Canada: Whose Company Is It Anyway? CBCA Amendments To Require Federal Corporations To Maintain Beneficial Ownership Records

Last Updated: May 2 2019
Article by Fraser Hartley and Jake Schroeder

Amendments to the Canada Business Corporations Act will require privately held federal corporations to maintain records of individuals with significant control. As a result, many corporations will face additional corporate recordkeeping requirements.

The Amendments will officially come into force on June 13, 2019. One of the stated objectives is to combat money laundering and terrorism financing by identifying beneficial owners of private federal corporations. Under the current rules, the identities of beneficial owners – those individuals who ultimately benefit from the ownership of shares in a corporation – can effectively remain hidden because there is no requirement for corporations to collect or disclose beneficial ownership information. Many beneficial owners hold their interests in corporations indirectly through one or more holding companies, trusts, or other structures that do not give a clear view of ultimate beneficial ownership when viewing a corporation's Central Securities Register.

Under the new rules, corporations are required to identify and maintain a register of individuals with significant control over the corporation. An individual with significant control is defined as someone who:

  1. is the registered or beneficial owner of, or who has direct or indirect control or direction over, a significant number of shares;
  2. has direct or indirect influence that, if exercised, would result in control in fact of the corporation; or
  3. to whom prescribed circumstances apply (note that the prescribed circumstances are to be set out in forthcoming regulations).

A "significant number of shares" is defined as the number of shares of a corporation that:

  1. carry 25% or more of the voting rights attached to all of the corporation's outstanding voting shares; or
  2. are equal to 25% or more of all the corporation's outstanding shares as measured by fair market value.

The rules look for "direct or indirect control or direction" when identifying an individual holding significant control and are designed to pierce intermediate holding companies and trusts to identify the individuals ultimately behind these structures. The rules also seek to identify those whose influence results in control in fact over a corporation who may not otherwise be caught by the numerical shareholding test.

Control in fact is undefined in the CBCA, but the term may be defined in forthcoming regulations. Some guidance can be found in the Income Tax Act and its accompanying guides, as well as the government ownership guidelines for radio-communications, airlines, banks, and other Canadian entities. These sources make it clear that there is no standard definition of control in fact and that its assessment should be made based on the facts of each situation. However, several common factors have been recognized as indicating the existence of control in fact, including:

  1. the power to make or influence strategic decisions;
  2. the existence of veto rights;
  3. the number of options or warrants held;
  4. the existence of director nomination powers; and
  5. the experience of directors.

Upon identifying individuals with significant control, a corporation must record the following information in its register for each individual:

  1. name, date of birth, last known address;
  2. jurisdiction of residence (for tax purposes);
  3. date on which the individual became or ceased to be an Individual with significant control;
  4. description of how the individual qualifies as being an Individual with significant control;
  5. other prescribed information to be set out in the regulations; and
  6. the steps taken to identify all Individuals with significant control and to ensure information kept in the register is accurate, complete, and up to date.

This "New Register" exists in addition to the existing requirement to maintain a "Central Securities Register" detailing legal ownership of a corporation's outstanding shares. The New Register must be kept current by:

  1. updating within fifteen days of becoming aware of information required to be recorded by the New Register; and
  2. taking reasonable steps on a yearly basis to ensure that the information is accurate and up to date.

As June 13th approaches, private federal corporations and their counsel will have to move quickly to ensure that they do not run afoul of these rules. Failure to comply with the requirements of the Amendments will potentially expose directors, officers, and shareholders to penalties. Corporations should work diligently to notify their shareholders of these new requirements and begin developing processes and systems to record and update data in the New Register.

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.

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