Pre-Merger Notification Interpretation Guideline Number 15: Assets in Canada and Gross Revenues From Sales in, from or into Canada (Sections 109 and 110 of the Act)

Enforcement Guidelines

Draft for Public Consultation — April 11, 2012

This Interpretation Guideline is issued by the Commissioner of Competition ("Commissioner"), who is responsible for the administration and enforcement of the Competition Act ("Act"). The purpose of this Guideline is to assist parties and their counsel in interpreting and applying the provisions of the Act relating to notifiable transactions. This Guideline sets out the general approach taken by the Competition Bureau ("Bureau") and is not intended to be a binding statement of how discretion will be exercised in a particular situation and should not be taken as such, nor is it intended to substitute for the advice of legal counsel to the parties, or to restate the law. Guidance regarding a specific proposed transaction may be requested from the Merger Notification UnitFootnote 1 ("MNU").


Table of contents

1. Background

Section 114 of the Act requires parties to a proposed transaction that exceeds the party-size and transaction-size thresholds under sections 109 and 110 of the Act, respectively, to notify the Commissioner of the proposed transaction and supply the prescribed information. To determine whether a proposed transaction exceeds the party-size threshold under section 109 of the Act, the assets in Canada and the gross revenues from sales in, from or into Canada (being domestic sales, exports and imports) for all parties to the transaction, together with their affiliatesFootnote 2, must be calculated. To determine whether the transaction-size threshold under section 110 of the Act is exceeded, the aggregate value of the assets in Canada being acquired and the gross revenues from sales in or from Canada generated from those assets must be calculated.

2. Policy

The audited financial statements are the starting point for determining whether or not an asset is "in" Canada or gross revenues from sales are "in, from or into" Canada. In reviewing the audited financial statements of merging parties and their affiliates, consideration should be given to the principles set out below. In addition, while information in audited financial statements that is segmented by geographic regions may be helpful in assessing whether a proposed transaction exceeds notification thresholds, it is incumbent on parties to look beyond these segmented results to ensure that threshold calculations are consistent with the requirements of the Act and the Notifiable Transactions Regulations.

2.1 Assets "in" Canada

Except as set out below, all assets on the audited financial statements of a Canadian entity are assets "in" Canada. An entity is considered Canadian where it is incorporated in Canada or, in the case of an unincorporated entity, formed pursuant to a Canadian statute.

2.1.1 Tangible assets

Whether a tangible asset is an asset "in" Canada typically depends on where the asset is physically located. In particular:

  • An immovable tangible asset, such as a building or land that is located in Canada is an asset in Canada, whereas if it is located outside of Canada it is not an asset in Canada.
  • A moveable tangible asset, such as inventory, equipment or vehicles of a Canadian entity is considered to be "in" Canada, unless the asset was physically located outside Canada throughout the entire relevant fiscal period. Evidence of location may include a record of registration in a foreign jurisdiction or a log of where the asset was located throughout the entire relevant fiscal period.
  • Where a moveable tangible asset of a foreign entity is physically located in Canada at any time during the relevant fiscal period, parties are expected to determine what proportion of the value of that asset is attributable to Canada, and include that amount in calculating the value of assets in Canada.

2.1.2 Intangible assets

The location of an intangible asset, such as a copyright, trademark or patent, is typically determined by the statute conferring the legal rights and privileges associated with the asset. In particular:

  • An intangible asset with rights and privileges conferred pursuant to a Canadian statute is an asset "in" Canada. For example, a Canadian patent is considered to be an asset in Canada, while a patent granted pursuant to a foreign statute is not an asset in Canada. Where a group of patents that are registered in multiple jurisdictions, including Canada, have a single value on the audited financial statements, parties are expected to determine what proportion of that value of that asset is attributable to Canada, and include that amount in calculating the total value of assets in Canada.
  • An intangible asset of a Canadian entity with legal rights and privileges that are private or contractual in nature (i.e., that are not conferred by statute) are assets in Canada.
  • The goodwill of a Canadian entity is typically considered to be an asset in Canada, unless it can be demonstrated that the goodwill was generated by an event that occurred outside Canada.

2.1.3 Financial assets

The location of financial assets is typically determined by the statute conferring the legal rights and privileges associated with that asset. In particular:

  • A financial asset with rights and privileges conferred pursuant to a Canadian statute is an asset "in" Canada, whereas a financial asset with rights and privileges conferred pursuant to a foreign statute is not an asset in Canada.
  • A financial asset of a Canadian entity with legal rights and privileges that are private or contractual in nature (i.e.that are not conferred by statute) is an asset in Canada. For example, loans or other types of receivables that are owed to a Canadian entity by a foreign entity and cash held by the Canadian entity, regardless of currency, are assets in Canada.
  • Where an entity holds shares of another company, those shares are financial assets and will be considered assets in Canada where the shares held are shares of a Canadian company. Whereas, shares held in a foreign company (i.e.a company incorporated in a foreign jurisdiction) are not assets in Canada.

