The Sanctions and Strategic Controls Bureau at Global Affairs Canada has issued new guidance on deemed ownership provisions to support comprehensive compliance with Canada’s sanctions regime.

For more information on sanctions, you can consult the full guidance on Canadian Sanctions Information and Guidance.
 
As each circumstance is specific and may engage sanctions in a different way, it is important to carefully review the applicable sanctions regulations before conducting any activities. Please note that Global Affairs Canada does not provide legal advice to the public and is unable to confirm if a particular activity or transaction is permitted under Canadian sanctions. As such, it is recommended that the persons (individuals or entities) in Canada and Canadian persons outside Canada ensure they are complying with Canadian sanctions measures on an ongoing basis, in consultation with private legal counsel, as required.

Here’s the guidance:

Canadian sanctions – Deemed Ownership 

This guidance provides information regarding thresholds for establishing deemed ownership under Section 2.1 (2) of the Special Economic Measures Act (SEMA) and Section 2.01 (2) of the Justice for Victims of Corrupt Foreign Officials Act (JVCFOA). Consult Information and guidance for more information on Canada’s sanctions regime.

On this page

• Deemed ownership provisions
• Control criteria
  • The 50% or more rule
  • Ability to change the composition or powers of an entity’s board
  • Ability to direct an entity’s activities
• Examples of possible scenarios (non-exhaustive)

Deemed ownership provisions

The deemed ownership provisions are an important consideration in the context of the dealings prohibitions set out in SEMA and JVCFOA and their regulations. The provisions generally apply to any individuals and entities subject to Canadian jurisdiction (“person(s) in Canada” or “Canadian person(s) outside Canada”). It prohibits those persons from dealing in any property, wherever situated, that is owned or controlled directly or indirectly by a listed person.

Under the SEMA and JVCFOA deemed ownership provisions, “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.”^Footnote 1 This means that an entity is deemed to be owned by a listed person if it is controlled, directly or indirectly, by one or more listed persons, even if the entity itself is not listed. The dealings prohibition applicable to the property of a listed person would then be applicable to the entity deemed to be owned by them.

When considering entities whose ownership can be attributed to listed persons, it is important to consider the total (aggregate) ownership or control by all listed persons together.

Control criteria

A person controls an entity, directly or indirectly, if any of the following criteria are met:

1. 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;
2. the person is able, directly or indirectly, to change the composition or powers of the entity’s board of directors; or
3. 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.

The 50% or more rule

Criteria (a) refers to shares, ownership interests or voting rights in an entity.

If listed person(s) collectively hold 50% or more of the shares, ownership interests, or voting rights in an entity, the entity is deemed to be controlled by that listed person(s) and the dealings prohibition would apply to that entity.

Canadian persons and persons in Canada are advised to act with caution when considering activities with entities that have significant ownership by one or more listed persons. Even if a listed person owns less than 50% of an entity, other listed persons may also have an ownership stake in the entity, which in combination could trigger Criteria (a).

This aggregate ownership approach is designed to counter sanctions circumvention. Listed persons may attempt to divide ownership of an entity among multiple designated persons to avoid triggering formal control thresholds. This approach also recognizes that a listed person can exercise meaningful influence over an entity without holding a majority stake.

By aggregating the ownership interests of designated persons, the Government of Canada can better identify situations where listed persons collectively control an entity or benefit financially from it. This allows compliance and enforcement authorities to assess the full ownership and influence structure of an entity on a case-by-case basis. Canada has adopted this approach in line with like-minded partners, including the European Union and the United States, to align its sanctions policy framework with theirs.

This is not to be confused with beneficial ownership under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA). Deemed ownership (50% control) works alongside beneficial ownership standards (25% threshold) used for broader anti-money laundering/anti-terrorist financing (AML/ATF) compliance.

Ability to change the composition or powers of an entity’s board

Criteria (b) refers to the ability of a listed person to influence the composition or powers of an entity’s board of directors, triggering the dealings prohibition. This could include, but is not limited to the following examples:

• having the right or ability to appoint or remove a majority of the members of the administrative, management or supervisory bodies of an entity, who have held office during the present and previous financial year, whether by exercising voting rights or through other means;
• controlling alone, pursuant to an agreement with other shareholders in, or members of an entity, a majority of shareholders’ or members’ voting rights in that entity; or
• the ability to appoint the majority of directors by virtue of being a major shareholder, even though that share is less than 50%.

Ability to direct an entity’s activities

Criteria (c) refers to the concept of a listed person exercising de facto influence over an entity’s activities, triggering the dealings prohibition. The following factors may be considered in determining whether criteria (c) is met:

• having the ability to direct an entity’s activities by virtue of being the largest shareholder compared to other shareholders;
• having the right to exercise a dominant influence over an entity, pursuant to an agreement entered into with that entity, or to a provision in its Memorandum or Articles of Association, or a written agreement where it appears clear that a non-shareholder or minor shareholder has the authority to solely decide on the business of an entity;
• a buyback clause in favor of a listed person;
• a listed person transferring shares before or after designation, especially if there is no compelling evidence that the transfer is to an independent third party for fair market value;
• using front persons where, for example, there is a new owner closely connected to a listed person (family member, business partners, former employee, etc.);
• using trusts, shell companies and/or limited liability companies to obfuscate linkages to a listed person.

In considering a person(s)’ ability to direct the activities of an entity, it is essential to fully understand the parties that may be involved in a proposed activity. Canadian persons and persons in Canada are encouraged to implement a sanctions compliance program consulting the Global Affairs Canada sanctions website, and undertake rigorous due diligence.

Examples of possible scenarios (non-exhaustive)

1. Entity D is not listed by Canada. However, Entity D is 50% owned by Entity E, which is a listed person. The dealings prohibition applicable to Entity E is also applicable to Entity D.
2. Entity F is not listed by Canada. However, Person G and Person H, which are listed, collectively own 50% of Entity F. Entity F is considered to be owned by listed persons. The dealings prohibition applicable to Person G and Person H are also applicable to Entity F.
3. Entity J is listed by Canada. It owns 40% of Entity K, so Entity K does not meet the 50% or more threshold established by s. 2.1(2)(a). Entity L, which is not listed by Canada, owns 60% of Entity K and is deemed to be its owner. However, there is a shareholder agreement where Entity L grants Entity J the power to appoint the majority of the board of directors of Entity K. The dealings prohibition applicable to Entity J is also applicable to Entity K.
4. Individual N is listed by Canada. Individual M is not listed by Canada. However, Individual M is a family member or a close friend or associate of Individual N. Individual N in the past had a controlling role in Entity O or its associated companies, but asserts that they no longer have that role because they allege that they sold their controlling shares to Individual M in the months after they were listed by Canada.Individual M presently wholly owns Entity O. Absent compelling evidence to the contrary there is a reasonable inference that Individual N is using Individual M as a proxy to control Entity O. In such cases, the dealings prohibition applicable to Individual N is also applicable to Entity O.

Footnotes

Footnote 1

JVCFOA deemed ownership provision: “If a foreign national 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 foreign national.”