Structured finance and securitisation in Canada: overview

A Q&A guide to structured finance and securitisation law in Canada.

This Q&A provides an overview of, among others, the markets and legal regimes, issues relating to the SPV and the securities issued, transferring the receivables, dealing with security and risk, cash flow, ratings, tax issues, variations to the securitisation structure and reform proposals.

To compare answers across multiple jurisdictions, visit the Structured finance and Securitisation Country Q&A tool.

This Q&A is part of the global guide to structured finance and securitisation. For a full list of contents visit www.practicallaw.com/securitisation-mjg.

Alison Manzer and Peter Sullivan, Cassels Brock & Blackwell LLP
Contents

Market and legal regime

1. Please give a brief overview of the securitisation market in your jurisdiction. In particular:
  • How developed is the market and what notable transactions and new structures have emerged recently?

  • What impact have central bank programmes (if any) had on the securitisation market in your jurisdiction?

  • Is securitisation particularly concentrated in certain industry sectors?

The securitisation and structured finance market in Canada is mature and reflects usual global structures and trends. Canada actively participates in the globalisation and harmonisation of the securitisation and structured finance market. The incentives of recent years to increase regulation governing the securitisation and structured finance market has been reflected in Canadian regulatory change, while still encouraging and facilitating the use of securitisation and structured finance technology in debt financings.

The term ABS market is dominated by credit card, automotive and equipment receivables securitisations. Commercial mortgage-backed securities (CMBS), structured notes and private placements have staged a comeback from largely disappearing during the 2014-2015 period.

The covered bond market, employing securitisation technologies, has seen significant growth, with existing covered bond issuers establishing registered programmes, and new series of registered covered bonds being consistently issued.

Structures in Canada, much like the global approach, have been reflecting a return to more asset direct, simplified structures, with a significant pull back from complex structured products which have been notably absent from the market in recent years.

 
2. Is there a specific legislative regime within which securitisations in your jurisdiction are carried out?
  • What are the main laws governing securitisations?

  • What is the name of the regulatory authority charged with overseeing securitisation practices and participants in your jurisdiction?

The primary legislative regime governing securitisation is the provincial legislation governing the trading in securities. The provincial and territorial governments of Canada have jurisdiction over securities laws, and are able to issue legislation, regulation, rules and policy which govern securities.

The instruments issued for structured finance and securitisation will generally be a security, for the purposes of allocation of legislative responsibility. The securities legislation of each province governs the manner in which the security can be distributed, the persons to which it can be distributed, and the requirements for disclosure and related activities in connection with the trade in the security.

Many participants in the structured finance and securitisation industry are accredited or exempt purchasers, meaning that they can acquire the securities without the issuer being required to register the security, register the trade or a broker dealer handling the trade, or issue a prospectus in connection with the trade.

Other areas of legislation which can affect structured finance and securitisation relate to the assets which are the subject matter of the transaction, or relate to the institutions engaged in the issuance or purchase of the instruments. Banks, trust companies, credit unions, insurance companies and pensions, which are the largest institutional purchasers of the issued securities, are governed by legislation which will dictate the nature of the assets they can acquire, and the capital allocation for the acquisition. This legislation effects industry acceptance of products issued in Canada. Most financial institution legislation is at the federal government level.

 
3. What are the main reasons for doing a securitisation in your jurisdiction? How are the reasons for doing a securitisation in your jurisdiction affected by:
  • Accounting practices in your jurisdiction, such as application of the International Financial Reporting Standards (IFRS)?

  • National or supra-national rules concerning capital adequacy?

  • Risk retention requirements?

  • Implementation of the Basel III framework in your jurisdiction?

The reasons for using securitisation transactions in Canada are similar to those recognised in the global markets. The aspects of a transaction which generally need to be present for a securitisation or structured finance transaction to be an effective source of financing for the issuer generally include:

  • Access to lower cost financing rates.

  • Funds to repay its acquisition financing and achieve a greater overall return.

  • Minimal credit enhancement liquidity credit facilities, residual risk and contracted credit enhancement.

  • Preservation of the right to residual values.

  • Contained access to capital cost allowance to reduce income tax.

  • An acceptable discount while accelerating the receipt of proceeds from the asset.

