Legal update: M&A in the pharma sector

Of counsel James Baillieu explores the pharma M&A horizon in PharmaTimes magazine. The pharma sector saw deal activity fall in 2017 compared to previous years. While the number of deals remained robust, their value was significantly lower due to fewer large acquisitions. Looking ahead, however, many expect deal levels to pick-up as Trump’s tax reforms give US companies increased cash resources to fund acquisitions. Indeed, as of mid-January deals worth over $30 billion have already been announced.

Please check out the article in PharmaTimes for more.

Stay informed on M&A developments and subscribe to our blog today.

Investor confidence, disruption risk and US tax reform will continue to spur M&A activity

JP Morgan recently released its 2018 Global M&A Outlook report, predicting that 1) investor confidence from solid GDP growth, 2) disruption risk from technological change, and 3) opportunities from the passing of the US tax reform will drive significant M&A activity in the year ahead.

Investor confidence

In 2017, nine out of ten equity sectors in the US achieved positive returns.  The strong equity performance was driven by several factors, including:

  • strong corporate earnings growth across sectors (apart from the energy sector);
  • historically low interest rates;
  • low unemployment rates and improving GDP growth; and
  • increasing consumer and business confidence.

It is expected that solid GDP growth in all major economies and healthy equity and debt markets will continue to provide companies with confidence to pursue M&A opportunities with an emphasis on bolstering organic growth and shareholder value.

Disruption risk

Technological change continues to create disruption risk for big companies and drive cross-sector M&A activity as companies look to acquire new technologies and capabilities to compete. In 2017, there was over USD $950b in cross-sector M&A volume, which was 21% above the 10-year historical average of $794b.

As digitally-fluent millennials now represent the largest demographic with an increasing influence in the markets, companies will have to develop or acquire new technologies, especially in the retail sector, to meet millennials’ expectations of instant delivery services and gratification, continuous purchasing relationships and the ability to compare prices, product information and peer reviews. Given the rate of technological advances and the reality of demographic changes, it is inevitable that technology will continue to create more differentiation between the largest, most successful firms and the rest of the market.

US tax reform

The Tax Cuts and Jobs Act of 2017 (US tax reform) was passed in December 2017 with seismic implications for US corporations.  Most significantly, the US tax reform lowered the US corporate tax rate to 21%. This will likely lead to certain behaviour changes for US companies, such as repatriating cash to buy other US assets. Further, the new territorial tax regime (i.e., tax-free dividends from foreign subsidiaries) accompanied by a one-time transition tax on repatriated foreign earnings should increase cash balances on the whole and spur M&A activity for US incorporated multinationals.

The author would like to thank Peter Choi, Articling Student, for his assistance in preparing this legal update.

Stay informed on M&A developments and subscribe to our blog today.

Notice provisions in purchase agreements: to email or not to email

Email has become an integral part of the way in which most businesses conduct their day-to-day affairs. According to a recent study, the number of worldwide email users will rise from 3.7 billion in 2018 to over 4.1 billion by 2021. While email continues to grow as a favoured mode of communication in the business world, new demands have surfaced in the M&A context as a result – particularly, in regards to the use of email for providing contractual notice.

In a typical M&A transaction, there may be some reluctance to allow for notice delivery by email. The notice provision (which tells parties how they can deliver effective notice to other parties under the agreement) may either exclude or not explicitly include email as an acceptable method of notice. However, it will be necessary to consider whether email should be accepted as proper notice in two different scenarios: (i) when a party wants to include email as a form of notice in the contract-drafting phase, or (ii) when a party uses email to provide notice, although not expressly permitted by the contract.

