and interim financial statements (NI 52-109 - Certification of Disclosure in Issuer's Annual and Interim Filings). This certificate includes certification of internal control over financial reporting and disclosure controls and procedures.

  • Proxies, proxy solicitation, and management information circulars. NI 51-102 contains certain requirements for proxy materials sent in connection with meetings of voting security holders. However, these materials are usually only sent to voting shareholders, not holders of debt.

  • Technical reports for mineral projects. NI 43-101 - Standards of Disclosure for Mineral Projects (NI 43-101) requires issuers to file within a specified period of time a technical report in a prescribed form in certain circumstances, including to support first-time disclosure or changes of mineral resources, mineral reserves or the result of a preliminary economic assessment on a property that is material to the issuer.

  • Annual reports on reserves data and other oil and gas information. NI 51-101- Standards for Disclosure for Oil and Gas Activities (NI 51-101) requires oil and gas issuers to issue and file, on an annual basis, a statement of the issuer's reserves data and other information specified in Form 51-101 F1 as at the last day of the most recent financial year. The annual information required by Nl 51-101 may be provided in standalone documents or included as part of an issuer's AIF.

  • Corporate governance practices. NI 58-101 - Disclosure of Corporate Governance Practices requires an issuer (unless otherwise exempted) to disclose its corporate governance policies in the form required under Form 58-101 F1 either in the management information circular sent in connection with an annual meeting of voting shareholders or alternatively in its AIF.

Credit support issuers

Certain debt issuers can qualify for an alternative continuous reporting regime as credit support issuers (NI 51-102). This status can be based on, among other things, the fact that the issuer is a wholly-owned subsidiary of an entity (parent guarantor) that has provided an unconditional guarantee as to the payment of principal, premium (if any) and interest relating to the issued debt securities, and the fact that the parent guarantor has a class of securities registered under the Securities Exchange Act of 1934 of the United States (Exchange Act). As a credit support issuer, the issuer would satisfy the requirements of NI 51-102, including the requirement to file its own interim financial reports and annual financial statements, provided that the issuer and the parent guarantor satisfy specified criteria. Among other things, the issuer must file the following documents for public disclosure (at www.SEDAR.com):

  • Copies of all documents the parent guarantor is required to file with the United States Securities and Exchange Commission (SEC) under the Exchange Act, at the same time or as soon as practicable after the filing by the parent guarantor of those documents with the United States Securities and Exchange Commission.

  • Interim and annual "summary financial information" (as defined in NI 51-102) which includes financial information regarding the issuer.

 
10. Do the continuing obligations apply to foreign companies with listed debt securities?

Certain issuers with classes of securities registered under the Exchange Act (SEC foreign issuers) and foreign issuers from designated jurisdictions (including the United Kingdom, Australia, Hong Kong, France, Germany and Mexico) can file their home country continuous disclosure filings with the Canadian Securities Administrators in lieu of parallel Canadian continuous disclosure filings, provided certain conditions are met (NI 71-102 - Continuous Disclosure and Other Exemptions Relating to Foreign Issuers). Additionally, all documents must be provided to Canadian security holders in the same manner and at the same time as they are provided to foreign security holders.

 
11. What are the penalties for breaching the continuing obligations?

Where an issuer is in default of filing continuous disclosure documents, the Canadian Securities Administrators can issue either:

  • A cease trade order, which prohibits trading in the securities of the issuer by persons or companies identified in the order.

  • A management cease trade order, which prohibits the trading only of the Chief Executive Officer, Chief Financial Officer and, at the discretion of the regulators, the board of the issuer.

Any person or company that acquires or disposes of an issuer's securities in the secondary market during the period of time that a material change has not been disclosed as required, has a right of action for damages against, among others, the issuer and each director and officer of the issuer who authorised, permitted or acquiesced in the failure to make timely disclosure.

Any director or officer of an issuer can be personally liable to either or both of a fine of up to CAD5 million or to imprisonment for up to five years less a day, if they authorise, permit or acquiesce in making a statement in a continuous disclosure filing that, in a material respect and at the time and in light of the circumstances in which it was made:

  • Is misleading or untrue.

  • Does not state a fact that is required to be stated or that is necessary to make the statement not misleading.

