Vol. 2 Issue 1 Spring 2012 DOING BUSINESS IN ATLANTIC CANADA. In this issue:

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1 Vol. 2 Issue 1 Spring 2012 DOING BUSINESS IN ATLANTIC CANADA In this issue: 2 CCAA Proceedings Beware when Acting for Debtor Companies 4 Tax Incentives for Businesses Operating in Atlantic Canada 7 Life and Disability Insurance in Atlantic Canada

2 CCAA Proceedings Beware when Acting for Debtor Companies By Maurice Chiasson, Q.C. A recent decision from the New Brunswick Court of Queen s Bench should be required reading for all counsel involved in proceedings under the Companies Creditors Arrangement Act ( CCAA ). The companion decisions of Justice Lucie A. LaVigne in Re Tepper Holdings Inc NBQB 311 and 2011 NBQB 336 serve as stark reminders of the obligations of counsel involved in CCAA proceedings and particularly for those acting on behalf of the debtor. Tepper Holdings Inc. and various related companies sought and obtained a stay of proceedings under the CCAA in late June The initial order provided for the usual relief (a stay of proceedings and an administrative charge to cover the fees and expenses of the professionals representing the debtors, including their counsel). The initial application also provided for debtor-in-possession (DIP) financing of up to 1 million. The application for the initial order was made without notice to the secured creditors of the debtors. It appears from the decision that counsel for the debtors failed to alert the court to recent amendments to the CCAA which require notice to secured parties whose interests may be affected by DIP financing. As a result of the objection of the secured creditors, the initial order was varied shortly after it was issued to greatly reduce the extent of permitted DIP financing and also to reduce the extent of the administrative charge and related retainer provided to counsel for the debtors. It later came to the attention of the various parties that counsel for the debtors charged legal fees (including disbursements and taxes) in excess of $500,000 in the first three months of the proceed- 2 SPRING 2012 DOING BUSINESS IN ATLANTIC CANADA

3 ings. The secured parties objected to the extent of these charges and brought an application before Justice LaVigne to have these charges significantly reduced. They argued that the legal charges were so high that a workable plan could not be developed. The secured parties also complained that counsel for the debtors had brought unnecessary proceedings during this period. Finally, it was argued that some of the amounts expended by counsel for the debtors were not related to the CCAA proceedings. The court was alerted to the fact that the initial cash flow statement provided on behalf of the debtors had estimated much lower legal fees and disbursements for the debtors counsel and counsel for the monitor (in the range of $130,000). There was no evidence before the court that counsel for the debtors had advised the court at any point that the cash flow statement was no longer correct. The court started its inquiry by determining it had the jurisdiction to review the legal accounts of counsel for the debtors as part of its general supervision of CCAA proceedings and must consider what is just, fair and reasonable (at para. 52 of 2011 NBQB 311) in the circumstances. The court also concluded that the onus was on counsel for the debtors to satisfy the court that its legal accounts were appropriate in the circumstances. The court considered the various factors to be considered in deciding whether to reduce the legal accounts. The court was concerned about the discrepancy between the provision for legal fees set out in the initial cash flow statement and the lack of disclosure by counsel to the debtors of such discrepancy. Also, the court concluded that counsel for the debtors had brought at least three unnecessary motions. Further, the court found unwarranted duplication of effort on the part of the legal firm representing the debtors. Finally, it concluded that approximately half of the legal accounts under review had been expended for purposes not directly related to the CCAA proceedings. In the end, the court concluded that the legal fees charged to the debtor companies were so high that they might prevent a viable proposal from being presented. In the result, the court ordered that the legal fees (including disbursements and taxes) be reduced to $150,000 (a reduction in excess of two thirds). In a subsequent application in the same proceedings, the court ordered that the legal firm representing the debtors personally pay the costs of the secured parties and the monitor for the proceedings to date an amount in excess of $100,000. The court concluded that the actions of counsel for the debtors were such