Business Corporations Act changes aim to provide transparency
By Rob Lamberti, AdvocateDaily.com Contributor
Privately owned firms governed by the Canada Business Corporations Act will now have to register the names of those who have significant control of their companies, says Toronto corporate lawyer Marlin Horst.
But it may be a problem identifying Individuals with Significant Control (ISC) in cases where the firms have ISCs who are located offshore, says Horst, partner with Shibley Righton LLP.
Introduced in the March 2019 federal budget and set to come into effect June 13, the change to the Act intends to remove secrecy by providing more transparency in a firm’s ownership, he tells AdvocateDaily.com.
“It is now possible for an individual to be in the background and that the corporation doesn’t even know about who actually has significant control over it,” Horst says. “I think what the government is hoping to accomplish may be more than they can achieve.
“But what they want to be able to do is increase the whole ‘know your client’ circumstance so that every company knows all the individuals that have significant control of that corporation,” he says.
The change only affects federally incorporated private corporations, Horst says. The regulation defines significant control as a person or persons with ownership of 25 per cent of the voting shares, or 25 per cent of all the shares based on fair market value. He says that control could include a financial institution, depending on the fiscal arrangements.
“This may be an individual who may not even be known to the corporation,” Horst explains, such as beneficial owners, who have their shares held in trust and their identities are kept secret.
“The purpose here is to get behind all of these things to find out the names of all the individuals who are able to pull strings. This requires the corporation to go further back to find the people who have significant control over the corporation,” he says.
“This is not necessarily limited to shareholders. It could be anyone with significant control, and that could be through a financing agreement because anyone who can exercise control over the corporation is subject to these rules.”
The federal government wants the ISC Register to include the following information about each person — name, date of birth, last known address, jurisdiction for tax purposes, date they acquired significant ownership or control, date they ceased to have significant ownership or control, and a description of how the individual meets the definition of significant control, Horst says.
The register must also be regularly updated, and there are significant penalties for failing to comply — fines of up to $200,000 for directors and officers, plus up to six months in jail, he points out.
Horst says the registers are not public, open only to shareholders or those who have an interest in the corporation, such as financial institutions.
He says, along with seeking transparency in ownership, the ISC Register serves, in part, to thwart criminal activities, including money laundering, involvement in terrorist organizations and industrial espionage.
“Right now there may be people on that (terrorist) list who own significant control of a corporation,” Horst says. “We’re probably only talking about a small number of corporations, but there is that possibility.”
Horst says within a private company setting, a person could find ways of exercising influence without showing themselves to the other shareholders. However, the government’s quest for transparency may be stymied if the controlling interests are located offshore, he adds.
“For the vast majority of corporations, this will not be very onerous because they already know who their shareholders are,” Horst says. “Most of these companies are closely held, so it won’t be difficult to find out who the individuals are.
“There will probably be a handful of corporations that will start running into brick walls as to who the shareholders are and, more importantly, learning the names of beneficial shareholders. The directors are obligated to maintain these registers, and if they can’t get the information that’s required, they could be in a bit of hot water.”
Horst says the problem among existing corporations that “run into a brick wall” is how they would deal with it.
“That’s a good question because the amendments offer little in guidance” to firms having difficulty in getting the information, he says.
“At this point, all they can do is ask, and I believe going forward, it’ll be easier because you can prevent someone from becoming a shareholder if they don’t provide the information,” Horst says.
He says if the directors can’t find out the identities of those who have significant control, “then you question whether they should still be shareholders of your corporation.”