Insights: Federal government enhances corporate ownership transparency

In brief

On March 22, 2023, the federal government introduced legislation (Bill C‑42¹) to advance its objective of implementing a publicly accessible beneficial ownership registry of federally-incorporated privately‑held business corporations. If enacted, Bill C‑42 will create a beneficial ownership registry for private corporations that are incorporated under the Canada Business Corporations Act (CBCA) and the registry will be accessible by the public. This expands the beneficial ownership registry for CBCA‑incorporated private corporations that was introduced in 2019.²

The key objectives of Bill C‑42 are to:

• increase corporate accountability
• improve the enforcement of sanctions and tracing of financial assets
• deter corporations from engaging in illicit activities (e.g. money laundering and tax evasion)

While the federal government is planning for its registry to be scalable, it is uncertain whether any of the provinces and territories will participate. To date, Alberta, Northwest Territories, Nunavut and the Yukon have not yet proposed or adopted corporate transparency laws. In addition, the final version of Bill C‑42 could be significantly different from its introduction because of concerns over personal information disclosure and privacy.

In detail

Background

Canada is known internationally for its rule of law and economic stability; however, in recent years, it has increased its share of certain inbound investments that used to go to traditional offshore destinations. Generally, private companies in Canada were not required to identify their controlling individuals beyond their directors and registered shareholders. As a result, Canadian private companies and other entities (such as limited partnerships and trusts) became attractive vehicles for potential money laundering, tax evasion and the improper concealment of assets and income. The phenomenon even gained a uniquely Canadian term: “snow‑washing.”

The world took notice in 2016 when the Panama Papers revealed that Canada was preferred by certain offshore advisers as a jurisdiction of questionable transparency and lax corporate accountability. In December 2017, in response to growing domestic and international criticism, the federal and provincial governments committed to an “Agreement to Strengthen Beneficial Ownership Transparency.” Since then, a series of new rules at the federal and provincial levels have been advanced to require private entities to collect and disclose information about the individuals who hold significant control. In British Columbia, Quebec and now at the federal level, rules have been enacted or proposed to require that such information be reported to relevant authorities on a periodic basis.

Progress at the federal level

Since June 2019, CBCA-subject private corporations are required to identify individuals with significant control (ISC) and to maintain a register of these individuals (ISC Register). Under the CBCA, an ISC is an individual who:

• owns, controls or directs a significant number of shares (generally, 25% or more, either individually or collectively when an agreement to vote collectively exists)
• has significant influence over the corporation without owning its shares, or
• demonstrates any combination of the above rights and interests

For each ISC, a corporation must include the following information in the register:

• name, date of birth and address
• country where the ISC is resident for tax purposes
• the dates that each individual became or ceased to be an ISC, and
• a description of how the ISC has significant control

In June 2022, a second set of legislative amendments to the CBCA, which introduce reporting requirements and authorize information sharing between governmental bodies, received royal assent. However, these amendments have not yet been proclaimed into force. When they become effective, the following provisions of the CBCA will apply:

• subsection 21.21(1) will require a non-exempt corporation³ to provide a copy of its ISC Register to Corporations Canada
  • on an annual basis, and
  • within 15 days of any new information or amendment being recorded to its ISC Register
• subsection 21.21(2) will require a non-exempt corporation to provide the information contained in its ISC Register upon incorporation, amalgamation or continuance under the CBCA, and
• section 21.301 will authorize the disclosure of information in the ISC Register to certain investigative bodies (i.e. any police force, the Canada Revenue Agency, and provincial/territorial taxation authorities), the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) or other prescribed entities

In October 2022, proposed regulations to the CBCA relating to the ISC Register were released. The proposed regulations provide:

• guidance on the reasonable steps required to update the ISC Register and what to do if a corporation is unable to identify an ISC
• exemptions to reporting issuers and their wholly-owned subsidiaries and Crown corporations

The final regulations, which are expected to include revisions based on public feedback, have not yet been published.

The effective date of the June 2022 amendments and the related proposed regulations has not yet been announced.

Bill C-42 – Key proposed amendments

Bill C‑42 contains the third set of proposed amendments to the CBCA intended to create a publicly searchable registry, which will significantly expand corporate transparency for federal private corporations. Key amendments in Bill C‑42 include:

• expanding the list of information that federal corporations are required to collect, including the citizenship, residential address and the address for services (if it has been provided to the corporation) for each ISC
• requiring federal corporations to make public certain information in respect of each ISC, including the name, address for services (if applicable) and residential address (if the address for services has not been provided)⁴
• amending the Income Tax Act, Proceeds of Crime (Money Laundering) Terrorist Finance Act (PCMLTFA) and other statutes, to authorize information sharing between different governmental bodies, and
• expanding whistleblower protections, namely adding certain inspection rights under the CBCA to the Access to Information Act  

Other proposed notable changes include:

• expanding the Director’s⁵ authority under the CBCA to compel a person to provide records and other information, and
• imposing fines not exceeding $5,000 against a corporation that, without reasonable cause, fails to deliver the ISC Register to the Director as required under the June 2022 amendments

In its current form, the CBCA contains an offence in subsection 21.4(1), which applies to directors and officers who knowingly authorize or allow the corporation to contravene the existing obligations to maintain an ISC Register and if requested, to disclose information to an investigative body. Bill C‑42 would extend this offence to the obligation to provide the information included in the ISC Register to the Director. The existing penalty for a breach of subsection 21.4(1) is a maximum fine of $200,000 or imprisonment for a maximum of 6 months, or both; it would remain unchanged.

Additionally, to encourage compliance with the new requirements, Bill C‑42 would give Corporations Canada the authority to deal with non‑compliant corporations by refusing to issue a certificate of compliance or by involuntarily dissolving the corporation.

The takeaway

Bill C‑42 will significantly expand the disclosure requirements for Canadian private corporations and impose a more stringent reporting regime on directors, officers and shareholders. Bill C‑42 also expands the ability for stakeholders, including many government agencies, to more effectively share data so that they can verify and confirm information on individuals that have significant control over Canadian corporations. Together with similar legislation proposed or in place at the provincial level, Canada is increasing corporate transparency and accountability. This is a significant and historic change, with critics raising concerns about risks to individual safety and privacy that could result from public access to sensitive personal information. Nonetheless, CBCA corporations should expect that these new rules will be enacted and possibly come into force in late 2023.

<sup>1. Bill C-42, An Act to amend the Canada Business Corporations Act and to make consequential and related amendments to other Acts (first reading: March 22, 2023)
2. For more information, see our Insights “New shareholder register requirements for private CBCA corporations: Ensure you comply.” 
3. Subsection 21.1(7) of the CBCA describes the corporations that are exempt from the transparency register requirements; it includes a corporation:
    - that is a reporting issuer or an émetteur assujetti under an Act of the legislature of a province relating to the regulation of securities
    - the securities of which are listed and posted for trading on a designated stock exchange (as defined in the Income Tax Act)
    - that is a member of a prescribed class
4. Exemptions are proposed for individuals who are: (i) under the age of 18, (ii) incapable persons, (iii) public office holders who are required to make divestments pursuant to the Conflict of Interest Act, or (iv) subject to a serious threat or safety concerns. Additional exemptions may be prescribed by regulations.
5. The Director appointed under the CBCA is the individual appointed by the federal Minister of Industry under the provisions of the CBCA to administer the CBCA.</sup>