Risks of allowing email as a form of notice

In the first scenario – where a party wishes to expressly allow for email communications – it is important to consider the following risks associated with email:

  • Confidentiality: There is naturally a concern over confidentiality as emails can easily be circulated. In certain scenarios, an email can be widely disseminated by inadvertence. For example, this could occur by mistakenly responding to all recipients in an email chain as opposed the intended recipient.
  • Authenticity: Unlike more traditional forms of notice, electronic mail can be altered by the recipient, creating evidentiary issues in the case of a dispute.
  • Receipt: From a practical standpoint, an email notice can be deleted or overlooked, especially given the volume of emails sent and received in any given day. For context, the study referred to above also indicates that the average office worker receives approximately 121 emails each day.
  • Technology: Emails can get caught in spam filters, lost in “cyberspace”, or may not be delivered due to some inexplicable server error.

Mitigating risk when email is an accepted form of notice

While it may not possible to counter all of these risks, the issues created by the potential of non-receipt can be mitigated in the contract-drafting phase. As a starting point, where email is contemplated as a form of notice, the relevant notice provision should be drafted to state that email is a permitted method of delivery. More importantly, the provision should address the consequences of email notices that are not received. Some options include:

  • Requesting acknowledgement: The notice provision can require the recipient to acknowledge receipt so that both parties can be reassured of delivery. There are also other forms of direct acknowledgment, including the use of a “read receipt” function in programs such as Outlook (which will provide an automatic notification to the sender when the email is opened) – although this technology can be faulty, creating further uncertainty. As an alternative, one could resort to the use of software applications such as “RPost” which can track and prove email correspondence. However, not all parties may have the necessary software or means to acquire it.
  • Deemed receipt: Arguably, the best solution is to stipulate the means necessary for an email to have been “deemed received” in the contract. For instance, if the sender has not received an email reply within a specified period of time, the sender can resend such notice by other means, and the delivery date would effectively be the date on which the initial email was sent.

Especially with the use of a deemed receipt provision, it is indeed possible to create greater certainty around the use of email.

Email not expressly permitted as a form of notice

In the second scenario – where a party sends a notice via email, despite the notice provision having  stipulated otherwise – the question of whether an email will constitute “good notice” depends on the interpretation of the notice provision as permissive or mandatory. As a general rule, notice clauses in a contract must be strictly complied with. Therefore, if the clause uses language such as “must” or “shall”, delivery by email will be ineffective notice, even if the email was received. On the flip side, courts will permit email notice if the clause is permissive rather than mandatory. The notice provision will likely be viewed as permissive where it does not prohibit email, using language such as “may”. In the case of a “permissive” notice clause, the ultimate test will be whether email delivery is “no less advantageous” to the recipient than the method specified in the agreement.

Either way, for greatest certainty, one must give careful consideration to the forms of notice that are to be permissible and draft a corresponding notice clause with as many forms of mandatory notice delivery which the parties agrees upon.

The author would like to thank Joseph Palmieri, Articling Student, for his assistance in preparing this legal update.

Stay informed on M&A developments and subscribe to our blog today.

“Two’s company, three may be a crowd”: the importance of considering third-party beneficiaries

In a typical M&A transaction, the vendor and the purchaser are front and centre stage. The spotlight is focused on the parties to the transaction, the negotiations and “papering” the deal. However, together with their respective counsel, the vendor and purchaser must also consider the role of third-party beneficiaries.

Who is a third-party beneficiary?

To fully appreciate the importance of third-party beneficiary issues, it is necessary to understand how a third party can become a beneficiary in the first place. Many purchase and sale agreements contain representations and warranties that may be relied upon by persons who are not parties by definition, but nevertheless seek to benefit from the agreement. For instance, employees may attempt to benefit from a provision related to continued employment for the target company employees when such a provision is typically intended to benefit and be enforceable by the purchaser. On the flip side, a purchaser may want to ensure that its affiliates or related entities can benefit from certain aspects of the agreement, such as the seller’s indemnification obligations. Without carefully determining which provisions are actually intended to benefit and be enforceable by a third-party, conflict can arise, increasing exposure and risk during the M&A process or thereafter.

