Executive Summaries Jan 24, 2023
Adoption of Bill 78 on Transparency Business: Are You Ready?
It is relatively easy, quick and inexpensive in Canada to incorporate a corporation. However, to protect the public, Québec has chosen to counterbalance this ease by imposing a duty of transparency that stands out from most jurisdictions. That's why, as of March 31, 2023, Bill 78, which aims to improve the transparency of enterprises, will come into force. Find out more about its impact and how to prepare for it.
The Quebec Enterprise Registrar (the “REQ”) is the organization responsible for keeping the most important information relating to associations and companies incorporated or carrying on activities in Québec. This includes the names and addresses of directors and principal shareholders, the address of the head office, and much more.
The Québec Government, with the enactment of the Act mainly to improve the transparency of enterprises (the “Act”), wishes to optimize the reliability of the available data in the REQ, promote transparency of enterprises and thus increase public protection and contribute to the fight against tax evasion, money laundering and corruption.
The Act does not broaden the number of persons or businesses required to register in Québec. A business not required to register in Québec today will not be required to do so after the Act comes into force. It is rather the scope of the information to be disclosed and the documents to be provided that is expanded.
What is the Main Change Brought about by this Act?
Persons, trusts and partnerships required to register in Québec (the “Registrants”) under the Act respecting the legal publicity of enterprises (the “ALPE”) will now have to disclose to the REQ, in addition to the numerous information already provided, information concerning their “ultimate beneficiaries”.
An ultimate beneficiary is an individual who has a right to:
- direct or influence the activities of a business; or
- benefit from a portion of its income or assets.
Who Qualifies as an Ultimate Beneficiary Based on a Subjective Approach?
First, on a subjective approach, the ultimate beneficiary of a Registrant is the individual who exercises direct or indirect influence over it so that, if such influence were exercised, the individual would have control in fact over said Registrant. The relevant provisions of the Québec Taxation Act will apply to determine whether such influence exists. Still, a legal and factual analysis must be carried out on a case-by-case basis.
A person exercising control-in-fact, could be, for example, a family member, a creditor or a co-contractor who has control or rights that allow him or her to influence the management of the business.
Now on an Objective Approach Base?
An ultimate beneficial owner of a Registrant is an individual who owns, directly or indirectly, 25% or more of such Registrant's voting rights or fair market value.
While seemingly simple, this objective approach will nonetheless impose a certain rigour in its application because it involves the regular determination of the fair market value of the Registrant and its allocation among the various classes of issued and outstanding shares.
For example, each transaction involving the issuance, transfer, or redemption of a Registrant’s shares is likely to cause a change in the list of ultimate beneficiaries, even if the proposed transaction (such as a redemption of preferred freeze shares) does not change the voting rights or shareholder interest distribution.
A company that may have more than one ultimate beneficiary will have to take the necessary steps to track them and ascertain their identity.
Is it Mandatory to Disclose the Ultimate Beneficiaries?
Certain categories of Registrants are exempt from the requirement to disclose their ultimate beneficiaries, such as:
- legal persons established in the public interest (e.g., Crown corporations, school boards, hospitals, etc.);
- non-profit legal persons;
- reporting issuers within the meaning of the Securities Act;
- trust companies governed by statute;
- financial institutions; and
Special interpretation provisions apply concerning beneficiaries and trustees to determine whether they are ultimate beneficiaries under the Act.
It should be noted, however, that despite using the term ultimate "beneficiary", which may be confusing, trusts that are not subject to the ALPE will not be required to register under the Act. The identity of their beneficiaries and trustees will only be disclosed to the REQ if they are ultimate beneficiaries of a Registrant.
Also, the obligation to disclose the identity of ultimate beneficiaries does not entail the obligation to disclose to the REQ the identity of the various entities (holding companies, trusts, etc.) that may come between a Registrant and its ultimate beneficiaries.
Therefore the new regime will not necessarily shed light on the entire corporate structure between a Registrant and its ultimate beneficiaries.
What Documents and Information Will be Required?
Some may have noticed that the ultimate beneficiary registry is very similar to the Register of individuals with significant control (ISC) that corporations governed by the Canada Business Corporations Act (CBCA) must maintain as of 2019.
However, the Québec system differs in a significant way.
On the one hand, the Act, based on the Act respecting the legal publicity of enterprises, applies to all persons required to register in Québec, not only to corporations governed by the Québec Business Corporations Act. This includes corporations governed by the CBCA or by any foreign law, partnerships and trusts.
On the other hand, unlike the ISC register which is only recorded in the minute book of the companies concerned, the register of ultimate beneficiaries is disclosed to the REQ and is accessible online.
The following information shall be disclosed to the REQ:
- identity of each ultimate beneficiary;
- address of ultimate beneficiaries;
- date of birth of any natural person registered in the REQ;
- type of control exercised by the ultimate beneficiaries;
- date on which a person became an ultimate beneficiary and the date on which he or she ceased to be an ultimate beneficiary;
- copy of a valid identification document issued by a government authority for directors, which the REQ will have to destroy once the registration or update is completed.
These new disclosures will have to be made with the first annual update of a reporting issuer following the coming into force of the relevant provisions of the Act.
This information will be publicly available on the REQ website, except for dates of birth and domicile addresses if a valid professional address has been declared in addition to the domicile address.
Thus, although the obligation to provide a domicile address has not been repealed, the Act partially legitimizes the common practice of disclosing a professional address instead of a domicile address. Not only will this information be accessible on the REQ website, but it is also expected that as of March 31, 2024, the REQ platform will allow searches based on an individual's name to identify the businesses he is the ultimate beneficiary of.
It is intended, however, that the names and addresses of ultimate beneficiaries who are minors, although declared to the REQ, will not be available to the public.
What are the Penalties for Non-Compliance?
Registrants who fail to comply with their registration and updating of information obligations under the ALPE may be subject to penalties and administrative measures.
The applicable administrative measure would be the automatic cancellation of registration, while a penalty would be a fine of between $500 and $20,000, depending on the case.
The Act will force companies doing business in Québec to greater transparency, at the cost of an additional administrative burden. The scope of the information that will be required to be provided to the REQ - and which will be widely available to the public - raises legitimate privacy concerns.
It will be interesting to see if these new requirements deter foreign companies from establishing or doing business in Québec, especially if other Canadian provinces do not adopt similar measures.
Do You Have any Questions? We Can Help You.
To better anticipate the impact this Act could have on your business, do not hesitate to contact our Business Law team, who will be happy to advise you.
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