Canada’s National AI Strategy: Is Canada Underweighting Intellectual Property Protection for SMEs?

Jun 8, 2026 | Article

Canada’s new National AI Strategy reflects an important shift in how the federal government understands artificial intelligence. AI is no longer framed primarily as a research or innovation issue. Instead, the Strategy presents it as strategic infrastructure tied to sovereignty, industrial competitiveness, productivity, and long-term economic resilience.

A central theme runs throughout the document: Canada has historically been successful at generating innovation but less successful at retaining commercialization outcomes and long-term value capture domestically. The Strategy repeatedly acknowledges that Canadian firms, talent, and intellectual property often scale abroad, leaving Canada with strong upstream innovation but weaker downstream ownership positions.

In many respects, the Strategy’s diagnosis is persuasive. Modern AI competition is no longer driven solely — or even primarily — by traditional patent portfolios. Increasingly, competitive advantage derives from combinations of proprietary datasets, compute access, deployment ecosystems, operational scale, tacit know-how, cloud infrastructure, and integration capability. The Strategy is therefore correct to emphasize sovereign compute, AI infrastructure, commercialization ecosystems, and adoption capacity as strategic concerns.

The more difficult question is whether the Strategy sufficiently addresses how Canadian SMEs will retain durable bargaining power and long-term value in that environment.

That issue matters because smaller firms do not compete under the same conditions as hyperscalers or dominant platform companies. Large AI firms can often rely on infrastructure ownership, ecosystem lock-in, market reach, and operational scale to sustain their positions. SMEs usually cannot.

As a result, intellectual property serves a different function for smaller firms than it does for dominant incumbents. For many SMEs, patents, copyright, licensing structures, trademarks, contractual protections, trade secrets, and data-governance frameworks are not simply legal assets. They are mechanisms for reducing dependency asymmetries, improving investment readiness, strengthening negotiation leverage, and protecting commercialization pathways.  The deliberate adoption and practice of IP hygiene within SMEs remains a pillar of long-term growth and sustainability.

The Strategy arguably underemphasizes this practical reality.

A Shift in Focus Away from Traditional IP Protection

One of the most striking aspects of the Strategy is the limited attention dedicated to traditional forms of intellectual property protection. Patents in particular occupy a surprisingly modest place in the overall framework. Instead, the document consistently emphasizes openness, infrastructure, data mobilization, commercialization, interoperability, sovereign compute, open-source AI, and broad-based adoption.

This reflects an increasingly common policy perspective within the AI sector. Many policymakers and technologists now believe that long-term competitive advantage in artificial intelligence derives less from formal IP rights and more from operational ecosystems that are difficult to replicate. In the context of large frontier AI companies and hyperscalers, there is certainly some truth to this observation. Firms such as OpenAI, Anthropic, Google DeepMind, and Meta are not defended primarily through traditional patent portfolios (that said, while Meta Platforms and Alphabet are massive patent holders, OpenAI and Anthropic have healthy patent portfolios). Their advantages often stem from scale, access to data and compute, deep integration ecosystems, infrastructure ownership, and market reach.

But Canadian SMEs do not compete under those conditions.

This distinction is critically important because the role that intellectual property plays for SMEs is fundamentally different from the role it plays for dominant global platforms.

Why Formal IP Still Matters for SMEs

Unlike large multinational technology companies, Canadian SMEs generally lack massive compute resources, integrated cloud ecosystems, entrenched distribution channels, and dominant market positions. Although the Strategy aims to reduce some of these structural disadvantages over time, formal IP rights continue to serve functions that go far beyond simple exclusionary protection.

For many SMEs, patents help signal defensibility to investors, support valuation discussions, improve bargaining leverage in strategic partnerships, and reduce dependency asymmetries when dealing with much larger counterparties. Copyright, meanwhile, can play an increasingly important role in software, training datasets, interface design, outputs, and content governance. Trademarks help anchor trust and differentiation, particularly in enterprise and regulated markets where credibility matters deeply. Contractual IP frameworks and licensing structures frequently become essential tools for governing collaboration, deployment rights, commercialization pathways, and ownership allocation.

These protections are especially important in sectors where Canadian AI SMEs are actively emerging, including industrial automation, healthcare, energy systems, telecommunications, cybersecurity, advanced manufacturing, robotics, and defence-adjacent technologies. In many of these sectors, SMEs do not necessarily need to block the entire market. Instead, they need enough defensibility to negotiate effectively, attract capital, and avoid becoming economically subordinated to larger infrastructure players.

The Strategy, however, spends comparatively little time discussing these more practical SME realities.

The Risks of Over-Reliance on Trade Secrets

The Strategy appears to place substantial implicit faith in ecosystem-driven competitive protection and trade-secret-oriented value creation. While trade secrets can certainly be extremely valuable in AI, they are also operationally fragile, particularly for smaller organizations.