Implications in a Purchase Agreement

Accordingly, the purchase and sale agreement should clearly and explicitly indicate the parties’ intention to either exclude a third-party from attaining contractual benefits or create rights in favour of a third-party. If a boilerplate “no third-party beneficiary” clause is incorporated into the agreement, any parties for which a benefit may have been intended should be carved out. Depending upon the circumstances, it may also be advisable for the parties to provide context as to why a third party is to be entitled to a particular benefit. By using unequivocal and explanatory language, parties can prevent unwarranted future legal fees.

Without a clear, express and explicit provision in the agreement, the parties may end up in litigious circumstances. Under Canadian common law (with the exception of New Brunswick), the doctrine of privity of contract exists, meaning that a contract cannot confer rights or impose obligations on any person other than the parties to the contract. While one might assume that this bodes well for a vendor or purchaser seeking to exclude a third-party, this is not the case as the doctrine has been met with mixed treatment in recent years. In the leading cases of London Drugs Ltd. v. Kuehne & Nagel International Ltd. and Fraser River Pile & Dredge Ltd. v. Can-Dive Services Ltd., the Supreme Court of Canada created a principled exception for when a third party can obtain the benefit of protections under a contract, thereby permitting third-parties to use contractual provisions as a shield. Although the Supreme Court was reluctant to allow third-parties to use the contract as a sword (i.e., to enforce an affirmative benefit), the Ontario Court of Appeal has ruled otherwise, creating doubt and ambiguity. In any event, the key consideration remains whether the parties to the contract intended to extend a benefit to the third-party or preclude it from such.

As a result, it is critical to be mindful of the risks involved when a suitable mechanism is not in place to ensure that a beneficiary will either be included or excluded from having certain rights enforced, should the need arise.

The author would like to thank Joseph Palmieri, Articling Student, for his assistance in preparing this legal update.

Stay informed on M&A developments and subscribe to our blog today.

2018 merger review thresholds for Competition Act and Investment Canada Act

The threshold for certain pre-closing net benefit reviews under the Investment Canada Act (ICA) and the threshold for a pre-closing merger notification under the Competition Act have been increased for 2018.

Competition Act

Canada uses a two-part test for determining whether a pre-merger notification is necessary. The two-part test is based on the size of the parties and the size of the transaction. The transaction size component can be adjusted annually for inflation. Under the size of the parties test, the parties, together with their affiliates, must have aggregate assets in Canada or annual gross revenues from sales in, from or into Canada, in excess of C$400 million. Under the size of transaction test, the value of the assets in Canada or the annual gross revenue from sales (generated from those assets) in or from Canada of the target operating business and, if applicable, its subsidiaries, must be greater than C$92 million. The 2017 transaction size threshold was C$88 million.

These changes took effect February 10, 2018.

Investment Canada Act

In general, any acquisition by a “non-Canadian” of control of a “Canadian business” is either notifiable or reviewable under the ICA. Whether an acquisition is notifiable or reviewable depends on the structure of the transaction and the value and nature of the Canadian business being acquired, namely whether the transaction is a direct or an indirect acquisition of control of a Canadian business. With limited exceptions, the federal government must be satisfied that a reviewable transaction “is likely to be of net benefit to Canada” before closing can proceed; notifiable transactions only require that the investor submit a report after closing. Separate and apart from the net benefit review, the ICA also provides that any investment in a Canadian business by a non-Canadian can be subject to a national security review.

The threshold for a pre-closing net benefit review depends on whether the purchaser is: (a) controlled by a person or entity from a member of the World Trade Organization (WTO); (b) a state-owned enterprise (SOE); or (c) from a country considered a “Trade Agreement Investor” under the ICA[1].  A different threshold also applies if the Canadian business carries on a cultural business.

Generally speaking, for a non-SOE from a WTO country (other than a Trade Agreement Investor) directly acquiring a Canadian business that does not carry on a cultural business, the threshold will be whether the Canadian business has an enterprise value of greater than C$1 billion.

