Written by Jonathan McCullough, Gordon Cameron and James McClary
Two weeks before implementation, potentially onerous new burdens for private investment funds that use a British Columbia company have been removed. Proposed amendments to the Business Corporation Act (BCA) would have applied to private equity, venture capital and other investment funds—almost all of which are organized as limited partnerships—and created an enormous administrative and compliance burden.
The proposed rules, left unchanged, would have fundamentally altered the attractiveness of using a British Columbia company for private funds. It would have also left existing funds with a difficult choice: comply with onerous disclosure regulations far beyond those of any other Canadian jurisdiction, or exit the province.
The problem was that under the proposed amendments, each limited partner of a private pooled investment fund would have been made a "significant individual". As persons deemed to control a B.C. company, a limited partner would then have to disclose its "significant individuals." This would likely require an inquiry up the chain of ownership to identify the individuals who control the limited partner.
As discussed previously, the new transparency register requirement for the equity holders of a B.C. company are part of an international effort to combat money laundering and tax avoidance. Like many other Canadian and non-Canadian jurisdictions, such registers maintained by companies are meant to show authorities the individuals who actually control corporate entities. Registers are required to be disclosed to certain law enforcement and regulatory agencies under certain circumstances.
However, the original version of the B.C. regulation inadvertently captured individuals who do not control B.C. companies at all, but may hold an interest in one through a limited partnership. Many private pooled investment funds have hundreds of investors as limited partners, each with relatively small, passive interests in the fund. Most of those limited partners are corporations or other collective entities.
Amended Partnership Deeming Rule
On September 17, 2020, the B.C. government amended B.C. Reg 77/2020 to replace the partnership deeming rule in section 51(1)(b) from:
(b) a person controls a partnership if the person is a partner in the partnership
(b) a person controls a partnership if the person
(i) is a partner, other than a limited partner, in the partnership, or
(ii) is a limited partner who
(A) is entitled to at least 25% of the profits of the partnership,
(B) is entitled to at least 25% of the assets of the partnership on windup,
(C) has at least 25% of the votes in partnership management, or
(D) has the right to appoint or remove the majority of the partnership’s management
Disclosure of all limited partners is no longer required, unless and until a limited partner actually has elements of real control over the limited partnership. The amendments to the BCA take effect on October 1, 2020.
Bennett Jones and Private Funds in B.C.
Bennett Jones identified this problem in April 2020 immediately after the amendments to the BCA were introduced. Led by our Vancouver office and our Private Equity & Investment Funds group, we made submissions to the B.C. Ministry of Finance as they sought public comment on the changes. In addition, Bennett Jones contacted our local and international clients and other impacted groups, and organized support from other major law firms in Vancouver. We are very pleased that this advocacy and that the collaboration was successful.
Should you have questions about the repealing of section 51(1)(b) or other amendments to the BCA, please contact a member of the Bennett Jones Private Equity & Investment Funds group.