More Than Just Cold Air – Hot Topics in Canada Impacting U.S. Business

1. More Than Just Cold Air – Hot Topics in Canada Impacting U.S. Business Presented to Houston Chapter of ACC March 8, 2011 by: C. Anne Calverley, Q.C. Alex MacWilliam

2. Who We Are A leading full service Canadian business law firm tracing its roots back to mid-1800s Over 500 lawyers and 85 paralegals Offices in Vancouver (60), Edmonton (80), Calgary (110), Toronto (170), Montreal (90) and Ottawa (30) Associations with firms around the world Long-time ACC Sponsor and regularly in Houston Extensive expertise in oil and gas, power, pipelines, energy services, financing, infrastructure and utilities

3. Introduction • Update on Canadian political and economic matters impacting the United States • Income Trusts – Back From the Crypt • Investment Canada Act – BHP Billiton and Potash Corp. • Energy developments – Secure supply for U.S. – Chinese investment and opening of Asian markets • New Consumer Product Safety legislation – impacts on foreign manufacturers exporting to Canada

4. “I see the deer are starting to show up in my backyard - that's always a sign of Spring”

5. When Canadians Get Surly

6. What’s Going On Up There? • La Nina is no sweet little girl • Canadians in a surly (but always polite) mood • Politicians are no exception • 5 years of minority Conservative federal government • Balance of power held by any one of the 3 opposition parties • Spring federal election?

7. "Blistering pace of oil deals expected to continue" The Globe and Mail, October 5, 2009 The blockbuster transactions that dominated Canada's oil patch this year are expected to trigger a cascade of other deals in the coming months, industry experts and bankers say Renewed interest in Canada's oil assets led the country to the top spot globally for oil and gas mergers and acquisitions in the third quarter

8. “Oil M&A Activity to Stay High” The National Post – January 26, 2011 • 2010 – a year of property deals in Canadian energy sector • 72% of $35B came from sale of properties and production • Including large deals like BP sale of $3.4B in assets to Apache and Suncor’s sale of almost $2B of assets to 4 purchasers • Compare to average of 80% of transaction value from corporate mergers and acquisitions in 2005-2009 • Offshore purchasers including Sinopec, PTT, Sasol, Mitsubishi • Outlook for 2011 - “a robust M&A marketplace” • More corporate transactions and fewer property sales • Underfinanced companies with conventional natural gas focus will be “exploring strategic alternatives” or contemplating receivership • Prices will remain strong for oil-focused companies

9. Income Trusts FOR SALE Halloween 2006

10. 2006 to 2008 Income Trusts

11. Income Trusts are Baaack Income Trusts

12. Background • In 2006 there were approximately 250 publicly traded income trusts. • Market capitalization of $200 billion. • On Halloween 2006 the Department of Finance announced its intention to tax income trusts as if they were corporations, commencing in 2011. • Most income trusts have now converted to corporations. 1

13. Sample Structures Business Income Trust Original Structure Unitholders income flows out to Unitholders Income Trust (interest incomeand business income) Debt Shares OPCO (interest expense)

14. Sample Structures Unitholders Business Income Trust “Second Generation” Income Trust Public Trust Units and Debt Operating Trust Commercial Trust Equity GP Co LP Units GP Units Operating LP

15. Sample Structures Royalty Trust Unitholders Public Trust Income Distribution Commercial Trust Royalty Oil and GasCo

16. Comparison of Trust versus Corporation Tax Trusts became a popular investment vehicle for tax-exempt entities such as pension plans and registered retirement savings plans. * Assumes corporate tax rate of 25% commencing in 2012.

17. Tax Burden on a U.S. Investor Corporation

18. Tax Regime – Old Rules • Amounts distributed by trust to unitholders were deductible in computing trust’s taxable income. • High tax rate on undistributed income of trust. • Tax efficient to distribute trust income so that it was included in taxable income of unitholders. • Tax Exempt unitholders were not taxed on distributions (ie: pension funds, RRSP’s etc.). • Non-resident investors in treaty countries generally subject to 15% withholding tax.