For a non-SOE from a Trade Agreement Investor directly acquiring a Canadian business that does not carry on a cultural business, the threshold will be whether the Canadian business has an enterprise value of greater than C$1.5 billion.

How enterprise value will be determined will depend on the nature of the transaction:

Publicly traded entity: acquisition of shares Market capitalization plus total liabilities (excluding operating liabilities), minus cash and cash equivalents
Not publicly traded entity: acquisition of shares Total acquisition value, plus total liabilities (excluding operating liabilities), minus cash and cash equivalents
Acquisition of all or substantially all of the assets Total acquisition value, plus assumed liabilities, minus cash and cash equivalents transferred to buyer

The net benefit review threshold for investments by SOEs from WTO member states is based on the book value of the assets of the Canadian business.  It increases annually, and for 2018 the threshold will be C$398 million, up from C$379 million in 2017.

The net benefit review threshold for investments by non-WTO investors, or for the direct acquisition of control of a cultural business (regardless of the nationality of the buyer) is C$5 million in book value.  The threshold for an indirect acquisition of control is C$50 million in asset value.

It is important to remember that any acquisition, whether of control or even a minority interest, of a Canadian business by a non-Canadian can be reviewed to determine whether it could be harmful to Canada’s national security.  Parties to transactions that could raise issues as identified in the Guidelines on the National Security Review of Investments, and that aren’t otherwise subject to a pre-closing net benefit review, should consider submitting their notice of acquisition in advance of closing.

[1]Trade Agreement Investors include investors from the European Union, the United States of America, Korea, Mexico, Chile, Peru, Colombia, Panama, and Honduras.

Stay informed on M&A developments and subscribe to our blog today.

Federal government creates new Ombudsperson to oversee corporate activity abroad

On January 17, 2018, the federal government announced two new initiatives relating to the oversight of Canadian companies doing business abroad.

The first initiative is the creation of an independent Canadian Ombudsperson for Responsible Enterprise (CORE). The mandate of the CORE will be to investigate allegations of human rights abuses linked to Canadian corporate activity abroad. The Ombudsperson will undertake independent and/or collaborative fact-finding, make recommendations, and monitor the implementation of its recommendations. It will also report on its activities to the public throughout this process. The Ombudsperson will have the power to initiate investigations, compel witnesses and documents, and recommend sanctions.

The CORE will initially focus on the mining, oil and gas, and garment sectors. However, it is expected to expand to other business sectors within a year of the Ombudsperson taking office.

The second initiative announced is a multi-stakeholder Advisory Body on Responsible Business Conduct to advise the federal government on the development and implementation of its laws, policies and practices in relation to oversight of Canadian companies operating abroad. The Advisory Body will also provide advice on the operating procedures adopted by the CORE.

Additional information about the CORE and Advisory Body can be found on the Global Affairs Canada website.

Stay informed on M&A developments and subscribe to our blog today.

Top M&A attractions in 2018: technology assets and international markets

According to Deloitte’s latest M&A trends report, corporations and private equity (PE) firms expect to see an acceleration of M&A activity in 2018, both in volume and size of deals, and with particular interest in technology assets and international markets.

Key Findings

After surveying more than 1,000 executives at corporations and PE firms on their views and expectations for 2018, Deloitte provides some insightful findings.

Technology acquisitions now rank #1 as a strategic driver for M&A deals

20% of those surveyed cite the acquisition of technology assets as the principal reason behind deals, which surpasses deals to expand customer bases in existing markets.  Further, if you combine deals made to advance digital strategy with acquisition of technology assets, then this would account for about a third of all deals being pursued.

Deals are working better

The majority of companies and PE firms appear to be getting better at making deals successful.  To illustrate, only 1 in 10 respondents say that the majority of their M&A deals are not generating the anticipated returns on investment. One reason behind more successful deals could be that companies are now incorporating the use of non-spreadsheet-based M&A technology tools as part of the M&A process which increases efficiency, reduces costs and conflict, and improves post-deal integration. As such, 62% of those who have yet to tap into new M&A technologies state that they would like to do so moving forward.