2.2 Gross revenues from sales "in, from or into" Canada

Merging parties should consider whether the audited financial statements provide a reasonable approximation of the value of revenues "in", "from" and/or "into" Canada before relying on them in any particular case. For example, segmented sales information reported in the notes to audited financial statements often does not reflect the allocation of sales revenues required for determining whether a proposed transaction is notifiable under the Act. Reported Canadian sales may include sales both "in" Canada and "into" Canada, and exclude sales "from" Canada. Particularly in the case of consolidated audited financial statements that reflect sales in and from multiple jurisdictions, it may be necessary to consult working papers or other records to determine the value of sales "in or from" Canada or "in, from or into" Canada.

Whether gross revenues from sales are considered to be "in, from or into" Canada depends on the location of the seller and/or purchaser, which may correspond with the jurisdiction of incorporation or, in the case of an unincorporated entity, the jurisdiction of its enabling statute. As such, whether gross revenues are from sales "in, from or into" Canada can often be determined as follows:

  • gross revenues from sales "in" Canada are those revenues from sales to a purchaser located in Canada that are booked in the audited financial statements of a Canadian party or Canadian affiliate of a party;
  • gross revenues from sales "from" Canada are those revenues from sales to a purchaser not located in Canada that are booked in the audited financial statements of a Canadian party or Canadian affiliate of a party; and
  • gross revenues from sales "into" Canada are those revenues from sales to a purchaser located in Canada that are booked in the audited financial statements of a foreign party or foreign affiliate of a party.

Where the jurisdiction of incorporation of the seller is not the origin of the sale, the general principles set out above may not apply. For example, if the production and sales operations of a Canadian-incorporated seller are located exclusively outside of Canada, its sales are not "in or from" Canada, even if those sales are reported on its Canadian audited financial statements. Conversely, if a foreign-incorporated company has production or sales operations in Canada, some or all of its sales may be "in or from" Canada. Ancillary functions, such as human resources and pay services, are typically not considered to be part of production and sales operations.

The same principles apply when determining the location of the purchaser. For example, revenues from sales by a foreign seller to a Canadian purchaser where production and sales activity takes place outside Canada and the assets are delivered to the purchaser's facility located outside of Canada will not be considered to be sales "into" Canada.

2.3 "Generated from those assets"

When calculating the gross revenues from sales in or from Canada to determine the transaction-size threshold under section 110 of the Act, only those gross revenues from sales generated from those assets "in" Canada are relevant. Accordingly, if the audited financial statements of a party to the proposed transaction have to be adjusted, as a result of certain assets being considered either "in" or not "in" Canada, the gross revenues from sales, as stated in the audited financial statements, that correspond to such assets, may also have to be adjusted. If such adjustments to gross revenues from sales are necessary, it is important to consult the appropriate sections of the Notifiable Transactions Regulations.Footnote 3

Revenues are considered to be generated from assets in Canada if any of the revenue-generating assets of the target business are located in Canada. Revenue-generating assets include assets that contribute in any way and at any stage (e.g., manufacture, sale) to the sale of the asset. Ancillary functions, such as human resources and pay services, are typically not considered to be revenue-generating assets.

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3. Examples

The examples below are hypothetical and are intended only to illustrate the guidance outlined above. It is assumed for the purposes of these examples that the transaction-size threshold under section 110 of the Act is $77 million.

Example one

Party B, a Canadian corporation, is proposing to acquire 100% of the voting shares of Party A, a corporation incorporated in the United States. Party A's production facilities are located in the U.S., but A also maintains a sales office in Canada. Party A has $10 million in assets in Canada booked in its U.S. audited financial statements; these assets are comprised of land, an office building, a warehouse and some equipment and inventory. Party A has $200 million in gross revenues from sales to Canadian customers booked in its U.S. audited financial statements.

For the purposes of determining whether or not the transaction-size threshold has been met, Party A has a total of $10 million of assets "in" Canada. Regarding the gross revenues from sales generated from those assets, the $200 million in gross revenues from sales to Canadian customers would typically not be included in the transaction-size calculation because these sales are booked in the audited financial statements of a foreign party and, therefore, would not be considered to be gross revenues from sales "in" or "from" Canada; however, in the present case, because some of the revenue-generating assets that contribute to the $200 million in gross revenues from sales to Canadian customers (i.e., some land, an office building, a warehouse and some equipment and inventory) are physically located in Canada, these sales are considered to be gross revenues from sales "in" Canada, even though they are accounted for in the books of a foreign party. Accordingly, the transaction-size threshold is met.

Example two

Party D, a Canadian corporation, is proposing to acquire 100% of the voting shares of Party C, a U.S. corporation that operates a cruise line. Party D has assets in Canada of $300 million booked in its Canadian audited financial statements. Party C has an administrative office in Canada and two of its cruise ships were present in Canada for approximately one month during its most recent fiscal period. The two ships are registered in the U.S. and their book value, as stated in Party C's U.S. audited financial statements, is $350 million.

For the purposes of determining whether the $400 million party-size threshold under section 109 of the Act is met, given that the two ships were present in Canada for one month during Party C's most recent fiscal period, these ships are considered to be assets in Canada. Accordingly, the section 109 threshold is met. For the same reason, the transaction-size threshold is also met.

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