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

Read about using notice-and-access under the Canada Business Corporations Act

This policy sets out information about applying to the Director appointed under the Canada Business Corporations Act (CBCA) (the Director) to exempt a corporation from any financial disclosure requirement set out in section 155 or any of sections 157 to 160 as well as their corresponding provisions set out in sections 70 to 72 of the Canada Business Corporations Regulations (CBCA Regulations) (collectively referred to as the “Financial Disclosure Requirements”, or individually a “Financial Disclosure Requirement”). It will help you:

  • understand some of the Financial Disclosure Requirements that your corporation must meet
  • decide if your corporation should apply for this exemption.

Note

This policy provides information and sets out guidelines. It is not intended to be a binding statement of the decision that will be made in any particular case nor is it meant to replace legal advice. Consider consulting a lawyer or another professional advisor to ensure that your particular needs are being addressed when applying.

Financial Disclosure Requirements

The CBCA and the CBCA Regulations contain various requirements relating to financial disclosure, including those listed in the table below.

Summary of the Financial Disclosure Requirements

Financial Disclosure Requirement

Reference to the CBCA or the CBCA Regulations

Annual financial statements must be placed before shareholders at annual meeting as well as the report of the auditor, if any

CBCA – paragraph 155(1)

 

Annual financial statements must consist of at least the following statements:

  • a statement of financial position or a balance sheet
  • a statement of comprehensive income or an income statement
  • a statement of changes in equity or a statement of retained earnings, and
  • a statement of cash flows or a statement of changes in financial position

CBCA Regulations – paragraph 72(1)

Financial statements of subsidiaries and of bodies corporate whose accounts are consolidated into a corporation’s financial statements must be kept at the corporation’s registered office, and these must be made available for examination upon request by shareholders

CBCA – section 157

Annual financial statements must be approved by the directors

CBCA – section 158

Annual financial statements must be sent to shareholders as well as the report of the auditor, if any

CBCA – paragraph 159(1)

Distributing corporations must send their annual financial statements to the Director as well as the report of the auditor, if any

CBCA – paragraph 160(1)

Annual financial statements must be prepared using Canadian generally accepted accounting principles (Canadian GAAP)

CBCA Regulations – paragraph 71(1)

This table is only a summary of the Financial Disclosure Requirements. To fully understand your corporation’s obligations, refer to section 155 and sections 157 to 160, and sections 70 to 72 of the CBCA Regulations. You can also consult our page on corporate records and other corporate obligations for instructions on preparing financial statements.

Financial Disclosure Requirements are important because they:

  • ensure that a corporation is accountable for the use of its funds
  • ensure transparency and disclosure to shareholders and, in the case of distributing corporations, to the public (for example, potential shareholders, creditors or other persons interested in the corporation).

There may be circumstances where it would be detrimental to a corporation to meet one or more Financial Disclosure Requirements. In these cases, the corporation can apply to be exempted from any requirement in section 155 or sections 157 to 160 (refer to section 156 of the CBCA).

The Director has the power to exempt a corporation from any of the Financial Disclosure Requirements, on any terms that the Director thinks fit, as long as the detriment that may be caused to the corporation by the requirement outweighs its benefit to the shareholders or, in the case of distributing corporations, the public.

When a corporation can apply for this exemption

A corporation must apply for this exemption at least 60 days before the documents in respect of which the exemption is requested are to be sent. The Director can extend the time for making an application as long as no prejudice will result from the extension (refer to paragraph 89(1)(e) and subsection 89(2) of the CBCA Regulations).

How long an exemption is effective

An exemption generally takes effect on the date it is granted and relates to the applicable financial year.

Review of an application

When evaluating an application to be exempt from a Financial Disclosure Requirement, the Director will assess the detriment that may be caused to the corporation by complying with the requirement as well as the benefit that the requirement normally provides. To grant this exemption, the Director must reasonably believe that the detriment outweighs the benefit.

There are different tests for an application made by a distributing and a non-distributing corporation.

Distributing corporation

The Director will ask:

Does the detriment that may be caused to a distributing corporation by the requirement outweigh its benefit to the shareholders or to the public (for example, potential shareholders, creditors or other persons interested in the corporation)?

Non-distributing corporation

The Director will ask:

Does the detriment that may be caused to a non-distributing corporation by the requirement outweigh its benefit to the shareholders?

Factors the Director will consider

In determining whether the detriment outweighs the benefit that complying with a requirement would normally provide to the shareholders or, in the case of distributing corporations, the public, the Director will consider the following factors, among others:

  • the content of the information
  • the shareholdings of the corporation (closely-held versus public corporation)
  • whether all the shareholders consent to the exemption
  • the knowledge the shareholders and the public (for example, potential shareholders, creditors or other persons interested in the corporation) would have about the financial position of the corporation notwithstanding the lack of exempted information.

