Policy on exempting a corporation from the financial disclosure requirements – Canada Business Corporations Act, section 156

Table of contents

  1. Statement of general principles
  2. Legislative framework
  3. Guidelines for making an application
  4. Other information
  5. Making the application
  6. Annex A - Example of documents to submit when making an application under Subsection 156 of the CBCA

1. Statement of general principles

  • 1.01 The September 22, 2004 exemption policy is repealed and replaced with this policy.
  • 1.02 This policy sets out information to facilitate an application to the Director appointed under the CBCA for an exemption authorizing a corporation to omit prescribed items from, or dispense with publication of, prescribed financial statements.
  • 1.03 The financial disclosure rules prescribed in the Regulations are designed to provide a corporation's shareholders with relevant information about the financial position of the corporation. The Director will only grant an exemption if satisfied that disclosure of the prescribed information would be detrimental to the corporation.
  • 1.04 Nothing in this policy is intended to constitute a binding statement of what position the Director will take with respect to a particular application. This policy is intended to reflect the Director's understanding of the Director's role in processing an application under section 156 of the CBCA.

2. Legislative framework

  • 2.01 Section 155 of the Act generally states the obligation of a corporation to present certain financial statements on an annual basis. The items and contents of these statements are prescribed in sections 70 and 72 of the Regulations.
  • 2.02 Section 70 of the Regulations stipulates that the financial statements referred to in paragraph 155(1)(a) of the Act shall, except as otherwise provided by this Part, be prepared in accordance with generally-accepted principles as set out in the Handbook of the Canadian Institute of Chartered Accountants (CICA).
  • 2.03 Section 72 of the Regulations further stipulates in subsection 72(1) that the financial statements referred to in section 155 of the Act shall include at least:
    1. a balance sheet;
    2. a statement of retained earnings;
    3. an income statement; and
    4. a statement of changes in financial position.
  • 2.04 Section 156 of the CBCA provides that the Director may, on application of a corporation, authorize the corporation to omit from its financial statements any item prescribed, or to dispense with the publication of any particular financial statement prescribed, and the Director may, if the Director reasonably believes that disclosure of the information contained in the statements would be detrimental to the corporation, permit the omission on any reasonable conditions that the Director thinks fit.
  • 2.05 A corporation that does not comply with the financial disclosure rules prescribed in the Regulations and that fails to obtain an exemption from the Director is in contravention of the CBCA which can result in civil and/or criminal liability.

3. Guidelines for making an application

  1. General considerations
    • 3.01 The general test used by the Director consists in determining whether the disclosure of information would be detrimental to the corporation if the exemption is not granted.
  2. Factors considered in reviewing an application
    • 3.02 In determining whether there would be a detriment to the corporation, the Director may consider the following circumstances, among others:
      1. the corporation would be at a disadvantage with suppliers, customers or others;
      2. the corporation would be at a disadvantage because it deals only in one line of products or services and its competitors:
        1. are not required to make similar disclosure; or
        2. deal in several lines of products or services and disclose information in a form that prevents identification of financial information in respect of any particular product or service;
      3. a competitor, who does not disclose, could calculate the profit margin on a specific product or service sold by the corporation and place the latter in a disadvantageous position by reducing its price for this product or service;
      4. a supplier could increase the selling price of raw materials sold to the corporation making the disclosure, on the basis of its knowledge of the profitability of a product sold by the latter;
      5. an important customer could demand a reduction in the sale price on the basis of its knowledge of the profit made on a product or
      6. the corporation's only public shares are exchangeable shares whose dividend and dissolution entitlements are determined only by reference to the financial performance of the sole parent corporation and the parent corporation will send to all shareholders of exchangeable shares the same documentation that it sends to its own shareholders, and will make all necessary filings with the appropriate securities regulatory authorities.
    • 3.03 In determining whether the circumstances justify granting an exemption, the Director may weigh the detriment of disclosure to the corporation against the potential prejudice of non-disclosure to shareholders who would otherwise benefit from the information. The Director will look at factors such as:
      1. the content of the information;
      2. the shareholdings of the corporation (closely-held versus public corporation);
      3. whether all the shareholders consent to the exemption;
      4. the knowledge the shareholders would have about the financial position of the corporation notwithstanding the lack of exempted information.
      It should be noted that, except in certain limited circumstances, the fact that the corporation will have to spend a certain amount of money to prepare financial statements cannot be considered a financial detriment caused by the disclosure of information.
  3. Conditions for issuing an exemption
    • 3.04 In exempting a corporation, the Director may find it appropriate under the circumstances to include one or more conditions in the exemption.
    • 3.05 The Director may also require the applicant to forward a copy of the exemption to shareholders and all securities regulators concerned.