Canada has accepted International Financial Reporting Standards (IFRS), and the IFRS method is required to be used by all Canadian publicly accountable companies, publicly listed companies and regulated financial institutions. Canadian private companies can use a variation of the IFRS standards, specifically continuing some of the private company principles previously recognised under Canadian generally accepted accounting principles. It would be unusual for an issuer of securities in structured finance or securitisation transactions to use accounting standards other than IFRS.

Canada is an active participant in the Basel Accords, and Canada has accepted Basel III as the comprehensive capital and liquidity standards of Canadian financial institutions. Basel III reforms have been, and continue to be, implemented in Canada through the requirements for federally regulated financial institutions.

The Office of the Superintendent of Financial Institutions (OSFI), the Canadian Federal financial institutions regulator, has issued guidelines B-5 and B-5A to outline the regulatory framework for securitisation in Canada. These are the regulatory requirements regarding capital pursuant to OSFI's capital adequacy requirements, and liquidity principles, which have been developed to regulate financial institution and systemic risk as to capital and liquidity. Risk retention rules have not been enacted.

 
4. How is an SPV established in your jurisdiction? Please explain:
  • What form does the SPV usually take and how is it set up?

  • What is the legal status of the SPV?

  • How the SPV is usually owned?

  • Are there any particular regulatory requirements that apply to the SPVs?

A special purpose vehicle (SPV) in Canada can be structured as a trust, corporation, limited partnership, or effectively any other entity recognised as capable of entering into contractual arrangements.

Securitisation vehicles in Canada are most frequently a trust, but do not need to be. A trust can provide efficient tax planning because it is a tax flow through vehicle if the income is distributed to the named beneficiaries. In a trust structure control over the secured assets is transferred to a vehicle controlled by a trustee who is given specific fiduciary obligations.

Partnerships and limited partnerships can also effectively be used where a flow through vehicle is desired for the SPV. Limited partnerships in Canada are similar to those in many other jurisdictions, particularly the US, and consist of a partnership formed between a general partner with full liability and limited partners with limited liability similar to that of a shareholder.

The special purpose vehicle can also be a business corporation which is established using the statutory law in Canada relating to the formation of business corporations.

There are no specific requirements for the SPV.

 
5. Is the SPV usually established in your jurisdiction or offshore? If established offshore, in what jurisdiction(s) are SPVs usually established and why? Are there any particular circumstances when it is advantageous to establish the SPV in your jurisdiction?

SPVs used in Canadian transactions are usually established in Canada. The choice of Canada is to provide a level of legal and tax certainty and a level of familiarity for Canadian investors and other transaction parties which are the most prevalent counterparties.

Other jurisdictions may be considered if there are specific transaction attributes, such as location of the investors, the nature and location of the assets, or multi-jurisdictional aspects to the receivables. Tax implications for the transaction will be a specific concern for the choice of jurisdictions.

 
6. What steps can be taken to make the SPV as insolvency remote as possible in your jurisdiction? In particular:
  • Has the ability to achieve insolvency remoteness been eroded to any extent in recent years?

  • Will the courts in your jurisdiction give effect to limited recourse and non-petition clauses?

The legal concept, under Canadian law, of making a special purpose vehicle insolvency remote, is to ensure that the assets have been transferred to it on a true sale basis. If so, the creditors of the originator can no longer exercise remedies against the assets transferred. It is also important to ensure that the SPV has no creditors other than those which are acquiring the securitisation or structured finance issued securities. This means that there must initially be a limited number of clearly recognised expenses which will be paid from the proceeds of the accounts receivable, and the priority and extent of those expenses needs to be clearly documented and ordered in priority.

There are very few differences in law between Canada and other jurisdictions, particularly in the US, that effect the legal steps needed to achieve bankruptcy remote status. One matter that needs to be considered is the possible application of consolidation principles among entities under common control and business activity. Unlike in the US, consolidation is not a common Canadian law concept in bankruptcy, and generally will not effect the remoteness of the vehicle.

Most SPVs also include specific provisions in their constating documents which limit the ability of a party to claim rights to the assets once in the vehicle. Liabilities which are incurred by the SPV, such as tax liabilities, will remain liabilities within the vehicle.

Generally the vehicle will be limited in its business undertaking in connection with its contractual rights, limitations on claims by beneficiaries, and restrictions on the activities to be undertaken.

