Cross-Border Counselor

Many Canadian companies and individuals own U.S. real property interests through a U.S. corporation. The Foreign Investment in Real Property Tax Act (“FIRPTA”) regime imposes a withholding tax (currently at a rate as high as 15%) on the gross proceeds realized by Canadians upon the sale or transfer of a U.S. real property interest. This withholding is imposed without regard to whether the disposition results in a taxable gain.  However, with advance planning, this withholding may be reduced or eliminated. A U.S. real property interest (“USRPI”) generally includes land, buildings, growing crops and timber, and mines, wells and other natural deposits (including oil and gas properties and mineral deposits) located in the United States and equity interests in a “United States real property holding corporation” (“USRPHC”) as well as certain interests in a USRPI-owning partnerships (subject to certain “look-through” rules). A U.S. corporation (or entity classified as a U.S. domestic corporation for U.S. federal income tax purposes) will generally be a USPRHC if, at any time during the prior 5 year period, the fair market value of its USRPIs equals or exceeds 50% of the aggregate fair market value of (a) such corporation’s USRPIs, (b) such corporation’s interests in foreign real property, and (c) such corporation’s other assets that are used or held for use in a trade or business. If shares in a USRPHC are sold or transferred by a Canadian in certain tax-deferred transactions (as determined for U.S. federal income tax purposes), certain certification and filing requirements must be satisfied to avoid FIRPTA withholding. If that sale or transfer is made pursuant to a taxable transaction (as determined for U.S. federal income tax purposes), FIRPTA withholding may be reduced (or eliminated) by filing an IRS Form 8288-B if the actual tax due on the “built-in gain” in the shares of the USRPHC is less than 15% of the gross sale proceeds (or if the shares are in a built-in loss position). To be effective, an IRS Form 8288-B must be completed, signed, and filed with the IRS prior to the effective time of the sale or transfer. In order to be complete, the form must generally contain: (i) the U.S. taxpayer identification number of the transferor and the transferee; (ii) a description of the USRPI being transferred; (iii) the fair market value of the USRPI being transferred and evidence supporting the same (which, in some cases, requires an independent third-party appraisal); and (iv) the transferor’s adjusted tax basis in the USRPI being transferred. If the Canadian transferor does not have a U.S. taxpayer identification number, it will need to obtain one. Completing an IRS Form 8288-B often requires advanced planning. Canadian companies and individuals holding shares in a USRPHC (or USRPIs) may be able to significantly reduce the U.S. withholding taxes to which they are subject by planning ahead and timely filing an IRS Form 8288-B.

On Thursday, November 4, 2021, the Office of the Superintendent of Financial Institutions announced that, subject to approval by the superintendent, Canadian banks and other financial institutions may begin repurchasing their own shares. Share buyback transactions by Canadian companies are not novel. However, the U.S. federal income tax treatment of U.S. shareholders participating in a share buyback transaction with a Canadian corporation can often be surprising. Depending on the U.S. shareholder’s particular circumstances, the tendering of shares of a Canadian corporation for cash pursuant to a share buyback transaction will generally either be treated as a “sale or exchange” of such U.S. shareholder’s shares or as a “distribution” by the Canadian corporation in respect of such U.S. shareholder’s shares. Under Code Section 302, after applying certain constructive ownership and attribution rules, a U.S. shareholder whose shares are sold back to the issuing Canadian corporation for cash will generally be treated as having engaged in a “sale or exchange” of such shares if the transaction: has the effect of a “substantially disproportionate” distribution by the Canadian corporation with respect to such U.S. shareholder; results in a “complete termination” of such U.S. shareholder’s equity interest in the Canadian corporation; or is “not essentially equivalent to a dividend” with respect to such U.S. shareholder. Each of the tests above generally considers the proportion of shares of the Canadian corporation the U.S. shareholder holds immediately prior to, and (if any) immediately after, the share buyback transaction either based upon the aggregate issued and outstanding shares of the Canadian corporation or the shares actually and constructively held by each U.S. shareholder individually. Provided certain holding period and other requirements are satisfied, a U.S. shareholder that is deemed to “sell or exchange” their shares of a Canadian corporation may be eligible for the lower, more favorable, capital gains tax rates. If the U.S. shareholder is deemed to receive a “distribution” with respect to its shares, such U.S. shareholder would generally recognize, as ordinary income, a dividend equal to the amount of any distribution paid on the shares, without reduction for any Canadian taxes withheld from the amount paid, on the date the distribution is received to the extent the distribution is paid out of the Canadian corporation’s current or accumulated “earnings and profits” as determined for U.S. federal income tax purposes. If the distribution exceeds the Canadian corporation’s earnings and profits, the U.S. shareholder’s tax basis in its remaining shares would then be reduced (but not below zero) with any then remaining excess generally treated as capital gains. However, many Canadian corporations do not maintain calculations of their current and accumulated earnings and profits in accordance with U.S. federal income tax principles. In those instances, U.S. shareholders deemed to receive a “distribution” pursuant to a share buyback transaction may be required to treat the entirety of the proceeds received as a taxable dividend subject to ordinary income tax rates. The U.S. federal income tax consequences of share buyback transactions are different for Canadian corporations classified as “passive foreign investment companies” for U.S. federal income tax purposes. In the U.S., recent legislative proposals have included an excise tax, at a rate as high as 2%, on share buyback transactions for public companies in the U.S. It remains uncertain whether any such tax will be adopted and, if adopted, what scope of publicly traded corporations will be subject to that tax.

In transactions in which a Canadian corporation seeks to acquire a U.S. target entity for shares of the Canadian acquiror in a transaction intended to be tax-deferred for U.S. federal income tax purposes, the ability of U.S. shareholders of the U.S. target to qualify for tax-deferral may depend on the activities the Canadian acquiror conducts in Canada (or other non-US jurisdictions). Under the general rule in Code Section 367(a), if a U.S. person transfers stock in a U.S. corporation to a Canadian corporation (as characterized for U.S. federal income tax purposes), such transfer will not be characterized as a tax-deferred exchange for U.S. federal income tax purposes (even if the transaction would otherwise qualify as a tax-deferred exchange). There are a number of exceptions (and exceptions to the exceptions) to the general rule contained in Code Section 367(a). One of the most important exceptions is the “Active Trade or Business Exception”, which applies where the Canadian corporation directly, or through certain qualified subsidiaries: (i) is engaged in an active trade or business in Canada (or other non-US jurisdiction) for the entirety of the 36-month period immediately prior to the transaction; (ii) at the time of the transaction, has no intent to dispose of or discontinue such trade or business; and (iii) has a fair market value which is substantial as compared to the U.S. target corporation. The Active Trade or Business Exception can be critical to achieving tax-deferral for U.S. owners of U.S. target companies. Each component of the Active Trade or Business Exception is subject to complex rules and interpretations. Even if the Active Trade or Business Exception is satisfied, if an owner of the U.S. target would own, directly, indirectly or pursuant to certain attribution rules, 5% or more of the outstanding voting power or value of the Canadian corporation immediately after the exchange, the exchange will generally be taxable to such U.S. target owner unless that person enters into a “gain recognition agreement” with the Internal Revenue Service. A gain recognition agreement is an agreement whereby a U.S. target owner agrees that if a “gain recognition event” occurs within a five-year period following the initial transfer, such U.S. target owner will also recognize at the time of such “gain recognition event” the gain that existed in their equity holdings at the time of the initial transfer. Code Section 367(a) also does not generally apply to any transfer of property by a U.S. person to a Canadian corporation which is, or will be immediately after such transfer, treated as an “inverted corporation” (i.e., a U.S. domestic corporation for U.S. federal income tax purposes) under Code Section 7874(b). The business activities, employee headcount, and employee compensation of the Canadian acquiring corporation in Canada will also generally be relevant in determining whether a Canadian corporation is, or will be immediately after such an exchange, an “inverted corporation”. Because determining whether tax-deferral may be available for U.S. shareholders of a U.S. target company can have a significant impact on structure, pricing and other material transaction terms, it is best for Canadian corporations evaluating acquisitions of U.S. target companies to analyze as early as practical whether the Active Trade or Business Exception (or any other exception under Code Section 367(a)) may be available.

The OTC Markets has published proposed rule changes that would, effective September 23, 2021, require that in order to be quoted on the OTCQX International, a company must either be an SEC reporting company, file reports with the SEC under the Regulation A+ reporting system, or be exempt from SEC reporting requirements by virtue of Rule 12g3-2(b).  Companies relying on the Rule 12g3-2(b) exemption must annually certify to the OTC Markets that they continue to comply with that exemption.  Another alternative, which had allowed companies to be quoted on the OTCQX International if they are exempt from SEC reporting requirements for other reasons, is being eliminated.  Companies previously relying on that exemption may transfer to the OTCQB tier of the OTC Markets if they satisfy the OTCQB requirements. While many publicly traded Canadian companies comply with Rule 12g3-2(b), and therefore will be able to continue to be quoted on the OTCQX International, the proposed rule changes may adversely affect three groups of companies: Companies whose trading volumes in the United States are sufficiently high that during the course of their most recently completed fiscal year, less than 55% of worldwide trading occurred in the one or two countries constituting the primary non-U.S. trading market; Newly public companies who are seeking an OTC quotation during the same fiscal year in which they have first begun trading in Canada or another foreign country; and Companies that fail the SEC’s “foreign private issuer” test under Rule 3b-4, because a majority of their voting securities are beneficially held by U.S. residents and they have an additional strong nexus to the United States. These companies would not satisfy the requirement of Rule 12g3-2(b) to be a “foreign private issuer” with a “primary trading market” outside the United States, and therefore would not be eligible to apply to the OTCQX International or in the case of a company already quoted on the OTCQX International, to continue such quotation, unless they were SEC or Regulation A+ reporting companies.  They could, however, apply for quotation on the OTCQB and later upgrade to the OTCQX International if they gained or regained compliance with Rule 12g3-2(b).