Maintaining secrecy protection in modern AI environments is difficult. SMEs frequently operate through collaborative development models involving cloud providers, universities, research institutes, external developers, integration partners, and investors. Employee mobility remains high, API-driven architectures can expose operational insights, and AI systems themselves create newer forms of vulnerability such as model extraction, reverse engineering, prompt leakage, and derivative fine-tuning.

Large hyperscalers can often sustain trade-secret-based protections precisely because they possess the operational scale and infrastructure control necessary to maintain them effectively. SMEs, by contrast, may struggle to preserve secrecy over long commercialization cycles involving partnerships, customer integration, procurement processes, and financing discussions.

An ecosystem that increasingly favours secrecy-based competitive protection may therefore unintentionally favour entrenched incumbents.

Open Source as Both Opportunity and Threat

The Strategy’s strong endorsement of open-source AI reflects another important policy tension. The government clearly views open-source ecosystems as mechanisms to promote accessibility, interoperability, competition, resilience, and reduced dependency on dominant technology providers.

There are legitimate reasons to support this approach. Open-source ecosystems can lower barriers to entry for SMEs, accelerate adoption, reduce vendor lock-in, encourage innovation, and create shared technical foundations that support broader participation across the economy.

At the same time, however, aggressive openness creates very real commercial risks for smaller firms. Without complementary forms of protection, Canadian innovators may inadvertently find themselves reproducing one of the country’s longstanding structural problems: local innovation combined with foreign monetization.

This concern is especially acute in AI because dominant multinational firms are uniquely positioned to absorb, scale, optimize, and commoditize openly available innovations. Large players possess the infrastructure, compute capacity, engineering resources, and distribution channels necessary to rapidly operationalize technologies developed elsewhere.

As a result, openness without broader strategic IP planning can sometimes weaken the long-term competitive position of smaller firms rather than strengthen it.

The Missing “Whole-of-IP” Framework

The deeper issue is not that the Strategy undervalues patents specifically. Rather, the document appears to underemphasize the importance of layered and integrated intellectual property strategies.

Modern AI commercialization rarely depends on a single form of protection. Increasingly, successful AI companies rely on carefully balanced combinations of patents, trade secrets, copyright, trademarks, contractual controls, licensing frameworks, data governance structures, standards participation, certification ecosystems, and selective open-source deployment.

A carefully calibrated “whole-of-IP” strategy recognizes that different forms of protection serve different strategic purposes. Patents may strengthen defensibility and attract investment. Trade secrets may protect tacit operational know-how. Copyright may govern datasets, software, and content assets. Trademarks may reinforce trust and market differentiation. Contracts may govern commercialization rights, collaboration structures, and deployment models. Selective openness may accelerate ecosystem adoption while preserving core economic advantages.

In practice, sophisticated AI commercialization rarely means “patent everything” or “open everything.” Instead, it requires disciplined balancing.

The Strategy understandably focuses on adoption, scale, infrastructure, and ecosystem development. However, without stronger emphasis on layered IP governance, there is a legitimate risk that Canadian SMEs could be encouraged toward commercialization models that ultimately weaken their long-term bargaining power internationally.

The Money Question: What Happens if Public Investment Creates Weakly Defensible Companies?

Another important tension sits beneath the Strategy’s repeated references to investment, commercialization, and SME support.

The federal government is proposing very significant public spending to accelerate AI adoption and scale Canadian AI companies. Across the document, the Strategy refers to major public investments tied to compute infrastructure, AI adoption, commercialization initiatives, mission-oriented programs, sovereign AI capabilities, venture financing, and SME support mechanisms. It also explicitly references leveraging existing programs such as Elevate IP and IP Assist to help Canadian companies commercialize intangible assets internationally.

At a high level, the logic is understandable. Canada wants to avoid repeating its historical commercialization problem in which promising domestic innovation is ultimately scaled, acquired, or monetized elsewhere. The Strategy therefore seeks to inject capital into the ecosystem in order to accelerate domestic growth, strengthen AI adoption, and support Canadian commercialization.

But this raises a difficult question:

What happens if substantial public investment is directed toward firms whose intellectual property positions are ultimately insufficiently defensible in global markets?

This is where the Strategy’s relative underemphasis on layered IP protection may eventually become problematic.

If Canadian SMEs are encouraged — either directly or indirectly — toward commercialization models built heavily around openness, interoperability, shared infrastructure, broad data access, and limited formal IP defensibility, the government risks funding companies that may struggle to retain long-term economic leverage once confronted with large global incumbents.

This risk becomes particularly acute in AI because dominant international players possess enormous advantages in:

  • compute access;
  • infrastructure ownership;
  • distribution channels;
  • customer ecosystems;
  • capital reserves;
  • and engineering scale.