US-based investors are looking abroad for deals

US-based companies and PE firms indicate that they will continue to vigorously engage in M&A activity abroad. For large corporations with revenues over $1 billion, almost half (49%) predict pursuing more than 40% of their deals in foreign markets.

At the top of the list, with 39% of respondents expressing M&A interest, is Canada, with Central America (32%) coming second.  Other English-speaking countries such as the UK and Australia are tied for third at 29 percent. Deal activity in China (18%) and Japan (14%) are expected to drop significantly from a year ago. Lastly, European countries, as a whole, are less likely to draw deal activity in 2018.

With cash reserves up for the second year in a row for the majority of US-based corporate respondents, it is likely that they will look north of the border for a good portion of their M&A deals in the months to come.

The author would like to thank Peter Choi, Articling Student, for his assistance in preparing this legal update.

Stay informed on M&A developments and subscribe to our blog today.

Why have a document retention policy?

The current digital age has made it easier for companies to retain an enormous volume of documents – significantly more than a company could have afforded to keep before the advent of electronic record-keeping. In response, companies have sought to upgrade their IT systems to digitize their paper records and to allow for increased storage. These upgrades, however, are inadequate without the adoption of a comprehensive formal policy to guide a company’s record-keeping process.

Why have a document retention policy?

Besides general organization purposes, there are a few other good reasons why a company should adopt a document retention policy: 

1. Legal compliance

First and foremost, having a document retention policy enables a company to fulfill its legal obligation to preserve documents that may be relevant to pending or potential litigation (i.e., its “litigation hold” obligation).

Second, there are legislative requirements to retain certain documents for a mandated period of time. For example, for the purpose of tax auditing, the Income Tax Act generally requires that “records” and “books of account” be retained for a period of six years from the end of the last taxation year to which the records and books of account relate.[1] The Canada Business Corporations Act requires that corporate records, which include a company’s articles and bylaws, meeting minutes or resolutions, copies of meeting notices and a securities register, be maintained at the registered office of the company and available for inspection by the company’s shareholders and directors.[2]

A document retention policy is a good tool that can be used to facilitate legal compliance with any legislative record-keeping requirements.

2. Litigation and M&A preparedness

Having a document retention policy enables a company to stay on top of the documents it has stored. If the policy is renewed and audited (which it should be), the supervisor(s) of the policy should have a good understanding of where documents are being stored and which documents the company actually has. This would come particularly in handy in the event where a company becomes engaged in litigation or becomes a potential M&A target, where in both cases, a company would be tasked with finding specific documents and often finding those documents quickly. With a document retention policy, a company is able to hit the ground running in both scenarios.

3. Costs

A document retention policy prescribes a time period for when documents must be retained. Documents that have been retained in excess of the prescribed time period can be discarded, thereby ensuring that digital space is not wasted and limiting the everyday costs associated with storing documents. Moreover and as discussed above, a document retention policy allows a company to save costs in the event where it becomes engaged in litigation or becomes a potential M&A target, during the discovery phase of a litigious dispute and during the diligence phase of a M&A transaction, respectively.

What should be included in a document retention policy?

A good document retention policy should list the types of documents that are to be retained, the length of time those documents should be retained for and where or how those documents should be stored (i.e., which folder should each type of document be saved to; should documents be saved to a hard-drive or to a network, etc.), taking into account the company’s business needs and its legal compliance obligations. General counsel (or whoever is designing the policy) should engage the IT department to assist with preparing the policy. The policy should also make clear who has responsibility for supervising compliance with the policy and whose role should include periodically updating and conducting a formal audit of the policy, the frequency of which should be laid out in the policy. In addition, the policy should advise employees of the company’s litigation hold obligation and address any connected protocol.

Besides M&A preparedness, what are the benefits of having a document retention policy in the context of a M&A transaction?