On August 13, 2021, the United States Occupational Safety and Health Administration (“OSHA”) released updated guidance on mitigating and preventing the spread of COVID-19 in the workplace to reflect changes in the Centers for Disease Control and Prevention (“CDC”) guidance for fully vaccinated individuals in response to the spread of the Delta variant.  The guidance serves to update OSHA’s June 10, 2021 COVID-19 workplace safety rule, but is advisory in nature and does not create any legal obligations for employers.  OSHA emphasized that vaccination is “the most effective way” to protect workers from the transmission of COVID-19 in the workplace, but now also recommends that all workers wear masks in public indoor settings in areas of substantial or high transmission, regardless of vaccination status.  OSHA also recommends that employers consider requiring workers to get vaccinated or submit to regular COVID-19 testing. Canadian employers with operations in the U.S. should review OSHA’s guidance and implement COVID-19 safety measures for their U.S. worksites. CDC Guidance The CDC had previously advised that fully vaccinated people no longer needed to wear masks or physically distance, and could forego testing following exposure to COVID-19 under most circumstances.  However, in July, the CDC issued revised guidance for fully vaccinated individuals, recommending that they: Wear masks in public settings if they are in “an area of substantial or high transmission”; Get tested if experiencing symptoms of COVID-19; and Wear masks and get tested following exposure to a suspected or confirmed case of COVID-19 for 14 days or until they receive a negative test result. In response to preliminary evidence suggesting that fully vaccinated people can be infected by – and spread – the Delta variant, the CDC Guidance states that fully vaccinated individuals can help to stop the spread of COVID-19 by wearing masks. OSHA Guidance OSHA’s August guidance is “designed to help employers protect workers who are unvaccinated. . . or otherwise at risk” and to incorporate CDC guidance involving individuals who are fully vaccinated, but who are located in areas with substantial or high levels of community transmission.  To that end, OSHA recommends that employers adopt a multi-layered approach to protect workers and mitigate the spread of COVID-19. Mandatory Vaccination or Regular Testing.  OSHA encourages employers to adopt policies requiring workers to get vaccinated or submit to regular COVID testing.  In addition to suggesting that employers consider a mandatory vaccine program (or a testing regime), OSHA continues to encourage employers to provide paid leave for workers taking time off to get vaccinated or to recover from any side effects associated with the vaccine.  Employers requiring vaccination should comply with the reasonable accommodation requirements under the Americans with Disabilities Act and Title VII. Worker Mask Requirements.  Under the new OSHA guidance, employers should continue to provide appropriate personal protective equipment (“PPE”) for workers.  OSHA has adopted the CDC recommendation that all workers should wear masks or other face coverings in public indoor settings in areas with substantial or high transmission of COVID-19, regardless of vaccination status.  Where respirators, including N95 face masks, are necessary (e.g., for certain jobs such as in healthcare where surgical face masks are insufficient) to protect workers from exposure to COVID-19, employers must provide such respirators in accordance with the relevant OSHA standards, which would include the implementation of a Respiratory Protection Program. Visitor Mask Requirements.  OSHA encourages employers to suggest or require that unvaccinated customers, visitors, and guests over the age of two wear masks or other face coverings in public indoor settings in areas of substantial or high transmission of COVID-19. Physical Distancing.  OSHA recommends that employers implement physical distancing in all communal work areas for unvaccinated and at risk workers.  OSHA also recommends limiting the number of such workers in one place at any given time by offering flexible worksite policies and staggering worker shifts.  In workplaces where unvaccinated and other at-risk workers cannot maintain six feet of physical distancing, OSHA recommends that employers use solid physical barriers to separate workers. Other Recommendations.  OSHA also continues to recommend that employers mitigate the spread of COVID-19 in the workplace by: Educating workers on their COVID-19 policies in a manner that is easily understood; Maintaining adequate ventilation in the workplace; Performing regular cleaning and disinfection; Prohibiting discrimination and retaliation regarding reports of workplace safety and health concerns; Reporting work-related COVID-19 cases to OSHA in compliance with OSHA’s COVID-19 reporting guidance; and Complying with other applicable OSHA standards, including PPE requirements, sanitation, etc. Key Takeaways OSHA adopted recommendations for fully-vaccinated workers that align with the most recent CDC Guidance: Fully-vaccinated individuals should continue to wear masks in public indoor settings in areas of substantial or high transmission; Individuals may choose to mask, regardless of the level of transmission, particularly if they – or someone in their household – are at an increased risk of severe disease or are not fully-vaccinated; and Regardless of vaccination status, individuals who are exposed to someone with a suspected or confirmed case of COVID-19 should get tested and wear a mask in public indoor settings for 14 days, or until they receive a negative test result. Employers should consider adopting vaccine requirements. Employers should consider requiring workers who are unvaccinated to undergo regular COVID-19 testing, in addition to mandatory masking and physical distancing. Employers are encouraged to provide paid leave to workers for time spent getting vaccinated and recovering from any vaccine side effects.

As discussed in more detail here, on August 6, 2021, the United States Securities and Exchange Commission (the “SEC”) approved NASDAQ Rules 5605(f) and 5606, which require each NASDAQ listed company (subject to certain narrow exceptions) to (i) publicly disclose, to the extent permitted by applicable law, information on the voluntary self disclosed gender, racial characteristics and LGBTQ+ status of the issuer’s board members, and (ii) have at least two “diverse” board members or explain why it does not have two diverse members meeting the applicable requirements. Issuers with five or fewer board members are required only to have one “diverse” board member. Canadian issuers that are NASDAQ listed are subject to the new rules. However, a Canadian issuer that is either (i) a “foreign private issuer” as defined under SEC rules or (ii) any other issuer that is incorporated under the laws of a jurisdiction other than the United States and has its its principal executive office outside the United States, may satisfy the board composition requirements by having at least two female directors, or one female director and one director who is either (i) an underrepresented individual (based on national, racial, ethnic, indigenous, cultural, religious or linguistic identity in the county in which the issuer’s principal executive office is located) or (ii) a member of the LGBTQ+ community. The new rules are subject to a transition period, but will begin to take effect for all on the later of August 7, 2023, or the date the issuer files the proxy or information statement (or Form 10-K or 20-F) for the issuer’s annual shareholder meeting in 2023. While the new rules affect only NASDAQ listed companies, the SEC’s rule making agenda indicates that it may also propose new values regarding board diversity disclosure, which suggests that similar rules may be applicable to a broader range of listed companies in the future.

On September 28, 2021, companies trading in the United States over-the-counter securities markets (“OTC Markets”) that do not comply with amended Rule 15c-211 will no longer be eligible for quotation on the OTC Markets, effectively eliminating their public quotation in the United States. Amended Rule 15c-211 requires that broker-dealers obtain and review basic information about an issuer and its security before initiating or resuming quotation of a security in the OTC Markets. The amendments should have no effect on companies that are traded on a national securities exchange (i.e., NASDAQ, New York Stock Exchange, NYSE American, etc.), the OTCQX or OTCQB. Companies trading on the OTC Pink or OTC Grey Market will need to have current and public disclosure available to broker-dealers and investors and verified before a broker-dealer can initiate or resume quotation of a security in the OTC Markets. OTC Markets Group has created a program for Rule 15c-211 verification for companies that trade on the OTC Pink through the OTC Disclosure & News Service that can be relied upon by broker-dealers. Immediate action is required for these companies if they intend to remain eligible for quotation in the United States OTC Markets. If not already done, Canadian issuers trading on the OTCQX or OTCQB will need to verify compliance with Rule 12g3-2(b) on their OTCIQ profile immediately so that OTC Markets compliance team can confirm Rule 15c-211 compliance. Companies that satisfy the Rule 15c-211 public information eligibility requirements include (i) issuers that are subject to reporting under the Securities Exchange Act of 1934, as amended, Regulation A or Regulation Crowdfunding; (ii) foreign private issuers that are exempt from registration under the Exchange Act pursuant to Rule 12g3-2(b); and (iii) issuers that provide disclosure specified in Rule 15c-211. Other exemptions are for unsolicited quotations and seasoned issuers that satisfy trading and capitalization requirements. Companies that are quoted for trading on over-the-counter securities markets should consult with their legal advisor at Dorsey & Whitney LLP on the application of Rule 15c-211 on eligibility for quotation in the United States.

