The 2001 Cape Town Convention on international interests in mobile equipment (the Cape Town Convention) and its Protocol on matters specific to aircraft equipment (the Protocol) came into force in Canada on 1 April 2013, and are currently in effect in all Canadian provinces. The Cape Town Convention created the International Registry of aircraft objects, which permits parties to register interests in aircraft objects including airframes, helicopters and engines. As property rights are a matter of provincial jurisdiction in Canada, statutes have been enacted in each province to give practical effect to the Cape Town Convention.
The 1958 New York Convention on the recognition and enforcement of foreign arbitral awards was ratified by Canada on 12 May 1986. Consequently, parties can apply to any superior court in Canada to ask for the recognition and enforcement of a foreign arbitral award.
Canada ratified the 1944 Chicago Convention on international civil aviation (the Chicago Convention) on 13 February 1946. The Chicago Convention established the International Civil Aviation Organization and instituted rules regarding airspace, aircraft registration and safety. The Chicago Convention also laid the framework for international scheduled and non-scheduled traffic rights between member states.
The 1929 Warsaw Convention on the unification of certain rules relating to international carriage by air was ratified by Canada on 8 September 1947. This convention regulates liability for the international carriage of passengers and cargo.
Finally, Canada ratified the 1999 Montreal Convention on the unification of certain rules for international carriage by air on 19 November 2002. This convention amended important provisions of the 1929 Warsaw Convention and is more passenger friendly. It introduced a two-tier liability system in which air carriers are strictly liable or have the burden of proving that they were not negligent.
What is the principal domestic legislation applicable to aviation finance and leasing?
Due to Canada’s constitutional structure, the power to legislate on aviation finance and leasing matters is divided between the federal and provincial legislatures.
Federal law
Sections 91(10) and (13) of the British North America Act 1867 (the Constitution Act) as well as the provision for peace, order and good government provides Canada’s federal parliament with the right to legislate on issues such as interprovincial and international transport and health and safety. As a result, the federal government has enacted multiple laws, regulations and orders. The most important include:
The following issues are governed by federal law in Canada:
Bankruptcy and insolvency also fall under federal jurisdiction (section 91, paragraph 21 of the Constitution Act). As such, the Bankruptcy and Insolvency Act 1985 and the Companies' Creditors Arrangement Act 1985 may also apply to aviation finance and leasing.
Provincial jurisdiction
For aircraft financing, the principles applicable to secured transactions fall under provincial jurisdiction. With respect to property law, Quebec’s laws are derived from its French heritage and the civil law system, whereas other provinces’ and territories’ laws are based on the English common law system.
As Canada has not ratified the 1948 Geneva Convention on the international recognition of rights in aircraft, to perfect a security interest or ensure the validity, priority or enforceability of a lease over an aircraft, the registration (or publication in Quebec) involves:
Quebec
In Quebec, loan financing is typically secured by a security interest called a hypothec and governed by the CCQ. Leases, leasing and instalment sales are title-based instruments, which are also governed by the CCQ. This regime differs from the common law regime because the title aspect is of high importance.
Common law provinces
Concerning the legislative framework for secured transactions, each province has enacted its own PPSA that provides similar rules. In the various PPSAs, a ‘security interest’ is defined as any interest in personal property that secures the payment of performance of an obligation without considering the title aspect of such personal property.
Moreover, some contractual devices are deemed to be security interests under the PPSAs, including:
Are there any restrictions on choice-of-law clauses in contracts to the transfer of interests in or creation of security over aircraft? If parties are not free to specify the applicable law, is the law of the place where the aircraft is located or where it is registered the relevant applicable law?
Pursuant to article VIII (2) of the Protocol, there are no restrictions regarding choice-of-law clauses. Because Canada ratified the Protocol, the parties to an aircraft purchase agreement or aircraft leasing agreement may agree on the law that is to govern their contractual rights and obligations. There are certain preferred choice-of-law clauses due to their balanced approach to commercial matters and general sophistication in dealing with complex commercial disputes.
However, article 3097 of the CCQ applies for a lease, leasing or instalment sale in Quebec. Thus, if an aircraft’s main hangar is located in Quebec, the right should be governed by Quebec law and registered in Quebec. In addition, the creation of a hypothec (the Quebec equivalent to a security interest) must be governed by Quebec law under article 3105 of the CCQ if the domicile (ie, a corporation’s head office) of the grantor is in Quebec. Registration should also be made in Quebec.
