CRS: Be ready for July 1^st, 2017

April 6, 2017

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CRS entry into force: July 1^st, 2017

The Common Reporting Standard (“CRS”) will impose new obligations on financial institutions, including investment funds, as of July 1st, 2017. These rules are an addition to the existing Foreign Account Tax Compliance Act (“FATCA”), which applies to Canadian investment funds. The entry into force of the CRS means that, as of 2018, at the time of reporting, any investment fund that does not comply with its due diligence and reporting obligations regarding a reportable account it maintains might be subject to penalties.

New guides from the Canada Revenue Agency

Guidance on the CRS
Guidance on the FATCA
Self-certification forms
- for entities: English and French
- for individuals: English and French

The Canada Revenue Agency (“CRA”) recently published new guidance that aims to assist financial institutions in complying with the obligations under the FATCA and the CRS.

Here is an overview of the new measures that will be put in place and of recent publications by the CRA.

CRS

Canada signed the Multilateral Competent Authority Agreement (“MCAA”) on automatic exchange of information on June 2^nd, 2015. Through this agreement, Canada committed to implement the CRS. The purpose of the CRS is to make tax avoidance more complex for taxpayers. It advocates for international cooperation through the establishment of a system for the automatic transmission of tax information among the countries which adhere to it. In Canada, the implementation of this standard will be accomplished by way of an amendment to the Income Tax Act.¹ This amendment will come into force on July 1^st, 2017.

In general terms, the CRS requires financial institutions to disclose certain information to the CRA regarding account holders or beneficial owners who are residents of foreign countries. The CRA will in turn transmit this information to the countries concerned and ensure that the taxes owed to these countries are paid. The CRS defines the due diligence procedures that must be put in place, the financial institutions that have to report, the different types of accounts to report, the taxpayers concerned, and the financial account information to be exchanged. The CRS draws significantly from the FATCA.²

Due diligence

The due diligence procedure requires financial institutions, including investment funds, to identify reportable accounts by collecting information about account holders. The main objective of this procedure is to determine the tax residency of the account holders and their beneficial owners.

Financial institutions are required to collect indicia linked to account holders and request account holders to self-certify their residence status. Any entity or individual who wishes to open an account after June 30^th, 2017, and even before, will have to give this information to the investment fund in order to proceed with the opening of the account and the investment.

Reporting

Every financial institution, including every investment fund, will have to report to the CRA the required information on reportable accounts collected during the due diligence procedure. The reporting is done electronically. General information such as the name, address, foreign taxpayer identification number, jurisdiction, and birth date of the holder will be reported to the CRA if the account is classified as a reportable one. Institutions will also have to communicate the account balance, at the end of the year, and the payments made during the year.

This information will be sent directly by the CRA to the tax authorities in the country of residence of the account holder or of the beneficial owners.

New publications from the CRA

On March 22^nd, 2017, along with the presentation of the 2017 federal budget, the CRA released two new guidance documents, one on the CRS and one on the FATCA, intended for financial institutions. In addition to the guidance documents, the CRA also introduced new online self-certification form templates that can be used by financial institutions in order to ensure that they have obtained all the necessary information to comply with the standards. The use of these forms is not mandatory, but it is recommended by the CRA. Institutions that make the decision to continue using their own forms or the American W8 forms will need to ensure that they meet all their obligations and that their forms allow the collection of all necessary information and attestations from account holders.

Income Tax Act, R.S.C. (1985), c. 1 (5^th Supp.), section XIX.
www.lavery.ca/en/publications, see our newsletter Lavery Capital, No. 4, April 2015.