In practice, intangible assets rarely become commercially valuable merely because they exist. To support financing, licensing, procurement, partnerships, and international commercialization, they often need to be sufficiently identified, governed, allocated, and formalized to function as durable business assets. Put differently, intangible assets often need to be strategically crystallized before they can be effectively commercialized.

Absent carefully structured intellectual property strategies, smaller Canadian firms may successfully innovate, raise public funds, develop technology, achieve early adoption, and still find themselves unable to defend margins, negotiate effectively, or maintain control over commercialization outcomes once larger actors enter the space.

In that scenario, Canada could unintentionally reproduce the very cycle the Strategy is attempting to prevent: public support helping generate innovation domestically, while long-term value capture ultimately migrates elsewhere.

The issue is not that openness, interoperability, or adoption are inherently problematic. In many respects, they are essential for AI ecosystem growth. However, openness without strategic defensibility can create structural asymmetries that disproportionately favour the largest market participants.

This is particularly important because AI commercialization often involves long investment horizons and substantial public support before profitability emerges. If SMEs lack durable ownership positions by the time global competition intensifies, Canadian taxpayers may effectively absorb portions of the commercialization risk while foreign firms capture disproportionate long-term economic value.

A stronger “whole-of-IP” framework may therefore not only be important for SMEs themselves, but also for protecting the effectiveness of Canada’s broader public investment strategy.

A carefully balanced approach combining patents, trade secrets, copyright, licensing control, branding, standards participation, contractual protections, and selective openness is more likely to produce firms capable of retaining long-term strategic leverage internationally. Without that balance, there is a legitimate risk that portions of Canada’s substantial AI investment strategy could indirectly subsidize future foreign value capture.

The Copyright Silence

Perhaps the most notable omission in the Strategy is its near-total silence regarding the rights of copyright holders whose works are used to train large language models and other generative AI systems.

The document speaks extensively about protecting Canadian innovation, supporting creators, safeguarding culture, commercializing intangible assets, and strengthening AI ecosystems. Yet it says almost nothing about training-data licensing, consent, remuneration, text-and-data mining, copyright exceptions, or transparency obligations relating to training corpora.

Given the global significance of these issues, the omission is difficult to ignore.

The government appears caught between two competing objectives. On one hand, the Strategy seeks to accelerate Canadian AI capability-building and support globally competitive domestic AI firms. On the other hand, the same document repeatedly emphasizes the need to protect Canadian creators, intellectual property, and cultural assets.

These goals may be on a collision course with each other.

Overly restrictive copyright frameworks could create serious barriers for Canadian AI entrants attempting to compete internationally. But excessively permissive approaches may also weaken creator rights and further erode Canada’s long-term ability to retain value from its own intellectual and cultural production.

For SMEs, the uncertainty surrounding training-data governance is not merely theoretical. Increasingly, it affects procurement discussions, investor diligence, customer indemnities, export readiness, licensing negotiations, and overall commercialization risk.

Conclusion

Canada’s National AI Strategy marks an important and overdue recognition that AI is fundamentally linked to economic sovereignty, industrial competitiveness, and long-term national resilience. The document correctly identifies many of the structural realities shaping modern AI competition, including the importance of compute infrastructure, commercialization capability, operational ecosystems, and strategic autonomy.

But for Canadian SMEs, the conversation cannot end with adoption and openness alone.

AI competitiveness is also about defensibility, ownership, bargaining power, appropriation risk, and durable value capture. Smaller firms operating in global markets often require carefully layered intellectual property strategies precisely because they lack the structural advantages available to dominant incumbents.

As Canada continues to build its AI ecosystem, policymakers will need to ensure that efforts to promote openness and rapid commercialization do not inadvertently weaken the ability of Canadian firms to retain and defend the value of what they create.

That balance may ultimately determine whether Canada becomes merely a strong adopter of AI technologies — or a durable owner of globally competitive AI businesses and intellectual property.

Fresh Paint or New Architecture? CIPO’s March 2026 Practice Notice and the Rise of Disclosure-Driven Software Eligibility

May 4, 2026 | Article

Executive summary

CIPO’s March 2026 practice notice formally abandons the language that drew sustained criticism under PN2020‑04 — notably references to a claim’s “contribution,” a “technological problem,” and a “technological solution.” In their place, the notice re‑centres subject‑matter analysis on purposive construction, explicitly aligning examination practice with recent Federal Court and Federal Court of Appeal jurisprudence.

Yet for software and AI inventions, a closer reading suggests that the practical battleground may not be eligibility doctrine as such, but disclosure quality. By expressly permitting examiners to treat elements described as well‑known, conventional, or disclosed with little detail as common general knowledge (CGK) during purposive construction, the notice introduces a powerful upstream lever — one that may lead to familiar outcomes, albeit through a different pathway.

