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Business Law Today

August 2012

Taking Security in Canada: The Rules of the Game

Kiriakoula Hatzikiriakos


  • An overview of the Canadian secured transactions regime highlighting the differences between the Personal Property Security Act and the Civil Code, outlines “how” to create and perfect security interests under Canadian law.
  • By examining securities history, creation, and perfection, the similarities and distinctions between U.S. security interests and their Canadian analogs become apparent.
  • Conflict of laws provisions relating to security help answer “where” securities should be created and perfected, and “why” that matters.
  • Even though Canadian and U.S. secured transaction law are quite similar, it is important to be aware of the differences to protect collateral.
Taking Security in Canada: The Rules of the Game

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In today's economy, many businesses operate or own assets in multiple jurisdictions. This reality can give lenders access to a greater collateral pool to secure their loans. However, creating and perfecting security interests across borders can present certain challenges that only knowledge can overcome. Understanding the Canadian secured transactions regime can help the lender to better structure its security package and be on top of the game.

Fictitious Case Study

Border Line Co. is an American textile manufacturing company incorporated in Delaware, with its main operations in New York. It also operates two manufacturing facilities in Canada through its wholly-owned subsidiaries, both incorporated under Canadian corporate law (Canada Business Corporations Act): Wildnorth Co. 1 (with places of business in Ontario and Quebec and its registered and chief executive office in Quebec) and Wildnorth Co. 2 (with places of business in British Columbia (BC) and Ontario and its registered and chief executive office in Ontario).

Wildnorth Co. 1's and Wildnorth Co. 2's assets consist mainly of inventory, equipment, and accounts receivable deposited in accounts of Canadian financial institutions. Wildnorth Co. 1 owns the building in which it operates in Quebec, whereas Wildnorth Co. 1's and Wildnorth Co. 2's operations in Ontario and BC are located on leased premises. Wildnorth Co. 2 owns an important investment securities portfolio held in a securities account (the securities account agreement is governed by Ontario law). Both Wildnorth Co. 1 and Wildnorth Co. 2 own five trademarks for the inventory, registered at the Canadian Intellectual Property Office (CIPO), as well as property and casualty insurance policies in each province where property is located.

You are representing a U.S. lender financing Borderline Co. and its Canadian subsidiaries. The US$30 million credit facility will benefit all of Borderline Co.'s operations, both in the United States and in Canada. A portion of the facility will be financing the acquisition by Wildnorth Co. 1's acquisition of equipment for its manufacturing facility located in Quebec. You begin by creating and perfecting valid security interests against the assets of Borderline Co. under Article 9 of the Uniform Commercial Code (UCC Article 9), but the value of Borderline Co.'s assets in the United States is not sufficient to cover the credit commitment. In the event of Borderline Co's default to repay the loan, your client may not be able to recover what is owed to it if the Canadian assets are not included in the collateral pool. Fearing that scenario, you "cross" the border and gaze at the Canadian landscape. You are overwhelmed by its dimensions. A closer look makes you realize that beyond its size, you come face to face with a country with two official languages (English and French) and a bijuridical legal system. At first, all this may seem so foreign, until we delve into the principles of Canadian secured transactions law. By the end of this article, you may have changed your mind and cross over the Canadian border to re-enter the United States with less qualms about taking security in your neighboring country. The goal is to answer your "where," "why," and "how" queries: "where do I take my security," "why do I create and perfect my security in such province," and "how do I create and perfect my security"?

This is a primer on the Canadian legal regime relating to creation and perfection of security interests. To the extent the Canadian assets form a valuable part of the collateral, you should seek legal advice in the provinces where you are taking your security. Canadian counsel can also guide you with understanding and dealing with third-party rights that can "trump" your security. Let's begin with a brief history of the Canadian secured transactions regime.

Canada: Bijuridical Legal Regime

As previously mentioned, Canada's legal system is bijuridical: common law inherited from the English and civil law from the French. Canada has two main government levels: federal and provincial (or territorial). Secured transactions laws are of provincial jurisdiction and based on the following statutory framework: the Personal Property Security Act (PPSA) in the common law provinces and territories and the Civil Code (CCQ) in Quebec. The structure of the PPSAs is based on pre-2001 UCC Article 9. The CCQ draws its origins from the French Napoleonic Code. All Canadian provinces and territories (except Quebec) have a PPSA. There are essentially two models of PPSA: the "Model Act" or "Western Model" (on which are based the PPSAs of most Canadian provinces/territories) and the Ontario PPSA. The PPSAs are basically similar, with a few local variations. As for Quebec, the CCQ contains a "Book" (section) dealing with "hypothecs" (Articles 2660-2802). The next section of this article will guide you through some of the Canadian secured transactions concepts. Given the similarities between the PPSAs and UCC Article 9, we will focus on some of the distinct elements of Quebec law. Also, we must keep in mind that certain property charged as collateral may be regulated by federal law (e.g., intellectual property), as is the case also in the United States. In such circumstances, we must take into account the relevant federal statutes and file the security with the relevant federal registries (e.g., filing of security in trademarks with the Canadian Intellectual Property Office--a similar approach is taken under U.S. law where lenders record their security interests in trademarks at the United States Patent and Trademark Office).


