According to the Government of Canada, 90% of the world’s top mining companies have business connections to Canada. Notwithstanding this fact, Canada, while maintaining a role in investigation of complaints made to the Canadian Ombudsman for Responsible Enterprise (CORE),[2] did not until now have any laws focused on ensuring transparency and reporting of forced and child labor in the supply chain, other than at the time of importation of goods. This changed on January 1, 2024, with the coming into force of the Act.

While this client alert discusses the reporting obligations imposed by the Act on certain international mining companies, the ramifications of this legislation extend to many consumer and industrial sectors including energy, automotive, and manufacturing, many of which have minerals in their supply chain.

Executive Summary

The Act will apply to international mining companies that meet minimum threshold levels of Canadian business activities or presence in Canada, are listed on a Canadian stock exchange, or engage in prescribed activities in Canada.[3]

It requires covered “entities,” as well as certain federal government institutions, to file annual reports describing preventative measures taken to reduce the risk of forced or child labor in their supply chains. Penalties can be imposed for failure to file a report or for misrepresentations made within the report. The Act contains broad inspection and enforcement mechanisms such that persons appointed by the Minister of Public Safety and Emergency Preparedness can secure documents, information, or access data from covered entities to establish compliance.[4]

In addition, the Act amends the Customs Tariff by prohibiting the importation of goods manufactured or produced, in whole or in part, using forced labor or child labor,[5] as well as prison labor, as those terms are defined in the Act.

The Reporting Obligation

As we noted in our previous publication, the imposition of the reporting obligation is based on a two-part analysis: the Act applies to businesses that 1) fall under the definition of “entity” and 2) if they engage in activities as enumerated by the Act.

1. Definition of “entity”

An “entity” is defined as “a corporation or a trust, partnership or other unincorporated organization,” without regard to whether such an entity is Canadian or foreign, as follows:

1. Is listed on a stock exchange in Canada.
2. 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:
   1. it has at least $20 million in assets,
   2. it has generated at least $40 million in revenue, and
   3. it employs an average of at least 250 employees.
3. Is prescribed by regulations.[6]

Once it has been determined that the business is covered by the definition of “entity,” the next step is to determine if it is engaged in the types of activities enumerated in the Act. The reporting obligation only applies if both conditions are satisfied.

2. Prescribed Activities

The Act provides that the reporting obligation applies to an “entity” if it is engaged in the following activities:

1. Producing, selling or distributing goods[7] in Canada or elsewhere.
2. Importing into Canada goods produced outside Canada.
3. Controlling an entity engaged in any activity described in paragraph (1) or (2).[8]

Satisfaction of only one of the above conditions is sufficient for the entity to be subject to the reporting obligations.

Furthermore, participation in one of the prescribed activities can take place, directly or through a controlled entity. On the other hand, a controlled entity does not have to include the activities of its major shareholder in assessing whether it has a reporting obligation.

Contents of the Report

In short, entities are responsible for 1) completing an online questionnaire, 2) submitting the report, and 3) publishing the report on its website.

The reporting obligation requires that entities describe steps taken in the previous fiscal year to reduce the risk of forced labor or child labor in any part of its supply chain. The Act refers to the following types of information that should be set out within the report:

1. Its structure, activities, and supply chains.
2. Its policies and due diligence processes related to forced labor and child labor.
3. The parts of its business and supply chains that carry a risk of forced labor or child labor being used, and steps taken to address them.
4. Remediation measures taken against forced labor or child labor.
5. Measures taken to remediate loss of income to the most vulnerable families whose loss of income resulted from the measures taken to remediate use of forced labor or child labor in the entity’s business or supply chains.
6. The training provided to employees to recognize the existence of forced labor and child labor in the supply chain.
7. Tow the entity evaluates its effectiveness in ensuring that forced labor or child labor are not used in its business and supply chains.[9]

Once completed, reports must receive approval from the governing body of the reporting entity, e.g., board of directors.[10] Finally, the report (and any revised report) has to be filed with the Minister[11] on the government’s electronic registry and published in a prominent place on the company’s website.[12] Procedures exist for revising the report after it has been filed.

Canadian Government Guidance

On December 20, 2023, and thereafter amended on March 20, Public Safety Canada provided its Guidance to assist in interpreting the Act. The Guidance addresses and explains key concepts related to business presence in Canada based on having a place of business in Canada, engaging in business in Canada or having assets in Canada.