The SPV will not take actions which would incur internal liabilities such as the hiring of employees, the entering into of leases, or other contractual liabilities and obligations. It will generally outsource all of those business activities, under arrangements which are fully subordinated, or which are restricted as to claims in the event of financial difficulties or winding up.

 
7. Is there a risk that the courts can treat the assets of the SPV as those of the originator if the originator becomes subject to insolvency proceedings (substantive consolidation)? If so, can this be avoided or minimised?

Canadian law generally recognises the separation of entity identity, and does not impose consolidation, either substantive or procedural. Other than in circumstances where the conduct of the entities is such as to result in an inability to separately distinguish their liabilities, assets and business activities, separateness will be appropriately recognised.

In circumstances where the corporate activities, assets and liabilities are so inter-related or inter-twined, as to result in a difficulty of separately assessing source and legal responsibility, there can be a risk of consolidation, but this is very rare.

Generally, the SPV will:

  • Take title on a true sale basis to its assets.

  • Limit and specifically structure its liabilities.

  • Not provide cross-guarantees or assurances or receive them.

  • Maintain separate books and accounts.

  • Conduct business in its own name on an arm's length basis from other entities.

This will avoid consolidation principles under Canadian law.

 
8. What factors will determine whether to issue the SPV's securities publicly or privately?

Securities are generally issued privately where the transaction is being conducted with parties that are accredited or exempt purchasers.

Most institutional purchasers of structured finance and securitisation securities are considered exempt purchasers, so that the issuer is not required to deal with registered dealer brokers, register the securities, or issue a prospectus. This greatly decreases the cost, and increases the speed and ability of trading in the securities.

Most of the structured finance and securitisation market operates in the private or exempt market in Canada. The choice arises due to the nature of the purchaser rather than the nature of the securities. If the securities are to be offered to persons that do not meet the requirements for an exempt purchaser, the public markets will be used, with increased costs both at the time of issue and for maintenance of the securities.

 
9. If the securities are publicly issued:
  • Are the securities usually listed on a regulated exchange in your jurisdiction or in another jurisdiction?

  • If in your jurisdiction, please identify the main documents required to make an application to list debt securities on the main regulated exchange in your jurisdiction. Are there any share capital requirements?

  • If a particular exchange (domestic or foreign) is usually chosen for listing the securities, please briefly summarise the main reasons for this.

The securities issued in the structured finance and securitisation market are generally issued on an exempt placement basis, with institutional purchasers being the primary investors for each issuance.

This market generally trades on a bilateral basis, or on an over-the-counter basis using proprietary trading platforms. Securities are not generally listed and traded on the regulated exchanges in Canada. Most products in this market trade among the large regulated financial institutions, primarily the Canadian chartered banks.

If the securities are listed, it is generally on the Toronto or Montreal exchanges.

Constituting the securities

10. If the trust concept is not recognised in your jurisdiction, what document constitutes the securities issued by the SPV and how are the rights in them held?

Trust concepts are legally mature in Canada. The use of a trust and the issuance of securities under a trust declaration and trust indenture are well established. The use of the trust is the most common method of establishing a securitisation vehicle, and the issuance of securities according to trust concepts is well established.

If a trust is not used, it is not as a result of a failure to appropriately recognise trust concepts in Canada, but rather a choice for tax or business structuring reasons.

 

Transferring the receivables

Classes of receivables

11. What classes of receivables are usually securitised in your jurisdiction? Are there any new asset classes to have emerged recently or that are expected to emerge in the foreseeable future?

The Canadian market for structured finance and securitisation covers a broad range of classes of receivables. There are effectively no limitations legally or due to business appetite or rating requirements, which limit the class of receivables.

The most common issuances in recent years have included consumer assets such as credit cards and lines of credit, automotive receivables, and both residential and commercial mortgages.

The nature of the receivables must generally meet the requirements as to, among others:

  • Jurisdiction of the obligors' place of business.

  • Transferability of the receivable.

  • Arm's length nature of the receivable from the original.

  • The absence of delinquency or default.

  • The extension of credit being in the ordinary course of business.

These criteria are generally established as the eligibility criteria of the relevant rating agencies.

Transferring receivables from the originator to the SPV

12. How are receivables usually transferred from the originator to the SPV? Is perfection of the transfer subject to giving notice of sale to the obligor or subject to any other steps?

Transfer of the receivables

Receivables are transferred by sale and assignment structured to achieve a true sale.