that the relations between the various parties had been severely compromised. In the end, the secured creditors insisted that the debtors replace their counsel as a condition of their continued support for the CCAA proceedings. This decision illustrates that counsel for the applicants in a CCAA proceeding have a responsibility to provide full disclosure to the court of all applicable legislative requirements, particularly recent amendments. The failure of counsel during the initial hearing to provide notice to the secured parties in the face of an application for DIP financing and the related failure to bring this deficiency to the attention of the court did not assist counsel when such failures were ultimately brought to the court s attention. Further, counsel must ensure that all materials placed before the court are accurate in all material respects. Issues surrounding the cash flow statement played a critical role in the court s decision. CCAA proceedings are by their very nature time-sensitive, time-intensive and complicated proceedings. This decision reminds everyone that such factors cannot insulate counsel from complying with their ethical responsibilities to the court. The court places great reliance on counsel in such matters to live up to their duties to the court and the other parties. Failure to do so can have dramatic consequences. [Note In the interests of full disclosure, Stewart McKelvey is acting as counsel to the monitor in these proceedings.] Maurice Chiasson, Q.C. Halifax, N.S mchiasson@stewartmckelvey.com DOING BUSINESS IN ATLANTIC CANADA SPRING

4 By Jim Cruickshank and Joel Reed E ach of the Atlantic provinces offers tax incentives to businesses. This article offers a brief overview of the incentives in each province, and compares the features of key incentive programs that are offered by more than one province. DIGITAL MEDIA/FILM TAX CREDITS Nova Scotia offers both a Film Tax Credit and a Digital Media Tax Credit. Both credits are fully refundable. The Film Tax Credit is calculated as 50 per cent of a corporation s eligible salaries (60 per cent if the film is shot outside the Halifax metro area), with a 5 per cent bonus for frequent producers of films in Nova Scotia. The Digital Media Tax Credit is 4 SPRING 2012 DOING BUSINESS IN ATLANTIC CANADA the lesser of 50 per cent of eligible Nova Scotia labour expenditures, or 25 per cent of total expenditures in Nova Scotia (60 per cent or 30 per cent if the digital media is developed outside of the Halifax Regional Municipality). Newfoundland and Labrador offers a fully refundable Film Tax Credit, in an amount equal to the lesser of 40 per cent of eligible labour expenditures or 25 per cent of total production costs. Pre-approval of projects by the government is required. The program will in some cases assist with bringing in out of province mentors, when qualified local talent is not available. The credit is capped at $3 million per year per corporation (together with any associated corporations) and larger projects attract audit requirements.

5 Newfoundland and Labrador does not offer a tax incentive for digital media. New Brunswick is phasing out its Film Tax Credit. However, in 2011 the province announced consultations on the development of a Digital Media Tax Credit. To date no program has been announced. Prince Edward Island does not provide tax incentives for film or digital media but does offer a 30 per cent Video Game Labour Rebate for developers of video games. The Prince Edward Island Specialized Labour Tax Credit, discussed below, is also relevant to the digital media industry. EQUITY INVESTMENT TAX CREDITS Nova Scotia offers an Equity Tax Credit to Nova Scotia resident individuals who invest in eligible businesses. The non-refundable credit is calculated as 35 per cent of the investment, to a maximum annual credit of $17,500. Credits can be carried forward seven years or back three years. Pre-approval of eligibility must be received from the government before the investment is made. The investor and the business must both meet eligibility criteria in order to qualify for the credit (as is the case in the other provinces). New Brunswick offers the Small Business Investor Tax Credit Program. The tax credit, which is non-refundable, is calculated as 30 per cent of investments of up to $250,000 per year (maximum $75,000 credit). Pre-approval of investment eligibility is required. As with Nova Scotia, the credit can be carried forward seven years or back three years. Newfoundland and Labrador calls its program the Direct Equity Tax Credit Program. The credit is nonrefundable. A key difference is that the credit is calculated as 20 per cent of the investment up to a maximum credit of $50,000 in the North East Avalon region, and as 35 per cent of the