Under the PPSAs, the security interest or purchase money security interest must be registered at the place where the registered office, chief executive office or place of business of the grantor is located.
Moreover, both article 5(3) of the Cape Town Convention and article VIII (3) of the Protocol provide that the domestic rules of law are applicable with regards to the perfection of security interests, not the conflict of laws rules of that jurisdiction. Hence, this excludes the possibility of transferring to the laws of another jurisdiction.
Title transfer
Transfer of aircraft
How is title in an aircraft transferred?
There is no specific rule regarding the transfer of title in an aircraft in Canada. However, upon the transfer of ownership of a Canadian registered aircraft, the existing owner must notify Transport Canada within seven days. If the new owner is eligible for Canadian registration of the aircraft (ie, they meet the residency or citizenship requirements), the aircraft is then held subject to an interim certificate of registration, which is valid for 90 days. The new owner is obligated to, within seven days, file an application for registration of the aircraft with Transport Canada.
In more complex sale-leaseback transactions, there are still filing requirements. However, by adhering to these requirements, the validity of the certificate of registration of the aircraft is maintained in its entirety. The transfer typically occurs after the delivery of a document evidencing the transfer of ownership from the existing owner to the buyer (bill of sale).
While registration of a contract of sale is not legally required under the 2001 Cape Town Convention on international interests in mobile equipment, it is always advisable to register on the International Registry despite the added costs involved. The registration of a contract of sale perfects the interests of the buyer against any other validly granted but unregistered interest. The only company in Canada that currently provides the services to access the International Registry in Canada is EscroAir.
There is no separate registry for aircraft engines.
Transfer document requirements
What are the formalities for creating an enforceable transfer document for an aircraft?
There are no specific requirements for the contents of a bill of sale. However, the document must identify the asset, indicate that some consideration was paid for it (even if nominal), and assert the sale, conveyance or transfer (or a combination thereof) of the seller’s interest to the buyer. Such documents may also include a warranty from the seller on the validity of the title transfer that has been professed by the seller.
Registration of aircraft ownership and lease interests
Identify and describe the aircraft registry.
The Aeronautics Act 1985 established the Canadian Civil Aircraft Register. The person that holds custody and control (eg, the operator) of an aircraft (rather than the owner) must:
The Civil Aircraft Register is operated by Transport Canada. Aircraft owned by Canadians – or based and primarily operated in Canada – must be registered under the Civil Aircraft Register. This requirement stems from obligations set out in the 1944 Chicago Convention on international civil aviation (the Chicago Convention). Alternatively, aircraft may be registered at foreign states that have an agreement to allow licensed aircraft to operate in Canada.
To be a registered owner of a Canadian registered aircraft, the applicant must be Canadian. A non-Canadian entity can be a registered owner of a private Canadian aircraft if they are incorporated under the laws of Canada or a Canadian province.
The Civil Aircraft Register can be classified as an operator-based registry. The person or entity with legal custody and control of the aircraft must register it with Transport Canada. Section 202.35(3) of the Canadian Aviation Regulations 1996 provides that an owner has legal custody and control when they have ‘complete responsibility for the operation and maintenance of the aircraft’. Because it is operator-based, the registered owner on the Civil Aircraft Register does not necessarily hold legal title to the aircraft. As such, a foreign national may be the title holder of an aircraft, but if a Canadian third party manages and operates the aircraft, it must be registered with Transport Canada.
Once registered in Canada, the Civil Aircraft Register database makes public all current and historical aircraft registration information. This includes the aircraft’s registration mark, common name, model name, serial number, registered owner and date of registration. However, this registry provides no information on the legal owner of the aircraft or the existence of any liens. In Canada, the registration of security interests takes place under applicable provincial legislation. It is therefore essential to consult both the International Registry of mobile assets, as well as the applicable security registers in the applicable provinces to determine the status of title to the aircraft in question.
In contrast to Canada’s rules, under the US system, perfection of security interests in aircraft typically requires that such interests be recorded with the Federal Aviation Administration’s Aircraft Registry. Furthermore, other holders of liens that arise under US state law that apply to an aircraft registered with the Federal Aviation Administration may record notices of the existence of such liens with the Federal Aviation Administration’s Aircraft Registry. These recorded documents are searchable public records.
Registrability of ownership of aircraft and lease interests
Can an ownership or lease interest in, or lease agreement over, aircraft be registered with the aircraft registry? Are there limitations on who can be recorded as owner? Can an ownership interest be registered with any other registry? Can owners’, operators’ and lessees’ interests in aircraft engines be registered?
