2021 has brought significant corporate law updates at both the provincial and federal level, many of which can impact trust and estate planning and implementation for family businesses. Practitioners working in this field should be aware of these changes to ensure they are using optimal planning strategies for their individual client needs.
Director Residency Requirements
Effective July 5, 2021, corporations incorporated under the Business Corporations Act (Ontario) (the “OBCA”) are no longer required to maintain a minimum number of Canadian residents on their boards of directors. Prior to this amendment, at least 25% of the board of an OBCA corporation was required to be Canadian residents, or one director if the board was comprised of three or less directors.
This change aligns Ontario with a growing list of provinces and territories no longer requiring Canadian residency for corporate directors. Residency requirements now only exist for corporations incorporated federally and for provincial corporations in Manitoba, Newfoundland, and Saskatchewan.
Although the change was primarily intended to encourage foreign corporations to incorporate in Ontario once again, it also has benefits for cross-border estate planning. Prior to the OBCA amendments, a family whose key decision-makers resided outside of Canada would have faced complications operating a business or using a holding corporation in Ontario. The family could have either (1) incorporated in one of the other provinces or territories that did not mandate Canadian residency for directors and registered the corporation extra-provincially in Ontario, or (2) incorporated in Ontario and used a local manager or other outside director from a corporate services provider, often additionally requiring the need for a unanimous shareholder agreement to restrict the power of such director(s). Either option added significant costs and administrative complications to the estate planning process. But now that there are no minimum Canadian residency requirements, the same family is free to incorporate its business and/or holding company in Ontario and retain its key non-resident decision makers as the sole directors. Regardless of the OBCA changes, a shareholders’ agreement may still be a valuable tool and may still restrict director powers when some shareholders are not involved in managing the affairs of the corporation as directors.
While the OBCA changes make it easier for cross-border families to incorporate in Ontario, doing so will still have tax implications that need to be carefully analyzed. An OBCA corporation is deemed to be a resident of Canada for income tax purposes upon incorporation regardless of its directors’ residencies. But, where the directors exercising “central management and control” are located outside of Canada, it could mean the corporation is also deemed resident of another jurisdiction for tax purposes. In circumstances where this possibility of dual residence for tax purposes is undesirable, it may be prudent for an OBCA corporation to establish a director structure that maintains management and control in Canada.
Written Shareholder Resolutions
The OBCA now also gives shareholders an easier way of passing ordinary resolutions. There are typically two types of resolutions passed by shareholders. “Ordinary” resolutions usually cover standard administrative approvals like the election of directors, approval of financial statements, appointment of auditors (if any), and other annual (or more frequent) matters. These resolutions are usually passed by a simple majority vote, unless otherwise set out in the shareholders’ agreement. Conversely, “special” resolutions deal with rare and often major changes, like changing the name of the corporation, adding or deleting share classes, changing shareholder rights, and other fundamental corporate changes. These resolutions require two-thirds of the eligible votes to pass or some other higher percentage as set out in the shareholders’ agreement.
Shareholders can vote on all resolutions by show of hands in person, by appointing a proxy, or by executing a written resolution. Prior to the OBCA amendments, written shareholder resolutions always required approval by all shareholders eligible to vote on such matters. That is, even if the shareholder resolution dealt with a matter that could be passed by ordinary resolution in person (meaning it could have been passed by a simple majority), it required all shareholders to approve if voted on by written resolution instead. The OBCA amendments have simplified this process and now allow a written shareholder resolution to pass by a simple majority if it only deals with matters requiring an ordinary resolution.
Importantly, the corporation must provide written notice of the resolution within 10 business days of signing to any shareholder who does not sign but would have been eligible to do so. Also, matters that require approval by special resolution continue to require 100% shareholder execution for written resolutions. Lastly, this amendment only applies to non-offering (privately-held) corporations.
This amendment makes it significantly easier for shareholders to use written resolutions as a means of voting on routine matters. Prior to the amendments, a written shareholder resolution was reserved only for minor administrative matters where full consensus by all shareholders could be obtained. Now, it can be used in all circumstances where ordinary resolutions are required even if a minority of shareholders are not available or may disagree. It can effectively act as an alternative to in-person voting for ordinary resolutions.
Both OBCA updates give much-needed flexibility to corporate governance planning and execution. However, any existing OBCA corporation wishing to take advantage of these updates must first review its by-laws and articles of incorporation to determine if an amendment is necessary. Many corporate documents based on the prior OBCA rules may contain restrictions on the number of non-resident directors and written resolution voting to ensure compliance. These documents will need to be updated to match the OBCA amendments. If a corporation and its shareholders have entered into a shareholders’ agreement, the agreement will also need to be reviewed and amended if the parties wish to take advantage of the OBCA updates.
On April 19, 2021, Deputy Prime Minister and Minister of Finance Chrystia Freeland released the long-awaited federal budget, featuring more than $101 billion of stimulus spending. Given the recently called election, it remains to be seen how much of this budget will be implemented, however the following developments may not be a partisan issue and could still proceed regardless of the election results. The federal government had proposed providing $2.1 million over two years to support the implementation of a publicly accessible corporate beneficial ownership registry by 2025. This follows public consultations from February to May 2020 on the issue. The federal government has indicated it supports the idea of a centralized registry of beneficial ownership information for use by law enforcement, tax, and other authorities. The registry would include information identifying all natural persons who own and control Canadian corporations. Privately-held federal corporations must already collect some of this information about their shareholders, but they are currently not required to disclose such details publicly. Among other things, it remains unclear whether such a registry would be accessible by members of the general public, or the type and level of detail required to be submitted by such persons, as well as verification and enforcement measures.
The proposed beneficial ownership registry follows similar developments in Quebec and British Columbia to develop local registries. Ontario has not indicated an intention to establish its own beneficial ownership registry, although its Ontario Business Registry is expected to launch on October 19, 2021. The Ontario Business Registry is a long-awaited online public registry allowing users to, among other things, register a business name, update corporate information, dissolve a business or not-for-profit corporation, and effect other corporate transactions. Currently, many of these updates still require paper applications. It is possible that the Ontario Business Registry could facilitate beneficial ownership disclosure in the future should the province proceed with this. It’s worth noting that the Office of the Ontario Privacy Commissioner, in its commentary on the proposed federal registry, supported an approach that included a network of public registries at each provincial and territorial level if a federal portal housing all relevant links is made available.
Should the federal government (or each province and territory) decide to create a beneficial ownership registry, trust and estate planning practitioners will need to be aware of the reporting requirements. It will be important to understand how “control” is defined for each registry, as a broad definition could mean disclosing shareholder details many levels above the actual corporation in question.