investment, to a maximum credit of $50,000, for investments elsewhere in the province. The credit can be carried forward seven years or back three years. Program pre-approval is required. The Prince Edward Island Share Purchase Tax Credit is a tax rebate of Prince Edward Island personal income tax, calculated as 35 per cent of an eligible investment, to a maximum credit of $35,000. Program pre-approval is required. INVESTMENT TAX CREDITS To encourage investment in Atlantic Canada (and the Gaspé Peninsula), the federal Income Tax Act provides investment tax credits ( ITCs ) for the purchase of new qualified property for use in Atlantic Canada. These ITCs are earned at a rate of 10 per cent of the capital cost of the qualified property. The ITCs are partially refundable, and can be carried back three years or forward 20 years. Qualifed property includes many types of buildings, machinery and equipment used in certain qualifying industries, including manufacturing, farming, fishing, logging, and natural resource extraction. Prince Edward Island offers its own 10 per cent ITC in addition to the federal ITCs discussed above. The Prince Edward Island ITC is a non-refundable credit against Prince Edward Island corporate income taxes. The credit is only available with respect to machinery and equipment, not buildings, and can be carried forward seven years and back three years. Prince Edward Island also offers an Enriched Investment Tax Credit, administered outside of the tax system, that provides a 25 per cent rebate of provincial tax to corporations involved in manufacturing and processing that are engaged in high-productivity applications with a strong export focus. Nova Scotia has a similar grant program outside of the tax system: through its Capital Investment Incentive Nova Scotia will contribute 20 per cent, up to a maximum of $1 million, toward the cost of certain technologicallyadvanced machinery, clean technology, equipment, software and hardware. SCIENTIFIC RESEARCH AND EXPERIMENTAL DEVELOPMENT ( SR&ED ) The SR&ED program is the federal government s key incentive for scientific research and experimental development. In brief, the SR&ED program provides for the deductibility of allowable expenditures on SR&ED activities, and provides ITCs for certain SR&ED expenditures; these ITCs are refundable for small businesses. Nova Scotia, New Brunswick and Newfoundland and Labrador all offer a top-up to the federal ITCs for SR&ED. In these provinces the extra credit is a 15 per cent refundable ITC for qualified expenditures incurred in those provinces. Newfoundland and Labrador also offers ITCs to individuals under certain circumstances (in Nova Scotia and New Brunswick the credits are only available to corporations). Prince Edward Island is the only province in Canada that does not currently offer ITCs in addition to those offered by the federal government in respect of SR&ED activities. However, Prince Edward Island of- DOING BUSINESS IN ATLANTIC CANADA SPRING

6 fers a significant non-tax incentive in the form of the Prince Edward Island Innovation and Development Labour Rebate, which provides rebates of 37.5 per cent of eligible salaries and wages paid in connection with the development and/or commercialization of new products, processes and services that will be sold primarily beyond the borders of Prince Edward Island. OTHER TAX INCENTIVES Nova Scotia offers a three year tax holiday for new small business corporations with at least two employees (at least one of whom is full-time and unrelated to any shareholder), provided the corporation is not associated with another corporation, is not a professional corporation, and meets certain other criteria. Newfoundland and Labrador s Economic Diversification and Growth Enterprises ( EDGE ) Program provides incentives for new business initiatives if: there is the potential that at least 10 new permanent jobs will be created and maintained, a minimum capital investment of $300,000 will be made (or incremental annual sales of $500,000 will be generated), the business would not establish itself or expand without EDGE assistance, the EDGE incentives will not give the business a direct competitive advantage over another business in the province, and there will be a substantial net economic benefit to the province. The incentives include: a 100 per cent rebate on provincial corporate income tax and payroll tax for 10 to 15 years (depending on where the business is established in the province), a 50 per cent rebate on federal corporate income tax for the same period, a further five year period of partial corporate income tax rebates (a phase out period), and a 100 per cent rebate on municipal property and/or municipal business taxes for the 10 to 15 year period, together with an additional five year