Another consequence of failing to meet continuous disclosure obligations by an issuer with listed debt securities is that the stock exchange could temporarily halt trading in the securities of the defaulting issuer until all requirements are met.

 

Advisers and documents: debt securities issue

12. Outline the role of advisers used and main documents produced when issuing and listing debt securities.

Main documents

The main documents produced in a debt securities offering generally include:

  • The offering document (that is, the prospectus, offering memorandum or term sheet).

  • An underwriting or agency agreement.

  • Subscription agreements (in certain circumstances).

  • A trust indenture (or note purchase agreement).

  • Any road show presentation or other marketing materials.

If the debt securities being offered are secured, security and inter-creditor documents establishing both the secured parties' rights against the collateral and the relationship with any other secured parties will also be entered into.

Main advisers

Underwriters, external auditors, issuers' and investment dealers' legal counsel, and other professional experts act as gatekeepers to the Canadian capital markets.

In connection with a prospectus offering, the investment dealers discharge their gatekeeper role by:

  • Completing a due diligence investigation.

  • Participating in the preparation of the prospectus.

  • Certifying that, to the best of their knowledge, information and belief, the prospectus constitutes full, true and plain disclosure of all material facts relating to the offered securities.

An issuer's external auditors provide an independent assessment of whether the information in the issuer's annual financial statements has been fairly presented. The auditors:

  • Audit and review the historical financial statements required in a prospectus.

  • Prepare letters to the investment dealers providing comfort with respect to financial data contained in the prospectus.

  • Participate in conference calls or meetings regarding the investment dealers' due diligence investigation.

  • Provide "expert" consents to the Canadian Securities Administrators concerning their audit report.

External legal counsel to the issuer assist in the drafting of the prospectus and will:

  • Review and advise on other documents.

  • Analyse transaction structuring.

  • Facilitate the investment dealers' due diligence process.

  • Maintain a dialogue with any relevant regulators and stock exchanges.

  • Co-ordinate closing of the offering.

External legal counsel to the investment dealers work with external legal counsel to the issuer on many of the same tasks noted above, taking a primary role in assisting the investment dealers' with the due diligence process and drafting the underwriting agreement. Unlike US law firms, Canadian law firms do not customarily provide 10b-5 negative assurance letters to support the investment dealers' due diligence defence in Canadian offerings (see Question 16).

To the extent that other portions of the prospectus reflect a report, valuation, statement or opinion of an expert, the consent of that expert to the Canadian Securities Administrators is generally also required.

In certain cases, rating agencies may also provide rating letters that indicate the creditworthiness of the debt being issued.

 

Debt prospectus/main offering document

13. When is a prospectus (or other main offering document) required? What are the main publication/delivery requirements?

Any trade in Canada of securities of an issuer that have not been previously issued is considered a distribution under Canadian securities laws and can only be made under a prospectus or an exemption from the prospectus requirements (a private placement). Similarly, any trade in Canada of previously issued securities of an issuer from the holdings of any control person (generally, a person, company or combination of persons or companies holding a sufficient number of any securities of that issuer to materially affect the control of that issuer) is also a distribution and also can only be made under a prospectus or exempt private placement.

Securities laws in Canada broadly define a "trade" to include, among other things:

  • Any sale or disposition of a security for valuable consideration.

  • Any receipt by an investment dealer of an order to buy or sell a security.

  • Any act, advertisement, solicitation, conduct or negotiation directly or indirectly in furtherance of any of the above.

As a first step, a preliminary prospectus is filed in all of the provinces and territories of Canada in which the securities of the issuer will be offered to the public. If more than one province or territory is involved, the issuer must designate one principal regulator (generally, the regulator of the jurisdiction in which the issuer's head office is located or the jurisdiction with which the issuer has the most significant connection) to review the prospectus (Principal Regulator) and provide comments and questions to the issuer (Comment Letter). If the prospectus is filed in Ontario and the Principal Regulator is not the Ontario Securities Commission (OSC), the Principal Regulator and the OSC will undertake a co-ordinated review and comment process.

The investment dealers participating in the prospectus offering must send a copy of the preliminary prospectus to each prospective purchaser who indicates an interest in purchasing the offered securities.