This article examines the March 2026 practice notice through that lens and considers its implications for software patent drafting and prosecution in Canada.

From “contribution” to purposive construction: a genuine reset

The March 2026 practice notice states unambiguously that references in the MOPOP to a claim’s “contribution,” to a “technological solution to a technological problem,” and to evaluating essentiality based on a “problem and solution” do not apply.

Subject‑matter is instead determined based on purposive construction conducted in accordance with Supreme Court of Canada jurisprudence, before any assessment of patentability.

This restructuring responds directly to concerns expressed by the courts in cases such as Choueifaty, Benjamin Moore, and Dusome, where CIPO’s prior tendency to re‑characterise claims at a later stage — often via an “actual invention” or problem–solution analysis — was found to be inconsistent with the principles of claim construction as set out by the Supreme Court more than 20 years ago.

On its face, this is more than cosmetic. It removes from the formal framework the very concepts that had become lightning rods for judicial review.

The CGK lever: where scrutiny now concentrates

The same practice notice, however, emphasises that in purposive construction:

Elements of the claim that are presented in the specification as being well‑known, used in a conventional way, or upon which little or no detail is disclosed may constitute common general knowledge.

This sentence may prove to be the most important — and under‑examined — part of the notice for software and AI applications.

In practice, treating software implementation elements as CGK can have a decisive effect. Once such elements are discounted as conventional, what remains of the claim may be characterised as an abstract algorithm or a set of rules, prompting the familiar conclusion that the claimed subject‑matter lacks the requisite physicality.

Viewed through this lens, the March 2026 notice does not so much eliminate the risk of “same old” outcomes as relocate decisive scrutiny of the claim earlier in the analysis. The gatekeeping function shifts from an overt “contribution” inquiry to an implicit assessment of whether the implementation is sufficiently described to be treated as part of the invention, rather than as background knowledge.

Physicality remains the ultimate constraint

Unsurprisingly, nothing in the March 2026 practice notice suggests a relaxation of CIPO’s long‑standing position that patentable subject‑matter must have physical existence or manifest a discernible physical effect or change.

For computer‑implemented inventions, the notice confirms that merely reciting a computer is not enough. Physicality may be found where there are additional physical essential elements (such as measurement or sensing), or where the invention improves the functioning of the computer itself.

Where the computer is the only physical element, the notice proposes asking the so‑called “Schlumberger question”: does the claim amount, in substance, to programming a mathematical formula or abstract rules on a computer? If so, some “something more” is required.

The point is not that this approach is new, but that — combined with aggressive CGK filtering — it provides a well‑trodden path to outcomes that applicants will find familiar.

Why “fresh coat of paint” critiques persist

Commentary to date has rightly welcomed the elimination of “actual invention” as a free‑standing inquiry and the formal abandonment of problem–solution language. Those changes matter, particularly for appeal and judicial review posture.

At the same time, it is apparent that practitioners remain skeptical about whether examination outcomes will materially change for software and AI inventions. The March 2026 notice leaves intact both the physicality requirement and the examiner’s ability to narrow the invention during purposive construction by treating lightly described elements as CGK.

In other words, the architecture of the analysis has changed — but the pressure points may not have.

Practical implications: disclosure as an eligibility strategy

A key practical consequence of the March 2026 notice is that disclosure depth now operates as a form of eligibility risk management for software inventions.

Applicants who describe critical implementation steps at a high level, or who characterise them as routine or conventional, may find those elements discounted at the construction stage — with predictable downstream effects on subject‑matter eligibility.

Conversely, detailed disclosure of how claimed software functionality is implemented, interacts with hardware, or improves computer operation may help resist CGK characterisation and preserve a more concrete “nature of the invention.”

This shift raises familiar trade‑offs: more detailed disclosure can strengthen eligibility positioning, but it also increases drafting burden and may expose implementation detail that businesses would prefer to protect as know‑how.

Looking ahead – and inviting debate

The March 2026 practice notice is not merely a stylistic rewrite of PN2020‑04. It represents a conscientious effort by CIPO to realign examination practice with binding jurisprudence and to avoid analytical shortcuts that courts have rejected.

At the same time, for software and AI inventions, the notice places renewed emphasis on an issue that has always mattered — but now does so explicitly: what the specification says, and how it says it.

Whether the new framework leads to genuinely different outcomes in examination, or whether familiar results re‑emerge through CGK‑based construction, will ultimately be an empirical question.

That question is now squarely in the hands of practitioners and examiners alike. Will we be seeing meaningful changes in how software claims are construed and assessed — or simply a re‑labeling of the same objections through a different entry point?

I would welcome debate on that point, particularly from those already prosecuting applications under the March 2026 guidance.

