New beneficial ownership rules are coming in June. Are you ready?

A host of measures to fight money laundering and improve corporate transparency will impact accountants. CPA Canada and the federal government invite CPAs to attend webinars to prepare for beneficial ownership rules. Learn more here.

The federal government has made changes to the Canadian Business Corporations Act that may affect many Canadian accountants and others who need to maintain information on beneficial ownership starting June 13 or face stiff penalties. The changes are part of a suite of amendments to federal legislation and regulations aimed at combating  anti-money laundering and corruption. The federal beneficial ownership rules will affect corporations governed by the CBCA.

CPA Canada and the federal government are teaming up to prepare Canadian CPAs for changes to comply with requirements for  new  beneficial ownership registers  – which is the first major new requirement to come into force.

Corporations Canada is inviting CPAs to attend one-hour information and feedback sessions via webinars from late April to mid-May. Registration will open soon.

If you'd like to receive a notification when the webinar registration opens, please subscribe for an email alert.

Beneficial ownership registers offer better corporate transparency which is a necessary ingredient to strengthen Canada’s anti-money laundering regime. Internationally and at home, CPA Canada has been working closely with the federal government and through IFAC and other international efforts to combat anti-money laundering and corruption.

The new beneficial ownership information requirements for federally incorporated companies were passed into law in December 2018 and will become effective June 13, 2019. They are just one set of legislative changes the government plans to introduce. Others were announced in the federal budget on March 19 and if tabled in a bill this session, new measures could also be passed into law by this June.

Corporations will need to maintain a register of information on individuals having significant control over it. Given the nature of the information to be collected and maintained, it will likely be CPAs, along with lawyers and corporate secretaries, who are tasked with helping their clients or employers deal with the recordkeeping requirements.

Corporations and their individual directors, officers and shareholders can also be held accountable for non-compliance, and the penalties for non-compliance are harsh.

It is important that all CPAs are aware of changes occurring in this area both within Canada and internationally. You can find additional information in the May edition of PIVOT, where  an expert panel discusses white-collar crime and anti-money laundering efforts; in the January edition where a column lays out what Ottawa’s corporate reporting overhaul means for CPAs; and on the CPACanada.ca website at the AML policy webpage. 

The provinces are expected to enact similar requirements for corporations formed under provincial statutes in the future based on joint federal-provincial agreements. On April 2, British Columbia was the first province to introduce its own legislation to require registers of beneficial ownership information for provincially incorporated companies.

Under the new CBCA rules, if an individual’s interests or rights amount to 25 per cent or more of the voting rights, or 25 per cent or more of the fair market value (FMV) of shares, when compared with all of the corporation’s outstanding shares, that individual will have significant control. On interests and rights, the rules refer to an individual who is the registered holder or beneficial owner, or has direct or indirect control over the shares. When two or more individuals are acting jointly or in concert, their holdings are combined and compared with these same rights and interest tests. Finally, when an individual has any direct or indirect influence over the corporation that results in control in fact, they are also deemed to have significant control.   

Other than the simplest cases, such as where one individual owns a single corporation, these recordkeeping requirements could be quite complicated. In particular, the broad definition of “significant control” means you need to trace through a tiered corporate structure to identify which individuals ultimately hold interests and rights in shares. You then need to determine whether the holdings are significant. You also need to review the impact of a shareholders’ agreement or other similar agreements.

Once those having significant control of a corporation are determined, the registry must include the following information for each of these individuals:

  • their name, date of birth and address
  • their jurisdiction of residence for tax purposes
  • the day on which they became or stopped being an individual with significant control
  • a description of how the individual has significant control over the corporation, including a description of any interests and rights they have in shares of the corporation
  • a description of the steps the corporation takes to keep this registry up-to-date each year
  • any other prescribed information

Adding to the burden, the registry needs to be reviewed and updated each fiscal year. If changes occur at other times in the year, the register must be updated accordingly within 15 days of the change.

