Law Times

Law Times • December 1, 2008 Parliament Hill. And Canadian law is going to play a big role in what happens. Harper will be trying to force H He's b-a-a-a-ck The e's back. Stephen Harp- er and his Conservatives are back in business on Hill By Richard Cleroux a snap election before the Liberals can dump their lame duck leader Stéphane Dion in the spring. Leading up to the last election campaign Harper used fear of crime extensively to win votes from a frightened, aging population. For many he became a "Dirty entrench in the constitution the rights of Christian churches not to perform same-sex marriages. One resolution Another resolution would Harry" hero of Canadian politics — cutting back parole; jailing more drug dealers; hammering kids who race cars on city streets; locking up drunken drivers; and wiping out house arrests for bad guys. Violent crime has been going down steadily in Canada for 10 years, but fear of crime has gone up dramatically, especially among people who watch U.S. television crime shows. In politics, percep- tion is what counts, not reality. Harper almost won his major- ity. But he overdid it. Promising to jail 14-year-olds was over the top. It cost him the women's vote and a lot of Quebec votes, maybe 10 to 20 seats in all. Goodbye majority. Now, Harper has a new ap- scrapping the national gun regis- try entirely, something Harper never got around to doing. A resolution to "revamp" the federal student loan program would "eliminate the inclusion of parental income and assets in loan applications." That would mean rich kids would have the same access to loans as poor kids. It passed. One resolution would recog- called for proach; it is more refined. He will use not just Criminal Code law, but all Canadian law to bring about the massive and profound changes to Canadian society he has been promising for the past decade. He believes Canadians are with him. It is what Harper's mentor Uni- versity of Calgary professor Tom Flanagan calls Harper's policy of "incremental conservatism." The Conservatives held a big party convention in Winnipeg earlier this month to prepare the second Harper term. Resolutions at the conven- tion covered every legal aspect of life in Canada: matrimonial law; abortion law; pay equity law; labour law; tax law; immigration law; refugee law; access law; con- stitutional law; government ac- countability law; Aboriginal law; and, of course, criminal law. No area was left untouched. The really wacky stuff was culled out in a closed-door ses- sion on the Friday which the news media were not allowed to attend. The Saturday plenary debated the remaining 40 resolutions. One resolution urged replacing the principle of equal pay for work of equal value for women by equal pay for equal work. It passed. "They would take us back 30 years to what used to be," says New Democrat MP Judy Wasylycia-Leis, who promises to fight such legislation with everything she has. A labour law resolution rec- nize the "unborn child" as a victim of crime in the event of a deliber- ate injury or death of a pregnant woman. The resolution used the terms "mother" and "child" in- stead of "woman" and "fetus." A female delegate com- plained this was the same as say- ing a fetus was a person, which could lead eventually to taking away a woman's right to choose about abortion. She was booed and the resolution passed. At the back of the hall, a group of Christian anti-abortion dele- gates was celebrating. One chant- ed: "We did it, we did it." The convention had some- thing for First Nations people — a resolution to run more aud- its of contractors who provide social services to band councils. A few resolutions were de- feated: one would have limited the terms of Supreme Court judges to 10 years. It was barely defeated. Judges were not popu- lar at the convention. A resolution to crack down on telemarketing and mass-marketing fraud schemes was defeated. A resolution from West Coast delegates for social housing for the homeless was defeated. Some reporters were stunned COMMENT col has yet to be signed by the U.S. secretary of state and the president (both expected dur- ing the current administration), Canada has already gone ahead and eliminated, effective Jan. 1, 2008, withhold- ing taxes on interest paid to any U.S. arm's length lenders (equivalent provisions doing likewise for non-arm's length lenders are being phased in over the next couple of years). The repeal of this with- holding tax is considered to be one of the critical planks of the Fifth Protocol, and Canada struck first with legislation implementing the repeal even before it is fully approved in the U.S. Prior to such repeal, Canadian borrowers making interest payments to foreign lenders were required to remit a withholding tax (10 per cent in the case of American lenders) on top of the interest otherwise payable. That's not un- like a situation where a purchaser would have to withhold and remit income tax on a purchase from a non-resident vendor under s.116 of the Income Tax Act. While there are some obvious domestic policy reasons for a withholding tax re- gime, by turning Canadian mortgage borrowers into tax collectors, Canadians have, for decades now, been largely shut out from freely available capital pools south of the border, in light of recent events; some might say, gratefully so. One historic exception to this general rule has been the mortgage lending in Canada by U.S. insurance companies. The reason that U.S. insurance companies have not been as reticent to mortgage lend in Canada is because the withholding tax was only ever intended to apply to short-term debt. reminiscences of the Great Depression. There's been details of market losses and new record lows; plans (and more plans) for the deployment of hundreds of billions of dollars of United States government bailout funds; and incessant talk of the failures, near-failures, and forced recapitalizations of dozens of venerable U.S. economic institutions. It's truly apocalyptic stuff for those so inclined. Lost amongst all of this economic doom and gloom is the news of the recent ratification on Sept. 23, by a unanimous U.S. Senate, of the Fifth Protocol to the U.S.