Beneficial Ownership Rules – Part 1: The Basics

In Part 2 released on June 11, we identify whether a business valuation may be required for the new beneficial ownership rules.

Starting June 13, 2019, new reporting requirements are in effect for Canadian companies. Intended to help combat money laundering, corruption, and the financing of terrorist activities, the new rules require companies to annually track the identity of their beneficial owners. The Government of Canada believes these new rules will remove the relative anonymity provided through corporations, to help investigators unveil the true identity of individuals behind corporate transactions.

Do the Beneficial Ownership Rules Apply to Me?

Although there are some exceptions, the new rules generally apply to private corporations that are federally incorporated in Canada.

The new beneficial ownership rules do not currently apply to:

• Publicly-traded companies
• Life insurance companies, brokers, and agents
• Financial entities and securities dealers
• Private corporations that are provincially incorporated (for example, incorporated under the Ontario Business Corporations Act)

The Standing Committee on Finance has recommended that the beneficial ownership rules should eventually apply to private corporations that are provincially incorporated. British Columbia recently enacted similar legislation, and the other provinces are expected to follow.

What is Required for Compliance?

To be in compliance with the beneficial ownership rules, corporations will be required to annually track the following information:

• The names and addresses of all beneficial owners with significant control of the corporation
• The names of all directors of the corporation
• Other information on the ownership, control, and structure of the corporation

What is “Significant Control”? Who is a “Beneficial Owner”?

Under the beneficial ownership rules, an individual has “significant control” if they hold either 25% of the total voting rights or 25% of the fair market value of the corporation’s share capital. This applies to both the registered owner and the “beneficial owner.”

A “beneficial owner” could be the registered owner of a corporation’s share capital. However, the definition applies to a much broader group of individuals, including individuals who:

• Own or control the shares of the holding companies that own the corporation
• Have direct or indirect control of the corporation
• Have direct or indirect influence on the corporation that, if exercised, would result in control

If individuals act jointly or in concert with others, their ownership interests are considered on a combined basis to determine whether they meet the beneficial ownership conditions.

Where Do I Go From Here?

Unless your corporation has very simple ownership structure, determining who is the true beneficial owner of a corporation can be complex. Complexity, however, does not appear to justify lack of compliance. Penalties for contravention are significant, at up to $200,000 per offence or up to six months of imprisonment, depending on the nature of the offence.

For further information or to discuss how the beneficial ownership rules could affect you more specifically, contact Davis Martindale today. We would be happy to help.

You may also be interested in: Part 2: Beneficial Ownership Rules – Valuation Considerations