When all matters raised in the initial and any subsequent Comment Letters have been addressed to the satisfaction of the Principal Regulator (and the OSC, if applicable), a copy of the final prospectus is filed with the Canadian Securities Administrators in each Canadian province and territory where the securities are to be sold, and delivered to each investor under the offering. Following the expiry of a short statutory rescission period, the offering can then be completed.

 
14. Are there any exemptions from the requirements for publication/delivery of a prospectus (or other main offering document)?

Generally, the same prospectus exemptions are available for issuances of debt securities as other securities. There are a few exemptions specifically for certain debt instruments.

Securities offered in reliance on an exemption from the prospectus requirements cannot be sold to the general public and can only be resold in reliance on a further exemption from the prospectus requirements or, in certain cases, following a restricted or seasoning period (commonly known as a "hold period").

Available exemptions from the prospectus requirements include:

  • Accredited investor. This is the most commonly used exemption and generally permits the sale of securities to persons and companies generally considered to be sophisticated investors , such as financial institutions, pension funds, certain mutual funds and high income or net worth individuals.

  • Minimum amount investment. Generally permits the sale of securities to a non-individual investor who purchases, as principal, the prescribed minimum amount of CAD150,000 of securities.

  • Private issuer. Generally permits the sale of securities by an issuer whose securities are subject to transfer restrictions and are beneficially owned by not more than 50 people (not including employees and for employees of the issuer and its affiliates).

  • Employees, executive officers, directors and consultants. Generally permits the sale of securities to employees, executive officers, directors and consultants of an issuer if participation in the distribution by such person is voluntary.

  • Family, friends and business associates. Generally permits the sale of securities to family, friends, business associates, a founder of the issuer or a control person.

  • Short- term debt. Permits the sale of negotiable promissory notes and commercial paper (other than asset-backed commercial paper) maturing not more than one year from the date of issue, if the note or commercial paper distributed:

    • is convertible or exchangeable into or accompanied by a right to purchase another security other than eligible short-term debt; and

    • has a credit rating from a recognised rating agency that is at, or above, specified threshold levels and not below specified threshold levels.

  • Short-term securitised products. Permits the sale of short-term securitised products (principally, asset-backed commercial paper) maturing not more than one year from the date of issue, if the product distributed:

    • restricts its underlying pool of assets to bonds, mortgages, leases, loans, receivables, royalties, and related security interests;

    • has a credit rating from at least two recognised rating agencies that is at, or above, specified threshold levels and not below specified threshold levels; and

    • provides "global-style liquidity" support.

In addition, the issuer of a short-term securitised product must provide certain pre- and post-distribution disclosure.

An offering of securities made by way of a private placement in reliance on a prospectus exemption does not require securities regulatory approval and generally does not require the preparation or dissemination of any particular form of offering document. However, issuers commonly prepare a disclosure document in respect of a private placement of securities, often in the form of an offering memorandum, which may resemble a short-form prospectus in form and content, or in the form of a term sheet setting out the material terms of the offering. There is also a separate "offering memorandum" exemption, under which there are limits on how much an investor can invest and for which there is a specific form of offering memorandum required.

Prospectus exemptions are available whether the private placement is part of a larger international offering or is an entirely Canadian private placement.

 
15. What are the main content/disclosure requirements for a prospectus (or other main offering document)? What main categories of information are included?

Long form prospectus

Non-financial statement disclosure. The basic form of prospectus for an issuer first accessing the Canadian capital markets is referred to as a "long form prospectus".

The form and substance requirements for a long form prospectus are specified in National Instrument 41-101 - General Prospectus Requirements and Form 41-101F1 and include the items specified under "Prospectus content requirements" near the end of this document.

Issuers with mineral projects (see NI 43-101) and oil and gas activities (see NI 51-101) are each subject to additional disclosure requirements.

Financial statement disclosure. A long form prospectus for non-venture issuers must include:

  • Audited consolidated statements of comprehensive income, changes in equity and cashflow for each of the three most recently completed financial years.

  • Statement of financial position as at the end of the two most recently completed financial years, each ended more than 90 days before the date of the prospectus.

If the issuer has not completed three financial years, these requirements apply only to the years completed.

If the offering takes place more than 60 days after the end of a quarterly financial period, the prospectus must also contain:

  • Unaudited comparative statements of comprehensive income, changes in equity, statement of cashflow of the issuer for the most recently completed interim period and the corresponding period in the immediately preceding financial year.

