Beginning June 13, “non-distributing corporations” organized under the Canada Business Corporations Act (CBCA) will have to collect and maintain in a share register detailed information about individuals with “significant control” over the corporation. These changes to the CBCA (Amendments) reflect the federal government’s commitment to enhance transparency over beneficial ownership of companies and might serve as a model for similar changes to corporate legislation in Canadian provinces and territories.
Background: In 2016, the Financial Action Task Force (FATF) criticized Canada’s corporate law regime for regulatory gaps relating to the quality and reliability of beneficial ownership information for legal entities and partnerships. For example, although CBCA corporations have to maintain share registers, these registers only need to include the names and addresses of registered security holders, not beneficial owners. According to FATF, gaps like these increase the risk of money laundering and terrorist financing by permitting nominee shareholders and trusts to conceal the identity of beneficial owners.
In December 2017, Canada’s federal, provincial and territorial ministers of finance agreed in principle to pursue legislative amendments to ensure that corporations hold accurate and up-to-date information on beneficial owners that will be available to authorities. And, as we discussed in our November 2018 bulletin, the House of Commons Standing Committee on Finance released a report recommending that the authorities create a pan-Canadian beneficial ownership registry, accessible to law enforcement agencies, that covers all legal persons or entities having at least a 25% of total share ownership or voting rights in Canadian companies or foreign companies that own property in Canada. The Amendments represent a step toward this goal, at least at the federal level.
Which Corporations Are Subject to the Amendments? The Amendments apply to federal, non-distributing corporations, i.e. private corporations. A non-distributing corporation is a corporation established under the CBCA that:
- is not a reporting issuer in any jurisdiction in Canada;
- has not filed a prospectus or registration statement in Canada or elsewhere;
- does not have any securities listed or posted for trading on a stock exchange inside or outside Canada, and
- is not a successor to a distributing corporation.
Reporting issuers in Canada, and significant beneficial owners of reporting issuers’ shares in Canada, are already subject to securities legislation (such as the early warning regime and insider reporting obligations) that provide more transparency in this area, and so this is why “distributing corporations” are exempt from the Amendments.
Which Shareholders Will Be Identified in the Share Register? Corporations will have to identify and maintain detailed information in a securities register about individuals with “significant control” over the corporation. Significant control is defined to mean an individual:
- Who is the registered or beneficial owner of, or has direct or indirect control or direction over, any number of shares that either carry 25% or more of the voting rights attaching to all of the corporation’s outstanding voting shares or represent 25% or more of all of the corporation’s outstanding shares measured by fair market value (Significant Number of Shares);
- Who has any direct or indirect influence that, if exercised, would result in control in fact of the corporation; or
- To whom prescribed circumstances (which haven’t been specified yet) apply.
Individuals with direct or indirect joint ownership, control or influence over a Significant Number of Shares will each be considered an individual with significant control under the Amendments.
Which Information Must Be Collected and Maintained? The corporation will have to maintain a share register in Canada containing detailed information about individuals with significant control over it, including:
- The individual’s name, birthdate and latest known address;
- Their jurisdiction of residence for tax purposes;
- A description of how the individual qualifies as having significant control;
- The date on which each individual became or ceased to be an individual with significant control; and
- Steps taken to identify all individuals with significant control and ensure that the information is kept up-to-date.
Who Gets Access to the Information? The corporation will have make this information available to its shareholders and creditors, upon request, to use for matters relating to the corporation’s affairs. Furthermore, although corporations subject to these new requirements will not have a pro-active duty to report this information to authorities, the Director appointed under the CBCA can request it.
Keeping the Information Up-to-Date: The corporation has several requirements to keep the information up-to-date:
- At least once every financial year, the corporation will have to take reasonable steps to ensure that it has identified all individuals with significant control over the corporation and that the information in the register is accurate, complete and up-to-date.
- It must update the share register within fifteen days of becoming aware of any information it is required to collect and maintain.
- Within one year after the sixth anniversary of the day an individual ceases to be a significant shareholder, the corporation must dispose of that individual’s personal information (unless other legislation in Canada requires the information to be kept for a longer period of time).
Shareholders Have Obligations, Too? If a corporation requests any of the information it is required to collect and maintain in the share register from one of its shareholders, the shareholder is required to reply accurately and completely, to the best of their knowledge, as soon as feasible.
What Happens Next? Corporations Canada is expected to enact regulations that indicate how to create and maintain the register before the new requirements come into force on June 13, 2019.
Since all of the Ministers of Finance agreed in principle to pursue similar legislative amendments, we think it is likely that similar changes will be made to corporate statutes in provinces and territories over time. The commitment, however, was of the “we’ll try” rather than “we’ll do it” variety, so there is no clear timeline for change.