On May 28, 2021, the United States Equal Employment Opportunity Commission (“EEOC”) released new guidance regarding COVID-19 vaccinations in the workplace.  The new guidance clarifies some significant issues, including whether employers may require U.S. employees to be vaccinated (at least as a matter of U.S. federal law) and the types of incentives they may provide to vaccinated employees.  Employers must also comply with the significant number of new state laws that address these same issues, and in many cases, contradict the EEOC’s positions. I.                   Mandatory Vaccinations The EEOC confirmed that employers may require all employees physically entering the workplace to be vaccinated for COVID-19, but with important caveats.  The guidance reiterates the requirement that employers comply with the reasonable accommodation requirements under the Americans With Disabilities Act (“ADA”) and Title VII of the Civil Rights Act of 1964 (“Title VII”).  The guidance also reminds employers to be mindful of whether certain groups of employees may face barriers to receiving vaccinations, and warns employers to ensure vaccination programs do not disparately impact any protected groups. II.                Reasonable Accommodations Employers requiring employee vaccinations must continue to comply with reasonable accommodation requirements under the ADA and Title VII.  Employees may seek accommodation in the form of exemption from a mandatory vaccination policy either because of a disability or a sincerely held religious belief. If an employee reports that they are unable to receive the vaccination due to a disability, employers should consider the request for accommodation (in the form of not requiring that employee to be vaccinated) and determine whether the unvaccinated employee would “pose a direct threat due to a significant risk of substantial harm to the health or safety of the individual or others that cannot be eliminated or reduced by reasonable accommodation” using the EEOC’s direct threat analysis.  If the unvaccinated employee poses an unacceptable direct threat to the health and safety of others, they must assess whether a reasonable accommodation may be made for the employee, such as allowing the employee to work remotely or otherwise in isolation from others. Likewise, employers must assess whether reasonable accommodations can be made for employees who report that they are unable to be vaccinated due to a sincerely held religious belief. III.             Vaccine Incentives Many employers hope to incentivize employee vaccination in lieu of a vaccine mandate.  The new EEOC guidance clarifies employers’ right to incentivize employee vaccinations. Employers who administer vaccines directly to employees may offer incentives, as long as they are not coercive.  Because employers administering vaccines to employees directly must ask certain medical screening questions, there is a concern that using large incentives could make employees feel pressured to disclose protected medical information. Meanwhile, employers providing incentives to employees for showing proof of vaccination by a third party, but who do not administer the vaccine directly, may provide larger incentives because they do not receive any disability-related information from employees, therefore reducing the risk of pressure to share protected medical information.  Employers offering incentives may require proof of vaccination by a third party, either by providing documentation or by certifying their vaccination status. As with all confidential medical information, employers should take special care to keep vaccination information confidential, including by keeping vaccination information separate from employees’ personnel files. IV.             State Law Considerations Employers should remember that the EEOC’s new guidance only covers federal equal employment opportunity laws, and that some state and local laws may restrict employers’ ability to mandate vaccinations in the workplace or provide vaccine incentives. On May 7, 2021, Montana’s governor signed House Bill 702, which made Montana the first jurisdiction to recognize an individual’s vaccination status as a protected classification.  Under the Montana law, employers are prohibited from mandating employee vaccinations or from requiring employees to disclose their vaccination status.  Other states are working rapidly to follow Montana’s lead. Likewise, Iowa’s legislature is considering legislation that would prohibit employers from mandating vaccination or “otherwise discriminating against” employees who decline the vaccination for any reason.  If passed, the law may prohibit employers from offering vaccine incentives as they may be considered discriminatory against unvaccinated employees. V.                Takeaways Employers may implement mandatory vaccination programs, as long as they provide reasonable accommodations as required by the ADA and Title VII, and no applicable state law prohibits it.  The legal landscape at the state level is changing rapidly so employers considering mandating COVID-19 vaccination should frequently check applicable state law and update their policies and programs appropriately. Employers who wish to incentivize, rather than mandate, vaccination may do so, though they should carefully consider whether to administer the vaccine themselves or encourage employees to seek vaccination by a third party. Employers should consult with a labor and employment attorney before introducing either a mandatory vaccine program or vaccination incentives to ensure that any program complies with applicable federal and state laws.

Generally, an “inversion” is a transaction in which a non-U.S. corporation directly or indirectly acquires substantially all of the properties held by a U.S. corporation or partnership, after which the former owners of that U.S. corporation or partnership are in control of the acquiring non-U.S. corporation. Inversion transactions can take many different forms.  Over the years, inversion transactions have continually drawn scrutiny, perceived to be transactions pursuant to which a U.S. company effectively changed its domicile to a non-U.S. jurisdiction and, accordingly, reduced its U.S. income tax liability. In response, Congress enacted the anti-inversion rules under Code Section 7874 as a means of discouraging inversion transactions and preserving the U.S. tax base. Under Code Section 7874, if a non-U.S. corporation (the “non-U.S. acquiror”) acquires, directly or indirectly, substantially all of the assets of a U.S. corporation or U.S. partnership (the “U.S. domestic target”), and the former owners of the U.S. domestic target hold stock in the non-U.S. acquiror constituting at least 80%, by vote or value, of all issued and outstanding stock of the non-U.S. acquiror after the transaction by reason of their ownership in the U.S. domestic target, then the non-U.S. acquiror will be treated as a U.S. domestic corporation for U.S. federal income tax purposes. If stock constituting at least 60%, but less than 80%, of the aggregate voting power or value of the non-U.S. acquiror is held by the former owners of the U.S. domestic target after the transaction by reason of their ownership in the U.S. domestic target, then the non-U.S. acquiror is generally respected as a non-U.S. corporation, but it would thereafter be subject to various disadvantages for U.S. federal income tax purposes for a period of 10-years after the inversion transaction. Code Section 7874 and the Treasury Regulations and administrative guidance promulgated thereunder contain a number of exceptions and additional rules applicable to determining whether an inversion transaction has occurred. For example, shares issued by the non-U.S. acquiror in a public or private financing which is related to the acquisition are disregarded in determining what percentage of the non-U.S. acquiror is owned by former owners of the U.S. domestic target. An “inversion” transaction in which the non-U.S. acquiror is treated as a U.S. domestic corporation for U.S. federal income tax purposes may have certain benefits, including permitting its acquisition of the U.S. domestic target to constitute a tax-deferred transaction (if the requirements applicable to the acquisition structure are met) and permitting future tax-deferred acquisitions of other U.S. companies. On April 7, 2021, the U.S. Department of Treasury released a report outlining the Biden Administration’s “Made in America Tax Plan” (the “Plan”). As part of the Plan, the Biden Administration proposed to expand the existing anti-inversion rules. Under the Plan, a non-U.S. acquiror that acquires a U.S. domestic target would be treated as a U.S. domestic corporation for U.S. federal income tax purposes if either (i) the former owners of the U.S. domestic target hold stock of the non-U.S. acquiror constituting 50% or more (presumably by vote or value, although the Plan is not specific in that regard) of the non-U.S. acquiring corporation after the transaction by reason of their ownership in the U.S. domestic target, or (ii) the non-U.S. acquiror is subsequently managed and controlled from within the United States. It remains uncertain whether the Plan will be enacted into law and, if so, what anti-inversions may be included in ultimately enacted legislation.

Two former employees of Cresco Labs have filed a collective and class action complaint in Illinois federal court, alleging that their employer failed to compensate its employees for time spent putting on and taking off personal protective equipment (“PPE”). Similarly, two employees of Walmart, Inc. filed a class and collective action complaint in California federal court alleging that the company failed to compensate employees for time spent completing pre-shift health screenings. Canadian employers with U.S.-based operations should take special care to compensate all non-exempt employees for time spent donning and doffing required PPE and participating in mandatory pre-shift health screenings. Under the Fair Labor Standards Act (“FLSA”) and state and hour laws, employees must be compensated for any activities that are integral to their principal work activities. Time spent putting on and taking off PPE and completing mandatory pre-shift health screenings is likely compensable, and employers should treat it as time worked. I.   Employers Must Compensate Employees for Time Spent Completing Donning and Doffing PPE and Mandatory Pre-Shift Health Screenings Like many employers facing the COVID-19 pandemic, both Cresco Labs and Walmart require employees to wear PPE during their shifts and complete pre-shift health screenings. While these safety precautions are appropriate to stop the spread of COVID-19 in the workplace, employees must be compensated for their time completing mandatory safety activities. According to the Cresco Labs complaint, employees had to report to work twelve to sixteen minutes early to complete mandatory health screenings and put on company-issued PPE. The complaint also alleges that employees spent three to five minutes after their shifts removing the PPE, including masks, hairnets, arm sleeves, gloves, scrubs, and protective shoes. While the company allowed employees to clock in five minutes early to complete the health screening and put on their PPE, the plaintiffs allege that it took longer than five minutes to complete the pre-shift activities. The complaint also alleges that the company rounds employee punches to their scheduled start times, effectively eliminating their pre-shift pay. Because employees were generally scheduled to work forty hours per week, the plaintiffs also allege failure to pay overtime as required by the FLSA. According to the complaint filed in the Walmart case, “employees are required to arrive at Walmart at least 30 minutes prior to the start of their scheduled shift so that they can complete the COVID-19 screening with enough time to clock in by the start of their scheduled shift.” The complaint alleges that employees lined up to have their temperatures taken and complete a symptom and exposure screening. Employees who passed the screening received stickers and PPE before being permitted to clock in at the other end of the store. Employees who failed the screening would be subject to a second examination before clocking in. According to the complaint, the whole process would take ten to fifteen minutes, or longer if there was a line. Generally, employers are required to compensate non-exempt employees for all compensable time, which includes time spent on all activities integral to their work activities. Employees who are required to complete pre-shift health screenings and put on company-issued PPE must be compensated for that time because these activities are necessary for the employee to begin their shift. Likewise, employees who are required to self-report symptoms before arriving to their worksite may be entitled to pay for the time between reporting and clocking in. II.   The Dangers of Non-Compliance Non-compliance with wage and hour laws can be dangerous for employers because it may lead to costly litigation. The FLSA contains a procedure for class certification by which a single aggrieved employee may seek to represent all similarly situated employees in a class action. Under the FLSA, employees may collect damages equal to their unpaid wages. In addition to back pay, employees are entitled to “liquidated damages” equal to the damages for unpaid wages if the employer’s violations are found to be willful. Essentially, employees can recover double damages for unpaid wages under the FLSA. The FLSA also includes a fee-shifting provision, which requires the employer to pay the prevailing plaintiff’s attorneys’ fees. Many state laws impose additional penalties for violation of wage and hour laws. Canadian employers with employees based in the U.S. should review their COVID-19 safety policies to confirm their compliance with the FLSA and applicable state laws. Specifically, employers should be certain that employees are compensated for all time spent complying with COVID-19 safety protocols before and after their scheduled shifts.