Feel free to contact us to schedule a call with an IP professional. This content is for informational use only, does not constitute legal or professional advice, and does not establish a lawyer-client relationship. To obtain such advice, please communicate with our offices directly.

The long arm of the law: Canadian court orders offshore gambling site to block Manitoba users

Aug 26, 2025 | Article

By May M. Cheng and Alexander Watts

This article was originally published on Law360 Canada on July 18, 2025, 11:05 AM EDT .
You can read the original article here.

In a wake-up call for digital platforms offering online gaming services to Canadian consumers, a provincial court in Manitoba has issued a decision blocking a service provider for violating Canadian gambling laws.

In Manitoba Liquor and Lotteries Corp. v. IL Nido Ltd., 2025 MBKB 89, a well-known online entertainment and gambling platform was enjoined from operating in the province of Manitoba and ordered to use geo-blocking technology to prevent users in the province from accessing its services.

This is a stark reminder that online gaming remains highly regulated in Canada and foreign entities operating online must still comply with local laws.

Background Facts

The applicant, the Manitoba Liquor and Lotteries Corporation (MBLL), is Manitoba’s exclusive provider of lotteries, including online gambling products and services. MBLL is subject to both federal and provincial regulatory frameworks, and the profits from all gambling services are used to fund government-sponsored programs in the province that benefit Manitobans.

The respondent, Il Nido Ltd., is incorporated in Antigua and Barbuda and operates the websites Bodog.eu and Bodog.net; the first offers real-money gambling services, including betting on various sporting events or table and casino games, and the latter offers free versions under the same branding. A second respondent, Sanctum IP Holdings Ltd., owns the Canadian trademark registration for BODOG. Neither of the respondents responded to MBLL’s application or participated in the proceedings.

Violations of Canadian Law

Under sections 202 and 206 of the Criminal Code, all gambling in Canada is prohibited unless it falls within a statutory exception that is typically reserved for provincial authorities. The respondent’s Bodog.eu and .net platforms were accessible to Manitoba residents, but were not authorized or licensed to operate in Manitoba under Canadian law. The MBLL therefore sought an injunction to prohibit the respondents from offering unauthorized gambling services in Manitoba.

In addition, the MBLL sought an injunction under the Competition Act and Trademarks Act for falsely claiming that Bodog was a legal website in Canada. MBLL alleged that the respondents’ promotional materials violated:

  • section 52(1) of the Competition Act (by making false or misleading representations), and
  • section 7(d) of the Trademarks Act (by advertising false or misleading descriptions likely to deceive the public).

MBLL claimed that the respondents  misrepresented the lawfulness, character and quality of the Bodog platforms to deliberately mislead Manitobans by misrepresenting that:

  • “Bodog is a legal online casino in Canada”
  • Bodog is “one of the safest places to gamble online within the realms of the country”; and
  • “Bodog is the most trusted site in Canada”

Manitoba Court of King’s Bench decision

The court found that the respondents knowingly made materially false representations to promote their business and services in Canada, in violation of s. 52(1) of the Competition Act. By advertising their platforms as legal and trustworthy for the purposes of attracting players in Manitoba, the respondents misled customers and engaged in conduct harmful to both the public and MBLL, including by diverting profits from online gaming outside the province.

The court also held that the respondents violated s. 7(d) of the Trademarks Act by using demonstrably false representations regarding lawfulness trustworthiness and safety of the online platforms in Manitoba. The court held that the demonstrably false representations used in association with the respondent’s trademark diminished the goodwill of MBLL’s marks and contributed to reputational harm.

Permanent injunction granted

Recognizing the limited ability to enforce monetary judgements against offshore entities, the court concluded that injunctive relief was the only effective remedy. The court also held that there was no impediment to exercising its discretion to grant the permanent injunction, citing the framework in Google Inc. v. Equustek Solutions Inc., 2017 SCC 34 at para. 66. Having found that MBLL’s legal rights were established, that damages were inadequate, and that no alternative remedy was available, the court granted a permanent injunction that included the following relief:

  • Prohibiting the respondents from operating or advertising their Bodog.eu and Bodog.net platforms in Manitoba;
  • Requiring that the respondents use geo-0blocking to prevent Manitoba residents from accessing their websites and gambling services; and
  • Restraining the respondents from using advertising to target Manitoba residents across digital and traditional media.

Importantly, the court noted the permanent injunction was narrowly tailored to target only unlawful conduct in Manitoba and relied on technology the respondents already had employed to geo-block the services.

Conclusion

It would seem that the resurgence of online gaming that took place during the pandemic is now facing a reckoning as legitimate Canadian gaming authorities take on foreign actors targeting the pocketbooks of Canadian residents. While legitimate Canadian gaming authorities intensify efforts to crack down on unauthorized platforms, businesses offering online gambling or related services should treat this case as a cautionary precedent. Claims about legality, safety or legitimacy must be truthful, verifiable and clearly tailored to avoid misleading the public; companies would be well advised to regularly review their advertising, trademark use and technological safeguards to ensure compliance. As the digital marketplace continues to evolve, this case signals that any business targeting Canadian consumers must operate within the bounds of Canadian law, or risk significant consequences.