There are no provisions for the registration of aircraft title or security interests in the Civil Aircraft Register. There is also no separate register for aircraft titles or mortgages.
Security interests and title retentions are registered with provincial registries or with the International Registry.
Registration of ownership interests
Summarise the process to register an ownership interest.
There is no need to register an ownership interest. However, the bill of sale must be filed with Transport Canada either to maintain Canadian registration of the aircraft or to expedite a request for the deregistration and export of the aircraft. No other formalities are applicable.
Title and third parties
What is the effect of registration of an ownership interest as to proof of title and third parties?
Aircraft registration is mandatory and allows the legal operation of an aircraft in Canada and internationally, subject to compliance with international conventions. While aircraft registration is also proof that the registered party has legal custody and control of such aircraft, it does not constitute proof of title.
Following Canada’s ratification of the 2001 Cape Town Convention on international interests in mobile equipment (the Cape Town Convention) on 21 December 2012, international interests registered at the International Registry are effective against third parties and take priority over any interests registered in the future, whether nationally or internationally.
In common law provinces, security interests in aircraft must be registered to be enforceable against third parties. The security interest must first be attached, and the debtor must sign a written agreement that contains a sufficient description of the secured object. Subsequently, a financing statement must be filed with the appropriate register. This is true for aircraft mortgages, aircraft loan agreements and aircraft leases (exceeding the defined term set forth in the applicable province).
In Quebec, the security interest is perfected (or published) once it has been properly registered at the Register of Personal and Movable Real Rights. Again, a sufficient description of the underlying object and the specific sum secured must be indicated. After the publication of a movable hypothec, third parties are presumed to be aware of the creditor’s rights. With regard to aircraft leases, registration is just like any other security interest and must be done in the relevant personal property registry.
The 15-days rule – which requires that assets be perfected by, at most, 15 days after the debtor gains possession – must be followed in any province following the creation of a purchase money security interest to have priority over any other security interest in the same type of collateral (in common law provinces) or to have the effects of the ownership interests being effective against third parties and retroactive to the date of registration (in Quebec).
Registration of lease interests
Summarise the process to register a lease interest.
Leases of aircraft must be filed with Transport Canada to demonstrate the Canadian owner’s legal custody and control of the aircraft. It is also advisable to register aircraft leases under the applicable provincial system.
A ‘lease’ is defined in section 203.01 of the Canadian Aviation Regulations 1996 as an:
agreement in respect of the operation of an aircraft that specifies a commencement and termination date and, during the term of which, the lessee has legal custody and control and the right to exclusive possession and use of the aircraft.
Standard 222.16 established by Transport Canada sets forth the requirements that leases for aircraft must comply with to form the basis of registration in Canada. Leases do not need to be notarised.
Leases that are subject to the Cape Town Convention should be registered at the International Registry to maintain priority against any secured creditors.
In Quebec, leases and leasing agreements can both be registered at the Register of Personal and Movable Real Rights, but there is a distinction between the two types of leases on the form. However, there is a special time requirement that applies to these types of lease agreements over certain categories of assets, such as aircraft. If registration occurs within 15 days of their creation, the effects are retroactive to the date of creation.
Certificate of registration
What is the regime for certification of registered aviation interests in your jurisdiction?
One must obtain the following a certificate of registration and a certificate of airworthiness.
The owner of an aircraft – as described in section 101.01(1) of the Canadian Aviation Regulations 1996 – must contact Transport Canada to obtain a certificate of registration that notes the aircraft type, the serial number, the registration marks and the owner. The certificate of registration does not convey any title to the owner.
A certificate of airworthiness is required to fly an aircraft. Applications must be submitted to Transport Canada. The owner must provide the basic information in relation to the aircraft and its engine, including the manufacturer, model and serial number. On receipt of an application, Transport Canada has five days to grant a certificate. Once the aircraft obtains a certificate of airworthiness, it is deemed to satisfy the obligations set out in the Chicago Convention.
Deregistration and export
Is an owner or mortgagee required to consent to any deregistration or export of the aircraft? Must the aviation authority give notice? Can the operator block any proposed deregistration or export by an owner or mortgagee?
A lessor (mortgagee) is entitled to deregister an aircraft without the consent of the lessee (borrower) only with the proper documentation in hand. When the lease or mortgage provides for the termination and repossession of the aircraft in the event of a default, Transport Canada will accept notice of such termination and repossession with evidence and particulars of default, notwithstanding any objections by the lessee (borrower) and deregister the aircraft. Otherwise, the lessor (mortgagee) must provide Transport Canada with evidence of proper repossession, a court order or the lessee’s (borrower’s) consent.
