By May 1, 2020, all private B.C. companies must have a “transparency register” of beneficial owners created and ready for law enforcement officials to inspect.
This transparency register tracks personal information on “significant individuals.” If you are a director or officer of a private company, you are responsible for bringing the company into compliance.
There is good reason to comply, as transparency registers provide a corporate BlockWatch-like community effort to prevent illegal laundering of money through legitimate corporate and other business entities. Yet there may also be reason to withhold information that is not related to anti-money-laundering activities or is afforded protection by privilege.
The mandates of B.C.’s corporate transparency legislation involve:
• identifying “significant individuals”;
• reporting and tracking information on significant individuals (at least annually); and
• permitting certain enforcement officials to access the transparency register.
Recognizing significant individuals
Significant individuals may be categorized by share ownership, rights and abilities, and acting in concert.
Any individual who owns 25 per cent or more of the shares of a company is significant. For most owner-managed companies, the owner/shareholder is the only significant individual.
Family-owned companies, on the other hand, can have unexpected outcomes. Take, for example, a company that did an estate freeze by which a retiring shareholder converted common shares into preferred shares, and the successor shareholder (in such cases often the shareholder’s son or daughter) subscribed for new common shares. The 25 per cent share ownership threshold applies to the total number of common and preferred shares issued, regardless of voting rights. If the number of preferred shares issued is more than 25 per cent of all issued shares of the company, the retired shareholder is significant and must be tracked.
Any individual who owns at least 25 per cent of all shares of a company may hold all or part of those shares as a trustee or agent for another. If the individual holds shares as a trustee, every beneficiary of the trust is a significant individual. If the individual holds shares as a personal or legal representative or agent for another person, the person for whom the shares are being held is a significant individual.
The 25 per cent share ownership threshold also applies to individuals who have indirect control through a chain of intermediaries (such as other companies, partnerships and certain trusts). B.C.’s Business Corporations Act defines indirect control for this context in detail.
Finally, any individual with combined interests that exceed the 25 per cent threshold is significant. Thus, if a trustee holds only 20 per cent of all shares under a trust with several beneficiaries, and one beneficiary personally owns shares of the same company that represent 5 per cent of all shares, that beneficiary’s combined 25 per cent interest meets the 25 per cent threshold.
Rights and abilities
Significant individuals are also identifiable through their rights and abilities – such as the right or ability to elect, appoint or remove a majority of the directors – or by acting in concert with other individuals.
Directors are appointed by shareholders. However, any individual – shareholder or not – who can directly elect, appoint, or remove a majority of the directors of the company is considered “significant” for purposes of the new legislation. For example, if a director of a company does not own shares, but the director’s spouse is a shareholder, the director may nevertheless be significant by being able to exercise direct and significant control over the spouse.
Any individual is also considered “significant” if he or she has indirect control of a right to elect, appoint or remove one or more directors. Indirect control involves chains of intermediaries connecting the individual to the B.C. company.
Finally, any individual able to exercise direct and significant influence over a shareholder is significant. Direct and significant influence exists, for example, when a family business is passed to adult children on condition that major decisions (including the makeup of the board of directors) require the parent’s consent. We strongly advise consulting a lawyer if this situation could apply to you.
Acting in concert
Interests are considered “pooled” among individuals who agree or arrange to exercise their interests, rights and abilities jointly or in concert. Interests are also pooled between an individual and his or her spouse, children or other relative living in the same home. Each pooled individual is significant if the pooled interest meets the 25 per cent threshold of share ownership or the pooled interests together control the right to elect, appoint or remove a majority of the directors of the company.
Reporting significant individuals
On the transparency register, the directors must obtain and provide, for each significant individual:
• full name, date of birth and last known address;
• citizenship or permanent resident status;
• residence for income tax purposes;
• date(s) when the individual became or ceased to be a significant individual;
• description of how the individual is a significant individual; and
• other prescribed information.
Directors must report all information on significant individuals, even if incomplete, and include a description of their compliance efforts. Moreover, they must keep information up to date and confirm it every year.
Enforcement of transparency register
Information on a company’s transparency register is accessible to directors and inspecting officials. Inspecting officials include:
• Canada Revenue Agency;
• B.C. tax authorities including property transfer tax and speculation tax administrators;
• police officers and RCMP officers;
• BC Securities Commission and BC Financial Services Authority (formerly Ficom);
• the Financial Transactions and Reports Analysis Centre of Canada (Fintrac); and
• the Law Society of BC.
This list is not comprehensive as tax, law enforcement, or regulatory authorities can pass information from a transparency register within and outside of Canada.
Inspecting officials may personally attend a company’s records office to review the transparency register. B.C. companies should have a transparency register ready for inspection at any time and may limit the hours for inspection by resolution.
Fines for non-compliance
Directors and officers may be fined up to $10,000 for information or omission that is false or misleading (subject to a due diligence defence). Fines of up to $100,000 may apply to companies and of up to $50,000 to individuals for other failures to comply with transparency register requirements.
Identifying beneficial owners of private companies in B.C. through the “significant individual” tests is not always clear or easy to determine. Even so, adopting this new transparency register requirement is not optional.
Allison Eng (firstname.lastname@example.org) is an associate lawyer with McQuarrie Hunter LLP.