It is standard for the target of a M&A transaction to provide a representation and warranty with respect to the condition and maintenance of its “books and records”. A target should carefully review the language specific to this representation and warranty in order to ensure it can be given without breach. For example, a target that is not in compliance with legislative record-keeping requirements may find itself in breach of a representation and warranty that provides that “the books and records are fully, properly and accurately kept”. In addition to the language of the representation and warranty itself, the target should review the definition of “books and records”, and if necessary, narrow it to the point where it is comfortable that the definition only relates to those documents which have been retained in compliance with legislative requirements. Having a document retention policy will provide a company with greater comfort that it has met all legislative record-keeping requirements and can safely give this “books and records” representation and warranty.

For more information or for assistance drafting a document retention policy, please contact Norton Rose Fulbright Canada, LLP.

[1] Income Tax Act, RSC 1985, c 1 (5th Supp), s 230(4)(b).

[2] Canada Business Corporations Act, RSC 1985, c C-44, s 20-21.

Stay informed on M&A developments and subscribe to our blog today.

Schedule some time for disclosure schedules

If selling your company were a vacation, preparing disclosure schedules would be the part where you plan what to bring. Pack too much and it might be a burden; pack too little and you might miss something that you really need. Not to mention that packing isn’t particularly exciting, although I have been told that some would disagree. Whichever side of that debate you may land on, you will likely have to admit that packing is, nevertheless, necessary. Similarly, disclosure schedules will be a necessary part of almost every exit transaction.

What are disclosure schedules and what is their purpose?

An agreement for the purchase and sale of a company – whether that purchase and sale be structured as that of equity or assets – is ultimately an agreement regarding the allocation of risk among the seller and the buyer. An analogy can be drawn to the sale of a farm – let’s call it Greenacre: a buyer will want to know that, having paid the price agreed on with the seller, she will receive the legal title to Greenacre and that the land itself would not be saddled with surprises. This latter point is where disclosure schedules come into play.

To use an extreme example, if a buyer thinks she is buying Greencare, which looks like a lush parcel of grassland, but it turns out after it is bought that it’s actually a landfill, she will likely be upset. Of course, visiting Greenacre and seeing that it is, in fact, lush grassland – in other words, conducting due diligence – would allay a buyer’s more obvious concerns. However, solving the issue in this manner has its limitations. To boot, a buyer wouldn’t know from visiting if Greenacre has always been pristine grassland. To allocate risk of the potentiality that it may have been a landfill in the past, the buyer could ask the seller to make a simple representation. For example, that “the seller warrants to the buyer that Greenacre has always been a lush grassland”. This would seem fair in the event where the seller knows much more than the buyer about Greenacre. If it turns out that Greenacre was in fact a landfill at some point, the buyer would sue the seller for breach of the representation that it had always been a lush grassland, on the basis that the buyer wouldn’t have paid as much had it known this fact. Thus, the risk is allocated to the seller.

Naturally, an operating business is not a plot of land and, as a result, many more unknown facts influence a buyer’s decision to buy a business and what to pay for it. As a result, agreements of purchase and sale will often have scores of representations and warranties. The buyer negotiates for the representations and warranties to be as broad as possible to shift the greatest amount of risk on the seller. The seller has the opposite interest. In most cases, the representations will be broad, but qualified. To use the prior example, “Greenacre has always been pristine grassland, except between 1992 and 1994, when it was used as farmland”. It is fairly customary to list such qualifications in a disclosure schedule, so that the representation in the text of the agreement would look slightly different: “except as set forth in section “x” of the disclosure schedule, Greenacre has always been pristine grassland”. The respective section of the disclosure schedule would then list all instances where the representation was not true.

