Invisible Hand No More – Updates To Ontario And Canadian Corporate Laws Pose Onerous Disclosure Obligations Aimed At Exposing Shareholders With Significant Control

The Ontario and Canadian Governments have recently tightened reporting measures that pose increased scrutiny on private business owners' shareholders. As of January 1, 2023, Ontario's Business Corporations Act (the "OBCA") requires privately-held companies to maintain a register of all shareholders defined as "individuals with significant control" (ISC) over the company.

While federal companies have had these obligations since June 2019 under the Canada Business Corporations Act (the "CBCA"), additional federal laws came into effect on May 4, 2023, that now require federal entities to comply with various steps to update their ISC registers if they are unable to identify any.

Yearly obligations concerning ISCs registers should be closely monitored and maintained to avoid the potentially severe penalties for non-compliance discussed below. While onerous, mandating compliance will help prevent the misuse of corporate entities for criminal purposes, such as tax evasion.¹

A. WHO IS CONSIDERED TO BE AN ISC?

Go through each step below:

Federal and provincial definitions of an ISC are substantially similar, as follows:

1) An ISC can be any shareholder who owns a "significant number of shares," being those with:

a. ≥25% of the voting rights of all outstanding shares; or
b. ≥25% of the fair market value of all outstanding shares.

Business owners must also consider whether an individual can be a "shareholder" deemed to have a "significant number of shares" in one of the following ways:

2) An ISC can mean a "shareholder" meeting any of the following definitions:

a. a registered holder of the shares;
b. the beneficial owner of the shares; or
c. a shareholder with "significant control," defined as "direct or indirect influence, control or direction" over the shares in question, that, if used would give them "control in fact" (discussed below in Step 3.).

3) A shareholder will also be an ISC if they have "direct or indirect influence" equating to "control in fact" over the corporation, which can include:

a. the right or ability to change the board of directors' composition;
b. the right or ability to change the directors' powers;
c. the right or ability to make unilateral decisions for the corporation without consulting the board or shareholders;
d. whether these rights can be exercised directly or by influencing shareholder(s); and
e. any of the exceptions for arm's length individuals set out below.

4) Multiple individuals can have "significant control" together through joint ownership or control over shares in any of the following forms:

a. their individual interests or rights;
b. a combination of interests or rights jointly;
c. an agreement or arrangement requiring the joint exercising of rights; or
d. a combination of interests or rights held by "related persons."

If any individual shareholder (a person, a corporation, a trust, etc.) meets the threshold under Step 1 by applying Steps 2 to 4, the corporation will have to report the details outlined below.

B. WHAT INFORMATION DO YOU NEED TO DISCLOSE ABOUT ISC?

For both Ontario and Canada Corporations, the following information must be disclosed for each ISC:

a. the name, date of birth, and latest known address;
b. the jurisdiction of residence, for tax purposes;
c. the day on which each individual became and/or ceased to be an ISC;
d. a description of the traits that make the individual an ISC, including their interests and relevant share-related rights; and
e. a description of steps taken by the corporation to identify the individual as an ISC.

This information must be reported yearly and within 15 days of discovery. In other words, a sudden change in ownership after a transfer of shares can trigger new reporting obligations. Where a corporation requests this information from a shareholder, that individual must give a prompt, accurate, and complete response to the best of their knowledge and regardless of their shareholdings at the time.

C. WHO IS NOT AN ISC WITH "DIRECT OR INDIRECT INFLUENCE" BY DEFAULT?

Multiple individuals may not have "direct or indirect influence" over a corporation where an agreement or arrangement governs how business is carried out (i.e., franchising, licensing, leasing, distribution, supply or management agreements, or something similar) and he or she has:

(i) control in fact (see 2(c));
(ii) a significant number of shares (≥25% of the voting rights or FMV of all outstanding shares); and
(iii) the corporation and the individual are at arm's length (they are not related).

D. MAINTAINING THE REGISTER OF ISC

In addition, corporations must dispose of any personal information collected during the seventh year after an individual ceases to have significant control over the corporation. Both federal and provincial amendments set out various classes of corporations that are exempt from these reporting requirements, including Crown corporations and wholly-owned subsidiaries of reporting issuers.

E. ENFORCEMENT CONSIDERATIONS

The CBCA and now the OBCA authorize compliance inquiries and set out offences and penalties in connection with the register of ISCs. For example, law enforcement is empowered to demand ISC-related disclosure for matters including tax compliance, regulatory purposes, or offences pursuit. Fines can range from $5,000.00 for non-compliance to $200,000.00 and imprisonment for a term of six months for:

(i) failing to maintain and disclose the register;
(ii) recording of false or misleading information in the register; or
(iii) providing any person or entity with false or misleading information relating to the register.

Importantly, this includes where Canadian authorities intend to give information to agencies outside Ontario (i.e., for enforcement by foreign tax authorities or financial regulators).

CONCLUSION

In light of the significant consequences of failing to file the appropriate disclosure, we strongly recommend that all clients complete their annual filings and resolutions as required and consider engaging a corporate lawyer to assist in doing so.

Footnote

1. This is intended to be in line with Ontario's recent commitment under the Canada-wide Agreement to Strengthen Beneficial Ownership Transparency, which prompted the Ontario Government to pass Bill 43: Build Ontario Act (Budget Measures), 2021 S.O. 2021 c. 40, on December 9, 2021, amending the OBCA.