Countdown To Compliance: Canada's Modern Slavery Act And Implications For Junior Issuers

The initial reporting deadline under Canada's new modern slavery act, Fighting Against Forced Labour and Child Labour in Supply Chains Act (the "Act"), is fast approaching, with the initial annual report due on May 31, 2024. The Act was enacted to combat forced labour and child labour by requiring certain government institutions and private entities to disclose their efforts to address these issues within their operations and supply chains.

The Act came into force on January 1, 2024. It requires reporting entities to complete and publish an annual report outlining the steps the entity has taken during its previous financial year to prevent and reduce the risk that forced labour or child labour is used at any step of the production, distribution, and sale of goods in Canada or elsewhere by the entity or of goods imported into Canada by the entity.

Companies need to follow three steps to comply with the Act: (i) determine if the company is an "entity" under the Act, (ii) if the company is an "entity" under the Act, determine if it is a "reporting entity" under the Act, and (iii) if the company is a "reporting entity" under the Act, file an annual report and complete an online questionnaire.

Determine If Your Business Is an "Entity" Under the Act

The reporting obligations under the Act are imposed on "entities", which can include a corporation or a trust, partnership, or other unincorporated organization that either:

1. is listed on a stock exchange in Canada; or

2. has a place of business in Canada, does business in Canada or has assets in Canada and that, based on its consolidated financial statements, meets at least two of the following conditions for at least one of its two most recent financial years:

(a) it has at least $20 million in assets,

(b) it has generated at least $40 million in revenue, and

(c) it employs an average of at least 250 employees.

When determining whether an entity does business in Canada, it may consider the location(s) where: goods are produced, sold or distributed; employees are located; deliveries, payments, purchases or contracts are made or assets are acquired; and assets, inventories or bank accounts are located. Doing business in Canada does not require having a place of business in Canada.

Determine If Your Entity Is a "Reporting Entity"

If a corporation or a trust, partnership or other unincorporated organization meets the definition of "entity" under the Act, the entity must determine if it has reporting requirements under the Act. Reporting requirements are only for entities: (i) producing, selling, or distributing goods in Canada or elsewhere, (ii) importing into Canada goods produced outside of Canada, and (iii) that control another entity that produces or imports goods. The federal government has provided guidance on how to interpret the prescribed activities, including:

1. Production of Goods: includes the manufacturing, growing, extracting and processing of goods.

2. Goods: refers to goods that are the subject of trade and commerce, understood in the ordinary sense of the word.

3. Importing: the entity is responsible for accounting for those goods under the Customs Act (Canada). Purchasing goods produced outside Canada from a third party, where that third party is considered to be the importer for the purposes of the Customs Act, does not count as importing goods.

4. The terms "producing" and "importing" are not intended to capture services that solely support the production or importation of goods. For example, marketing, administrative services, financial services and software services.

5. The term "control" includes both direct and indirect control and extends down the entity's organizational chain.

6. There is no prescribed threshold for the minimum value of goods that an entity must produce or import in order for the Act to apply.

Refer to the full text of the guidance for more information regarding the prescribed activities for reporting entities and the content required in the annual report.

Reporting Requirements for Reporting Entities

After determining that an entity is a "reporting entity" under the Act, reporting entities are required to take the following steps to comply with the reporting requirements of the Act:

1. prepare a report that details:

(a) its structure, activities and supply chains,

(b) its policies and its due diligence processes in relation to forced labour and child labour,

(c) the parts of its business and supply chains that carry a risk of forced labour or child labour being used and the steps it has taken to assess and manage that risk,

(d) any measures taken to remediate any forced labour or child labour,

(e) any measures taken to remediate the loss of income to the most vulnerable families that results from any measure taken to eliminate the use of forced labour or child labour in its activities and supply chains,

(f) the training provided to employees on forced labour and child labour, and

(g) how the entity assesses its effectiveness in ensuring that forced labour and child labour are not being used in its business and supply chains;

2. complete an online questionnaire with certain mandatory questions collecting identifying information about the entity, such as the financial year for which the report was completed, the sector in which the reporting entity operates, and other information needed to comply with each of the Act's reporting requirements, in addition to certain other optional questions that allow the entity to elaborate on their responses to the mandatory questions and to provide additional information, if desired;

3. upload the report, including an attestation from the appropriate governing body or bodies who have the legal authority to bind the entity or entities, in PDF format; and

4. publish the report on the reporting entity's website and for reporting entities incorporated under the Canada Business Corporations Act or any other federal act, also provide a copy to each shareholder along with the reporting entity's annual financial statements.

Penalties for Non-Compliance

The Act does not require reporting entities to establish or amend policies regarding forced or child labour, only to report on what has been done by the entity to identify or minimize forced or child labour, if anything. As the Act currently exists, reporting entities can meet their obligations under the Act by disclosing that they have taken no action to mitigate or prevent forced or child labour.

Penalties under the Act are imposed for failure to report, failure to make the report public, or for providing false or misleading information in the report. The Act provides the federal government with broad investigative powers to verify compliance with the Act. Every person or entity that fails to comply with the reporting requirements of the Act is guilty of an offence punishable on summary conviction and liable to a fine of not more than $250,000, including every person or entity that knowingly makes any false or misleading statement or knowingly provides false or misleading information. Notably, any director, officer, agent or mandatary of the reporting entity may be guilty of an offence and liable on conviction to the punishment provided for the offence, whether or not the person or entity has been prosecuted or convicted.

Application to Junior Issuers

All junior issuers listed on a stock exchange in Canada meet the definition of "entity" under the Act, but only some are "reporting entities" with reporting obligations under the Act. Junior issuers that are strictly in the research and development or mineral exploration phase will likely not be reporting entities under the Act if they do not produce, sell, or distribute goods in Canada, import any goods into Canada, or control an entity that produces, sells, distributes, or imports goods in Canada. Similarly, entities that strictly provide services that solely support the production or importation of goods do not have reporting obligations under the Act. Notwithstanding the above, as the spotlight on environmental, social, and governance (ESG) policies intensifies, shareholders, insiders, and investors will pay close attention to the annual reports to gauge an entity's commitment to combating forced labour and child labour. Junior issuers are urged to closely evaluate their business operations on an ongoing basis to determine whether any of the prescribed activities for reporting entities apply to their entity and to mitigate potential risks, specifically as their business evolves.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.