Specifically, in determining whether there would be a detriment to the corporation, the Director may consider the following circumstances, among others:

  • the corporation would be at a disadvantage with suppliers, customers or others
  • the corporation would be at a disadvantage because it deals only in one line of products or services and its competitors:
    • are not required to make similar disclosure
    • 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
  • 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
  • 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
  • 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
  • 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.

The fact that a corporation will have to spend a certain amount of money to meet a Financial Disclosure Requirement will not be considered as a detriment caused by the requirement unless paired with other factors.

Information that must be included in an application

An application (refer to Annex A for application template) must clearly set out:

  • which Financial Disclosure Requirement the corporation is seeking to be exempted from
  • whether the corporation is distributing or non-distributing
  • the arguments explaining the following:
    • how complying with that requirement would be detrimental to the corporation
    • regarding the benefit of complying with a requirement:
      • in the case of a non-distributing corporation, how the shareholders normally benefit from the requirement
      • in the case of a distributing corporation, how the shareholders and the public (for example, potential shareholders, creditors or other persons interested in the corporation) normally benefit from the requirement
    • why the requirement may not need to be complied with, if applicable
    • what alternative steps, if any, the corporation would take to achieve the benefit that the requirement would normally provide.

All applications will be reviewed on a case-by-case basis.

Issuing an exemption

If the exemption is issued, the corporation will be freed from certain Financial Disclosure Requirements on any terms that the Director thinks fit.

Renewing an exemption

There could be circumstances where a renewal is required. Renewal applications are reviewed on a case-by-case basis.

To apply for a renewal, it is not necessary to complete a detailed application. Instead, a letter is sufficient if it identifies the previous exemption, requests a renewal of the exemption, and states that the circumstances have not substantially changed.

For more information, see Applying for an exemption under the Canada Business Corporations Act.

Annex A - Template of an application under Section 156 of the CBCA

The following is a template that could be used when applying for an exemption pursuant to section 156 of the CBCA. The content of the application may require more or less details than what is included below.

Schedule A

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")

Description and Details of the Exemption Sought

This application is made in accordance with section 156 of the Canada Business Corporations Act, to exempt, for the financial year ending on (date), the corporation from the requirement of section (section) to (description of requested exemption).

Schedule B

Statement of facts

And / Or

  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 financial disclosure requirements that the corporation is seeking to be exempted from, as well as the function and importance of these requirements
      3. the shareholders affected
    1. Specifically, the following list suggests possible facts that, according to the circumstances of the application, may be relevant in determining whether or not the detriment caused to the corporation by the requirement outweighs its benefit to the shareholders or, in the case of a distributing corporation, to the public (for example, potential shareholders, creditors or other persons interested in 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% 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 exempt a corporation from any requirement set out in section 155 or any of sections 157 to 160, if the Director reasonably believes that the detriment that may be caused to the corporation by the requirement outweighs its benefit to the shareholders or, in the case of a distributing corporation, to the public.
  2. Specifically, this application is made to exempt the corporation from the requirement of section (section) to (description of the requested exemption) for the financial year ending on (date).
  3. The corporation is non-distributing (or distributing).
  4. The detriment caused to the corporation in (description of applicable requirement) would outweigh the benefits to the shareholders (or, in the case of a distributing corporation, to the public).
  5. The benefit that that requirement normally provides to the shareholders (or to the public, in the case of a distributing corporation), is accountability for the use of its funds as well as transparency with regards to their overall financial position.
  6. The exemption would not be prejudicial to the affected shareholders (or, in the case of a distributing corporation, to the public (for example, potential shareholders, creditors or other persons interested in the corporation)).
  7. The exemption should be granted for the following reason(s): For instance, although disclosing would provide accountability, transparency to shareholders (or, in the case of a distributing corporation, to the public (for example, potential shareholders, creditors or other persons interested in the corporation)), those benefits would be outweighed by the following detriment because:
    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.

Dated this ___ day of __________, 20_____, at the City of ____________, Province of ____________.

_________________
Signature - Capacity of ________.

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, in accordance with section 156 of the Canada Business Corporations Act, to exempt, for the financial year ending on (date), the Corporation from the requirement of section (section) to (description of requested exemption);

And Upon reading the application documents and being satisfied that there is adequate justification for so doing;

It is Hereby Determined that the Corporation is exempt from the requirement of section (section) to (description of requested exemption) for the financial year ending on (date).

Dated, this __ day of ___________, 20___.

______________
Deputy Director