Commencing June 13, 2019 private corporations governed by the Canada Business Corporations Act (the "CBCA") will be required to maintain a register (the "Register") of individuals who, directly or indirectly, have significant control over the corporation (an "ISC"). The government of Canada’s stated objective of the Register is to provide greater transparency over who owns or controls a corporation in order to assist governmental authorities and law enforcement agencies with matters such as tax evasion and money laundering.
Not only is this development relevant to CBCA companies for their day-to-day record keeping, it will also be relevant to M&A transactions where the target is a CBCA company. A buyer of a CBCA target will usually conduct a review of the target’s minute book, including its Register, and a buyer of a target will look for representations and warranties in a purchase agreement that the target is in compliance with all applicable law. Targets that are gearing up for a sale will want to ensure that their Register is in compliance with the new requirements, both from the perspective of presenting a clean minute book, and from the perspective of ensuring the truth and accuracy of its representations and warranties.
Although the CBCA is the first Canadian corporate statute to require disclosure of corporate control, all Canadian provincial and territorial governments have agreed in principle to pursue legislative amendments to their respective corporate statutes to introduce similar record keeping requirements for corporate control.
Individuals with Significant Control
Under the new requirements, an individual will be deemed to have significant control over a corporation if she or he owns (whether as a registered or beneficial holder), directs or controls (whether directly or indirectly) a number of shares that exceeds either: (i) 25% or more of the voting rights attached to the corporation’s outstanding voting shares, or (ii) 25% or more of the shares of the corporation measured by fair market value.
In addition, an individual, whether or not a shareholder of the corporation, will be deemed to have significant control over the corporation in the event that she or he has any direct or indirect influence that, if exercised, would result in control in fact of the corporation.
If two or more individuals hold shares jointly or act in concert (whether by agreement or arrangement) in respect of an aggregate number of shares of the corporation that exceeds either threshold set out above, each such individual will also be deemed to be an ISC.
Contents of the Register
The Register must include the following information for each ISC:
- name, date of birth and latest known address;
- jurisdiction of residence for tax purposes;
- the day on which the individual became or ceased to be an ISC;
- description of how the individual qualifies as an ISC; and
- description of steps taken by the corporation to identify the ISCs and ensure the information in the Register is accurate, complete and up-to-date.
The Register must be maintained at the registered office of the corporation or at any other place in Canada designated by the directors. The corporation is required to update the Register within 15 days of the date the corporation becomes aware of any changes to individuals with significant control over the corporation.
The corporation must also take reasonable steps on an annual basis to ensure it has identified all ISCs. Reasonable steps for a corporation will be context specific but will likely include at a minimum contacting shareholders to confirm ownership status of their shares.
Personal information of individuals who cease to be an ISC must be removed from the Register within one year after the sixth anniversary of the date on which the individual ceases to be an ISC.
Penalties for Non-Compliance
Penalties for non-compliance with these new provisions are significant. Directors and officers of the corporation who contravene these provisions can face fines of up to $200,000 or imprisonment of up to six months, or both. The corporation may also be liable for fines of up to $5,000.
Shareholders of the corporation who do not, to the best of their knowledge, provide accurate and complete responses to requests from the corporation for information relating to the Register can face fines of up to $200,000 or imprisonment of up to six months, or both.
Who Can Access the Register
Access to the Register is limited. The Director under the CBCA (or any governmental official with delegated authority) can access the Register upon request. Shareholders and creditors of the corporation can also access the Register by providing to the corporation an affidavit swearing only to use the information contained in the Register in connection with any matter relating to the affairs of the corporation.
2019 Federal Budget Proposes Further Amendments
The Government of Canada proposed in its 2019 federal budget further amendments to the CBCA (the "Proposed Amendments") which will make the Register more accessible to tax authorities and law enforcement. Under the Proposed Amendments, a police force, the Canada Revenue Agency, and certain prescribed bodies with investigative power may request from the corporation a copy of the Register or any information disclosed in the Register if it has reasonable grounds to suspect it is relevant to their investigation and certain prescribed conditions relating to the offence, an ISC and/or the corporation are present. The federal bill tabled in Parliament to implement the 2019 federal budget has not received royal assent as of the date of this post.
Further information related to the Register is available on the Government of Canada’s website here.