Canada: Canada Set To Require Beneficial Ownership Tracking By Non-Public CBCA Corporations

Last Updated: December 17 2018
Article by Gary R. Sollis and Andrea C. Johnson

Corporate records are typically the preserve of law clerks and paralegals. Changes to record-keeping rules that are likely about to become law, however, will impact shareholders, directors and officers of many federal corporations. As described below, the planned changes will require federal corporations to create and maintain a register or list of individuals who exercise "significant control" over the corporation, whether directly or indirectly. An indirect relationship of this nature is often referred to as "beneficial" control or ownership.

Background

A corporation governed by the Canadian Business Corporations Act (CBCA Corporation) is currently required to keep a record of the legal or "registered" owners of its shares, i.e. the persons named on its share certificates. A similar requirement exists under provincial corporate laws.1

A bill that is expected shortly to become law would require CBCA Corporations to keep a record of any individual(s) who exercise significant control over the CBCA Corporation. This is aimed at capturing information about beneficial owners, i.e. the individual(s) with ultimate ownership or control of a CBCA Corporation, who are sometimes not the legal owners. A legal owner could, for example, be another corporation or a nominee, while the beneficial owner would be the individual(s) behind that holding corporation or the individual(s) represented by the nominee.

The proposed amendments are groundbreaking in Canada, but reflect a broader international effort to require beneficial ownership disclosure. Such efforts are aimed at combating money laundering, terrorist financing and tax evasion. Member states of the European Union have laws at various stages of implementation in this respect.2 The United Kingdom has arguably the most advanced transparency regime, with mandatory public access to beneficial ownership of corporations, and access by law enforcement to beneficial owners of trusts.

The new requirements

The balance of this update includes a summary of key parts of the proposed legislative amendments in Canada, and reflects the wording of the proposal, known as Bill C-86, on the date hereof. The full text of the proposal, which is extracted from Bill C-86, is set out in the appendix to this update.

The term "individual with significant control" (ISC) is central to the amendments. It includes any individual, or any group acting "jointly or in concert", that owns or controls 25 percent or more of the voting rights attached to the CBCA Corporation's shares, or 25 percent or more of the CBCA Corporation's shares by value. For example, if a company controlled by a Mr. Smith owns 25 percent of the voting rights attached to the shares of a CBCA Corporation, Mr. Smith would have significant control over that CBCA Corporation.

The amendments would also capture any individual who has influence that, if exercised, would result in "control in fact" over the CBCA Corporation.

Terms such as "jointly or in concert" and "control in fact" are not defined in the CBCA or the proposed amendments. It is expected that non-legislative guidance providing context for these terms will be released in 2019. Also of note, these terms are used in other areas of the law, such as securities and tax, and have therefore been applied by the courts in other circumstances.

Public companies, also known as "reporting issuers", and those listed on a stock exchange, will be exempt from these new requirements. The rationale for this exemption lies, in part, in the securities law requirement for public disclosure of beneficial ownership of shares of reporting issuers at certain thresholds.3 4

Impact

When the proposed amendments become effective (see "Timing" below), a CBCA Corporation will have to keep a register of the following matters in respect of ISCs:

  1. Name, date of birth and latest known address;
  2. Jurisdiction for tax purposes;
  3. The day on which s/he acquired or ceased to have significant control;
  4. A description of how control is maintained; and
  5. A description of steps taken to update the record.

Additional information may be required by future regulations.

Once the amendments become effective, a CBCA Corporation will be required, at least annually, to take "reasonable steps" to identify ISCs, and to ensure the register of ISCs is up-to-date. If the corporation becomes aware of information required to be included in the register, it must record that information within 15 days of becoming aware of it. CBCA Corporations should consider integrating these requirements into their governance policies to ensure directors, officers and employees are able to discharge the corporation's duties in this respect.

Shareholders will be required to reply "accurately and completely as soon as feasible" to any requests from the corporation in respect of the matters to be recorded in the register of ISCs. This allocates responsibility to the person likely to have knowledge of the beneficial ownership, and is notable in that the CBCA does not otherwise extend any duties to shareholders – i.e. it doesn't require  shareholders to do things – except in special circumstances.

A CBCA Corporation will also be required to take certain steps, to be detailed under future regulations, if is unable to identify any ISCs.

Any knowing authorization, permission or acquiescence in a contravention of the duties set out above by a director, officer or shareholder, would constitute an offence, and could result in a fine of up to $200,000, up to six months of jail time, or both.