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February 21, 2024

New corporate transparency requirements in Canada, Québec and the U.S. – What Canadian and Québec companies need to know

Over the last several years, member countries of the OECD, including Canada and the U.S., have committed to various international undertakings dealing with corporate governance. In keeping with these commitments, since 2019, the Canada Business Corporations Act (CBCA) has required business corporations incorporated under the CBCA to prepare and maintain a register of individuals with significant control over the corporation. Nearly all Canadian provinces, including Québec, have also amended their legislation to make control of companies incorporated in their jurisdiction more transparent. For instance, since March 31, 2023, companies registered with the Québec Enterprise Register (REQ) must report their ultimate beneficiaries to the REQ. Providing greater transparency in the control of Canadian businesses is a continuing process, and additional provisions that apply to federal business corporations came into force on January 22, 2024, and others, applicable to businesses registered with the REQ, will come into force on July 31, 2024. The provisions of the Corporate Transparency Act of the United States requiring companies to report beneficial ownership information came into force on January 1, 2024; some of these provisions are of interest for Canadian companies. Canada – Public register of individuals with significant control Since June 2019, business corporations incorporated under the Canada Business Corporations Act have been required to maintain a register of “individuals with significant control” (ISCs) containing the following information: the name, date of birth and last known personal address of each ISC the citizenship, country or countries where the ISCs are residents for tax purposes the date on which each of these individuals became an ISC the manner in which the individual is an ISC and any other information required by the regulation.1 Although federal corporations must make this register accessible to the Director tasked with administering the Canada Business Corporations Act, to shareholders and creditors of the corporation and to investigative bodies, the register was not accessible to the public until recently. On November 2, 2023, the federal legislator amended the provisions of the Canada Business Corporations Act to, among others: allow ISCs to provide an address for service in addition to their personal address provide that a portion of the ISC information compiled by federally incorporated businesses must be sent to the Director tasked with administering the CBCA provide that the Director must make the following information on ISCs accessible to the public: their name their address for reporting purposes if such an address is provided or, failing which, their personal address the date on which they became an individual with significant control and a description of the manner in which each one is an individual with significant control Note that even if the date of birth, citizenship, country or countries where the ISC is a resident for tax purposes and their personal address (if they provided an address for reporting purposes) must be provided to the Director overseeing the Canada Business Corporations Act, this information will not be made public. The Director may, however, in turn provide to any police force, the Canada Revenue Agency and any provincial body that has responsibilities similar to those of the Canada Revenue Agency, bodies that have investigative powers in relation to certain offences, a provincial enterprise register or provincial agency enforcing corporate law in that province all or part of a corporation’s ISC information, which goes beyond the information it makes available to the public. A corporation must send its ISC information electronically through the Corporations Canada website, at incorporation (if incorporated after January 22, 2024), annually and concurrently with the filing of its annual declaration, within 30 days following its merger with another CBCA corporation, within 30 days of the date on which it becomes subject to the CBCA after incorporating under the laws of another jurisdiction, and within 15 days following any changes made to its register of ISCs. These amendments came into force on January 22, 2024. To assist federal corporations in drawing up a list of their ISCs, the Director tasked with administering the Canada Business Corporations Act posted a letter template on its website that federal corporations may send to their shareholders, their ISCs and to anyone who could reasonably be expected to have the relevant knowledge to identify their ISCs.2 The purpose of that letter is to help the corporation in identifying its ISCs. It is mandatory for shareholders to respond to the corporation’s request and failure to respond may result in significant fines and even imprisonment. Québec – Search a natural person by last name and first name Since April 1, 2023, most private businesses that required to register in Québec must report to the Registre des entreprises du Québec the names, residential address and date of birth of each of their ultimate beneficiaries, and the type of control exercised by them or the percentage of shares or units of the corporation owned by these ultimate beneficiaries or of which they are the beneficiaries. In general, an ultimate beneficiary of a business is a natural person who owns or is the beneficiary of 25% or more of the voting rights for that business, who owns or is the beneficiary of 25% or more of its fair market value or who has an influence that could result in de facto control over the business. The information reported on ultimate beneficiaries is accessible to the public and free for anyone consulting the REQ. The requirement to report ultimate beneficiaries applies to almost all businesses registered in Québec and is not limited to businesses incorporated under Québec law nor to business corporations. Therefore, any foreign legal person that is required to register in Québec must report its ultimate beneficiaries. The same applies to partnerships, such as general partnerships and limited partnerships, and some trusts. As of July 31, 2024, it will be possible to search the REQ using the last name and first name of a natural person. Accordingly, from that date, it will be possible to obtain the list of all businesses registered in the REQ of which a person is a director, officer, one of the three shareholders controlling the greatest number of votes and an ultimate beneficiary by searching by his or her last name and first name. The last and first name of the natural person and his or her residential address will appear in the search results. However, if a work address was reported to the register for that person, only the work address will appear. Federally incorporated businesses registered with the REQ A federally incorporated business that does business in Québec must maintain a register of its ISCs under the Canada Business Corporations Act and report information on its ultimate beneficiaries to the REQ. Although most ISCs of a federally incorporated