One of the hottest going-public trends in 2020 and 2021 has been the rise of SPACs – Special Purpose Acquisition Companies – as a vehicle for private companies to go public. SPACs are shell companies that are formed, funded and taken public for the purpose of later acquiring an operating company. By merging with a SPAC, the private company effects a reverse takeover, inheriting the SPAC’s existing cash and taking over its management. SPAC mergers have quickly increased from being occasional to outpacing the number of traditional IPOs. A SPAC merger involves different players that can have different motivations than a traditional IPO. In a traditional IPO, a private company may slowly prepare to become a public company, augmenting staffing and systems over a period of years, before engaging with underwriters that will conduct an initial public offering of securities for the company. By comparison, in a SPAC merger, the SPAC typically has a limited window of time, usually 12-24 months, in which it can identify, negotiate and close a qualifying transaction. Failure to complete a transaction by the end of that period requires the SPAC to return capital to its investors. This limited timeframe puts great pressure on the private company to be ready to go public more quickly. In addition, the SEC imposes certain disabilities on successors to SPACs. On March 31, 2021, the SEC issued two new guidance documents highlighting these and other important issues that a private company should consider before going public by merging with a SPAC. First, the SEC’s Division of Corporation Finance issued a Staff Statement on Select Issues Pertaining to Special Purpose Acquisition Companies, which reminds private companies that if they go public through a SPAC merger, the combined public company will be subject to a number of special rules applicable to former shell companies, which include: Financial statements for the acquired business satisfying the SEC’s standards must be filed within four business days of the completion of the merger, as part of a larger filing that must include extensive additional information regarding the combined business, similar to the information that would be required in an SEC registration statement or prospectus (referred to as Form 10 information); The combined public company cannot use incorporation by reference in a Form S-1 registration statement for three years after the completion of the merger; The combined public company cannot use Form S-8 to register compensatory securities offerings until at least 60 days after the combined company has filed current Form 10 information; The combined public company will be an “ineligible issuer”, as defined by the SEC, which means that for three years following the completion of the merger, the issuer: Cannot qualify as a well-known seasoned issuer; May not use a free writing prospectus; May not use a term sheet free writing prospectus available to other ineligible issuers; May not conduct a roadshow that constitutes a free writing prospectus, including an electronic roadshow; and May not rely on the Rule 163A safe harbor, which protects certain pre-filing communications from being considered impermissible offers of securities; The combined public company will be subject to the Exchange Act’s requirements relating to adequate books and records, internal control over financial reporting and disclosure controls and procedures; and If the SPAC was listed on a national securities exchange, such as the New York Stock Exchange or NASDAQ, the exchange will require the combined public company to satisfy all quantitative and qualitative standards applicable to an initial listing in order to remain listed after the merger. Further, while not mentioned in the Staff Statement, Rule 144 is not available to permit resales of securities of a former shell company until one year after the resulting issuer has filed current Form 10 information, and thereafter, its availability is always conditioned upon the combined public company continuing to be an SEC reporting company that is current in its SEC filings. Concurrent with the Staff Statement, Paul Munter, the SEC’s Acting Chief Accountant, issued a public statement on Financial Reporting and Auditing Considerations of Companies Merging with SPACs. This statement highlights a number of things for private companies to consider before completing a SPAC merger, generally seeking to impress upon private companies that a SPAC merger should be approached with the same seriousness, planning and rigor as a traditional IPO: Marketing and Timing Considerations. While a private company may spend years preparing for a traditional IPO, SPAC mergers are often sought to be completed within a few months. It is, therefore, essential that target companies have a comprehensive plan in place to address the resulting demands of being a public company on an accelerated timeline. This includes preparing for robust financial reporting and filing requirements, as well as an evaluation of various functions, including people, processes and technology, that will need to be in place to meet SEC filing, audit, tax, governance and investor relations need post-merger. It is essential for the combined public company to have a capable, experienced management team that understands what the reporting and internal control requirements and expectations are of a public company and can effectively execute the company’s comprehensive plan on an accelerated basis; Financial Reporting Considerations. The combined public company should have sufficiently knowledgeable personnel, appropriate staffing and processes in place to produce high quality financial reporting that is in compliance with all SEC rules and regulations. Management should be prepared for various financial reporting challenges that may arise in the process of the SPAC merger, including complex accounting issues such as the determination of the appropriate accounting principles, identification of the combined company’s predecessor entity for financial statement purposes, the form and content of the required financial statements and pro forma information, which entity should be treated as the acquirer for accounting purposes, accounting for any earn-out or compensation arrangements, transitioning from private to public company accounting principles and potential acceleration of adoption of recent accounting standards; Internal Control Considerations. Management should understand the requirements relating to internal control over financial reporting and disclosure controls and procedures, including the timing of management’s first required reports on these topics, and any required auditor attestation of internal control over financial reporting; Corporate Governance and Audit Committee Considerations. Companies should understand the importance and role of the board and audit committee of each party to the SPAC merger, and the combined public company, including the range of skills, experience and independence of the board of the combined public company; and Auditor Considerations. The private company’s annual financial statements should be audited in accordance with the Public Company Accounting Oversight Board (PCAOB) standards by a public accounting firm registered with the PCAOB and compliant with both PCAOB and SEC independence requirements. This requires thoughtful consideration, and may require changes to previously prepared financial statements, the auditor or the audit team. Auditor independence, in particular, can be an issue in SPAC mergers. SPAC mergers provide an important alternative to a traditional IPO, but as discussed above, they should be approached with the same seriousness, planning and rigor as a traditional IPO.

Draft legislation currently being debated in the UK Parliament will introduce a new regime similar to that of the Committee on Foreign Investment in the United States (“CFIUS”) while maintaining the UK’s position as an attractive forum for business and an openness to foreign investment. While the National Security and Investment Act (“NSIA”) will not come into effect until later this year, it will have retroactive effect from November 12, 2020. It is therefore important that entities contemplating any transaction which has a UK element and is likely to come within the ambit of the new law obtain advice now to assess whether that transaction may be at risk of challenge once NSIA becomes law.  The Secretary of State for the UK has implemented some procedures to assist clients and advisers in determining whether a deal completed prior to NISA coming into force may be at risk of challenge once the new law comes into effect. More information about the draft legislation is available here.

Canadian persons and entities owning a significant interest in a U.S. corporation or U.S. entity classified as a “disregarded entity” for U.S. federal income tax purposes should ensure they are compliant with IRS Form 5472 filing requirements to avoid substantial U.S. federal income tax penalties. IRS Form 5472, “Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business” must be filed by: (i) any U.S. corporation which has a Canadian shareholder that owns, directly or indirectly, 25% or more of the voting power or value of that corporation; (ii) any U.S. entity classified as a “disregarded entity” for U.S. federal income tax purposes that has a Canadian owner; and (iii) any Canadian corporation engaged in a U.S. trade or business within the United States; provided, in each case, that a “reportable transaction” occurs. The scope of “reportable transactions” requiring the filing of IRS Form 5472 is very broad, and generally includes, without limitation, capital contributions, intercompany debt financing arrangements and other transactions that have the potential to reduce U.S. federal income tax liabilities or result in assets being transferred to, or distributed from, the entities listed above. The failure to file penalty for Form 5472 is $25,000, which may be increased by an additional $25,000 to the extent the Form is 90 days late. An additional $25,000 penalty may be assessed each 30 days thereafter. The U.S. federal income tax rules implementing Form 5472 also require the maintenance of certain records in accordance with applicable regulations. The failure to maintain those records in the prescribed manner may also be assessed a penalty of $25,000. Certain Canadian owners of the entities listed above may also have IRS Form 5471 (a form similar to IRS Form 5472) or other reporting obligations, which may also be subject to significant failure to file penalties. The timely filing of these often overlooked IRS Forms is critical to avoiding substantial IRS penalties.