The Guidance recommends that any conclusions reached for income tax purposes and employment law purposes may be considered in determining whether a foreign entity is going to have a reporting obligation for having a place of business or doing business in Canada.[13]

For example, if an entity has a business number issued by the Canada Revenue Agency, with or without the extensions to comply with the Goods and Services Tax (GST) legislation and the Customs Act, this suggests that prior analysis has been conducted by the company’s advisors that business is being carried on in Canada.

Additionally, reliance on a double taxation treaty exemption so as not to become liable for Canadian income tax on its Canadian business activity may suggest that the company’s tax advisors have previously concluded that there exists a likelihood that business is being carried on in Canada even though there is no “permanent establishment” in Canada.

Additionally, the Guidance provides details on characteristics of compliant responses and best practices. It also elaborates on terms not defined in the Act.[14]

Failure to Report

Failure to comply with the Act by not publishing a report or by submitting false or misleading information may result in bringing criminal charges and fines upon conviction, depending on the nature of the non-compliance. The Act currently provides that consequences may include:[15]

• Fines of not more than $250,000.
• Prosecution of directors, officers, employees, and agents.
• On-site searches without a warrant.
• Compliance orders.

Conclusion

Given the presence in Canada of some of the largest mining companies in the world, whether Canadian incorporated or incorporated elsewhere, it can be expected that the impending May 31 deadline demands immediate attention from those mining companies that to date have not undertaken the task of preparing their first annual report to the Canadian government and to their shareholders.

Whether an obligation exists to file the report may in some cases require considerable analysis. The Act’s application requires a very fact-based, rigorous analysis and difficult questions of legal interpretation. As many of the terms in the Act are undefined, they will have to be interpreted based on the Guidance and rules of statutory interpretation accepted by Canadian courts. For example, exploration companies, royalty and streaming companies, and Canadian companies with overseas assets may be faced with decisions on whether they need to make a report depending on how they are structured, and the type of activities carried on by various affiliated companies.

This client update takes a somewhat different approach from the summaries we have reviewed issued by law firms and other advisors. We have focused our analysis on the mining sector for several reasons; many international mining companies, while operating almost exclusively outside Canada, inevitably end up having some connection to Canada (as it is a major financial jurisdiction for the mining sector), resulting in making them subject to the Act.

Mining companies also have many upstream users of the products from mine operations (as minerals are used in almost every industrial sector). Therefore, accurate reporting by this sector will be critical foundational information for upstream industrial users of minerals, and to date, there has been limited focus on the impact of this Act to the mining sector as compared to consumer products such as textiles, apparel, footwear, and fashion products.

For some mining companies, particularly those that are not listed on a Canadian stock exchange and do not have a physical business presence in Canada, the analysis on whether they are subject to the reporting obligation because they are carrying on business in Canada will require a much deeper factual and legal analysis than for others where the determination on whether a report must be filed will in most cases be fairly obvious.

[1] Introduced into the Canadian Parliament as Bill S-211, as explained in our previous publication.

[2] Canada’s CORE investigates Canadian companies for human rights violations and abuses in their overseas activities in the garment, mining, and oil and gas sectors. It relies on complaints being brought from interested parties. In addition to complaints against apparel companies, it has to date investigated two Canadian mining companies with operations in the Xinjiang Uyghur Autonomous Region (XUAR) allegedly benefiting from Uyghur forced labor.

[3] See S.C. 2023, c. 9, s. 2.

[4] Id. at s. 14-18.

[5] Pursuant to the Act, the Customs Tariff now includes “child labour,” by amending the tariff item which was previously limited to forced labor and prison labor.

[6] S.C. 2023, c. 9, s. 2 (emphasis added).

[7] The guidance provided by Public Safety Canada, last modified on March 20, excludes reference to “selling and distribution” activities, notwithstanding that the Act states otherwise. This understandably has created uncertainty on whether these activities should be considered as covered activities. See Guidance, Prepare a report- Entities (“Reporting requirements are for entities producing goods in Canada or elsewhere or importing goods produced outside Canada.”)

[8] Id. at s. 9 (emphasis added).

[9] S.C. 2023, c. 9 at s. 11(3).

[10] S.C. 2023, c. 9, s. 11(4).

[11] See Guidance, Submit a report, last modified March 20, 2024.

[12] See id. at s. 13(1).

[13] See Guidance, Prepare a report - Entities, last modified March 20, 2024,.

[14] Id.

[15] See S.C. 2023, c. 9, s. 15, 18-19.