Legal Glossary
Canadian legal terms, in plain English.
64 terms founders actually search for — defined clearly, with the Canadian statutes and case law that matter.
Acceleration clause
A provision that makes a debt or obligation immediately due and payable upon a triggering event, such as a missed payment, change of control, or covenant breach. Common in convertible notes and loan agreements.
Articles of incorporation
The constitutional document filed with a federal or provincial corporate registry to create a corporation. Sets out the share structure, restrictions, and corporate name.
Assignment (IP)
The transfer of ownership of intellectual property — copyright, patent, trademark, or trade secret — from one party to another. In Canada, copyright assignments must be in writing under the Copyright Act.
Bridge note
Short-term convertible debt issued between equity financing rounds to provide runway while the company negotiates its next priced round. Typically converts at a discount to the next round.
Capital gains exemption (LCGE)
The Lifetime Capital Gains Exemption allows Canadian residents to shelter up to $1,250,000 (effective June 25, 2024, per Bill C-69) of capital gains on the disposition of qualifying small business corporation shares from tax.
Carried interest
The share of fund profits — typically 20% — paid to the general partner of a limited partnership as a performance incentive. In Canada, the CRA may recharacterize carried interest as income rather than capital gains depending on the fund structure.
CASL (Canada's Anti-Spam Legislation)
Federal law requiring express or implied consent before sending commercial electronic messages, including email, SMS, and social media. Penalties can reach $10 million per violation for corporations.
CBCA (Canada Business Corporations Act)
The federal statute governing the incorporation, organization, and conduct of federally incorporated business corporations in Canada. Covers share issuance, directors' duties, shareholder rights, and fundamental changes.
Change of control
An event where a majority of the voting shares or effective control of a company transfers to a new party. Triggers drag-along rights, acceleration clauses, and executive severance provisions in most transaction documents.
Clawback
A contractual right to recover previously distributed amounts. In the fund context, allows limited partners to reclaim excess carried interest from the general partner if later investments underperform.
Co-sale rights (tag-along)
A right that allows minority shareholders to participate in a sale of shares by a majority shareholder, on the same terms and price, protecting them from being left behind in a partial exit.
Confidential information
Any non-public information disclosed in a business relationship that derives value from its secrecy. In Canada, the duty of confidence arises from the three-part test in Lac Minerals: the information must be confidential, disclosed in confidence, and misused by the recipient.
Convertible note
A debt instrument that converts into equity upon a qualifying event, typically a priced financing round. The note accrues interest and converts at a discount or valuation cap, whichever is more favourable to the investor.
Copyright Act
The federal statute governing the creation, ownership, and enforcement of copyright in Canada. Provides that the author is the first owner of copyright, subject to the employment exception in s.13(3), and that assignments must be in writing.
D&O insurance
Directors and officers liability insurance protects individuals serving on a company's board against personal liability arising from their decisions. Essential for startups because CBCA s.119 imposes personal liability for unpaid wages.
Data processing agreement (DPA)
A contract between a data controller and a data processor that sets out the scope, purpose, and security requirements for processing personal information. Required under PIPEDA's accountability principle and Quebec's Law 25.
Dependent contractor
A worker classification between employee and independent contractor. Dependent contractors are economically dependent on a single client and entitled to reasonable notice of termination, but not statutory benefits. The leading test is from McKee v. Reid's Heritage Homes.
Drag-along rights
A provision that allows majority shareholders (typically 66.7% or 75%) to force minority shareholders to join in a sale of the company on the same terms, ensuring a clean exit without holdouts.
Due diligence
The investigation and verification process a buyer, investor, or lender undertakes before closing a transaction. Covers corporate records, financial statements, IP ownership, employment compliance, material contracts, and litigation.
Equity incentive plan
A corporate plan authorizing the grant of stock options, restricted share units (RSUs), or other equity-based compensation to employees, directors, and consultants. Governed by corporate statute, securities regulation, and the ITA.
ESA (Employment Standards Act)
Ontario's minimum employment standards legislation, covering minimum wage, hours of work, overtime, vacation, public holidays, termination notice, and severance pay. The ESA sets the floor — contracts cannot go below it.
ESOP (Employee Stock Option Plan)
A plan that grants employees the right to purchase shares at a fixed exercise price. In Canada, the s.110(1)(d) deduction allows CCPC employees to be taxed at capital gains rates if shares are held for two years after exercise.
