Amendments to the Canada Business Corporations Act will require private companies to register “individuals with significant control,” in what the federal government calls a push for greater transparency and against money laundering and tax evasion.
Taking effect June 13, the registry will be obligatory from private corporations incorporated under the CBCA. Those individuals with either a 25-per-cent interest in the corporation or who have a significant influence over the corporation will need to register a document including their name, birth date, address, tax jurisdiction, the date they acquired significant ownership or control and for which they ceased to have such control and a description of why they meet this criteria. The register is not a public document but must be held with the corporation and made available to shareholders of the corporation and its creditors, as well as, if requested, Corporations Canada.
The type of information in and people who have access to the registers raises a privacy issue, says Karen Hennessey, a partner in Gowling WLG's Ottawa office and leader of the firm's Canadian Corporate practice group.
“The way they've attempted to protect privacy is to say that a corporation is supposed to delete that information six years after the person ceases to be someone of significant control,” she says. “But in the meantime, this very private personal information of individuals is going to be in this register, potentially available to shareholders, creditors, and investigative bodies of the corporation for a significant period of time.”
The legislation grants access to shareholders and creditors who swear an affidavit that their use of the information is only for influencing the voting of shareholders, acquiring securities in the corporation “or any other matter relating to the affairs of the corporation,” Hennessey says.
“So I think there'll be questions about making sure that information is kept. And access to that information is appropriately restricted. Any creditor can write to the company and say 'please give me access to your register.' And now you've given the birth dates and addresses and names of these individuals,” she says.
“That's a very broad access, in my view,” she says. “And I question about what purpose would a creditor need this information given the information in there includes birth dates, addresses of individuals.”
The reporting is mandatory and will be difficult to comply with for larger corporations with a complex ownership, says Hennessey.
A person is of significant influence, according to Corporations Canada, if they fall into one of two categories. The first category is they who own or have voting rights to 25 per cent of the company’s voting shares or own 25 per cent of all shares measured by fair market value, whether that is owned jointly or individually. The second includes an individual with influence over the corporation but who doesn’t own shares.
The second category is “tricky” and requires analysis, says Hennessey. A person could fall into that category through a contract that gives them specific rights, a debenture or a share pledge agreement where they can influence the company — for example, the ability to control or appoint the board of directors — without being a shareholder, she says, adding that the corporation is not always privy to side agreement among minority shareholders. It gets even more complicated with larger companies with subsidiaries, she says.
“Corporations Canada hasn't given a lot of guidance. So, you can imagine, in many of these circumstances, there's going to require case-by-case analysis of specific, factual situations that determine whether or not these different thresholds are triggered,” she says.
Lawyers advising clients on the CBCA amendments will seek guidance through U.K. and European law, as similar registers exist in these jurisdictions, Hennessey says.
For failure to keep a registry of individuals with significant control or to have one containing false or misleading information, the government will impose penalties against the corporation and directors, officers, shareholders and creditors. The penalty is a $5,000 fine against the corporation or a $200,000 fine and six-month prison term for liable individuals. Shareholders or creditors who misuse ISC register information are also liable for a $5,000 fine and six months in jail.
Manitoba and British Columbia both have similar amendments working their way through their provincial legislatures. According to the federal Department of Finance, provincial and territorial finance ministers from across the country have agreed in principle an intention to produce legislative amendments “to ensure corporations hold accurate and up to date information on beneficial owners that will be available to law enforcement, and tax and other authorities.”