By Christine Pound, ICD.D, Rebecca Saturley, & Daniel Roth

Canada’s anti-modern slavery legislation comes into force on January 1, 2024. To prepare for the first reporting deadline on May 31, 2024, organizations need to determine if they are required to submit and publish annual supply chain transparency reports. Businesses in both goods- and services-producing industries need to review their operations and supply chains to ensure they are compliant.

The Fighting Against Forced Labour and Child Labour in Supply Chains Act, is commonly referred to as Canada’s ‘Modern Slavery Act’ (the “Act“). The Act implements Canada’s international commitment to reduce the use of forced labour and child labour in the foreign and domestic supply chains of certain businesses that operate in or from Canada, by imposing public reporting obligations intended to increase the transparency of those business’ supply chains.

Thresholds

A two-step test determines whether an organization is subject to the Act and required to submit and publish annual reports:

1. Is your organization subject to the Act? – Does your organization qualify as either a “Government Institution” or an “Entity”?
2. Is your organization required to prepare and submit annual reports? – Does your organization engage in any of the prescribed activities?

Step 1: Is your organization subject to the Act?

The Act applies to:

1. Government Institutions, including any department or ministry of state of the Government of Canada, or any body or office, listed in Schedule I to the Access to Information Act; and any parent Crown corporation, and any wholly-owned subsidiary of such a corporation, within the meaning of section 83 of the Financial Administration Act.
2. Entities, including a corporation, a trust, partnership, or other unincorporated organization that:
   • is listed on a stock exchange in Canada; or
   • 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,
     • (ii) it has generated at least $40 million in revenue, and
     • (iii) it employs an average of at least 250 employees.

Step 2: Is your organization required to prepare and submit annual reports?

Organizations subject to the Act must prepare and submit annual reports if they are:

1. Government Institutions that are producing, purchasing, or distributing goods in Canada or elsewhere.
2. Entities that are:
   • producing (including manufacturing, growing, extracting, and processing), selling, or distributing goods in Canada or elsewhere;
   • importing into Canada goods that are produced outside of Canada; or
   • controlling an entity engaged in any activity described in (a) or (b).

Businesses that are subject to the Act, but are not required to prepare and submit annual reports, should pay careful attention to be aware if they engage in any activities that give rise to reporting obligations. Businesses that are not subject to the Act but are close to the threshold conditions should pay careful attention to be aware if their operations tip over the thresholds.

What does it mean to “control” an entity?

The Act captures both wholly- and majority-owned subsidiaries regardless of their form or jurisdiction, and includes modes of “control” other than ownership, such as financial, contractual, or influential control. As a result, businesses may be obligated to report on a wide range of business-to-business relationships, including potentially outside of their organizational charts. The Act expressly contemplates that the regulations may prescribe the circumstances in which an entity is controlled by another entity, so the threshold for “control” remains indeterminate until such regulations are issued.

What will businesses have to report?

By May 31 each year, entities engaged in prescribed activities are required to report the steps they took during the prior financial year to prevent and reduce the risk that forced or child labour was used at any stage of the production of goods in Canada, or of goods imported into Canada, including:

1. the entity’s structure, activities, and supply chains;
2. the entity’s policies and due diligence procedures related to forced and child labour;
3. the parts of the entity’s business and supply chains that carry a risk of forced or child labour being used and the steps taken to assess and manage that risk;
4. any measures taken to remediate any forced or child labour;
5. any measures taken to remediate the loss of income to the most vulnerable families due to any measure taken to eliminate the use of forced or child labour in the entity’s activities and supply chains;
6. the training provided to the entity’s employees on forced and child labour; and
7. how the entity assesses its effectiveness in ensuring that forced and child labour are not being used in its business and supply chains.

The Act requires that all reports be submitted to and approved by an entity’s governing body prior to publication. A joint report may be filed in respect of multiple entities, in which case the report must be approved either by the governing body of each entity included in the report, or by the governing body of the entity that the controls each entity included in the report. Entities are required to file the reports in the publicly accessible register maintained by the Ministry of Public Safety and make their reports available and accessible to the public through their websites.

Corporations incorporated under the Canada Business Corporations Act (CBCA) as well as other federally incorporated entities (e.g. banks) must also provide the report to each shareholder, along with its annual financial statements. Since publicly traded entities with December 31 year ends generally mail their financial statements to shareholders prior to May 31, publicly traded CBCA entities will experience an earlier reporting deadline, and will also be required to file a copy of their report on SEDAR+.

What should your organization do to prepare?

In preparation for the first reporting deadline on May 31, 2024, businesses should consider:

• Contracts and relationships. Does your organization have records of all contractual counterparties, where they operate, and how they were vetted? Do your organization’s supplier contracts contain appropriate risk-mitigation and enforcement provisions?
• Corporate governance and audit. What policies and procedures (e.g. supplier code of conduct, hiring policy, whistleblower policy) does your organization have in place to address the prevention and remediation of forced and child labour? How is compliance monitored and disclosure managed? How are potential violations addressed?
• Training and reporting. Do your organization’s ongoing employee and supplier training programs address forced and child labour? Does your whistleblower policy provide an effective avenue to report potential violations by employees or suppliers?

Enforcement and penalties

Failure to comply with reporting obligations or remedial measures may result in summary conviction and fines of up to $250,000 for businesses and each of their directors, officers, agents, and mandataries. The Act grants the Minister of Public Safety extensive investigative powers, including the power to order an entity to take any measures considered necessary to ensure compliance with the Act.

Key takeaways

• No minimum volume: There are no minimum activity thresholds before reporting requirements are triggered – undertaking any prescribed activity in any volume attracts the Act’s reporting obligations. For example, importing a single paperclip from the USA would trigger reporting obligations if a business is publicly traded or meets the financial and/or employee thresholds.
• Scope is uncertain: The Act is drafted broadly and many key terms (including “goods”, “importing”, “processing”, and “distributing”) are undefined. In the absence of regulations or other official guidance, businesses should consult with counsel to determine whether their operations fall within the likely scope of these terms. For example, businesses operating in both goods- and services-producing industries may be captured.
• Multinational implications: Entities do not need to be Canadian in origin, nor are there restrictions on the physical location or applicable jurisdiction of the assets, revenues, and employees that should be considered in determining whether the Act applies. Arguably, a multinational business with Canadian subsidiaries that are subject to the Act may be required to report on its entire global supply chain.
• Reporting requirements: The board of directors, or equivalent, of an entity must approve the report. The report speaks to a wide range of corporate governance, audit, human resources, and operational aspects of a business. CBCA and publicly traded entities may be subject to earlier reporting deadlines due to related shareholder reporting obligations.

This client update is provided for general information only and does not constitute legal advice. If you have any questions about how Canada’s Modern Slavery Act applies to your organization, and for assistance preparing your first report by May 31, 2024, please contact a member of our Corporate Governance group.

Click here to subscribe to Stewart McKelvey Thought Leadership.