Debt financing transactions: What foreign lenders and borrowers need to know 

Who this is for: CFOs, treasurers, GCs, and financing counsel at foreign companies lending into Canada, borrowing through Canadian subsidiaries, or taking or granting security over Canadian assets. 

In this article:

1. Introduction: The Canadian lending market 

An ever-increasing global market has resulted in opportunities in Canada for businesses around the world. Many global businesses turn to debt financing to leverage those opportunities. This chapter discusses debt financing in Canada and the major legal issues that foreign entities should be aware of when considering and structuring financing in Canada and taking or granting security over assets in Canada. 

Lending in Canada 

The banking market in Canada is largely dominated by the country’s five largest banks: Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia, Bank of Montreal, and Canadian Imperial Bank of Commerce. While these banks dominate the market, borrowers have other options. Alongside the five major banks are many other domestic and foreign bank subsidiaries. Beyond these banks, there is an array of nonbank financial institutions. Borrowers may seek financing from insurers, trust companies, credit unions and Caisses Desjardins, independent leasing companies, and financing arms of certain manufacturers. Additionally, two federal Crown corporations assist small and medium-sized businesses:  

• the Business Development Bank of Canada provides specialized financing for higher-risk borrowers; and 
• Export Development Canada provides trade credit and insurance products for exporters. 

For foreign lenders considering lending to Canadian borrowers, as long as they are not considered to be carrying on business in Canada, the federal Bank Act does not restrict a foreign bank or lender from lending to a Canadian borrower or taking security over assets located in Canada. Generally, a foreign lender will not be considered to be carrying on business in Canada where:  

• it is not conducting business through a nominee or agent located in Canada;  
• the negotiations between the parties take place outside of Canada; and  
• the transaction is completed outside of Canada.  

Foreign lenders who structure their Canadian lending activity to satisfy these three conditions can generally lend into Canada without triggering Bank Act registration requirements, but the analysis should be confirmed for each lending arrangement, particularly where the lender has other Canadian connections or where ongoing loan administration is conducted from within Canada. 

Foreign banks that do wish to have a presence in Canada for the purposes of carrying on the business of banking in Canada are governed by the Bank Act. Subject to the requirements of that legislation, a foreign bank may carry on its banking business in Canada by either establishing a branch office or by creating a foreign bank subsidiary in Canada. Additionally, while more limited, a foreign bank may also maintain a representative office in Canada provided that such an office would be limited to promoting the services of and acting as a liaison with customers of the foreign bank. 

Types of Canadian lending 

As in other countries, most corporate and commercial lending takes place by way of operating or term loans, negotiated with a single lender or syndicated among several lenders.  

Operating loans are made to fund the short- to medium-term working capital needs of a business and are almost always repayable on a demand basis. Revolving operating loans are often asset-based, meaning the borrower may borrow up to a borrowing base. Typically, the borrowing base consists of the borrower’s most liquid noncash assets: domestic receivables under 90 days, inventory, and work-in-progress. 

Term loans are generally made to finance capital acquisitions and are repayable upon the occurrence of an event of default or expiration of the term. The loan is amortized over the term of the loan or a longer term that reflects the useful lifetime of the capital assets that secure the loan. Depending on the type of collateral assets used as security, term loans may be structured in different ways. For example, a real estate development may require a combination of revolving, operating credit, bridge financing, and longer-term debt. 

2. Specific issues arising from lending and borrowing in Canada 

Withholding tax on interest 

For most foreign lenders, withholding tax on interest paid by Canadian borrowers is not a cost — but the conditions for the exemption must be met. 

Effective January 1, 2008, the Canadian Income Tax Act was amended to eliminate Canadian withholding tax on interest on loans made to Canadian residents by non-residents of Canada provided that:  

1. the lender deals at arm’s length with the borrower; and  
2. no portion of the interest on the loan is “contingent or dependent on the use of or production from property in Canada or is computed by reference to revenue, profit, cash flow, commodity price or any other similar criterion or by reference to dividends paid or payable to shareholders of any class of shares of the capital stock of a corporation.” 

For non-arm’s length lenders and borrowers, parent-to-subsidiary loans being the most common example, withholding tax on interest payments has been eliminated for U.S. residents who can claim the benefits of the Canada-United States Income Tax Convention. For non-arm’s length lenders from other jurisdictions, withholding tax at 25% (reduced by applicable treaty) applies. 

