Canadian guidance released on Modern Slavery Act reporting

Modern slavery legislation is now in force in Canada and requires certain businesses to report on their efforts to prevent and reduce the risk of forced labour and child labour in their supply chains.

The deadline for Reporting Entities to submit their Forced and Child Labour in Canadian Supply Chains report is quickly approaching. The Government of Canada recently released its guidance on preparing the report which includes various items that Reporting Entities are required to address.

The Fighting Against Forced Labour and Child Labour in Supply Chains Act (also known as the “Modern Slavery Act” or the “Act”) came into force January 1, 2024. The Act aims to “increase industry awareness and transparency and drive businesses to improve practices.”

• The Act gives broad power to the Minister of Public Safety or their designates around compliance and enforcement including significant fines;
• The Act is currently being implemented by Public Safety Canada; and
• A summary of the information received through the reports will be tabled in an annual report to Parliament by the Minister of Public Safety.

Most Reporting Entities are required to submit their report by May 31, 2024. However, certain federally incorporated entities may be required to submit their reports earlier. For example, if the entity is required to deliver its annual financial statements to shareholders before May 31, 2024. The statute requires annual reporting by certain government organizations, public and large private companies on due diligence activities related to the prevention of forced labour and child labour in supply chains.

The guidance has clarified the steps required for entities to comply with the Act, including specific disclosure requirements to include in the report. As noted in the guidance prior to the deadline, Reporting Entities need to:

1. Review internally and gather applicable information requirements to complete the report;
2. Have the report approved by the Reporting Entity’s governing body and attested;
3. Complete the online questionnaire;
4. Upload the report to the Public Safety Canada website; and
5. Post the report on the Reporting Entity’s website.

A. Who is required to submit a report?

The Act creates a two-part test to determine if an organization is required to submit a report. First, the organization must be an “Entity” as defined in the report, and second, the organization must also be a “Reporting Entity.” An “Entity” under the Act includes Corporations, trusts, partnerships and other unincorporated organizations that are either:

1. Listed on a stock exchange in Canada; or
2. Have a place of business in Canada, do business in Canada or have assets in Canada that, based on consolidated financial statements, meet at least two of the following conditions during at least one of its two most recent financial years:

• • Have at least $20 million in assets;
  • Generate at least $40 million in revenue; or
  • Employ an average of at least 250 employees.

The guidance outlines clarifications on the above financial tests which are described below.

A corporation or a trust, partnership or other unincorporated organization meets the definition of “entity” above, is required to submit a report if the entity is also:

• Producing, selling or distributing goods in Canada or elsewhere;
• Importing into Canada goods produced outside Canada; or
• Controlling an entity engaged in any activity described in paragraph (a) or (b).

1. What does it mean to “have a place in Canada or do business in Canada?”

To determine if a business has a place in Canada or does business in Canada, the guidance requires an ordinary of reading of such words and defers to the criteria applied by the Canada Revenue Agency to determine whether a business is doing business in Canada. Typically, however, a “place of business “means any premises, facility or installation used to carry on business, whether or not it is used exclusively for that purpose. Premises, facilities or installations may be considered to be a place of business whether owned or rented, or, in some cases, where it is simply available to the business (such as a co-working space).

When determining whether an entity does business in Canada, it may consider the location(s) where: goods are produced, sold or distributed; employees are located; deliveries, payments, purchases or contracts are made or assets are acquired; and assets, inventories or bank accounts are located. This list is not exhaustive and the relevant factors to consider will vary depending on the nature of the business. Entities should note that doing business in Canada does not require having a place of business in Canada. Furthermore, an entity listed on a Canadian stock exchange is automatically an “entity” under the Act.

2. How do I calculate my assets, revenue and employees?

The size-related thresholds (assets, revenue and employees) should be calculated based on consolidated financial statements, which includes subsidiaries. For the purpose of the calculation, asset and revenue values should be converted into Canadian dollars if those statements use a different currency.

The guidance requires businesses to determine their assets, revenue and employees on a total or global basis. This means that assets are not restricted to those located in Canada, revenue is not restricted to revenue from business activities in Canada and the number of employees includes those residing or employed in Canada or in any other jurisdiction. In addition, the guidance requires assets are to be calculated on a gross basis, not a net basis.

3. What does it mean to be producing, selling, distributing and importing goods?

The Modern Slavery Act guidance provides the following definitions:

Note that, under the Act, there is no prescribed threshold for the minimum value of goods that an entity must produce, sell, distribute or import in order for Act to apply. However, the guidance notes that the terms used in the Act should be understood as excluding very minor dealings.

B. What must be included in the report?

The report is required to describe action taken by the business to prevent the use of child labour and reduce the risk that child labor is used at any step of its supply chain. The report’s scope applies to any step of the production of goods in Canada or elsewhere, or any goods imported into Canada. The report should focus on steps taken in the most recently completed fiscal year.

Entities should bear in mind that the report will be publicly available for review when preparing and responding to the reporting requirements. For this reason, entities are not required to disclose confidential or commercially sensitive information in their reports that would expose the entity to legal risk or compromise individual privacy.

C. Specific requirements of the report

The report is required to discuss, in appropriate detail, seven topics each of which are discussed below:

1. Structure, activities and supply chains

The guidance requires Reporting Entities to discuss each of its structure, activities and supply chains.