  • A statement of financial position as at the last day of that financial year.

Management's discussion and analysis must accompany the financial statements (see Question 9, Periodic disclosure).

Financial statements must also be provided in respect of certain completed significant acquisitions and probable future acquisitions and, in certain circumstances, the issuer must also provide pro forma financial statements giving effect to the completed or proposed acquisition.

Exceptions from the financial statement and audit requirements are available in some circumstances, including for junior issuers, which are generally only required to include two years of annual financial statements in a prospectus with only the most recent year required to be audited.

National Instrument 52-107 - Acceptable Accounting Principles, Auditing Standards and Reporting Currency requires all issuers (other than certain designated foreign issuers and US issuers) to prepare financial statements in accordance with the International Financial Reporting Standards (IFRS) for publicly accountable enterprises, and audited in accordance with Canadian generally accepted auditing standards. The auditor undertaking the audit must have entered into a participation agreement with the Canadian Public Accountability Board.

Short form prospectus

Once a company becomes a reporting issuer in Canada, it may be able to qualify securities for offering in Canada under a short form prospectus under National Instrument 44-101 - Short Form Prospectus Distributions. A short form prospectus incorporates by reference portions of the issuer's continuous disclosure filings, including the issuer's:

  • AIF.

  • Most recent annual financial statements and interim financial reports (along with corresponding MD&A).

  • Management information circular.

  • Business acquisition reports.

  • Material change reports.

See Question 8.

Shelf financings

The Canadian Securities Administrators permit eligible reporting issuers to qualify for distribution of a specified quantum of securities (debt and/or equity) for a 25-month period using a shelf prospectus (NI 44-102 - Shelf Distributions). In a shelf prospectus, which follows the form of a short form prospectus, the issuer is permitted to leave silent specific details of the securities to be offered and the means of distribution. When a specific offering is contemplated, a shelf supplement is used to complete disclosure of the terms of the offering and effect a sale of securities. Medium term notes are generally offered under a shelf prospectus and one or more prospectus supplements under customised requirements for such continuous offerings. Canadian banks make significant use of the shelf prospectus procedure for their medium term note programmes (see Question 2).

French translation

If an issuer offers securities under a prospectus in the Province of Québec, the prospectus and any documents incorporated by reference must be translated into French.

 
16. Who is responsible for the prospectus (or other main offering document) and/or who is liable for its contents?

In Canada, liability attracted by an offering of debt securities is the same as it is for other types of securities. The provincial and territorial securities laws imposing liability in respect of an offering of securities are similar in nature and scope. The discussion that follows is based on the securities laws of Ontario, Canada's largest securities market.

The issuer, the investment dealers, the issuer's auditors and the issuer's and investment dealers' legal counsel work co-operatively to draft, review and vet the document.

A prospectus must:

  • Contain full, true and plain disclosure of all material facts relating to the securities issued or proposed to be distributed.

  • Not include any misrepresentation.

  • Comply with the extensive disclosure rules set out in securities legislation, including required form disclosure.

A "material fact" is one that would reasonably be expected to have a significant effect on the market price or value of the offered securities.

A "misrepresentation" is defined as an untrue statement of material fact, or an omission to state a material fact that would be required to make a statement not misleading.

The chief executive officer, chief financial offer, any two directors of the issuer, and the investment dealers (and promoters, if any) must sign certificates contained in the prospectus certifying that the prospectus meets all required statutory disclosure requirements.

A final prospectus is a liability document under securities laws, as investors are granted statutory rights to sue for rescission of the purchase or damages if there is a misrepresentation in the prospectus. Subject to a number of qualifications and defences, the following persons are jointly and severally liable under these provisions:

  • The issuer and its directors.

  • Any persons signing the prospectus.

  • Any security holders selling under the prospectus.

  • The investment dealers.

  • Any experts named in the prospectus (to the extent the misrepresentation is contained in the expert's report or opinion disclosed in the prospectus).

Only the investment dealers have a due diligence defence, which provides a strong incentive for investment dealers to conduct thorough investigations regarding the operations and business of the issuer, and to require full disclosure of all material facts in the prospectus. By doing so, the investment dealers can rely on those procedures to show that they took reasonable steps to ensure that the prospectus does not contain a misrepresentation.

