Q1 | Torys QuarterlyWinter 2023

Corporate transparency: Québec enacts new obligations

New obligations are coming into effect on March 31, 2023 for persons and entities required to register with the Québec Enterprise Registrar (REQ). The requirements, which are designed to increase corporate transparency, were passed on June 8, 2021 in Bill 78, An Act mainly to improve the transparency of enterprises. Bill 78 significantly amends the Act Respecting the Legal Publicity of Enterprises (LPA).

The new obligations will primarily require certain persons and entities who are registered to conduct business in Québec pursuant to the LPA to declare certain information relating to the natural persons who are their ultimate beneficiaries, including their names, domiciles and dates of birth.

Who is impacted by the new rules?

The amendments to the LPA set rules relating to the information required to be recorded in the REQ in order to optimize the reliability of information and improve the transparency of enterprises. The new requirements apply to all persons or entities that must be registered with the REQ in accordance with the LPA or that register voluntarily, including Québec private corporations, partnerships, trusts, sole proprietorships and other groups carrying on business in Québec as well as foreign entities which “carry on an activity” in Québec (as such notion is defined in the LPA).

What information needs to be disclosed?

Under the amendments, all natural persons declared on the REQ, including directors, officers and the three shareholders holding the majority voting rights, will be subject to declaring their date of birth and their domicile to the REQ. In addition, all current and future directors declared on the REQ must provide the REQ with a valid copy of identification issued by a governmental authority. This requirement only applies to directors (not to any other related persons). Similarly, partnerships will need to disclose the date of birth and domicile of each partner or, if the partnership is a limited partnership, the birth date and domicile of each general partner and of the three largest contributors to the partnership among the limited (special) partners.

In addition, pursuant to the amendments, certain information concerning the ultimate beneficiaries of the registrants will need to be disclosed, such as the names, domiciles and dates of birth of the ultimate beneficiaries and the “type of control exercised by each ultimate beneficiary or the percentage of shares or units each one holds or of which each one is a beneficiary”. The date at which the ultimate beneficiary became, and if applicable the date at which the person ceased to be, an ultimate beneficiary will also have to be disclosed.

Entities are required to take the necessary measures to locate and identify their ultimate beneficiaries.

The definition of “ultimate beneficiary” includes a natural person who:

  • owns directly or indirectly 25% or more of the voting rights;
  • owns directly or indirectly 25% or more of the fair market value;
  • has influence that could result in control in fact;
  • is the general partner of the registrant; or
  • is the trustee of the registrant.

In the case of natural persons holding shares or units jointly, and the voting rights attached to such shares or units confers on them, together, the power to exercise 25% or more of those voting rights, each of those natural persons is deemed to be an “ultimate beneficiary”.

An entity may have several ultimate beneficiaries, all of whom will have to be reported in the REQ. This applies regardless of an entity’s place of incorporation. The reporting requirements also extends to “ultimate beneficiaries”, regardless of where they are located.

The Government of Québec's website on corporate transparency mentions that “control in fact” of a registrant exists when a person is able to influence the decisions of the enterprise in an important way and refers to articles 21.25 and 21.25.1 of the Taxation Act (Québec), with the necessary adaptations.

Can “indirect” owners be “ultimate beneficiaries”?

The use of the term “indirectly” means that a natural person can be captured by the definition based on indirect ownership of a registrant by a natural person.

In contrast to other corporate transparency requirements in Canada, Québec has opted for a broader concept of indirect ownership that has some similarities to the notion of “beneficial ownership” found in Canadian anti-money laundering legislation and regulations. It will require registrants to notably analyze whether any natural person (or exempt entity) has, through direct or indirect holdings, an interest in shares or units of the registrant which meets or exceeds the 25% threshold or meets the “control in fact” test.

Entities that are exempt from disclosing their ultimate beneficiaries are considered to be natural persons for the purposes of determining the ultimate beneficiaries of non-exempt entities. For instance, if a reporting issuer controls a private company, the reporting issuer will need to be disclosed as an ultimate beneficiary of that private company.

What entities are exempt?

Certain entities are exempt from the obligation to disclose the requested information required by the amendments, such as not-for-profit legal persons established for a private interest, legal persons established in the public interest (such as crown corporations), reporting issuers within the meaning of the Securities Act, financial institutions within the meaning of the Insurers Act, trust companies governed by a federal statute or a statute from another province, banks and associations within the meaning of the Civil Code of Québec.

Will the government release this information to the public?

As of March 31, 2024, the public will be allowed to do a search using the surname and first name of a natural person in the REQ to find out who is linked to a business.

In addition to providing a domicile address, any registrant may also declare the professional address of a natural person whose domicile must be disclosed. If a professional address is disclosed, the information with respect to the domicile of that person will not be publicly available. If no such professional address is disclosed, then the person’s domicile will be public information. As a result, it becomes extremely important to ensure that a professional address is disclosed with respect to all natural persons affected by the new requirements.

Likewise, a copy of identification issued by a governmental authority and the date of birth of a natural person will not be publicly available. This documentation will solely be used by the REQ to determine the reliability of information.

What are the sanctions for not complying?

The penalties and administrative measures existing under the LPA will be applicable for registrants who do not comply with the new requirements. Sanctions can include the cancellation of the registration of the offending enterprises and penalties ranging from $500 to $25,000.

The new rules in practice

Entities currently registered with the REQ to whom the new obligations apply are required to comply by the deadline to file their annual updating declarations. Registrants will be required by the LPA to take the necessary measures to locate and identify their ultimate beneficiaries.

The Government of Québec's website on corporate transparency indicates that the notion of “necessary measures” requires more than simply taking “reasonable measures” and mentions that in many cases, it will require legal analysis. This likely means that a registrant will need to ensure that they have the means to collect and update such information and cannot simply be considered exempt from their requirement on the basis that they do not have access to a specific information.

The fact that as of March 31, 2024, searches by names of individuals on the REQ will be possible is likely to create concerns on the privacy and confidentiality of certain information required to be reported, even if Bill 78 provides a process to maintain the confidentiality of the domicile of individuals for that specific reason.

In summary, Québec’s Bill 78 is more stringent than transparency legislation in other Canadian jurisdictions. This may be a disincentive to foreign companies that are considering doing business in Québec or using Québec corporations as their jurisdiction of choice. As part of their overall strategy, they will need to balance the many benefits of doing business in Québec with the new transparency requirements.

To discuss these issues, please contact the author(s).

This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.

For permission to republish this or any other publication, contact Janelle Weed.

© 2024 by Torys LLP.

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