The PPSA concept of a "security interest" is very similar to the UCC Article 9's security interest: an interest in personal property that secures payment or performance of an obligation. It also includes all assignments of accounts or chattel paper and the interests of a lessor of goods under a lease for a term of more than one year, whether or not such assignments or interests secure payment or performance of an obligation. Certain transactions are excluded from the PPSA scope. These exclusions are also similar to those found under UCC Article 9. For example, the assignment of insurance claims under a policy of insurance (in the PPSAs, with the exception of the Ontario PPSA, this exclusion does not extend to the proceeds of the insurance resulting from the loss or damage to collateral) and real property interests are not covered by the PPSA. In those cases, provincial legislation (other than the PPSA) sets out the requirements for creating and perfecting security (e.g., insurance statutes for assignments of insurance policies, and mortgages and land registration statutes for real property security).

The CCQ includes the concept of "security" in its section dealing with conflict of laws on secured transactions. However, the term is not defined. Quebec's conceptual and functional equivalent of a "security interest" is the "hypothec." This word finds its origins in the Latin hypotheca and in the Greek hypothéke, and refers to a legal right over a debtor's property that remains in the debtor's possession. That explains the definition of a "hypothec" in Article 2660 of the CCQ: "a real right on a movable or immovable property made liable for the performance of an obligation. It confers on the creditor the right to follow the property into whosever hands it may be, to take possession of it or to take it in payment, or to sell it or cause it to be sold and, in that case, to have a preference upon the proceeds of the sale ranking as determined in this Code." From the CCQ's definition, we note that a hypothec can be created on both personal and real property. Some Quebec terminology: "movable property" is "personal property"; "immovable property" is "real property"; "corporeal property" refers to "tangible property;" and "incorporeal property" is "intangible property." The CCQ does not provide for "collateral types" or categories of collateral (e.g., goods, equipment, and inventory), as is the case under the PPSAs and UCC Article 9. In contrast to the PPSAs/UCC Article 9, the CCQ's section on the creation of hypothecs applies both to personal and real property. A "movable hypothec" is security on personal property and an "immovable hypothec" is real property security.

Another important distinction between the PPSA/UCC Article 9 and the CCQ is that the latter does not necessarily apply to any transaction which is intended to create a security interest in personal property. In principle, conditional sale agreements and leases (true or financing) are not treated as "security" under the CCQ. (For more on this, see K. Hatzikiriakos, "An Attempt to 'Demystify' Quebec Secured Transactions Law, "Commercial Finance/Uniform Commercial Code Newsletter, Summer 2010, Part I, and Spring 2011, Part II.) In fact, the CCQ distinguishes "hypothecs" from what is commonly referred to as "title retention devices" (TRDs) (a filing relating to a TRD evidences the seller's/lessor's ownership in the asset sold/leased). Leases, leasing contracts and "installment sales" (conditional sales) are considered TRDs. In 2004, the Supreme Court of Canada held that these types of transactions are not "security." (Ouellet (Trustee of) [2004] 3 S.C.R. 348 (leases), at; Lefebvre (Trustee of); Tremblay (Trustee of) [2004] 3 S.C.R. 326 (installment sales), at These rulings opened the door to a looming uncertainty over whether the CCQ's articles relating to hypothecs (e.g., conflict of law rules) apply to TRDs. In Quebec, it is important to properly qualify the TRD used in a transaction. The device's nature will determine the type of filing that is required and the delay in which it should be made. For example, the rights resulting from an "installment sale" (conditional sale) must be registered within 15 days of the date of the sale. Leases with a term of more than one year in respect of a road vehicle (e.g., personal vehicle, motorcycle, or aircraft) or other movable property determined by regulation or, in principle, of any movable property required for the service or operation of a business enterprise must be registered. It is also important to note that, unlike the PPSA and UCC Article 9, the CCQ does not distinguish between a "true lease" and a "financing lease." A leasing contract is akin to the "finance lease" of Article 2 UCC.