Fair market value (FMV)
The highest price, expressed in money, that a property would bring in an open and unrestricted market between a willing buyer and a willing seller, both knowledgeable and acting at arm's length. Critical for option pricing under ITA s.7.
Fiduciary duty
The obligation of directors and officers to act honestly, in good faith, and in the best interests of the corporation. Under CBCA s.122, this includes a duty of care, diligence, and skill. Breach exposes directors to personal liability.
FINTRAC
The Financial Transactions and Reports Analysis Centre of Canada. Businesses in designated sectors (including legal and accounting) must report suspicious transactions and large cash transactions to FINTRAC under the PCMLTFA.
Fixed-term employment
An employment contract with a defined end date. If terminated early without a lawful termination clause, the employer owes the balance of the term. Howard v. Benson Group confirmed that early-termination provisions must comply with ESA minimums.
Founder lock-up
An agreement restricting a founder from transferring or selling their shares for a defined period, typically aligned with vesting or a financing milestone. Protects co-founders and investors from premature dilution or exits.
Good leaver / bad leaver
A classification system in equity agreements that determines how unvested (and sometimes vested) shares are treated when a shareholder or employee departs. Good leavers (death, disability, termination without cause) receive FMV; bad leavers (cause, voluntary resignation) receive par value or cost.
Governing law
The contractual clause specifying which province's or country's laws apply to interpret and enforce the agreement. In Canada, Douez v. Facebook (2017 SCC 33) limits the enforceability of foreign forum selection clauses in consumer contracts.
GST/HST
The Goods and Services Tax (5% federal) and Harmonized Sales Tax (combined federal-provincial, 13-15%) apply to most commercial supplies in Canada. Businesses with revenue over $30,000 must register. Legal services are taxable supplies.
Indemnification
A contractual obligation where one party agrees to compensate the other for specified losses, liabilities, or damages. In Canada, the enforceability of indemnification clauses is subject to the Tercon v. BC framework on exclusion clauses.
Independent contractor
A self-employed worker engaged under a contract for services rather than a contract of service. The Sagaz test (control, ownership of tools, chance of profit/risk of loss, integration) distinguishes contractors from employees.
Investor rights agreement
A companion document to a priced round that grants institutional investors information rights, board observer seats, pro-rata participation rights, and registration rights.
IP assignment
The transfer of all right, title, and interest in intellectual property from a creator to another party. In Canada, the Copyright Act provides that the employer owns copyright in works created in the course of employment (s.13(3)), but contractor-created works require a written assignment.
Lac Minerals
The leading Supreme Court of Canada decision on breach of confidence. Established the three-part test: (1) the information had the necessary quality of confidence, (2) it was communicated in circumstances importing an obligation of confidence, and (3) it was misused by the party receiving it.
Liability cap
A contractual limit on the maximum amount of damages one party can recover from the other. Typically set at the fees paid in the prior 12 months or the contract value. Subject to the Tercon v. BC enforceability framework.
Limited partnership
A partnership structure with at least one general partner (unlimited liability, manages the fund) and one or more limited partners (liability capped at their capital contribution). The standard vehicle for Canadian PE and VC funds.
MFN clause (most favoured nation)
A provision guaranteeing that if the company offers better terms to a subsequent investor, the earlier investor automatically receives those improved terms. Common in SAFE agreements and bridge notes.
Moral rights
Rights of an author under the Copyright Act to the integrity of their work and to be associated with it by name. Moral rights cannot be assigned in Canada — only waived. IP assignment agreements must include a moral rights waiver to be effective.
NDA (Non-Disclosure Agreement)
A contract establishing a confidential relationship between parties who are sharing sensitive information. In Canada, the enforceability framework is rooted in the Lac Minerals breach-of-confidence doctrine rather than U.S.-style trade secret statutes.
NI 45-106
National Instrument 45-106 — Prospectus Exemptions. The securities regulation that provides exemptions from the prospectus requirement for private placements, including the accredited investor exemption (s.2.3), the friends and family exemption (s.2.5), and the offering memorandum exemption (s.2.9).
Non-compete
A restrictive covenant preventing an individual from competing with their former employer. Since Ontario's Working for Workers Act (2021), non-competes are banned for all employees except C-suite executives. Even where permitted, they must pass the Shafron reasonableness test.
Non-solicitation
A restrictive covenant preventing a departing employee or contractor from soliciting the company's clients, customers, or employees. Easier to enforce than non-competes because they are narrower in scope. Must be reasonable in duration and scope per Elsley v. J.G. Collins.