 

 

Show Me the Money—Later? The Ins and Outs of Taxation Considerations in Earn-Outs Structures

Aug 15, 2025 | Article

By Gregory M. Prekupec & Rahul Gupta

What happens when a buyer and seller cannot agree on how much a business is worth? One approach is for the seller to walk away from the deal with the hope a new buyer will agree with their valuation. To avoid the inefficiency which stems from this route, the parties can agree to an “earn-out” or “reverse earn-out” to bridge any gaps which may exist between the buyer and seller parties. Despite the reconciliatory nature of this approach, one must be made aware of its tax implications before pursuing it.

An earn out is a conditional payment of the purchase price which is subject to the corporation achieving certain metrics within a specified time-frame post closing. For instance, if the corporation achieves a certain EBITA threshold for the first three years after the acquisition. If the target achieves these targets, the seller receives the balance of the purchase price, as specified by the underlying purchase agreement. Otherwise, the funds flow back to the purchaser. In a reverse earn out scenario, the inverse is true. If the target does not achieve certain milestones, the seller returns a portion of the purchase price back to the purchaser.

In addition to the above, earn-outs/reverse earn-outs can also serve as a useful tool for each of the following scenarios:

A. Market or industry volatility;

B. The target is engaged in an experiential or novel venture (e.g., a new style of restaurant); or

C. The purchaser is unable to secure adequate financing to fund the acquisition.

The primary tax considerations for a seller in an earn-out or reverse earn-out scenario is whether the earn-out payments are treated as capital gains or ordinary income. Sellers prefer such payments to be treated as capital gains as only 50% of the amount received (i.e., the gain) is included in the seller’s taxable income; whereas, ordinary income treatment includes 100% of the payment in the same. Generally speaking, the Canada Revenue Agency’s view on the tax treatment of an earn-out can be based on how the transferred property is being used. Asset-based deals can reduce the risk of ordinary income treatment as income is being derived from the use of an asset, rather than ownership of a business (i.e., shares).

Novel pleadings alleging inferiority of grey market goods survive motion to strike

Jul 31, 2025 | Article

By May M. Cheng and Farai Munyurwa

This article was originally published on Law360 Canada on July 17, 2025, 10:58 AM EDT .
You can read the original article here.

The decision in Toyota Jidosha Kabushiki Kaisha (c.o.b. Toyota Motor Corp.) v. Marrand Auto Inc., 2025 FC 1105, issued on June 18, 2025, by Justice Janet Fuhrer, upheld a decision by Associate Judge Trent Horne that barely allowed the claim to survive a motion to strike. The decision appealed from had struck out the entire amended statement of claim with leave to amend only the claims advanced under paras. 7(b) and 22 of the Trademarks Act (TMA).The remaining claims under the Competition Act and s. 7(c) of the TMA were struck without leave to amend (see decision appealed from at Toyota Jidosha Kabushiki Kaisha (c.o.b. Toyota Motor Corp.) v. Marrand AutoInc., [2024] F.C.J. No. 2505.)

Justice Fuhrer makes the following query at the outset of her appeal decision on the motion to strike: “When is a TOYOTA bumper no longer a TOYOTA brand product? When it is damaged during shipment by a grey marketer, according to the Plaintiffs. Not so fast, says the Defendant.”

For those around long enough to recall the unsatisfying Supreme Court of Canada’s decision in Consumers Distributing Co. v. Seiko Time Canada Ltd., [1984] S.C.J. No. 27, where the court elected not to determine whether grey market goods could be deemed inferior when sold without the manufacturer’s warranty, this case raises the spectre of a definitive ruling on this elusive topic that has not been the subject of a decision in the 40 years since.

It should be remembered that in Seiko, Consumers Distributing was supplying a warranty card and made clear to customers that it was not an authorized dealer, so there were no false and misleading statements by the distributor as to the provenance of the goods, which were admitted to be genuine but simply diverted goods, and there was in fact a warranty provided, so this made it more difficult to allege inferiority based on lack of a warranty.

Justice Fuhrer’s decision is a terrific read as a definitive current summary of the legal elements required to establish a passing-off action, which she concludes very much still requires “use.” On this point, Justice Fuhrer found a palpable, but not overriding, error in Associate Judge Horne’s analysis. She nevertheless disagrees with Associate Judge Horne that any case law supports the proposition that passing off can be claimed in the absence of use and firmly makes the case with reference to a number of recent decisions including Justice Glennys McVeigh’s recent decision in 2K4 Inc. (c.o.b. Indican Pictures) v. Indiecan Entertainment Inc., 2025 FC 20 at para. 127. The result is an error that is palpable, but not overriding, in Justice Fuhrer’s estimation.

