Introduction

2023 was another busy year for the Canadian structured finance market, marked by a number of changes to the legal landscape, including the upcoming permanent cessation of the publication and use of the Canadian Dollar Offered Rate (“CDOR”) in June 2024 and the related adoption of the Canadian Overnight Repo Rate Average (“CORRA”) as an alternative reference rate.

Our Firm’s industry-leading national structured finance practice in Canada played key roles in many significant Canadian structured finance transactions in 2023. As we look back on a busy year, the following is a review of the Canadian structured finance market in 2023, including key legal developments that may be of interest to you.

Market Activity

The Canadian securitization market continued to see consumer-based assets being securitized in 2023, including credit card and auto (loan and lease) receivables, residential and commercial mortgages, and home equity lines of credit. Our Firm was involved in several issuances of asset-backed securities (“ABS”) by issuers sponsored by Canadian Schedule I banks in the above-mentioned asset classes, including ABS issuances by issuers sponsored by Bank of Montreal (“BMO”), Canadian Imperial Bank of Commerce (“CIBC”), Canadian Tire Bank, Equitable Bank (“EQB”), National Bank of Canada (“NBC”), Royal Bank of Canada (“RBC”) and The Toronto-Dominion Bank (“TD”). We have also acted on several ABS issuances by issuers sponsored by companies in the automotive space, including issuances by issuers sponsored by Ford Credit Canada Company and Toyota Credit Canada Inc.

In 2023, our Firm advised issuers, sellers, purchasers and dealer syndicates on a number of securitizations involving esoteric asset classes, including data center and telecommunications revenues. We also continued to leverage our expertise in unconventional structured product offerings, including cross-border strategic risk transfer programs.

Canadian Schedule I banks, including BMO, CIBC, EQB, NBC, RBC and TD, and others such as Desjardins and HSBC Bank Canada, continued to be active issuers of covered bonds in 2023. Fixed and floating rate covered bonds were offered by Canadian covered bond issuers across a broad range of international markets, with notable issuances including an inaugural offering by each of Desjardins and TD in Switzerland and CIBC and Desjardins in Norway, and offerings by a number of financial institutions into the U.S., Australian, U.K. and Euro markets on which our Firm has advised. 

Cross-Border Activity

Our Firm continues to advise originators, issuers, sponsors, financial institutions, private equity firms and foreign law firms on cross-border structured finance matters, including ABS issuances, whole loan and receivables sale transactions, significant risk transfer transactions, warehouse funding structures and factoring transactions.

Securitization transactions involving multiple jurisdictions give rise to a number of Canadian-specific tax, regulatory, security interest, disclosure and other legal issues, owing to the difference in legal regimes in Canada, the U.S., European countries and elsewhere. Our Firm has advised clients on structuring cross-border transactions to align with Canadian tax requirements and ensure that security interests are perfected in all relevant Canadian provinces, including Quebec, and disclosure obligations are met where relevant. In addition to advising Canadian originators and issuers looking to sell assets and issue ABS in foreign markets, our Firm has also advised institutional investors, trust companies and other stakeholders in cross-border transactions seeking compliance with Canadian legal requirements. 

Legal Updates

Transition to CORRA

In anticipation of the permanent cessation of the publication of all tenors of CDOR on June 28, 2024 (the “CDOR Cessation Date”), and the transition to CORRA as the key Canadian dollar interest rate benchmark, the Canadian Alternative Reference Rate Working Group (“CARR”) and the Office of the Superintendent of Financial Institutions have published a number of guidelines to facilitate the transition.   

On July 27, 2023, CARR published a notice introducing a “no new CDOR or BA Loan” milestone date of November 1, 2023. After November 1, 2023, new loan contracts can no longer reference CDOR or bankers’ acceptance (“BA”) rates. The purpose of this new milestone date is to further ease the transition to alternative reference rates by ensuring that the number of loans that need to be amended to include alternative reference rates before the CDOR Cessation Date does not grow.

In its July 27, 2023 notice, CARR clarified that “new loan contracts” include any agreements that create additional CDOR or BA exposure, material amendments, changes in pricing, term extensions requiring lender consent and facility amount increases to existing loan agreements. For further information on this notice, please see our Firm’s August 10, 2023 article.

Our Firm continues to actively monitor all developments in the transition to CORRA as the key Canadian dollar interest rate benchmark and assist various ABS market participants in the implementation of CORRA in Canadian dollar floating interest rate transactions.

