It appears 2024 will include an unwelcome surprise for many business owners in Canada – public disclosure of their ownership interests in corporations. If you own federally-incorporated corporations, the agenda this fall should include a review to prepare for compliance.
Canada Business Corporations Act
Since 2017, Canada and the provinces, including Newfoundland and Labrador, have adopted a policy to introduce transparency and public disclosure of corporate ownership in Canada. To date, implementation has consisted of amendments imposing new record-keeping requirements on companies. In 2019 Canada amended the Canada Business Corporations Act ("CBCA") to require federally-incorporated corporations to maintain an "Individual with Significant Control" ("ISC") Register in their records (see our 2019 article New Shareholder Information Requirements for CBCA Companies). Newfoundland and Labrador followed suit, with amendments in November 2021 which came into force in April 2022 (see our articles Amendments Affecting All Newfoundland and Labrador Corporations; and Reminder: New Requirements On All Corporations As Amendments Going Into Effect 1 April).
Details of this regime are set out in the articles linked above, but the basic structure requires a corporation to identify the individuals who control, directly or indirectly, 25% or more of the corporation. Personal information about such "individuals with significant control", including names, addresses, birthdates, and the nature and extent of their shareholdings or interests, have to be recorded by the corporation in an ISC Register document. This Register is required to be kept on file by the corporation and updated regularly.
The introduction of the ISC Register requirements in Canada and Newfoundland and Labrador occurred both during the COVID-19 pandemic, and with the absence of: active publicity or notices of the requirements from any level of government; enforcement activities; or any requirement to file the ISC Register information. As a result, while the penalties for both corporations and officers and directors for failing to comply are significant (and increasing, as set out below), the requirement to compile and hold an ISC Register in the corporation's files has likely been ignored by many corporations and their owners.
This complacency period is about to come to an end. While the next step in the ISC process was never a secret, its implementation will be a turning point for business confidentiality in Canada.
In Budget 2022, the Federal Government announced it was accelerating the creation of a Canadian publicly-searchable corporate ISC registry (the "PISCR") for CBCA corporations, from 2025 to the end of 2023. It then introduced amendments to the CBCA to facilitate same. In Budget 2023, it confirmed this commitment, and at the end of March it introduced Bill C-42, to further amend the CBCA to implement such a registry. Bill C-42 made it through the House of Commons in June and will be considered by the Senate in the fall. If it passes (and that should be expected) it will set the stage for new requirements to be implemented as soon as the Federal government has processes in place, which they have said will be the "end of 2023".
The amendments to implement the PISCR include further changes from the systems described in the articles above:
- In addition to the existing requirements for a corporation's ISC Register to record names, birth dates and residential addresses, two new pieces of information will be required: an address for service (if it exists) and the citizenship of each ISC.
- Information from the corporation's ISC Register information will have to be provided to the PISCR annually by every CBCA corporation, and updated upon any change of control transaction.
- The information that has to be filed with the PISCR for each ISC has been reduced; instead of sending all of the information required to be in the ISC Register, the PRISCR will only require a subset of this information. That list is to be identified by the CBCA registry, but in legislative hearings, government officials indicated this is expected to be restricted to names and addresses, and to specifically exclude birth dates. Such information will still be required to be recorded by a corporation in its ISC Register, but would not be available to the public.
- In addition to fines and charges, failure to provide the required ICS Register information to the PISCR can result in 1) refusal by the CBCA Registry to issue a Certificate of Compliance for the corporation, and 2) dissolution of the corporation.
- The fines and penalties for failure to comply with the ISC Register requirements, which were already high, have increased significantly. The fine for a corporation failing to comply with requirement to have an ISC Register has gone from $5000 to $100,000. More importantly, conviction of an offense for failure to comply for an officer or director (for failing to ensure the corporation records accurate information in its ISC Register) or a shareholder (for failing to provide required information) has increased from $200,000 to $1,000,000, in addition to potential jail time.
In summary, once these amendments are in force and the system active, CBCA corporations will be required to file ISC Register information with the federal corporations registry. That information will be publicly posted and searchable on the PISCR. The result will be the disclosure of the identify of individuals owning or controlling the corporations as public information for the first time in Canada.
At this point, these amendments and the PISCR will only apply to the approximately 15% of Canadian corporations that are registered under the CBCA. However, the express intention of Canada is to design a database that can incorporate information from all provincial corporation systems, and to actively pursue integration with the provinces. Quebec has recently implemented these requirements, with the introduction of a publicly-searchable Quebec corporate beneficial ownership registry.
Newfoundland and Labrador has not yet announced that it will be joining the federal program. However, based on the process for the November 2021 amendments, such a decision and the necessary amendments could be introduced and passed in the provincial legislature quickly and without material public consultation.
Management and owners of CBCA corporations would therefore be advised to implement and bring up to date their ISC Register, to comply with existing legal requirements and to be ready for this next step. The incentives to do so will be as much to avoid business issues as well as enforcement issues. While the significant fines and penalties under the legislation should not be ignored, we are expecting the failure to comply with the requirements to have an ISC Register will be more likely to arise in the context of transactions and financing activity, where 1) officers are required to affirm a corporation is in compliance with all relevant legal obligations, or 2) a failure to have information registered in the PISCR will frustrate and delay transactions if Certificates of Compliance cannot be obtained.
Finally, a couple of additional observations:
- Newfoundland and Labrador businesses organizations should not assume they do not have CBCA corporations in their structures, particular if they have recently undergone a financing or refinancing. One of the ways to deal with issues caused by the "illicit loan" provisions of the Newfoundland and Labrador corporation legislation in financing transactions has always been to have one or more of the corporations involved exported to the CBCA. This has been a largely technical process, frequently occurring in the middle of the financing transaction. However, these actions may now have unforeseen consequences, as it may mean groups of related businesses may include corporations that are captured by these new CBCA amendments.
- It has to be noted that anyone expecting a political solution to this issue will likely be disappointed. Bill C-42 was unanimously supported by all parties in the House of Commons. In committee discussions, all opposition parties pushed for amendments to make the legislation tougher. The CPC and NDP both proposed amendments which would have lowered the "significant control" threshold from 25% to 10%, mandated provincial participation, and increased the fines and penalties for failure to comply. In fact, it was an amendment proposed by the NDP and unanimously approved that amended Bill C-42 by increasing the corporate fine for failure to comply from $5000 to $100,000.
It is difficult to overstate the impact these changes will have to some small and medium sized businesses. While for many corporations the ISC Register will not be materially different from the information on directors (which is already publicly disclosed), other business owners have gone to significant lengths to structure their corporate ownership in an attempt to preserve their privacy. This legislation is expressly designed to prevent such activity by not only requiring disclosure of such information but also making it publicly available.
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.