Is your organization caught in the new importer rules related to forced and child labour in your supply chain?

If your organization imports goods into Canada, it may be subject to reporting requirements related to eliminating child and forced labour in your global supply chain, particularly if it meets certain criteria below and may impact any associated organizations. The new legislation under Bill S-211 – An Act to enact the Fighting Against Forced Labour and Child Labour in Supply Chains Act and to amend the Customs Tariff (the “Act”) was enacted rather quietly as of January 1, 2022, and the first reporting year of 2023 was due May 31, 2024.

Importantly, the relatively new legislation has significant penalties for not filing the report or making false statements in a report and also has directors’ liability provisions in relation to the penalties that may be imposed against the organization. Canada is not the first country to enact such legislation and the United States’ Customs and Border Protection has been enforcing similar legislation for the last couple of years.

The purpose of this Act is to implement Canada’s international commitment to contribute to the elimination of forced labour and child labour through the imposition of reporting obligations on:

• government institutions producing, purchasing, or distributing goods in Canada or elsewhere; and
• entities producing goods in Canada or elsewhere or in importing goods produced outside Canada.

Organizations impacted by Bill S-211

The Act applies to an entity that is a corporation, a trust, a partnership, or other unincorporated organization that is:

1. 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 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:
   1. it has at least $20 million in worldwide assets,
   2. it has generated at least $40 million in worldwide revenue, and
   3. it employs an average of at least 250 employees globally; or
3. A prescribed person (none have been at this time).

If a corporation or a trust, partnership, or other unincorporated organization meets either of criteria (a) or (b) under 2. above then it is an entity for the purposes of the Act. Any company with shares or debt securities listed on the TSX Venture Exchange for example, is an entity subject to the Act, even if it does not have a place of business in Canada or doesn’t meet the other tests. As such, the Act is extraordinarily broad and perhaps could be unintentionally burdensome as a result.

Also keep in mind, that the definition of entity includes persons headquartered and operating in Canada or in any other country or jurisdiction provided the tests above have been met. Fortunately, most small businesses in Canada should not be affected by the Act, but large private companies outside of Canada that “do business in Canada”, etc., and meet the tests above, will be impacted, particularly because of the control test for groups of companies and the consolidated financial statements pertaining to the thresholds in the second criteria.

Government institutions are also impacted and are defined to include any department or ministry of state of the Government of Canada, or any body or office, listed in Schedule I to the Act (most Ministries, etc.) as well as any parent Crown corporation, and any wholly-owned subsidiary of such a corporation, within the meaning of section 83 of the Financial Administration Act.

On the surface, it would appear that any and all provincial and municipal/local governments or similar bodies are not considered “government institutions”, but would most likely be included as “entities” under that defined term, assuming they meet the tests outlined above.

Reporting Obligations

Applies to any entity that is:

• producing, selling, or distributing goods in Canada or elsewhere (globally).
• importing goods into Canada that are produced outside of Canada; or
• controlling an entity engaged in any of the above two activities.

An entity is controlled by another entity if it is directly or indirectly controlled by that other entity in any manner. An entity that controls another entity is deemed to be controlled by the other entity.

Annual Report

Every entity must file a report on or before May 31 of each year, showing 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 of goods in Canada or elsewhere (i.e., globally) by the entity or of goods imported into Canada by the entity. The first report was due on May 31, 2024.

• An entity may submit a ‘Single Report’ by providing a report in respect of the entity; or
• Submit a ‘Joint Report’ if associated with more than one entity.

The report must also include the following information in respect of each entity subject to the report:

• its structure, activities, and supply chains,
• its policies and its due diligence processes in relation to forced labour and child labour,
• 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,
• any measures taken to remediate any forced labour or child labour,
• 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,
• the training provided to employees on forced labour and child labour, and
• how the entity assesses its effectiveness in ensuring that forced labour and child labour are not being used in its business and supply chains.

The report must be approved as follows:

• in the case of a report in respect of a single entity, by its governing body; or
• in the case of a joint report, either
  • by the governing body of each entity included in the report, or
  • by the governing body of the entity that controls each entity included in the report.

The approval of the report must be evidenced by a statement that sets out whether it was approved by the governing body (board of directors) and signed by one or more board members. An entity may submit a revised version of the report. The revised version of the report must, in addition to the ‘Supplementary Information’, indicate the date of the revision and include a description of the changes made to the original report.

An entity must provide the original or revised report and make the report available to the public, including by publishing it in a prominent place on its website. The Act requires entities incorporated under the Canada Business Corporations Act or any other Act of Parliament to also provide the report to shareholders along with its annual financial statements.

Penalties

• Every person or entity that fails to comply is guilty of an offence punishable on summary conviction and liable to a fine of not more than $250,000.
• Every person or entity that knowingly makes any false or misleading statement or knowingly provides false or misleading information is guilty of an offence punishable on summary conviction and liable to a fine of not more than $250,000.

Liability of Directors, Officers, etc.

If a person or an entity commits an offence under this Part, any director, officer or agent or mandatary of the person or entity who directed, authorized, approved to, consented in or participated in its commission is a party to and guilty of the offence and liable on conviction to the punishment provided for the offence, whether or not the person or entity has been prosecuted or convicted.

Offence by Employee or Agent or Mandatary

In a prosecution for an offence, it is sufficient proof of the offence to establish that it was committed by an employee or agent or mandatary of the accused, whether or not the employee or agent or mandatary is identified or has been prosecuted for the offence, unless the accused establishes that they exercised due diligence to prevent its commission.

Our takeaways

Given that Canada is somewhat “late to this game” and then quietly introduced and passed this legislation with little fanfare, most Canadian businesses and certainly offshore importers are entirely unaware of its far-reaching impact, penalties, and directors’ liability. As such, we wanted to get this out to the business community in Canada, the US and globally, so that everyone can get up to speed. In theory, it would appear that together with the Act and the amendments to the Customs Tariff, that CBSA has the ability to stop or seize shipments of any importer that is not in compliance with the Act, similar to what we’ve been hearing of recent seized shipments in the US by CBP.

In assisting an offshore client comply with the Act and helping to draft the report, we needed to get clarity on several things and were not able to get much in the way of answers from CBSA at this point. As such, the administration of the Act is not yet at a place where most affected entities can properly comply. For instance, one of our key questions relates to what is the meaning of “does business in Canada”? That terminology is not generally used in tax-speak, but could it equate to “carrying on business in Canada” as we are used to in the tax world?

Another question for public companies would be whether any type of listing such as a “debt security” counts for being “listed on” any Canadian stock exchange. In other words, if an entity did not have any stock securities listed, but did have a CUSIP number for any other type of security, does that make it subject to the Act?

With many unanswered questions, importers may be uncertain about their compliance and with the first year’s reporting deadline in the rearview mirror, will they be subject to penalties given that CBSA has not agreed to provide any extensions or grant amnesty from penalties (or shipment seizures) through any form of voluntary disclosure program.

Simple stuff, right? At Achen Henderson, we have an experienced team of Customs and Trade specialists along with Canadian and US indirect tax professionals to help your business navigate these issues and the sea-change of other tax changes and challenges wherever you do business in Canada or the US.