Where withholding tax is applicable in Canada, a non-resident lender will require the Canadian borrower to gross up the interest payment to ensure the lender receives the expected net amount. This adds material cost to the borrower and should be modelled before the financing is structured.  

The thin capitalization and EIFEL rules discussed below further constrain the deductibility of interest paid to non-resident lenders, making the total cost of non-arm’s length intercompany financing a multi-variable calculation that requires tax advice before the loan is made. 

Interest rules 

Describing the rate of interest 

The Interest Act permits the parties to a loan to agree as to what rate of interest will apply to borrowed funds. The agreement must provide for a clear and unambiguous rate of interest which can be readily interpreted and calculated. It is common practice to tie the rate of interest to a floating reference rate, that can be readily calculated. This is permissible provided the reference rate can be identified with certainty and the agreements specify the dates on which the applicable interest rate is to be adjusted. Should the parties fail to adequately specify a rate of interest, and no law provides otherwise, the Interest Act (Canada) imposes a statutory rate of 5% per annum. 

Annual rate of interest 

The Interest Act provides that, except as to mortgages on real property, whenever any interest is by the terms of any written or printed contract, made payable at a rate or percentage for any period less than a year, no interest exceeding the rate or percentage of 5% per annum shall be chargeable on any part of the principal money unless the contract contains an express statement of the yearly rate or percentage of interest to which the other rate or percentage is equivalent.¹ Section 4 is not triggered where interest is payable monthly or at other periods that are less than one year but, rather, where interest is payable, for example, at a monthly rate (or at any rate for any period less than a year). Therefore, as long as the rate of interest is stipulated at an annual rate, section 4 will not be triggered simply because interest payments are calculated and paid more frequently than on a yearly basis. 

Interest charged on arrears, where secured by a mortgage on real property 

Pursuant to the provisions of section 8 of the Interest Act, no fine, penalty, or rate of interest may be exacted on any arrears of principal or interest secured by a mortgage on real property that has the effect of increasing the charge on the arrears beyond the rate of interest payable on principal money not in arrears. 

Criminal rate of interest – updated as of January 1, 2025

The criminal rate of interest under section 347 of the Criminal Code was significantly amended, effective January 1, 2025. The previous cap of 60% effective annual rate has been reduced to 35% annual percentage rate (APR) for most loans. 

The new regime introduces a tiered structure for commercial loans: 

• Commercial loans to corporations for business purposes exceeding $500,000: exempt from the criminal rate cap entirely 
• Commercial loans to corporations for business purposes between $10,000 and $500,000: capped at 48% APR 
• All other loans, including loans to individuals: capped at 35% APR 

The amendments also expand the scope of the offence. It is now a criminal offence not only to receive payment of interest at a criminal rate, but also to offer or advertise to enter into an agreement at a criminal rate. Lenders must review their standard-form loan documentation and marketing materials to ensure compliance with the new regime. 

For foreign lenders providing commercial loans to Canadian borrowers of more than $500,000, the criminal rate exemption typically applies. For smaller commercial loans or any consumer lending, the 35% APR cap applies and must be respected, noting that “interest” for these purposes is broadly defined to include fees, commissions, penalties, and all other charges, not just the stated interest rate. 

3. Tax rules affecting interest deductibility 

Thin capitalization rules 

Foreign lenders often lend to a foreign corporation which, in turn, lends those funds to a Canadian subsidiary. The Income Tax Act (Canada) contains so-called “thin capitalization” rules which deny the deductibility of interest payable by a Canadian corporation on debt owing to “specified non-residents” (e.g., the parent corporation or certain other non-arm’s length persons that are not residents of Canada) to the extent that the ratio of such debt to the “equity” (as defined in the Income Tax Act) of the Canadian subsidiary exceeds 1.5:1. In other words, the rules prevent Canadian subsidiaries from deducting interest on the portion of loans from a foreign parent that exceeds 1.5 times its “equity.” This is a double hit: the interest deduction is lost and withholding tax applies to the disallowed amount. Foreign groups that capitalize Canadian subsidiaries primarily with intercompany debt must model the thin cap ratio before the first loan is advanced — restructuring after the fact triggers its own costs.  

The thin capitalization rules have been extended in recent years to apply to non-resident corporations as well as trusts and partnerships (in the case of partnerships, the debt of the partnership is attributed to its members in proportion to their partnership interest). The Income Tax Act (Canada) also contains extensive anti-avoidance rules (the so-called back-to-back loan rules) to prevent indirect loan arrangements from avoiding being subject to the thin capitalization rules. 

