New corporate ownership tracking requirements now in effect

Maintaining a register of individuals with significant control (ISC Register) is required. An individual has significant control if they:

• Are a registered or beneficial owner of, or have direct or indirect control or direction of, either:
• 25% or more of the corporation's outstanding voting shares, or
• 25% or more of the fair market value (FMV) of all the corporation's outstanding shares, or
• Have any direct or indirect influence that, if exercised, would result in control in fact of the corporation, or
• Are a person to whom prescribed circumstances apply.

Currently, there are no regulations to describe prescribed circumstances, although they may be determined at a later date. Note that if two or more individuals hold shares jointly, and either 25% shareholding test (above) is met, then each of the individuals will be considered to have significant control. In the case where two or more individuals agree to exercise their share rights jointly or in concert, and those rights collectively would meet either 25% shareholding test, each individual would be considered to have significant control.

The following information is required to be maintained for individuals with significant control:

• Name, date of birth, and address;
• Jurisdiction of residence for tax purposes;
• Date when individual obtained significant control (and ceased to hold significant control, if applicable);
• Description of how the individual has significant control of the corporation, including a description of their interests and rights in respect of the corporation; and
• Description of reasonable steps taken by the corporation at least once a year to ensure the register is accurate and complete.

Currently, the corporation is required to provide information in the ISC Register to the Director of the CBCA upon request. In addition, shareholders and creditors may request access to the ISC Register when certain conditions are met. The government has also recently introduced legislation to require a corporation to provide a copy of information in the ISC Register to an investigative body (e.g., tax authorities and law enforcement) on request when they have reasonable grounds to suspect that certain offences have been committed. Note that the ISC register is not available to the public.

At least once a year, the corporation must take reasonable steps to identify all individuals with significant control of the corporation and ensure the ISC Register is accurate and complete. In addition, the corporation is required to update the ISC Register within 15 days of becoming aware of changes. Note that shareholders are required to provide the corporation with accurate and complete information, when requested, to maintain the ISC Register. Significant penalties could apply for failure to maintain a record of this information or for non-compliance with the changed rules. In addition, the corporation is required to provide information requested by those who can access the ISC Register.

There are compliance concerns for more complex share structures. The compliance required to determine if there are any shareholders with significant control should not be too onerous for an affected corporation with only one class of shares outstanding and only registered shareholders who are individuals. However, the level of difficulty of initial and ongoing compliance will increase depending on the complexity of a corporation's share structure and ownership tiers, as well as whether valuations are required.

The broad definition of significant control means that the ownership structure of a corporation must be traced through a tiered corporate structure to identify the individuals who ultimately hold interests and rights over the corporation. These individuals' ownership interests must then be assessed to determine if the particular individual has significant control. In situations in which a particular corporation has separate types or classes of shares outstanding (such as common and fixed-value preferred shares) and multiple shareholders, it will be important to determine the value of shares of each class in order to know if a particular individual controls at least 25% of the votes or FMV of that corporation. This requirement could result in the need for a valuation of the shares and of the company as a whole. The complexity and cost of the valuation will depend on each corporation's circumstances.

The issuance of preferred shares and separate classes of shares is often part of tax and estate planning. As such, any time such planning is undertaken in the future, it will be important to work closely with your lawyer and BDO tax advisor to ensure individuals with significant control are identified. Affected corporations should put procedures in place to track changes to beneficial and indirect ownership in order to prevent being offside of the new tracking rules.

Another area of potential complexity relates to the requirement to track the date when an individual obtains or ceases to hold significant control. This may be problematic when there are fluctuations in the value of an individual's shares compared to the total value of the company, and when such fluctuations may cause the individual to exceed or fall below the 25% FMV threshold.

Lastly, given the broad definition of significant control, any time shareholders' agreements are amended or new agreements that affect ownership and control of the corporation are entered into, it will be necessary to perform reasonable steps to determine whether the ISC Register needs to be updated.

If your company is like many owner-managed businesses, you may not be immediately or directly affected because your corporation is provincially or territorially registered rather than federally registered. However, the provinces and territories have agreed in principle to improve corporate transparency and to work together to better harmonize corporate ownership record requirements between jurisdictions. Consequently, you will be affected when similar rules are adopted provincially or territorially. There are indications that Canadians should expect more requests to provide transparency regarding business and investment ownership from federal, provincial, and territorial governments going forward. For example, British Columbia was the first province to pass legislation to establish a similar register. Manitoba has also introduced legislation to follow the federal changes. Note that the provincial or territorial legislation must be studied separately from the federal rules, as there may be differences from the federal legislation in the provincial or territorial laws. As such, it is prudent to watch for relevant provincial announcements that may affect your company. Depending on the complexity of your company's share structure, you should also consider whether it makes sense to begin preparations in advance of the expected changes.