However, this is not the only use of disclosure schedules. In other circumstances, the disclosure schedule will provide a list of subject matter items covered by the representation that would not otherwise be practical to include in the text of the agreement of purchase and sale itself. For example, a representation regarding owned trademarks might point to a section of the disclosure schedule providing a list and particulars of the trademarks by jurisdiction. For a company that sells consumer products, this list may be very extensive and would not lend itself to being included in the body of the agreement of purchase and sale. Instead, the representation in the text of the agreement is drafted to speak to certain attributes of those trademarks listed in the disclosure schedule.

Practical considerations

While the representations in the agreement of purchase and sale are often negotiated by counsel with guidance from the seller, it is commonplace for operations personnel of the seller who have an intricate knowledge of the business to be the ones who prepare disclosure schedules with assistance from counsel. In doing so, the seller should consider what the scope of disclosure should be.

Generally, in most cases, it is favourable to the seller to over-disclose, because most items included in disclosure schedules are carve-outs, rather than informational lists. While it may technically be true that a representation requiring a list of items to be disclosed in the disclosure schedule will be narrower if fewer items are disclosed, in most cases a technical breach will occur in any case if items that should have been disclosed in a list are not included. Similarly, if an issue exists, having it disclosed may afford the sellers an argument that the purchaser was aware of the issue and should not be entitled to claim against the seller in the face of such knowledge (this being subject to inclusion of clauses in the agreement of purchase and sale that address such situations).

However, in some narrow circumstances, over-disclosure will lead to an extension of representations to items for which risk was not intended to be allocated to the seller. The simplest example would be representations regarding certain contracts listed in a schedule, which are not intended to cover non-material contracts. A breach of a representation may occur if a contract for restocking the company’s break room vending machine is unnecessarily listed in the a disclosure schedule and has lapsed, where the representation speaks to it as being in force. Even in these circumstances, however, there is question as to whether damages would arise, so over-disclosure may still be harmless.

Some worst case scenarios involving over-disclosure may, however, result in real deal issues. An example could be where a consent of a third party is unnecessarily included in a list of consents in the disclosure schedule which the seller is required to obtain in order for the buyer to be required to close the transaction, and the seller subsequently fails to obtain such consent resulting in a technical walk right for the buyer.


At the bottom line, disclosure schedules often end up quite cumbersome, voluminous and time-intensive. Often, preparing these can be disheartening work. Despite this, disclosure schedules should be prepared in a thorough and careful manner for all of the reasons discussed above.

After all, selling a company is not akin to going on a gap year, albeit it isn’t clear which one involves more risk.

The author would like to thank Jenny Ng, Articling Student, for her assistance in preparing this legal update.

Stay informed on M&A developments and subscribe to our blog today.

Taxation of cryptocurrency: unchartered territory and treacherous waters

With the recent market uproar for blockchain technology and cryptocurrency, the tax question is becoming more and more pertinent. Whether one is trading in cryptocurrency, issuing it in an effort to raise capital, hanging onto it as a long term investment, mining it or using it to access software apps, numerous questions arise.

Answering these questions with any measure of certainty, however, is tough. No legislation has been introduced  and no Canadian case law has yet been decided on cryptocurrency (although one surmises that that won’t be the case for long). The Canada Revenue Agency (CRA) has released a few interpretations, but these are of debatable value, having been released in 2013 and 2014. These interpretations have also been challenged by members of the tax community, and it is unclear whether a court would take the same positions, should the question of the tax treatment of cryptocurrency come before it.

The CRA positions

The CRA views provide a helpful guide as to what position the CRA may take in assessing tax on cryptocurrency transactions. Their views can be summarized as follows[1]:

