The proposed Extractive Sector Transparency Measures Act has been enacted by Parliament and is now awaiting proclamation. The Government of Canada has stated that it intends to have the Act in force by June, 2015. This post provides a short overview of the legislation and its potential application to contracts between resource developers and Aboriginal governments.
Disclosure Obligations under the Act
Once the Act comes into force, each company subject to the Act will have to prepare and submit an annual report to the Minister of Natural Resources within 150 days of its financial year end. The report must disclose payments made to any level of government in Canada or abroad that fall into certain categories, the aggregate value of which is greater than CDN$100,000, including payments made to bodies that perform duties on behalf of a government. The Act also provides for penalties of up to $250,000 for failure to comply with the reporting obligations.
These reporting obligations will impact resource developers specifically, as the Act applies to any company engaged in the commercial development of oil, gas or minerals in Canada or elsewhere that
- is publicly listed in Canada, or
- does business in Canada and has met two of the following three criteria in either of its two most recent financial years:
- (i) at least $20 million in assets;
- (ii) at least $40 million in revenue; or
- (iii) at least 250 employees.
Federal regulations can expand or restrict the scope of companies subject to the Act.
Payments made to a defined list of payees will have to be reported. Payees include governments in Canada and in other countries, as well as entities established by those governments. Federal regulations may also expand the list of payees that trigger reporting requirements.
The Act specifies the categories of payments to be included in the annual reports. If payments within a category to a payee exceed $100,000, each payment must be disclosed in the company’s report. The categories include:
- taxes, other than consumption taxes and personal income taxes;
- fees, including rental fees, entry fees and regulatory charges;
- production entitlements;
- bonuses, including signature, discovery and production bonuses;
- dividend payments; and
- infrastructure improvement payments.
In addition, federal regulations may add further categories of payments requiring disclosure.
The Act leaves other details to be incorporated though regulations. For example, the Act allows for regulations to be made addressing the following matters, among others:
- circumstances in which all or part of the Act will not apply to a company, a payee or a type of payment;
- whether a company is controlled by another (and therefore subject to the Act);
- what aggregate payment amount within a given payment category triggers mandatory disclosure (if none is prescribed, the aggregate amount is CDN$100,000);
- how long records must be kept by companies (unless otherwise provided in regulations, then companies must retain records for at least five years);
- what level of public disclosure is required for the report provided to the Minister (unless regulations are passed limiting disclosure requirements, then the entire report submitted to the Minister must be made public); and
- what rate of exchange shall be used for the conversion of payments made abroad into Canadian funds.
It is expected that federal regulations fleshing out details of the Act will be brought into force concurrently. The government is also developing administrative tools to support industry compliance, including a reporting template.
Application to Contractual Payments to Aboriginal Groups
While the Act will impose new reporting obligations on resource developers for payments to all domestic and foreign governments, uncertainty remains as to how those obligations will apply to payments arising from financial commitments in private contracts between resource developers and Aboriginal governments and organizations ‑ including impact benefit agreements.
A resource developer may enter into an agreement with an Aboriginal government or organization where that government or organization is acting in any of four or more different capacities:
- in a governmental capacity (such as an Indian Act band with the power to tax resource companies on reserve lands);
- in the capacity of owner of mineral resources (such as a land claims organization that holds subsurface and surface rights in its settlement lands);
- in a consultative capacity (such as a representative of rights holders in relation to potential impacts of resource development activities on Aboriginal or treaty rights); or
- in a commercial capacity (such as a band-owned contractor providing goods or services to the company).
Payments made to Aboriginal organizations acting in their governmental or land-owner capacities — royalties, rents, production entitlements, bonus payments, etc. — will likely be reportable. It is less clear to what extent payments made to Aboriginal organizations acting in a consultative or commercial capacity will be subject to the Act’s disclosure requirement.
Most agreements between resource developers and Aboriginal governments or organizations are typically considered confidential by both parties. Unless otherwise provided in the regulations, qualifying payments under those agreements will have to be disclosed, even where the agreements were entered into before the Act was passed or brought into force.
While the Act has significant potential implications for contracts between resource developers and Aboriginal organizations, the impact will not be felt immediately as the Act provides for a two year delay in its application to payments made to Aboriginal governments in Canada. The federal government has stated that those two years will allow it the opportunity for further consultation with Aboriginal organizations and governments about how the reporting obligations will apply to payments made to these groups. Accordingly, it is likely that there will be further guidance and clarification regarding the application of this legislation prior to the time at which it may ultimately apply to these payments.