Following the first year of reporting under Canada’s Fighting Against Forced Labour and Child Labour in Supply Chains Act (the “Supply Chains Act”), Public Safety Canada has presented its inaugural annual report to Parliament and published updated guidance on the reporting requirements. As we look ahead to the upcoming year, it is important for companies to assess their reporting obligations and maintain their current momentum in preparation for the next reporting period.
- Recently issued guidance from Public Safety Canada provides added insight into scope of Canadian modern reporting requirements.
On November 15, 2024, Public Safety Canada issued updated guidance on the reporting requirements under the Supply Chains Act. The updated guidance clarifies the scope of reporting obligations for the foreign parents of Canadian companies, as well as companies involved in the creation and distribution of intangible goods.
Below is a summary of the key updates to the guidance:
- Guidance on the interpretation of having “assets in Canada”: Under the Supply Chains Act, only companies with a place of business in Canada, doing business in Canada, or possessing assets in Canada are required to make an annual report. There has been ambiguity regarding the interpretation of “assets in Canada,” as previous guidance referred to both intangible and tangible assets. For foreign parent companies that do not conduct business in Canada or have any place of business in Canada, it was unclear whether holding Canadian shares or intellectual property, which are both arguably considered intangible assets, was sufficient to trigger a reporting requirement under the Supply Chains Act.
Public Safety Canada has now revised its guidance to state: “Having assets in Canada refers to any tangible property in Canada owned by a person or business. An organization should not include intangibles such as intellectual property, securities and goodwill in its assessment, when determining whether it has assets in Canada.”
In other words, Canadian shareholdings alone are not sufficient to require an international parent company to report under the Supply Chains Act. This clarification is relevant for many international companies or foreign parent companies with Canadian shareholdings that do not otherwise operate in Canada or possess physical assets in Canada.
- Public Safety Canada has provided clarification on its enforcement stance regarding non-reporting by Canadian distributors and retailers that do not manufacture or import goods: Under the Supply Chains Act, the sale and distribution of goods in Canada is listed as a prescribed activity which may require a company to make an annual report. However, Public Safety Canada has now issued explicit guidance indicating that distribution and sales activities alone do not impose a reporting obligation. In its updated guidance, Public Safety Canada clarifies that the reporting obligation applies only to businesses that:
- produce goods in Canada or elsewhere;
- import goods produced outside Canada; or
- control another entity that produces or imports goods.
Public Safety Canada has outlined its enforcement position by stating “[e]ntities solely involved in distributing and selling are not expected to report under the Act. Public Safety Canada will not pursue enforcement action in these cases.” This clarification provides companies with a better understanding of the specific commercial activities that will trigger a reporting obligation under the Supply Chain Act.
- Reporting requirements do not apply to companies engaged in the supply of intangible goods: As mentioned above, only businesses involved in the production or importation of goods (or those controlling an entity that produces or imports such goods) are required to make an annual report under the Supply Chains Act. In its revised guidance, Public Safety Canada has clarified that the Supply Chains Act does not extend to companies producing intangible goods, such as software services and insurance services. Specifically, the updated guidance from Public Safety Canada states: “‘Goods’ refers to tangible physical property subject to trade and commerce, as commonly understood. Real property, electricity, software services, and insurance plans are excluded from this definition.”
- Key Insights from Public Safety Canada’s first annual report on Canada’s modern slavery legislation
On September 27, 2024, Public Safety Canada tabled its first annual report on the Supply Chains Act in Parliament. The Supply Chains Act, which entered into force on January 1, 2024, requires certain entities to report annually on the measures they have taken to combat and minimize the risks of forced labor and child labor within their supply chains.
Overview of the annual report
During the first reporting period, which ended on May 31, 2024, Public Safety Canada received 5,795 reports. Public Safety Canada received additional reports following the deadline, bringing the total to 6,303 by July 31, 2024. The 2024 annual report only includes data from the 5,795 reports submitted by the deadline.
Public Safety Canada confirmed that their mandatory online questionnaire, which reporting entities complete before submitting their annual reports, is designed to collect data to measure progress year over year. This data forms the basis of their reports, with some reports sampled for qualitative analysis.
Under the Supply Chains Act, Public Safety Canada’s report to Parliament must include
- a summary of the activities identified by reporting entities that pose a risk of involving forced or child labor;
- the actions taken by reporting entities to evaluate and mitigate these risks;
- the measures implemented by reporting entities to address and rectify instances of forced or child labor, if any; and
- orders issued by Public Safety Canada to enforce compliance with the Supply Chains Act, along with any charges brought against entities for non-compliance.