19. Tax Regime – New Rules • The SIFT rules apply to trusts and partnerships that are listed or traded on a stock exchange or other “public market”. • SIFT’s are now taxed on business income as if they were corporations. • Amounts distributed to investors out of after-tax income are taxed as dividend income.

20. Recent Transactions • The SIFT rules only apply to income earned by a publicly listed or traded partnership or trust from a business that is carried on in Canada. • The SIFT rules do not apply to: • entities that are not publicly listed or publicly traded (i.e. most private placements); or • publicly listed or traded trusts or partnerships that do not carry on business in Canada.

21. U.S. Optimus Real Estate Fund Structure - 2008 Investors Unitholders Distributions from MFT Mutual Fund Trust Units MFT Optimus US Real EstateFund 25% Equity 75% Debt net rental incomecapital gain Optimus Canadian LP Optimus Canadian GP 75% Debt 25% Equity US – Optimus LP (US real estate) rental income (sheltered by interest expense) and capital gains (subject to US tax). This transaction was undertaken by way of private placement.

22. Eagle Energy Trust - 2010 Unitholders Investment in Units Distributions Promoter publicly listed Mutual Fund Trust *Eagle EnergyTrust(Alberta Trust) Interest on CT Notesand income and return of capital on CT Units Investment inCommercial Trust Notes and Units EEI Holdings Inc.(Alberta Co.) *Eagle Energy Commercial Trust(Alberta Trust) CT Trustee Eagle Energy Inc.(Alberta Co.) Income and return of capital Investment in LP Eagle EnergyAcquisition LP(Delaware LP) Eagle Energy US GP LLC(Delaware LLC) General Partner * Both trusts elected to be treated as corporations for US tax purposes. Interest expense and drilling costs provide significant tax shelter. Oil and Gas Assets

23. Recent Developments in Canadian Shale Gas • February 28, 2011 closing of $1.025 billion of investment in Canadian shale gas property by Sasol Energy of South Africa. • Transaction involves • 51,000 acres of land in British Columbia. • Estimated reserves of 9.6 trillion cubic feet. • Processing facilities. • Expected to produce 40 to 60 million cubic feet equivalent per day in 2011. • Sasol and Talisman will perform a feasibility study on the viability of a Gas to Liquids plant in western Canada.

24. Recent Developments in Canadian Shale Gas

25. Use of Deferral Partnerships • In Canada, it is acceptable to form a deferral partnership to carry on business. • Taxation of Year 1 partnership income is deferred until December 31 of Year 2 achieving an 11 month deferral of tax for corporate partner. • It is generally not acceptable to “stack” partnerships over partnerships to extend this deferral. corporate fiscal year Jan 1 Dec 31 partnership fiscal year Dec 31 Jan 1 Year 1 Year 2

26. Related Considerations • The above form of transaction can generally be structured to avoid the necessity of Investment Canada approval for a non-resident investor in Canadian shale gas properties. • Tax optimization can be achieved by allocating to each partner those tax deductions that relate to its particular contribution.

27. Sample allocation of Tax Deductions allocate deductions relating to SGP Partner 1 Partner 2 cash contribution contribution of shale gas property (SGP) Partnership allocate deductions relating to drilling activity 5642487

28. Chinese Investment inCanadian Resource Sector 2009-2011 Source: various media reports

29. U.S. Taking Notice • In response to Petro-China deal with Athabasca Oil Sands, Chair of U.S.-China Economic and Security Review Commission said Canada should subject deal to thorough review that would include sensitive national security issues • "I think that an acquisition like this should raise national security questions both for the government of Canada and for the government of the United States." • Deal passed the review, as have all subsequent Chinese investments in Canada

30. Investment Canada Act Net Benefit Test • Review of investments by a non-Canadian to acquire control of Canadian business • Test is whether parties can demonstrate "Net Benefit" to Canada • "Non-Canadian" includes any corporation a majority of whose voting securities are owned by non-Canadian citizens

31. Investment Canada Act Net Benefit Test • State-owned enterprises (SOEs) • Governance and commercial orientation of SOEs to be considered in assessing "net benefit" to Canada • Standards of corporate governance • Will Canadian business continue to have the ability to operate on a commercial basis?