An authorised party who has an irrevocable deregistration and export request authorisation (IDERA) signed by the operator and filed with Transport Canada is entitled to apply for deregistration of the aircraft from the Civil Aircraft Register. The IDERA cannot be revoked without the consent of the authorised party. Consent of the operator is not required before the authorised party exercises its rights thereunder.
Powers of attorney
What are the principal characteristics of deregistration and export powers of attorney?
Following the adoption of the Cape Town Convention, the IDERA is an important document used to deregister an aircraft in Canada.
When the beneficiary of an IDERA seeks deregistration for the purposes of exportation, all that is required is the filing of the IDERA with Transport Canada. There are no other formalities. On reception of the filed IDERA, Transport Canada will acknowledge and confirm its receipt. Afterwards, the beneficiary may proceed by requesting the deregistration of the aircraft.
In the case of aircraft that do not qualify for the Cape Town Convention, the allowances for an IDERA similarly do not apply. In those cases, having a broad power of attorney and executed but undated lease termination agreements is the safest approach to ensuring a seamless aircraft repossession and power of sale for any lessor.
When an IDERA was not registered with Transport Canada, it is possible for a registered owner (as defined in the Canadian Aviation Regulations 1996) to request a deregistration with the Civil Aircraft Register pursuant to the terms of a lease agreement or a power of attorney granted by the lessee to the lessor. The Canadian aircraft authorities will not notify any party except the registered owner (as they do not consider the interests of beneficial owners or secured creditors) provided, however, that special requests for such notifications may be filed.
Cape Town Convention and IDERA
If the Cape Town Convention is in effect in the jurisdiction, describe any notable features of the irrevocable deregistration and export request authorisation (IDERA) process.
For aircraft, there are two different circumstances:
In the first situation, the IDERA must have been filed and acknowledged by Transport Canada. On reception of the filed IDERA, Transport Canada will acknowledge and confirm its receipt. When the authorised party in an IDERA seeks deregistration for the purposes of export, all that is required is the filing of a formal request with Transport Canada. There are no other formalities. In the event the registered owner wants to deregister the aircraft or even change the registration marks, the consent of the authorised party to such an action is first required.
In the second situation, it is possible for a registered owner (as defined in the Canadian Aviation Regulations 1996) to request a deregistration at the Civil Aircraft Register. Additionally, a creditor with a power of attorney may seek deregistration of an aircraft. The Canadian aircraft registry authorities will not notify any party except the registered owner, as they do not consider the interests of beneficial owners or secured creditors.
Security
Security document (mortgage) form and content
What is the typical form of a security document over the aircraft and what must it contain?
In common law provinces, owners can grant a security interest pursuant to the Personal Property Security Acts (PPSAs). For a security interest to be valid, the following conditions must be met:
In Quebec, owners can grant a movable hypothec under the Civil Code of Quebec. For a movable hypothec to be valid, the following conditions must be met:
Regardless of the jurisdiction, the two security instruments must be perfected through registration in the appropriate provincial registry. While most security documents are in English, in Quebec, they can be in French.
Security documentary requirements and costs
What are the documentary formalities for creation of an enforceable security over an aircraft? What are the documentary costs?
No documentary formalities are necessary in common law provinces or in Quebec. The basics of the asset that is subject to the security, the extent of the security and the details of the parties involved are required.
Security registration requirements
Must the security document be filed with the aviation authority or any other registry as a condition to its effective creation or perfection against the debtor and third parties? Summarise the process to register a mortgagee interest.
In common law Canadian provinces, when the debtor is a corporation incorporated under provincial law, the location is the jurisdiction of its incorporation. When the debtor is a corporation that has been incorporated under federal law, the location is the jurisdiction in which its registered office or head office is situated.
In Quebec, the proper jurisdiction to register a security interest for a movable property that is used in more than one jurisdiction (ie, an aircraft) is the one in which the owner is domiciled. The ‘location’ of the owner is defined as follows in the different PPSAs, except for the Ontario PPSA:
Registration should be done in the province of the location or domicile of the debtor or owner. In common law provinces, all security interests under a PPSA should be registered through a financing statement that is to be filed electronically. Security interests in Quebec, however, must be published by filing an application for registration with the Register of Personal and Movable Real Rights.
