New record-keeping requirements under the Canada Business Corporations Act: A primer

Beginning June 13, 2019, private corporations regulated under the Canada Business Corporations Act (“CBCA”) will be required to maintain a register of individuals who, directly or indirectly, have “significant control” over the corporation. Currently, CBCA corporations do not have to look behind the names of their registered shareholders to determine ultimate beneficial control.

This new register will not be available to the public but it will be open to shareholders and creditors of the corporation. Directors and officers will have personal liability to ensure the corporation complies with the new provisions. Note that these requirements will not apply to public companies and to some other corporations exempted by regulation.

The new register is consistent with initiatives in Canada and internationally to combat money laundering and terrorist financing. Lenders will find it of assistance in meeting their increasing “know your client” obligations. It is possible that similar requirements will soon be adopted under provincial legislation as well.

Many CBCA companies, however, are likely to find the requirements onerous and difficult to interpret. The government intends to bring in regulations that may clarify the new obligations. There may also be an opportunity for public comment on the regulations, although a specific process has not been announced.

Who is an Individual with Significant Control (“ISC”)?

“Individual” is defined in the CBCA as a “natural person”. An individual has “significant control” of a corporation when:

• with respect to a “significant number of shares”, being shares representing (i) 25% or more of voting rights in the corporation or (ii) 25% or more of fair market value of the corporation:
  • he or she is the registered holder;
  • he or she is the beneficial owner; or
  • he or she has direct or indirect control or direction over them; or
• the individual has direct or indirect influence that, if exercised, would result in control in fact of the corporation.

Further circumstances may be prescribed by regulation. Individuals who jointly hold interests or rights may each be ISCs.

Importantly, an ISC need not be a shareholder at all – the direct or indirect influence giving rise to “control in fact” (also known as de facto control) referred to in paragraph 2 above could arise from any kind of “influence” based in a legally enforceable right to effect a change to the board of directors or its powers, including under a financing agreement, purchase agreement or shareholders’ agreement.

What does the corporation need to do?

Corporations must list all ISCs in the register with the required personal information, including name, date of birth, address, jurisdiction of residence for tax purposes and a description of the reason they are an ISC, and keep such information up to date. Shareholders of the corporation are required to provide these details about ISCs to the best of their knowledge, and commit an offence if they fail to do so.

At least once each year, the corporation must take “reasonable steps” to ensure that it has identified all ISCs. These steps may include questioning shareholders to determine who controls them, and reviewing the corporation’s key agreements with an eye to issues of control. The register must describe the steps taken by the corporation to ensure that the information reflected is up to date and accurate.

Among other things, a corporation will need to determine:

• are there any holders (individually or jointly with others) of a “significant number of shares”, being shares representing (i) 25% or more of voting rights in the corporation or (ii) 25% or more of fair market value of the corporation? Note that this analysis may be complicated if there is more than one class of shares outstanding;
  • if the answer to question 1 is yes and any of those holders are individuals (i.e. natural persons), then the corporation will need to ask those holders:
    • to provide the relevant information required under the CBCA to be included in the registry; and
    • whether they are the beneficial holders of their shares, and if not, to identify the beneficial holders. The beneficial holders must also be listed in the registry;
  • if the answer to question 1 is yes, and any of those holders are not individuals, the corporation will need to ask those shareholders to identify the individual or individuals that has direct or indirect control or direction over them. This inquiry could disclose the names of individuals far up the corporate chain, or may result in no names if no individual holds control;
• is there an individual (shareholder or otherwise) that has any direct or indirect influence that, if exercised, would result in control in fact of the corporation? A full analysis of “control in fact” or “de facto control” is outside the scope of this article, but this could include, for example, an individual that controls a debenture holder who has the right to appoint the majority of the board, or an individual who has a right under a shareholders’ agreement to buy shares sufficient to elect a majority of the board.

The corporation is also required to dispose of all personal information about an ISC within one year after the sixth anniversary of the day on which that person ceased to be an ISC.

Issues arising

We anticipate that some situations will give rise to uncertainty as to the implementation of the new rules. For example:

• who is the controlling individual of a trust? Depending on the circumstances, it would likely include the trustees, the person appointed in the trust deed to appoint replacement trustees, and possibly an influential beneficiary;
• who is the controlling individual of a partnership? This would require an analysis of the partnership agreement, if any;
• how do contingent rights, options to purchase, veto rights and other provisions commonly found in shareholders’ agreements, convertible debentures, purchase agreements and other instruments affect control?
• if management of a corporation feels they are already knowledgeable about issues of control, what “reasonable steps” do they have to take every year?
• how can management best protect the security of the information obtained from its inquiries?
• what, if any, responsibility does management have if it suspects, but is not sure, that shareholders are not being forthcoming with the names of their controlling individuals?
• what steps should law firms (as corporate registered offices) take to implement the new registry and assist corporations with the steps they must take annually to update it?

Privacy and issues of personal liability

Only direct shareholders of a corporation are required to be responsive to questions from the corporation about ISCs, not indirect shareholders. In some cases, this could limit the information a corporation would have about its ISCs.

Directors and officers who knowingly permit or acquiesce in the recording of false or misleading information in the register, or in the failure to keep a register, will be guilty of an offence. Consequently, they likely must contribute information known to them other than through their role for the corporation (such as through their roles for parent or holding corporations). If a director, officer or shareholder is convicted of contravening these new requirements, he, she or it may be liable to a maximum fine of $200,000 or to imprisonment for a maximum of six months, or both.

Entities wishing to retain the secrecy of ultimate controlling individuals will need to be aware that knowledge held by appointee directors will be taken into account in preparing the register.

The new register may contain considerable information that does not show on the existing shareholders’ register. It is not available to the public: it will only be available to the Director under the CBCA on request, and to shareholders and creditors of the corporation for permitted purposes, being influencing the voting shareholders, offering to acquire shares, or any other matter relating to the affairs of the corporation.

The new register must be kept at the registered office of the corporation or “at any other place in Canada designated by the directors.” Although typically it is convenient and efficient to keep all registers together at the registered office, if the information in the register of ISCs is highly sensitive, the corporation could keep it at another location in Canada such as its business office.

This new requirement may be a disincentive for companies to incorporate (or remain incorporated) under the CBCA, and cause some companies to consider provincial incorporation instead. Due to the agreement in December 2017 of the provincial and federal Finance Ministers in Canada to pursue legislative amendments to ensure corporations hold accurate and up-to-date information on beneficial owners2, however, it is likely that some or all provinces and territories will implement similar legislation in the near future.