-Canada Tax Treaty. Although the Fifth Proto- J ust about any page of just about any newspaper since October, indeed earlier if one is selective in one's reading materials, has been filled with there was no resolution calling for the abolition of gay and lesbian marriages, a big issue in the Chris- tian Right in the party. One delegate explained there was no need. An agreement to bring in such legislation was made beforehand with the Harper government. If so, it was news to most reporters. Ryan Sparrow, the Conserva- ognized the right of unions to exist, but non-members would not have to take part. One observer remarked the delegates had not heard of the Rand formula. Another observer replied that indeed they had. A tax law resolution proposed income splitting for families of children under seven years old. "But that's unfair to me," protested one delegate. "I'm a single mother. What am I sup- posed to do?" Some of the 2,000 delegates booed. The resolution was adopted. tives' former communications director who was suspended last month for making callous remarks about a dead soldier's father, said that Harper would not be bound by the convention resolutions, and the whole thing was not much more than "a consultative" exercise. But two delegates insisted that in the past 90 per cent of conven- tion resolutions have been picked up by the Harper government. The coming days will tell just how much the convention's "exercise" in re-writing Can- adian law will end up on the Commons' order paper. LT Richard Cleroux is a freelance reporter and columnist on Parliament Hill. His e-mail address is richard cleroux@rogers.com. www.lawtimesnews.com was "short-term" became commonly known as the "5/25 exemption," which tested whether the borrower could be forced (or potentially forced) to repay more than 25 per cent of the principal within the first five years of the term of the loan, other than by default or illegality. If not, then the loan was deemed not to be The litmus test for whether any given loan Goodbye 5/25 criteria were, however, generally not so lucky. The 5/25 exemption was always intended to The Dirt By Jeffrey W. Lem provide certainty for U.S. mortgage lenders and their Canadian borrowers in respect of withhold- ing tax eligibility. In theory, by applying the tests for the 5/25 exemption, both borrowers and lend- ers could tell, before signing the commitment, whether taxes would have to be withheld by the borrower. In reality, however, the 5/25 exemption gave little such comfort. The intricacies, compli- cations and technicalities of the exemption, and the consequences of failing to meet its require- ments, eventually meant that the simplest loan involving a U.S. lender and a Canadian borrower eventually required sophisticated structur- ing and equally sophisticated tax opinions to complete. Even U.S.-based mortgage lenders that otherwise qualified under the former 5/25 exemp- tion, often had to make substantial adjustments to their normal loan documents in order to make the cut. Standard mortgage terms that would not raise an eyebrow on purely domestic mortgage loans on either side of the border (such as cash sweeps, material adverse change clauses, and in- surance proceed scoops) have historically been considered offside of the former 5/25 exemption. That's because they all permitted the possibility of a mandatory prepayment within five years even if the borrower was not otherwise in default. With the withholding tax now eliminated, lend- PAGE 7 ers' counsel can expect a return to documentary nor- malcy in such cross-border loans. Likewise, from a legal documentation standpoint, borrowers' counsel will find less structuring issues driven by a need to comply with the 5/25 exemption and overall less borrowing transaction costs for their clients. As history would have it, of course, the Canadian government's pre-emptive repeal of the withholding tax could not have been more inadvertently ill-timed, opening the Canadian mortgage market to greater U.S. mortgage short- term and medium-term lending just in time to see those targeted U.S. mortgage lenders, at least those still standing, all but shut down their mortgage loan operations for other reasons. Although this current credit freeze and market a short-term loan and would then be exempt from the withholding tax. If so, then the loan was deemed to be short term and therefore sub- ject to withholding tax. Unlike almost all other mortgage lenders, in- surance companies typically lend for long terms with gradual amortization schedules. As such, U.S. life insurance companies, with their appetite for low-risk, long-term mortgages, would generally have met the 5/25 exemption requirements with regularity when lending in Canada. Other U.S. mortgage lenders with "less than life" underwriting meltdown has all but eliminated any immediate benefits to be seen by the repeal of the withhold- ing tax, the long-term benefits of eliminating with- holding taxes on U.S. mortgage loans into Canada cannot be understated. When Australia eliminated its withholding taxes in 2006 on similar cross-bor- der loans, it experienced a huge influx of foreign mortgage financing, and there is no reason why the repeal of Canadian withholding taxes will not eventually expand the attractiveness of Canadian mortgages for American and other foreign lenders. In due course, once the world's economies return to normal, Canadian borrowers and American lenders will see the repeal of the withholding tax as a "win-win" situation, with only Canadian domestic lenders lamenting the loss of what had previously been their tax- driven near-monopoly on the Canadian short- and medium-term mortgage markets. LT Jeffrey W. Lem is a partner in the real estate group at Davies Ward Phillips & Vineberg LLP. His e-mail address is jlem@dwpv.com.

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