The assignment must be an absolute assignment and not by way of a charge, in writing and signed by the assignor. There is no other legal formality required other than in each of the common law provinces and territories in Canada, except Québec which has a civil law tradition codified under the Civil Code of Québec (Civil Code). An assignment of receivables requires registration under the applicable province or territory's Personal Property Security Act (PPSA) to avoid claims by the creditors of the assignor. If the applicable financing statement is not registered, the SPV's ownership interest is at risk to competing claims of the seller's secured creditors.

If Québec law applies to the assignment of the receivables, the protection from the claims of creditors of the assignor requires the receivables sold to constitute a "universality of claims" (loosely analogous to all of the receivables in a specified category). If the receivables that are transferred do not constitute a universality of claim, the assignment requires notification to or consent of the obligor to be effective.

Real property receivables, the assignment of an interest in mortgages, will require different considerations in Canada, being subject to real property law rather than personal property law. Techniques have been developed in Canada to provide appropriate assurance to the SPV, as to its absolute ownership, and to the acquirors of interest in real estate based securitisation, to ensure that ownership of, and rights to recover, the real estate based receivables are appropriately protected.

 
13. Are there any types of receivables that it is not possible or not practical to securitise in your jurisdiction (for example, future receivables)?

There are effectively no types of receivable that cannot be securitised. Canadian law permits the assignment, and accordingly the securitisation, of future receivables.

 
14. How is any security attached to the receivables transferred to the SPV? What are the perfection requirements?

Security interests attached to receivables can be transferred as part of the sale and assignment of receivables to the SPV. Under the Personal Property Security Act (PPSA), applicable in all provinces except Québec, filing of a financing change statement can be registered to publicly record the transfer of security, but the filing is not mandatory to maintain perfection of and transfer the security interest.

Under the Québec Civil Code, registration is required at the applicable register for the assignment of the security securing the transferred receivables, to transfer the security to the assignee.

Prohibitions or restrictions on transfer

15. Are there any prohibitions or restrictions on transferring the receivables, for example, in relation to consumer data?

There are generally no prohibitions or restrictions which affect the transfer of receivables under Canadian law. Essentially all forms of receivables are transferable under basic principles of law, and this is readily accomplished by simple contractual assignment. The limited requirements for registration to ensure protection from claims of the creditors of the transferring party are readily met.

An exception are federal government receivables in Canada, which are the subject matter of the federal Financial Administration Act. These receivables can be assigned, but must be absolutely assigned and on a specifically identifiable basis.

Receivables which are not assignable by contractual agreement are limited in nature and kind, and can readily be identified by review of the contracts creating such receivables. A restriction of this nature would be rare in the types of receivables which are the subject of securitisation in structured finance transactions.

Privacy legislation in Canada does provide some concerns with regard to the transfer of receivables which have, inherent in the nature of the receivable, access to personal or private information. However, the transfer of such receivables will permit the use of such information, to the extent that it is necessary to collect on a receivable or realise security granted in relation to the receivable.

Avoiding the transfer being re-characterised

16. Is there a risk that a transfer of title to the receivables will be re-characterised as a secured loan? If so:
  • Can this risk be avoided or minimised?

  • Are true sale legal opinions typically delivered in your jurisdiction or does it depend on the asset type and/or provenance of the securitised asset?

There are limited grounds on which a sale or assignment of a receivable will be recharacterised as a secured loan. This arises essentially only under the principles of the Personal Property Security Act (PPSA), which requires a registration of the assignment of receivables to ensure that it will be enforceable against the creditors of the assignor. Otherwise, the simple statement of intent to absolutely assign, accompanied by documentation which makes the statement of sale an assignment, will characterise the transfer as such, and will avoid recharacterisation as a secured loan. The risk can be avoided by completion of registration under the personal property security registrations systems in the common law provinces, and notice and registration under the Québec Civil Code.

Ensuring the transfer cannot be unwound if the originator becomes insolvent

17. Can the originator (or a liquidator or other insolvency officer of the originator) unwind the transaction at a later date? If yes, on what grounds can this be done and what is the timescale for doing so? Can this risk be avoided or minimised?

Circumstances in which a sale or assignment of receivables can be unwound by the liquidator or other insolvency officer of the originator are rare in Canadian law. At the federal level in Canada the applicable legislation is the Bankruptcy and Insolvency Act (BIA) or Companies' Creditors Arrangement Act (CCCA), and those acts provide for very limited circumstances in which such a step or action can be taken.

