Corporate transparency: the difference between the federal and provincial systems

Since 2018, federally-regulated corporations have been required to maintain a register of individuals with significant control ("ICP"). The purpose of the register is to be able to determine which individuals control a given corporation, even if shares are held through another corporation, or by a nominee.

On March 31, 2023, Quebec legislators followed suit with the concept of "ultimate beneficiary" disclosure. Here's a look at some of the differences between the federal and provincial corporate transparency regimes.

Scope of application

Under the federal business corporation regime, only companies incorporated or continued under the Canada Business Corporations Act are subject to the requirement to keep an IBO register.

In contrast, the provincial legislator chose to include the rules for declaring ultimate beneficiaries not in the Business Corporations Act, but in the Act respecting the legal publicity of enterprises. Thus, subject to a series of exceptions provided for in the Act, all companies registered in Quebec, regardless of their incorporation regime, must declare their ultimate beneficiaries. Note that even federally incorporated companies must declare their ultimate beneficiaries in Quebec.

Disclosure method

At the federal level, the law currently prescribes only a register of individuals with significant control, in the same way that a corporation must keep a securities register. Federal corporations have no obligation to disclose IBOs in Corporations Canada's public register, and so the list of IBOs is not public. However, a bill to make the register public has been tabled and is currently before Parliament.

The declaration of ultimate beneficiaries in Quebec does not constitute a "register" per se, but rather a disclosure obligation in the enterprise register, just as the list of directors, the three principal voting shareholders, and other information provided for in the Legal Publicity Act must be disclosed. There is therefore no obligation to create a new register to be kept on the books of a provincial corporation , although a company could do so voluntarily.

Notion of indirect holding

Provincial rules require disclosure of individuals holding, even indirectly, a number of shares conferring at least 25% of the voting rights and corresponding to at least 25% of the fair market value of all outstanding shares. Thus, when shares are held by corporations, the percentage that a given individual holds indirectly must be calculated through the chain of shareholdings. For example, if a corporation ("Company A") owns 100% of the shares of another corporation ("Company B"), and an individual owns 50% of the shares of Company A, that individual is considered to indirectly own 50% of the shares of Company B, and should be disclosed as the ultimate beneficiary.

Under the federal system, it's more a question of "control" of a significant number of shares (conferring at least 25% of voting rights and FMV). If we return to the previous example, the individual in question would not have to be registered in the IBO register for his sole holding of shares in Company B, since he does not control the shares of Company B. If, however, he did hold 51% of the shares of Company B, he would not have to be registered in the IBO register. If, however, he held 51% of the shares in Company A, he would control the shares in Company B and would therefore be an IBO. With a few exceptions, control is generally understood as the right to elect the Board of Directors of a given company (50% + 1).

Fines and penalties

The federal regime provides for substantial fines and penalties in the event of contravention of the IBO registry rules. A person who knowingly contravenes the rules could be fined up to $200,000 and imprisoned for up to 6 months. In addition, a parliamentary bill is expected to increase the maximum fine to $1 million and the maximum term of imprisonment to 5 years.

For the time being, provincial fines are the same as for any other contravention of the legal publicity provisions, i.e. a maximum of $5,000 for individuals and $10,000 in other cases.