PMSIs and security interests (in common law provinces), and hypothecs, leases and leasing documents (in Quebec) over aircraft parts, while subject to the same national registration requirements, must be individually identified.
It is best practice to register security interests over objects governed by the 2001 Cape Town Convention on international interests in mobile equipment (the Cape Town Convention), both at the provincial property registry level and with the International Registry. This ensures that objects that do not fall under the definition of ‘aircraft objects’ under the Cape Town Convention are nevertheless covered.
Registration of security
How is registration of a security interest certified?
A verification statement issued by the registrar of the applicable register would be issued by the appropriate provincial registry in common law provinces. Certified statements of the registration issued by the registrar can be obtained in Quebec as well.
Effect of registration of a security interest
What is the effect of registration as to third parties?
The first-to-register rule is utilised to rank security interests. This applies to a hypothec in Quebec as well as to a regular security interest in common law provinces. In the latter, a PMSI has priority (except for super-priorities and other unregistered liens – such as airport fees, and repairers and storage lien claims) over the aircraft and proceeds thereof where the proper registration procedure was followed. There is no ranking in Quebec for leases, leasing or instalment (conditional sales). Provided that the registration is made within 15 days of the contract, the conditional seller or lessor has title to the property, which is effective against third parties.
Security structure and alteration
How is security over aircraft and leases typically structured? What are the consequences of changes to the security or its beneficiaries?
The key principles in respect of trusts apply both in common law provinces and in Quebec. Provided that a trustee holds the security for a group of beneficiaries and there is a change in that group, there is no impact on the grant of the security.
Airframes and engines are subject to different security instruments under Canadian law, including the following.
In cases where the same security interests are created under a security agreement (as defined in article 1 of the Cape Town Convention), registration should be done in the International Registry. Title retentions are deemed to create security interests covered by the Cape Town Convention.
Security over spare engines
What form does security over spare engines typically take and how does it operate?
The principle of accession applies to spare parts and components of aircraft under Quebec and Canadian common law. Hence, any security interest over an aircraft extends to all spare components that are sufficiently attached thereto, thus losing their individuality.
Engines constitute a spare part and are subject to security interests. Therefore, it is important to consider the application of priority rules. Under certain PPSAs, a security interest that attaches to goods – which then become accessions to an aircraft – confers priority to security interests in the accessions over other security interests with respect to the aircraft as a whole.
It is important to note that, because engines are not separately registered with Transport Canada, an irrevocable deregistration and export request authorisation is likely to have limited usefulness in the case of engines.
It is prudent to specifically describe each spare part or engine in the hypothec, security interest, PMSI or title retention agreement to ensure that such parts are captured.
Enforcement measures
Repossession following lease termination
Outline the basic repossession procedures following lease termination. How may the lessee lawfully impede the owner’s rights to exercise default remedies?
Under an aircraft lease agreement, creditors’ rights are enforceable either before or after the lease termination.
Jurisdiction
Creditors can initiate proceedings seeking repossession of an aircraft if the debtor defaults under a security agreement creating a security interest (or a hypothec in Quebec). Depending on the jurisdiction, they can enforce self-help remedies.
Common law provinces do not allow self-help remedies. Similarly, Quebec does not allow self-help remedies and a court must authorise any enforcement measure. With the adoption of the 2001 Cape Town Convention on international interests in mobile equipment (the Cape Town Convention), self-help remedies are now permitted in the event of a default made under an aircraft leasing agreement. However, they must be judicially authorised. Furthermore, under Quebec law, a default under a hypothec agreement does not necessarily allow the enforcement of the creditor’s rights. The debt must be certain, liquid and due.
Enforcement of rights
In addition to jurisdiction, enforcement depends on the creditor’s right being enforced. Especially in Quebec, the following rights exist:
Instalment sales are more complex. Article 2 of the Bankruptcy and Insolvency Act 1985 makes the reservation of ownership akin to a security interest, forcing the instalment seller to be involved in the bankruptcy process. Under article 1749 of the Civil Code of Quebec, an instalment seller is forced to use a recovery process similar to those available to a hypothecary creditor.
With regard to hypothecs, creditors can either:
In common law provinces, provincial statutes may restrict the right to take possession of an aircraft if the lease is a conditional sale contract that contains a right to purchase or create a security interest. Moreover, the civil enforcement agency is the only one that can seize the aircraft in the event of default. In lessee-initiated bankruptcy proceedings, lessors must respect a 60-day stay period pursuant to Alternative A of the Cape Town Convention. During this period, the lessee must preserve and maintain the aircraft in accordance with the lease. The lessee must return the aircraft to the lessor unless:
If the security interest is an international interest, federal law substantive rules governing enforcement on default are supplementary to the Cape Town Convention.