Key insights
- Joint reports: A significant percentage (37%) of the reports filed were joint reports, meaning the reports were made by more than one entity from the same corporate group. This highlights the efficiencies available under the Supply Chains Act for such filings. Interestingly, only 13.7% of entities were subject to similar filing requirements in other jurisdictions, such as Australia and the United Kingdom. This may be because only the local entity filed a report in the jurisdiction, given the uncertainties around the issue of ‘control’.
- Breakdown of reporting entities: The manufacturing, wholesale, and retail industries had the largest number of reporting entities. The vast majority of these entities were Canadian (81.95%), followed by those from the US (13.52%).
- Risk areas: The most frequently identified risks are the raw materials or commodities used (23%), the sector or industry in which the entity operates (21%), its direct suppliers (20%), the locations of its activities, operations, or factories (19%), and the types of products it sources (19%).
- Mitigation measures: Entities commonly took actions such as conducting internal risk assessments (49.8%), creating due diligence policies and processes related to forced and child labor (45%), monitoring suppliers (38.5%), and establishing anti-forced labor and child labor standards and codes of conduct (37%).
- Remediation efforts: Only a small percentage of entities (5.6%) reported taking steps to address forced or child labor in their operations or supply chains. The majority (87.5%) indicated that this issue was not applicable to them, suggesting they found no instances of such labor. Among the entities that implemented remediation measures, these steps included supporting victims’ reintegration into the workforce, establishing grievance mechanisms, issuing formal apologies, and compensating affected workers.
The Government of Canada is uniquely positioned to compare the statistics of reporting entities on a year-to-year basis. However, the effectiveness of this approach may be questioned, as the entities required to report can vary each year. This highlights the need to refine the statistics to reflect the status of entities that reported in the previous year. For instance, while some entities have begun identifying risks, gaps still remain. Comparing statistics from the previous reporting year can be valuable for assessing how the same entities have progressed in the current year. Identifying trends over the years will allow the Government of Canada to highlight the top four steps entities have taken to reduce the risks of forced and child labor, thereby enabling its international counterparts to compare their compliance methodologies more effectively.
Next Steps
The next reporting period under the Supply Chains Act begins on January 1, 2025. As we enter the second filing year, companies must review the requirements and determine whether they need to file an annual report. Currently, private sector entities required to file include those that produce goods either in Canada or abroad, or import goods into Canada.
The Supply Chains Act defines “entities” as companies that meet any of the following criteria:
- They are listed on a Canadian stock exchange
- Have a place of business in Canada
- Do business in Canada
- Have assets in Canada
Companies not publicly listed in Canada will only be considered “entities” if they meet at least two of the following three criteria based on their consolidated financial statements over the last two financial years: the entity has at least $20 million in assets, generates at least $40 million in revenue, and employs an average of at least 250 employees. These requirements can vary annually, meaning that changes in a company’s size, ownership, or operations could result in a filing obligation one year but not the next.
Companies operating on a calendar financial year must implement any new policies or procedures they plan to report for the previous financial year by the end of 2024. Although the filing deadline is May 31, 2025, submissions should only reflect activities from the previous financial year.
The Supply Chain Act’s requirements for reports are stringent. As such, companies should plan for approvals from the governing body and ensure that the report is completed to align with the company’s 2025 board meetings. While Public Safety Canada accepted late reports in the first reporting year, Public Safety Canada may not extend the same leniency in the upcoming reporting period. Companies should also caution that the Supply Chains Act includes an enforcement framework, which was not applied during the first year reporting period. Companies should maintain their current momentum as they prepare for next year’s mandatory reporting on forced labor and child labor in their supply chains.
To learn about the Government of Canada’s additional initiatives to combat forced and child labor in supply chains, check out our Q4 2024 Canadian Trade Update. This update highlights notable steps, such as expanding current import prohibitions of goods mined or manufactured by forced labor to include goods produced by child labour. Since November 2021, the Government has also required that all contracts include anti-forced labour clauses. Recently, Public Procurement Services Canada held public consultations on a draft “Ethical Procurement” policy, which includes a human rights due diligence framework with specific guidance for suppliers.
Special thanks to Amy Bing from Baker McKenzie’s Toronto office for her contribution to this post.