Another difference between the PPSA/UCC Article 9 and the CCQ is that assignments of property for the purpose of securing the performance of an obligation are not valid in Quebec. Practically speaking, this means an assignment of accounts receivable as "security" is not valid in Quebec. If a creditor wants its debtor's accounts in its collateral pool, it must "hypothecate" the accounts. This does not mean that an outright sale of accounts is not permitted under Quebec law, such as the sale of accounts in a factoring transaction or in a securitization scenario, (i.e., sale of assets from the originator/seller to a special purpose entity). An absolute sale of accounts ("assignment of claims") is possible under the CCQ. However, it must follow the "assignment of claims" rules (Articles 1641-1650 CCQ) which are distinct from the rules relating to hypothecs. The seller can render enforceable the assignment vis-à-vis third parties either by filing the assignment at the Quebec personal property registry (Register of Personal and Movable Real Rights (RPMRR)) (if the sale relates to a "universality," i.e., an entire category of accounts receivable) or by giving notice of the assignment to the account debtor (if the sale relates to specific accounts). For more on assignment of claims, consult Part III of the article titled "An Attempt To 'Demystify' Quebec Secured Transactions Law" (to be published in a subsequent issue of the Commercial Finance/Uniform Commercial Code Newsletter).

Bearing the conceptual framework of Canadian secured transactions in mind, we will now turn our attention to the creation and perfection of security interests and hypothecs.

Security Creation

Similar to UCC Article 9, PPSA security interests are created and rendered enforceable through attachment. The rules of attachment are the same: attachment occurs when value is given, the debtor has rights in collateral, and a signed security agreement with a sufficient description of collateral is made (or secured party obtains possession of the collateral).

The concept of "attachment" does not exist in Quebec. However, the principles of creation of a hypothec are very similar to the PPSA attachment. A hypothec without "delivery" (i.e., non-possessory security) must be created in an "act constituting a hypothec" (i.e., written security agreement). Typically, pledges are created by physical delivery of the property or title to the creditor; however, we do see written agreements put in place for evidentiary purposes.

The deed of hypothec (i.e., security agreement) must expressly provide that the grantor "hypothecates" its property. The property should be sufficiently described and can essentially consist of (permit us to use the Quebec terminology) a universality (an entire category of) or specific movable (corporeal or incorporeal) property. An "all present and after-acquired personal property" grant clause (i.e., the universality of the grantor's present and after-acquired movable property) is considered a "sufficient description" under the CCQ. As is the case under the PPSA and UCC Article 9, the hypothec will "attach" to the after-acquired property once the grantor acquires "title" to the collateral (title in the CCQ refers to the "right of ownership"), which includes the right to dispose of property. The same deed of hypothec can charge both movable and immovable property (in contrast to the PPSA and UCC Article 9 jurisdictions, where a separate "mortgage" or "debenture" is typically used to charge real property). However, when real property is being charged, the CCQ requires the deed to be notarized (executed in the presence of a notary). The deed of hypothec must describe the obligations secured and--an important distinction from the PPSAs/UCC Article 9--the specific amount, stated in Canadian dollars, for which the hypothec is granted, commonly referred to as the "hypothec amount." This amount corresponds to the maximum amount for which the hypothec can be enforced. Typically, this amount represents the indebtedness amount (i.e., total credit commitment, and perhaps a little buffer to allow for future indebtedness increases, and an additional 20-25 percent "bump-up" targeted to cover enforcement expenses). Interest on the hypothec amount can also be stated (it can be fixed or floating, but must be determinable). As mentioned, the hypothec amount must be stated in Canadian dollars. This necessarily implies that where the indebtedness amount is in a currency other than Canadian dollars, this amount needs to be converted in Canadian dollars (an amount to factor in fluctuations in foreign exchange rated must be added). In some cases, we see "extravagant" hypothec amounts (set in the billions!). However, in a realization scenario, the creditor will only be able to enforce the hypothec for the amount due when enforcement occurs.

Security Perfection

Under both the PPSA and the CCQ, a validly created security interest/hypothec in collateral must be perfected so it can gain priority vis-à-vis third party unsecured creditors, including a trustee in bankruptcy. Similar to UCC Article 9, there are three methods of perfection under the PPSA and the CCQ (the CCQ refers to "publication"): registration, possession, and control.

