New requirement for OBCA corporations to maintain register of individuals with significant control

The Ontario government has introduced new requirements under Bill 43 that will require private Business Corporations Act (Ontario) (the OBCA) corporations to establish and maintain a register detailing all individual persons with “significant control” over the corporation. The new requirements, which are similar to those enacted for federal companies in 2019 under the Canada Business Corporations Act (the CBCA), become effective on January 1, 2023. Underlying the reforms is lawmakers’ continuing desire for greater transparency of corporate ownership to help combat tax evasion, money laundering, criminal and other serious wrongdoing.

With the January 1, 2023 implementation date fast approaching, OBCA corporations should begin taking reasonable steps now to determine which individuals should be listed in the register. As indicated below, there are scenarios where the application of the rules is not entirely straightforward, particularly in the context of an inter-related group of companies with a complicated ownership structure that may include non-corporate entities such as trusts and partnerships.

Which Ontario companies are caught?

The Ontario rules apply to all OBCA private corporations, except for private corporations that are wholly-owned subsidiaries of a public company. The comparable CBCA provisions do not currently exempt these types of wholly-owned subsidiaries, although new regulations have been proposed that would have that effect. Public companies are not required to comply if they are “offering corporations” or are listed on designated Canadian or foreign stock exchanges (this covers most major world exchanges).

What is significant control?

The new Ontario requirements pertain to all individual shareholders, registered or beneficial, who have “significant control”, direct or indirect, over the corporation.

Share ownership

An individual will be considered to have significant control over a corporation if he or she owns, controls or directs (whether directly or indirectly, such as through a personal holding company or otherwise) shares:

• carrying 25% or more of the voting rights attached to the corporation’s outstanding voting shares; and/or
• constituting 25% or more of the fair market value of the corporation’s outstanding shares.

Control in fact

Significant control will also be deemed to exist when an individual has direct or indirect influence over a corporation which, if exercised, would result in “control in fact” of the corporation. A person who sits at the top of a group of related corporations can be characterized as having significant control of corporations down the chain even in the absence of any direct interest in those downstream entities.

Interpretive issues can arise with the “control in fact” concept. Unlike the CBCA, the new OBCA rules indicate that all relevant factors are to be taken into account in making that determination, but the existence of a legally enforceable ability to change a board of directors or its authority is not determinative. This creates a degree of ambiguity that is only partially solved by the inclusion of certain “arm’s length relationship” exclusions. The new OBCA rules state that, on their own, arm’s length distribution, franchising, licensing, management, supply, leasing and similar agreements or arrangements do not result in control in fact, even though they might affect how a corporation’s business is conducted. The CBCA has no similar exclusions.

Groups

The new OBCA rules also address significant control in the context of groups as follows:

• where a group of individuals jointly own rights and/or interests that meet the 25% test, each member of the group must be disclosed on the register;
• where a group of individuals is party to a voting or similar arrangement in respect of shares of the corporation that meet the 25% test, each member of the group must also be disclosed; and
• unlike the CBCA, the Ontario rules specifically deem certain family members of a person (spouses, children and other relatives that co-habitate with the relevant person) to each be individuals with significant control if, on a collective basis, the 25% threshold is met.

What must included in the new register?

The new register must contain the following information about individuals with significant control over the corporation:

• name, address and birthdate;
• residential jurisdiction for tax purposes;
• date when significant control was obtained and, if applicable, date when significant control ceased;
• description of how the individual qualifies as having significant control (i.e., ownership of a class of shares through a holding company); and
• any other information required by future regulations.

The register must also indicate the reasonable steps undertaken by the corporation, at least once each financial year, to ensure that the register is complete and accurate. The deadline for amending the register is 15 days after the corporation becomes aware of a need for an amendment, whether as a result of the reasonable steps taken by the corporation each financial year or otherwise.

Ontario corporations are entitled to request from their shareholders any information needed for the register. Shareholders have a statutory obligation to reply promptly, accurately and completely, to the best of their knowledge.

The register must be kept at the corporation’s registered office, unless the board designates another Ontario location.

Who can access the register?

Most importantly, the new OBCA register is not available to the public. Access to the register is limited only to the government, law enforcement and certain regulatory authorities (including tax, financial and securities authorities) for purposes that are limited to investigative and enforcement matters. Unlike CBCA corporations, shareholders and creditors of OBCA companies currently have no express statutory rights to access the register.

What are the consequences of non-compliance?

The penalties for non-compliance with the new Ontario register requirements are severe. Every director or officer of a corporation who knowingly:

• authorizes, permits or acquiesces in the contravention of the requirement to maintain a register;
• authorizes, permits or acquiesces in the recording of false or misleading information in the register; or
• provides any person or entity with false or misleading information relating to the register

is subject to a fine of up to $200,000 or to imprisonment for a term not exceeding six months, or both. The same penalty applies to every shareholder of an OBCA corporation who does not reply accurately and completely to the best of its knowledge promptly if the corporation requests information from the shareholder necessary to complete the register.

OBCA corporations that fail to properly create, maintain or update their registers or that fail to respond to proper enquiries concerning it are subject to a fine not exceeding $5,000 in any particular instance.