Canada – Federal Corporate Law: New Record Keeping Requirements – June 2019

So, the federal government has introduced new record keeping requirements for private, federally-formed corporations governed by the Canada Business Corporations Act (“CBCA”). The amendments to the CBCA are being made in an effort to meet international obligations to increase corporate transparency and prevent tax-evasion and money laundering and will require corporations to track and report the individuals who are beneficial owners of shares with significant control.  Notwithstanding, these obligations will prove significant to all private companies formed under the CBCA, with specific exemptions for reporting issuers and corporations listed under a designated stock exchange.  The exempted corporations are already subject to disclosure requirements that pertain to beneficial ownership of shares at certain thresholds.

The new beneficial ownership requirements were passed into law with Bill C-86 in December 2018 and will come into force on June 13, 2019.  Please also take note of the possible tax implications for those identified as beneficial owners of shares with significant control.  In my experience, such individuals are unable to remain cloistered against potential directors’ liability if the corporation is targeted by Canada Revenue Agency (“CRA”).

What Constitutes an Individual with “Significant Control?”

The amendments will require corporations to create and maintain a register of individuals who hold “significant control” in the corporation. Individuals will be deemed to hold significant control if they, either by themselves or “jointly or in concert”, own or control 25% or more of the voting rights attached to a corporation’s shares, or 25% or more of a corporation’s shares by value.  For the purposes of the legislation, individuals are considered to hold significant control jointly or in concert if they hold an interest that meets this definition with another individual, or if they have an agreement to exercise their rights with another person (for example, a voting agreement or shareholders agreement).  Individuals who do not own shares may also be captured by these amendments if they have significant influence over the corporation.

The broad definition of “significant control” found in the amendments will require organizations to trace corporate structures (including tracing through shareholder entities such as trusts and partnerships) to determine the individual human being who ultimately holds rights and interests in an affected CBCA corporation. Further consideration will then be required to determine whether such individuals are “significant” for the purposes of the legislation.

Challenges may arise when determining whether a shareholder meets the threshold of holding 25% or more of all of the corporation’s outstanding shares measured by fair market value, as this may fluctuate over time (especially, with corporations holding complex share structures).

What is Included in the Register?

The amendments require federal corporations to create and maintain a register of current information of a corporation’s beneficial ownership. Corporations Canada has released an example of what a beneficial ownership register could look like, available through their website. However, at this time, there is no prescribed format for the register, so long as it contains the prescribed information. For each individual who holds significant control the register must include the following information:

• name, date of birth and address;
• jurisdiction of residence for tax purposes;
• date when individual obtained significant control and ceased to hold significant control of the corporation;
• description of how the individual has significant control over the corporation, including a description of any interests and rights they have in shares of the corporation
• description of the steps taken by the corporation in each financial year to ensure the register is complete and accurate; and
• any other prescribed information required by regulation.

Who Can Access the Register?

Information contained on the register will not be publicly available but will be available to directors, shareholders and creditors of a corporation. CRA and other regulatory bodies, may also be able to access the information. In the future, registers of beneficial owners may become more widely accessible.  Bill C-97, which is currently before Parliament, proposes giving certain investigative bodies involved in investigating crimes related to those listed in a schedule to the CBCA, the authority to request information from registers without a warrant. It is uncertain if, or when, this will become law.

In the interest of protecting privacy, corporations will be required by law to dispose of personal information collected in the process of maintaining a register of beneficial ownership six (6) years after an individual ceases to be an individual with significant control.

Compliance & Penalties

Once the amendments are in effect, corporations will be required to take “reasonable steps” to discern who the individuals with significant control in the corporation are, and to ensure registers are complete and accurate. Timeliness is an important requirement of the amendments.  A corporation that becomes aware of information that should be included in the register will have fifteen (15) days to update it.  Shareholders will also have a duty to respond to inquiries from a corporation pertaining to information required for the register “accurately and completely as soon as feasible”.

Non-compliance with the new requirements could result in significant monetary penalties, imprisonment, or both, for not only corporations themselves, but their directors, officers and shareholders.  Corporations may be fined up to $5,000.00 for failure to meet the requirements to maintain a register of individuals with significant control, or for failure to meet a request for information from an investigative body.  Directors and officers can be fined up to $200,000.00 or imprisoned for up to six (6) months for failure to meet the requirements to maintain the register, respond to a request from an investigative body or for allowing false or misleading information to be recorded in the register. Shareholders will face the same penalties for failure to meet their obligations to provide information for the register.

As the amendments are part of a larger plan towards national and international corporate transparency, provincial finance ministers have also pledged to strengthen transparency with respect to beneficial ownership. As such, it is likely that these CBCA amendments will be used as a model for provincial legislation.  The next several months will determine how and when the Provinces go about amending their own provincial legislation (in my base of Nova Scotia, found within the Nova Scotia Companies Act).