New Filing Requirements for Canadian Federal Corporations – Individuals with Significant Control (ISCs)
Starting January 22, 2024, all federal corporations created under the Canada Business Corporations Act (CBCA) are required to file information regarding individuals with significant control (ISCs) with Corporations Canada.
1. Who is an ISC?
According to the CBCA, an ISC is an individual (see: human person) that:
- owns, controls or directs 25% or more of the shares of a corporation individually, jointly or in convert with one or more individuals;
- has control over the corporation without owning any shares; or
- meets a combination of any of the above two factors.
If a corporation’s shareholder is an entity (for example, a corporation, partnership, or trust), the individual(s) in control of such entity must be identified as ISCs.
Additionally, if multiple family members jointly own more than 25% of the shares of a corporation and one family member has sufficient influence over the other family members, such influential individual may be considered an ISC.
2. What information will be filed?
The following information regarding ISCs must be filed with Corporations Canada:
Information that will be made public:
- full legal name;
- date on which the individual became an ISC;
- description of the ISC’s significant control; and
- mailing address.
Information that will not be made public:
- date of birth;
- country of citizenship;
- country of tax residency; and
- residential address.
If an ISC is less than 18 years of age, information will not be made publicly available until such individual turns 18 years old.
You may file an application to not make the information about an ISC public if:
- making the information publicly available presents or would present a serious threat to the safety of the individual;
- the ISC is declared incapable either by court or under provincial or territorial laws; or
- making the information publicly available would go against the Conflict of Interest Act or a similar legislation of a province or territory.
3. Who is excluded from the ISC filing requirements?
Most federal corporations are required to comply with the new filing requirements, however, the following corporations are excluded:
- non-federal corporations (for example, a corporation incorporated under a province’s corporations act);
- a reporting issuer under provincial securities legislation or a wholly-owned subsidiary of a reporting issuer;
- a public corporation that trades its securities on a stock exchange designated by the Income Tax Act or a wholly-owned subsidiary of such a corporation; or
- a crown corporation or a wholly-owned subsidiary of a crown corporation.
4. What does this mean for you?
If your corporation is federally incorporated and not exempt from the filing requirements, failure to maintain and file the ISC information may result in directors or officers facing penalties up to $1,000,000 or possible imprisonment, as well as potential fines to the corporation of up to $1,000,000 and involuntary dissolution.
Please reach out to the Voyer Law team to discuss your annual filing requirements and to maintain your corporation in good standing.
Investors don’t care where your Startup is Incorporated
Many founders I speak with are concerned about where their startup is incorporated and how this could impact fundraising opportunities in the United States. In reality, this concern is unfounded.
Any sophisticated investor considers the product/service, team, market potential and other commercialization factors before, if at all, considering where a startup is incorporated. In some circumstances, an investor may request that the startup alter its jurisdiction of incorporation but whether or not they proceed with the investment is determined 90% by quality of the company over jurisdiction of incorporation. As relayed to me by Canadian founders, “if an investor passes because you’re a Canadian company, that’s not the real reason for passing“.
Where an investor requires your startup to be incorporated in the U.S. there is a simple process for creating this structure that I discussed in a previous blog post – The Canadian-U.S. Swap: Moving an Early-Stage Startup to the U.S.
Canadian founders should focus on building a compelling product/service and not waste energy worrying about minutia of incorporation. Sell investors on your company and any issues concerning where your company is incorporated can be worked out between your legal counsel and investors.
Revisiting “Should I Incorporate my Canadian Startup in Delaware?”
It seems Canadians are still wrestling with whether to incorporate their startup in Delaware. I wrote about this question back in September 2014 and since then the post has racked up over 1,000 views. Back then, I concluded with this piece of advice, which I still stand by:
Don’t lock yourself into Delaware before you know where your investment comes from. Based upon the cost and complexity of operating a Delaware startup from Canada, I recommend that you incorporate in Canada at the start. Where a future U.S. investor requires you to incorporate in Delaware (or another state) your legal advisors can assist with this transition. Conversely, Canadian investors may prefer to invest in a Canadian company!
Tip: your product/service is important, not the place of incorporation.
Fully-Diluted Calculations
Congratulations, you received a term sheet! While the main terms, such as valuation, are certainly important, there are numerous less noticeable terms that can have just as great an impact. One such term is “fully-diluted”.
What is a fully-diluted calculation?
A fully-diluted calculation assumes that all options, warrants and other rights to acquire stock have been exercised or converted, regardless of whether they are actually vested or exercisable at the time of the offering.
Let’s illustrate the impact of a fully-diluted calculation compared to a funding round without full dilution.
Startup has issued 1,000,000 shares and 100,000 options. None of the options are vested. Investor desires to take 10% interest in the company.
Not fully-diluted: Startup will use the number of issued shares only to calculate the 10% and will issue investor 111,100 shares (representing 10%).
Fully-diluted: Startup will use the total number of issued shares and options to calculate the 10% and issue the investor 122,200 shares. However, since none of the options are vested, and may never vest, investor actually acquired a present-day interest of 10.89%.
While the above example seems benign given the .89% difference, that percentage could be worth a large sum if the company exits in the future. What if you are selling an almost controlling interest in the company, perhaps 23.5%? In that case, a fully-diluted calculation could result in a sale of a 25%+ (and controlling) present-day interest depending on the number of outstanding options etc. In other situations, an investor may request that the entire option pool (even if no options have been granted) be factored into the fully-diluted calculation – in the case of a 12% option pool, this term would have a substantial impact.
In sum: while you may not be able to avoid a fully-diluted calculation in a term sheet, it’s important to understand its impact and to negotiate with that impact in mind.