In recent years, several countries have undertaken various actions to combat fraud, tax evasion, tax avoidance, money laundering and the financing of criminal activities. Despite the implementation of several measures to strengthen corporate transparency, the Quebec government is still seeking solutions to counter these schemes.
It is in this context that, in October 2019, Quebec's Ministry of Finance published a consultation document entitled Corporate Transparency (Consultation Paper), seeking comments on the three following approaches that it is proposing to take:
- Requiring all enterprises to obtain and disclose information on "ultimate beneficiaries", being beneficial owners and individuals with significant control, to the Quebec enterprise registrar
- Allowing individuals to search Quebec's enterprise register using the name and address of a natural person
- Requiring all landowners to disclose information on ultimate beneficiaries.
This article examines the first two approaches.
INFORMATION ON ULTIMATE BENEFICIARIES
The first approach is part of an international trend fuelled by recent leaked documents (the Panama Papers in 2016 and the Paradise Papers in 2017), calling for measures to counter tax evasion, money laundering and terrorist financing by improving the disclosure of information on beneficial owners or ultimate beneficiaries of shell companies used in such schemes.
Pursuant to Directive 2015/849 (Directive), released on May 20, 2015, which was subsequently amended by Directive 2018/849, released on May 30, 2018, the European Union requires its Member States to ensure that private corporate and other legal entities formed within their territory obtain and hold adequate, accurate and current information on such entities' "beneficial owners", defined as natural persons who ultimately own or control such entities through direct or indirect ownership of at least 25 per cent of the entity's shares. The information is to be held in a central register accessible to all competent authorities and any member of the public.
In 2015, to comply with Directive 2015/849, the United Kingdom amended its Companies Act, 2006 adding to it Part 21A, Information about People with Significant Control. Under Part 21A, private companies governed by the Companies Act, 2006 are required to gather and maintain information relating to "people with significant control" (PSCs) and to enter such information in a special register accessible to any person, or to have it entered in the public register maintained by the Registrar.
PSCs are individuals who hold, directly or indirectly, more than 25 per cent of the shares or voting rights of a company, or have the right to appoint or remove the majority of the board of directors; or have the right to exercise, or actually exercise, significant influence or control over the company. The concept of significant influence or control is explained in detailed guidance issued by the Secretary of State.
This international trend started gaining momentum in Canada in December 2017, when the Agreement to Strengthen Beneficial Ownership Transparency (Agreement) was signed by the federal, provincial and territorial Ministers of Finance. The Agreement provides that to prevent "the misuse of corporations and other legal entities for tax evasion and other criminal purposes, such as money laundering, corruption and the financing of terrorist activities," amendments would be made to corporate statutes by July 1, 2019, to ensure that "corporations hold accurate and up-to-date information on beneficial owners that will be available to law enforcement, and tax and other authorities." The Agreement follows the federal government's commitment, in its 2017 budget, to improve corporate and beneficial ownership transparency.
In November 2018, the House of Commons published a report by the Standing Committee on Finance (Committee) entitled Confronting Money Laundering and Terrorist Financing: Moving Canada Forward. In its report, the Committee recommended that "the Government of Canada work with the provinces and territories to create a pan-Canadian beneficial ownership registry for all legal persons and entities, including trusts, who have significant control which is defined as those having at least 25% of total share ownership or voting rights" (emphasis added). The proposed registry would include details such as names, addresses, dates of birth and nationalities of individuals with significant control. While the registry would not be publicly accessible, it would be made accessible to various authorities, including the Canada Revenue Agency, the Canadian Border Services Agency, the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), authorized reporting entities and other public authorities.
In its 2018 budget, the federal government acted upon the recommendation. The Budget Implementation Act, 2018, No. 2 (Bill C-86) amended the Canada Business Corporations Act (CBCA) by adding the requirement for private companies to maintain a register of individuals with significant control, such individuals being defined as: a registered holder of a significant number of shares (shares carrying at least 25 per cent of the voting rights or equal to 25 per cent of the corporation's shares measured by fair market value); an individual having direct or indirect control or direction over a significant number of shares; or an individual who has "any direct or indirect influence that, if exercised, would result in control in fact of the corporation." However, many of these notions were neither defined nor explained in the bill.
