The reporting deadline for organizations with reporting obligations under Canada’s Fighting Against Forced Labour and Child Labour in Supply Chains Act[1] is May 31, 2025.
The Act is in its second year of application. The first reporting year came with its challenges, namely determining whether an organization had reporting obligations under the Act. Even with the availability of Public Safety Canada’s public guidance on the Act, determining an organization’s reporting obligations was a challenge. Many organizations opted to report out of an abundance of caution. Based on the inquiries it received in the first reporting cycle and the issues it observed from the first year’s reports, Public Safety Canada updated its public guidance in an effort to help organizations better understand and evaluate their reporting obligations.
The updated guidance has provided clarity in some areas of uncertainty, but it remains to be seen if it goes far enough. Public Safety Canada has acknowledged that the first couple years of the Act’s application will be a learning process—for both Public Safety Canada and the public. Therefore, Public Safety Canada has confirmed that its focus for this year’s reporting cycle remains increasing public awareness of the Act and promoting compliance with the Act’s reporting obligations. It will not be prioritizing the enforcement of non-compliance just yet.
The Act’s Purpose
The Act is considered “transparency legislation”. It imposes obligations on certain organizations to report annually on their efforts to prevent or reduce the risk of child labour or forced labour being used in their supply chains. It does not impose obligations on organizations to take specific responsive actions to address the risks of child labour or forced labour being used in their supply chains. We expect that the Government of Canada will introduce legislation in the future that will require organizations in specific industries that carry a high risk of child labour or forced labour being used in their supply chains to take responsive actions to address these risks. However, that is not within the scope of the Act and organizations need not worry about whether they are doing enough to prevent or reduce the risk of child labour or forced labour being used in their supply chains—at least for the purpose of the Act.
Clarifying the Act’s Application
Unchanged from last year is the two-step test to determine if an organization must report under the Act. First, an organization must determine if it is an “entity” as defined under the Act. Second, if an organization is an entity, it must determine if it engages in activities that require it to report in accordance with the Act. With the updated guidance, organizations may find it easier to determine if they have reporting obligations.
Step One – An Entity
An organization is an “entity” if it meets one of the two following criteria:
- 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:
- it has at least $20 million in assets,
- it has generated at least $40 million in revenue, and
- it employs an average of at least 250 employees.
Updated Guidance
(i) Does business or has assets in Canada
An organization should consider if it does business in Canada by evaluating the factors considered by the Canada Revenue Agency when determining if a person is “carrying on business in Canada” for GST/HST purposes. Whether a person is carrying on business in Canada for GST/HST purposes is a question of fact requiring consideration of all relevant facts. These factors include, but are not limited to:
- the place of delivery;
- the place of payment;
- the place from which transactions are solicited;
- the location of assets or an inventory of goods;
- the location of a bank account; and
- the location of a branch or office.
Public Safety Canda clarified that having assets in Canada refers to any tangible property in Canada. We note that the updated guidance now excludes intangible property from this analysis, contrary to the guidance from last year’s reporting cycle. Therefore, organizations should no longer include intangible property such as intellectual property, securities and goodwill in their analysis of step one.
(ii) The assets, revenue and employees thresholds
An organization must use its consolidated financial statements to assess its assets, revenue and employees against the Act’s prescribed thresholds. The organization’s consolidated financial statements ought to include the assets, revenue and employees of any organization it controls (i.e., its subsidiaries) but not of any organization that controls it (i.e., its parent organization).
For example, a parent organization that has a place of business, does business or has assets in Canada and meets the prescribed thresholds is an entity under the Act. However, if its subsidiaries do not individually meet these requirements, they are not entities and are not subject to the Act.
In line with its updated guidance for determining if an organization has assets in Canada, Public Safety Canada clarified that the assets threshold should only take into account the tangible property owned by the organization.
Step Two – Engaged in Prescribed Activities
An organization that is an entity under the Act has reporting obligations if it engages in any of the following activities:
produces goods in Canada or elsewhere;
imports goods produced outside Canada; or
controls another entity that produces or imports goods.
Updated Guidance
(i) Producing or importing goods
Public Safety Canada clarified that it will not seek enforcement action against entities solely involved in distributing and selling goods that do not report under the Act. For example, a retail store that sources the goods that it sells only from domestic parties need not submit a report. It is not producing goods or importing goods produced outside Canada.
Furthermore, the terms “producing” and “importing” are not intended to capture services that solely support the production or importation of goods. These services include marketing, logistics, and software.
Public Safety Canada also clarified that “goods” refers to tangible physical property that is the subject of trade and commerce, understood in the ordinary sense of the word. Helpfully, Public Safety Canada confirmed that real property, electricity, software services, and insurance plans are excluded from the definition of “goods” in this specific circumstance. Nevertheless, “goods” remains an extremely broad term.
An entity that is importing goods must be the “true importer” to have reporting obligations, meaning that it caused the goods to be brought into Canada. Entities such as customer brokers, express couriers, trade consultants and other third-parties authorized to transact business on behalf of the importer will generally not be considered importers because they are not the person that caused the goods to be imported—they merely helped facilitate the importation process.
Generally, entities that produce or import goods must report. However, Public Safety Canada clarified that entities that produce or import goods but at a “very minor dealings” level may be exempt from the Act’s reporting obligations. What is considered “very minor dealings” may be interpreted in accordance with the de minimis principle and evaluated within the context of each entity’s business. Essentially this analysis is factually-driven because what is considered too small to be meaningful or taken into consideration will depend on the entity’s business.
(ii) Control
If an organization is unsure about whether it exercises control over any entity that produces or imports goods, Public Safety Canada clarified that in addition to considering accounting standards (e.g., International Financial Reporting Standards, Generally Accepted Accounting Principles (United States), etc.) for guidance, an organization may also consider the Office of the Superintendent of Financial Institution’s guidance on the concept of control.
The Office of the Superintendent of Financial Institution’s guidance discusses the concepts of “control in law” and “control in fact”. In both instances of control, the guidance sets out factors that ought to be considered and examples of their application to various scenarios.
Takeaways
Organizations that reported last year should consider if Public Safety Canada’s updated guidance has affected their analysis of the two-step test regarding their reporting obligations under the Act. Organizations that did not report last year should also consider if they should report this year based on the updated guidance.
Please feel free to reach out to a member of our team if you are unsure about your organization’s reporting obligations or if you would like our support in preparing your organization’s annual report.
[1] You may see it referred to as the “Supply Chains Act” or the “Modern Slavery Act”.