Who’s the Boss? Requirements to Reveal Beneficial Owners

Over the last few years, Canadian companies have likely begun to hear the term “beneficial ownership” [1] more regularly. Recently, various Canadian jurisdictions have implemented rules requiring companies to report the beneficial owners of their shares, either publicly (as in the case of Quebec), or privately (as in the case of federal corporations).

As will be discussed in further detail below, companies primarily operating in Alberta may already be subject to these disclosure rules. This will be the case where the company is incorporated under the Canada Business Corporations Act (“CBCA”) or is doing any business in Quebec.

For those companies not yet subject to these rules, it is highly likely that this will change in the near future. The federal and provincial governments have committed to increasing corporate ownership transparency and the federal budget makes clear that this commitment is more than just words. Further action at the federal and Alberta government levels is anticipated soon.

 

BACKGROUND

The Trend to Transparency

Beneficial ownership rules were good for those who had valid reasons for wanting to shield their identity when it came to exercising ownership and/or control of a private company. But those good reasons have invariably been turned on their head and used for more nefarious purposes. That has unfortunately resulted in cause for enormous change that, once completed, will obliterate the shield of anonymity that beneficial ownership rules were intended to provide.

Those changes were given huge impetus by two prime causes. First was the publication of the Financial Action Task Force (“FATF”) Recommendations,[2] international standards for corporate transparency. Second was the (now disbanded) Panamanian law firm Mossack Fonseca. In April, 2016, they were exposed in the “Panama Papers” as the brains behind what was termed “snow-washing,” or using shell companies in one jurisdiction (usually a tax haven) to launder money from another.

On top of all that, Canada was identified by Transparency International as having lax anti-money laundering rules that allowed a lot of snow-washing to go undetected. That all caused the federal government to take action and to spur provincial counterparts to do likewise. This led to the signing of the Agreement to Strengthen Beneficial Ownership Transparency in December 2017[3] (the “Beneficial Ownership Agreement”).

Full Exposure

Though the Beneficial Ownership Agreement addresses the main areas of concern of the FATF, it does so through changes to rules governing beneficial ownership. Chief amongst them is to ensure information on individuals who enjoy beneficial ownership of private corporations is made available to the Canada Revenue Agency (“CRA”), along with other law enforcement and regulatory bodies.

The federal government has already begun taking steps towards this goal. For example, in the 2018 federal budget, changes to trust reporting requirements were announced. Starting in 2021, almost all trusts will now need to report their settlors, trustees and beneficiaries to the CRA.[4]

The most recent federal budget passed on April 19th included allocating $2.1 million towards the creation of a publicly accessible corporate beneficial ownership registry (the “Registry”). The Registry will be designed, implemented and managed by Innovation, Science and Economic Development Canada. It is expected to be operational by the end of 2025.

Though the prime function of the Registry is to assist CRA and law enforcement agencies (both local and global) investigate money laundering, tax evasion and terrorist financing. To do that, it must facilitate identifying beneficial owners of private corporations.

That is why one of the mandates of the Beneficial Ownership Agreement is the amendment of provincial and federal laws calling for the disclosure of beneficial owners. That trend is now well underway. To the chagrin of those with good intentions, that trend is irreversible.

 

CURRENT FEDERAL LEGISLATION

Federal Law

At the federal level, Bill C-86[5] amended the CBCA[6] effective June 13th, 2019, by requiring federally incorporated companies to maintain a register of “individuals with significant control” (the “ISC Register”). There are a few exceptions to that; namely crown corporations and companies listed on designated stock exchanges.

Significant Control

For purposes of the ISC Register, the following individuals are considered to exercise significant control:

  • an individual who is the registered holder, beneficial owner, or exerts control over 25% or more of the shares with voting rights attached to a corporation’s outstanding shares;
  • an individual who is the registered holder, beneficial owner, or exerts control over 25% or more of all of the corporation’s outstanding shares measured by fair market value; or
  • anyone (registered or not) who has any direct or indirect influence over the operations or management of a corporation such that, if exercised, would result in actual control or “control in fact” of the corporation.[7]

The following information must be kept on each person with significant control:

  • name and date of birth;
  • address and domicile for tax residency purposes;
  • the date the person become an individual with significant control;
  • how that person is deemed an individual with significant control; and
  • the date the person ceased being an individual with significant control.[8]

Though the foregoing refers to natural persons and not legal persons, if a legal person is a shareholder, then there is a requirement to trace back to a natural person who fits into any of the aforementioned categories. Simply stopping at a corporate shareholder without further enquiry is insufficient.

The ISC Register must be kept current and updated within fifteen days of any change that affects or fits into the aforementioned three categories. There must also be an annual update to confirm accuracy.[9]

Fines of up to $5,000 can be levied against a corporation that fails to comply.[10] Additionally, a director, officer or shareholder of the corporation can be held personally liable for failing to comply. Penalties include a fine of up to $200,000 and up to six months imprisonment.[11] Needless to say, anyone who is a director, officer or shareholder of a corporation that has beneficial owners needs to be aware of these new requirements.