Hybrid Mismatch Rules  

In response to the Organization for Economic Co-operation and Development’s (“OECD”) Base Erosion and Profit Shifting (“BEPS”) Action 2 recommendations on hybrid mismatch arrangements, the Income Tax Act (Canada) was amended in 2024 to include rules in section 12.7 and 18.4 and related provisions, addressing certain deduction/non-inclusion mismatches arising under three categories of arrangements: hybrid financial instrument arrangements, hybrid transfer arrangements and substitute payment arrangements, as well as a deeming rule for certain notional interest expenses (the “Hybrid Mismatch Rules”). Where the Hybrid Mismatch Rules apply, a deduction (including a deduction of interest) may be denied or an amount may be included in income, and the denied amount may be deemed to be a dividend subject to withholding tax.  

On January 29, 2026, the Minister of Finance (Canada) released draft legislation expanding the Hybrid Mismatch Rules to address additional hybrid mismatch outcomes involving certain hybrid entities and imported hybrid arrangements, generally for payments arising on or after July 1, 2026 (the “Hybrid Mismatch Proposals”). The Hybrid Mismatch Proposals, which are in consultation form, are highly complex and there is significant uncertainty as to their interpretation and application. 

Excessive Interest and Financing Expenses Limitation (“EIFEL”) rules 

Generally effective as of October 1, 2023, the EIFEL rules implement recommendations of the OECD’s BEPS Action 4 report, limiting certain taxpayer’s deductions for interest and similar financing expenses to a proportion of their earnings. The EIFEL rules apply to taxpayers that are corporations or trusts, including non-resident corporations and trusts. Generally, where applicable subsection 18.2(2) denies a deduction for a proportion (determined formulaically) of each of a taxpayer’s interest and financing expenses. As a result, non-excluded entities may deduct interest and financing expenses only up to a cap, which is based primarily on a fixed percentage of the entity’s “adjusted taxable income plus interest and financing revenues.” 

The regime is broad applying to interest and certain financing fees, leasing financing payments, some hedging-related payments amounts and some partnership income. There are exclusions and relieving mechanisms, including excluded entities, and certain intra-group payments. If a deduction is denied, it generally becomes a restricted interest and financing expense that may be deductible in a later year.  

Guarantees 

It is common for a lender to require an intercorporate guarantee from a parent or affiliate of a Canadian borrower.  

Federal corporations created under the Canada Business Corporations Act and corporations created under provincial legislation in the provinces of British Columbia, Alberta, Saskatchewan, and Ontario are generally permitted to provide financial assistance to any person, for any purpose, on the (in certain of those jurisdictions) condition that the guarantor discloses to its shareholders all material financial assistance (including the granting of a guarantee).  

Under Quebec civil law, it is also possible for a corporation to provide financial assistance to its shareholders. However, the form and enforceability requirements for guarantees in Quéebec differ from common law provinces, guarantees to be enforced in Quebec require Quebec-law-specific drafting and should not be assumed to work as executed under another province’s law. 

For foreign parent guarantees of Canadian subsidiary obligations, lenders should confirm which jurisdiction’s law governs the guarantee and that the guarantee is enforceable in that jurisdiction against the foreign guarantor, which may require a foreign law opinion in addition to the standard Canadian legal opinion. 

4. Limitation periods 

Ontario – demand loans 

The limitation period on demand promissory notes in Ontario is two years, commencing once a demand for performance is made and dishonoured, following an amendment to the Limitations Act, 2002 that took effect retroactively to January 1, 2004. Commercial parties under Ontario law can, to the extent it is permitted under the Limitations Act, 2002, extend, suspend, or exclude basic limitation periods for agreements made after October 19, 2006, and guarantees under Ontario law should expressly provide for such an extension to avoid the guarantee becoming unenforceable before the lender has exhausted its remedies against the borrower. 

Guarantors – commencing action within limitation periods 

There is case law in certain jurisdictions which has held that the limitation period on a guarantee commences when the underlying guaranteed debt becomes due.² Therefore, lenders should ensure that they commence an action against any guarantors for payment within applicable limitation periods commencing from when the debtor owes payment (rather than wait until the lender has completed its remedies against the borrower and its assets). In addition, in Ontario commercial parties can extend limitation periods and, therefore, guarantees under Ontario law should contain language to provide for such an extension. 