32. Investment Canada Act • Since 1985, 1587 transactions reviewed • No non-cultural industry transaction rejected UNTIL… • April 2008, Government rejects acquisition by Alliant Techsystems (U.S.) of MacDonald Dettwiler & Associates (MDA)($1.3 billion)

33. Investment Canada Act • MDA owns remote sensing satellite RadarSat 2, built with Government of Canada funding and used to monitor Canada’s Arctic • Sovereignty issue • Priority use by Canada could not be assured • Reasons for rejection of transaction not provided • New National Security focus?

34. Aussie, Aussie, Aussie – No, No, No • Second case of Investment Canada Act being used to prevent takeover of Canadian company by foreign buyer • BHP Billiton hostile $39B bid for Potash Corp of Saskatchewan • Controversial bid opposed by Board and govts of Sask. and Alberta (yes!) – two provs where Conservatives are strongest • November 2010, federal Industry Minister said he would not approve deal as it would not provide a “net benefit” to Canada • BHP withdrew bid before final decision so Govt did not have to release its in-depth reasons and has refused to so voluntarily

35. Aussie, Aussie, Aussie – No, No, No • Announced review of Investment Canada Act – even though extensively revised in 2009 • Govt wants to increase transparency in application of ICA • Significant uncertainty now that did not exist before • Imprecise guidelines on “net benefit” and unclear definitions of what would be “injurious” to Canada’s “national security” • Political influence • Canada suing U.S. Steel over 2007 acquisition of Stelco for breach of undertakings given to obtain ICA approval of deal

36. Developments in Canadian Energy Sector • Forecast capital spending in oilsands of $16B in 2011 (up 18%) • Mackenzie Gas Pipeline Project received regulatory approval in December – 264 conditions attached – most important is that Imperial Oil must decide by end of 2013 if it will build • Enbridge Northern Gateway Project proceeding – will open Asian markets for Canadian oil – competition for U.S. • Application filed in May 2010 • Hearing before Review Panel has not been set yet • TransCanada Keystone XL pipeline project in U.S. regulatory limbo since mid 2010 – EPA GHG concerns re oil sands • State Dept. can grant permit – considering another EIA

37. Developments in Oilsands Sector • Alberta under domestic and international pressure re oilsands • GHGs, impacts on water, tailings ponds, duck deaths • Syncrude convicted of federal and provincial offences as result of deaths of 1600 ducks in tailings pond – $3 million fine • Appoints expert review panel January 2011 to create “world-class” environmental monitoring and reporting system • Opponents say panel is “industry and business heavy” • Media reports last week that Alberta poised to change reclamation security rules for Syncrude and Suncor

38. CanadaConsumer Product Safety Act • Passed December 15, 2010 • Substantially revises existing regulatory scheme for “consumer products” • Brings regulatory tracking and enforcement powers to par with other federal environmental, health and safety laws • “Consumer products” are products reasonably expected to be obtained by an individual to be used for non-commercial purposes • Definition is potentially broader than in U.S. CPSA as CCPSA focuses on intention of consumer not of manufacturer • Products designed or sold for trade purposes but capable of being used by consumers will be subject to the CCPSA

39. CanadaConsumer Product Safety Act • Broad, general prohibition against manufacture, import, advertisement or sale of any consumer product posing a danger to human health or safety • Representations and packaging that misrepresent consumer products as not being a danger are also prohibited • Mandatory tracking measures, record keeping and incident reporting

40. Key points U.S. Companies should know • New duty to advise government on known risks • Expanded recall and compliance powers • General duty not to sell hazardous consumer products • when in doubt - test • Definition of “consumer product” very broad • will capture many “trade” or “business” products sold in outlets to which consumers have access • Overall, CCPSA very close to U.S. CPSA

41. Alex MacWilliamalex.macwilliam@fmc-law.com(403) 268-7090 C. Anne Calverleyanne.calverley@fmc-law.com(403) 268-6873