Secured creditors must:
Outline the basic measures to enforce a security interest. How may the owner lawfully impede the mortgagee’s right to enforce?
International security interests
Enforcement will fall under the Cape Town Convention when other forms of security interest are also international interests. Under the Cape Town Convention, the enforcement measures are similar to those available under federal law, with the exemption that the judicial authority and remedies of sale by the creditor do not exist. Accordingly, a creditor has the following remedies available:
The court’s intervention is optional. However, remedies must be exercised in a commercially reasonable manner, which prevents the courts from interfering with the parties’ security agreement on the mode of exercising enforcement remedies. This is why some security agreements acknowledge the rights of a creditor in advance of a default to be commercially reasonable.
The regime contemplated by Alternative A under article XI of the Cape Town Convention’s Protocol on matters specific to aircraft equipment has been adopted by Canada and was integrated into the Bankruptcy and Insolvency Act 1985. It allows for strict and efficient repossession measures to be taken. Hence, were a debtor to default on its obligations and fail to remedy them within 60 days, it would have to surrender possession of the aircraft in favour of the creditor.
Non-international security interests
Secured creditors can usually apply to the court to have the aircraft relinquished. In common law provinces, a creditor can exercise self-help remedies when the security agreement provides for them, or if the aircraft is repossessed without excessive force.
In Quebec, creditors must file a notice of exercise of hypothecary recourses with the Register of Personal and Movable Real Rights 20 days before repossessing the aircraft. Self-help remedies are prohibited in Quebec, which is not the case in common law provinces. Nevertheless, with the ratification of the Cape Town Convention, this position has been overruled with respect to aircraft objects.
The time frame within which repossession can take place depends on whether other parties with competing claims are opposing the enforcement. When there is no opposition, an order to relinquish the aircraft can be obtained in a few weeks. However, if a trial is required, the process may take up to one or two years.
If there is contestation, some provisional grounding measures may be sought as authorised under federal law, including:
Which liens and rights will have priority over aircraft ownership or an aircraft security interest? If an aircraft can be taken, seized or detained, is any form of compensation available to an owner or mortgagee?
Despite article 39 of the Cape Town Convention, federal law governing non-consensual rights and prior claims continues to apply. As such, non-consensual interests that exist over an aircraft at the date of the declaration, or which are created thereafter with a priority over a registered security interest, will continue to maintain priority over any international interest. The same rule applies to a hypothec under Quebec law, which is similar to non-contractual liens available in common law provinces.
There are several types of liens under Canadian law that may have priority over consensual interests, including the following.
Pursuant to article 2 of the Bankruptcy and Insolvency Act 1985 and article 1749 of the Civil Code of Quebec, in Quebec, liens do not affect the lessor in a lease or leasing and have a limited effect on an instalment seller.
Enforcement of foreign judgments and arbitral awards
How are judgments of foreign courts enforced? Is your jurisdiction party to the 1958 New York Convention?
Because Canada is a party to the 1958 New York Convention on the recognition and enforcement of foreign arbitral awards, Canadian courts typically recognise and enforce judgments rendered by foreign courts in favour of a secured party.
Taxes and payment restrictions
What taxes may apply to aviation-related lease payments, loan repayments and transfers of aircraft? How may tax liability be lawfully minimised?
Under Part IX of the Excise Tax Act, Canada imposes a goods and services tax (GST) at the rate of 5 per cent on all supplies of property and services made in or imported into Canada. Some provinces (Ontario, New Brunswick, Newfoundland and Labrador, and Nova Scotia and Prince Edward Island) have combined their provincial sales tax with the GST to implement the harmonised sales tax (HST). HST has the same operating rules as GST and applies to the same goods and services taxable under GST. The HST rate varies between provinces at the following rates:
In Quebec, most property and services are subject to the Quebec sales tax (QST) in addition to the GST. The QST rate is 9.975 per cent on the selling price excluding GST.