The court’s analysis concerning the legality of grey market goods remains the same as determined by Justice Nicholas McHaffie in the earlier decision of TFI Foods Ltd. v. Every Green International Inc., 2021 FC 241 at para. 50, which clearly states that “the sale in Canada of grey market goods does not, in itself, constitute passing off.” However, the TFI Foods decision did not decide the question left unanswered by Seiko because the conduct complained of was material misrepresentations as to being an “authorized distributor in Canada” for the grey goods. The interlocutory injunction and subsequent summary judgment granted in the TFI Foods case were limited to holding these were actionable false representations as to the status of the distributor. There was no allegation of lack of warranty or inferior quality of the goods arising from their grey goods status.

In this case, the defendant, Marrand Auto Inc., a reseller of grey market automobile components, was sued by a number of Toyota entities in Canada (collectively, “Toyota”) after a shipment of automotive parts bearing TOYOTA trademarks was detained by the Canada Border Services Agency.
Toyota inspected the goods and determined they were not counterfeit, but it claimed the parts were:

  • “Unauthorized,” as they lacked Toyota’s standard warranty;
  • Not sourced through authorized dealers; and
  • Damaged during shipment, allegedly compromising consumer safety.

If these allegations can be shown to be true in Marrand, the question remains as to whether this is merely allowed as part of the sale of diverted goods or whether this scenario presents sufficient concerns that courts will intervene to prevent the sale of grey goods. The case also has implications for “upcycled” goods that may also fall under the same shadow for no longer having the warranty of the original seller and which may be damaged during refurbishment.

While finding that Seiko differs factually from the case in Marrand, Justice Fuhrer indicated that Associate Judge Horne did not err in refusing to conclude that the current claim is doomed to fail, even in the absence of false or misleading representations by the defendant about the grey goods. Further, the s. 22 TMA claim concerning potential depreciation of goodwill remains arguable on the principle that the sale of damaged merchandise could be treated differently than a simple resale.

In the result, the Marrand case was allowed to proceed, and a fresh Amended Statement of Claim
had already been served at the time the appeal was argued. This case will be one to follow on
whether the law on grey goods is modified to allow manufacturers to take a harder line on diverted
goods that are nevertheless genuine. We have waited a whole 40 years, but it may finally be time for
the courts to revisit Seiko. 

 

Default Happens: A Practical Guide at Lender’s Rights and Remedies

Jul 18, 2025 | Article

By Gregory M. Prekupec & Rahul Gupta

Events of default occur by the existence of a certain action or omission which violates an aspect of an underlying loan agreement. Such event enables the lender to declare the same and to subsequently enforce its rights and remedies to make itself whole, as much as possible.

However, for a variety of reasons, lenders are often willing to negotiate with defaulted borrowers, for instance, by providing them with additional time to cure the default(s). As such, if the borrower is able to cure the default, then the loan agreement can resume.

The underlying loan agreement will provide the violations which would constitute an event of default, which ordinarily include the borrower ceasing its operations, the borrower’s failure to pay any principal amount or to perform any obligation under the loan agreement, the commencement of any bankruptcy or reorganization proceedings, and so on.

Lender Remedies

As mentioned above, the occurrence of an event of default can entitle the lender to pursue its rights and remedies under the underlying loan agreement. There are four general routes available to a lender when dealing with a defaulted borrower:

A. Performance of the remedies afforded to the lender pursuant to the underlying loan agreement;

B. Litigation to enforce the same;

C. Advancement under the Personal Property Security Act (Ontario) (“PPSA”), and,

D. Advancement under the Bankruptcy and Insolvency Act (Canada).

Each of these four remedies will be explored in greater detail below. A lender may have additional recourse should the borrower’s subsidiaries, affiliates, shareholders, or other entities also be party to the loan agreement.

Enforcement of Contractual Remedies

As an underlying rule, even if such loan agreement does not necessitate the borrower being notified of enforcement activity, notice is nonetheless required.

Depending on the extent of the event of default, a lender will likely commence by providing the borrower with a notice of default or demand letter which explains the nature of the default and any cure periods being afforded to the borrower. Subsequently, if the borrower fails to satisfy any arrears or omissions pursuant to any granted cure period, the lender can do any of the following: refuse to make future loan advances (depending on the structure provided in the loan agreement), terminate the loan agreement, or accelerate the loan.

A. Future Loan Advances

Loan advances are contingent upon the borrower’s compliance with all aspects of the loan agreement. As such, the occurrence of an event of default enables a lender to refuse to make any further loan advances. Syndicated credit facilities are similar such that each lender in the syndicate would refuse the extension of further credit.

