The federal Extractive Sector Transparency Measures Act (the "Act") requires entities in the extractive resource sector to disclose payments made to government entities in Canada and abroad through a number annual reporting requirements. This includes payments made to Indigenous governments. For a more robust discussion on the Act and its implications, please refer to our July 7, 2015 Cassels Brock e-Lert.
On March 1, 2016, Natural Resources Canada ("NRCan") finalized implementation tools that had previously been released to the public for comment. Most notably, the Guidance is a substantive supplement to the Act, published to assist extractive resource entities in interpreting and understanding the reporting requirements under the Act. The Guidance offers helpful clarification in several areas of the Act that were previously vague or unclear. Further, the Technical Reporting Specifications outline important reporting procedures and the Information Sheet provides a short summary of unique considerations regarding payments made to Indigenous governments.
Entities engaged in the commercial development of oil, gas, or minerals should familiarize themselves with the Act and the implementation tools to better understand the policies and procedures that are essential to comply with the legislation.
The Guidance provides general information on areas such as:
- The scope of commercial development of oil, gas, and minerals;
- What entities are subject to the Act;
- What entities must report payments under the Act; and
- What types of payments should be reported under the Act.
The Guidance notes that it is not intended to be prescriptive, but rather practical and illustrative. It is important for entities in the extractive sector to understand that they are ultimately responsible for determining, given the facts and circumstances of each entity, if and how the Act applies to them. Below is a brief summary of the most salient clarifications provided by the Guidance.
1. Commercial development of oil, gas, or minerals
Only entities that are engaged in the commercial development of oil, gas, or minerals are subject to the Act. "Commercial development" captures two categories of activities – the exploration or extraction of oil, gas, or minerals and the acquisition or holding of a permit, license, lease, or any other authorization to carry out any exploration or extraction of oil, gas, or minerals. The Guidance clarifies that exploration or extraction refers to the key phases of commercial activity which occur during the life cycle of a project, extending from prospecting to exploration and to closure, remediation, and reclamation of a project.
The Guidance provides that commercial development generally does not include post-extraction activities such as refining, smelting, or processing of oil, gas, or minerals, as well as marketing, distribution, transportation or export. Commercial development is also not intended to extend to ancillary or preparatory activities for the exploration or extraction of oil, gas, or minerals, such as manufacturing equipment or construction of extraction sites.
2. Reporting Entities
An Entity (as defined in the Act) whose securities are listed on a stock exchange in Canada or an Entity whose securities are not listed on a stock exchange in Canada but: (i) has a place of business in Canada, (ii) does business in Canada, or (iii) has assets in Canada and meets two of the three following size-related criteria in at least one of two of its most recent financial years:
- has at least $20 million in assets;
- has generated at least $40 million in revenue;
- employs an average of at least 250 employees (each a "Reporting Entity"),
must report payments under the Act.
In applying the size-related criteria, the Guidance notes that assets should be calculated on a gross basis, not a net basis. Further, assets and revenues in the size-related criteria are not restricted to assets or revenue in Canada or to assets and revenue from the commercial development of oil, gas, or minerals. Reporting Entities should include all global assets and revenues in determining whether the size-related criteria is met. Lastly, the global assets and revenues of a parent company should not be included in the size-related analysis, only those of the entity itself.
3. Payments and Payees
The Guidance reinforces the payment amount that triggers a reporting obligation under the Act. A payment made to the same payee that totals, as a single or multiple payments, C$100,000 or more within one of the enumerated categories set out in the Act must be disclosed. In some cases it may be unclear whether a payment should be reported under one category or another. For example, a mineral royalty payment may be considered a tax, a royalty, or perhaps both. The onus is on the Reporting Entity to use reasonable judgment to determine in which category a payment applies, and the Guidance provides elaborate commentary on each category. The Guidance expressly states that Reporting Entities should not artificially structure payments to avoid the reporting regime.
The Guidance also indicates that payments made to state-owned enterprises only constitute a reportable payment if, in receiving the payment, the state-owned entity is exercising or performing a power, duty, or function of government as opposed to engaging in commercial activity, which does not constitute a reportable payment.
For the purposes of determining whether a series of payments constitute payments made to the same payee, the Guidance states that Reporting Entities must group together departments, ministries, trusts, boards, commissions, corporations, bodies or other authorities that perform or are established to perform a power, duty, or function on behalf of a particular level of government. For example, if several payments in one category are made to the National Energy Board, Environment Canada, and NRCan that add up to a sum greater than or equal to C$100,000, this would be considered a reportable payment under the Act.
Technical Reporting Specifications
The Technical Reporting Specifications provide the form and manner of specifications for the reporting process under the Act, including instructions on how to complete the reporting template. The Technical Reporting Specifications facilitate the communication process between NRCan and Reporting Entities by outlining enrolment procedures.
The enrolment process is done by completion and submission of a Contact Form by Reporting Entities, including subsidiary Reporting Entities, to NRCan prior to submitting a report. Reporting Entities are encouraged to enrol with NRCan before June 30, 2016. Should a business become aware that it qualifies as a Reporting Entity at a later date, it is encouraged to enrol with NRCan as soon as possible. After enrolling, Reporting Entities can complete and submit reports using the Reporting Template. Once finalized, reports are published online and remain publicly available for at least five years.
The Information Sheet offers a general overview of unique considerations regarding payments made to Indigenous governments. The requirement for Reporting Entities to report payments to Indigenous governments was deferred by two years until June 1, 2017. The Information Sheet states that Reporting Entities are not required to disclose impact and benefit agreements, however some payment obligations included in such impact and benefit agreements may be required to be reported under the Act.
The contribution of James Lyle, articling student, in the preparation of this article is gratefully acknowledged.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.