5. Security 

Overview: Canada’s substantially uniform personal property security framework 

With the single and significant exception of Quebec, Canada offers a substantially uniform approach to taking security over personal property. All common law provinces have enacted Personal Property Security Acts modelled after Article 9 of the US Uniform Commercial Code, with electronic registration systems that allow quick and cost-effective perfection of security interests across the country. Quebec operates its own civil law hypothec regime, described separately below. 

PPSA jurisdictions — personal property security 

Except for the Province of Quebec, each jurisdiction in Canada has enacted its own Personal Property Security Act. Each PPSA provincially regulates the creation, perfection, and enforcement of security interests in personal property and provides for a system of priority among competing interests. 

A “security interest” is generally defined as an interest in personal property that secures payment or performance of an obligation. “Personal property” generally includes every tangible and intangible asset that is not real estate (or affixed to real estate).  

To create an enforceable PPSA security interest, a creditor must ensure that its interest has “attached” and is then “perfected.” 

“Attachment” generally occurs when value is given, the debtor has rights in the collateral, and a security agreement has been executed in which the borrower grants a security interest to the lender over specific assets or a described class of assets. 

“Perfection” of a security interest occurs when the secured creditor has given notice of its security interests by effecting a registration under the PPSA or, in the case of certain types of collateral, by physical possession or “control.”  

Each PPSA jurisdiction maintains a computerized registry that allows creditors to electronically file and search security interests. For foreign lenders new to Canadian lending, the PPSA registration process is straightforward and can typically be completed within one business day for standard collateral. 

The PPSAs provide for conflict of law rules to determine which provincial registration system takes precedence depending on the type of collateral and the location of the debtor and the collateral itself. Where collateral is moveable and may cross provincial borders, such as vehicles, equipment, rolling stock, security interests may need to be registered in more than one Canadian jurisdiction. Foreign lenders should confirm the location of all collateral and the location of the debtor in accordance with the PPSA to confirm which jurisdiction(s) to file PPSA registrations.  

Lenders outside of Canada are often concerned about perfecting a security interest in depositary accounts. While such a security interest may be perfected by registration under the applicable PPSA, as a practical matter, lenders do commonly require a control agreement be entered into between the lender, the borrower (or account holder), and the financial institution holding the account. 

Types of PPSA security 

Depending on the nature of the loan, a lender may seek one or more types of security. The security taken may create a general interest over all the present and after-acquired assets of the debtor, or the interest may be asset-specific. In the case of real estate collateral, the security will be registered on title as a dollar amount. Some of the most common security agreements include: 

General security agreement (GSA): The most common form of security used in lending in Canada. Through a GSA, a borrower will grant to a lender a blanket security interest in all of its present and future personal property and proceeds. GSAs can, however, be modified to exclude certain property or to charge only specific assets. For most commercial lending transactions, the GSA is the primary security document, it is broad, well-understood by Canadian courts, and enforceable across all PPSA jurisdictions. 

Specific security agreements: Lenders sometimes take a security interest in specific assets (even though this interest may already be included in a GSA). These specific security agreements are generally used for smaller loans and will usually target assets which are particularly valuable such as machinery, equipment, motor vehicles, patents, trademarks, or copyrights. This also allows a lender to tailor the representations, warranties, and covenants to the specific assets. 

General assignment of accounts receivables and book debts: Some lenders require that a general assignment of accounts receivables (also known as a general assignment of book debts) be granted to give the lender a security interest in the borrower’s accounts receivable (again even though this interest may be already included in a GSA). The terms of the assignment will vary according to the particular circumstances, and the lender will determine whether it wants a general assignment (of all present and future debts) or a specific assignment of particular debts. It is usual for the assignment to provide that, in the event of default, the lender has authority to collect any debts owing to the borrower included in the assignment. 

Assignment of insurance: Assignments of key person life insurance and property insurance are common forms of additional security. Notice of any insurance assignment should be provided to the insurer and acknowledgement obtained. Lenders should confirm that any assigned insurance policy remains in force and that the borrower’s compliance with policy conditions is monitored throughout the life of the loan, a lapsed policy that was assigned as security leaves the lender unprotected. 