Not a Public Registry

The ISC Registry is not available directly to the public. It is available to the following:

  • shareholders and creditors of the corporation (on application);
  • the CRA; and
  • law enforcement and regulatory bodies (like CBSA).[12]

 

CURRENT PROVINCIAL LEGISLATION

Quebec Way Out Front

Though all Provinces will have to comply with their undertakings as made under the Beneficial Ownership Agreement, Quebec has thus far been leading the way. On June 8, 2021, it adopted Bill-78, An Act mainly to improve the transparency of enterprises.[13]

Bill-78 requires that beneficial owners of a Quebec enterprise be included in the provincial enterprise registry for that enterprise. Though the term “ultimate beneficiary” is used, in practice, based on how it is defined, that means the same as a beneficial owner. The effect is that generally the same criteria will apply as for inclusion in the federal ISC Registry, except that “ultimate beneficiary” in Bill-78 includes the general partner of a limited partnership.

The Bill also refers to “beneficial ownership.” The definition of that however is provided in separate legislation.

Bill-78 also requires that a corporation, regardless of where it is registered (or incorporated) that engages in business in Quebec must register beneficial ownership on the enterprise registry. That is quite a significant step in the push for transparency. It is also quite onerous for a small corporation from another jurisdiction that only does a small amount of business in Quebec. Regardless, they need to be made aware of that.

Information on the enterprise registry (which is public) can be accessed and searched using both the name of the enterprise and / or a natural person name. Moreover, any change in beneficial ownership must be registered within thirty days of the change occurring.

Registration information is fairly consistent with what the ISC Register calls for. Failure to comply can result in fines of up to $25,000.[14]

Other Provinces

British Columbia and Manitoba are expected to produce legislation that is more in keeping with the ISC Registry. Though Alberta signed the Beneficial Ownership Agreement, there have so far been no definitive announcements regarding how the province plans to meet its obligations in that regard.

 

WHAT IT ALL MEANS

Holding ownership of a corporation beneficially has benefits. Over and above tax planning reasons (which are in and of themselves very beneficial), there are also competitive reasons.

For example, if a company known for having deep-pockets wishes to lease new premises, they could have a harder time negotiating a stronger deal than a more obscure company would. Companies also might want to segregate ownership of assets for strategic reasons. They also might wish to shield them from creditors. Those are all bona fide reasons for wanting to take advantage of beneficial ownership structures.

That will now become more challenging. For those companies operating in Quebec or incorporated under the CBCA, reporting on beneficial ownership is already required. Other provinces are expected to follow suit in the near future. Soon, the information shield related to beneficial ownership will all but cease to exist in Canada and beyond.

For those Alberta companies with beneficial ownership structures in place, these will have to be re-visited and amended to take account of the changing landscape. Please contact us if you would like more information.

Sign up for the Corporate Commercial Securities email list here for future updates on any changes to Alberta’s beneficial ownership reporting rules.

[1] “Beneficial ownership refers to the natural persons who, through direct or indirect means, exercise ultimate ownership or control over a corporation, such as through an ownership interest or control over decision-making”: Canada, “Public consultations on strengthening corporate beneficial ownership” (6 April 2021), online: <https://www.ic.gc.ca/eic/site/142.nsf/eng/00002.html>.

[2] The FATF is an inter-governmental body committed to strengthening responses to global money laundering and terrorist financing. Canada has been a member of FATF since 1990 (online: FATF <https://www.fatf-gafi.org/countries/#Canada>).

[3] Department of Finance Canada, Agreement to Strengthen Beneficial Ownership Transparency (2017), online: <https://www.canada.ca/en/department-finance/programs/agreements/strengthen-beneficial-ownership-transparency.html>.

[4] For more information on these changes, see our previous article here.

[5] Bill C-86, A second Act to implement certain provisions of the budget tabled in Parliament on February 27, 2018 and other measures, 1st Sess, 42nd Parl, 2015-2016-2017-2018 (assented to 13 December 2018), SC 2018, c 27.

[6] Canada Business Corporations Act, RSC 1985, c C-44.

[7] Ibid, s 2.1.

[8] Ibid, s 21.1(1).

[9] Ibid, ss 21.1(2)-(3).

[10] Ibid, s 21.1(6).

[11] Ibid, s 21.4(5).

[12] Ibid, ss 21.3, 21.31.

[13] Bill-78, An Act mainly to improve the transparency of enterprises, 1st Sess, 42nd Leg, Quebec, 2020 (assented to 8 June 2021) SQ 2021, c 19.

[14] Act respecting the legal publicity of enterprises, SQ c P-44.1, s 162.