What You Need To Know About New Transparency Obligations Affecting Canadian Companies

By Taylor Keene & David McHugh

Big changes are coming to the information collection obligations of companies in Canada and the information disclosure obligations of their shareholders. If you are a director, officer, or shareholder of a Canadian corporation, you’ll want to read this blog post.

Effective June 13, 2019, federal companies (that is, companies incorporated under the Canada Business Corporations Act) will be legally obligated to keep and update a register of individuals with significant control over the corporation. And if you’re a shareholder of a federal corporation, you will be legally obligated to disclose the prescribed information to the corporation. These new obligations, however, do not apply to public companies, or companies listed on a stock exchange. Although for now these requirements will only apply to federal companies (CBCA), it is expected that provincial corporate legislation will soon be amended to adopt similar requirements. In fact, British Columbia has already introduced similar legislation that is working its way through the legislature. Consequently, even if you are only involved with a provincial corporation, you should keep these looming new obligations on your radar.

So what’s the big deal? Why the new obligations? The purpose of the new information collection and disclosure obligation are to prevent the misuse of corporate and other legal entities for purposes of tax evasion, money laundering, and other criminal purposes by increasing the transparency of corporate beneficial ownership.

A.   Overview of the Obligations

I.   Who is An Individual with Significant Control?

Good question. First, lets clarify some legalese. When lawyers talk about an “individual” they mean a natural person, also known as a human. This can be contrasted with a “person”, which one would think is also limited to humans, but in fact, at law a “person” can actually be both a corporation or an individual.

Now that we have law school 101 out of the way, lets dive into the new legal requirements for federal companies.

An “individual with significant control” (“ISC”) is an individual who:

(i) is the registered holder of a “significant number of shares”;

(ii) the beneficial owner of a “significant number of shares”;

(iii) has direct or indirect control or direction over a “significant number of shares”; or

(iv) has any direct or indirect influence that, if exercised, would result in control in fact of the corporation.”

An individual will also be deemed to be an ISC under (i), (ii), (iii) if they hold such an interest in a “significant number of shares” jointly with one or more other individuals.

Significant number of shares” is defined to be (i) any number of shares that carry 25% or more of the voting rights attached to all of the corporations outstanding voting rights; or (ii) any number of shares that is equal to 25% or more of all of the corporation’s outstanding shares measured by fair market value.

II.   What information needs to be included in the Register?

The register must contain the following information about each ISC (the “Prescribed Information”):

  1. Their name, date of birth, and their latest known address;
  2. Their jurisdiction of residence for tax purposes;
  3. The date on which the individual became or ceased to be an ISC, as applicable;
  4. A description of how they are an ISC, including, as applicable, a description of their interests and rights in respect of shares of the corporation; and
  5. A description of each step taken to ensure the information is accurate, complete, and up-to-date.

III.   How often must the Register be updated?

Fairly frequently. The information contained in the register must be updated at least once each financial year. It is expected that corporations will take reasonable steps to verify if any ISC’s information has changed or whether any shareholders have become ISCs in the intervening year.

In additional to the annual update, the corporation must amend the register if they become aware that any of the required information has changed, within 15 days of becoming aware of such change.

VI.   How is the information to be obtained?

Practically speaking, the corporation will have to request the required information from their shareholders, and the shareholders must, “to the best of their knowledge, reply accurately and completely as soon as feasible”. It is an offence for a shareholder to knowingly refuse to comply (see Offences and Penalties below).

The company must take “reasonable steps to ensure that it has identified all individuals with significant control over the corporation and that the information in the register is accurate, complete and up-to-date”. Keep in mind that individuals other than shareholders could be individuals with significant control. The Prescribed Information pertaining to these individuals also needs to be included and maintained in the register.

It is anticipated that there will be supplementary regulations that prescribe the steps a corporation must take if they are unable to identify an ISC, but there are currently no such regulations, and there will be no such regulations on the Effective Date. Nevertheless, an organization still remains obligated to take reasonable steps to identify and collect the required information about individuals with significant control.

V.   Obligations related to personal information

Corporations don’t hold on to the information forever. In fact, the corporation must dispose of any personal information (as defined in the Personal Information Protection and Electronic Documents Act) relating to an individual within one year following the sixth anniversary of the day they cease to be an ISC. Make sure to set your watch!

VI.   Penalty for non-compliance

A corporation’s failure to comply with the register requirements in the Canada Business Corporations Act may result in a fine of up to $5,000. Although this penalty is relatively modest, directors, officers and shareholders may be subject to significantly greater penalties, including fines of up to $200,000 or imprisonment – see Offences and Penalties below.

B.   Access to the ISC Register

I.   Disclosure to Director

If the Director of Corporations Canada (the “Director”) makes a request, a corporation must disclose any information in its ISC register to the Director.

II.   Access by Shareholders and Creditors

A shareholder or a creditor of the corporation may require the corporation to allow them access to the ISC register, or to provide an extract from the register, by sending an affidavit to the corporation that meets the statutory requirements.

The CBCA only permits shareholders and creditors to use information from the ISC register for certain limited purposes. If a shareholder or creditor uses the information for purposes other than those permitted, they may be fined up to $5,000, or subject to imprisonment for a term not exceeding six months, or both.

III.   Proposed access by investigative bodies.

Budget Implementation Act 2019 No. 1 (Bill C-97), if approved in its current form, would provide investigative bodies (defined to be any police force, or the CRA and its provincial equivalents) access to the ISC register without a warrant if such information in required for investigative purposes related to certain prescribed crimes.

C.   Additional Offences & Penalties

The CBCA will provide for the following additional offences.

I.   Offences by directors and officers

The CBCA will provide for the following offences committed by directors of officers:

(i) knowingly authorizing, permitting or acquiescing in the failure to maintain the ISC register.

(ii) knowingly providing or knowingly authorizing, permitting or acquiescing in the recording of false information in the ISC register.

(iii) knowingly authorizing, permitting, or acquiescing in the provision to any person of false or misleading information in relation to the ISC register of the corporation.

II.   Offences by shareholders

A shareholder must provide the Prescribed Information to the corporation if they are so requested, and failure to do so knowingly will be an offence under the CBCA.

III.   Penalties for offences

A person who commits any of the offences listed in parts I. and II. above is liable on summary conviction to a fine up to $200,000 or to imprisonment for up to six months, or both.

D.   Implications for Businesses

The countdown for compliance is on, but with a solid game plan a federal company, and its stakeholders, can minimize or eliminate their risk of liability.

  1. Notify your company’s shareholders of the new register requirements and request the legally required information;
  2. Use the disclosed information to determine who is an individual with significant control;
  3. Determine who else the company will need to contact to determine individuals with significant control, contact those persons, and collect the required information;
  4. Record the required information in your company’s register of individuals with significant control;
  5. Record all the steps your company took to identify all of its individuals with significant control;
  6. Update the register of individuals with significant control at least once per year and whenever new relevant information is learned; and
  7. Six years after an individual ceases to be an ISC, remove their personal information from the register and destroy it.

Federal companies should also implement procedures for tracking ISCs and maintaining the accuracy and completeness of the ISC register. Doing so will reduce the risk of exposure to liability under the new ISC register requirements.

The above is, of course, a simplification of the process – obtaining legal advice is always recommended. If your company needs assistance with compliance, Segev LLP is happy to help. Feel free to reach out to us, and one of our lawyers who will be happy to assist.

For more information, or to connect with one of our lawyers, please contact us at: inquiries@segev.ca or 604-629-5400

This article is for informational purposes only, does not constitute legal advice, and should not be relied upon as legal advice.