business will also be the ultimate beneficiaries under the Act respecting the legal publicity of enterprises and vice versa, the two acts do not define an ISC and ultimate beneficiary in exactly the same way. A person may be an ultimate beneficiary under the Act respecting the legal publicity of enterprises without necessarily being an ISC under the Canada Business Corporations Act (and vice versa). Consequently, the content of the register of ISCs for a federally incorporated business — and thus information it will have reported to the Director in charge of the Canada Business Corporations Act — may not be identical to the ultimate beneficiary information it will have reported to the REQ. However, federally incorporated businesses that do not do business in Québec are not required to register under the Act respecting the legal publicity of enterprises. All other provinces, except for Alberta,3 have now incorporated provisions into their business corporations legislation requiring corporations registered under the laws of that province to maintain a register of individuals with significant control. As a result, these provisions only apply to business corporations incorporated under the law of the province and, therefore, do not apply to business corporations incorporated under the Canada Business Corporations Act or under the business corporation act of another province. Corporate Transparency Act in the United States coming into force – Impact on Canadian businesses On January 1, 2021, the Corporate Transparency Act, part of the U.S. Anti-Money Laundering Act of 2020, came into force. Just like the amendments made to the Canada Business Corporations Act and to the Act respecting the legal publicity of enterprises (Québec), the aim of the Corporate Transparency Act is to prevent and fight against money laundering, terrorism financing, corruption, tax fraud and other illicit activities, among others, by increasing the transparency of private companies incorporated in or registered in the United States. On January 1, 2024, the reporting requirements in the Corporate Transparency Act to identify “beneficial owners,” which are basically equivalent to ISCs under the Canada Business Corporations Act and “ultimate beneficiaries” under the Act respecting the legal publicity of enterprises (Québec), came into force. Businesses covered by the act and incorporated before January 1, 2024, have until January 1, 2025, to file their first Beneficial Ownership Information Report. Businesses incorporated after that date must file their first report no later than 30 days after the date they first register with a U.S. government authority. Reports on beneficial ownership of businesses are filed with the Financial Crimes Enforcement Network, an agency of the U.S. Department of the Treasury, better known by its acronym FinCEN. Reporting businesses must submit an updated report within 30 days of any change in information previously reported to FinCEN. Reports on beneficial ownership are not accessible to the public and are not subject to the U.S. Freedom of Information Act. The information contained in these reports will be, however, generally accessible to United States law enforcement agencies and United States federal tax authorities. Foreign law enforcement authorities may also be granted access in certain circumstances through United States federal intermediary agencies. Provided they have received the consent of their clients, financial institutions will also have access to the information to facilitate compliance with customer due diligence requirements under applicable law. All corporations incorporated in the U.S. must file beneficial ownership information reports unless they are legally exempt. Exempt businesses include: most businesses whose securities are registered under the Securities Act of 1934 large businesses, i.e., businesses with more than 20 full-time employees in the U.S., having a facility in the U.S., and having reported over U.S.$5 million in gross revenues or sales in the previous reporting period. It follows that in most cases, unless it is exempted, usually because it will qualify as a “large business” due to the number of its employees and its revenues, a U.S. subsidiary of a Canadian corporation will have to comply with the act and report the identity of its Canadian beneficial owners. A reporting business must, among other things, report the full name, the date of birth and the address of all its beneficial owners. The U.S. subsidiary of a Canadian corporation must also submit a copy of the Canadian passport (or from the country of citizenship of the person in question) for each of its beneficial owners. A person is deemed a beneficial owner of a corporation if he or she is a natural person who, directly or indirectly, exercises substantial control over the reporting corporation, or owns or controls at least 25% of the corporation’s ownership interests (shares, units or others), in voting rights or in value. The definition of “substantial control” for the purposes of the Corporate Transparency Act is much broader and more specific than what is found in equivalent Canadian legislation. An individual has “substantial control” over a reporting corporation under the Corporate Transparency Act if such individual (i) is a senior officer in the corporation, (ii) has authority to appoint or remove certain officers or a majority of the directors (or similar body) of the reporting corporation, (iii) is an important decision maker of the reporting corporation or (iv) has any other form of substantial control over the reporting corporation. The Corporate Transparency Act imposes serious penalties on individuals who willfully fail to file or update beneficial ownership information or who willfully file false information. These penalties include civil penalties of up to U.S.$500 per day of violation, fines of up to U.S.$10,000, as well as potential; imprisonment for a period up to two years. Note that the act contains a presumption against senior officers in respect to reported information that is false, incomplete or not up to date. These officers could therefore be held personally held liable for civil penalties and fines and could be subject to imprisonment if the reported information proves to be false or incomplete or not up to date. Senior officers must therefore be especially vigilant and ensure that the reporting requirements under the Corporate Transparency Act are met. The Director tasked with administering the Canada Business Corporations Act has posted a template for the register of ISCs on its website. This register can be found at: https://ised-isde.canada.ca/site/corporations-canada/sites/default/files/documents/2023-12/04.3_isc-register-template_en.xlsx This template can be found at: This template can be found at: https://ised-isde.canada.ca/site/corporations-canada/sites/default/files/documents/2023-12/06.1_request_for_information_template_isc_en.pdf The three territories, Yukon, Northwest Territories and Nunavut, still have yet to amend their legislation to require a register of individuals with significant control to be maintained for business corporations incorporated under the business corporation acts of those territories.

