Canada gears up for new reporting cycle under the Supply Chains Act

Ahead of the second reporting cycle under the Fighting Against Forced Labour and Child Labour in Supply Chains Act (the “Supply Chains Act” or the “Act”), Public Safety Canada released updated guidance for businesses on November 15, 2024 (the “Updated Guidance”).

The Supply Chains Act, which came into force on January 1, 2024, requires certain businesses to publish a report annually on the risks of modern slavery in their business and supply chains and the steps taken in the previous year to mitigate such risks. In line with the coming into force of the Act, Public Safety Canada published some guidance in December 2023 to assist businesses in complying with the new legislation. Despite the guidance, the Supply Chains Act brought in its wake many questions from businesses across Canada and beyond with respect to their obligations. Taking in feedback received throughout the first reporting cycle and following consultation with relevant stakeholders, Public Safety Canada published much-awaited revised guidance to clarify various aspects of the Act, namely as to its scope of application.

Clarifications with respect to applicability

Companies in the sale/distribution business

Section 9 of the Supply Chains Act imposes reporting obligations on, namely, any entity that produces, sells or distributes goods in Canada or elsewhere. While a previous version of the guidance suggested that entities solely involved in selling and distributing goods were not required to report, many such businesses chose to report out of an abundance of caution, as section 9 of the Act expressly subjects such entities to reporting obligations. In this Updated Guidance, Public Safety Canada confirmed unequivocally that entities solely involved in distributing and selling are not expected to report under the Act and that it will not seek enforcement action in those instances.

SaaS companies and other companies producing intangible goods

Previously, there were questions as to whether a company offering software services or electricity would be producing “goods” and would therefore be subject to the Act. The Updated Guidance clarifies that the term “goods” only refers to tangible physical property that is the subject of trade and commerce. Real property, electricity, software services, and insurance plans are thus specifically excluded from the definition of goods.

Foreign parent of a Canadian company

The Supply Chains Act includes in its definition of “entities” subject to the Act those businesses which have “assets” in Canada and meet certain size thresholds. The previous guidance defined “assets” as any property owned by a person or business, including investments and other intangibles such as goodwill. This led to much debate, as it meant that parent companies operating purely outside Canada, with no nexus to Canada other than through shares of their Canadian subsidiary, would have to report and have their report approved by their board of directors, a requirement which could prove onerous depending on the size of the organization. This interpretation also captured under the scope of the Supply Chains Act certain companies which do not operate in Canada, but have trademarks or patents registered in Canada.

Under the Updated Guidance, “assets” is now defined as any tangible property owned by a person or business. Intangibles such as intellectual property, securities and goodwill are excluded from the definition. As such, companies who do not do business in Canada, have a place of business in Canada or possess any tangible property in Canada are not required to report.

This revised definition of the term also applies to the calculation of whether a business meets the size threshold of $20 million in “assets”. In other words, in determining whether a company meets the test at subparagraph (b)(i) of the definition of “entity” in the Act, the company should calculate its global tangible assets only.

Customs brokers

As the Supply Chains Act imposes reporting obligations on any entity that imports goods into Canada, many turned to Public Safety Canada’s guidance to determine whether the foreign seller, the Canadian buyer, the customs broker, or any other party in between would qualify as the “importer” of goods.

Previously, Public Safety Canada’s guidance stated that the entity “responsible for accounting for the goods under the Customs Act” was the importer. This is modified by the Updated Guidance, which defines the entity importing goods as “the true importer”, i.e., “the entity that, in reality, caused the goods to be brought into Canada”.

Public Safety Canada therefore excludes most customs brokers from the scope of the Supply Chains Act, as licensed customs brokers may be authorized to account for commercial goods, while not being the party causing such goods to be imported. In addition to customs brokers, the Updated Guidance similarly excludes express couriers, trade consultants, and other third parties authorized to transact business on behalf of the importer.

Very minor dealings

The previous guidance exempted businesses engaged in very minor dealings from the application of the Act, however discussions abounded as to what constituted “very minor dealings”.

In the Updated Guidance, Public Safety Canada chose not to establish a specific number or percentage threshold, but rather provided the broad guideline that this term should be interpreted in accordance with generally accepted principles of de minimis and evaluated within the context of each entity’s business. In other words, Public Safety Canada opted for a subjective standard over an objective one.

This comes as good news for companies that import limited amounts of goods, such as office furniture or office “swag”, that might not otherwise be captured under the scope of the Supply Chains Act.

Notion of “control”

The Supply Chains Act imposes reporting obligations on any entity that “controls” a reporting entity. While Public Safety Canada has always taken the position that the notion of “control” should be interpreted broadly, the Updated Guidance now refers to the Office of the Superintendent of Financial Institutions’ guidance on the concept of control to assist businesses in assessing whether they control an entity for the purposes of the Act. According to this guide, control may notably occur through a person’s ownership stake in a company, their ability to select or influence directors, their involvement in management, the company’s financial or business reliance on that person, or the person’s ability to trigger the effective winding-up of the business.

Some other clarifications

Questionnaire

In the first reporting cycle, there was some confusion as to which entity or entities should complete the questionnaire in the event of a joint report among multiple entities. The Updated Guidance clarifies that the questionnaire only needs to be completed by the entity that submits the report.

Report attestation

The Updated Guidance also provides additional information on what constitutes a proper attestation at the end of a report—a wet or electronic signature is required; typing “signed” in the signature block is not sufficient.

If you would like to discuss your business’s obligations under the Supply Chains Act for the upcoming reporting cycle, please contact the authors of this article.