It will effectively require that a transfer at undervalue has occurred, so that the original transfer of the accounts receivable is not completed at fair or reasonable market value.

In circumstances where the sale or transfer was completed at a significant undervalue, it may be considered a reversible transaction. This result is fully eliminated by ensuring an arm's length transfer at reasonable value.

If the transfer is a transfer at an undervalue on an arm's length basis there is a three month period, and on a non-arm's length basis a 12 month period, to review and reverse the transaction.

Establishing the applicable law

18. Are choice of law clauses in contracts usually recognised and enforced in your jurisdiction? If yes, is a particular law usually chosen to govern the transaction documents? Are there any circumstances when local law will override a choice of law?

In general, Canadian courts recognise and apply parties' contractual choice of law, provided the choice is bona fide and there is no public policy reason to avoid recognising the foreign choice of law.

The courts will not take automatic judicial notice of the content of the foreign law, therefore it must be pleaded and proven through expert testimony.

Despite foreign law recognition, the courts will apply Canadian and provincial laws to certain procedural matters and matters that have an overriding effect, such as:

  • Requirements for perfection of security as to assets in Canada.

  • Bankruptcy.

  • Application of Canada tax law.

 

Security and risk

Creating security

19. Please briefly list the main types of security that can be taken over the various assets of the SPV in your jurisdiction, and the requirements to perfect such security.

Security can be taken over all assets of every nature and kind in Canada. The two regimes for taking security divide between personal property (all property other than that relating to real estate) and real estate. There is an appropriate legal basis for taking security over each of these two types of assets. It is done by way of contractual agreement with the granting of the appropriate security interest, and registration in the appropriate register.

All assets which are not real estate can be registered under the PPSA in the common law provinces and the Québec Civil Code in Québec. This registration includes all present and future assets, and assets of every nature and kind. Real estate is registered against title to the real property.

 
20. How is the security granted by the SPV held for the investors? If the trust concept is recognised, are there any particular requirements for setting up a trust (for example, the security trustee providing some form of consideration)? Are foreign trusts recognised in your jurisdiction?

Security granted by the SPV is typically held by a trustee or agent on behalf of the investors according to a trust created under a trust indenture. All common law provinces recognise the concept of a trust. In Québec, under the Civil Code, there are formalities that must be observed when the SPV enters into the hypothec that is providing security to the investors (and other creditors) but these resemble the usual trust principles.

A trustee's duties and liabilities are derived from the common law, statute and the trust indenture. Trusts validly established under a foreign law are usually recognised in Canada if the basic trust requirements are met.

Credit enhancement

21. What methods of credit enhancement are commonly used in your jurisdiction? Are there any variations or specific issues that apply to the credit enhancement techniques set out in the Guide to a standard securitisation (Guide)?

The form of credit enhancement used will vary on a transaction-by-transaction basis. The most common methods of providing credit enhancement in Canada include:

  • Creating subordinated tranches of securities.

  • Over-collateralisation.

  • Letters of credit.

  • Third party guarantees.

  • Cash reserves.

  • Insurance.

  • Bonds.

  • Repurchase obligations.

These methods are consistent with the structure and documentation for such methods in other jurisdictions, particularly those in the US.

Risk management and liquidity support

22. What methods of liquidity support or cash reservation are commonly used in your jurisdiction? Are there any variations or specific issues that apply to the provision of liquidity support as set out in the Guide?

Liquidity support in Canada generally meets the internationally recognised requirements, and specifically will for rating purposes meet the "global style" liquidity requirements.

Liquidity facilities to be appropriately recognised as meeting rating standards will need to be based on market disruptions standards, and not credit standards of the specific transaction or issuer, and allow for call on the liquidity reserves in the event of such a market disruption.

Liquidity will generally be provided by any of the following:

  • A line of credit facility made available to the issuer.

  • A repurchase facility made available to the issuer, whereby a repurchase transaction will be essentially automatically entered into for the securitised assets.

  • Extendible securities, which extend the term for repayment in the event of a disruption.

  • A securities purchase obligation on the part of a financially stable third party.

Each of these liquidity facilities will be provided by a financially stable third party, and will provide for the rapid deployment of funds to ensure the ability to complete repayment of the then maturing issued securities. These facilities will be contractually documented with the party providing the required liquidity support.

