The ever-expanding scope of the corporate profile

I suppose I've been rather old-fashioned in my approach to setting up corporate and ownership structures, as I've always believed in the efficacy of Occam's Razor being applied:

• every component entity should have genuine economic substance
• the simplest solution is the best
• oftentimes it is also the cheapest to administer

That's why I'm often bemused when I see owners devising a web of relationships when setting up their affairs, such as this one that was filed in a 2009 CCAA proceeding:





The owners' identities here (anonymized in the court filings here as AR, MF and PB) can be easily determined through a standard Internet search, but their beneficial ownership in these companies (upon analyzing the investment flows) comes out to 12.5%, 12.5% and 75% respectively in the destination company of White Birch Paper Company, being an unlimited liability corporation incorporated in Nova Scotia. The choice of intermediaries was most likely driven by US tax law, as Canadian ULCs, limited partnerships, S corporations and limited liability companies (the latter two being uniquely American in nature) are regarded as flow-through entities for income tax purposes there. The fact that the three principals gained their primary wealth from real estate development may also explain their preference for such ornate ring-fencing of assets.

White Birch, in turn, was the parent company for all the group companies shown below:

The problem with ornate structures

Setups like this are especially problematic when organizations are working to secure financing, as it's only logical to assume that investors need to know with whom they are placing their money. Knowing who the principals are, and their previous experience (whether notorious or benign) is only common sense, but the stories concerning securities scandals, phoenix activities, money laundering and terrorism financing that pop up in the business papers only too frequently remind us that this is a matter that should never be taken for granted. Canada, unfortunately, has been relatively naïve in guarding against this, resulting in what has been called "snow washing", and our financial institutions and professional advisers still need to get up to snuff with the rest of the world.

The current controls

The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC)currently governs what financial institutions and other money handlers must do to deal with the risks of money laundering and terrorism financing in the Canadian financial system. In that regard, there are specific guidelines dealing with:

• "know your client" requirements, including those for
• properly identifying individuals and entities
• identifying their business relationships
• determining significant beneficial ownership interests in entities
• identifying any third parties that may have effective control over entities
• identifying any politically exposed persons and those connected with them
• ongoing monitoring of such information
• reporting any suspicious transactions or suspected terrorist property concerning such persons to FINTRAC

Much of this is self-explanatory, but some expansion is required to explain what is covered by the concept of "politically exposed persons". The following table will help to identify who is included:

Class of persons	Description
Foreign PEP	head of state or head of government;   member of the executive council of government or member of a legislature;  deputy minister or equivalent rank;   ambassador, or attaché or counsellor of an ambassador;  military officer with a rank of general or above;  president of a state-owned company or a state-owned bank;  head of a government agency;  judge of a supreme court, constitutional court or other court of last resort; or  leader or president of a political party represented in a legislature.
Domestic PEP	Governor General, lieutenant governor or head of government;  member of the Senate or House of Commons or member of a legislature;  deputy minister or equivalent rank;  ambassador, or attaché or counsellor of an ambassador;  military officer with a rank of general or above;  president of a corporation that is wholly owned directly by Her Majesty in right of Canada or a province;  head of a government agency; judge of an appellate court in a province, the Federal Court of Appeal or the Supreme Court of Canada;  leader or president of a political party represented in a legislature; or  mayor or other head of a municipal council
Head of an international organization (HIO)	the head of an international organization established by the governments of states; or  the head of an institution established by an international organization.
Family member of a PEP or a HIO	their spouse or common-law partner;  their child;  their mother or father;  the mother or father of their spouse or common-law partner; and  a child of their mother or father (sibling) Note: in this case, a child does not include a step-child
Close associate of a PEP or a HIO	business partners with, or who beneficially owns or controls a business with, a PEP or HIO;  in a romantic relationship with a PEP or HIO, such as a boyfriend, girlfriend or mistress;  involved in financial transactions with a PEP or a HIO;  a prominent member of the same political party or union as a PEP or HIO;  serving as a member of the same board as a PEP or HIO; or   closely carrying out charitable works with a PEP or HIO.  Note: the above list is not exhaustive

One might think that such controls might already be comprehensive enough, but the Canadian rules have a lot of holes built into them, as has been noted by Transparency International here. We still have a long way to go to comply with the principles adopted by the G20 in 2014 concerning the disclosure of beneficial ownership in entities.

