Notwithstanding the anaemic state of securitization generally, cross-border securitization of Canadian receivables has remained fairly steady, and in some sectors has actually picked up.
This is due in part to Canadian domestic securitization having only slightly recovered from its near-death state, and in part to Canada eliminating virtually all withholding tax on arm's-length interest payments, and thereby providing new access to U.S. and other foreign investors for Canadian loan, lease and consumer receivables.
As a result of these developments, Canadian businesses that have historically looked to domestic ABS and ABCP markets have begun to securitize cross-border.
Executing a cross-border securitization of Canadian receivables requires the parties, particularly those in the U.S., to come to grips with a number of legal, tax and business issues that can affect the transaction's economics and must be resolved in order to satisfy the investor's/funder's and rating agencies' requirements. Several of these issues are highlighted below:
Canadian Leases Canadian withholding tax still applies to most lease payments. However, Canadian auto and equipment leases are for the first time being securitized cross-border by transferring the leases to Canadian SPVs which then obtain funding under withholding tax-free loans from U.S. or other non-Canadian term investors and ABCP conduits.
Consumer AssetsResidential mortgages, credit card receivables and other Canadian consumer assets can now be transferred cross-border without withholding tax. Nevertheless, challenges created by recent changes to the Canada-U.S. tax treaty are leading such assets, and even plain vanilla trade receivables, to be transferred to Canadian SPVs and funded through cross-border loan structures.
Currency The parties must determine how best to hedge the foreign exchange risk inherent in funding Canadian receivables with non-Canadian debt. ABCP conduits will often utilize a series of spots and forwards, while term ABS usually require more tailored swaps.
Quebec In the case of Quebec originators or obligors, it may be necessary to ensure that the receivables constitute a "universality", or discrete class, under the Quebec Civil Code and comply with French language rules. As well, Quebec registration requirements may preclude the use of a co-ownership structure for the Quebec receivables.
GST/PST Entire Canadian receivables should be assigned in the first step transfer, rather than co-ownership interests, in order to ensure that the transferred receivables include the federal goods and services tax (GST) and certain "harmonized" provincial sales taxes. Other provincial sales taxes may not be transferrable free of governmental claims.
Government Receivables Certain obligations owed by federal and certain provincial government entities cannot be transferred without consent. If consents are not practical, appropriate concentration levels are often established.
Anti-assignment Clauses Since Quebec has not adopted the Uniform Commercial Code provisions that counter the effect of anti-assignment clauses, Quebec contracts may warrant additional due diligence.
Arrangers There is a 15% federal withholding tax on fees for services rendered by non-Canadians in Canada, and an additional 9% tax if they are rendered in Quebec. U.S. and other foreign arrangers and bankers should provide any structuring and advisory services outside Canada.
SearchesCanadian financing statements and other security interest registrations may not automatically lapse after five years, or after a company changes its name or merges. A cost benefit analysis may be necessary when determining how far back to search, particularly in the case of multiple originators.
Blocked AccountsCanadian banks are less familiar with blocked account agreements than their U.S. counterparts, and less comfortable with the indemnifications and other obligations found therein. Sufficient time should be allocated to settle these arrangements.
Multiple Assignments If the structure provides for daily assignments, Quebec will require separate registrations for each assignment. It may be possible to structure around this or to conclude that Quebec law doesn't apply in the circumstances.
Deferred Purchase Price If Canadian receivables are first sold to a U.S. or other off-shore affiliate, any deferred purchase price note may attract Canadian withholding tax. This tax is often avoided through careful structuring, such using a cross-border loan (rather than sale) structure, or selling the receivables to a non-Canadian SPV in which the Canadian originator holds shares.
Servicing Fees Unless it can be confirmed that servicing fees will not be subject to the federal sales tax on services, Canadian receivables should be sold on a "servicing included" basis.
Governing Law Since a true sale opinion will deal with Canadian case law and insolvency statutes, having the sale agreement governed by the appropriate provincial law will facilitate Canadian counsel's ability to provide the opinion.
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