Nothing is More Opaque than Absolute Transparency

Nothing is More Opaque than Absolute Transparency[1]

It is no secret that Canada often legislates on the basis of its international commitments. What Canadians often do not realize is that Canada also legislates on the basis of international pressure on it. Such is the case with recent amendments to the Income Tax Act and the Canada Business Corporations Act, which require the disclosure of the otherwise hidden beneficiaries of assets or transactions.

We have written before about the Financial Action Task Force (the “FATF”) and its process of evaluating each country’s adherence to its Forty Recommendations. In Canada’s last evaluation in 2016, it was found to be partially compliant with Recommendation 24 which deals with transparency on the identity of beneficial owners of entities. And Canada was non-compliant with Recommendation 25 requiring transparency over legal transactions.

While Canada is a far cry from Pakistan, North Korea, and Iran all of whom are designated as financial pariahs for their support of money laundering and terrorist financing Canada nevertheless could face consequences if it remains deficient in any particular category. Consequently, in order to relieve the pressure on it and bring itself in line with the other industrialized economies, Canada has amended its laws to become compliant with the FATF recommendation.

The newest change involves disclosure under the Canada Business Corporations Act to the Government of beneficial ownership of shares. While these changes only apply to the CBCA the provincial and territorial governments have agreed to follow the federal lead in meeting the FATF commitments and so we expect similar provisions to be enacted (likely verbatim) in other Canadian jurisdictions.

The amendments frame the discussion in terms of “significant control” of the shares. Significant control includes:

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

A “significant number of shares” is defined as:

(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.

The FATF recommendations require that the list of those who exercise significant control be available to law enforcement agencies. So the CBCA was also amended to require corporations to maintain a registry of those who hold ‘significant control’ and to check on the veracity of the information at least yearly. The registry must hold more information than is standard and so corporations must request the following information.

(a) the names, the dates of birth and the latest known address of each individual with significant control;
(b)the jurisdiction of residence for tax purposes of each individual with significant control;
(c)the day on which each individual became or ceased to be an individual with significant control, as the case may be;
(d)a description of how each individual is an individual with significant control over the corporation, including, as applicable, a description of their interests and rights in respect of shares of the corporation;
(e)any other prescribed information; and
(f)a description of each step taken in accordance with subsection (2).

On the whole, this part of the AML / CFT international regime is sensible but impractical. If a lawbreaker is using a corporation as part of its plan to finance terrorism or launder money (or, for that matter, evade tax), it is hard to see why they would feel any compunction about providing a falsified register to the government. Particularly, as the punishment for this is only $5000, in a world where penalties for corporations that fail to live up to administrative requirements are hardly ever punished.

So, as usual, the costs and invasion of privacy are borne by the law abiding.

[1] With apologies to Margaret Atwood