The workplace safety framework in the United States is difficult to navigate at its best.  Since the beginning of the COVID-19 global health emergency, employers have faced increasingly complex challenges involving inconsistent and conflicting guidance regarding workplace safety regulations and best practices.  Since taking office in January 2021, the Biden administration has initiated the process of clarifying rules and advice to employers regarding COVID-19 safety measures. Employers with operations in the U.S. should monitor these developments, with particular attention to the Occupational Safety and Health Administration (“OSHA”) and the feasibility of COVID-19 liability waivers. I.  Occupational Health & Safety On January 21, 2021, President Biden signed his Executive Order on Protecting Worker Health and Safety, which directed OSHA to issue revised COVID-19 guidance.  In response, OSHA issued its latest COVID-19 guidance, “Protecting Workers: Guidance on Mitigating the Spread of COVID-19 in the Workplace” on January 29, 2021.  This new guidance highlights the use of COVID-19 prevention programs as “the most effective way” to slow the spread of COVID-19 in the workplace and explains these programs should include the following elements: Assignment of a workplace coordinator who will be responsible for COVID-19 issues on the employer's behalf. Identification of where and how workers might be exposed to COVID-19 at work. Identification of a combination of measures that will limit the spread of COVID-19 in the workplace, in line with the principles of the hierarchy of controls. Consideration of protections for workers at higher risk for severe illness through supportive policies and practices. Establishment of a system for communicating effectively with workers and in a language they understand. Educate and train workers on your COVID-19 policies and procedures using accessible formats and in a language they understand. Instruct workers who are infected or potentially infected to stay home and isolate or quarantine to prevent or reduce the risk of transmission of COVID-19. Minimize the negative impact of quarantine and isolation on workers. Isolating workers who show symptoms at work. Performing enhanced cleaning and disinfection after people with suspected or confirmed COVID-19 have been in the facility. Providing guidance on screening and testing. Recording and reporting COVID-19 infections and deaths. Implementing protections from retaliation and setting up an anonymous process for workers to voice concerns about COVID-19-related hazards. Making a COVID-19 vaccine or vaccination series available at no cost to all eligible employees. Not distinguishing between workers who are vaccinated and those who are not. Application of other relevant OSHA Standards, including PPE requirements, respiratory protection, sanitation, protection from blood-borne pathogens, requirements for employee access to medical and exposure records, and OSHA’s General Duty Clause (requiring employers to provide a safe and healthful workplace free from recognized hazards that can cause serious physical harm or death). OSHA’s January 29 guidance also contains recommendations for employers to limit the spread of COVID-19 in the workplace, including: Isolating workers who have or likely have COVID-19 consistent with CDC guidelines; Quarantining workers who have been exposed to COVID-19 consistent with CDC guidelines; Implementing physical distancing and barriers in work areas; Using face coverings; Improving ventilation; Using PPE as necessary; Providing supplies for good hygiene practices; and Performing routine cleaning and disinfection. Employers who have been following OSHA and other federal and state agency COVID-19 safety guidance will find OSHA’s new guidance largely unsurprising, as it largely incorporates previous guidance and best practices. Notably, OSHA’s most recent guidance includes best practices surrounding vaccinations.  Besides providing vaccinations to workers at no cost, OSHA recommends that employers provide resources and information regarding the “benefits and safety of vaccinations” and advises that employees who have been vaccinated “must continue to follow protective measures.” II.  Employer Waivers of COVID-Related Liability For a number of reasons, including concern about the unequal bargaining power between employers and employees, many states limit or prohibit employer enforcement of waivers of claims related to workplace injuries.  These limitations and prohibitions also apply when workers are potentially exposed to COVID-19 in the workplace. Likewise, employers should remember that their duty to maintain a safe work environment cannot be waived by employees.  The Occupational Safety and Health Act of 1970 (“OSH Act”) requires employers to maintain working conditions free from known dangers.  OSHA has identified COVID-19 contracted in the workplace as a reportable injury.  Under OSHA’s guidelines, employers are required to make a reasonable and good faith inquiry to determine whether it is “more likely than not” that workplace exposure was causally related to cases of COVID-19.  This means that regardless of any waiver, an employer may have to take responsibility for cases of COVID-19 in the workplace. Generally, a state’s worker’s compensation laws provide employees’ exclusive remedy for injuries or illness arising from or occurring because of their employment, including injuries and illnesses that stem from an employer’s negligence.  Whether COVID-19 is considered an “occupational disease” subject to worker’s compensation varies by state, and individual state laws may make distinctions based on the date of contraction of COVID-19, the worker’s role and other factors.  Traditionally, state worker’s compensation agencies require workers to show that their injury or illness occurred within the course and scope of their employment and there was a particular risk based on the work conditions that exceeded the risk to the general public. However, in response to the COVID-19 public health emergency, several states have passed laws or issued guidance providing that certain types of employees (particularly essential workers) who contract COVID-19 within specific timeframes are presumed to have caught the illness through the course of their employment. Courts have also recently entertained claims alleging that employers intentionally failed to take steps to keep workers safe from COVID-19 and thus, the worker can sue the employer directly notwithstanding workers’ compensation laws. State and federal lawmakers have made efforts to shield employers from liability stemming from their employees or customers contracting COVID-19.  In 2020, Senate Republicans proposed a bill to shield employers from liability for COVID-19 exposure, unless the employee could prove “by clear and convincing evidence” that the employer was the source of the exposure, had not made reasonable efforts to comply with applicable laws or guidelines, and engaged in gross negligence or willful misconduct.  However, the proposed legislation would not preempt state worker’s compensation laws.  To date, the proposal has not been enacted.  Several states, including Georgia, Kansas, Louisiana, Mississippi, North Carolina, Ohio, Oklahoma, Tennessee, Utah and Wyoming, have enacted COVID-19 liability shields, which offer varying protections to employers. III.  Practical Considerations While the new OSHA guidance generally incorporates previous guidance and best practices, employers should take care to review and comply with the safety guidelines.  Given the addition of information related to vaccinations, employers should incorporate OSHA’s vaccine guidance into their COVID-19 response.  Employers should also review the U.S. Equal Employment Opportunity Commission’s guidance on vaccinations and confer with counsel before rolling out vaccination programs. OSHA guidance is not a standard or regulation, and does not directly create legal obligations for employers.  However, in the case of an OSHA investigation, OSHA’s inspectors will rely on this guidance when determining whether to issue an employer a citation.  Failure to follow OSHA guidance could also be used as evidence of wrong doing in a civil suit. Employers should also note that OSHA will likely issue new legal obligations related to COVID-19 soon.  President Biden’s executive order also ordered OSHA to “consider whether any emergency temporary standards on COVID-19, including with respect to masks in the workplace, are necessary, and if such standards are determined to be necessary, issue them by March 15, 2021.”  We expect OSHA to issue emergency temporary standards to this effect. Some employers have been asking workers to sign COVID-19 liability waivers as a deterrent to bringing claims.  However, given their doubtful enforceability, employers should consider the message sent to employees, regulators, and the public about the company’s priorities if such waivers are required.  Particularly given the remaining liability under worker’s compensation laws and the OSH Act, employers would be better served by foregoing COVID-19 liability waivers and focusing efforts on workplace safety compliance and messaging.

The Financial Industry Regulatory, Inc. (“FINRA”) has recently provided our firm with informal guidance that, in accordance with the principles of the multijurisdictional disclosure system (“MJDS”), a Canadian issuer that is undertaking a U.S. registered public offering may count its reporting history in Canada (along with any reporting history in the United States) toward the 36 month requirement in FINRA Rule 5110.  This has the effect of providing an exemption from filing with FINRA for Canadian issuers with a combined Canadian and U.S. reporting history of at least 36 months, even if they have a shorter reporting history in the United States.  This guidance will save qualifying Canadian issuers the time and financial cost of submitting materials to FINRA and obtaining FINRA clearance prior to offering securities in the United States. In September 2020, FINRA amended Rule 5110, which deals with registered corporate financing transactions.  FINRA added an exemption from the requirement to file offerings with FINRA (and pay FINRA filing fees) for an “experienced issuer.”  An experienced issuer is defined as an issuer that has: a reporting history of 36 calendar months immediately preceding the filing of the registration statement, and at least US$150 million aggregate market value of voting stock held by non-affiliates; or alternatively, the aggregate market value of the voting stock held by non-affiliates of the issuer is US$100 million or more and the issuer has had an annual trading volume of such stock of three million shares or more. Many Canadian issuers satisfy the market cap prong of the test but do not have a 36 month reporting history in the United States.  The new guidance will significantly increase the number of Canadian issuers that are eligible for the FINRA filing exemption.

Canadian companies engaged in M&A transactions with connections to the United States should be aware of recent changes to the rules under the Hart-Scott Rodino (HSR) Act. On February 2, 2021, the US Federal Trade Commission (FTC) announced the annual adjustment of the thresholds that trigger premerger reporting obligations (and the mandatory waiting period) under the HSR Act. The new thresholds will apply to transactions closing on or after March 4, 2021 (that is, 30 days after publication of the announcement in the Federal Register). This year, for the first time in a decade, the thresholds decreased. You can find a detailed discussion of the recent developments here. In addition, the FTC and Department of Justice announced on February 4, 2021 the temporary suspension of the practice of granting “early termination” of the HSR waiting period.  In other words, for the time being, issuers and advisors should assume that any reportable transaction will require the full 30-day waiting period (shorter in all-cash tender offers).  This is expected to be a short-duration suspension, but how short is not known. See FTC press release here. Canadian issuers and their advisors should note that the HSR reporting requirements may be applicable to transactions involving non-US targets, depending on the extent of the target’s US-based revenues and assets and other factors.

