Law drafted to cast light on resource sector revenue

By Eden Oliver, Claire Webster and Daniel Cipollone, Bennett Jones LLP

On 23 October, the government of Canada introduced its draft Extractive Sector Transparency Measures Act (the bill), which will impose mandatory reporting requirements for entities engaged in the “commercial development of oil, gas or minerals” (exploring, extracting, or having permits to do so) in Canada or elsewhere or that control an entity that is so engaged. The bill’s purpose is to implement Canada’s international commitments to participate in the fight against corruption in the extractive sector. The government intends to establish mandatory reporting standards for the extractive sector by June 2015.

The initiative is part of a larger global trend towards greater transparency and accountability within extractive industries. In the US, the Securities and Exchange Commission is developing mandatory reporting requirements for the extractive sector pursuant to section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The EU is establishing requirements through its Accounting and Transparency directives. The UK announced in August that under the Accounting Directive it will require extractive companies to publicly disclose their payments to governments from 1 January 2015.

The bill will require certain entities to file a report disclosing payments they or their subsidiaries made to any Canadian or foreign government totalling at least C$100,000 (or other prescribed amount) for the following payment categories: (a) taxes, excluding consumption taxes and personal income taxes; (b) royalties; (c) fees, including rental fees, entry fees and regulatory charges as well as payments for licences, permits or concessions; (d) production entitlements; (e) bonuses, including signature, discovery and production bonuses; (f) dividends, excluding those paid to governments as ordinary shareholders; (g) payments for infrastructure improvements; and (h) any other prescribed category of payment.

Reporting under the bill is not required if payments within each category are below the C$100,000 threshold, even if the combined total of all payments across all categories exceeds C$100,000.

Payments to aboriginal governments in Canada will be exempt for two years following the date the legislation comes into force, to permit further consultation as to whether such payments should be captured by the legislation.

Entities will be required to report commencing for the year after the financial year in which the legislation comes into force. Domestic and foreign entities exploring for or extracting oil, gas or minerals directly or through their subsidiaries and having a nexus with Canada should examine whether the rules will apply to them.

Who will report and how?

The reporting requirements will apply to entities listed on Canadian stock exchanges, or having a place of business in Canada, that conduct business in Canada or have assets in Canada and that, based on their consolidated financial statements, meet any two of the following conditions: (i) have at least C$20 million in assets; (ii) generate at least C$40 million in annual revenue; and (iii) employ an average of at least 250 employees.

A payment made by an entity that does not meet this test, and that is controlled by another entity, will be deemed to have been made by the controlling entity. The intended effect appears to be to include a corporate family’s collective payments in assessing whether the applicable dollar payment threshold has been exceeded. The bill also provides for consolidated reporting in instances involving wholly owned subsidiaries.

Each entity will be required to file a report annually, 150 days after its fiscal year-end. The report must include an attestation by a director or officer of the entity, or an independent auditor or accountant, indicating that the information in the report is true, accurate and complete.

Entities will be required to make information available to the public or make the report and any other information disclosed available to the public for five years. Also, entities will be required to maintain records of payments for seven years beginning on the day on which the entity discloses its report.

To avoid duplicative reporting requirements, the bill provides the minister concerned with discretion to determine whether the reporting requirements of another jurisdiction are an acceptable substitute for the bill’s requirements.

The minister will designate persons to administer and enforce the legislation. They will have a broad range of investigative, audit and directive powers.

Entities or persons that contravene the reporting requirements will be guilty of an offence punishable on summary conviction and liable to a fine not exceeding C$250,000 for each day the offence is continuing. Officers and directors of an entity who direct, authorize, assent to, acquiesce or participate in the commission of such an offence will be considered guilty and liable to the punishment provided for the offence, except if they establish that they exercised due diligence to prevent the commission of the offence.

Eden Oliver is a partner, Claire Webster is an associate and Daniel Cipollone is an articling student at Bennett Jones LLP, a law firm with offices in Calgary, Toronto, Edmonton, Ottawa, Vancouver, Washington DC, Dubai and Doha, and a representative office in Beijing.


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