Securities pledge agreement: While a GSA generally would include a security interest in securities, lenders will sometimes require specific, more comprehensive securities pledge agreements for the purpose of charging securities owned by a debtor. While these agreements allow lenders certain rights in respect to those securities, in most cases the lender will not have voting rights or rights to any dividends until after an event of default has occurred. In Canada, each PPSA provides for the ability to “perfect” a security interest in securities by possession of physical share certificates, registering under the PPSA, or both. Therefore, in addition to the execution of the securities pledge agreement, where the underlying securities are certificated, it is common for a lender to take possession of share certificates (together with a stock transfer power of attorney). Although less common, some lenders will also require that pledged securities be transferred into the name of the lender or its nominee to avoid problems arising from a private company’s constating documents which often restrict the transfer of shares. 

The provinces of Ontario, Alberta, British Columbia, Saskatchewan, Newfoundland and Labrador, Quebec, New Brunswick, Nova Scotia, Manitoba, the Northwest Territories, the Yukon Territory and Nunavut have passed Securities Transfer Acts (STAs).  

The province of Prince Edward Island is the only province or territory without an STA. This new legislation is modelled after Article 8 of the U.S. Uniform Commercial Code. The STAs are designed to work hand in hand with the PPSAs and change substantially the way securities are held and pledged. The key provisions of the STAs are that they, firstly, introduce a concept of “security entitlement.” A security entitlement provides the “entitlement holder,” that is, the holder of the security, certain rights and property interests. These rights and property interests are enforceable against the “securities intermediary,” for example, a stock brokerage firm. Another key area of the STAs is the requirement for the secured party to maintain “control” as another method of achieving “perfection” of the pledge of the security interest. Whether a security interest is perfected by control or registration is important given its effect on priority in the event of competing interests. 

Non-PPSA jurisdiction: Quebec 

The Province of Quebec is Canada’s only civil law jurisdiction and utilizes a Civil Code to codify the province’s general principles of law. Like the PPSAs in many respects, the Code sets out a system of registration and enforcement with respect to security interests. While the Civil Code works in a similar fashion as the PPSAs it sets out two types of security interests that can be created:  

A movable hypothec is similar to a security interest over personal property. It may be granted with or without delivery. A hypothec without delivery allows the grantor to retain use of the property, it must be in writing, describe the hypothecated property with sufficient detail, and be published by registration in the RDPRM. A hypothec with delivery (also known as a pledge) is perfected by the creditor holding the pledged property or title. 

An immovable hypothec: Quebec’s equivalent of a mortgage, must be created by notarial deed executed before a Quebec notary and registered in the land register. There is no equivalent to an informal real property charge in Quebec, the notarial deed requirement is mandatory and cannot be substituted by a document executed in another form. 

Cash collateral in Quebec: Since January 2016, Quebec allows the grant of a hypothec with delivery on a monetary claim (cash collateral). A creditor obtaining control of a bank deposit or security deposit by entering into a control agreement with the depositary institution obtains a security interest that ranks ahead of any prior movable hypothec on the same collateral, regardless of when the prior hypothec was registered. This priority-by-control rule is significant for lenders taking security over cash accounts of Quebec borrowers: control agreements are not merely a best practice; they are a priority tool. 

A hypothec in Quebec is an accessory right and cannot survive longer than the principal obligation. A hypothec can be legal or conventional and must respect the formalities of the law. A conventional hypothec is created with the consent of the debtor, unlike the legal hypothec, which can be created without the debtor’s consent. 

Subject to certain exceptions set forth below, only a person, a partnership or a trustee carrying on an enterprise may grant a hypothec on a universality of property (movable or immovable, present or future, corporeal or incorporeal). Carrying on an enterprise means the carrying on by one or more persons of an organized economic activity, whether or not it is commercial in nature, consisting of producing, administering or alienating property, or providing a service, constitutes the carrying on of an enterprise³. Any joint stock legal person who does and any legal person without capital stock which do not carry on an enterprise may, avail itself of notwithstanding the provisions of the Civil Code of Québec, and grant a hypothec on a universality of property, movable or immovable, present or future, corporeal or incorporeal. 

A hypothec “without delivery” allows the debtor to keep possession of the (hypothecated (i.e., charged) property. This hypothec must be in writing and must describe the hypothecated property with sufficiency. By way of exception, a natural person not carrying on an enterprise can only grant a hypothec without delivery on certain properties namely road vehicles, motorcycles, boats, aircrafts, and incorporeal property (i.e., intangibles) such as securities, claims, and intellectual property rights. The other type of movable hypothec is the hypothec with delivery and is published by physical dispossession of the creditor’s holding the pledge pledged property in favour of the creditor or title. The hypothec with delivery is also known as a pledge. 

