Features | From Pivot Magazine

What Ottawa’s corporate reporting overhaul means for CPAs

Big changes are coming to corporate record-keeping requirements, but Ottawa still owes the profession some answers

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Close up of woman's face reflecting into monitor showing information and dataWith such a dramatic shift in corporate ownership record-keeping requirements in the works, CPAs will have to pay particularly close attention to what’s coming down the tracks (Laurence Dutton) 

In the annals of Canadian corporate record-keeping, the changes proposed to take effect July 1 may be among the most far-reaching in years. Strange, then, that the looming overhaul of Canada’s corporate ownership record-keeping requirements to recognize “beneficial ownership” of corporations is getting so little attention.

During the past few years, governments around the world, Canada included, have moved to clamp down on money laundering, aggressive tax avoidance or outright evasion, and the financing of terrorist and other criminal activities. The 2016 Panama Papers investigation, which revealed a vast network of hidden and offshore financial activity, prompted many governments to address gaps and other issues. There’s a lot of money at stake: estimates of Canada’s so-called “tax gap”—the difference between the tax revenue governments expect to bring in, and what they actually receive—vary from $6 billion to $47 billion per year.

A federal government discussion paper released in February 2018 on improving Canada’s anti-money laundering and terrorist financing regime identified a range of proposals, among them beneficial ownership information that would require recording and maintenance of precisely who has beneficial ownership of private corporations. This followed an agreement among federal and provincial finance ministers in December 2017 to pursue legislative amendments to their corporate statutes to ensure corporations hold accurate and current information on beneficial owners that will be available to law enforcement, tax and other authorities.

According to the paper, beneficial ownership refers to “the identity of the natural person who ultimately controls the corporation or entity, which cannot be another corporation or another entity.” With such a reference, it’s all about giving tax and other authorities the tools to see through layers of corporations, or other entities such as trusts, in order to track down those people who ultimately control and benefit from these corporations. 

Canadian governments may be missing out on up to $47 billion in annual tax revenues.

More recently, federal Bill C-86* was released in November 2018 and it contains changes to the Canadian Business Corporations Act to mandate the collection of beneficial ownership information. The key rule is a corporate requirement to maintain a registry of information on individuals who have interests, rights—or a combination of the two—in respect of a significant number of shares of the corporation. The number is deemed “significant” when 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 of shares, when compared with all of the corporation’s outstanding shares. The reference to fair market value may create concerns for many corporations. For example, it is common for private corporations to issue both common and fixed-value preferred shares. If determining the exact relative value of shares owned by each shareholder is required, this process could be both onerous and expensive if it is necessary to value the corporation as a whole to determine these values.   

The draft legislation also had significant penalties that could apply if the corporation knowingly fails to maintain the register or if false information is provided or recorded. Shareholders themselves can also be liable if they knowingly fail to provide information or provide false information. 

In another significant development in November 2018, the House of Commons Standing Committee on Finance made a number of recommendations, including the creation of a pan-Canadian beneficial ownership registry for all legal persons and entities, including trusts, who have significant control over corporations. It also recommended that the proposed registry should not be available to the public. If the recommendation is adopted and filings must be made to disclose the beneficial ownership information for collection in a registry, common sense would dictate that corporations should be able to use their tax returns to report this information as opposed to a separate filing, to help minimize the compliance burden.

For some corporations, the exercise will be easy—for example, where a single corporation is owned by a single individual. For other structures, things could get a lot more complicated. An example would be corporations owned by multiple families who have corporate structures of their own. Overall, additional corporate accountability mechanisms are certainly important, but the compliance, as a general principle, shouldn’t be too onerous, nor should it be excessively costly for corporations and their owners to satisfy the new rules.

For Canadian CPAs, the reality is that big changes aren’t very far away.

As of late fall, practical guidance as to how to carry through with these requirements, as well as details on the extent of the reporting, was still outstanding, although the government did recognize last February that providing “clear, standardized direction” to corporations and their advisors will be crucial. What does seem clear is that a good deal of the responsibility for sorting out these matters will fall to the corporation’s accounting and tax advisors. 

One question you may be asking is how trusts fit into all of this. In addition to this initiative, similar requirements were introduced for trusts in the 2018 federal budget. Under this change, additional information such as the identity of beneficiaries, trustees and settlors will have to be reported for trusts beginning with the 2021 taxation year. As many trusts hold shares of private corporations, it will be crucial to ensure that the two sets of reporting rules are coordinated so that compliance work is not duplicated. 

Other national governments are implementing similar reforms, so Canada is following an international trend. But for Canadian CPAs, the reality is that the July 1, 2019, proposed implementation date isn’t very far away, and there’s still a great deal that needs to be done: clarifying the precise rules, issuing guidance from the government’s perspective and developing processes to unearth all the beneficial ownership information that may be locked away in a complex, layered corporate structure for CPAs. 

To stay up to date, check out CPA Canada’s website regularly for news on changes as they become available. With such a dramatic shift in corporate ownership record-keeping requirements in the works, CPAs will have to pay particularly close attention to what’s coming down the tracks.

*The federal legislation, Bill C-86, has passed into law since the original writing of this story. The amendments to the Canada Business Corporations Act will come into force in June 2019.