Lexpert US Guides

www.lexpert.ca/usguide-corporate/ | LEXPERT • June 2016 | 23 sure they explain – in ways an average target customer would be expected to understand – why they want to collect the informa- tion and what they might do with it. Another significant change under the Digital Privacy Act will be more familiar to US counsel: Mandatory cyber breach report- ing. Any company that loses custody of its customers' data will now be required to report the incident to the federal Privacy Commis- sioner as well as notifying individuals at real risk of "significant harm." It's a definition that, in Canada, includes humiliation, damage to reputation or relationships, and identity the. While the penalties of running afoul of the new privacy laws are not as high as the anti-spam laws, the Act also introduces a new right of private action, which is expected to give privacy- related class actions a shot in the arm. Not that they need it. All but unheard of in Canada a few years ago, today there are 20 to 30 that have either been certified or are pending certification, says Cheryl Slusarchuk, a partner at Blake, Cassels & Graydon LLP. "ere's been a real rise," she says. "Set that against the fact that we're now going to have mandatory national breach reporting and you've got two things happening at once in the cybersecurity area. "If I were US external counsel I'd be interested to know my risk profile for cyber security incidents is likely going up in Canada compared to what it used to look like." Slusarchuk, who works out of her firm's Toronto and Vancou- ver offices, says it's worth noting that there has also been an evolution of privacy torts, "which we haven't previously had." And there have been some interesting court decisions. Condon v. Canada was the largest class action involving a digital privacy breach in Canada. It was filed aer a government department admitted losing track of an external hard drive containing the names of hundreds of thousands of Canadians who had obtained student loans. In 2015, the Federal Court of Appeal held that their claims based in negligence and breach of confidence should proceed even though there was no evidence any of the students had had their identity stolen or suffered a financial loss. What that shows, says Slusarchuk, is that the courts are more willing to certify privacy claims, "and that's even absent proof of harm." While the climate around electronic communications and privacy may seem unwelcoming to US-based companies accustomed to a very different environment, the spate of young tech companies developing north of the border is anything but. "ere's an active and growing technology hub in virtually every province," says Deborah Weinstein of LaBarge Weinstein LLP. "e biggest hubs are definitely Vancouver, Waterloo, ON, the Toronto region, Ottawa and Montréal. But I wouldn't want to downplay what's going on in Edmonton, in Saskatoon, in Halifax. We see that technology is really a big driver for many communities and with the new Liberal government we see it becoming even stronger and in regions you wouldn't think of." e low Canadian dollar has a number of large US tech companies interested — and many innovative Canadian startups are interested right back. But American companies looking at a Canadian purchase need to be careful. e acquisition can trigger a sharp increase in research and development costs, warns Weinstein, who is based in Ottawa. "e biggest thing for US companies buying Canadian compa- nies, if they're buying private companies, which, face it, most technology companies are, is the private Canadian companies get a big tax benefit through the SR&ED [Scientific Research and Experimental Development] refund. If you qualify, about 30 per cent or more of eligible research and development is given back by the federal government tax authorities as a cash refund. "When these companies are bought by non-Canadians, the 30 per cent decreases to about 20 per cent and it is no longer a cash refund. It turns into a tax credit, which is offset against Canadian taxes. So that's something that US general counsel, CFOs and lawyers need to be very aware of, because when they review the financial statements of the target, they have to realize the R&D cost which shows to be quite low is actually low because it's been offset by a big tax refund. "e financial guys have to scope that into their forecast of operating expenses going forward, and that can be the basis of quite a negotiation around valuation because if they lose that benefit, which they do 99 per cent of the time, then the challenge is that sometimes the buyer doesn't want to pay as high a valua- tion as they thought at the outset when they thought costs were a lot less." It may be possible to structure an acquisition to keep the company Canadian, several lawyers said. Young tech startups that choose not to sell have a tougher row to hoe than their US counterparts, says Anthony Morris, a senior partner at Norton Rose Fulbright Canada LLP in Calgary. Access to capital for technology innovation in Canada has historically been more challenging in Canada than in the US, where there is a greater appetite and a broader financial infra- structure to draw upon, he says. "is is gradually changing as a deeper pool of technology leaders develops but this takes time. Canada also provides pockets of government financing and supports that should be understood and explored by any start-up and early-growth entity, though this can be somewhat challeng- ing to leverage at times." Morris believes the biggest risk for US business right now is "not appreciating the depth of technology and innovation devel- opment talent that exists in Canada, and missing the business opportunities that it presents. "For example, Calgary has a relatively young and well-educated workforce and its business cost structures are rapidly decreasing, making it a much more attractive place to invest in knowledge- based enterprises, especially with the current exchange rates. Even within Canada, it's becoming a much more attractive place to establish businesses." Takach of McCarthys says many more Canadian tech entre- preneurs are staying home to start and grow their businesses. "I think we've reached a tipping point, a maturity point — we have the investors here now, we have many more venture capital funds than we used to. We have some great recent successes like Constellation Soware and Shopify. So we've reached a critical mass where you don't have to go to the States, although a lot of entrepreneurs still choose to." ONLINE BUSINESS

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