Identifying who controls an entity

Trusts that earn income and/or make distributions are required to file form T3APP, together with a copy of the instrument creating the trust, in order to obtain a trust account number for reporting purposes.

As of July 2017, Canada adopted the Parts XVIII and XIX of the Income Tax Act, which respectively implemented the mandatory identification of US persons subject to IRS reporting obligations, as well as the Common Reporting Standard which mandates the disclosure of a passive non-financial entity's controlling persons. Disclosure is by way of filing form RC519 (or one with equivalent information) with the entity's financial institution.

The next steps underway

In December 2017, Canada's ministers of finance issued an Agreement to Strengthen Beneficial Ownership Transparency, which stated that all jurisdictions had agreed in principle to ban the use of bearer shares by Canadian corporations, and to compel them to maintain registers of beneficial ownership to show who really are the significant investors in them.

Bearer shares

While shares are ordinarily subject to entry on a register to record who owns them, bearer instruments do not require registration at all in the company records, and they can be controlled merely by whoever holds possession of them. Their abolition is definitely a no-brainer for establishing another formal link in tracing their real owners.

Canada chose to implement this in 2018 as part of Bill C-25, which was advertised as being primarily a measure promoting gender equity on boards. It received Royal Assent on 1 May 2018, whereby the Canada Business Corporations Act had the following new section inserted:

29.‍1 (1) Despite section 29, a corporation shall not issue, in bearer form, a certificate, warrant or other evidence of a conversion privilege, option or right to acquire a share of the corporation.

(2) A corporation shall, on the request of a holder of a certificate, warrant or other evidence of a conversion privilege, option or right to acquire a share of the corporation that is in bearer form and that was issued before the coming into force of this section, issue in exchange to that holder, in registered form, a certificate, warrant or other evidence, as the case may be.

One problem immediately comes to mind on reading this, in that there is no requirement for existing bearer shares to be converted into registered form by a specific date. That appears to preserve existing arrangements that may now be in effect, and it suggests that Canada will still be offside on the world stage in this matter.

Beneficial ownership

While financial institutions and others handling money have been obliged to maintain records on beneficial ownership of their corporate clients for some time, corporations have not had the same duty to maintain such records internally. It had essentially been a guessing game on the outside, where arrangements had been seen to be opaque. I can also easily see that bureaucratic inertia or wilful blindness could impede upon the due diligence that would be necessary to make these controls effective.

Bill C-25 turned the screws partially on this as well, by amending another provision of the CBCA to read as follows:

153 (1) Shares of a corporation that are registered in the name of an intermediary or their nominee and not beneficially owned by the intermediary must not be voted unless the intermediary, without delay after receipt of the prescribed documents, sends a copy of those documents to the beneficial owner and, except when the intermediary has received written voting instructions from the beneficial owner, a written request for such instructions.

That should bring some of these arrangements out into the open. However, we still need more complete information as to who those beneficial owners may be at any given time, and not just at shareholder meetings.

It's coming as Part 4, Division 6, in Bill C-86 that was introduced in the House of Commons on 30 October 2018. The latest of the increasingly weighty omnibus finance bills, to become known as the Budget Implementation Act, 2018, No. 2, that particular portion within it will amend the Canada Business Corporations Act to provide "for a corporation that meets certain criteria to keep a register of individuals with significant control and requirements respecting the information to be recorded in it." It's very notable that no press release has been issued for this particular matter, so we should pay special attention to it as a result.