4. Other information

  1. Additional information required
    • 4.01 The Director may require other information not provided in the application in order to decide whether or not to exempt the corporation.
    • 4.02 Under section 91 of the CBCR, the Director has the authority to seek additional information from the applicant or third parties. With respect to information requested from third parties, section 92 of the CBCR provides that the applicant shall be given a copy of the information obtained and be given a reasonable opportunity to respond.
    • 4.03 There is no statutory obligation on the Director, however, to seek information at the request of third parties nor to allow third parties to make representations regarding an application.
  2. Access to information contained in an application
    • 4.04 Pursuant to section 266 of the CBCA, a person who has paid the required fee is entitled to examine, make copies or extracts of any document required by the CBCA to be sent to the Director. The information filed with the Director in support of an exemption application is not confidential since such information is required to be filed in order to obtain an exemption. Consequently, an application for exemption is public information.
  3. Offences
    • 4.05 Section 250 of the Act creates an offence with respect to documents required by the Act or Regulations to be sent to the Director, or any other person, that contains a false or misleading statement about material fact or omits to state a material fact.

5. Making the application

  1. Format
    • 5.01 Along with a cover letter indicating the name of the applicant corporation, the application must provide information under three distinct headings: description and details of the exemption sought, statement of facts, and argument. These are described briefly below with further elaboration contained in the attached Annex A. We recommend the use of Annex A as a model.
  2. The documents
    • 5.02 Detailed below is a brief description of the three major documents that comprise the submission:
      1. Description and Details of the ExemptionSought: The applicant must describe the exemption sought and note that this is an application for an exemption under section 156 of the Canada Business Corporations Act (see attached Annex A, Schedule A).
      2. Statement of Facts: The applicant must include sufficient facts and all material information which might effect the Director's decision (see attached Annex A, Schedule B). The applicant should specifically speak about the business of the corporation, about the affected shareholders, and about the prescribed items or statements to be excluded (i.e. their function and importance).
      3. Argument: Following the statements of facts, the applicant must provide convincing reasons that the disclosure of the prescribed items or statements in question would be detrimental to the corporation (see attached Annex A, Schedule C).
  3. Renewals
    • 5.03 If the applicant seeks to renew an exemption that has been granted and the circumstances have not substantially changed, it is not necessary to complete a detailed application. Instead, a letter identifying the previous exemption, requesting for a renewal of the exemption, and stating that the circumstances have not substantially changed is accepted. Note that if the applicant wishes to change the wording of the decision, the applicant must refer to the changes and provide reasons for these changes in the letter.
  4. Effective date of the exemption
    • 5.04 An exemption will bear the date on which it was granted.
    • 5.05 Pursuant to paragraph 89(1)(e) of the CBCR, an application shall be made 60 days before the documents in respect of which the exemption is requested are to be sent to the Director. Nevertheless, subsection 89(2) provides that despite subsection (1), the Director shall extend the time for making an application for an exemption if the applicant establishes that no prejudice will result from the extension.
  5. Duration
    • 5.06 An exemption generally takes effect on the date it is granted and is applicable for 1 financial year ending on or after the effective date of the exemption.
  6. Revocation
    • 5.07 The Director will generally not revoke an exemption before providing notice to the applicant and the opportunity to respond by submitting new facts and arguments to support the exemption.
    • 5.08 A revoked exemption ceases to carry effect from the date of revocation.
  7. Fees and number of copies to file
    • 5.09 The prescribed fee for an exemption application is $250.00.
    • 5.10 Only one set of documents is required.
  8. Time for processing an application
    • 5.11 Section 90 of the CBCR provides that the Director shall, within 30 days after receipt of an application for an exemption, grant the exemption requested or send to the applicant written notice of the Director's refusal, together with reasons for the refusal.
    • 5.12 An application duly completed and filed, with no outstanding issue or concern, will usually receive a response from the Director within 15 working days after receipt of the application.
    • 5.13 An applicant requiring that the Director review the application on an expedited basis should bring the request immediately to the attention of the Director's staff, providing reasons for the urgency.
  9. Publication
  10. Appeal of Director's decision
    • 5.15 An applicant who feels aggrieved by a decision of the Director to grant, or to refuse to grant, an exemption may apply to the court, pursuant to paragraph 246(c) of the Act, for an order requiring the Director to change the decision.

