June 2019 CBCA Regulations: Serious Implications for Private Corporations

On June 13, 2019, significant changes are being introduced that will directly affect corporations registered federally under the Canada Business Corporations Act (CBCA). The pending changes are designed to bring the CBCA into compliance with Financial Action Task Force recommendations made in October 2018, specifically recommendations 10 and 22 which were intended  to prevent the misuse of Canadian financial institutions by corporations for purposes of tax evasion, corruption, money laundering and terrorist funding activities.

Current Shareholder Registry

Under the current legislative scheme CBCA corporations are only required to maintain a securities register that documents registered or legal shareholders, and contains information relating to :

• The name and address of each person or entity that is or has been a security holder of that corporation
• The number of securities held by each person or entity
• The dates of the issue and/or transfer of the shares, with relevant particulars

This allows shareholders to be holding companies or trusts belonging to individual(s) whom ultimately control the corporation, as beneficial owners.

Starting In June: Recording Beneficial Shareholders

Once the new regulations are implemented under Bill C-86, also known as the Budget Implementation Act, CBCA corporations will be required to document and record certain information regarding both registered and beneficial shareholders who have significant control over that corporation. “Significant Control” is defined by the new Section 2.1 of the CBCA to be:

2.‍1 (1) For the purposes of this Act, any of the following individuals is an individual with          significant control over a corporation:

(a) an individual who has any of the following interests or rights, or any combination of them, in respect of a significant number of shares of the corporation:

(i) the individual is the registered holder of them,

(ii) the individual is the beneficial owner of them, or

(iii) the individual has direct or indirect control or direction over them;

(b) an individual who has any direct or indirect influence that, if exercised, would result in control in fact of the corporation; or

(c)an individual to whom prescribed circumstances apply.

Joint ownership or control

(2)Two or more individuals are each considered to be an individual with significant control over a corporation if, in respect of a significant number of shares of the corporation,

(a)an interest or right, or a combination of interests or rights, referred to in paragraph (1)‍(a) is held jointly by those individuals; or

(b)a right, or combination of rights, referred to in paragraph (1)‍(a) is subject to any agreement or arrangement under which the right or rights are to be exercised jointly or in concert by those individuals.

Significant number of shares

(3)For the purposes of this section, a significant number of shares of a corporation is

(a)any number of shares that carry 25% or more of the voting rights attached to all of the corporation’s outstanding voting shares; or

(b) any number of shares that is equal to 25% or more of all of the corporation’s outstanding shares measured by fair market value.

Read together, any individual or two individuals with joint ownership, holding 25% or more of the voting rights attached to a CBCA corporation’s issued and outstanding securities, will be considered having “significant control”.

Amendments to Section 21.1 thru 21.4 of the CBCA then place corporations on an additional duty to maintain and keep a new register of individuals with significant control over the corporation (the “Beneficial Register”), containing information on each individual’s:

• Date of birth and latest known address
• Jurisdiction of residence for tax purposes
• Day on which that individual became or ceased to have significant control, as the case may be
• A description of how that individual has significant control of the corporation, as the case may be, by describing nature of their rights and interests in respect to the shares of the corporation
• Any other prescribed information
• A description of steps taken by the corporation to update the information annually

Information recorded in the Beneficial Register must be kept for a period of six years.

Exemptions

Certain CBCA corporations will be exempt from this requirement, such as publicly traded companies, reporting issuers, or members of a prescribed class. The Beneficial Register would not be available to the public, except upon request by the Director of Corporation Canada. If shareholders or creditors of the corporation wish to have access to the Beneficial Register, they must send an affidavit to the corporation stating that the information will not be used except in connection with:

• An effort to influence the voting shareholders of the corporation
• An offer to acquire securities of the corporation
• Any other matter relating to the affairs of the corporation

The breach of these new provisions in the CBCA will open up corporations and individuals to monetary penalties and in some cases incarceration. For example, directors and officers of CBCA corporations that fail to properly prepare and maintain a Beneficial Register are guilty of an offence, that on summary conviction may subject them to a $200,000 fine or to imprisonment not exceeding six months, or both.

Summary

Upcoming changes to the CBCA are intended to provide increased transparency to the corporate landscape across Canada. No longer will nominee shareholders and trusts be permitted to conceal the identities of beneficial owners. Provinces and territories are now in the process of adopting similar measures to bring provincial laws in line with the CBCA.

If you would like more information about whether your company is required to maintain a Beneficial Register, and how to proceed, please contact a member of our Business Law Group.

Henry Ka is an Associate in our Business Law Group.