On March 20, 2024, Public Safety Canada (“PSC”) released updated guidance (“Guidance”) on the application of the Fighting Against Forced Labour and Child Labour in Supply Chains Act (the “FCLA”).

While PSC’s update is aimed to provide clarity, it left many ambiguities, particularly regarding the definitions of “consolidated financial statements”, “asset” and “control”.  These terms play a critical role in determining whether a foreign entity may fall within the reporting requirements of the FCLA.

Guidance on Definitions

The Guidance clarifies that “assets” are “any property” owned by a person or business, including money, land, buildings, investments, inventory, vehicles and intangibles like goodwill.

The Guidance also emphasizes that the meaning of “control” will include both direct and indirect control situations – also potentially broadening out the application of these rules.  While accounting standards, such as International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP), may help in assessing “control”, that determination is not restricted to these standards.  In fact, “control” should be assessed based on both formal control and from a substance over form perspective, and could include joint control situations.

On the use “consolidated financial statements”, the Guidance is helpful, confirming that entity should include the revenue, assets, and employees of any subsidiary it controls, but exclude revenue, assets and employees of parent and grandparent companies up the control chain.

Unanswered Questions

While providing some clarity in certain areas (e.g., what “consolidated financial statements” is likely to mean), the Guidance leaves more questions unanswered in other areas.  Does momentary ownership of goods being delivered or trans-shipped in Canada count as “having assets”?  (It seems so).  What about owning intellectual property being used and/or licensed in Canada (think “Coca Cola”, or “Aspirin”).  Is that “having assets”?   (Maybe not but who knows?)

The Guidance’s note on substance over form also raises some additional questions.  Should an organization adhering to GAAP standards consider “substance over form” or “de facto control” for the purpose of the FCLA?

Takeaways

Despite obvious efforts to clarify, the Guidance may fail to address some very common situations including those raised previouslyby us.  The FCLA’s broad language and public-policy purpose (addressing forced and child labour) suggests an extremely wide potential application, making it unlikely that any doubt in these areas will be resolved in favour of NOT reporting.

With the Annual Report deadline of May 31, 2024 rapidly approaching, businesses must determine next best steps.  And it would seem that a “best practices” approach requires reporting if there is any doubt in the reporting obligation!

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