Well-drafted loan agreements would trigger certain covenants upon an event of default, such as prohibiting a borrower from issuing dividends or pausing all acquisition activity. These remedies, particularly when combined, can have a devastating effect on the borrower’s business operations, which should incentivize immediate compliance with the loan agreement and cooperation with the lender(s).

B. Termination

Loan agreements afford lenders two additional remedies upon an event of default: the termination of any existing commitments for future loans and the acceleration of all amounts due, including any associated costs. The latter will likely be structured as an automatic remedy which would not require the lender providing additional for the same.

C. Acceleration

Acceleration is the automatic and immediate obligation of the borrower to pay all outstanding loan amounts and all associated costs. The borrower’s non-compliance with the same empowers the lender to enforce its rights through litigation or compel the borrower into bankruptcy or insolvency proceedings.

Despite the above, lenders often do not use this remedy as it would allow other lenders to also accelerate their loan, which increases the likelihood the borrower filing for bankruptcy. Lenders may, however, consider this remedy attractive if the borrower’s bankruptcy or insolvency is inevitable or the lender has lost faith in the borrower’s principals operating the business in a commercially reasonable fashion.

Alternative Remedies

As mentioned above, lenders may wish to negotiate with the borrower instead of immediately declaring an event of default. As such, lenders and borrowers may be able to negotiate for:

A. a waiver of the event of default;

B. the lender and borrower entering into a forbearance agreement where the lender will not declare an event of default for a certain time period;

C. amending the loan agreement;

D. an equity cure, where the borrower can receive an equity injection from its shareholder(s) to be provided for the funds required to settle any arrears; or

E. the requirement the borrower divest from its subsidiaries.

As a matter of commercial practicality, it is best practice for borrowers to remain transparent with their lenders throughout the lifecycle of the loan agreement. This creates an open and collaborative environment which invites the possibility of reasonable compromises rather than automatic deference to litigation or bankruptcy/insolvency proceedings. However, this is not to excuse the lender conducting comprehensive reviews of the borrower’s operations upon the occurrence of an event of default to confirm the borrower’s financial viability moving forward.

Additional Considerations

Regardless of the avenue a lender decides to pursue in regards to a defaulted borrower, it must consider all aspects, including the ones listed below.

A. Default Interest

Loan agreements include default interest provisions which charge a certain interest rate on the outstanding amount and is incurred until the lender is made whole.

B. Letters of Credit

An event of default leads to no additional letters of credit being issued. In addition, the lender may require the borrower provide a cash deposit to be used as additional collateral. The borrower refusing which would entitle the lender to claim such amount against the borrower during legal proceedings.

C. Set Off

The lender can off set any deposit it holds from the borrower and use such funds to repay a portion of the defaulted loan.

D. Guarantors

If the loan agreement provides for a guarantee from a corporate affiliate of the borrower, or a personal guarantee of the borrower’s director(s), then the lender is entitled to treat the guarantor as the borrower. In other words, the lender can enforce its rights against any or all of the borrower(s) and guarantor(s). However, this would also require the guarantor receive the same notices as the borrower.

E. Collateral

If the loan agreement provides for a guarantee from a corporate affiliate of the borrower, or a personal guarantee of the borrower’s director(s), then the lender is entitled to treat the guarantor as the borrower. In other words, the lender can enforce its rights against any or all of the borrower(s) and guarantor(s). However, this would also require the guarantor receive the same notices as the borrower.

F. Enforcement Issues

There are a number of enforcement-related issues which may arise.

First, there may be other creditors, including government agencies such as the Canada Revenue Agency, which also have amounts owing to them. Therefore, a lender must understand its order in repayment priority. For instance, tax arrears can carry a supermajority such that they override all other secured claims. It is also important to determine the existence of intercreditor agreement(s) and subordination agreement(s). In so doing, senior lenders may be prioritized over subordinated creditors or the senior lender may be limited in its enforcement abilities.

Second, if the borrower operates in a number of jurisdictions, the lender must understand the procedural issues, if any, it will have to undergo to enforce the loan agreement.

Conclusion

In navigating the complex landscape of lender enforcement, it is critical for lenders to adopt a strategic and legally sound approach when responding to borrower defaults. From out-of-court workouts and enforcement under the PPSA, to formal insolvency proceedings and actions against guarantors or collateral, each remedy must be exercised with consideration of its implications, procedural requirements, and the overarching duty of good faith. A well-drafted loan agreement—paired with proactive monitoring and clear communication—remains a lender’s most powerful tool. By understanding and leveraging the full spectrum of remedies available under the law, lenders can not only protect their financial interests but also promote constructive resolutions that mitigate risk and preserve long-term value.

 

 

 

This article was informed by Practical Law Canada and industry practice.

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