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February 15, 2024

Federal budget: Measures to support the development of renewable energies and technologies

With climate change continuing to be a topic of concern across the international community, Canada has recently taken another step to support the development of renewable energies and technologies. In the 2023 budget tabled on March 28, 2023, the Canadian federal government unveiled new tax incentives aimed at supporting investments in both renewable energies and certain clean technologies. These incentives can be grouped into five main Investment Tax Credits (ITCs). Clean hydrogen The Clean Hydrogen ITC covers investments in equipment that will be used in clean hydrogen projects. This refundable credit of up to 40% of investments will be applied to equipment that becomes available for use no later than 2034. Clean electricity The Clean Electricity ITC covers investments in the production, transmission and storage of clean electricity. This refundable credit of 15% of eligible investments will also be available until 2034 and will cover the renovation and refurbishment of existing facilities used in the aforementioned activities. Clean technology manufacturing The Clean Technology Manufacturing ITC is a credit equal to 30% of the cost of acquiring certain equipment and machinery used in the manufacturing, processing or extraction of certain minerals and substances used in clean technology. Here again, the credit will only be available until 2034. The 2023 federal budget also expanded certain credits introduced in the 2022 federal budget, namely the Clean Technology ITC and the Carbon Capture, Utilization and Storage ITC (CCUS ITC).The Clean Technology ITC was originally announced as a credit available for investments in certain clean electricity-generating property and has now been expanded to include certain geothermal energy systems. It provides for the reimbursement of up to 30% of investments. As for the CCUS ITC, it provides for the reimbursement of 37.5% to 60% of certain expenses incurred in projects aimed at capturing, storing and processing carbon dioxide. All of these credits are subject to numerous conditions relating to the types of projects or property involved, the structure of the entity applying for the refundable credit and even the terms of employment of the workforce assigned to these projects. As such, consulting a tax adviser prior to investing in clean technology is recommended in order to maximize available ITCs. Although these measures have not yet been fully fleshed out and adopted, they will apply retroactively to 2022 or 2023, as the case may be, making it all the more important to get the right advice as soon as possible as to their implementation. Our tax team is well equipped to help you navigate the complexities of these new credits and will be happy to work with you on your new green projects.