OBCA (Ontario Business Corporations Act)
Ontario's provincial corporate statute governing the incorporation and conduct of Ontario corporations. Similar to the CBCA but with provincial-specific provisions, including a 10-year dissolution revival period and different oppression remedy thresholds.
PIPEDA
The Personal Information Protection and Electronic Documents Act — Canada's federal private-sector privacy law. Requires organizations to obtain consent for the collection, use, and disclosure of personal information and to implement the 10 fair information principles.
Preferred shares
A class of shares with rights, privileges, and restrictions that rank ahead of common shares on dividends and/or liquidation. In VC financings, preferred shares carry a liquidation preference, anti-dilution protection, and conversion rights.
Privacy policy
A public-facing document disclosing how an organization collects, uses, stores, and shares personal information. Required under PIPEDA and Quebec's Law 25. Must be available at or before the point of collection.
Pro-rata rights
The right of an existing investor to participate in subsequent financing rounds to maintain their percentage ownership of the company. Typically granted in investor rights agreements or SAFE side letters.
Quebec Law 25
Quebec's modernized private-sector privacy legislation (phased in September 2022 through September 2024) that imposes consent requirements, mandatory privacy impact assessments, breach notification, and data portability obligations. Applies to any organization processing Quebec residents' personal information.
ROFR (Right of First Refusal)
A right giving existing shareholders or the company the first opportunity to purchase shares that a shareholder proposes to sell to a third party, on the same terms as the third-party offer.
SAFE agreement
A Simple Agreement for Future Equity — an instrument that converts into equity upon a qualifying financing event. The Canadian adaptation adds NI 45-106 exemption compliance, GST/HST treatment, and provincial securities filings not present in the Y Combinator original.
Sagaz test
The Supreme Court of Canada's four-factor test for distinguishing employees from independent contractors: (1) control over the work, (2) ownership of tools, (3) chance of profit / risk of loss, and (4) integration into the business.
Severance
Compensation owed to an employee upon termination without cause. In Ontario, the ESA provides statutory severance (s.64) for employees with 5+ years of service at employers with a $2.5M+ payroll. Common law reasonable notice (Bardal factors) often exceeds the statutory minimum.
Shareholder agreement
A private contract among shareholders of a corporation that governs their relationship, share transfer restrictions, governance, and exit mechanics. Supplements the articles of incorporation and corporate statute.
Shotgun clause (buy-sell)
A deadlock resolution mechanism where one shareholder offers to buy the other's shares at a stated price; the recipient must either sell at that price or buy the offeror's shares at the same price. Forces fair pricing through the threat of being on either side.
SLA (Service Level Agreement)
A contract defining the performance metrics, uptime commitments, and remedies (typically service credits) for a service provider. In the SaaS context, covers availability, response times, incident severity levels, and maintenance windows.
Solicitor-client privilege
The legal protection that prevents the compelled disclosure of confidential communications between a lawyer and their client made for the purpose of obtaining or giving legal advice. In Canada, it is a substantive right, not merely a rule of evidence (Descoteaux v. Mierzwinski).
Tag-along rights
A contractual right allowing minority shareholders to join a sale initiated by a majority shareholder, selling their shares on the same terms. Protects minority holders from being stranded in a company with a new controlling shareholder.
Terms of service
The legal agreement governing a user's access to and use of a digital platform or service. In Canada, must comply with CASL consent requirements and Douez v. Facebook limits on forum selection clauses in consumer contracts.
USA (Unanimous Shareholder Agreement)
A special form of shareholder agreement under CBCA s.146 (or its provincial equivalents) that transfers some or all of the directors' powers to the shareholders. The shareholders who assume those powers also assume the corresponding liabilities.
Valuation cap
The maximum company valuation at which a SAFE or convertible note converts into equity. Protects early investors by ensuring they receive a minimum ownership percentage regardless of how high the company is valued at the next priced round.
Vesting
The process by which an individual earns full ownership of equity over time or upon achieving milestones. A standard startup vesting schedule is four years with a one-year cliff, meaning no shares vest until the first anniversary.
Waksdale
The landmark 2020 Ontario Court of Appeal decision holding that if any part of a termination clause violates the Employment Standards Act, the entire termination provision is void — even the parts that comply. Fundamentally changed how Canadian employment agreements must be drafted.
Working for Workers Act
Ontario legislation (Bill 27, 2021) that bans non-compete agreements for most employees (s.67.2), requires electronic monitoring policies, and introduced the right to disconnect. Only C-suite executives are exempt from the non-compete ban.
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