An often overlooked exception to U.S. withholding taxes may result in a lower overall U.S. tax burden. The Foreign Account Tax Compliance Act (“FATCA”) was enacted in an effort to ensure that U.S. taxpayers could not avoid U.S. federal income tax on investment income through the use of non-U.S. accounts or entities. FATCA requires that certain foreign financial institutions (“FFIs”) and nonfinancial foreign entities (“NFFEs”) comply with information reporting requirements intended to identify U.S. account holders or U.S. owners. FFIs generally include banks, investment companies or similar financial institutions, and certain non-U.S. trusts while NFFEs generally include any entity that is not a financial institution. Under FATCA, a withholding agent that does not obtain proper documentation from its beneficial owners as required for compliance with applicable FATCA reporting requirements (e.g., an IRS Form W-9, W-8BEN, W-8BEN-E or other applicable form) is generally required to withhold 30% of a withholdable payment to an FFI or NFFE. For these purposes, a “withholdable payment” is defined as (i) any payment of interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income (collectively, “FDAP Income”), if such payment is from sources within the United States, and (ii) any gross proceeds from the sale or other disposition of any property of a type which can produce interest or dividends from sources within the United States (e.g., capital gains of stock of a U.S. corporation). However, in December of 2018, Treasury issued Proposed Regulations which would remove gross proceeds from the definition of a “withholdable payment”, and thereby eliminate the withholding requirements on gross proceeds described in (ii) above. The Preamble to the Proposed Regulations noted that financial institutions faced significant administrative burdens in complying with such withholding requirement for gross proceeds and that it was no longer necessary given widespread compliance with the FATCA regime. While these Proposed Regulations have yet to be finalized, the Preamble provides that taxpayers may generally rely on the Proposed Regulations until such time that final Treasury Regulations are issued. Accordingly, only payments of U.S.-source FDAP Income are currently subject to FATCA withholding and reporting requirements.

The United States is currently experiencing the largest surge in COVID-19 cases since the global health emergency began.  In the past several weeks, the United States Food and Drug Administration (“FDA”) granted emergency-use authorization to the Pfizer and Moderna COVID-19 vaccines, prompting employers to ask whether they may require employees to be vaccinated. It is imperative that Canadian employers understand their rights and responsibilities with regard to the vaccination of U.S.-based employees. A.  Can Employers Require Employees to Receive the Vaccination? Generally speaking, employers may disallow employees from entering the workplace if they have not been vaccinated, though employers must accommodate employees with disabilities or religious objections.  On December 16, 2020, the Equal Employment Opportunity Commission (“EEOC”) published guidance addressing the topic of COVID-19 vaccinations in the workplace.  This guidance confirms that employers may lawfully require employee vaccinations as a condition of entry to the workplace, absent a disability or religious objection that would prevent the employee from being vaccinated.  The EEOC also warns employers who seek to require vaccinations to be conscious of confidentiality requirements under the ADA, which would apply to any pre-screening questions asked prior to the vaccine being administered. Employees may be protected from adverse employment actions by the Americans with Disabilities Act (“ADA”) if they have a disability that would make vaccination dangerous or by Title VII of the Civil Rights Act of 1964 (“Title VII”) if they have a religious objection to vaccination.  Employers are prohibited from mandating employee vaccination as a condition of employment when an employee indicates that they are unable to receive the vaccine due to a disability (including an allergy to the vaccine or its ingredients) or because of a sincerely held religious practice or belief. If an employee reports that they are unable to receive the vaccination due to a disability, the EEOC has stated that employers should consider the request for accommodation (in the form of not requiring that employee to be vaccinated) and determine whether the unvaccinated employee would “pose a direct threat due to a significant risk of substantial harm to the health or safety of the individual or others that cannot be eliminated or reduced by reasonable accommodation” using the EEOC’s direct threat analysis.  If the unvaccinated employee poses an unacceptable direct threat to the health and safety of others, they must assess whether a reasonable accommodation may be made for the employee, such as allowing the employee to work remotely or otherwise in isolation from others.  Likewise, employers must assess whether reasonable accommodations can be made for employees who report that they are unable to be vaccinated due to a sincerely held religious belief. Employers that decide to make vaccination a condition of employment should be prepared for requests for accommodation based on disability and religious beliefs, and update their accommodation procedures accordingly. B.  Should Employers Require Employees to Receive the Vaccination? There are several factors for employers to consider in determining whether they should make vaccination a condition of employment, including vaccine availability, the cost of vaccination, whether their employees are unionized, and how the employer would respond to employees refusing to be vaccinated. 1.  Vaccine Availability Although the FDA has granted emergency-use authorization for two vaccines, supply is severely limited, with the first doses being distributed to health care providers and high risk individuals.  As a practical matter, it is highly unlikely that companies will have access to sufficient doses of the vaccine to inoculate their entire workforce for quite some time.  In the meantime, employers should consider alternatives to vaccination, such as continued remote work, social distancing, and mask requirements to address safety concerns in the workplace.  If these measures are adequate, employers should consider delaying any plans to mandate employee vaccination until doses of the vaccine are more widely available. 2.  Cost of Vaccination Employers considering a mandatory vaccination program should also consider the practical burdens for the employer and employees.  Specifically, employers should determine whether they will cover some or all of cost of vaccination.  Likewise, employers should consider whether employees will be provided time to be vaccinated during their workday or whether vaccines will be provided on-site.  Providing answers to these questions at the outset will ease some employee concerns and facilitate the smooth roll-out of a vaccination program. 3.  Employer Response to Employee Refusal of the Vaccine The COVID-19 pandemic is an increasingly polarizing and political issue in the United States, including stay-at-home orders, mask mandates, and most recently, vaccination.  Some employees may see vaccination as in infringement on their individual liberties or a safety concerns given the vaccine’s accelerated development and approval.  Despite statements by public health officials, many Americans feel that the risk of adverse side effects outweighs the vaccine’s benefits, or that the vaccine may not be effective at all. Employers hoping to implement a mandatory vaccine program should consider how they will respond to an employee’s refusal to be vaccinated.  Employers may have to decide whether they are prepared to terminate employees who refuse the vaccine.  Employers should reflect on the impact that terminating employees may have on their workplaces, including increased turnover, decreased employee morale, difficulty hiring amidst an ongoing pandemic, and other staffing issues.  Employers requiring COVID-19 vaccination should clearly communicate their policies in advance of implementation, emphasizing their necessity and describing how they will be enforced. 4.  Unionized Workforces Employers with unionized workforces face additional considerations.  If a collective bargaining agreement is silent on the topic of vaccinations and the agreement’s Management’s Rights clause does not afford the company discretion to mandate employee vaccination, employers are likely required to bargain with the union over a mandatory vaccination program.  Additionally, employers must decide whether an employee’s refusal to be vaccinated (subject to the exceptions discussed above) would constitute “just cause” for termination in anticipation for union grievances. C.  Takeaways Absent a disability or religious objection issue with particular employees, U.S. employers will generally be able to make vaccination a condition of employment. However, employers should carefully consider whether doing so makes practical sense.  Employers who make the vaccine a condition of employment before it is widely available or fail to take into account employee concerns regarding costs and safety may face a significant backlash from their workforce, even if that workforce does not have a basis for bringing legal claims.  Likewise, employers hoping to implement a mandatory vaccination program should be conscious of the effect of any collective bargaining agreements in their workplaces.  Most importantly, employers must determine how to enforce a mandatory vaccination program prior to implementation. The best route for many employers will be to strongly encourage employees to get the vaccine once it becomes available and to lower barriers to vaccination by paying associated costs, rather than to make vaccination a strict requirement for continued employment.

The United States Department of Labor (DOL) has issued a proposed rule addressing the definition of “independent contractor” in the context of the Fair Labor Standards Act (FLSA). Canadian companies with a presence in the United States should monitor the proposed rule and its impacts on their American operations.  If adopted, the proposed rule would loosen restrictions on classifying workers as independent contractors for purposes of the FLSA and provide more flexibility for Canadian organizations. While some states have adopted the DOL’s approach to independent contractor classification, others, such as Washington and California, have adopted more restrictive rules.  Employers should be sure to confirm the laws regarding independent contractor classification in the states in which they wish to hire independent contractors to ensure compliance.  Some state laws require different classification analyses for various state laws, including state wage and hour laws, workers’ compensation, and unemployment insurance benefits. Likewise, Canadian employers should be aware that the proposed rule only addresses the independent contractor classification for purposes of the FLSA and should also be aware of the Internal Revenue Service (IRS) rules regarding classification of independent contractors for tax purposes. The DOL’s proposed rule outlines a multi-factor test for classifying independent contractors.  It includes two “core” factors and three “guidepost” factors, all of which are intended to determine the economic dependence or independence of the individual. The proposed rule focuses on whether a worker is economically independent and in business for themselves, or if the worker is economically dependent on the company for work.  Workers found to be economically dependent on the company for work are properly classified as employees.  Workers found to be economically independent and in business for themselves are properly classified as independent contractors. I.                “Core” Factors The factors in the proposed rule are not exhaustive and no single factor is considered dispositive.  However, under the proposed rule, the core factors are considered the most probative and carry the most weight.  If both core factors support the same worker classification, there is a substantial likelihood that the status indicated by the core factors is the appropriate classification. A.             The “Control” Factor The Control Factor focuses on whether the worker exercises substantial control over the key aspects of the performance of the work.  Considerations include whether the worker sets their own schedule, chooses assignments, works without supervision, and/or is able to work for others. The proposed rule clarifies that a company’s requirement that a worker comply with certain legal obligations, quality control, health and safety standards, and/or meet deadlines does not constitute the type of control that would necessitate the classification of a worker as an employee instead of an independent contractor. B.             The “Profit and Loss” Factor The Profit and Loss Factor focuses on the worker’s opportunity for profit or loss based on their initiative or investment in the work.  The Profit and Loss analysis addresses the worker’s personal initiative or management of expenditures. It is important to note that under the proposed rule, whether investments made by a worker are similar to those made by the company is irrelevant.  In this regard, the proposed rule favors independent contractor classification. II.            Secondary Factors The proposed rule includes three secondary factors for determining the appropriate classification for workers: (1) the amount of skill required for the work; (2) the degree of permanence of the working relationship between the worker and the potential employer; and (3) whether the work performed is part of an integrated unit of production. Under the proposed rule, the “skill” factor is intended to focus on skill alone, and should not consider initiative and other factors, which are to be analyzed as part of the “core” factors.  The “permanence” factor addresses the continuity and duration of the relationship between the worker and the company.  Under the proposed rule, work of a sporadic or definite duration favors independent contractor status.  The “integrated unit” factor considers whether the work was part of the integrated unit of production.  The proposed rule would assign limited probative value to the question of whether a worker’s work is important to the business. III.          Opportunity for Public Comment The DOL has foregone the traditional 60-90 day notice period in favor of a 30 day notice period, signaling the administration’s attempt to finalize the proposed rule before the Biden administration is seated in January. While seeking comments on all aspects of the proposed rule, the DOL is specifically interested in comment on its theory that employers will increase utilization of independent contractors if the rule is finalized and whether the rule will entice companies to reclassify workers currently classified as employees as independent contractors.  It also seeks feedback regarding how companies’ use of independent contractors may change as a result of the proposed rule, particularly in light of the ongoing COVID-19 public health emergency. IV.          Takeaways for Employers If the proposed rule is finalized, employers will have a clear and business-friendly test to use when classifying workers as independent contractors.  It is important to note that the DOL’s rules have no bearing on state laws that use different, and potentially more worker-friendly, analyses.  Employers should carefully review existing independent contractor and employee classifications. Canadian companies with American operations should address worker classifications with their American counsel.  If and when the DOL adopts the proposed rule, Canadian companies may choose to reclassify some workers as independent contractors while maintaining compliance with the FLSA.

