Canadian private companies have been obligated since January 22 to provide information on individuals who own, control, or benefit from them, warns the Chartered Professional Accountants of Canada (CPA Canada).
This requirement for increased transparency arises from the Act to amend the Canada Business Corporations Act and to make consequential and related amendments to other Acts, known as Bill C42. The law mandates every private company governed by the Canada Business Corporations Act (CBCA) to provide information on "actual ownership."
"Actual ownership" is based on the concept of "individual with significant control." The information requirements, for instance, apply to each shareholder holding at least 10% of any share class of the company’s capital, as set out in the Income Tax Act, which is affected by these amendments.
Beyond shareholders
Michelle A. Wood-Tweel, Vice President, Regulatory Affairs at CPA Canada, in an interview with Insurance Portal, pointed out that a company must disclose information about anyone exerting significant influence on the business, even if they do not own shares.
Beyond changing shareholders, a company must analyze any changes in its debt profile, says Wood-Tweel. She mentions changes in the kind of debt in the company that come with people having control over the company. “Take, for example, a lender who finds themselves in a position of significant control in the company without holding any shares. This must be reported," Wood-Tweel explained.
According to Wood-Tweel, transparency could extend to blood relations. " If you're somebody that, through family relationships, has the ability to control another person in your family, even though he’s the one on paper that own the shares, you control him. Then you're the individual with significant control, even if you don't own any stock directly," she said.
" All of that is what this legislation will begin to capture. That means that people have to pay attention to the ownership of the company, and also the types of things that can create control over the company that may not be necessarily tie directly into stock ownership," said the Vice President, Regulatory Affairs, at CPA Canada.
Registry Similar to Quebec's?
Michelle A. Wood-Tweel emphasizes that Bill C-42 paves the way for a very useful public federal registry to combat money laundering, terrorist financing, tax evasion, and other financial crimes.
"A public registry centralizing actual ownership information will strengthen the Canadian anti-money laundering regime and help in tracking down criminals and identifying the proceeds of crime," Wood-Tweel highlighted.
Wood-Tweel recalled that Quebec already has a registry. " So many of the things that are being accomplished by Quebec with the enterprise registry is what the federal government is trying to achieve," she said.
Second Phase
Businesses must provide information that will be used to create a database and add a publicly accessible base.- Michelle A. Wood-Tweel
These new legal transparency requirements are a second step, explained Michelle A. Wood-Tweel. She recalled that the first phase took place in June 2019. "Private companies governed by the CBCA had to communicate information on individuals with significant control, create a register at the company and keep that information on hand," said Wood-Tweel.
Mchelle A. Wood-Tweel explains what’s new with the requirements of January 22, 2024, “As private companies are filing their annual report, they need to supply information that will be utilized to create a database, and add a publicly accessible information base about those companies," she adds. Wood-Tweel believes these requirements will help prevent private companies from being used for illicit purposes.
Fines are steep
Michelle A. Wood-Tweel stressed the importance for professionals and financial advisors who work with entrepreneurs to make them aware of the new federal government’s legal transparency requirements regarding private company ownership.
The government specifies that each company subject to the CBCA must provide the required information at the same time as it files its annual report. If a change affecting an individual with significant control occurs, the company must communicate it to Corporations Canada within 15 days after recording it in its register.
Wood-Tweel warns that failing to meet the new requirements could be costly. “The fines are steep”, she adds. Corporations Canada lists several administrative and penal sanctions that a private company governed by the CBCA could face for not providing information on its individuals with significant control:
- Refusal to issue a compliance certificate (often required for a loan application, or to prove to a potential investor that the company exists or is not dissolved);
- The company could be subject to administrative dissolution if it has not filed information on its ISC at the time of its incorporation or within 30 days following the date of the merger certificate or the certificate of continuation;
- The company could be subject to administrative dissolution if it has not filed information on its ISC at the same time as its annual report;
- The company could be found guilty of an offense and, on summary conviction, be liable to a maximum fine of $100,000.