 

Cash flow in the structure

Distribution of funds

23. Please explain any variations to the cash flow index accompanying Diagram 9 of the Guide that apply in your jurisdiction. In particular, will the courts in your jurisdiction give effect to "flip clauses" (that is, clauses that allow for termination payments to swap counterparties who are in default under the swap agreement, to be paid further down the cash flow waterfall than would otherwise have been the case)?

In Canada, there are no variations of cash flow from those set out in Diagram 9 of the Guide, except any contractually agreed and those that may be imposed by rating agency requirements. Variations to the cash flow index could include:

  • Servicers are typically near the top of the priority of payments waterfall, including substitute servicers.

  • Separate waterfalls may be used for interest and principal receipts.

  • Payments to a swap counterparty may be subordinated if the swap counterparty has defaulted.

Profit extraction

24. What methods of profit extraction are commonly used in your jurisdiction? Are there any variations or specific issues that apply to the profit extraction techniques set out in the Guide?

In Canada, the methods of profit extraction set out in the Guide can be used. Tax consideration may affect the choice of method, for example servicing fees are subject to value added tax, so that profit extraction through a servicing fee is not commonly used in Canada.

A commonly used method of profit extraction in Canadian transactions is the deferred purchase price mechanism to pay out excess spread (whether that is monthly or trapped in a cash reserve account and paid out based on deal-specific timings). Another is ownership of a subordinate security instrument.

 

The role of the rating agencies

25. What is the sovereign rating of your jurisdiction? What factors impact on this and are there any specific factors in your jurisdiction that affect the rating of the securities issued by the SPV (for example, legal certainty or political issues)? How are such risks usually managed?

Canada has a sovereign debt rating of AAA with a stable outlook from Dominion Bond Rating Service (DBRS), Standard & Poor's, Moody's and Fitch. Each rating agency publishes the factors that they consider in arriving at their respective sovereign debt ratings. There are none which would affect a securitisation or structured finance rating in Canada.

 

Tax issues

26. What tax issues arise in securitisations in your jurisdiction? In particular:
  • What transfer taxes may apply to the transfer of the receivables? Please give the applicable tax rates and explain how transfer taxes are usually dealt with.

  • Is withholding tax payable in certain circumstances? Please give the applicable tax rates and explain how withholding taxes are usually dealt with.

  • Are there any other tax issues that apply to securitisations in your jurisdiction?

  • Does your jurisdiction's government have an inter-governmental agreement in place with the US in relation to FATCA compliance, and will this benefit locally-domiciled SPVs?

Sales of assets which are financed-based such as loans and receivables are not subject to stamp duty or transfer taxes in Canada. The sale of certain tangible assets may attract value added tax (VAT) and structuring should avoid those transfers. VAT can apply to the fees for servicing of the assets, but the assets are typically sold on a "fully serviced basis" with no separate servicing fee. If a substitute servicer is appointed, the fees may attract tax.

There are typically no withholding taxes on the interest payments and finance charges for arm's length loan transfer transactions, unless the interest payments are dependent on, or computed by reference to, revenue, profit, cash flow, commodity price or any similar criteria, which is generally not the case in a securitisation.

Payments on Canadian receivables (other than leases) sold to non-Canadian entities are typically not subject to withholding taxes unless they are services to Canadians.

If a non-Canadian buyer is servicing assigned receivables, it will want to avoid "carrying on business in Canada". Therefore the receivables may be sold to an intermediate SPV in Canada, which issues an interest bearing note to the non-Canadian SPV which is funding the purchase of the receivables.

Lease payments, royalties and dividend payments require careful tax planning to ensure that the 25% withholding tax is reduced as much as possible through bilateral tax treaties.

There are generally no other tax issues that apply to securitisation and structured finance transactions in Canada.

Canada has an inter-governmental agreement in place with the US relating to FACTA compliance. This does not generally affect locally domiciled SPVs, in that they will not have an attachment to the US which would draw the attention of FACTA legislation. On 5 February 2014 the Canadian government announced that it has entered into an inter-governmental agreement (IGA) with the US under the existing Canada-US Tax Convention (Convention), whereby financial institutions do not have to directly follow FACTA requirements. Under the IGA, financial institutions in Canada will report relevant information of US persons to the Canadian Revenue Agency (CRA) and CRA will then exchange the information with the US Internal Revenue Service (IRS) through the provisions of the Convention.