A Canadian which holds a partnership interest in a U.S. or non-U.S. partnership that has “effectively connected income” (“ECI”) is subject to U.S. tax withholding with respect to the Canadian partner’s allocable share of the partnership’s ECI.  That withholding tax must be remitted by the partnership to the IRS irrespective of whether any distributions are made by the partnership in that tax year and irrespective of the Canadian partner’s ultimate U.S. federal income tax liability for that tax year.  For this purpose, a “partnership” includes any entity classified as a partnership for U.S. tax purposes, including a limited liability company or “LLC” classified as a partnership. ECI generally includes all income from U.S. sources that is connected with the conduct of a U.S. “trade or business”. The term “trade or business” generally includes the performance of personal services, but also includes and excludes specific types of activities. The determination of whether activities rise to the level of constituting a trade or business requires specific analysis. Canadian partners in partnerships with ECI will be required to obtain a U.S. taxpayer identification number and to file a U.S. federal income tax return, as the activities of a partnership constituting a trade or business will be attributed to the Canadian partner. A Canadian partner will generally be eligible to claim a credit for their share of the ECI withholding tax remitted by the partnership in determining their aggregate U.S. tax liability. Accordingly, the withholding tax is not an additional tax. In addition to the foregoing, a Canadian which transfers or disposes of an interest in a partnership with ECI is generally subject to a 10% U.S. withholding tax, unless an exception applies. Exceptions to the 10% U.S. withholding tax generally assessed against transferors of interests in U.S. partnerships will be discussed in a subsequent blog post.

Effective December 8, 2020, the SEC’s definition of an “accredited investor” that is eligible to purchase securities in a private placement will be expanded to cover additional categories of investors, including investment advisers, individuals with certain professional certifications, and certain family offices, Indian tribes, governmental bodies, LLCs, funds and others.  For more details, click here. To take advantage of the new, broader definition, Canadian issuers should reach out to their U.S. counsel to update their applicable subscription agreement and other investment forms.

On October 7, 2020, the Securities and Exchange Commission (”SEC”) proposed a new limited, conditional exemption from broker-dealer registration requirements of Section 15(a) of the Securities and Exchange Act of 1934, as amended (“Exchange Act”) for “finders” who assist issuers with raising capital in private markets from accredited investors. The proposed exemption would permit natural persons to engage in certain defined and limited activities involving accredited investors without registering with the SEC as brokers. The proposed exemption seeks to assist small businesses to raise capital and to provide regulatory clarity to investors, issuers, and the finders who assist them. There will be a 30-day comment period for the proposed exemption following publication in the Federal Register. The SEC published a series of 45 questions at the end of the proposal seeking feedback. For additional information, see this eUpdate.

In conjunction with the OTC Markets, Dorsey has updated its Guide to Joining the OTCQX or the OTCQB Markets for Canadian and other Foreign issuers. Canadian issuers who trade on a qualified foreign stock exchange (which include the Toronto Stock Exchange, TSX Venture Exchange, Canadian Securities Exchange and the Aequitas NEO Exchange) and who meet certain financial criteria can trade in the United States on the OTCQX or the OTCQB by relying on their Canadian disclosure and without needing to register with the United States Securities and Exchange Commission. The OTCQX is for more established companies that meet higher financial standards while the OTCQB is for early-stage and developing companies. The OTCQX and OTCQB provide trading platforms in the United States that offer many of the benefits of traditional U.S. stock exchanges with less regulatory burden and lower reporting costs. Most Canadian issuers will require an approved sponsor to assist with joining the OTCQB and OTCQX. Dorsey is an approved sponsor and we have assisted over 150 issuers with their trading on the OTCQX or OTCQB over the past 10 years. The Guide to Joining the OTCQX or the OTCQB Markets for Canadian and Other Foreign Issuers can be found here.

2020 is shaping up to the be the biggest year ever for at-the-market (ATM) financing programs, and Canada-US cross-listed companies are getting their share of the financing.  In the last three months alone, at least 14 Canadian issuers that are listed on a NYSE or Nasdaq exchange have filed with the SEC for at-the-market (ATM) financing programs across a spectrum of industries, including mining, life sciences, technology, royalty and commodity trust issuers. Find out more about raising money through an ATM by: Reading our newly-published Guide to At-the-Market Programs for MJDS Issuers; Participating in one of our ATM webinars; or Calling your Dorsey contact.

The IRS has released a new webpage dedicated to the marijuana industry to help growers, processors, researchers and retailers understand and comply with their U.S. federal income tax responsibilities. The IRS Marijuana Industry webpage covers numerous topics that may be relevant for businesses directly engaged in, or related to, the cultivation, processing and sale of marijuana, including, without limitation, common U.S. federal income tax filing obligations, options for satisfying U.S. federal income tax liabilities, and penalties which will be assessed if such payment obligations are not satisfied on a timely basis. Perhaps of most significance, the IRS Marijuana Industry webpage also contains a series of FAQs including information on a number of common questions, including the potential application of Section 280E of the U.S. Internal Revenue Code to taxpayers in the marijuana industry. The IRS webpage dedicated to the Marijuana Industry can be accessed at: https://www.irs.gov/businesses/small-businesses-self-employed/marijuana-industry

We are seeing a significant increase in cases where a qualified person (QP) or related engineering firm has prepared a technical report or other required disclosure for a mining company, but then resisted, or outright refused, to provide the written consent that the mining company is required to obtain in order to be permitted to disclose the name of the QP and the conclusions of the QP in a prospectus that forms part of an SEC registration statement for a public offering or for the mining company’s annual report that is filed with the SEC.  This can be costly and damaging to the mining company, because it may put the company in a position where it cannot satisfy both the SEC consent requirements and the requirements of Canada’s National Instrument 43-101 (NI 43-101) without having another QP redo the first QP’s work. The incidence of QPs taking this position seems to be increasing as the SEC’s new mining disclosure rules under subpart 1300 come into effect.  For companies that file with the SEC on non-MJDS forms (Forms 10-K, S-1 and S-3 for domestic issuers, and Forms 20-F, F-1 and F-3 for foreign private issuers), the subpart 1300 rules will impose new requirements on QPs that will increase their exposure to potential liability.  The subpart 1300 rules will not apply to MJDS forms.  For the many Canadian mining companies that file with the SEC under the MJDS system (e.g., Forms 40-F and F-10), their QPs will not be subject to any increased exposure.  Nevertheless, we are seeing QPs taking a more cautious approach to consents as they become more aware of the potential liability to which they have always been subject as “experts”. To avoid the potential for unpleasantness at a later date, mining companies that may require an SEC consent from a QP should raise this requirement with the QP as part of the process of initially engaging the QP and consider building the QP’s obligation to provide any required consents into the express terms of any written agreement with the QP.