Registration of a financing statement (in CCQ, "application for registration") perfects security interests/hypothecs in all personal property collateral and can be done electronically. Under the PPSA, the lender can choose the length of the filing (from one year to perpetuity). CCQ filings are valid for 10 years and can be renewed. In the PPSA provinces, pre-filing (i.e., filing before execution of the security agreement) is permitted (except for consumer goods). Pre-filing is advantageous in that the lender's security interest will gain priority from the date of filing, even if the security agreement bears a later date. Pre-filing is not allowed in Quebec, where the application for registration must refer to the date the deed of hypothec was signed. To the extent the Quebec assets form a valuable part of the collateral, disbursement should factor in the delays for Quebechypothec filings. The "good" news is that filing processing times are relatively quick at the RPMRR, so, under normal circumstances, one can expect to obtain filing confirmation within a day or two of filing. As previously mentioned, TRD rights (and their assignment to third parties, e.g., a lender financing an installment sale) must also be filed at the RPMRR in order to be enforceable against third parties. (For a more detailed discussion on the topic, see "An Attempt to 'Demystify' Quebec Secured Transactions Law,"Commercial Finance/Uniform Commercial Code Newsletter, Summer 2010, Part I.) Although real property security is not discussed in this article, note that immovable hypothecs are registered in the land registry (as is the case in the other Canadian provinces under the land title and land registration statutes).

Whether under the PPSA or the CCQ, the general rule is similar: priority between competing registered security interests is determined from the date of filing. This "first-in-time" rule does not always guarantee the secured party's priority on the debtor's collateral. Certain rights can defeat the secured party's priority (e.g., statutory liens, and PMSIs in all Canadian provinces, except Quebec). A lengthy discussion of priority rules and the methods of possession and control as methods of perfection is beyond the scope of this article. As for possession, note that it is available for collateral similar to what is provided under UCC Article 9 (e.g., negotiable documents of title and instruments).

Control perfects security interests in investment property. The PPSA and CCQ rules relating to control on investment property were modeled on UCC Article 9. One important distinction between UCC Article 9 and the PPSA/CCQ: "control" is not available for the perfection of security interests/hypothecs on deposit accounts. The method for perfecting security interests in deposit accounts remains the filing of the security interest in the jurisdiction where the debtor is located (see next section for "debtor location" rules). Funds on deposit in a bank account are "intangibles" under the PPSA and "incorporeal property" under the CCQ. Changes to the Ontario PPSA are on the horizon to make available perfection by control for deposit accounts.

In addition to filing with the provincial personal property registries, some collateral falls under federal jurisdiction and filings with certain federal registries would be commendable (e.g., filing of security interests in the intellectual property registries) or even necessary (e.g., registered vessels under the Canada Shipping Act).

Now that we have a better handle on the basics of "how" to create and perfect security in Canada, let's turn our focus on the "where" and "why" queries. The answers lie in the conflict of laws provisions relating to security.

Conflict of Laws

Seeing how the PPSAs are very similar to UCC Article 9, counsel to the U.S. lender may be tempted to use a U.S.-law governed general security agreement to create and perfect a security interest in the PPSA provinces (Ontario and BC in our example). While this may seem appropriate at the outset, counsel should be wary of Canadian conflict of law rules relating to the validity and perfection of security interests, as well as the costs that may be related to proving U.S. law before a Canadian court (assuming, of course, that the Canadian court will accept to apply U.S. law). Under the PPSA, security interest enforcement matters are generally governed by the lex fori (i.e., law where enforcement procedures are taken). We say "generally" because the PPSA distinguishes between procedural (steps involved in the enforcement) and substantive (right to enforce) matters. In fact, the PPSA provides that "procedural" enforcement issues are governed by the lex fori. However, "substantive" matters are governed by the law of the contract between the secured party and the debtor. Considering all this, it may be wiser to use a security agreement governed by the law where the lender may ultimately conduct enforcement. In contrast to the PPSA, the CCQ contains no express conflict of law rule regarding enforcement. However, the analysis tends to be similar to the one made under the PPSA. In practice, when Quebec assets are involved, given the specificities of the Quebec "hypothec," lenders typically require a deed of hypothec to charge the Quebec assets.

So, which law applies to the validity and perfection of a security interest/hypothec? The PPSA and CCQ conflict of law rules relating to the validity and perfection of a security interest or hypothec are essentially the same. The conflict of laws provisions relating to security interests or hypothecs apply to the validity, perfection and effect of perfection of the security (in contrast to UCC Article 9, which sets out the rules for perfection and effect of perfection, but section 1-301 of the UCC provides the rule for validity of the security, i.e., law of contract). It is also important to note that a reference to the law of a jurisdiction in the conflict of law provisions of the PPSA and the CCQ is a reference to the internal law of that jurisdiction, excluding its conflict of laws rules (which is also the case under UCC Article 9). This has the obvious advantage of avoiding the renvoi. The renvoi could result in the application of laws of different jurisdictions--this approach would be contrary to the goals of certainty and predictability pursued by secured transactions laws.