Annex A

Example of documents to submit when making an application under Subsection 156 of the CBCA


Schedule A

In the Matter Concerning the Duirector Appointed Under the Canada Business Corporations Act

And

The Application of

(Name of the corporation)

(hereinafter called the "Corporation")

Description and Details of the Exemption Sought

  1. This application is for an exemption under section 156 of the Canada Business Corporations Act authorizing the corporation to omit from its financial statements any item prescribed, or to dispense with the publication of any particular financial statement prescribed, for the financial year ending (see 5.06 of the policy).
  2. The item(s) to be omitted or the statement(s) that will not be published are: (items or statements as prescribed in the Regulations)

Schedule B

Statement of facts

  1. The following statement provides sufficient facts and all material information in order to enable the Director to make an informed decision about the exemption sought:
    1. Generally, where applicable, provide details about:
      1. the business of the corporation;
      2. the prescribed items or statements to be excluded (their function, importance);
      3. the shareholders affected (prejudice ifinformation not disclosed);
      And/Or
    2. Specifically, the following list suggests possible facts that, according to the circumstances of the application, may be relevant in determining whether or not there is a detriment of the corporation. Indicate the facts that apply, providing the necessary details:
      1. The names of competitors, customers and suppliers.
      2. The fact that the corporation manufactures and sells only one line of products or services and a description of such products or services.
      3. The estimated value of gross revenues and total assets of the corporation for the financial year that would be covered by the exemption, if granted.
      4. The percentage of the market held by the corporation and each of its competitors.
      5. The name and place of incorporation of each competitor required to disclose the same financial information as the corporation.
      6. The way in which the competitors can calculate the profitability (profit margin) of a specific product or service sold by the corporation. Give a precise method of calculation.
      7. The names of customers contributing a substantial proportion (25 per cent or more) of the net profits of the disclosing corporation.
      8. The percentage of this portion of the profits and details of the impact disclosure would have on sales to this customer and the corresponding effect on the financial situation of the corporation.
      9. Financial data on which to base an assessment of the economic detriment which would be caused to the corporation.

Schedule C

Arguments

  1. This application is made pursuant to section 156 of the Canada Business Corporations Act which empowers the Director to authorize the corporation to omit from its financial statements any item prescribed, or to dispense with the publication of any particular financial statement prescribed, if the Director reasonably believes that their disclosure would be detrimental to the corporation.
  2. The disclosure of the prescribed item(s) or statement(s) described in this application would be detrimental for the corporation.
  3. The exemption would ("not be prejudicial" or "be prejudicial") to the affected shareholders.
  4. The exemption should be granted for the following reason(s): For instance,
    1. the corporation would be at a disadvantage with suppliers, customers or others;
    2. the corporation would be at a disadvantage because it deals in only in one line of products or services and its competitors:
      1. are not required to make similar disclosure;
      2. deal in several lines of products or services and disclose information in a form that prevents identification on financial information in respect of any particular product or service;
    3. a competitor, who does not disclose, could calculate the profit margin on a specific product or service sold by the corporation and place the latter in a disadvantageous position by reducing its price for this product or service;
    4. a supplier could increase the selling price of raw materials sold to the corporation making the disclosure, on the basis of its knowledge of the profitability of a product sold by the latter;
    5. an important customer could demand a reduction in the sale price on the basis of its knowledge of the profit made on a product or service by the disclosing corporation;
    6. the corporation's only public shares are exchangeable shares whose dividend and dissolution entitlements are determined only by reference to the financial performance of the sole parent corporation and the parent corporation will send to all shareholders of exchangeable shares the same documentation that it sends to its own shareholders, and will make all necessary filings with the appropriate securities regulatory authorities.

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Signature - Capacity of space to insert full name.


Schedule D

Model of a decision

In the Matter Concerning the Director Appointed Under the Canada Business Corporations Act

And

The Application of

Name of the corporation)

(hereinafter called the "Corporation")

For an Exemption Under Section 156 of the Canada Business Corporations Act

Exemption

Upon Application by the Corporation under section 156 of the Canada Business Corporations Act (the "Act") to exempt the Corporation from disclosing (indicate which items or statements prescribed in the Regulations), for the financial year ending on or about the (see 5.07 of the policy),

And Upon reading the application documents and being satisfied that the disclosure of such information would be detrimental to the Corporation;

It is Hereby Determined that (name of the corporation) is authorized to ("omit such items from its financial statements" and/ or "dispense with the publication of such prescribed statements"), for the financial year ending on or about the (see 5.07 of the policy).

Dated, this space to insert day day of space to insert month, 20space to insert year.

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Deputy Director

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