SECURITIES REGULATION & IR

                              
(left to right: David Frost, Partner; Claire Sung, Partner; Thomas Fung, Associate; and Gajan Sathananthan, Associate, McCarthy Tétrault, LLP)

As part of Canada’s efforts to promote responsible business conduct and safeguard human rights, the Fighting Against Forced Labour and Child Labour in Supply Chains Act (the Modern Slavery Act) came into force on January 1, 2024. The Modern Slavery Act requires certain entities to report, on or before May 31 of each year, on the risks of forced labour and child labour identified in their supply chains and the efforts taken during their previous financial year to address those risks.

The first reports under the Modern Slavery Act were due May 31, 2024. During the first reporting year, questions were raised by businesses on both the substantive and administrative elements of the reporting obligation under the Modern Slavery Act. For example, how should businesses assess whether they have a sufficient nexus to Canada when the criteria for such assessment are ambiguous – what does it mean to do ‘business in Canada’ or have ‘assets in Canada’? And is the reporting obligation so far-reaching as to require businesses to disclose personal or commercially sensitive information as part of their reporting? Finally, where businesses are required to deliver their report to shareholders along with their annual financial statements, how should the report be delivered?  

While Public Safety Canada (PSC) released initial guidance in December 2023 and March 2024, this left open a number of questions as to how the Modern Slavery Act applies to businesses. Now, with the first reporting year under its belt and as businesses plan ahead for the 2025 reporting year, PSC has provided further insights on the requirements under the Modern Slavery Act through updated guidance published on its website in November 2024 (the Updated Guidance) and an information session held in January 2025.

Further Insights from PSC

The Updated Guidance is based on PSC’s learnings from the first reporting year and subsequent consultations with various stakeholders in the fall of 2024. It provides further guidance and clarification on, among other things, the scope of application of the Modern Slavery Act and the content and delivery of reports under the Modern Slavery Act.   

Application of the Modern Slavery Act – Who is Subject to the Reporting Obligation?

The two-step test for determining whether a business is subject to the reporting obligation under the Modern Slavery Act is as follows:

1. Does the business fall within the scope of the term ‘entity’ as defined in the Modern Slavery Act such that they have a sufficient nexus to Canada?
2. If so, does the business engage in one or more of the relevant commercial activities caught under the Modern Slavery Act?

Determining if the business is an ‘entity’

The Modern Slavery Act defines ‘entity’ as a corporation or a trust, partnership or other unincorporated organization that:

• is listed on a stock exchange in Canada;
• 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:
              > it has at least $20 million in assets;
              > it has generated at least $40 million in revenue; and
              > it employs an average of at least 250 employees; or
• is prescribed by regulations (which there are none to date).

The first and third criteria are straightforward. However, the second criterion has caused great confusion as to what it means to do ‘business in Canada’ and have ‘assets in Canada’. The Updated Guidance sheds light on this.

To determine what constitutes doing business in Canada, the same factors used by the Canada Revenue Agency when determining if a person is carrying on business in Canada for GST/HST purposes may be used.

To determine what constitutes having assets in Canada, only tangible property should be included in the determination. As such, intangibles such as intellectual property, securities and goodwill should not be included in the determination (and, by extension, in the calculation of the value of a business’s total gross assets in Canada for purposes of the $20 million threshold). This helps alleviate concerns of foreign businesses whose only assets in Canada are ownership interests in Canadian companies and who were concerned that these securities could be considered assets in Canada for the purpose of the definition of ‘entity’.

Determining if the business engages in a relevant commercial activity

If a business meets the first prong of the two-part test and is determined to be an ‘entity’ under the Modern Slavery Act, then, according to Section 9 of the Modern Slavery Act, the business is subject to the reporting obligation if it engages in one or more of the following activities:

• producing, selling or distributing goods in Canada or elsewhere;
• importing into Canada goods produced outside Canada; or
• controlling an entity engaged in any activity described above.