On August 16, 2020, the United States re-imposed Section 232 tariffs on Canadian-origin primary aluminum imports, adding another twist to the long-standing trade dispute with Canada over its aluminum exports to the United States.  This tariff action followed a proclamation issued by President Trump dated 6 August 2020.[1]  Citing an 87% surge in imports of primary aluminum from Canada since a tariff truce announced in May 2019, the Trump administration re-imposed a 10% tariff on these imports.  This re-imposition of tariffs is happening despite the recent entry into force of the U.S.-Mexico-Canada Agreement (“USMCA”) in July 2020.  Canada promptly retaliated in kind by announcing countermeasure tariffs on certain U.S. aluminum goods. In early 2018, after a year-long investigation under Section 232 of the Trade Expansion Act of 1962, the Trump administration determined that aluminum imports from around the world threatened to impair U.S. national security.  In March 2018, the Trump administration imposed a 10% tariff on various aluminum imports, sourced from anywhere in the world.  (At the same time, the Trump administration also imposed a 25% tariff on various steel imports from around the world under Section 232.) Canadian aluminum products then became subject to whiplash in having tariffs imposed and removed.  Initially, Canadian aluminum products, along with Mexican products, were exempt, possibly in consideration of ongoing negotiations to replace the North American Free Trade Agreement (“NAFTA”).  Then, in June 2018, Canadian and Mexican aluminum products were added back onto the tariff list, which prompted Canadian and Mexican retaliatory tariffs on U.S. products. Despite this tit-for-tat mutual imposition of tariffs, the three countries nevertheless signed the USMCA in November 2018 to replace NAFTA.  To facilitate USMCA’s ratification by their national legislatures, the three countries declared a tariff truce in May 2019.  The Trump administration once again exempted Canadian and Mexican aluminum from the Section 232 tariffs, while Canada and Mexico rescinded their retaliatory tariffs against U.S. products.  The Trump administration also agreed not to re-impose Section 232 tariffs unless there was a surge of Canadian and Mexican imports beyond historic levels, and negotiations to address that surge are unsuccessful.  This truce paved the way for the USMCA’s entry into force on July 1, 2020. The U.S. tariff action affects only imports of unwrought, unalloyed aluminum from Canada – which are primary products made from raw bauxite that are used to fabricate downstream aluminum products.  This class of goods constitutes the largest share of Canadian aluminum exports to the United States.  Assuming this 10% tariff proceeds, it could significantly impact the aluminum market, from competing U.S. producers of primary aluminum, to producers of secondary aluminum from recycled goods that could compete with imported primary aluminum, and to downstream users of aluminum across all industries. Canada promptly imposed retaliatory tariffs on a variety of U.S. aluminum goods, as expressly allowed under the May 2019 tariff truce.[2]  Canada is imposing a 10% “surtax” on items ranging from raw aluminum ore to finished household appliances that use aluminum.  The May 2019 tariff truce had reserved Canada’s right to impose such countermeasures, albeit limited only to goods in the aluminum sector. If you have any questions about the Section 232 tariffs or other trade matters, Dorsey’s international trade attorneys profiled below would be happy to assist.  Dorsey’s attorneys at its offices in Canada and the United States are also prepared to assist clients with any other legal issues that may arise in cross-border transactions.[1] https://www.govinfo.gov/content/pkg/FR-2020-08-14/pdf/2020-17977.pdf. [2] https://www.canada.ca/en/department-finance/programs/consultations/2020/notice-intent-impose-countermeasures-action-against-united-states-response-tariffs-canadian-aluminum-products.html.

The CARES Act, signed into law on March 27, 2020 in the wake of the onset of the Covid-19 pandemic, contained numerous changes to U.S. federal income tax law. One such change applied to the deductibility of net operating losses (“NOLs”). Legislation enacted in December 2017 commonly known as the “Tax Cuts and Jobs Act” (the “TCJA”) prohibited the carrying back of NOLs to prior tax years and limited the amount of NOLs which could be deducted in any particular tax year to 80% of a corporate filer’s taxable income. Reversing course, Section 2303 of the CARES Act delayed the effective date of certain limitations in the TCJA by allowing a corporate taxpayer’s NOLs arising in a taxable year beginning after December 31, 2017 and before January 1, 2021 to be carried back to the five years preceding the taxable year of such loss. In addition, the CARES Act eliminated the taxable income limitation applicable to the deductibility of NOLs for tax years beginning after December 31, 2017 and before January 1, 2021 (with additional rules applying to tax years beginning after January 1, 2021). Recent SEC filings suggest that SEC-registered companies anticipate receiving refunds, in the aggregate, in excess of $5 billion. Due to the reduction of the U.S. corporate tax rate from 35% to 21% as a result of the TCJA, some corporate taxpayers may benefit significantly more than others, due to the ability to carry NOLs back to tax years in which a higher U.S. federal income corporate tax rate applied. Other corporate taxpayers may be unable to fully, or even partially, utilize accumulated NOLs due to not having taxable income in the five tax years preceding the year of a particular loss. NOL provisions in merger and acquisition agreements should be carefully analyzed in the wake of the CARES Act to ensure that the potentially significant benefits from the ability to carry back NOLs are appropriately negotiated.

Current closures at the Internal Revenue Service (“IRS”) have caused significant delays in obtaining an Employer Identification Number (“EIN”) for some U.S. businesses formed by Canadians, including new U.S. subsidiaries formed by Canadian companies. An EIN is a nine-digit number that the IRS assigns to businesses, which is necessary for many essential tasks, including making U.S. federal tax filings, hiring employees, or opening and maintaining a U.S. bank account. Applicants with a “U.S. Responsible Party” (i.e., a CEO, CFO, or President with a U.S. Social Security Number or Individual Taxpayer Identification Number) are generally able to obtain an EIN through the IRS’ online application portal, which remains open. Most applicants lacking a U.S. Responsible Party must submit their applications to the IRS via telephone, fax, or mail. However, due to the COVID-19 outbreak, the IRS has temporarily closed its EIN call center, fax lines, and mail-processing center. Accordingly, applicants lacking a U.S. Responsible Party may not be able to obtain an EIN until the IRS reopens one of these channels. As the IRS has not yet indicated when such reopening might occur, applicants lacking a U.S. Responsible Party are left with only one course of action. These applicants can submit a Form SS-4 via certified mail to the IRS for processing when the IRS reopens its mail-processing center. In doing so, such applicant can attest to having “applied for” an EIN and provide the official date of its application (being the date the application was mailed). While an EIN submitted via certified mail will generally be processed in the order received, the actual processing of the application will not begin until the IRS reopens its mail-processing center. In the ordinary course of business, the EIN-by-mail process can take up to one month. However, given the ongoing uncertainty surrounding COVID-19, the actual processing time of EIN applications submitted via certified mail may be far longer.

On April 29, 2020, the SEC issued new Compliance & Disclosure Interpretations (the “New C&DIs”) that clarified the compliance deadline for many mining companies that file with the SEC on non-MJDS forms such as Form 10-K or Form 20-F to comply with the SEC’s new mining disclosure rules in Subpart 1300 of Regulation S-K. The New C&DIs follow closely on the heels of the National Mining Association having submitted a letter on April 24, 2020, to the SEC’s Chairman, Jay Clayton, requesting a one-year delay in the Subpart 1300 compliance deadline in light of the COVID-19 pandemic. The SEC’s adopting release for Subpart 1300 on October 31, 2018, had required that mining companies begin complying with the new rules, including the filing of technical report summaries, beginning with the annual report filed for the company’s first fiscal year beginning on or after January 1, 2021 (in other words, in early 2022 for calendar year companies, and later in 2022 or very early 2023 for other companies). However, that timeline was to be accelerated for new registrants and also, apparently, for companies accessing the public markets, with compliance required beginning January 1, 2021, for any registration statement filed on or after that date. The treatment of shelf takedowns from existing registration statements after January 1, 2021, was not specifically addressed. The New C&DIs provide much-needed clarity regarding the Subpart 1300 compliance deadline for many mining companies: For non-calendar year companies, Subpart 1300 will not apply until the beginning of the company’s first fiscal year on or after January 1, 2021. For example, a company with a June 30 fiscal year end will not in any circumstance become subject to Subpart 1300 until July 1, 2021. If a company files a Securities Act registration statement after the beginning of its first fiscal year on or after January 1, 2021, and prior to its annual report for such fiscal year,[1] it is not required to comply with Subpart 1300 in the Securities Act registration statement if the form being used permits incorporation by reference of information from a prior annual report that was not subject to Subpart 1300, and such disclosure is not otherwise prohibited under the SEC’s rules. For example, if a calendar-year end company files a Form S-3 or Form F-3 during 2021, it may incorporate its annual report on Form 10-K or Form 20-F for the fiscal year ended December 31, 2020, even if that report contains disclosure in accordance with SEC Industry Guide 7. As a result of the New C&DIs, many mining companies that are working on implementing Subpart 1300 will not be required to comply with the new rules until the date in 2022 when they file their annual report for their first fiscal year beginning on or after January 1, 2021. The exception to this rule will be companies that file an initial Exchange Act registration statement or a Securities Act registration statement that does not permit incorporation by reference[2] after the start of their first fiscal year beginning on or after January 1, 2021. Those filings will trigger early compliance with Subpart 1300. The New C&DIs are available at sec.gov/divisions/corpfin/guidance/regs-kinterp.htm#section155. The SEC’s adopting release for Subpart 1300 is available at sec.gov/rules/final/2018/33-10570.pdf. Links for Dorsey's prior Q&A and webinar regarding Subpart 1300 are available at dorsey.com/newsresources/publications/client-alerts/2019/02/new-mining-disclosure-rules-2019 and dorsey.com/newsresources/events/videos/2019/02/webinar-playback-sec-new-mining-rules, respectively.   [1] Technically, the New C&DIs refer to the date on which audited financial statements for such fiscal year are required to be included in the Securities Act registration statement. [2] For example, Forms F-1 and S-1, the SEC’s equivalents to a “long form” prospectus, do not permit incorporation by reference if the company (i) is a new registrant, (ii) has not yet filed its SEC annual report for its most recently completed fiscal year, (iii) is delinquent in its SEC reports, (iii) is or was, or has a predecessor that was, within the last three years, a blank check company, a shell company, or a registrant for an offering of penny stock, or (iv) is registering a business combination. Forms F-4 and S-4, which are used to register business combinations, also include restrictions on incorporation by reference, depending on the nature of the registrant and the company being acquired.