Constitutional Framework: Federal Jurisdiction Over Banking
Banking in Canada is a federal matter. Section 91(15) of the Constitution Act, 1867 gives Parliament exclusive legislative authority over "Banking, Incorporation of Banks, and the Issue of Paper Money." This means that federally chartered banks — operating under the Bank Act, S.C. 1991, c. 46 — are subject to federal regulation and are generally immune from provincial laws that specifically target or restrict banking operations.
Provincial laws of general application (such as the Ontario PPSA for security interests, the Limitations Act, 2002 for limitation periods, and theLand Titles Act for real property security) do apply to banks to the extent they do not conflict with the Bank Act or trench on the core of federal banking jurisdiction.
The Supreme Court of Canada in Canadian Western Bank v. Alberta, 2007 SCC 22 reaffirmed the paramountcy principle and confirmed that OSFI's prudential regulation of banks cannot be replicated by provincial law.
The Office of the Superintendent of Financial Institutions (OSFI)
OSFI is the primary federal prudential regulator of banks, trust companies, insurance companies, and federally regulated pension plans. OSFI's mandate under the Office of the Superintendent of Financial Institutions Act, R.S.C. 1985, c. O-2.7 is to supervise financial institutions to determine whether they are in sound financial condition and complying with applicable legislation and supervisory requirements.
OSFI issues guidelines that establish prudential expectations for banks, including: Capital Adequacy Requirements (CAR); Liquidity Adequacy Requirements (LAR); guidelines on risk management and corporate governance; and guidelines on technology and cyber risk. OSFI guidelines are not technically law but are treated as effectively binding by regulated institutions given OSFI's supervisory authority.
Banker-Customer Relationship
The banker-customer relationship is primarily contractual. The deposit agreement between the bank and its customer governs the terms on which the bank holds customer funds and processes transactions.
The Debtor-Creditor Relationship
When a customer deposits money with a bank, the legal relationship is debtor-creditor: the bank becomes the owner of the deposited funds and owes the customer a debt equal to the deposit. The customer does not retain property rights in the specific funds deposited: Foley v. Hill (1848), 2 HLC 28. This foundational principle means that upon a bank's insolvency, depositors are unsecured creditors, not beneficial owners, subject to the protection of the Canada Deposit Insurance Corporation (CDIC) scheme for insured deposits.
Implied Terms in the Banking Contract
Banks owe customers certain implied contractual duties:
- Duty of secrecy: A bank owes a duty to keep its customers' affairs secret, subject to four exceptions identified in Tournier v. National Provincial and Union Bank of England, [1924] 1 KB 461: (1) compulsion of law; (2) duty to the public; (3) interests of the bank; (4) express or implied consent of the customer. PIPEDA imposes additional federal privacy obligations on banks.
- Duty to honour cheques: A bank is contractually obliged to honour its customer's cheques if the customer has sufficient funds, subject to any stop payment instructions.
- Duty to follow instructions: A bank must follow its customer's authorized payment instructions and is liable for wrongful dishonour.
Fiduciary Duties
A bank does not automatically owe fiduciary duties to its customers. A fiduciary relationship requires the bank to have undertaken to act in the customer's best interests, typically in an advisory or investment management context. The Supreme Court in Hodgkinson v. Simms, [1994] 3 SCR 377 established that a fiduciary duty arises where one party reasonably relies on the other to act in their interest and the other has accepted that obligation.
Banks providing investment advice, financial planning, or wealth management services may owe fiduciary obligations. Banks enforcing security or acting as arms-length commercial lenders generally do not owe fiduciary duties to borrowers.
Commercial Lending Structures
Term Loans
A term loan is a fixed-amount credit facility repayable over a defined period. The loan agreement typically provides for: a committed principal amount; an interest rate (fixed or floating, often expressed as prime plus a spread or CORRA plus a spread following the transition away from CDOR); a repayment schedule (bullet, amortizing, or partially amortizing); financial and operating covenants; and events of default triggering acceleration.
Revolving Credit Facilities
A revolving credit facility allows the borrower to draw, repay, and re-draw up to a maximum committed amount during the revolving period. Revolving facilities are typically used for working capital. Availability under a revolving facility may be subject to a borrowing base calculated as a percentage of eligible receivables and inventory (an asset-based lending structure).