Structure: A Reporting Entity’s legal and organizational form needs to be disclosed and include additional details with respect to (i) organizational mandate or role, (ii) the number of employees, both in Canada and outside Canada, (iii) partner organizations or members in a group, and (iv) whether the Reporting Entity exercises control of other entities and if so where they are located.

Activities: A Reporting Entity is required to disclose all activities and pursuits related to the production, sale, distribution or importation of goods by the entity and may include additional details, if applicable on (i) production, manufacturing, growing, extracting, processing, sale or distribution of goods, both in Canada and outside Canada, including the kinds and volumes of goods produced, manufactured, grown, extracted, processed, sold or distributed, (ii) importation of goods into Canada, including the kinds and volumes of goods imported and the locations from which the goods are imported, (ii) the location of the Reporting Entity’s business.

Supply chains: A Reporting Entity is required to provide an overview of their supply chain, including the suppliers (direct and indirect) of all goods and service that contribute to the production of goods produced, sold, distributed or imported by the entity, starting from acquiring the raw materials and finishing at the final product. An entity’s supply chain does not include the end users or customers who purchase its products or services.

2. Policies and due diligence processes in relation to forced or child labour

The guidance requires Reporting Entities to discuss processes used to identify and respond to the real and potential adverse impacts of activities throughout the supply chain. The guidance notes that due diligence and its support measures involve the following steps that may be discussed in the report:

• Embedding responsible business conduct into policies and management systems;
• Identifying and assessing adverse impacts in operations, supply chains and business relationships;
• Ceasing, preventing or mitigating adverse impacts;
• Tracking implementation and results;
• Communicating how impacts are addressed; and
• Providing for or cooperating in remediation when appropriate.

3. How the entity identifies and handles forced or child labour risks in its business and supply chain

The guidance (and the Act) requires Reporting Entities to identify parts of their activities and supply chains that carry a risk that forced or child labour could be used either in:

• The entity’s own activities;
• In the activities of any entities it controls; or
• In the activities of its direct or indirect suppliers.

As an example, the guidance notes that entities may specify that they have identified risks related to a particular sector, industry, country or region; the production of a particular product; or a particular step in the supply chain.

4. Any measures taken to remediate forced or child labour

The guidance requires Reporting Entities to discuss remediation measures that provide a remedy for an adverse impact and to the substantive outcomes that can counteract, or “make good,” the adverse impact. Noting that appropriate remedies will vary in the circumstances, the guidance provides that the purpose of requiring entities to describe the measures taken to remediate any forced or child labour is to encourage transparency.

5. Income support for vulnerable families affected by ending forced or child labour

The guidance requires Reporting Entities to discuss any measures taken to remediate the loss of income to the most vulnerable families that results from any measure taken to eliminate the use of forced or child labour in the entity’s activities and supply chain. However, the guidance notes that if a Reporting Entity has determined that vulnerable families have not experienced loss of income as a result of steps the entity has taken, or if no measures have been taken in this area, then stating this in the report is sufficient to address this requirement.

6. Training provided to employees on forced labour and child labour

The guidance requires Reporting Entities to discuss employee training on forced labour and child labour. The guidance encourages Reporting Entities to consider discussing:

• Whether the training is mandatory or optional;
• Whether the training is organization-wide or only covers employees in specific departments or branches of the organization;
• Which groups or levels of employees receive the training (for example, whether the training covers senior management/executive-level staff);
• The content of the training, including whether it covers forced labour, child labour or both;
• How the training was developed, including whether it was developed internally or by an external organization;
• The length of the training;
• Any mode(s) of assessment included in the training; and
• How many employees have received or will receive the training.

7. How the entity assesses its effectiveness in ensuring that forced labour and child labour are not used in its business and supply chains

The guidance requires a discussion of how a Reporting Entity assesses its effectiveness. Reporting Entities are encouraged to discuss policies, processes and other actions they have implemented to measure and track their success in preventing and reducing risks of forced labour and child labour in their activities and supply chains. However, if Reporting Entities that have not taken any steps to assess their effectiveness, the guidance notes that stating this fact is sufficient to address this requirement.

D. Governance and the Act

Canada’s new Modern Slavery Act will require stronger governance controls for Canadian companies and those who operate in Canada that are regulated by the Act. Specifically, with respect to the report, the Act and guidance includes certain steps a business must take in order to approve and file the report prior to the deadline:

1. Required board approval

Once a company completes its report under the Act, the Act requires that the report be approved by its governing body. Typically, this will be satisfied by a meeting of directors or by way of a written resolution of the director in lieu of a meeting. At a minimum, the resolution approving the report should:

• Attach the report to be approved by the directors;
• Contain clear language approving the report; and
• Authorize and name the member of the governing body authorized to execute and deliver the attestation discussed below.

2. The attestation requirement

When submitting a report, businesses are also required to include an attestation signed by a member of its governing body. Much like the officer certificates accompanying financial statements, there is prescribed language for this attestation. The prescribed language requires the signatory to verify that:

• They have reviewed the information in their report;
• They have exercised reasonable diligence; and
• The information in the report is true, accurate and complete.

Closing remarks

The board approval requirements and attestation under the Modern Slavery Act raise the stakes for the governing body of reporting companies. A solid governance foundation will be essential to avoiding any inadvertent offences under the Act.

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Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.