phase out period. Newfoundland and Labrador also offers a Resort Property Investment Tax Credit, which is a credit of 45 per cent of the purchase price of Qualifying Resort Development Property Units purchased outside of the North East Avalon region. The program s aim is to encourage the development of new high-end resorts in the province. As well, Newfoundland and Labrador has a reduced corporate tax rate on manufacturing and processing profits earned in the province. Prince Edward Island offers a Specialized Labour Tax Credit, which is a personal income tax credit designed to attract specialized workers, with skills or knowledge not otherwise available in the Prince Edward Island labour market, to Prince Edward Island. Individuals who qualify for the tax credit receive a rebate of up to 17 per cent of personal income taxes paid. The worker must migrate to Prince Edward Island to fulfill a specific position, which the employer must be able to demonstrate could not be filled from the Prince Edward Island labour pool (pre-approval is required before an offer of employment is made). Employees must be employed in certain strategic sectors identified by the provincial government to qualify for the program. Also, the same position cannot qualify for both the Specialized Labour Tax Credit and the Innovation and Development Labour Rebate (described earlier). Prince Edward Island also offers sector-specific tax holidays for corporations in targeted sectors, currently biosciences and aerospace. In addition to the provincial tax incentives described in this article, readers should keep in mind that the Atlantic provinces also offer many non-tax incentives (e.g. payroll rebates and direct grants) to attract businesses to their jurisdictions. If you are considering commencing business in Atlantic Canada, or expanding an existing business, your Stewart Mc- Kelvey advisor can assist you in navigating through the many available options. A professional tax advisor should be consulted in all cases before acting on the basis of the information in this article, as all of the programs have detailed eligibility requirements that must be satisfied and which cannot be described in detail in an article of this length. Jim Cruickshank Halifax, N.S jcruickshank@stewartmckelvey.com Joel Reed Saint John, N.B jreed@stewartmckelvey.com 6 SPRING 2012 DOING BUSINESS IN ATLANTIC CANADA

7 Life and Disability Insurance in Atlantic Canada By Stephen Hutchison and Vanessa Paton LIFE INSURANCE DEFINED At its most basic, life insurance is a contract between a policy-holder and an insurance company whereby the insurer agrees to pay money upon death. There are several different types of life insurance available, including term insurance, which remains in place until a specified age, and whole life insurance, which stays in place for the duration of the insured s life. Also available is creditor s group life insurance, which is designed to provide protection against having to repay the balance of a debt (such as a mortgage or car loan) in the event of death. DISABILITY INSURANCE DEFINED Disability insurance is a type of coverage whereby the insurer agrees to pay money or other benefits in the event that the insured individual becomes disabled as a result of bodily injury or disease. Group disability insurance is often available to employees. Self-employed individuals may wish to consider individual plans. Individual plans are easily tailored to one s specific needs and can give flexible and comprehensive coverage. Creditor s group disability insurance is sometimes offered in conjunction with mortgages, car loans, lines of credit and other debts. These types of policies can ensure that one s debt payments are covered in the event of disability. BUSINESS USES FOR LIFE AND DISABILITY INSURANCE There are a variety of ways that life insurance can be used by self-employed persons to protect their various interests. In addition to the provision of life insurance for employees and key persons in the business, this could include using life insurance as collateral for business loans and for funding buysell agreements so that surviving partners can purchase the deceased s share of the business from his or her heirs. Self-employed persons can have unique needs. Individual disability insurance plans can be tailored to cover such costs as overhead, paying deferred income taxes and bank loans. APPLICATIONS AND THE DUTY TO DISCLOSE It is crucial to provide accurate information when applying for any type of insurance otherwise, coverage could be invalidated. Life insurance is no exception to this general rule. There is a duty upon a potential insured to disclose any facts which are material to the application. This duty exists independently of any questions asked by the insurer. If the insured conceals a material circumstance from the insurer, whether he or she knows the circumstance to be material or not, the policy is avoided. This duty is codified in the legislation of each Atlantic province. Simply answering the questions posed by the insurer may not guarantee compliance with the duty to disclose. (See Federated Life Insurance Company of Canada v. Fleet and Bellefontaine, 2009 NSCA 76) It should be noted, however, that each Atlantic province also has legislation stipulating that after a period of two years, a life insurance policy is DOING BUSINESS IN ATLANTIC CANADA SPRING

