Canadian Securities Administrators Research Articles

Policy Forum: The Income Taxation of Crypto Contracts

Current Canada Revenue Agency (CRA) guidance suggests that cryptoassets (such as bitcoin) should generally be taxed as commodities for the purposes of the Income Tax Act. However, recent changes in the regulation of entities that facilitate the purchase and sale of cryptoassets (crypto trading platforms) under securities law have introduced new ways of understanding transactions involving cryptoassets. Many crypto trading platforms hold cryptoassets on behalf of users rather than delivering the cryptoassets directly to them, and the Canadian Securities Administrators has taken the position that this relationship among crypto trading platforms and their users itself constitutes a security. To date, there has been no guidance from the CRA relating to the taxation of these securities, which are known as "crypto contracts." This article considers potential income tax implications arising from the existence of crypto contracts by exploring how income taxation would differ for users of crypto trading platforms if they were taxed on crypto contracts rather than cryptoassets. Specifically, the article considers the treatment of transactions as being on income or capital account, the availability of elections to treat transactions on capital account, the applicability of section 49.1 of the Income Tax Act, and the income taxation of staking rewards earned through crypto trading platforms. Rather than offering conclusions on these topics, this article aims to provide a framework for thinking about crypto contracts from a Canadian income tax perspective and to provoke further thought from Canadian tax professionals.

Risk disclosure and firm risk: Evidence from Canadian firms

In recent decades, financial and accounting regulators have turned the spotlight on risk management and disclosure. Like securities regulators in the United States, the United Kingdom and several other countries, Canadian Securities Administrators have set out requirements for the disclosure and discussion of risks in the MD&A section of annual reports. Responding positively to these new guidelines, organisations now report many risks in their MD&A. These disclosure requirements are intended to provide information about a company’s material risks to help stakeholders understand and evaluate interrelated risks, the risks’ impact and the company’s risk management strategies (Khandelwal, Kumar, Verma, & Pratap Singh, 2019). However, since the nature of the risks disclosed derives wholly from organisational decisions, the content of these disclosures can be considered voluntary. For this reason, some critics argue that risk disclosures are by and large boilerplate in nature (Bao & Datta, 2014; Hope, Hu, & Lu, 2016). From this perspective, this study aims to examine whether there is a relationship between the risks firms disclose in their annual reports and their systematic risk. The regression analyses were carried out on the risks disclosed by a sample of 200 Canadian companies included in the 2016 Toronto Stock Exchange S&P/TSX Composite Index. These analyses revealed a positive and significant relationship between the risks disclosed and the firms’ systematic risk. Our results support the regulatory approaches respecting this type of information adopted by a number of countries. Accordingly, disclosing the risks that companies face should help small investors understand and appreciate them.

Director elections: An analysis of shareholder response to directors’ reputation and expertise

The purpose of this study is to determine whether shareholders take directors’ independence, gender, expertise, and reputation into account when voting in directors’ elections. To this end, we regressed several explanatory variables representing these characteristics on the percentage of “in favour” votes cast during annual elections in 2017 for each director, based on a sample of 60 Canadian firms. Among these explanatory variables, we used two measures of their reputation, one measure of their level of education, several measures of their area of expertise, and one measure of their independence. Their reputation was assessed based on their inclusion in the Canadian Who’s Who directory and their membership on another board of directors of a Canadian public company. The other explanatory variables were collected from official company documents, especially the proxy circulars available on the Canadian Securities Administrators website. The accounting and financial variables were drawn from the Research Insights database. The results of the regression analysis indicate that although shareholders do not seem to consider directors’ reputation and expertise when casting their vote, they do take their independence and gender into account

Tales from the Crypt - How to Regulate Initial Coin Offerings

Given the boom in, and media attention surrounding, Initial Coin Offerings (ICOs), this Commentary asks whether this new type of financing is one that fills a market gap in the financial sector, or is just a way of defrauding unsuspecting retail investors looking to invest in new startups. We set forth arguments showing that ICOs do indeed fill an essential gap in funding for entrepreneurs that have limited access to other forms of startup financing such as crowdfunding, venture capital or bank lending. We point out that for an ICO to be the efficient way of financing, the business venture needs to develop: i. a decentralized platform, usually based on blockchain technology; where ii. a coin gives digital access to the platform; and serves as iii. a means of payment for users that engage in decentralized, person-to-person (P2P) exchange in order to create and transfer value between them. If these features are fulfilled, using an ICO can be integral to the project’s success, and we label it simply a “fundamental ICO.” Based on such guidance, and very much in the spirit of “activity-based regulation,” we suggest that Canadian securities regulators develop specific regulations for ICOs that move beyond the question of whether an ICO is a security or not and take into account the special nature of such financing. Alternatively, or until new rules arrive, regulatory relief could still be granted for fundamental ICOs under the Canadian Securities Administrators (CSA) Sandbox. Our proposed test can also create guidelines for the right approach to taxation that is consistent with the value that is added by such financing. Tax rules can be based on the dual roles of the coins, which are both an investment stake and a currency. There is value in bringing together economic, regulatory and legal aspects to develop a specific framework for the regulation and taxation of ICOs in Canada. This can ensure an environment that reaps the benefits of the ongoing blockchain revolution for the Canadian economy without exposing investors unnecessarily to fraud.