As with certain other corporate records, a shareholder or creditor of a CBCA Corporation will be entitled to access the register of ISCs, but only for certain limited purposes. Similarly, the corporation will be obliged to disclose information in such register to the Director of Corporations Canada on request.

Timing

The applicable amendments to the CBCA will become effective six months after Bill C-86 is approved by Parliament and receives royal assent. That is likely to occur before the year-end, in which case a CBCA Corporation would be required to have its register of ISCs established by mid-2019. We will provide further updates when the timing is known and when any guidance on interpreting the new legislation is made available.

Since this is a new area of corporate law in Canada – i.e. no corporate statute in the country currently requires a record of beneficial ownership – CBCA Corporations may wish to provide their shareholders with notice of the requirements before it comes into force.

Outlook

The proposed amendments constitute the first of two federal measures aimed at increasing corporate transparency. The second, for which there is no current timetable, would involve making registers of ISCs more widely accessible. At a minimum, it is expected that law enforcement will be provided with ISC information under that second step. It is unlikely that the government will go so far as the United Kingdom has done in making the bulk of such information open to the public.
Provincial and territorial finance ministers have also committed to mandating ISC registers across Canada. With that said, an uneven level of enthusiasm among the other jurisdictions means that certain of them will, at a minimum, delay the applicable legislative changes.

Daniel McElroy, Practice Support Lawyer in Dentons' Vancouver office, contributed to this note.

Footnote

1 Québec, Manitoba and Alberta also require corporations governed by the laws of those provinces to report their significant shareholders of record, i.e. legal owners, in annual filings.

2 Dentons' EU Transparency Register provides details on legislative efforts in 12 EU countries, plus the UK.

3 Such disclosure, known as "insider" and "early warning" reporting, is generally the responsibility of the shareholder rather than the corporation.

4 The exemption does not extend to subsidiaries of reporting issuers. In the case of a CBCA Corporation (Subco) that is a wholly-owned subsidiary of a reporting issuer (Pubco), an ISC of Pubco could, in some cases, also be an ISC of Subco. It would make sense in such a situation that Subco could rely on the public disclosure by the ISC of her or his interest in Pubco. It is expected that guidance or regulations to be released in 2019 will address this matter.

Appendix

Draft amendment to the CBCA, extracted from Bill C-86

182 The Canada Business Corporations Act is amended by adding the following after section 2:

Individual with significant control

2.1 (1) For the purposes of this Act, any of the following individuals is an individual with significant control over a corporation:

(a) an individual who has any of the following interests or rights, or any combination of them, in respect of a significant number of shares of the corporation:

(i) the individual is the registered holder of them,

(ii) the individual is the beneficial owner of them, or

(iii) the individual has direct or indirect control or direction over them;

(b) an individual who has any direct or indirect influence that, if exercised, would result in control in fact of the corporation; or

(c) an individual to whom prescribed circumstances apply.

Joint ownership or control

(2) Two or more individuals are each considered to be an individual with significant control over a corporation if, in respect of a significant number of shares of the corporation,

(a) an interest or right, or a combination of interests or rights, referred to in paragraph (1)(a) is held jointly by those individuals; or

(b) a right, or combination of rights referred to in paragraph (1)(a), is subject to any agreement or arrangement under which the right or rights are to be exercised jointly or in concert by those individuals.

Significant number of shares

(3) For the purposes of this section, a significant number of shares of a corporation is

(a) any number of shares that carry 25% or more of the voting rights attached to all of the corporation's outstanding voting shares; or

(b) any number of shares that is equal to 25% or more of all of the corporation's outstanding shares measured by fair market value.

183 The Act is amended by adding the following after section 21:

Register

21.1 (1) The corporation shall prepare and maintain, at its registered office or at any other place in Canada designated by the directors, a register of individuals with significant control over the corporation that contains

(a) the names, the dates of birth and the latest known address of each individual with significant control;

(b) the jurisdiction of residence for tax purposes of each individual with significant control;

(c) the day on which each individual became or ceased to be an individual with significant control, as the case may be;

(d) a description of how each individual is an individual with significant control over the corporation, including, as applicable, a description of their interests and rights in respect of shares of the corporation;

(e) any other prescribed information; and

(f) a description of each step taken in accordance with subsection (2).

Updating of information

(2) At least once during each financial year of the corporation, the corporation shall 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.

Recording of information

(3) If the corporation becomes aware of any information referred to in paragraphs (1)(a) to (e) as a result of steps taken in accordance with subsection (2) or through any other means, the corporation shall record that information in the register within 15 days of becoming aware of it.