Tax may be recovered in most commercial activities by claiming an input tax credit (ITC). The registered supplier will account for GST (hereinafter references to GST also incorporate the provincial sales taxes) collected on their taxable supplies and GST paid on their inputs by remitting the difference between the tax collected and the tax paid. The excess will be refunded if the supplier paid more tax than it collected on its supplies. Hence, GST is imposed only on the value added during each stage of the manufacture and supply process. Ultimately, it is the consumers that bear the burden of GST on their purchases since they do not register under the Excise Tax Act and are therefore not entitled to recovery through ITC.
Loans
In Canada, financial products – such as loans or other forms of credits – are exempt from GST, HST and QST.
Leases
Different rules apply depending on whether the aircraft is leased in or outside of Canada. A supply made in Canada is taxable at the standard GST or HST rate. A supply made outside Canada is technically outside the scope of GST or HST. Determining the place of supply’s location occurs only once at the beginning of the lease. It is a once-and-for-all determination that is irrespective of the separate-supply rule. Depending on the province, provincial sales taxes have an additional patchwork of applicability to aircraft transactions.
Transfers
Where the transfer of ownership to the aircraft occurs is important. If the transfer of ownership and the delivery happens outside Canada, GST is not applicable. However, if the transfer of ownership and delivery occurs in Canada, GST will be applicable to the transfer unless the non-resident seller does not conduct business in Canada, in which case a special non-resident rule will apply.
The financier or foreign lessor does not have to pay taxes on income in Canada unless they conduct business in Canada for the purposes of the Excise Tax Act or the Income Tax Act.
Finally, non-residents do not have to register if:
Are there any restrictions on international payments and exchange controls in effect in your jurisdiction?
Are there any limitations on the amount of default interest that can be charged on lease or loan payments?
There are a number of Canadian interest rate rules that might create limitations on the amount of default interest that could be charged.
Under section 347(1)(b) of the Criminal Code, interest rates exceeding 60 per cent per year are considered to be criminal rates of interest.
Under the Interest Act 1985, agreements that provide daily, weekly or monthly interest rates must also contain an express statement of a yearly rate of interest (except in real estate mortgages or hypothecs on immovables). Failure to include this statement prevents the lender from charging over 5 per cent interest per year.
Customs, import and export
Are there any costs to bring the aircraft into the jurisdiction or take it out of the jurisdiction? Does the liability attach to the owner or mortgagee?
Imports
Most goods imported into Canada are subject to federal GST, which is calculated at the rate of 5 per cent of the duty-paid value of the shipment. To import an aircraft into Canada, the importer must pay this tax at the time of entry into Canada. If registered for GST purposes, the importer may claim ITC for taxes paid on the imported aircraft. There is a C$110 fee for registering an imported aircraft in Canada.
Exports
Under certain circumstances, goods and services exported from Canada and subject to GST could go untaxed (zero-rated). The fee to export a Canadian-registered aircraft is C$2,500, C$400 or C$200 depending on the type of aircraft. With the exception of exports to the United States, export declarations are required to be filed in respect of aircraft that are sold for export.
Customs duties
In addition to import and export fees, customs duties may be collected by the Canada Border Service Agency. The Department of Finance establishes duties that vary depending on the type of goods and the location of origin. For instance, Canada is a party to the Canada–United States–Mexico Agreement, which could reduce custom duties for imports and exports to the signatory countries.
Insurance and reinsurance
Summarise any captive insurance regime in your jurisdiction as applicable to aviation.
In Canada, the Office of the Superintendent of Financial Institutions (OSFI) regulates insurance both federally and provincially under the Insurance Companies Act 1991.
To operate an aircraft, every owner must subscribe to liability insurance covering public liability and risks of injury to or death of passengers. The Air Transportation Regulations 1996 set minimum coverage amounts, which may be provided by a single policy or a combination of primary and excess policies. Nonetheless, owners must respect the minimum coverage amount. Licensees must file, on an annual basis, a certificate of insurance and accompanying endorsement.
There is no requirement to obtain insurance from domestic insurance companies. However, all Canadian airlines must obtain their insurance from insurers licensed or registered in Canada, or licensed or approved by a foreign government to issue aircraft insurance policies.
Are cut-through clauses under the insurance and reinsurance documentation legally effective?
There is no Canadian jurisprudence on the legal effectiveness of cut-through clauses. However, the OSFI has issued guidelines to ensure that the terms and conditions of insurance and reinsurance contracts are clear. It has stated that one must not use such clauses to frustrate the scheme of priorities under the Winding-Up and Restructuring Act. Nevertheless, the OSFI also recognises that there are situations where the interests of insurers and their policyholders may be better served by the use of such clauses. It does not intend to restrict its use in such situations where they do not give preferential treatment over other claims under the Winding-Up and Restructuring Act.