Investment dealers' counsel also typically host a formal and detailed due diligence session with the issuer's management, auditors and counsel immediately before filing a preliminary prospectus, followed by a brief bring-down oral due diligence session immediately before the final prospectus is filed and a final due diligence session prior to closing of the offering.

Defences for the other parties noted above, including issuers, are limited.

Statutory liability in connection with a private placement

Canadian jurisdictions take varying approaches to liability and rights of action in connection with a private placement of securities. Most, including Ontario, provide investors who have received an offering memorandum in connection with the private placement a statutory right of action for rescission or damages against the issuer or selling security holder for any misrepresentation in the offering memorandum. Certain jurisdictions also allow for these rights as against the directors of the issuer, and Saskatchewan grants investors these rights against other offering participants.

However, the securities legislation of the provinces of Alberta, British Columbia and Québec do not provide for such statutory rights of action. It has become customary (but not required) to provide investors in these provinces with contractual rights that mirror the statutory rights of rescission or damages for a misrepresentation that are available to investors in Ontario.

Common law liability

Even where (as in the case of an offering memorandum in certain provinces) there is no statutory right of action, the common law tort of negligent misrepresentation could render the issuer, investment dealers and other offering participants liable for any misrepresentation in a prospectus or offering memorandum.

 

Timetable: debt securities issue

17. What is a typical timetable for issuing and listing debt securities?

Debt securities are most commonly offered by private placement (with an offering memorandum or term sheet). If using the public market, they most commonly are offered via base shelf prospectus or short form prospectus.

Private placement of securities

Private placements of debt securities, which are undertaken in reliance on statutory exemptions from the prospectus requirement, are not subject to the regulatory review process and therefore can be effected relatively quickly. Issuers are not required to deliver a disclosure document to investors who purchase securities in connection with a private placement. Typically, however, issuers will prepare an offering memorandum in connection with the sale of securities under a private placement. Unlike a prospectus, an offering memorandum is subject to few formal requirements. In some private placements by reporting issuers, a term sheet setting out the material terms of the offering may be used in place of a full offering memorandum.

There is no strict timeline for private placements, which can be completed in a matter of weeks, including preparation time for the offering memorandum (if used), subscription agreements, and co-ordination of closing.

Public offering of securities

If an issuer is using the shelf distribution procedure (see Question 15), only the base shelf prospectus requires regulatory review. Subsequent prospectus supplements (other than for novel products) with pricing information can be immediately issued and the debt securities (typically, unlisted notes) offered thereunder can be immediately sold (the entire process taking about two days).

Short form prospectus offerings of debt are typically marketed on a best efforts agency basis. A well organised and prepared company can complete a short form prospectus offering in four to seven weeks, including two to four weeks of marketing (that is, a road show). Addressing comments from the issuer's principal regulator could take additional time and some preparation time may be required in advance of launching an offering (for example, for drafting of the prospectus, settling of an agency agreement or French translation of any documents incorporated by reference).

 

Tax: debt securities issue

18. What are the main tax issues when issuing and listing debt securities?

The following provides a high-level summary of certain Canadian federal income tax issues for the issuers and holders of debt securities (Holders) that should generally be considered when issuing and listing debt securities. This summary does not cover all possible Canadian tax issues and does not discuss various special rules that may apply in particular circumstances or to particular types of investors (such as investors with special relationships to the issuer, or investors engaged in certain types of businesses).

Taxation of Canadian-resident holders of debt securities

The Canadian taxation of a Canadian resident Holder (Canadian Holder) is generally the same regardless of whether the issuer of the debt security is resident in Canada for tax purposes.

Canadian Holders that are corporations, partnerships, or certain trusts are generally required to include, in calculating their income for a taxation year, any interest that accrues to the end of the year, or that became receivable or was received by them before the end of the year, except to the extent that it was previously included in calculating their income. Other Canadian Holders, including individuals, are generally required to include any interest received or receivable by them (depending upon the method they regularly follow when calculating income) in a taxation year in calculating their income for that year.

Notwithstanding these general rules, special interest accrual rules can apply to "prescribed debt obligations", which include debt obligations which do not stipulate that interest is payable (for example, a debt security issued at a discount), or which provide that the interest rate in respect of a particular taxation year depends on a contingency existing after that year. Similarly, where a debt security is issued at a discount, the amount of the discount may be deemed to be to be income to the Canadian Holder in the year in which they acquired the debt security.