Information from shareholders

(4) If the corporation requests information referred to in any of paragraphs (1)(a) to (e) from one of its shareholders, the shareholder shall, to the best of their knowledge, reply accurately and completely as soon as feasible.

Disposal of personal information

(5) Within one year after the sixth anniversary of the day on which an individual ceases to be an individual with significant control over the corporation, the corporation shall — subject to any other Act of Parliament and to any Act of the legislature of a province that provides for a longer retention period — dispose of any of that individual's personal information, as defined in subsection 2(1) of the Personal Information Protection and Electronic Documents Act, that is recorded in the register.

Offence

(6) A corporation that, without reasonable cause, contravenes this section is guilty of an offence and liable on summary conviction to a fine not exceeding five thousand dollars.

Non-application

(7) This section does not apply to a corporation that

(a) is a reporting issuer or an émetteur assujetti under an Act of the legislature of a province relating to the regulation of securities;

(b) is listed on a designated stock exchange, as defined in subsection 248(1) of the Income Tax Act; or

(c) is a member of a prescribed class.

Inability to identify individuals

21.2 A corporation to which section 21.1 applies shall take prescribed steps if it is unable to identify any individuals with significant control over the corporation.

Disclosure to Director

21.3 (1) A corporation to which section 21.1 applies shall disclose to the Director, on request, any information in its register of individuals with significant control.

Access — affidavit

(2) Shareholders and creditors of the corporation or their personal representatives, on sending to the corporation or its agent or mandatary the affidavit referred to in subsection (3), may on application require the corporation or its agent or mandatary to allow the applicant access to the register of the corporation referred to in subsection 21.1(1) during the usual business hours of the corporation and, on payment of a reasonable fee, provide the applicant with an extract from that register.

Affidavit

(3) The affidavit required under subsection (2) shall contain

(a) the name and address of the applicant;

(b) the name and address for service of the body corporate, if the applicant is a body corporate; and

(c) a statement that any information obtained under subsection (2) will not be used except as permitted under subsection (5).

Application by body corporate

(4) If the applicant is a body corporate, the affidavit shall be made by a director or officer of the body corporate.

Use of information

(5) Information obtained under subsection (2) shall not be used by any person except in connection with

(a) an effort to influence the voting of shareholders of the corporation;

(b) an offer to acquire securities of the corporation; or

(c) any other matter relating to the affairs of the corporation.

Offence

(6) A person who, without reasonable cause, contravenes subsection (5) is guilty of an offence and liable on summary conviction to a fine not exceeding five thousand dollars or to imprisonment for a term not exceeding six months, or to both.

Offence — preparation and maintenance of register

21.4 (1) Every director or officer of a corporation who knowingly authorizes, permits or acquiesces in the contravention of subsection 21.1(1) by that corporation commits an offence, whether or not the corporation has been prosecuted or convicted.

Offence — recording of false or misleading information

(2) Every director or officer of a corporation who knowingly records or knowingly authorizes, permits or acquiesces in the recording of false or misleading information in the register of the corporation referred to in subsection 21.1(1) commits an offence.

Offence — provision of false or misleading information

(3) Every director or officer of a corporation who knowingly provides or knowingly authorizes, permits or acquiesces in the provision to any person or entity of false or misleading information in relation to the register of the corporation referred to in subsection 21.1(1) commits an offence.

Offence — subsection 21.1(4)

(4) Every shareholder who knowingly contravenes subsection 21.1(4) commits an offence.
Penalty

(5) A person who commits an offence under any of subsections (1) to (4) is liable on summary conviction to a fine not exceeding $200,000 or to imprisonment for a term not exceeding six months, or to both.

184 Section 250 of the Act is amended by adding the following after subsection (3):

Register of individuals with significant control

(4) For greater certainty, a register referred to in subsection 21.1(1) or an extract from it is not a report, return, notice or other document for the purposes of this section.

185 Subsection 261(1) of the Act is amended by adding the following after paragraph (c):

(c.01) prescribing the form of the register referred to in subsection 21.1(1) and the manner of preparing and maintaining it;

(c.02) respecting steps to be taken by a corporation for the purposes of subsection 21.1(2);

Coming into Force

Six months after royal assent

186 Sections 182 to 185 come into force on the day that, in the sixth month after the month in which this Act receives royal assent, has the same calendar number as the day on which it receives royal assent or, if that sixth month has no day with that number, the last day of that sixth month.

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