Since January 2016, Quebec implemented new rules allowing for the grant of a hypothec with delivery on a monetary claim (i.e. cash collateral). This new regime creates security on monetary claims. A creditor wanting to obtain control of a bank deposit or security deposit, where the deposit is owing by a third party, must enter into a control agreement with the latter. 

Before January 2016, a creditor had to obtain a movable hypothec without delivery charging claims as collateral. The rank of this movable hypothec without delivery was thus determined by the date and time of its publication (i.e., registration) in the Register of Personal and Movable Real Rights, and accordingly subject to all other movable hypothecs without delivery already granted by the debtor on the same claims. 

Under the new rules, a security charging a monetary claim (i.e. cash collateral) obtained by control ranks ahead of any other movable hypothec encumbering that same claim, from the time control is obtained. Therefore, even if a prior-ranking hypothec was granted by the same debtor on the same collateral, the security obtained on cash collateral by control would be opposable to both secured creditors and third parties. 

Such control is obtained in a bilateral relationship, between a debtor and its creditor, if the debtor consents to the monetary claim securing his or her obligations towards the creditor. However, if the monetary claim is due by a third party to the debtor, the control is obtained pursuant to a control agreement entered into by such third party in favour of the creditor. 

Secured creditors must bear in mind that the above-described security is a movable hypothec with delivery which implies delivery of the monetary claim to the creditor. Claims being incorporeal property, the delivery is conceptual since there is no physical delivery or possession. Considering that the hypothec is perfected by possession and not publication at the applicable registry, the hypothec created thereof represents an undisclosed security that remains unknown to other creditors, even though it can be set up against them. 

The immovable hypothec (the Quebec version of a mortgage) is created pursuant to a notarial deed en minute executed before a Quebec notary. The hypothecs on present and future rents produced by an immovable as well as hypothecs on indemnities paid under the insurance contracts covering the rents are considered immovable hypothecs. 

As under the PPSAs, the Civil Code requires the publication (i.e., perfection) of a security interest. Ranking of a hypothec is determined by the time and date of its publication by registration or delivery. Although the Civil Code’s terminology and procedures are quite unique in Canada, the taking and enforcing of security in Quebec is substantially the same as in the other provinces. A hypothec confers on the secured party the right to take possession of the property, to take it in payment, to sell it or to cause it to be sold and thus to have a preference upon the proceeds of the sale. 

Federal jurisdiction: Other federal legislation 

While not commonly done, other federal legislation in Canada exists which provide for the ability to file or register an interest in applicable property. Such legislation includes: the Patent Act, the Trademark Act, the Industrial Design Act, the Integrated Circuit Topography Act, the Copyright Act, the Plant Breeders Rights Act, the Canada Shipping Act, (in respect of any vessel which is registered or recorded under that Act), and the Canada Transportation Act (in respect of any rolling stock to which the provisions of that Act may apply). 

In addition to the foregoing, Part VII of the Financial Administration Act⁴ provides for certain notice and acknowledgement requirements relating to the assignment of Federal Crown (government) debts. An assignment of Federal Crown debts which does not comply with that Act is ineffective as between the assignor and the assignee as against the Crown. Consequently, the secured party would not have a valid security interest in Federal Crown debts unless that Act is complied with. 

Real property security 

Lenders in Canada commonly take security over real property by way of charge or mortgage of land registered on title to a specific parcel of property granting the lender (the mortgagee) a charge or encumbrance on the property. The lender must perform a land registry/title search to ascertain the mortgagor’s title and any registered charges or encumbrances. In addition, lenders will often require a separate assignment of leases and rents. As the rights under the lease and the right to receive rents are considered personal property in some jurisdictions, the security interest granted under an assignment of leases and rents is also commonly registered under PPSA legislation in addition to registration on title to the applicable property.  

In Quebec, a security interest in real property is taken by way of a hypothec over “immovable” property as described above.  

Finally, some jurisdictions have legislation with restrictions against carrying on business as a “mortgage broker,” which may include, among others, any person that carries on business which involves lending of money secured, in whole or in part, by a mortgage or security over real property. 