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November 21, 2023

Clarifications regarding the application of mandatory disclosure rules to severance agreements

On November 2, 2023, in response to certain controversy, the Canada Revenue Agency (“CRA”) sought to clarify the application of the new disclosure rules, in force since June 22, 2023. The CRA’s comments relate, in particular, to the impact of reporting obligations on severance agreements, a topic we initially covered a few weeks ago1. We believe it is appropriate to go over these clarifications. As a reminder, the disclosure rules generally apply to so-called avoidance transactions carried out to obtain a tax benefit and presenting one of the following three generic hallmarks: contingent fee arrangements, confidential protection or contractual protection. At first glance, the interpretation of these hallmarks suggests that severance agreements involving an employee’s undertaking to indemnify their employer are subject to reporting obligations. However, in response to questions from a number of legal experts, the CRA commented on the disclosure rules, specifying, in particular, that a tax indemnity granted under a severance agreement is not subject to the reporting obligation where it occurs in a business or financial context between persons dealing at arm’s length, and acting freely and prudently. In this regard, the CRA pointed out that the contractual protection included in such an agreement would not be considered a generic hallmark insofar as it does not cover a tax treatment giving rise to an unwarranted benefit. The CRA gave as an example a settlement reached between an employer and employee further to dismissal, harassment complaints or other employment-related recourses, providing for severance pay or warranted damages. Even if the employee were to undertake to reimburse the employer in the event of unexpected tax treatment, this type of agreement would not give rise to reporting obligations. Although the CRA’s clarifications were meant to clear things up, they did not definitively establish how the mandatory disclosure rules apply to severance agreements. A certain level of uncertainty remains with regard to severance agreements with no real legal basis awarding tax-free damages to an employee. In such a case, it would be difficult to argue that the business context warranted a favourable tax treatment for the employee. In the case of an agreement providing for the payment of unwarranted damages, and where contractual protection extends to the tax treatment of the amount paid, the avoidance transaction may, despite the CRA’s comments, require disclosure to the tax authorities. One thing is certain: tax indemnity clauses may well disappear from severance agreements. Ultimately, the new rules reinforce the principle that the granting of tax-free damages should be limited to circumstances that warrant it. Quebec case law has long established that the mere fact of losing one’s job does not give rise to damages, barring exceptional circumstances. In short, the CRA’s guidelines do not have the force of law, and may be amended or revoked at any time. Consequently, maintaining a cautious and conservative approach will be crucial when determining whether the new mandatory disclosure rules apply to severance agreements. Our team of employment law and tax professionals is available to answer your questions about these major changes and help you make informed decisions when negotiating severance agreements. Termination agreements: New reporting requirements apply!

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November 1, 2023

Mining industry: reduction of red tape aimed at facilitating lithium exploration in Quebec

Canada’s finance minister unveiled a series of legislative proposals on August 4, 2023 aimed at making significant changes to the flow-through share regime, particularly as regards lithium exploration. Although a number of these changes had already been announced in the 2023 federal budget, e.g. the inclusion of lithium brine in the “mineral resources” definition, they had not really affected junior exploration companies in Quebec since this type of lithium is virtually non-existent in the province. More targeted change However, the recent proposals include a more targeted change for mining companies exploring for traditional “hard rock” lithium, which is much more common in Quebec. These proposals include amending the definition of “mineral resources” to systematically includetraditional hard-rock lithium in the list set out in section 248 of the Income Tax Act (the “Act”). The consequences As a consequence of this change, the requirement for mining companies to obtain a certificate issued by Natural Resources Canada will be eliminated. The application process for this certificate represented a heavy administrative burden for exploration companies. Moreover, lengthy processing times often delayed the conclusion of flow-through share subscription agreements. This change is a timely one: growing numbers of companies are refocusing on exploring for lithium rather than for more traditional metals such as gold. This reflects not only the market’s infatuation with lithium, but also the recent 30% tax credit potentially available to investors incurring mining exploration expenses involving critical metals. Proceed with caution For the time being, however, these legislative proposals only apply to lithium; they do not cover all critical minerals. Mining exploration companies should proceed with caution if they plan to explore for other types of critical minerals such as graphite and rare earth elements, for example. This is because a mineral resources certificate issued by Natural Resources Canada may still required in those cases. Our team of professionals specializing in securities, mining law and taxation is available to answer any questions you may have concerning this new measure and to guide you in arranging a successful flow-through financing.

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CRS: Be ready for July 1st, 2017

CRS entry into force: July 1st, 2017

CRS