Clarifying who benefits

Cui bono? "Who benefits?" Cicero says the celebrated judge Lucius Cassius said it first. And what worked for the trial courts of Republican Rome still works today: the first step in understanding any illegal act is usually to find out whose life was improved by it.

In December 2017, federal, provincial and territorial finance ministers signed an agreement to strengthen reporting standards on beneficial ownership of corporations. The agreement was intended to fight tax evasion and money laundering, and Ottawa followed through with amendments to the Canada Business Corporations Act (CBCA) that took effect this past June. The changes require private companies incorporated under the CBCA to maintain registers of "individuals with significant control," or ISCs.

An ISC register was the federal government's response for the roughly 9 per cent of corporations registered at the federal level; all provincial governments are expected to follow suit.

To the politicians, the need for a register was obvious. The Panama Papers and Paradise Papers disclosures had made tax evasion a white-hot political issue. In June, the Canada Revenue Agency estimated that the gross Corporate Income Tax gap for the 2014 tax year to be between $9.4 and $11.4 billion. 

But no one outside government seems to have a practical idea yet of how the registry will work — who must be included, how "significant control" is to be defined, and who gets access to the information in the future. Regulations could help clarify what's expected of federally registered corporations and the law firms that represent them —but a spokesperson for Innovation, Science and Economic Development Canada says the department is still mulling over "whether regulations may be required."

"Corporations are being told they have to make annual determinations of who has influence, but so far they're not being told how to do it," says Karen Hennessey, a partner in Gowling WLG's Ottawa office and head of the firm's corporate practice group.

How the ISC register is supposed to work

Starting June 13, CBCA-incorporated corporations have to maintain registers of ISCs -- defined as people who own, control or direct significant numbers of shares, or who have "significant influence" over a corporation without necessarily owning a large piece of it. (Penalties for non-compliance run to $5,000 for the corporation or between $5,000 and $200,000 and prison terms of up to six months for individuals, depending on the offence.)

The legislation defines a "significant" number of shares as representing 25 per cent or more of voting rights, or 25 per cent of all the shares based on their "fair market value." An individual also counts as an ISC if they own or control a significant number of shares with one or more other people.

That sounds straightforward. It isn't, says Hennessey. "Working out the fair market value of shares in a private corporation can be extremely difficult, especially when there's more than one class of shares," she says.

The work of identifying a company's ISCs also can be complicated by the presence of trusts, says Megan Filmer, a partner at DLA Piper in Vancouver.

"If a trust controls more than 25 per cent of a company's shares, who controls the trust?" she says. "Sometimes identifying the responsible human being for the purposes of reporting can be challenging."

Still, evaluating influence based on share ownership is much easier than evaluating influence that doesn't depend directly on share ownership. Someone with a legally enforceable power to make a change to the authority or makeup of a corporation's board of directors would clearly be an ISC for the purposes of the registry — but what about contingent rights, options to purchase or veto rights? What happens if minority shareholders have side agreements extending their influence without the corporation's knowledge? How deep are corporations expected to delve into identifying everyone who could be described as wielding "significant control"? Cui bono?

"I have already received questions from clients who run CBCA-registered corporations which are wholly owned subsidiaries of public companies," says Filmer. "Do they have the same reporting requirements? At the moment, the answer appears to be 'yes,' they do have to create a register. But it might be something that regulations could clarify."

"Corporations are going to be relying on law firms to tell them who should be listed, and we're going be telling them to the best of our ability — with the caveat that it could all change on the basis of future court decisions or regulations," says Hennessey.

"It could become a question of the federal government telling a corporation, 'You should have known this person had significant influence, you should have dug deeper.' And how can a corporation be expected to know if someone is whispering in someone's ear?"

Even one of the non-governmental organizations that pushed for the registry acknowledges that Ottawa owes corporations some regulatory clarity. "That's a valid criticism," says Sasha Caldera of Canadians for Tax Fairness. "More specificity is needed on what constitutes control and influence. With shareholdings, ownership is easy to determine. Ascertaining control is not so easy."

Privacy anxieties

There is also a question of privacy. The ISC register must include full names, dates of birth, last known addresses and tax jurisdictions. Access to the register is limited to the director designated under the CBCA, to shareholders and creditors (including the Canada Revenue Agency), and to investigative bodies on request.

"The access is strictly limited, which is good. What concerns me is that shareholders and creditors are entitled to the entire registry, which includes dates of birth, and I'm not sure why they need that information," says Hennessey. "It's the DOB access I find most troubling since that's the sort of information you need for identity theft or fraud.

"Corporations could end up sharing this information with third parties, and it has to remain in the registry for six years after someone has ceased to be a person with significant control. Who's seeing it in the meantime? There's no requirement to tell even former shareholders with whom the information was shared, and that's going to lead to significant anxiety."

"This information is, presumably, going to be held by law firms and corporations in their databases. Clients may perceive a risk that the information could be hacked," says Filmer. "That opens the possibility of some people purposefully withholding their information from the registry and risking penalties."

The international trend seems to be tilting toward more widespread transparency in ISC registries. Caldera suggests Canada could follow the U.K.'s example by making a redacted version of the registry open to the public.

"We do want the information to be publicly available. But the privacy argument is a serious one, and there are ways to address it," Caldera says. "In the U.K., the public registry only includes partial birthdates and addresses. Also, Canada has more robust privacy laws than the U.K. does, and it would have to comply with them.

"Still, this is the way the world is going. Canada has been lagging behind when it comes to addressing money laundering and tax evasion. We still these changes as a first step, but only a first step."