Global Affairs Canada (GAC) has issued new guidance on the deemed ownership rules under Canada’s sanctions laws. These rules establish circumstances in which a company that is not sanctioned is deemed to be controlled by a sanctioned person, such that the company's property is treated as the property of the sanctioned person and subject to a dealings prohibition.
As such, the guidance will have significant implications for Canadian businesses complying with Canadian sanctions.
We discuss the guidance and its implications below.
Background: Canada’s Deemed Ownership Framework
Canada’s sanctions laws prohibit persons in Canada and Canadians abroad from dealing in property that is owned, held or controlled, directly or indirectly, by sanctioned persons.
In 2023, Canada amended two sanctions laws, the Special Economic Measures Act (SEMA) and the Justice for Victims of Corrupt Foreign Officials Act (JVCFOA), adding provisions that established three circumstances in which a business is deemed to be controlled by a sanctioned person such that the property owned, held, or controlled by the business will be treated as the property of that sanctioned person:
- the person holds, directly or indirectly, 50% or more of the shares or ownership interests in the entity or 50% or more of the voting rights in the entity;
- the person is able, directly or indirectly, to change the composition or powers of the entity’s board of directors; or
- it is reasonable to conclude, having regard to all the circumstances, that the person is able, directly or indirectly, and through any means, to direct the entity’s activities.
While the first criterion is consistent with legal control, the second and third criteria significantly broadened the conception of control, giving rise to uncertainty in the business community about how to apply these provisions in practice.
New Guidance on Application of Control Tests
1. 50% Ownership or Voting Rights Test
GAC specifies that this test is met if listed person(s) collectively hold 50% or more of the shares or ownership interests, or voting rights in an entity. Holdings of multiple listed persons are to be aggregated such that the minority ownership interests of two or more listed persons (even if not associated or acting in concert) may constitute control.
2. Board Control Test
This test addresses whether a listed person has the power to change the composition or powers of an entity’s board of directors. This would include having the right to appoint or remove the administrative, management or supervisory bodies of an entity; controlling alone a majority of shareholders' or members' voting rights; or the ability to appoint the majority of directors by virtue of being a major shareholder.
3. De Facto Control Test
This test refers to circumstances where a listed person exercises de facto influence over an entity’s activities. GAC notes that the following factors may be relevant in determining whether this criterion is met, including whether a listed person:
- can direct an entity’s activities by virtue of being the largest shareholder.
- has the right to exercise dominant influence pursuant to the constating documents or through contractual means (e.g., a management and control agreement or a shareholders’ agreement).
- has a buyback clause in their favour.
- transfers ownership, especially if there is an absence of compelling evidence that the transfer was at arm’s length.
- uses proxies to act on their behalf.
- obfuscates linkages through the use of trusts, shell companies and/or limited liability companies.
Illustrative Examples
GAC also provided several simplified scenarios illustrating when the tests would be met:
- The 50% ownership test is met if unsanctioned Corporation A is 50% owned by sanctioned Corporation B; or if unsanctioned Corporation A is owned by two minority sanctioned shareholders each owning 25%.
- The Board Control Test is met if sanctioned Corporation A owns 40% of Corporation B, but has entered into a shareholders’ agreement with Corporation C granting Corporation A the right to appoint the majority of the board of directors of Corporation B.
- The De Facto Control Test is met if sanctioned Individual A purports to have sold their controlling interest in Corporation B to Individual C, who is a family member or close friend of Individual A; or unsanctioned Individual A wholly owns Corporation B and there is a reasonable inference that sanctioned Individual C is using Individual A as a proxy to control Corporation B, unless compelling evidence establishes otherwise.
Unfortunately, these scenarios seem relatively clear from existing law, and will provide little practical guidance on more complex, nuanced scenarios that businesses may confront.
Compliance Considerations
Businesses should ensure that their sanctions compliance processes account for this guidance as required, using a risk-based approach, by doing the following:
- Identifying all persons holding ownership, voting, or governance rights in counterparties and transaction participants.
- Calculating ownership and voting interests on an aggregated basis.
- Determining whether there are governance arrangements which may grant a sanctioned person control.
- Assessing whether there are other grounds that may grant de facto control to a sanctioned person, including recent ownership changes, the use of complex ownership structures, or the use of potential proxies.