The following year, the Budget Implementation Act, 2019, No. 1 (Bill C-97) clarified the terms of the new registry by further amending the CBCA to provide investigative bodies with access to the registry, which was consistent with its purpose.
The 2018 and 2019 amendments to the CBCA came into effect in June 2019.
It was then up to the provincial and territorial Finance Ministers to honour the December 2017 Agreement and follow the federal government's lead.
In 2019, legislation to this effect was introduced and passed in Manitoba, British Columbia and Saskatchewan. The bills introduced in Manitoba and Saskatchewan mirror in substance the provisions of the federal legislation (and more specifically those of Bill C-86). However, the B.C. bill differs in several respects, including the terminology used (transparency register; significant individual) and the definition of "significant individual", being individuals holding 25 per cent of voting rights or shares, but not 25 per cent of shares measured by "fair market value". Furthermore, the meaning of "indirect control of shares" is set out in the Regulations whereas control in fact is defined in the Act. Differences of note also include lighter penalties, as well as access to a corporation's register being restricted to directors of that corporation and to fiscal, law enforcement and regulatory authorities.
Quebec's Minister of Finance then revealed the Quebec government's intentions with the publication of the Consultation Paper in October 2019.
The Quebec government veers away from the approaches taken by the federal government and the governments of Manitoba, British Columbia and Saskatchewan, all of which have opted for a private registry that is accessible to investigative agencies and is in keeping with their mission to counter tax evasion, aggressive tax avoidance, money laundering and the financing of terrorist activities. The Quebec government appears to opt instead for a public registry accessible to all, like those of the EU and the U.K. That is to say, total transparency.
Rather than requiring private companies under Quebec jurisdiction to each keep their own private register of ultimate beneficiaries, Quebec's Minister of Finance proposes to require all companies doing business in Quebec, regardless of their jurisdiction of incorporation and whether private or not, to disclose information on their ultimate beneficiaries in the publicly accessible enterprise register.
According to the Consultation Paper, most enterprises would not be affected by this requirement, "as the shareholders or partners already registered in the register and the ultimate beneficiaries are, in most cases, the same individuals." This is because the Act respecting the legal publicity of enterprises already requires that companies disclose the names and addresses of their three principal shareholders. The Consultation Paper notes that ultimate beneficiaries who wish to remain anonymous may choose not to do business in Quebec, but also suggests that this would be the price to pay to enhance corporate credibility and transparency in business relationships, and to promote tax fairness and healthy competition.
Unless the results of its consultation deter it from doing so, the Quebec government is expected to introduce amendments to the Act respecting the legal publicity of enterprises in early 2020 implementing the approaches proposed in the Consultation Paper.
Issues to be Addressed
It will be interesting to see how this bill will address certain issues, among them the definition of "ultimate beneficiaries". According to the Consultation Paper, the Quebec government is considering applying the same concepts as those put forward by the federal government, adding that this approach would standardize the requirements for enterprises with respect to how ultimate beneficiaries are identified. If Quebec's bill applies the same concepts as those of the CBCA, it is hoped that they will be better articulated and that the Quebec government will consider the approach of the British Columbia bill, which defines a "significant number of shares" as a percentage of issued shares or voting rights, with no reference made to the problematic "fair market value" of shares, and also clearly defines "indirect control" and "control in fact", or that of the U.K. legislation, which is underpinned by guidance and explanations. The latter option should be seriously considered, so as to have international uniformity of requirements for identifying ultimate beneficiaries.
It also remains to be determined whether these requirements would only apply, as is the case everywhere else, to companies that are not reporting issuers. Although the Consultation Paper makes no mention of this, it does leave the door open to such a restriction.