The Updated Guidance offers important new insights on how to interpret the above criteria and determine whether a business is subject to the reporting obligation under the Modern Slavery Act.

Most importantly, PSC makes clear in the Updated Guidance that only those businesses directly engaged in the production of goods, importation of goods or controlling an entity engaged in these activities are subject to the reporting obligation and must therefore submit a report. This means that despite the reference to ‘selling or distributing goods’ in the above criteria, businesses solely involved in the sale or distribution of goods (and not in the production or importation of goods) are excluded from the reporting obligation and PSC will not seek enforcement action against those businesses. ‘Goods’, for clarity, refers to tangible physical property and thus does not include real estate, electricity, software services or insurance plans.

As far as what constitutes ‘importing’ goods, it was previously understood to apply to importers of record only. However, the Updated Guidance adjusts this interpretation, indicating that ‘importing’ is intended to capture the true importer that, in reality, caused the goods to be brought into Canada, i.e. accounted for or paid the duties on the goods being imported. While the Updated Guidance specifically notes that customs brokers, express couriers, trade consultants and other third parties authorized to transact business on behalf of the importer, or to account for goods in lieu of the importer, will generally not be considered to be ‘importing’ goods, there remains ambiguity in the interpretation of ‘importing’ that could make it more difficult for businesses to determine whether their importing activities will trigger the reporting obligation.

Finally, when considering these commercial activities, the Updated Guidance indicates that the reporting obligation will not be triggered for ‘very minor dealings’ in importing or producing goods. ‘Very minor dealings’ is to be interpreted on a case-by-case basis in accordance with generally accepted principles of de minimis in the context of the particular business.

Content and Delivery of Reports – What Are the Administrative Requirements?

In addition to the further guidance and clarification on the application of the Modern Slavery Act, the Updated Guidance also provides additional insights on the substance and form of the reporting obligation itself, including the following:

• Attestation of the report is mandatory and reports submitted without attestation will not be published by PSC on its website. The Updated Guidance provides sample attestation language that businesses can include (and modify as necessary) in their report. While wet signatures and electronic signatures on reports are both acceptable, identifying the report as signed by simply typing ‘Signed’ in the signature block is not.
• Where a business is incorporated under the Canada Business Corporations Act and thus required under the Modern Slavery Act to share a copy of the report with shareholders along with its annual financial statements, that can be done using the ‘standard means of delivery’. This provides clarity to businesses that were previously unsure as to how the requirement to share reports with shareholders interacted with other securities disclosure requirements.
• To protect privacy, personal information except for the name and title of the officials signing the attestation should not be included in the report. This aligns with PSC’s previous guidance that businesses are not required to disclose personal or commercially sensitive information that could create legal risk or compromise the privacy of any person.  

Focus for the 2025 Reporting Year

As confirmed by PSC during the information session held in January 2025, PSC’s focus remains to continue to fine-tune the application of the Modern Slavery Act and encourage compliance by businesses as opposed to strict enforcement. With certain key updates introduced in the Updated Guidance, it will be critical for businesses preparing for the 2025 reporting year to thoroughly review the updated Guidance to ensure that they understand PSC’s expectations. Many businesses may find that the updates will impact their determination as to whether or not they will need to file a report, and it is important that this analysis is done early to give ample time to prepare the report if required. In some cases, businesses that had previously submitted a report may now determine that they are no longer required to do so in light of the latest guidance, while other businesses that did not previously submit a report may now determine that they are within scope and must prepare and submit by the May 31, 2025 deadline. Investor relations teams should also be ready to address any questions that may arise from investors regarding the report and any business or investment risks identified therein, including, if applicable, how those risks and any efforts to address them tie into the environmental, social and governance strategies and goals of the business.

David Frost is a Partner at McCarthy Tétrault LLP. This article was written by Gajan Sathananthan, Associate and Thomas Fung, Associate at McCarthy Tétrault LLP.