  • Bitcoin and other cryptocurrency is not considered to be “money” or “currency” for the purposes of the Income Tax Act (the Act), but rather a “commodity”, meaning that:
    • Purchasing any other property using cryptocurrency will be considered to be a barter transaction, with Sections 3 and 9 of the Act applying to tax the profit from the transaction;
    • In exchanging cryptocurrency for other property, the value of whatever is received will be at least the value of what is given up and the taxable gain/loss will be incurred accordingly; and
    • Exchanging one cryptocurrency for another cryptocurrency would trigger a disposition for income tax purposes, potentially triggering a taxable capital gain.
  • Individuals selling goods or services in exchange for cryptocurrency will have to report the income in Canadian dollars;
  • Where a taxable supply is made and cryptocurrency is given in exchange, the consideration for GST/HST purposes is equal to the FMV of the cryptocurrency at the time;
  • Where a person trades or sells cryptocurrency like a commodity, the gain may be on either income or capital account and it is a question of fact in each scenario (much like trading in securities);
  • Whether activities using cryptocurrency are subject to tax depends on whether they are pursued for business, profit or commercial reasons and the Stewart[2] test applies;
  • “Mining” cryptocurrency is likely to be a business, and as such, the rules for valuation of inventory in section 10 and Part XVIII of the Income Tax Regulations will apply, where:
    • whether cryptocurrency is held as capital property or inventory is a question of fact; and
    • either the Lower-of-Cost-or-Market method, or Fair Market Value method can be used to value the inventory, unless the business is an adventure or concern in the nature of a trade (ACINT), in which case the valuation method to use is the cost of acquisition (as per subsection 10(1.01) of the Act).
  • Cryptocurrency could be a taxable employee benefit and included in employment income under 6(1)(a) of the Act; and
  • Cryptocurrency would be considered to be “specified foreign property” for the purposes of subsection 233.3(1), as “funds or intangible property” in paragraph (a) of the definition of “specified foreign property”, meaning if one holds cryptocurrency offshore, with a cost of $100,000 or more, the holding of which has to be reported to the CRA.


As stated, the views above may not necessarily be correct in law. Some authors have suggested that cryptocurrency would not be a “commodity”, but rather “money” for the purposes of the Act.[3] After all, it does have the key features of “money”; it provides a means of exchange, a unit of measurement and a store of value.[4] In fact, there is even a 2013 U.S. District Court decision that found that Bitcoin is “money” or “currency”, albeit for the purposes of U.S. securities laws.[5]

If found to be “money”, interest could potentially be deductible if one borrows cryptocurrency to invest in business or property.[6] One could also potentially invest in it through their RRSP,[7] and it would likely be GST/HST exempt.[8] Lastly, purchasing property with it would not give rise to a taxable event, which would be the case if the cryptocurrency were a commodity and subject to barter transaction treatment.


Irrespective of the above, the tax treatment of cryptocurrency will largely depend on the precise terms of the  cryptocurrency in question, such as whether it is convertible or exchangeable into fiat currency and whether it is used as a simple utility token to gain access to an app, or actively traded for the purpose of earning a profit. The facts surrounding its issue, use or investment will also be key.

It is important to keep in mind that just as the markets have taken notice, so has the CRA and the Department of Finance. One hopes something will come soon to alleviate the uncertainty. In the meantime, what is certain is that block chain and cryptocurrency are here to stay, at least for a while.

[1] CRA documents no. 2013-0514701I7, 2014-0525191E5, and 2014-0561061E5

[2] Stewart v. The Queen 202 SCC 46 – whether there is a reasonable expectation of profit from the alleged business activity.

[3] Olivier Fournier and John J. Lennard “Rebooting Money: The Canadian Tax Treatment of Bitcoin and Other Cryptocurrencies,” Report of the Proceedings of the Sixty-Sixth Tax Conference, 2014 Conference Report (Toronto: Canadian Tax Foundation, 2015), 11:1-27

[4] Ibid.

[5] Texas Securities and Exchange Commission v. Trendon T. Shavers and Bitcoin Savings and Trust, Civil Action No. Civil Action No. 4:13-CV-416

[6] As per the 20(1)(c) requirement that there be “borrowed money”.

[7] The definition of “qualified investment”, under section 204, includes “money” in paragraph (a)

[8] For Excise Tax Act purposes, it would be an exempt “financial service”, as the definition of such includes “money” in paragraph (a).

Stay informed on M&A developments and subscribe to our blog today.