In addition, it remains unclear whether ultimate beneficiaries will be required to disclose their role within the enterprise. The Consultation Paper rightly raises the question. One major difference between the Canadian and EU/U.K. regime is that, in the latter, ultimate beneficiaries must provide information to companies, failing which, under the U.K. legislation, they are subject to criminal sanctions and the suspension of their share ownership rights. Under Canadian federal law, an ultimate beneficiary who is not a shareholder or the director of a shareholder is not subject to any obligation or liability, which is illogical.
It also remains to be seen whether it will be possible to maintain the privacy of ultimate beneficiaries while still requiring them to disclose in the publicly accessible enterprise register highly personal information, such as their date of birth or holdings of 25 per cent or more of the shares of a company measured by fair market value. Without providing a solution, the Consultation Paper touches upon this constitutional issue, which has even more relevance in light of the second approach proposed in the Consultation Paper, namely allowing searches using the name and address of a natural person.
Furthermore, penalties for false or undisclosed information have yet to be defined. Under the CBCA, directors, officers and shareholders who violate their obligations with respect to the register of individuals with significant control are liable to a maximum fine of C$200,000 and imprisonment for a term of up to six months, which is more severe than the usual penalty for misinformation under the CBCA, but still much lighter than the two-year prison term under the U.K.'s Companies Act, 2006. The highest sanction under the Act respecting the legal publicity of enterprises, namely a fine of C$25,000, will likely need to be adjusted. The Quebec government may also need to consider whether an ultimate beneficiary who provides a false address should be more severely penalized than a director.
Moreover, it is still unclear what the probative value of the information on ultimate beneficiaries will be. The information currently required on the three principal shareholders (which will likely increase to four) is of practically no probative value, as it does not appear on the list of information that can be invoked by or against third parties pursuant to section 98 of the Act respecting the legal publicity of enterprises. At the federal level, information on individuals with significant control has no probative value, unlike that on shareholders in the securities register, which is presumptively valid. Will Quebec follow this example?
Another outstanding issue is whether the trust disclosure regime will be modified. Pursuant to the Act respecting the legal publicity of enterprises, only trusts "operating a commercial enterprise in Québec" are subject to the registration requirement. To achieve its stated goal of corporate transparency and further define the public disclosure of information on ultimate beneficiaries, will the Quebec government extend this obligation to personal trusts of corporate shareholders? Despite its relevance, this issue is not addressed in the Consultation Paper.
SEARCHES USING THE NAME AND ADDRESS OF A NATURAL PERSON
The second approach proposed by the Consultation Paper stems from the document entitled Tax Havens: Tax Fairness Action Plan, published in November 2017 by the Quebec government. One of the announced measures was to make the information in Quebec's enterprise register more accessible, namely by allowing the public, under certain conditions, to search the register using an individual's name.
This would significantly alter the purpose of the enterprise register. According to the 2010 parliamentary debates on the matter, such purpose is to make it possible to know, using the name of an enterprise, with whom you're doing business, and not to make it possible to conduct searches on individuals and their involvement in enterprises, as was recently confirmed in two judgments.
The Act respecting the legal publicity of enterprises protects the personal information of individuals named in the register by prohibiting the inclusion of individuals' names and addresses in compilations of information, or the use thereof as a basis for any such compilation. However, there are notable exceptions for government agencies, among others.
The Consultation Paper cites the many benefits of searches using an individual's name, including facilitating journalistic and credit investigations, but recognizes that increased transparency must be achieved in a manner that is in keeping with the right to privacy provided for under the various charters.
As previously mentioned, if privacy issues arise from adding new personal information to the register, such as an individual's date of birth and the fair market value of the shares held or controlled by that individual, these issues will certainly be magnified by authorizing searches using an individual's name and address, thereby allowing for the compilation of personal information that includes this newly added data.
There is no doubt that achieving a balance between corporate transparency and privacy will be a major challenge for the Quebec legislator. Comments received during the consultation period ending on December 15, 2019 should provide the Quebec government with insight on possible solutions. Still, how it intends to follow up on its proposed approaches remains to be seen.
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