New CBCA Rules and Risks of Non-Compliance - Register of Individuals with Significant ControlFriday, May 31, 2019
On June 13, 2019, new provisions in the Canada Business Corporations Act (the “CBCA”) will come into force that will require federally incorporated private corporations to maintain a register of all individuals who directly or indirectly exercise “significant control” over the corporation (the “ISC Register”). Reporting issuers (i.e., public companies) will be exempt from these new requirements.
Individuals with Significant Control – 25% Votes, 25% Value or “Influence”
Individuals are considered to have “significant control” over a corporation if they, directly or indirectly, own or control (i) shares that carry 25% or more of the voting rights attached to all of the corporation’s outstanding voting shares, or (ii) 25% or more of the corporation’s outstanding shares measured by fair market value.
In addition to the 25% “votes” or 25% “value” criteria to identify individuals with significant control, if an individual who has any direct or indirect influence that, if exercised, would result in control in fact of the corporation that individual is also considered to be an “individual with significant control.” Two or more individuals may each be considered an “individual with significant control” if they hold their interests or rights jointly or if they exercise their control or direction jointly or in concert with one another.
These provisions will apply to registered and beneficial shareholders as well as individuals who have direct, indirect or de facto control over shares.
Penalties for Non-Compliance
Corporations that fail to maintain an accurate ISC Register may be liable to a fine of up to $5,000.
Directors or officers who knowingly authorize, permit or acquiesce in the contravention of the new requirements to prepare and maintain an ISC Register commit an offence and are liable on summary conviction to a fine of up to $200,000, to imprisonment for up to six months, or both.
Directors or officers who knowingly record or knowingly authorize, permit or acquiesce in the recording of false or misleading information in the ISC Register commit an offence and are liable on summary conviction to a fine of up to $200,000, to imprisonment for up to six months, or both.
Directors or officers who knowingly provide or knowingly authorize, permit or acquiesce in the provision to any person or entity of false or misleading information in relation to the ISC Register commit an offence and are liable on summary conviction to a fine of up to $200,000, to imprisonment for up to six months, or both.
Every shareholder who knowingly contravenes the requirement to reply accurately and completely as soon as feasible to a corporation’s requests for information in contravention of the new provisions commits an offence and is liable on summary conviction to a fine of up to $200,000, to imprisonment for up to six months or both.
Substance of the ISC Register
The ISC Register must contain the following information about each individual with significant control over the corporation:
- date of birth;
- last known address;
- jurisdiction of residence for tax purposes;
- the day on which he or she became or ceased to be an individual with significant control; and
- a description of how he or she maintains significant control.
The corporation must take reasonable steps to ensure that it has identified all individuals with significant control over the corporation and update its ISC Register at least once a year. However, if a corporation becomes aware of information required to be disclosed in the register it must update the ISC Register within 15 days. Shareholders must reply “accurately and completely as soon as feasible” to any requests from a corporation for the foregoing information, though responsibility remains with the corporation to make a request.
Access to the ISC Register
A corporation’s ISC Register will not be publicly available. However, shareholders and creditors will be entitled to access the register in connection with matters relating to the affairs of the corporation. The Director of Corporations Canada will be entitled to access upon request. The 2019 federal budget bill is expected to expand the scope of persons that have the right to inspect a corporation’s ISC Register to include any police force, the Canada Revenue Agency (and provincial counterparts) and other investigative agencies (to be prescribed in the future).
Trend Towards Transparency
The new CBCA provisions represent part of a broader trend towards corporate transparency. In December 2017, Canadian Finance Ministers agreed to pursue federal, provincial and territorial corporate requirements for registers of beneficial shareholders in order to prevent the misuse of corporations for tax evasion, money laundering and financing terrorist activities. In November 2018, the House of Commons Standing Committee on Finance released a report that recommended the creation of a “pan-Canadian” beneficial ownership registry of persons with significant control over Canadian corporations in order to combat money laundering and terrorist financing. Accordingly, additional steps towards corporate transparency, such as amendments to provincial corporate statues, are likely forthcoming.
Private CBCA corporations should familiarize themselves with the new requirements in preparation for June 13, 2019 and consider providing notice of the requirements to their shareholders. In addition, corporations should consider creating policies for the creation and maintenance of their ISC Registers in order to ensure compliance.
Should you have any questions or require assistance with complying with the new requirements, please contact Charlie Malone by email at firstname.lastname@example.org, Nick Gray by email at email@example.com, Alison Sinclair by email at firstname.lastname@example.org or Melissa Smith by email at email@example.com.
This update is intended as a summary only and should not be regarded or relied upon as advice to any specific client or regarding any specific situation.
If you would like further information regarding the issues discussed in this update or if you wish to discuss any aspect of this commentary, please feel free to contact us.