On a disposition of a debt security, a Canadian Holder is generally required to include in calculating their income any accrued, but unpaid, interest (or interested that is deemed to have accrued) as of the date of disposition. If the debt security is held as capital property (which is generally the case if it is neither held as part of a business of buying and selling securities or as part of an adventure in the nature of trade), then only one-half of any residual gain (after accounting for accrued interest, if any) will be included in calculating the holder's taxable income. If the debt security is not held as capital property, then any gain will generally be included in the Canadian Holder's income.

In calculating their income, Canadian Holders who hold debt securities denominated into a foreign currency are generally required to convert all amounts into Canadian dollars using the applicable exchange rate at the relevant time. As a consequence, Canadian Holders can realise gains or losses for tax purposes solely as a result of fluctuations in the relevant exchange rate.

"Qualified investment" status of debt securities

A key issue for issuers seeking to market debt securities to Canadian retail investors is ensuring that such securities are "qualified investments" for certain tax-advantaged Canadian savings plans (Registered Plans), such as registered retirement savings plans or tax-free savings. Although there are a number of basis on which an issuer can rely to ensure that their debt securities are "qualified investments" for Registered Plans, debt securities are commonly qualified on the basis that either:

  • They are issued by a corporation the shares of which are listed on a "designated stock exchange" (including the TSX and certain other major Canadian and international exchanges).

  • They are issued as part of a single issue of debt of at least CAD25 million and have an investment grade rating.

  • They are issued by a Canadian corporation and the principal and interest is guaranteed by a Canadian corporation the shares of which are listed on a designated stock exchange in Canada.

Non-resident issuers need to be conscious that certain commonly used bases for qualifying a debt security as a "qualified investment" are not available for non-resident issuers. As a result, they may need to rely on less commercially attractive mechanisms to have their debt securities qualify as "qualified investments" for Registered Plans.

Taxation of non-residents of Canada

There is generally no Canadian withholding tax on payments of interest by a Canadian resident issuer to holders of debt securities that are not resident in Canada for tax purposes (Non-Resident Holders) to persons who deal at arm's length with the issuer. However, interest paid to Non-Resident Holders is subject to Canadian withholding tax where either:

  • The Non-Resident Holder does not deal at arm's length with the issuer.

  • The interest is "participating debt interest" that is dependent (in full or in part) on certain proxies for profit, including the use of property in Canada, revenue, profits, commodity prices, dividends paid or payable on shares of a corporation, or other similar criterion.

Where Canadian withholding tax would otherwise apply, an exemption from or reduction of such withholding tax may be available under an applicable tax treaty. For example, under the Canada-United States Income Tax Convention, Non-Resident Holders entitled to claim the benefit of the convention are generally exempt from withholding tax on interest (other than certain participating interest) even if they do not deal at arm's length with the issuer. Canada's other tax treaties generally reduce the withholding tax rate on interest to 10%. In the absence of relief under a tax treaty, Canadian withholding tax is imposed at a rate of 25%.

For debt securities issued by non-residents of Canada, there will generally be no Canadian income or withholding tax on interest paid to a Non-Resident Holder. However, where interest paid to a Non-Resident Holder by a non-resident issuer is deductible in calculating the issuer's income from a source in Canada (other than a source that is exempt under an applicable tax treaty), such interest may be subject to withholding tax as if it were paid by a Canadian-resident issuer.

A non-resident holder will generally not be subject to any Canadian income or withholding tax on the sale or other disposition of debt securities, whether the issuer is Canadian or non-Canadian.

Convertible debt securities raise a number of potential Canadian tax issues for non-resident holders, if the issuer of either the debt securities or the equity into which the debt securities are convertible is resident in Canada. For such debt securities, careful consideration must be given to the potential Canadian income and withholding tax issues.

Tax considerations for issuers

Any issuer subject to Canadian income tax will want to ensure that interest paid on the debt securities will be deductible in calculating the issuer's income for Canadian income tax purposes. Generally, reasonable interest on debt securities is deductible if the proceeds of the debt offering are used to earn income from a business or property (for example, buying income earning assets, or refinancing debt originally incurred to acquire income earning assets). In structuring their operations, issuers must take care to ensure that any interest expenses are borne by a legal entity having sufficient taxable income against which it can deduct such interest.