The lex situs (law of jurisdiction where charged property is situated at the time the security interest/hypothec attaches) governs the validity and perfection of a security interest/hypothec in tangible property (and possessory security interests/hypothecs). This rule is similar to what existed under former section 9-103 of the UCC, with multiple filings being required if the debtor's inventory is located in many jurisdictions. As we pointed out earlier, in Quebec, the security conflict of law provisions may not apply to TRDs. Instead, it is arguable that, in those cases, we may need to apply the conflict of laws relating to real rights and sales. It would be prudent for the lender to file the relevant TRD at the RPMRR (within the delays prescribed under the CCQ) if the debtor is domiciled in Quebec, the asset leased or sold is situated (or is destined to arrive) in Quebec or the TRD contract is governed by Quebec law.

The debtor's location governs the validity and perfection of a security interest/hypothec in intangible property and mobile goods. Under the PPSA, the debtor shall be deemed to be located at the debtor's place of business, or if there is more than one place of business, at the debtor's "chief executive office." This term is not defined under the PPSA and this can lead to uncertainty when trying to determine the debtor's location (e.g., if a company has its registered office in one province and executive offices in many provinces). For those who are familiar with secured transactions laws, this situation certainly brings back some "fond" memories from the former equivalent section 9-103(3)d of the UCC). Some PPSA provinces (e.g., Ontario and British Columbia) have begun proposals to amend the PPSA conflict of laws to define the debtor's location by referring to the debtor's jurisdiction of incorporation. These amendments will bring the PPSAs in line with the rules under UCC Article 9. Under the CCQ, a debtor's location is its "domicile." The domicile of a corporation is the "place and address of its head office" (registered office).

The PPSA/CCQ conflict of rules relating to security in investment property are essentially the same as those found under UCC Article 9. In fact, the PPSA and the CCQ rules were modeled on the UCC Article 9 rules. For the purposes of solving our case study (i.e., investment property of Wildnorth Co. 2), the validity and perfection of the security interest/hypothec in the securities account is governed by the law of the securities intermediary's jurisdiction (see rules in section 8-110(e) of the UCC). In our case study, this law would be Ontario since the securities account agreement is governed by Ontario laws.

The conflict of law rules have helped us understand "where" we must create and perfect our security. We are now ready to assist the U.S. lender in preparing a preliminary Canadian security "closing checklist":

  • For Wildnorth Co. 1: An Ontario-law governed security agreement charging all of Wildnorth Co. 1's personal property, presently owned and after-acquired, filed with the Ontario PPSA registry (for validity and perfection of security interest in inventory and equipment located in Ontario); a deed of hypothec charging the universality of Wildnorth Co. 1's property (both movable and immovable, presently owned and after-acquired) (for validity and perfection of hypothec on inventory and equipment located in Quebec and all intangibles, e.g., on accounts receivable, including deposit accounts, trademarks) filed at the RPRMM and at the Quebec Land Register (for the hypothec on the real property owned by Wildnorth Co. 1); filing at the RPMRR of the transfer of reservation of ownership of vendor for equipment financed by U.S. lender (such transfer to U.S. lender may be evidenced in sale agreement between vendor and Wildnorth Co. 1); filing of the hypothec on the trademarks owned by Wildnorth Co. 1 at the CIPO; assignment of insurance policies and proceeds to U.S. lender and notification to insurer to name U.S. lender as loss payee on the policy.
  • For Wildnorth Co. 2: An Ontario-law governed security agreement charging all of Wildnorth Co. 2's personal property, presently owned and after-acquired, filed in the Ontario PPSA registry (for validity and perfection of security interest in inventory and equipment located in Ontario and accounts receivable, including deposit accounts) and the BC PPSA registry (for validity and perfection of security interest in inventory and equipment located in BC); an Ontario-law governed securities account control agreement; filing of the security interest in the trademarks at the CIPO; assignment of insurance policy and proceeds to U.S. lender (and notification to insurer to name U.S. lender as loss payee on the policy).

In the end, despite the differences that exist between UCC Article 9 and the PPSA/CCQ, it is safe to say that the Canadian personal property secured transaction regime in Canada and in the United States are very similar. Of course, every transaction is unique and prudence dictates that you consult with Canadian counsel when Canadian property is an important part of your collateral.

The opinions expressed in this article are solely those of the author and do not necessarily represent the viewpoint of the National Bank of Canada. I dedicate this article to the memory of my mother whom I lost on July 7 and who will always be my source of strength and inspiration.