Guidance for businesses on Canada’s new legislation combatting child labour and forced labour in the supply chain

This year, the Canadian federal government took a step further in its efforts to eliminate from its market goods produced or distributed using either child labour or forced labour.

On January 1^st, 2024, Bill S-211, Fighting Against Forced Labour and Child Labour in Supply Chains Act, (“Act”), came into effect, requiring certain businesses to produce a report containing both information about the risks of child labour and forced labour in their supply chain and the steps taken to manage these risks.

First reports are required to be submitted online by 31 May 2024 to the Ministry of Public Safety and Emergency Preparedness (“Ministry”).

The government has issued guidelines (“Guidelines”) that answer general questions, including who qualifies as a reporting entity or a reporting government institution.

In order to address some ambiguities that may arise from this new legislation, the Q&A below should help clarify which commercial entities are required to submit a report, what this entails, and the consequences of non-compliance.

1. Does the Act apply to your organization?

If the answer is yes, the business will automatically be considered an entity.

If the answer is no, then the business is not considered an entity under the Act.

The Guidelines state that businesses should rely upon the same factors the Canada Revenue Agency considers to determine if a non-resident person is carrying on business in Canada for Goods and Services Tax/Harmonized Sales Tax purposes[1]. Tax and employment records can also be used.

If the answer is yes, and two of the three thresholds below are met, the business would be considered an entity, although it would not automatically be subject to reporting obligations.

             i. CAD$40 million or more in global revenue

            ii. CAD$20 million or more in assets

           iii. An average of 250 or more Canadian employees

The assets do not all have to be in Canada. The meaning of employment is as defined under Canadian common law and includes part-time and full-time employees.

If the answer is yes, and the business is considered an entity, then it will qualify as a “reporting entity”.

Section 9 (a) and (b) of the Act states that any entity that is either:

a) producing, selling, or distributing goods in Canada or elsewhere; or

b) importing into Canada goods produced outside Canada 

will be considered a reporting entity.

The Act does not define producing, selling, distributing, or importing goods. Under the Guidelines, the Ministry defines a producer as an entity that manufactures, grows, extracts or processes goods. It also defines an importer as an entity that is responsible for accounting for the goods under the Customs Act.

However, the Guidelines do not define the term “distributing goods” but states that the term should be interpreted within the ordinary sense of the word. 

The Guidelines also state that companies that solely assist with distributing, importing, or producing goods are not considered reporting entities under the Act. For example, companies that provide financial, software, or technical support to distributors are not reporting entities under the Act.

If the answer is yes, the business must submit either an individual or a joint report with the subsidiary. Section 9(c) of the Act considers an entity that controls another entity that produces, sells, imports, or distributes goods in Canada or from Canada as a controlling entity.

To determine control, the Ministry will sometimes make this determination based upon whether they are considered a controlling entity under applicable accounting standards such as GAAP or IFRS. However, this is not the only factor. The Ministry has stated that they will prioritize substance over form when assessing when an entity has control over another, and this can include situations where a company may have control over a specific operation of another entity but not the entity as a whole.

2. The report

Section 11 of the Act, identifies what the report must contain, including information about the entity on:

• its structure, activities, and supply chains.
• its policies and due diligence in relation to forced labour and child labour.
• the risk of forced labour and child labour in the supply chain and the steps taken to manage the risk.
• remedial actions taken in respect of child labour or forced labour.
• training provided to employees on child labour or forced labour.
• how the entity assesses its effectiveness in ensuring that forced labour and child labour are not being used in its business and supply chains.

To help answer these questions, the Ministry has provided further guidance in the form of a questionnaire that must accompany the report. The information requested goes beyond that required under the Act, for instance, reporting entities must disclose if they are also subject to reporting requirements under supply chain legislation in different jurisdictions, such as Australia’s Modern Slavery Act 2018.

The Act only imposes disclosure obligations but no additional obligations on businesses to prevent child labour or forced labour within their supply chains. However, if an entity is aware of certain child labour and forced labour risks within its supply chain or has taken steps to prevent child labour in its supply chains, this must be disclosed in the report.

A further purpose of this reporting requirement and the Act itself is for the federal government to comply with international obligations. Canada is a signatory of the International Labour Organization’s Convention 182, which requires Canada to take measures to eliminate child labour and forced labour.

In addition, the Canada-United States-Mexico Free Trade Agreement requires Canada to prohibit the importation of all goods produced in whole or in part with child labour and forced labour^[2]. To this end, the Act also amends the Customs Act  to allow federal agencies to exclude such goods^[3] from entering Canada. This allows the federal government to investigate goods that were disclosed by reporting entities as a perceived risk of child labour or forced labour and to prohibit the importation of such products.

For a report to be valid, the report must satisfy these procedural requirements:

• It must be submitted online on this website in a PDF format, bearing the entity’s governing body representative’s signature and not exceeding 100 MB in size.
• It must be posted on the reporting entity’s website.
• Entities incorporated under the Canada Business Corporations Act must provide the report to every shareholder with its annual financial statements.
• It must be approved by the entity’s governing body, with a joint report being approved by both of the entities' governing bodies.
• It must include the signature of the governing body.
• It must be in either English or French.
• It must be submitted before 31 May each year, starting in 2024, and will be included in a public database managed by the Ministry.

The Ministry recommends that the report should not exceed ten pages in length.

3. Consequences of non-compliance

The Act gives the Ministry significant investigative powers to determine non-compliance with the Act. Under Section 15 of the Act, the Ministry has the power to designate officials to investigate and determine non-compliance with the reporting obligations of the Act. If a designated official has a reasonable suspicion of non-compliance, they can enter a place of business and:

• Examine anything in the place, including any document.
• Use any computer system and examine its data.
• Take photographs and use any copying equipment.
• Direct any person to put any equipment into operation or to cease operating it.
• Prohibit or limit access to all or part of the place.
• Remove anything for the purpose of examination.

The owner or person in charge of the place must give all assistance reasonably required to enable the designated person to exercise their powers or perform their duties under this section. They must also provide any documents, information, or access to any data reasonably required. However, if the place of business is also considered a home, the designated official must get the consent of the occupier of the home to enter, or alternatively, obtain a warrant authorizing entry^[4].

The Act establishes summary offences for those who do not comply with it. Any individual or entity who does not produce a report, fails to disclose required information, provides faulty or misleading data to a designated official during an investigation, fails to assist in an investigation, or does not comply with an order by the Ministry, will be found guilty of a summary offence and could face a fine of up to CAN$250,000^[5].

To be found guilty of this summary offence, the entity or individual must be complicit in the non-compliance alleged. Specifically, they must have either authorized, assisted, agreed to, or directed an action that resulted in non-compliance with the Act^[6]. Liability for this summary offence extends not only to directors and officers of the entity but also to its employees and agents. However, employees and agents have a due diligence defence available under the Act^[7].

Comment

The Act plays an important role in helping Canada pursue its mission to eradicate the use of child labour and forced labour from its supply chains and fulfill its international commitments.

However, the Act and the guidance provided by the Ministry may give rise to some ambiguity regarding who is considered a reporting entity under the Act, and, consequently, who should abide by it. To clarify their position, if a business is uncertain as to whether they qualify as a reporting entity, they should consider seeking advice, as the potential consequences of not submitting a report when one is due could be severe, and, potentially, result in a federal investigation and fines against the business or its personnel and agents.