Criminal Interest Rate Regulations

On December 23, 2023, the federal government of Canada issued proposed Criminal Interest Rate Regulations (the “Regulations”) for consultation. These regulations follow recent changes in the Budget Implementation Act, 2023, No. 1, which amended section 347 of the Criminal Code (Canada) to lower the criminal interest rate to 35% annual percentage rate (“APR”) from the current 60% effective annual rate, as well as the criminal interest rate consultations launched in October 2023. These amendments are not yet in force.

The Regulations propose the following limits for loans that meet the following criteria: (1) the borrower is not a natural person, and (2) the borrower has entered into the agreement or arrangement for business or commercial purposes:

• Commercial loans under $10,000: Where the amount of the credit advanced under the agreement or arrangement is less than $10,000, no exemption would apply and the interest rate would be limited to 35% APR.
• Commercial loans over $10,000 but less than $500,000: Where the amount of the credit advanced under the agreement or arrangement is more than $10,000 but less than or equal to $500,000, the interest rate would be limited to 48% APR.
• Commercial loans over $500,000: Where the amount of the credit advanced under the agreement or arrangement is more than $500,000, no criminal interest rate limit would apply.

Please see our Firm’s January 2, 2024 article on the new criminal interest rate regulations issued for consultation.

Quebec Charter

As of September 1, 2022, all registrations made in the Quebec Register of Personal and Movable Real Rights must be in French. In the context of securitization transactions, this entails that the description of the assignment of receivables as a “universality of claims” (as well as all related defined terms) for Quebec law purposes must now be translated into French. Throughout 2023, our Firm assisted numerous clients in adapting their securitization documents to comply with these requirements and making the necessary registrations.

On June 1, 2023, some key amendments to the Charter of the French Language (Québec) (the “Quebec Charter”) relating to contracts pre-determined by one party (sometimes referred to as contracts of adhesion) (“Adhesion Contracts”) came into effect. Under Quebec law, an Adhesion Contract is one in which the essential elements were imposed or drawn up by one of the parties and were not negotiable. Standard-form contracts which are not negotiated are an example of Adhesion Contracts. The Quebec Charter requires that an adhering party be provided with a French version of the applicable Adhesion Contract and expressed its willingness to enter into an English version of the contract before it can sign an English version. There are important exemptions for loan agreements, financial instruments and contracts whose object is the management of financial risks (e.g., derivatives) and contracts used by parties outside Quebec. For contracts which benefit from an exemption, it is necessary to include a clause to the effect that the parties have expressly chosen that the contract be drafted in English.

In this regard, investor documents issued in public securities offerings and widely distributed private placements, including prospectuses and offering memoranda, now tend to include a choice of governing language clause acknowledging that the parties wish for all documents relating to the sale of the securities be drawn up in English. Inclusion of this language to ensure compliance with stricter French language regulations in Quebec has increasingly become the market standard in 2023.

Our Firm’s Structured Finance & Securitization Group in our Montreal office is well-positioned to advise on navigating the legal landscape in Quebec.

Hybrid Mismatch Rules

On November 28, 2023, the Department of Finance (Canada) released Bill C-59, providing revised rules pertaining to “hybrid mismatch arrangements” (the “Revised Hybrid Rules”). Proposed draft legislation in respect of hybrid mismatch arrangements was first released on April 29, 2022. 

Generally, hybrid mismatch arrangements entail using the differences in the income tax treatment between two or more countries, to claim a deduction in one country in respect of a cross-border payment, while not including the corresponding receipt in the recipient’s income in the other country. Such mismatches could result in double non-taxation, meaning certain income would not be subject to tax in any jurisdiction. The Revised Hybrid Rules would prevent tax advantages arising from such mismatches by denying the deduction of payments or requiring the inclusion payments made under hybrid mismatch arrangements. The Revised Hybrid Rules would apply in respect of payments arising on or after July 1, 2022 and would include new reporting requirements for payments arising on or after July 1, 2023.

Overview and Outlook

Despite a challenging economic environment, 2023 was a strong year for the Canadian structured finance market across a range of asset classes. As interest rates in Canada and abroad appear to be stabilizing, with a possibility of reductions in the second half 2024, borrowing costs for originators and issuers may potentially decrease and asset originations in certain asset classes may potentially increase in 2024. As a result, we believe that the Canadian structured finance market will continue to be active in 2024, particularly in the second half of 2024. We look forward to advising originators, issuers, dealers, lenders, purchasers and other parties in the structured finance industry in 2024.

McCarthy Tétrault has one of the top structured finance and securitization practices in Canada. We deliver practical and innovative advice combined with timely service in achieving your objectives. For more information about the Structured Finance & Securitization Group at McCarthy Tétrault, click here.