Deadline for modern slavery reports approaches as questions remain under Canadian legislation

With the deadline for reports fast approaching, uncertainty remains for a number of companies as to whether they are required to comply with Canada’s new modern slavery reporting legislation.

Overview of the legislation

The Fighting Against Forced Labour and Child Labour in Supply Chains Act (the “Act”, which is also referred to as “Bill S-211”) received royal assent a year ago on May 11, 2023, and came into force on January 1, 2024. The purpose of the Act is to implement Canada’s international commitment to combat forced labour and child labour by imposing reporting obligations on certain government institutions as well as on certain business entities producing goods in Canada or elsewhere or importing goods produced outside Canada.

More specifically as it relates to businesses, the Act applies to corporations, trusts, partnerships and other unincorporated organizations that meet both parts of the following two-part test:

Part One: “Entity”

The Act applies to “entities”, meaning a corporation, trust, partnership or other organization that:

a)   is listed on stock exchange in Canada; or

b)   (i) has a place of business in Canada, (ii) does business in Canada or (iii) 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:

• has at least $20 million in assets;
• has generated at least $40 million in revenue; and / or
• employs an average of at least 250 employees.

Part Two: “Reporting Entity”

The reporting obligations under the Act apply to an “entity” that:

a) produces (which includes manufacturing, growing, extracting or processing) sells or distributes goods in Canada or elsewhere;

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

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

The Act requires in-scope entities to file a report with the government by May 31 every year, with the first one due by May 31, 2024. The report is required to include a description of the steps taken during the 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 the entity or of goods imported into Canada by the entity.

A closer look at who needs to comply

For many companies, it is relatively easy to determine whether they have to comply with the Act. For others, the analysis is not as straightforward and the answer not always clear. The following are frequently asked questions and an overview of the relevant considerations.

Given its line of business, is my company considered to be “producing goods”?

“Production of goods” is defined in the Act as including the manufacturing, growing, extracting and processing of goods. The term “goods” is not defined, although in published guidance the federal government states that it refers to goods that are the subject of trade and commerce, understood in the “ordinary sense of the word”. Although the government has specified that “assets” includes intangibles, it has not similarly clarified the meaning of “goods”.

As a result of the lack of definition and limited guidance, it is uncertain whether companies within certain industries are required to report under the Act. For example, questions have been raised by companies that produce software, particularly when it is delivered under the software-as-a-service model. Other industries in question range from real estate developers to financial services companies to electricity producers. To the extent those companies import goods from outside of Canada, their requirement to comply with the Act is clear. But otherwise it is not necessarily evident and companies within the same industry may end up taking different approaches.

My company buys from suppliers within Canada, but the goods originate from outside of Canada – does that mean I am “importing”?

Although “importing” is not defined under the Act, the federal government has provided helpful guidance on the topic, stating that an entity would be considered to be “importing” if it is responsible for accounting for those goods under the Customs Act. Their guidance goes on to state that an entity would not be considered the importer if the goods are bought from a Canadian supplier and the entity did not cause the importation. “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.”

What does “distribution” mean for purposes of the Act?

Like other key terms, “distribution” is not defined in the Act. In considering its meaning, questions have arisen as to whether it includes internal distribution (such as providing uniforms and laptops to employees), temporary distribution (such as making books available in a library) and/or distribution for marketing purposes (such as giving out branded merchandise to customers).

On the one hand, given the broad nature of the Act, it is possible that these activities could be considered to be examples of “distribution”. On the other hand, it is questionable whether the supply of goods for internal use is truly what is intended to be caught by the Act. Likewise, if the good in question is meant to be returned to the entity, can it really be said to have been “distributed”? Finally, if the purpose of the distribution is not core to the business, such as a marketing activity, it would arguably be an insufficient connector to bring the entity into the scope of the Act. We note that the original federal government guidance, when discussing the meaning of “distribution”, stated that the term was not meant to include “very minor dealings”.

Interestingly, when the federal government amended its guidance at the beginning of March, it removed all references to “selling” and “distributing”. The implication of this appears to be that the government does not consider that the Act applies to entities that sell or distribute goods unless they also either produce or import goods. We note that the legislation itself was not amended – the reporting obligations are still stated to apply to entities that sell or distribute goods. As a result, the effect of the revisions to the guidance is unclear, but could be said to be evidence of the diminished role of selling and distributing within the scope of the Act.

Does my foreign parent company also need to comply with the Act?

The federal government has stated that if a foreign corporation meets the definition of “entity” and the criteria of a reporting entity in the two-part test described above, then it is subject to the Canadian reporting requirements. Issues arise in applying the first part of the test to determine whether a foreign parent company is an “entity”, as well as with the application of the second part of the test given its breadth.

As described above, an “entity” is a corporation or other organization that is either listed on a stock exchange in Canada or that meets certain connection-to-Canada and financial threshold tests, meaning that it does business in Canada, has assets in Canada or has a place of business in Canada. The federal government’s guidance provides that “assets” include investments, and a representative from the relevant government ministry has confirmed that, in their view, holding shares of a Canadian company would qualify as having assets in Canada. According to this analysis, assuming that it meets the financial thresholds (which are relatively low compared to those in jurisdictions with similar legislation), a foreign parent would typically meet the first part of the test.

That said, we note that the government’s guidance also provides that tax and employment-related records can be used to determine whether an organization has a place of business in Canada, does business in Canada or has assets in Canada, which may point to a different conclusion.

Under the second part of the test, a foreign parent would be caught if it produces, sells or distributes goods in Canada or elsewhere or imports goods into Canada. To pass this second test, its production, selling and/or distribution activities do not have to have any connection to Canada, with the result that this legislation could be said to have a very broad extra-territorial reach.

Even if the foreign parent does not itself engage in any production, selling, distribution or importing, it could still have a reporting obligation since the second part of the test also catches entities that control an entity that produces, sells, distributes or imports goods.

Given the large number of companies outside of Canada that may be impacted by this interpretation, we understand that the government is further considering this issue. However, it is unclear whether revised guidance will be published prior to the May 31 reporting deadline.

What happens if a company fails to report?

It is an offence under the Act not to file a report if required to do so, with the potential for fines of up to $250,000. Directors and officers also have personal liability. Beyond the fine itself, there are potential reputational risks associated with being found guilty of an offence. While it is difficult to predict with certainty whether and to what extent the government will enforce the Act this year, Public Safety Canada has indicated that it will be taking more of an educational approach for now.

Next steps and additional information

With the deadline for this first year of reporting around the corner, companies are encouraged to consult with their advisors to determine their reporting obligations under the Act. Where it is not clear, it would be prudent to document your analysis and the factors considered in making your determination.

For additional information, you may wish to consult the following resources:

• Legislation: Fighting Against Forced Labour and Child Labour in Supply Chains Act
• Federal government’s guidance: here
• Federal government’s FAQs: here
• NRFC’s most recent publication: Federal Government Updates Guidance Regarding Canada’s new modern slavery legislation

Authors

Alison Babbitt, Partner, Canadian Co-Head of Responsible Business and Sustainability, Norton Rose Fulbright Canada LLP

Katherine (Ruelle) Prusinkiewicz, Partner, Director of Knowledge, Norton Rose Fulbright Canada LLP

Meaghan Farrell, Associate, Norton Rose Fulbright Canada LLP

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