Syndicated Facilities
Large commercial borrowings are often structured as syndicated credit facilities, where multiple banks participate as lenders and one bank acts as administrative agent on behalf of the syndicate. The Loan Market Association (LMA) standard form documentation is commonly used in Canadian syndicated transactions, adapted for Canadian law. The administrative agent manages the mechanics of drawdowns, repayments, and enforcement, subject to instructions from the majority lenders.
Security Documentation in Ontario Commercial Lending
General Security Agreement (GSA)
A GSA creates a security interest in all present and after-acquired personal property (PAAP) of the borrower. The GSA is registered in the Ontario PPSR as a financing statement describing the collateral as "all present and after-acquired personal property." The GSA typically creates a floating charge over inventory and accounts and a fixed charge over specific identified assets (equipment, intellectual property).
Mortgage Debenture
A mortgage debenture (or debenture) is a document that creates both a fixed charge over identified real property and equipment and a floating charge over all other assets of the borrower. The floating charge crystallizes upon the occurrence of an event of default or appointment of a receiver, converting the floating charge into a fixed charge on all assets then held by the borrower. The mortgage debenture is registered against real property in the Land Titles Office and as a financing statement in the PPSR.
Real Property Security
A mortgage or charge against real property in Ontario must be registered in the Land Titles Office under the Land Titles Act to be effective against subsequent purchasers and encumbrancers. Priority between registered mortgages is determined by order of registration. Banks typically require a first mortgage on commercial real property securing a term loan.
Personal Guarantees
Banks lending to small and medium enterprises typically require personal guarantees from principals. A valid guarantee requires: consideration; writing signed by the guarantor (Statute of Frauds, R.S.O. 1990, c. S.19); and independent legal advice for the guarantor to reduce the risk that the guarantee will be set aside on the basis of non est factum or undue influence.
PPSA Priority in the Lending Context
A bank's PPSA security interest in a borrower's personal property must be perfected by PPSR registration to have priority over subsequent creditors and trustee in bankruptcy. The first-to-register-or-perfect rule under PPSA s.30 means that a bank that fails to register promptly may lose priority to a subsequent creditor who registers first.
Banks must also be alert to purchase money security interests (PMSIs) held by equipment suppliers and inventory financiers, which can take super-priority over the bank's GSA in the specific PMSI collateral. The bank should require the borrower to give advance notice of any PMSI financing and obtain subordination agreements from PMSI holders where possible.
Federal deemed trusts for unremitted source deductions (ITA s.227(4)) and HST (ETA s.222) take priority over bank security interests, including perfected GSAs. Banks conducting due diligence before advancing should search for CRA arrears and obtain representations and covenants from the borrower confirming all source deductions and HST are current.
Privacy Obligations: PIPEDA
Banks are subject to the federal Personal Information Protection and Electronic Documents Act (PIPEDA), S.C. 2000, c. 5 in respect of customer personal information collected in the course of commercial activity. PIPEDA requires banks to obtain meaningful consent for the collection, use, and disclosure of personal information; implement appropriate safeguards; and respond to access and correction requests.
The Office of the Privacy Commissioner of Canada (OPC) has jurisdiction over PIPEDA complaints against banks. The federal Consumer Privacy Protection Act(CPPA) — Bill C-27 — proposes to replace PIPEDA with a strengthened privacy regime including administrative monetary penalties, but had not yet come into force as of 2024.
Practice Points for Ontario Commercial Lawyers
- Register the bank's PPSR financing statement as early as possible — ideally before advancing funds — to obtain priority under the first-to-register rule.
- Require the borrower to represent and covenant that all CRA source deductions and HST remittances are current; a lien search with the CRA is appropriate in secured transactions.
- Require independent legal advice (ILA) letters from guarantors, particularly where the guarantor has a close personal relationship with the borrower.
- Review the interest rate clause carefully following the transition from CDOR to CORRA (Canadian Overnight Repo Rate Average) as the Canadian dollar benchmark rate; ensure fallback provisions are in place.
- For syndicated facilities, confirm the administrative agent provisions align with LMA market standards and that voting thresholds for enforcement actions are clearly defined.
- Advise borrower clients that the bank's duty of confidentiality is subject to court orders, regulatory demands, and enforcement-related disclosures; borrowers should not assume their financial information is protected from compelled disclosure.