Canadian resident issuers who issue debt securities issued in foreign currency need to be alert to the possibility of having to recognise a gain (or loss) in respect of such debt securities as a result of changes in the relevant exchange rate.

 

Clearing and settlement of debt securities

19. How are debt securities cleared and settled and what currency are debt securities typically issued in? Are there special considerations for holding, clearing and settling debt securities issued in foreign currencies?

CDS Clearing and Depository Services Inc (CDS), Canada's national securities depository, generally clears debt securities denominated in Canadian dollars. T + 3 (that is, no later than three business days after the trade is executed) is the most common settlement cycle, although others, such as T + 5, may be used. For public offerings, CDS or its nominee generally holds public debt securities in electronic registered form as one or more global certificates. Typically, public debt securities are not held in bearer form in Canada.

 

Reform

20. Are there any proposals for reform of debt capital markets/exchanges? Are these proposals likely to come into force and, if so, when?

Most significantly, the Canadian federal government and several provincial governments, including Ontario and British Columbia (two of the largest markets), have taken steps to implement a single securities regulator, the Cooperative Capital Markets Regulatory System (CCMR). The CCMR has released and received comments on consultation drafts of the uniform provincial capital markets legislation and complementary federal legislation proposed for enactment. The participating jurisdictions have targeted autumn 2016 as the implementation date for the CCMR; however, it is expected that this target will not be met.

 

Online resources

Ontario Securities Commission

W www.osc.gov.on.ca/

Description. Official, up-to-date website of the Ontario Securities Commission; source for securities regulatory instruments (such as national and multilateral instruments), local securities rules, policies, practice notes and compliance and other reports.

Government of Ontario eLaws

W www.ontario.ca/laws/statute/90s05

Description. Official, up-to-date consolidated legislation of the provincial government of Ontario, including the Securities Act (Ontario).

TMX Group

W www.tmx.com

Description. Official website of the TMX Group; includes the policies and forms for the TSX and the TSXV.



Contributor profiles

David Andrews, Associate

McMillan LLP

T +1 416.865.7248
F +1 416.865.7048
E david.andrews@mcmillan.ca
W www.mcmillan.ca

Professional qualifications. British Columbia, Canada 2013; Ontario Bar, Canada 2015

Areas of practice. Investment funds; note products; corporate finance; corporate governance.

Paul D Davis, Partner

McMillan LLP

T +1 416.307.4137
F +1 416.865.7048
E paul.davis@mcmillan.ca
W www.mcmillan.ca

Professional qualifications. Ontario, Canada 1988

Areas of practice. Mergers and acquisitions; proxy fights; corporate governance/finance; business restructuring; securities and business law matters for public and private issuers.

Will Van Horne, Partner

McMillan LLP

T + 1 403.531.4714
F + 1 403.531.4720
E will.vanhorne@mcmillan.ca
W www.mcmillan.ca

Professional qualifications. Ontario, Canada 2003; Alberta, Canada 2006

Areas of practice. Corporate finance; securities regulation; debt and equity financings and mergers and acquisitions.

Adam Kline, Counsel

McMillan LLP

T +1 416.865.7874
F +1 416.865.7048
E adam.kline@mcmillan.ca
W www.mcmillan.ca

Professional qualifications. Ontario, Canada 2005

Areas of practice. Securities; corporate finance; public and private mergers and acquisitions.

Kosta Kostic, Partner

McMillan LLP

T +1 514.987.5025
F +1 514.987.1213
E kosta.kostic@mcmillan.ca
W www.mcmillan.ca

Professional qualifications. Québec, Canada 2002

Areas of practice. Corporate finance; securities and mergers and acquisitions matters.

Mark Neighbor, Principal

McMillan LLP

T +1 604.691.7439
F +1 604.685.7084
E mark.neighbor@mcmillan.ca
W www.mcmillan.ca/MarkNeighbor

Professional qualifications. British Columbia, Canada 2009

Areas of practice. Corporate finance; corporate and commercial matters; mergers and acquisitions; IPOs (TSX); reverse takeovers; listed company maintenance.


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