 

Recent developments affecting securitisations

27. Please give brief details of any legal developments in your jurisdiction (arising from case law, statute or otherwise) that have had, or are likely to have, a significant impact on securitisation practices, structures or participants.

Canada has essentially fully implemented Basel III requirements, including liquidity requirements, at the federal level for federally regulated financial institutions. This will affect the most significant sector, the federally regulated institutional purchasers, in connection with the extent and basis on which they will acquire securitisation and structured product securities.

The mortgage-backed securities market in Canada, particularly for residential mortgages, has been heavily influenced by government programmes. The most significant percentage of residential mortgage-backed securitisation since 2007 has been undertaken using the Canada Mortgage and Housing Corporation federally supported securitisation programme. Recent announcements of a reduction of the allocations and involvement of this programme in residential mortgage securitisation in Canada will affect access to, and the rates being paid in, this securitisation sector.

There have been important regulatory changes that could impact securitisation and structured finance transactions in Canada using derivatives. Most provincial securities regulators have adopted regulations that will govern the mandatory reporting of swaps and other derivative instruments and require trading in some instances on registered trading platforms. These regulations are in response to agreement by the G20 countries in September 2009 to increase transparency and oversight of the OTC derivatives markets, to promote a fair and efficient market for participants.

 

Other securitisation structures

28. What other structures, including synthetic securitisations, are sometimes used in your jurisdiction?

Synthetic securitisations and structured finance transactions are supported by law and practice in Canada. Credit default swaps (CDS) are common and have been used for some time to reduce regulatory risk capital weightings assigned to assets for regulated financial institutions. These transactions are funded through asset-backed commercial paper (ABCP) or the issuance of credit-linked notes (issued on a public or private basis).

Bespoke, bilateral, transactions continue to be undertaken in Canada, which include:

  • Lease financing structures with synthetic and leveraged leasing concepts.

  • Tax-based structures in a range of asset classes.

  • Derivative transactions incorporating credit derivatives.

  • Equity derivatives.

  • Securities lending, interest rate and currency swaps.

Foreign exchange commodity swaps, both domestic and cross border, are routinely undertaken.

The authors have worked with some creative new structures in the past couple of years, which deserve note as creating market leading transaction structures. The first is the financing structured for the Can$9 billion Lower Churchill Hydro Electric Project, the largest infrastructure project undertaken in Canada. For the financing to work economically, it required access to Canada's AAA rating, and the lower rates which could be achieved in the public markets. A very complex structured finance transaction was developed, using a trust-on-trust structure, to achieve the Federal Government of Canada credit wrap which achieved the desired rating.

A complicated cross-border synthetic lease structure was also developed by the team to bridge the tax and commercial issues which faced an equipment lease transaction. This related to mining equipment to be located in South America, acquired and serviced from France, and owned and operated by US and Canadian operators. Structured finance concepts were used, including creative synthetic lease and servicing arrangements, to accomplish the transaction. This structure has now achieved market acceptance and is being used in other transactions.

 

Reform

29. Please summarise any reform proposals and state whether they are likely to come into force and, if so, when. For example, what structuring trends do you foresee and will they be driven mainly by regulatory changes, risk management, new credit rating methodology, economic necessity, tax or other factors?

In recent years, Canadian legislative incentives affecting securitisation and structured finance have reflected the global responses to the credit crisis, and the slow global recovery from that credit crisis, and are expected to continue to do so.

Canada has consistently followed international responses on the legislative front in areas such as:

  • Trading and securities regulation.

  • Accounting and financial accountability.

  • Financial institution regulation.

  • Capital and liquidity requirements for financial institutions.

  • Securities law incentives intended to create stability.

  • Transparency in securities trading.

Those that focus on the structuring and products made available in the securitisation and structured finance areas are expected to continue to follow these international incentives.

Canada, like most other jurisdictions, is increasingly viewing the products issued in the structured finance and securitisation markets as being systemically important, and having scope and impact that can adversely affect and potentially destabilise financial institutions and the financial markets.

 
30. Has the nature and extent of global, regional and domestic reforms had a positive or negative affect on revitalising securitisation in your jurisdiction?