Are assignments of reinsurance (by domestic or captive insurers) legally effective? Are assignments of reinsurance typically provided on aviation leasing and finance transactions?
Assignments of reinsurance are typically not provided on aviation leasing and finance transactions in Canada.
Can an owner, lessor or financier be liable for the operation of the aircraft or the activities of the operator?
The Air Transportation Regulations 1996 require a licensed air carrier that uses the aircraft and crew of another air carrier (operating carrier) to hold liability insurance through its own insurance policy or be named as an additional insured under the operating carrier’s policy. This must include a written agreement that the operating carrier will indemnify or hold harmless the contracting carrier for passenger and public liability. Furthermore, this applies to any wet lease, block space and code-sharing agreements into which the two parties have entered. The only exception is where the licensee causes damages through wilful misconduct or gross negligence.
Unless negligence is established on the part of a lessor or financier, they cannot be held liable to an injured third party under Canadian law. It is therefore advisable to have such lessors or financiers added as additional insured parties under the applicable insurance policies. The truth is that, while indemnification provisions may redirect the liability back to the insured operator, lessee or air carrier, their coverage may in fact be voided. It is important to note that severability of interests clauses are particularly useful in these instances as the named insured parties may have invalidated their coverage under the policy.
Does the jurisdiction adopt a regime of strict liability for owners, lessors, financiers or others with no operational interest in the aircraft?
No, a fault-based liability regime applies when ordinary activities may cause accidents. Neither the owner, lessor nor financier is strictly liable for an operator’s actions. In fact, the operator must indemnify and hold harmless the owner, lessor or financier from liability under its insurance policy, unless the situation involves wilful misconduct or gross negligence. However, there have been instances where there was such a close nexus between the lessor and the lessee that operated the applicable regulations that such a lessor was found to have been complicit in and therefore liable for the violations.
Third-party liability insurance
Are there minimum requirements for the amount of third-party liability cover that must be in place?
Section 7 of the Air Transportation Regulations 1996 sets the minimum coverage amount for liability for risks to or death of passengers to C$300,000 per passenger seated on board the aircraft and coverage for public liability to:
The coverage requirements exclude the air carrier’s employees. These requirements exist for all commercial air operators.
Update and trends
Key developments of the past year
What were the key cases, decisions, judgments and policy and legislative developments of the past year?
In its 2021 spring budget, the federal government proposed a tax on the sale of certain luxury goods purchased for personal use, such as aircraft. Following the release of draft legislation in March 2022, the luxury tax was enacted on 23 June 2022, and came into effect on 1 September 2022. The tax applies to aircraft manufactured after 2018, with a certified maximum carrying capacity of less than 40 seats and exceeding the price threshold of C$100,000. The luxury tax is calculated as the lesser of 20 per cent of the value of the aircraft above the C$100,000 threshold or 10 per cent of the total sale price of the aircraft.
Aircraft designed for military activities, equipped for the carriage of goods only, or registered with a government before September 2022 (subject to some exceptions), are excluded from the luxury tax. Likewise, aircraft used at least 90 per cent of the time in Canada for emergency services or in the course of business with a reasonable expectation of profit, will be exempt from the luxury tax, provided that the purchaser has complied with the requirements of the Act.
On 24 May 2022, Bill 96, respecting French, the official and common language of Quebec (Act), was adopted by Quebec’s National Assembly to promote the French language and affirm its status as Quebec’s only official language. The Act affects how registrations in Quebec’s Register of Personal and Movable Real Rights will be made; as of 1 September 2022, all new registrations must be prepared in the French language only. Foreign lessors and financiers used to contracting in the English language will need to take note when dealing with assets located in Quebec. These requirements will slow down the pace at which financing and leasing into the province of Quebec can occur, though there are certain workarounds available to aircraft financiers.
Air Passenger Protection Regulations
New amendments to the Air Passenger Protection Regulations came into force on 8 September 2022. Air carriers are now required to compensate passengers for cancellations or lengthy delays for reasons outside of their control, by providing passengers with a confirmed reservation on the next available flight offered by the carrier or one of its partners. Passengers not rebooked on a flight that leaves within 48 hours of the scheduled departure time of the original itinerary have two potential remedies available to them: (1) a refund of the unused portion of the passenger’s ticket within 30 days; or (2) a rebooking of the travel on the next available flight and refunds for any unused add-ons or services paid for.
