Insights: New reporting requirements for Nova Scotia ULCs ─ Large penalties for non-compliance

In brief

Amendments to the Companies Act (Nova Scotia) (NSCA), effective April 1, 2023, require Nova Scotia companies governed by the NSCA to maintain a register for individuals with “significant control” over the company. These amendments to the NSCA, which were originally introduced on February 25, 2020, are similar to those adopted federally under the Canada Business Corporations Act (CBCA), and under provincial statutes in British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Ontario, Prince Edward Island and Saskatchewan. The new register requirements may pose particular compliance challenges for Nova Scotia companies that are part of complicated multinational structures with many layers of ownership.

In detail

Register of individuals with “significant control”

Effective April 1, 2023, Nova Scotia companies (regardless of when they were formed) will be required to maintain a register of individuals with “significant control.” Individuals with significant control generally include:

• any individual holding or controlling (directly or indirectly):
  • shares that carry 25% or more of the votes attached to the voting shares
  • 25% or more of the shares measured by fair market value
• any individual with de facto control

Identifying individuals with significant control of Nova Scotia companies will require tracing the ownership of shares through corporate structures (some of which can be extremely complicated) to determine which individuals (being natural persons) hold direct or indirect rights and interests. Nova Scotia companies that are a reporting issuer under the Securities Act or listed on a designated stock exchange are exempt from the new register requirements.

Contents of register

The register of individuals with “significant control” will be required to include the following information for the individuals that meet the defined thresholds of control:

• name, date of birth and last known address
• jurisdiction of residence for tax purposes
• dates they became or ceased to be an individual with “significant control,” and
• a description of the nature of their control/interest

Who will have access

The NSCA will require companies to disclose (upon request) the new register to:

• the Registrar of Joint Stock Companies (Nova Scotia)
• shareholders and creditors of the company (upon furnishing an affidavit containing certain information), and
• certain investigative bodies, including a police force, Canada Revenue Agency (or a provincial taxing authority) and certain regulators (e.g. Nova Scotia Securities Commission and the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC))

We note that the permitted uses of the new register information by shareholders and creditors is broad, including use in connection with any matter “relating to the affairs of the company.”

Implications for multinational structures

Nova Scotia companies are frequently used in multinational structures. Until 2005, the NSCA was the only corporate statute that permitted the incorporation of an unlimited liability company (ULC). Nova Scotia ULCs were at the forefront of Canada‑US hybrid structuring for decades. Similarly, the NSCA was historically one of the only corporate statutes that did not impose a director residency requirement. While other jurisdictions have since abolished the director residency requirement, many long‑standing Nova Scotia companies were originally incorporated in Nova Scotia to circumvent the director residency requirement.

In the context of multinational corporate groups, identifying individuals with significant control may not be straightforward. Multinational corporate structures may involve a vast array of entities and multiple jurisdictions. The tracing of ownership or control may be complex, and its difficulty exacerbated by the application of foreign law to the legal concepts required to be considered to determine which individuals have significant control. Some examples where determining individuals with significant control could be complicated include the following:

• A discretionary trust holds 25% or more of the shares of a Nova Scotia company and has more than one beneficiary. The trustee has discretion to allocate the property or benefits of the trust among the beneficiaries. For the purposes of the new rules, the trustee, as well as each of the beneficiaries, would be considered individuals with significant control of the Nova Scotia company. If the trust is governed by foreign law, determining individuals with significant control may be more complex.
• An individual controls an entity that holds 25% or more of the shares of a Nova Scotia company. The individual would have indirect control over the shares of the Canadian corporation. For the purposes of the new rules, the individual would be considered an individual with significant control of the Nova Scotia company.
• A Nova Scotia company is owned by a partnership. To determine control of the company, the company would be required to look through the partnership to its members. If the members are corporations, the Nova Scotia company would be required to trace ownership through the corporate structure to determine individuals with significant control.

We expect that Nova Scotia will also implement regulations to further define “control” and elaborate on the application of the rules for individuals that hold or control interests through intermediaries.

Penalties for non-compliance

Effective April 1, 2023, Nova Scotia companies are required to take reasonable steps to identify individuals with significant control on an annual basis. A company that does not comply with the new rules may be subject to a fine of up to $5,000, depending on the nature of the breach. Every shareholder, director and officer of a Nova Scotia company that does not comply with their respective obligations under the new rules may be subject to a fine of up to $200,000, or imprisonment of up to six months, depending on the nature of their breach.

The takeaway

NSCA companies should develop new procedures to comply with the new reporting requirements. Multinational corporate groups with complex structures comprising Nova Scotia ULCs and/or Nova Scotia companies that are owned through multiple intermediaries may require help to determine which individuals are required to be included on the new register.