8 incontestable and, with the exception of fraud, a company cannot deny a claim because the information provided was inaccurate or incomplete. For disability insurance, rules surrounding the duty to disclose are much the same as those for life insurance. All material information must be disclosed. In the case of group insurance, failure to disclose or misrepresentation renders a contract voidable only where evidence of insurability is specifically requested by the insurer. The two year contestability period is also applicable. The statutory conditions of all four Atlantic provinces require that any statements used to avoid the policy or deny a claim be contained in the application or other written statements or answers furnished as evidence of insurability. A WORD ON LIFE INSURANCE BENEFICIARY DESIGNATIONS The designation of life insurance beneficiaries requires consideration of several factors. There are several types of beneficiaries and means of designating them. Care must be taken to ensure that one s life insurance goes to the intended recipient. Life insurance proceeds which are left to one s estate are subject to probate fees. By designating a specific beneficiary, no probate fees apply to those proceeds. In addition, where a spouse, child, grandchild or parent is named beneficiary, proceeds of life insurance are exempt from seizure by any of the policyholder s creditors. It is possible to name an irrevocable beneficiary, in which case the policyholder cannot later change or revoke the beneficiary without his or her consent to do so. In order to appoint an irrevocable beneficiary, one must comply with the applicable provincial legislation. An irrevocable beneficiary cannot be named via will. Further, an irrevocable beneficiary designation must be filed with the insurer, otherwise, the legislation provides that the designation will be treated as being revocable. Nova Scotia has specific wording, prescribed by the Insurance Act, R.S.N.S. 1989, c. 231, that must be present on the designation form. Both the agent and the insured must sign the form indicating that the consequences of an irrevocable designation have been explained by the agent and are understood by the insured. This requirement, which is unique to the Nova Scotia legislation, must be fulfilled in order to effect a valid designation of an irrevocable beneficiary - see Re McMasters Estate, 2010 NSSC 414. In summary, there are several considerations to bear in mind with respect to applications for and uses of life and disability insurance in Atlantic Canada. While the law in this area is similar to that in the rest of Canada, there are some significant distinctions of which one must be mindful. Stephen Hutchison Saint John, N.B shutchison@stewartmckelvey.com Vanessa Paton Saint John, N.B vpaton@stewartmckelvey.com Stewart McKelvey proudly celebrates over twenty years of innovative leadership as Atlantic Canada s first and largest regional law firm. With a distinguished heritage reaching back to Canada s confederation, our law firm has established an international reputation for generating results. More than 220 lawyers and 350 staff in our six locations have a single objective: the best results for our clients. Charlottetown, Prince Edward Island 65 Grafton Street, P.O. Box 2140 Charlottetown, P.E.I., C1A 8B9 Telephone: Fax: charlottetown@stewartmckelvey.com Fredericton, New Brunswick Suite 600, Frederick Square, 77 Westmorland Street P.O. Box 730, Fredericton, N.B., E3B 5B4 Telephone: Fax: fredericton@stewartmckelvey.com Halifax, Nova Scotia Suite 900, Purdy s Wharf Tower One 1959 Upper Water Street, P.O. Box 997, Halifax, N.S. B3J 2X2 Telephone: Fax: halifax@stewartmckelvey.com Moncton, New Brunswick Suite 601, Blue Cross Centre, 644 Main Street P.O. Box 28051, Moncton, N.B., E1C 9N4 Telephone: Fax: moncton@stewartmckelvey.com Saint John, New Brunswick Suite 1000, Brunswick House, 44 Chipman Hill P.O. Box 7289, Postal Station A, Saint John, N.B., E2L 4S6 Telephone: Fax: saint-john@stewartmckelvey.com St. John s, Newfoundland and Labrador Suite 1100, Cabot Place, 100 New Gower Street P.O. Box 5038, St. John s, N.L., A1C 5V3 Telephone: Fax: st-johns@stewartmckelvey.com