The immediate impact on the Canadian structured finance and securitisation market in the period following the start of the credit crisis in 2006 and its height in 2008 was the effective elimination of these transactions from the Canadian market, other than those with the sponsorship of the Federal Government or the six largest Canadian chartered banks.

Despite indications that the Canadian securitisation market had not failed due to the structures or nature of assets in Canada, but rather due to a liquidity confidence crisis arising from global issues, conduits other than those with sufficient financial backing were unable to continue, and most were wound up in an orderly manner and liquidated.

The regulatory reaction in Canada has been two-fold, one to follow the global reaction and ensure that Canadian regulation meets international standards, particularly those initiated in the US. Canada has also independently recognised the uniqueness of its market, and the relative immunity of the Canadian markets to the underlying issues which created the global crisis. Therefore it has enacted regulation which affects regulated financial institutions in all sectors, and the securities market, increasing transparency and standards for liquidity and credit support for securitisation and structured finance products.

The result of this has been a returning confidence to the markets, and the re-emergence of an active, openly trading, market in securitisation issues. While the issues remain heavily sponsored by the Canadian chartered banks, independent conduits, using counterparty relationships with those banks, are able to engage again in securitisation transactions. Structured finance transactions have been slower to return, but bilateral transactions using structured finance techniques have re-emerged in the market.

 

Contributor profiles

Alison Manzer, Partner

Cassels Brock & Blackwell LLP

T +416 869 5469
E amanzer@casselsbrock.com
W www.casselsbrock.com

Professional qualifications. Called to the Ontario Bar, 1979.

Areas of practice. A broad range of commercial practice in the financial services sector, including multi-jurisdictional transactions; structuring financing, investment and securitisation transactions to solve taxation, conflicts of laws, document structure, currency and rate issues, among others.

Professional associations

  • President of the Association of Commercial Finance Attorneys, based in New York.
  • American College of Commercial Finance Lawyers, having been a regent of the College.
  • Fellow of the American Bar Foundation. 
  • Canadian Bar Association, having been chair of the national committee on financial institutions, a member of the national liaison committee with the accounting profession, chair of continuing legal education and a member of the finance committee. Has chaired several other national and provincial committees for the Canadian Bar Association.
  • Active with several committees of the American Bar Association, including private equity, project finance (current committee chair), securitisation and structured finance and business finance.

Publications

  • Canada - U.S. Commercial Law Guide.
  • A Guide to Canadian Money Laundering Legislation.
  • The Bank Act Annotated.
  • A Practical Guide to Canadian Partnership Law.
  • Banking chapters of the CCH Canadian Commercial Law Guide.
  • A book on Banking and Credit Relationships, several chapters for Falconbridge on Mortgages, Asset-Based Lending in Canada, Law in International Finance and Halsburys Laws of Canada: Banking and Finance 2012 and Practice Advisor (Banking and Lending).

Non-professional qualifications. LL.B. (Law); B.Sc. Hon. (Biochemistry); M.B.A. and an LL.M. in banking and financial services; Canadian Securities Course and advanced securities programmes, Canadian Investment Finance I and II, Canadian Securities Institute; adjunct professor, Osgoode Hall Law School, teaching the Masters of Law program in international finance; Doctorate in Business Administration student.

Peter J Sullivan, Associate

Cassels Brock & Blackwell LLP

T +416 8605 6592
E psullivan@casselsbrock.com
W www.casselsbrock.com

Areas of practice. Financing transactions, acting for both lenders and borrowers in domestic and cross-border financing transactions and corporate reorganisations; negotiating and documenting syndicated loans, project financings, acquisition financings, asset-based financings, securitisations and subordinated debt arrangements.

Professional associations

  • Canadian Bar Association.
  • Law Society of Upper Canada.
  • Nova Scotia Barristers' Society.
  • Toronto Pride and Remembrance Run Board of Directors.
  • Part-time faculty member at the Schulich School of Law at Dalhousie University.
  • Former Legal Board Member and Past Chair of the Dalhousie Legal Aid Board of Trustees (2009 to 2011).

Publications

  • Halsbury' s Laws of Canada, First Edition - Banking and Finance..
  • Canada-U.S. Commercial Law Guide - Banking Relations (Thomson Carswell).
  • Canada-U.S. Commercial Law Guide - Equipment Financing (Thomson Carswell).

Non-professional associations. Bachelor of Arts, St. Thomas University; LL.B., Dalhousie University.


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