This builds upon s. 11.1 of the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations (SOR/2002-184), which requires financial institutions and others handling money to keep records of this matter, and specifically with respect to:

(a) in the case of a corporation, the names of all directors of the corporation and the names and addresses of all persons who own or control, directly or indirectly, 25 per cent or more of the shares of the corporation;
(b) in the case of a trust, the names and addresses of all trustees and all known beneficiaries and settlors of the trust;
(c) in the case of an entity other than a corporation or trust, the names and addresses of all persons who own or control, directly or indirectly, 25 per cent or more of the entity; and
(d) in all cases, information establishing the ownership, control and structure of the entity.

It's only logical that the corporations themselves will now have a positive duty to maintain and regularly update this information. It's not unique, as similar requirements are being instituted around the world, and the UK adopted its particular scheme in April 2016 under Part 21A of the Companies Act 2006 and the connected The Register of People with Significant Control Regulations 2016 (2016 No. 339).


The current federal Bill will provide, effective six months after Royal Assent, for any corporation constituted under the CBCA to maintain a register, updated annually, that would include:

• the names, the dates of birth and the latest known address of each individual with significant control;
• the jurisdiction of residence for tax purposes of each individual with significant control;
• the day on which each individual became or ceased to be an individual with significant control, as the case may be;
• 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;
• any other prescribed information; and
• a description of each step taken annually to ensure that the above information is accurate and up to date.

And who is an "individual with significant control"?

• A holder of a significant number of shares, whether as a registered holder, beneficial owner, or someone with "direct or indirect control or direction over them".
• Each of two or more individuals that hold an interest or rights in a significant number of shares, or where a right is subject to any agreement or arrangement by which such a right is to be exercised jointly or in concert by such individuals.
• In each of the above cases, a "significant number of shares" is any number of shares that constitute 25% of either the voting rights or market value.
• Someone "who has any direct or indirect influence that, if exercised, would result in control in fact of the corporation".
• Any other individual "to whom prescribed circumstances apply."

"Influence" and "control in fact" are not defined, but similar guidance in the UK suggests that:

• "control" is where a person can direct the activities of a company
• "significant influence" is where a person can ensure that a company adopts activities that are desired by him/her
• possessing an absolute veto over activities (other than for protecting minority interests), or over appointing a majority of the board of directors, will definitely suggest such power
• neither factor has to be exercised with a view to gaining economic benefits from the policies or activities of the company
• control can also occur where someone directs or influences a significant section of the board, or where the board regularly consults with, and is therefore influenced by, that person; this also extends to similar influence over a majority of the shareholders' votes

Any corporation that is a "reporting issuer" under any provincial securities act, a member of a "designated stock exchange" under the Income Tax Act,  or a member of a prescribed class, will be exempt from maintaining such a register. That effectively restricts the régime to private companies.

What are we not yet doing?

There are still some significant matters being addressed elsewhere that Canada has not yet touched:

• identifying the ultimate beneficial owner of an entity
• disclosing the controlling persons of active non-financial entities
• identifying the settlors, trustees, beneficiaries and controlling persons of trusts and similar arrangements (but that is scheduled to change in 2021)
• greater duties placed on nominee shareholders and directors in disclosing who they represent (as in this guidance from Guernsey)
• more stringent requirements for entities to possess a genuine economic substance, as opposed to being just a mere shell or conduit (as is currently being discussed in Jersey)
• more formal obligations on individuals and entities (such as what this bank is requesting in the Isle of Man) to disclose their rationale for being in business and operating an account at a financial institution, as well as more basic information such as their actual residential address (as opposed to an address for service of documents)

I know some managers at these institutions are more diligent than others in gathering this data, but there are many clients (and professional advisers) out there that are somewhat less than forthcoming in giving it. I regard that last attitude as being more wasteful in time than being upfront would otherwise be. I've operated with the latter attitude in my affairs, and it really does work.