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Ownership transparency is the top priority for regulators aiming to end the safe havens for corrupt funds. While most jurisdictions already demand public disclosure of beneficial owners in legal entities, many of them, including some Canadian provinces, still fall behind.
In 2023 it will all change for Ontario when Bill 43, Build Ontario Act (Budget Measures), 2021 finally comes into force. From January 01, 2023, the new regulation amending the Ontario Business Corporations Act introduces new requirements, obliging corporations to run a register of individuals with significant control (ISCs).
The new enactment requires all private corporations in Ontario to identify their ISCs and report them in the transparency register, setting harsh penalties for non-compliance. Keep reading to learn more about why regulators are actively seeking ownership disclosure and transparency and what should be addressed by entity management systems to comply with the amended Ontario Business Corporations Act.
Several years ago, a report by Transparency International mentioned Canada as one of the world's most opaque jurisdictions in relation to the ownership of private companies and trusts. Such a situation created conditions for numerous violations and allowed individuals to use shell companies for tax evasion, money laundering and concealing corruption.
Lack of ownership transparency allowed corrupt actors to hide their beneficial interests in Canadian companies and real estate. It also presented a serious impediment to tax authorities and law enforcement.
This situation was flipped on its head after the Canadian federal government introduced changes to the Canada Business Corporations Act, requiring full disclosure of personal information of individuals with significant control over Canadian businesses. However, in Ontario, similar regulations were nonexistent until November 2021, when Ontario's Minister of Finance came up with Bill 43, implementing a similar ownership transparency framework already present in the federal law.
The changes to the Ontario Business Corporation Act through Bill 43 affect all private corporations in Ontario, excluding those private companies which are wholly-owned by public corporations.
In addition, Bill 43 does not apply to:
• offering corporations, i.e., corporations which offer their securities to the public and are subject to securities legislation and/or,
• corporation whose shares are listed on designated Canadian or foreign stock exchanges as defined in the Income Tax Act (Canada), which includes most significant stock exchanges,
• corporations, which are members of a prescribed class.
Since identifying individuals with significant control is often heavily nuanced, the new regulations set several tests for ISC identification. In addition, the Build Ontario Act articulates cases which don't fall under the definition of ISC to avoid ambiguities and wrong application of the law.
In the meaning of Bill 43, individuals with significant control are those who:
• hold 25% or more interest in the corporation, defined by share of voting rights or by the market value of the shares,
• have any direct or indirect influence which, if exercised, would give them "control in fact" of the corporation, for example, by changing the board of directors or re-defining its rights.
The law also covers cases of joint ownership, for example, where several individuals jointly hold interests in a company above the 25% threshold, with each of them considered an ISC. The regulation also addresses voting arrangements among several individuals, which meet the 25% test, classifying each participant of such agreement as ISC.
While the amended Ontario Business Corporations Act allows broad interpretation of significant control, it also lists important exclusions to avoid wrong application.
Thus, the law states that the sole presence of one of the following relationships between an individual and a corporation does not result in "control in fact." The list of business relationships which do not make the individual automatically qualify as ISC when dealing at arm-length with a corporation includes franchising, licensing, leasing, distribution, supply, management and other similar arrangements.
The law requires corporations to prepare and maintain the register of ISCs, available at its registered office or another place in Ontario.
According to the law, the transparency register should include the following data about each individual qualified as an ISC:
• name, date of birth, address, and residence jurisdiction,
• date when an individual obtained or lost significant control over the corporation,
• explanation of the criteria for identifying an individual as an ISC,
• description of interests and rights related to the corporation,
• any other relevant information as can be required by law,
• description of steps taken to regularly update the register.
The new regulation obliges corporations to make checks to ensure that all their ISCs are identified and listed in the register at least once during each financial year. Meanwhile, if the corporation becomes aware of any new information referenced above, it is obliged to update the register accordingly within 15 days.
The Ontario Business Corporations Act enables access to the register for compliance, law enforcement and investigative purposes.
The list of persons and entities who are authorized to request access to corporations' transparency register in Ontario includes the Minister, police, provincial and federal tax authorities and other additionally designated regulators. Meanwhile, the law does not include provisions which would oblige companies to provide access to the register to shareholders or creditors.
The new regulation sets fines up to $5,000 for corporations failing to prepare and maintain the transparency register or respond to inquiries and meet their disclosure obligations. The same fines apply to shareholders and anyone else who fails to promptly respond to enforcement requirements about the register.
Meanwhile, directors and officers are subject to fines up to $200,000 and/or up to 6-month imprisonment for failure to comply with the ownership transparency requirements as set in the new regulation, including maintenance and disclosure of the transparency register. The same penalties apply for recording false data into the register or providing misleading information.
Shareholders are subject to the same fines and criminal penalties as directors and officers for not responding to requests related to the ISC register as required by the law.
Since identifying ISCs, entering information into the register and updating data always takes significant time, companies should plan ahead for measures to ensure ownership transparency. Businesses need to roadmap their entity management activities aimed to ensure compliance with ownership transparency requirements and provide for its implementation.
Companies with complex ownership structures and multiple legal entities can benefit from legal technology by automating their record-keeping, minimizing human error, ensuring the safety and security of their data and avoiding loopholes in compliance. For more information about how entity management software can streamline your record-keeping related to the ownership transparency register, please don't hesitate to get in touch with the Athennian team for a free consultation and demo.
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