Where will complications arise?

These rules will generally apply to private corporations, so the use of a value test will cause complications due to the use of shares other than common shares. In particular, complexity will arise for corporations that have issued fixed value preferred shares, which are a common tax, financial and succession planning tool. They typically have a first call on a corporation’s value, with the rest of the value accruing among the common shareholders. So, unless the value of fixed value shares held by one individual is clearly above or below the 25 per cent threshold, the corporation as a whole will need to be valued and compared to the value of the fixed value shares.

Another complication may arise where a corporation has issued both voting and non-voting common shares. Valuations of private corporations for other purposes are done infrequently, if at all. And, on top of the need to value the corporation as a whole, it will also be necessary to value the specific classes of shares held by an individual.

More complications may stem from the rule requiring corporations to track the days when individuals start and stop being beneficial owners. This may be especially hard where shares or a particular class are near the recordkeeping threshold but fluctuate in value relative to the value of the corporation as a whole.

The complexity of complying with these rules will clearly rise with the complexity of the corporation’s share structure. Further, starting with 2021 tax years, more requirements will take effect for trusts. These rules will require details on the identities of beneficiaries, settlors and trustees. Interaction of these rules with the recordkeeping rules for corporate beneficial owners will be especially complex for the many Canadian trusts that own shares of corporations.

Who can view the registry information?

For owners of corporations, one key question is who will have access to the registry information. In a February 2018 Department of Finance Canada discussion paper, the federal government says it is thinking about creating a national registry of corporate information and suggests that it may consult on whether to make the registry public. The House of Commons Standing Committee on Finance agreed with the creation of a registry but recommended against public access.

These issues are up for debate in the future. For now, the CBCA changes in Bill C-86 only require corporations to maintain the required registry information. These corporate records will be available to the CRA and other regulators, such as bodies charged with dealing with anti-money laundering and other activities, under their existing authority to request information. Of note in the recent federal budget, further amendments were proposed to the CBCA that will make the beneficial ownership records more readily available to tax authorities and law enforcement. The CBCA also states shareholder and creditors can have access to the information if some conditions are met.

CPA Canada supports a balanced approach

We raised some of these issues with Finance Canada in a May 2018 submission. Our submission highlights our support for corporate information requirements that improve transparency and consistency across jurisdictions. However, we also caution against new requirements and expectations that may be duplicative or confusing, especially where elements of key information may already be available to other parts of government such as through the tax system.

We also suggest undertaking a risk assessment to weigh the projected benefits of the new rules against the expected costs and regulatory burden on legitimate Canadian businesses and their owners. Further, CPA Canada agrees with the concepts, cited in Finance Canada’s discussion paper, of maintaining the balance between deterring and detecting money laundering and terrorist financing, and improving corporate transparency while respecting the constitutional and privacy rights of Canadians.

A number of other countries have adopted or are adopting similar beneficial ownership regimes. We believe that analyzing the strengths and weaknesses of these regimes would help ensure that successes and lessons learned are applied in Canada

What should be done to get ready?

Development of the pan-Canadian framework bears watching, but, for CPAs, the immediate concern is determining how to help clients and employers comply with the CBCA requirements coming into effect in June.

It is CPAs who will have a hand in this complex recordkeeping and should act now to ensure they are ready when the rules for corporations take effect. Corporations should begin notifying shareholders of the new requirements, and a process should be put in place to track and maintain the required information.We will continue to monitor developments and keep you informed on emerging issues of importance for you.

KEEP THE CONVERSATION GOING

Have you come across any additional issues that may affect CPAs as they cope with the new beneficial ownership recordkeeping rules? You can keep the conversation going by posting a comment below.

Disclaimer

CPA Canada’s Tax Blog is designed to create an exchange of ideas on tax policy and practice issues, and their impact on those who practice tax. Your comments can provide helpful input into the public interest advocacy positions developed by CPA Canada.