F. Prohibited Business
| Author | M.H. Ogilvie |
| Profession | LSM, B.A., LL.B., M.A., D.Phil., D.D., F.R.S.C. Of the Bars of Ontario and Nova Scotia Chancellor's Professor and Professor of Law, Carleton University |
| Pages | 169-174 |
Page 169
In addition to defining the business and activities in which banks may legally engage in Canada, the Bank Act defines the business and activities in which banks may not engage in Canada, again in Part VIII of the Act. This approach of setting out both positively and negatively the business of banking has been employed since the 1871 Act and may have been done to ensure that the discrete activities of other financial institutions such as trust and loan companies or securities or insurance companies were expressly prohibited to banks, to prevent them from entering those other businesses. Prior to the 1980 Act, any engagement in a prohibited activity would have resulted in a finding of ultra vires, rendering any contract null and void. However, the 1980 Act has provided for sanctions for banks engaged in such activities, while third parties contracting with such a bank are entitled to rely on the contract
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or pursue remedies in restitution. The following business and activities are expressly prohibited in banks in Canada.
Since the nineteenth century, banks have been expressly prohibited from dealing in goods, wares, and merchandise.150
Although the Act does not define these words, it has been widely assumed that the purpose of this prohibition is to prevent banks in Canada from becoming involved in various commercial and retail enterprises either directly or indirectly through subsidiaries or substantial investments in such enterprises. Courts have consistently made this assumption in cases relating to this provision.151
The only exception would occur when carrying on a business is related to a permitted banking business, that is, in a receivership or insolvency situation.152
This prohibition serves to distinguish Canadian banking from banking in a number of other countries, particularly in the European Union, where banks are permitted to own and engage in various commercial and retail activities in addition to banking per se.
No bank in Canada may act as an executor, administrator, official guardian, tutor, curator, judicial advisor, or committee of a mentally incompetent person. Nor may a bank act as a trustee for a trust.153
In short, banks are prohibited from engaging in fiduciary activities. In some senses, banks have always engaged in some fiduciary activities, such as giving financial advice, as the courts have acknowledged,154 but the main concern of this provision is to ensure that they do not directly engage in the fiduciary activities associated with trust companies. Moreover, the Act does permit banks to be involved in fiduciary activities in various indirect ways,155including offering certain services in the fiduciary component that are expressly permitted, such as RRSPs and RRIFs,156and presumably also offering advice in relation to
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the various businesses and activities in which banks are permitted to engage by the Act.157
Thus, the prohibition on fiduciary activities may be relatively narrow, to prohibit those activities expressly enumerated above and directly competing qua bank with trust companies.
Deposit taking has been a core business of banks for as long as banks have existed. However, the Bank Act restricts this business in certain ways for the purpose of ensuring that depositors’ interests are as secure as Parliament has legislated them to be. Thus, banks are permitted to accept deposits in Canada only if they are members of the Canada Deposit Insurance Corporation or if they have otherwise been authorized pursuant to the CDIC Act to accept deposits158without being a CDIC member.159
A non-CDIC-member deposit taker is required to ensure that the ratio of the total sum of all deposits of less than $150,000 to the total amount of all deposits on each day shall not be more than 1 percent, so as to ensure the security of small depositors’ deposits.160
Such a deposit taker is also required to give a prospective depositor notice in writing that its deposits are not CDIC insured prior to an account being opened161and to post notices in all branches to the public to that effect,162as well as in any advertisements.163
Such a deposit taker is prohibited from sharing premises with a CDIC-insured institution,164 and if it carries on business on premises adjacent to a CDIC-insured institution, it must clearly indicate to customers that its business and premises are separate.165
Banks are prohibited from dealing in securities except to the extent permitted by the regulations.166
The regulations prohibit banks from se-
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curities dealings consisting of primary distributions of shares; secondary market trading; primary distributions of debt obligations of bodies corporate; and acting as a selling agent in the distribution of mutual funds.167
They are, however, permitted to deal in securities on their own behalf; distribute debt obligations on behalf of a government, a public utility, or an international agency of which Canada is a member or which are...
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