Canada’s Proposed Bill C-47: Sanctions Ownership and Control Defined Yet Uncertainty Remains

April 25, 2023

On April 20, 2023, Canada’s House of Commons completed its first reading of the Budget Implementation Act, 2023, No. 1 (“Bill C-47”). Bill C-47 contemplates several meaningful sanctions-related amendments to Canada’s Special Economic Measures Act (“SEMA”) that will be of interest to Canadian businesses and practitioners if these amendments come into force as currently written.

Most importantly and as the singular focus of this update, these amendments would clarify and likely expand the scope of entities and property subject to Canadian sanctions prohibitions. If these amendments are passed as tabled in Bill C-47, companies will need to conduct heightened due diligence to mitigate their risk of sanctions liability. However, doing so will be difficult, if not practically impossible.

The Legislative Amendments
Deemed Ownership Provision

Bill C-47 proposes to add the concept of “deemed ownership”, which would clarify the transitive property of ownership and control in a corporate structure. Under the proposed amendment, if a sanctioned individual A or sanctioned entity B controls another entity Y, individual A or entity B would be deemed to own entity Y’s property. In many cases, this result would have already been clear because Canadians and persons in Canada must already not deal in property that is “controlled” by a sanctioned individual or entity. If A controls B and B controls C, then A often also controls C. The proposed deemed ownership provision reads as follows:

Deemed ownership

2.‍1 (1) If a person controls an entity other than a foreign state, any property that is owned — or that is held or controlled, directly or indirectly — by the entity is deemed to be owned by that person.

Three New Definitions of “Control”

The most impactful change to the SEMA proposed in Bill C-47 is the new definition of control, which sets out three ways in which a person may control an entity. Most of the country-specific regulations under SEMA prohibit Canadians and persons in Canada from dealing in property that is “owned, held, or controlled” by a sanctioned person or entity. There is currently no statutory definition of “owned”, “held”, or “controlled”. The three proposed methods of control are as follows:

(2) For the purposes of subsection (1), a person controls an entity, directly or indirectly, if any of the following criteria are met:

(a) 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;

(b) the person is able, directly or indirectly, to change the composition or powers of the entity’s board of directors; or

(c) 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.

Definition of Control (a)

Paragraph (a) is welcome guidance and confirmation concerning the Canadian approach to ownership and control. It does not likely change the existing scope of Canadian sanctions prohibitions because ownership of 50% or more of an entity was already widely accepted amongst the Canadian sanctions bar as sufficient to trigger the extension of Canadian sanctions prohibitions. Paragraph (a) proposes to adopt the U.S. approach to ownership, prohibiting dealings with entities where 50% or more of their shares or voting rights are controlled by sanctioned persons. This is also similar to the U.K. approach, but the U.K. extends its sanctions prohibitions only to those entities where there is more than 50% ownership (i.e., ownership at exactly 50% is not enough to trigger the extension for the United Kingdom but it is in the United States and would be in Canada).

Definition of Control (b)

The most impactful definition of control is the second criterion at paragraph (b) because it likely expands the meaning of “control” in a way that will make sanctions due diligence very difficult if not practically impossible for Canadians and persons in Canada seeking to comply with the law. Paragraph (b) suggests that if a sanctioned person has the power to appoint even just one director (while owning less than 50% of the company’s shares), the entity itself would be subject to Canadian sanctions prohibitions. This interpretation would appear to apply even if the sanctioned person could not change the majority of the board members. This would mean that the sanctioned person had sufficient control to subject the entity to Canadian sanctions prohibitions but insufficient control to effect actual change within the organization.

If our reading of this proposed amendment is correct, this would be a departure from sanctions enforcement by both the United States and the United Kingdom, as well as Canada’s own enforcement record (which is discerned through repeated experience dealing with Global Affairs Canada). In the United States, an entity controlled in this way by a blocked person is not automatically blocked under the U.S. 50 Percent Rule, but the United States may still sanction that entity as appropriate. In the U.K., guidance corresponding to paragraph (b) defines an entity to be owned or controlled by a sanctioned person if the sanctioned person has the right to “appoint or remove a majority of the board of directors of the entity.”

Definition of Control (c)

We do not view paragraph (c) as having much impact because it does not provide Canadians or persons in Canada with any further insight into when or how the Government of Canada will determine that a person is able to direct an entity’s activities. Paragraph (c) as drafted leaves parties to interpret when it is “reasonable to conclude, having regard to all the circumstances” that someone can direct an entity’s activities. This paragraph demonstrates the Government’s intent to align the statute with the only Canadian judicial discussion of control in Angophora Holdings Limited v Ovsyankin, 2022 ABKB 711, which provided a first principles analysis of the meaning of “control” under the existing sanctions regulations. Unfortunately, if this definition of control were to pass unamended, Canadians and persons in Canada would be left to conduct the same case- and fact-specific analysis they are already required to do.

Implications for Canadians Assessing Their Sanctions Liability

The clarification concerning the adoption of the 50% ownership rule in Canada will alleviate some uncertainty for Canadians and persons in Canada. This will thankfully make some aspects of sanctions due diligence easier. It will also more closely align Canadian sanctions prohibitions with the United States and United Kingdom, which will allow some multinational corporations to streamline their denied party screening procedures.

Unfortunately, however, the introduction of the concept of control whenever someone can change the composition of the board of directors raises serious concerns for Canadians and persons in Canada attempting to do the necessary due diligence. It is difficult to see how Canadians or persons in Canada could reliably and regularly determine if a sanctioned person can appoint one director to a third-party supplier or customer’s board of directors, but that is what would likely be required under the proposed legislation. Without any publicly available information concerning the entity in question’s bylaws, Canadians and persons in Canada will be left with no choice but to ask for this corporate information and/or rely on the entity’s response to a targeted question concerning the composition of its board.

To be sure, these proposed changes are not yet law in Canada and anyone seeking to modify these provisions must act quickly to lobby the Department of Finance, Global Affairs Canada, and their members of Parliament to seek changes to these provisions before they pass likely in or before June 2023.

Our team stands ready to assist in clarifying implications for your business or engaging with a Government Relations team to assist you with your sanctions compliance, permit application, or other needs.