The April 1, 2015 announced deadline for the federal government to implement the provisions of the Extractive Sector Transparency Measures Act (the Act), which received royal assent on December 16, 2014, is just over a month away. This Update considers the significant regulatory compliance burden that will have to be borne by Canadian resource extraction businesses, and questions whether Canada is in fact ready to lead this initiative.

The Act’s stated purpose is “to implement Canada’s international commitments to participate in the fight against corruption through the imposition of measures applicable to the extractive sector.” The legislation will require Canadian businesses involved in resource extraction to file detailed reports, which will be publicly available, concerning various types of payments made to both domestic and foreign governments.

The United States and the European Union have both committed to implementing similar measures, but appear to be lagging at this time relative to Canada. In particular, the U.S. measures implemented as part of the Dodd-Frank legislative initiatives suffered a setback in the U.S. courts, and it is expected that new measures will be proposed by the United States Securities and Exchange Commission in March 2015.

Application of the Act

Entities Engaged in the Commercial Development of Oil, Gas or Minerals

The reporting obligations will apply to any corporation, trust, partnership or other unincorporated organization “engaged in the commercial development of oil, gas or minerals in Canada or elsewhere” or which “controls a corporation or a trust, partnership or other unincorporated organization that is engaged in the commercial development of oil, gas or minerals in Canada or elsewhere.”

An entity is engaged in the commercial development of oil, gas or minerals if it is engaged in:

  1. the exploration or extraction of oil, gas or minerals;
  2. the acquisition or holding of a permit, licence, lease or any other authorization to carry out any of the activities referred to in paragraph (a); or
  3. any other activities in relation to oil, gas or minerals that may be prescribed in regulations.

Connection to Canada

The Act will apply to any entity that is publicly listed in Canada, has a place of business in Canada, does business in Canada or has assets in Canada, and that meets at least two of the following conditions in any one of its two most recent financial years:

  1. owns $20 million or more in assets;
  2. generated at least $40 million in revenue; or
  3. employs an average of at least 250 employees.

Nature of the Reporting Obligations

Reporting Payments

The Act requires the reporting of all payments made to any domestic or foreign government or trust, board, commission, corporation or body or authority if the total amount paid to the same payee in a financial year exceeds $100,000.

Under section 12 of the Act, the report must be made available to the public. This disclosure requirement may raise serious issues for entities that have agreements with foreign governments covered by confidentiality obligations.

The term “payment” is defined very broadly in the Act as “a payment – whether monetary or in kind – that is made to a payee in relation to the commercial development of oil, gas or mineral” and falls within one of following categories:

  1. taxes (other than consumption taxes and personal income taxes);
  2. royalties;
  3. fees, including rental fees, entry fees and regulatory charges as well as fees or other consideration for licences, permits or concessions;
  4. production entitlements;
  5. bonuses, including signature, discovery and production bonuses;
  6. dividends other than those paid as ordinary shareholders;
  7. infrastructure improvement payments; or
  8. any other prescribed category of payment.

If the Act is made effective in 2015, reports will be due on and after May 30, 2016 (i.e., 150 days after the end of each of the financial years commencing with the 2016 financial year). Thereafter, annual reports will be due on the same date in subsequent years. Payments made to aboriginal governments or entities will not have to be reported for two years after the Act comes into force.

The format of the report to be delivered under the Act is still to be defined and the government has retained discretion to specify in writing how payments are to be organized or broken down in the report. It is likely that reporting will be required on a project-by-project basis, with each project comprised of contracts and legal agreements of the entity that are “substantially interconnected” or “commercially or operationally” interconnected (or some similar interconnection).

Easing of Regulatory Burden

Substitution

The Act contemplates that if the reporting requirements of another jurisdiction (such as the United States or the European Union) achieves the purposes of the Act, the Minister may determine that a report filed pursuant to the requirements of that jurisdiction is an acceptable substitute. It is expected that, in practice, the Canadian government will allow for filings made by Canadian companies under the U.S. or EU legislation. The details of harmonization and substitution will not be available until such time as regulations are put forward.

Consolidated Reporting

Consolidated reporting of an entity and its wholly owned subsidiaries is contemplated by the legislation, as it deems a subsidiary to have satisfied its reporting obligations for a financial year if its parent company’s report contains information with respect to the payments made by the subsidiary during such financial year.

Failure to comply under the Act can result, upon summary conviction, to a $250,000 fine, subject to a due diligence defence. Once the Act is promulgated, every day that passes without compliance will constitute a new offence.

Looking Ahead

Testifying before the House of Commons Standing Committee on Finance in late November 2014, representatives from the Department of Natural Resources indicated that that the government is waiting for international standards to crystallize before providing more specific direction on the precise nature of reporting obligations through regulations or guidelines. Draft regulations have yet to be published by the Ministry. While the European Union has issued a Directive in respect of these transparency measures, in the United States, the timing for implementation remains even more unsettled.

Until the promulgation of further and more specific direction, the exact nature of the reporting requirements will remain unclear. Nevertheless, resource extraction companies in Canada must start planning, developing and implementing proper systems, policies and procedures for reporting in accordance with the requirements of the Act.