Canada's modern slavery act: What does it mean for private equity and venture capital?

Threshold and connection to Canada test

A corporation, trust, partnership or other unincorporated organization (each an entity) is potentially subject to the Act if:

(a) it is listed on a stock exchange in Canada; or

(b) it 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:

(i) it has at least $20 million in assets (all dollar amount references are to Canadian dollars),

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

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

Activities test

An entity that passes the threshold and connection to Canada test will have reporting obligations under the Act (such an entity referred to as a reporting entity) if it:

(a) produces, sells or distributes goods in Canada or elsewhere (we note that recent guidance issued by the Canadian federal government calls into question whether entities that are only engaged in distribution or selling are subject to the Act if they are not also engaged in production or importation);

(b) imports into Canada goods produced outside Canada; or

(c) controls an entity engaged in any activity described in paragraph (a) or (b) above.

Impact on private equity and venture capital

At first glance, private equity (PE) and venture capital (VC) firms and sponsors may not appear to be reporting entities under the Act, as they are not typically engaged in the sale, production, distribution or importation of goods. However, pursuant to (c) directly above, the Act also requires entities that control reporting entities to file their own reports. PE and VC firms that meet the threshold and connection to Canada test and control portfolio companies that are reporting entities under the Act are likely be reporting entities themselves.

The term "control" is not defined in the Act, but it likely includes the ability to appoint the majority of the board and any control that may be exercised pursuant to an agreement. Control includes direct and indirect control. The Canadian federal government has noted in published guidance that "control" should be applied broadly and may include situations in which an entity exercises joint control of an operation.

In addition, PE and VE firms may be engaged in importing goods on some level, even if that only involves items that are intended for business operations (such of office laptops or furniture). Although the Canadian federal government has provided guidance that the term "importing" should be understood as excluding "very minor dealings," no further guidance has been provided on what is meant by very minor dealings so a factual determination will need to be made in each case. The guidance does clarify that only the entities responsible for accounting for goods under the Customs Act would be considered to be "importing" for the purposes of the Act.

Contents of Report

A reporting entity must include the following in their reports:

• a discussion of the steps it has taken in 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 by it or of goods imported into Canada by it; and
• information on each of the following:
  • 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
    
     

Filing, posting and penalties

Reporting entities must prepare and file a report on or before May 31 of each year, beginning in 2024. The report must be posted prominently on the entity's website and must be filed with the Minister of Public Safety and Emergency Preparedness, along with a standardized questionnaire. Reports will be made publicly available by the Minister. Failure to comply with the Act can result in a fine of up to $250,000.

Implementation

The Act took a number of years to pass and its passage was not without controversy. There are still a number of key interpretation issues that need to be addressed and the federal government has published a guidance document which is periodically updated, without notice. We will continue to monitor the implementation of the Act and the development of regulatory and market standards.