Priority rules 

Personal property – PPSA jurisdiction 

Under the PPSAs and the Civil Code, the order of registration generally determines priority. Thus, the first creditor who correctly registers their interest will maintain first priority. There are, however, significant exceptions where statutory claims take priority (or “prime”) over secured creditors. Most priming liens arise from a debtor’s obligation to collect and remit monies owed to the government. These include unremitted payroll deductions and premiums and unremitted federal and provincial sales taxes. Note that the priority of certain statutory claims is affected by a debtor’s bankruptcy.  

A “purchase-money security interest” (PMSI), whereby a creditor who correctly satisfies the PPSA registration requirements can achieve priority ahead of a prior security interest where it has provided the financing for a debtor to acquire new assets on credit or where a debtor obtains new assets on a lease and the vendor takes a security interest in the assets to secure the payment of the price. If the secured party/vendor/lessor providing the financing complies with the PMSI rules in the applicable PPSA, it will obtain priority over every other PPSA secured party who may have an interest in such assets irrespective of the timing of registration by such other secured parties. 

Quebec 

In Quebec, prior claims rank ahead of movable or immovable hypothecs regardless of their time and date of publication and may be set up against other creditors notwithstanding any agreement to the contrary. Priority agreements, such as intercreditor agreements and cessions of rank, must be published in Quebec to be effective against third parties. 

Enforcement of security 

Before enforcing security, a lender is required at common law to make demand on the debtor and give the debtor a “reasonable” amount of time to pay. A party (be it the secured creditor or a receiver appointed by the secured creditor) selling or otherwise disposing of assets secured by security secured creditor must act in good faith and in a commercially reasonable manner when doing so and must give advance notice of its intention to realize on the security. The “reasonable time” to pay following demand is fact-specific and depends on the borrower’s circumstances, the nature of the assets, and the market conditions at the time of demand. In practice, Canadian courts have found that a reasonable time can range from a matter of hours to several days for liquid assets, and longer for complex businesses. Lenders should take legal advice before making demand, the timing and form of demand can affect the enforceability of subsequent enforcement steps. 

Legal opinions 

When a transaction is nearing its completion, lenders will often require legal opinions (generally from borrower’s counsel) to ensure that all documentation is in order and in compliance with applicable laws. Legal opinions are based more on law than fact and will require a thorough review of the corporate records of the corporations and documentation being opined on to ensure that it is in accordance with the law. To the extent the contracts being opined on are governed by the laws of a Canadian jurisdiction, opinions should confirm that the contracts being opined on are valid and legally binding obligations of the applicable parties. If the governing law is the laws of a jurisdiction outside of Canadian law (i.e., foreign law), it is common in Canada to require foreign law opinions covering unfamiliar matters such as, inter alia, recognition of foreign laws and recognition and enforcement of foreign judgments. Although opinion letters are not used in every form of financing, they have become commonplace and allow both sides the opportunity to ensure the accuracy of all documents and agreements. 

For transactions involving Quebec entities or Quebec-sited assets, a Quebec law opinion from Quebec-qualified counsel is required. The civil law regime is sufficiently distinct that an opinion from common law counsel does not provide adequate comfort on Quebec-specific issues. 

How Miller Thomson can help 

Debt financing in Canada, whether a foreign lender lending to a Canadian borrower, a foreign parent capitalizing a Canadian subsidiary with intercompany debt, or a foreign borrower taking security over Canadian assets, involves a matrix of federal and provincial rules that do not operate uniformly across the country and that have changed materially in the past two years. The criminal rate amendments, the Hybrid Mismatch Rule expansions, and the EIFEL rules have all altered the landscape for cross-border lending since 2023. 

Miller Thomson’s banking and financial services team advises foreign lenders and borrowers on Canadian financing transactions across all provinces, from PPSA security structuring and registration through Quebec hypothec documentation, Bank Act security, intercreditor arrangements, guarantee enforceability, and legal opinions. Our national presence includes Quebec practitioners who advise on the civil law security regime and can coordinate with common law counsel on national financing transactions involving assets in multiple provinces. 

Speak with a Miller Thomson Financial Services lawyer about your Canadian debt transaction  

1. R.S.C. 1985, c. I-15, s. 4.  ↩︎
2. 2015673 Ontario Inc. v. Chorny (2008), 90 O.R. (3d) 207; Business Development Bank of Canada v. Papke, [2003] B.C.J. No. 2689; Business Development Bank of Canada v. Papke, [2005] B.C.J. No. 1091. ↩︎
3. R.S.C. 1985, c. F-11. ↩︎
4. R.S.C. 1985, c. F-11.  ↩︎