An empirical investigation on the impact of XBRL adoption on information asymmetry: Evidence from Europe

Given the high cost of developing and implementing data standards such as eXtensible Business Reporting Language (XBRL), it is critical to assess their influences before they are adopted on a large scale. The European Parliament has voted for the new Transparency Directive that calls for the mandatory preparation of annual business performance reports in a single electronic reporting from January 1, 2020 based on a cost–benefit analysis by European Securities and Markets Authority (ESMA), with due reference to current and future technological options such as XBRL. Regulators in many other jurisdictions such as Canadian Securities Administrators are also assessing the costs and benefits from XBRL adoption. This paper informs such analysis by examining whether the expected benefit of information asymmetry reduction is realized through XBRL adoption in a European context. XBRL adoption among European non-financial firms is found to significantly increase market liquidity and thus reduce information asymmetry. The association is stronger for larger firms that have sufficient resources and expertise to properly implement the technology. The empirical findings also suggest that the association is stronger for non-high-technology firms whose financial statements affected by XBRL are more reliant upon by investors. Based on these findings, XBRL evidences a viable option as an electronic reporting format with effective implementation for businesses.

Normativity in Environmental Reporting: A Comparison of Three Regimes

Normativity is assessed as we evaluate and compare the environmental reporting practices of a sample of French and Canadian companies through the lens of institutional legitimacy. More specifically, we examine how French and Canadian firms changed their reporting practices in reaction to the promulgation of laws and regulations in their respective countries, i.e., the NER and Grenelle II Acts in France, and National Instrument 51-102 and CSA Staff Notice NR 51-333, issued by the Canadian Securities Administrators. The firms’ voluntary disclosures according to GRI guidelines are also investigated. Substantive legitimacy theory is used to explore the level of substantive disclosures provided by Canadian and French firms. The findings reveal that the French parliamentary regime is more successful than the Canadian stock exchange regulation in triggering environmental reporting, and that the GRI combined with local regimes prompts environmental disclosures. Notwithstanding the improvements in environmental reporting under all three regimes, a very low level of substantive disclosure is noted in both countries.

The Future of Poison Pills in Canada: Are Takeover Bid Reforms Needed?

The rules regarding shareholder rights plans, also known as “poison pills”, ensure that boards of directors facing a hostile takeover bid can retain a poison pill for a period of time in order to search for other potential offers. Over the years, the period of time has grown in length from twenty to thirty-five days and the Canadian Securities Administrators (CSA) have recently proposed a 120-day period during which takeover bids would remain open. In light of the historical rationale of takeover bid law to protect the interests of target shareholders, this article argues that the legal regime should not allow an extensive bid period of 120 days. While other aspects of the CSA proposal are sound, a lengthy bid period disadvantages both target shareholders and bidders and will ultimately deter bids from occurring.

The Future of Poison Pills in Canada: Are Takeover Bid Reforms Needed?

Proposed takeover rules will produce winners and losers and need rethinking, according to a new report from the C.D. Howe Institute. In “The Future of Poison Pills in Canada: Are Takeover Bid Reforms Needed?,” author Anita Anand, a University of Toronto law professor, assesses the rules proposed by the Canadian Securities Administrators (CSA), and recommends a key change: do not implement the proposed 120-day bid period and retain the current 35 day period.

Typologies in Canadian Securities Fraud: An Impact Assessment on Investor Protection, Money Laundering and the Financing of Terrorism (AML/CFT), and Risk Management Through Problem-Oriented Policing (POP)

A comprehensive foray into criminology of investment fraud in Canada is an elusive evaluation given the efficacy of the disparate current system to combat it. Surely, no authoritative source provides a measure of the size of the problem or its scope. This warrants an all-rounded initiative within the securities industry, and between the industry, government regulators, and policy thinkers to develop a robust what can be termed as problem-oriented policing (POP) to address tactical, strategic and ideological aspects of security fraud to protect investor rights, structure efficient and effective compliance management of the dynamic of ‘unclean’ and illicit money catalyzed through commingling with licit capital market, advancing cause of crime and terrorism. POP identifies pattern within a typology of securities fraud through analysis; developing a response; implementing the response; and monitoring and evaluating the program. Part I walks through the conceptual dimensions of fraud under Criminal Code and Securities Act fraud provisions, types and the extant structures to combat them, besides introducing notions and principles of POP as improvising the manner to combat this. Part-II discusses the scope of problem, the almost-symbiotic equation between organized crimes and securities fraud with malignant consequences for investor protection and money-laundering crimes. Part-III takes a resume of categories of enforcement cases chronicled in the 2014 Enforcement Report of Canadian Securities Administrators (CSA) as a barometer as to what ails the securities market in Canada having monstrous impact economically, socially, and politically. Part-IV underscores criticality of enforcement to shape up a robust securities regulatory framework. In conclusion, I have flagged recommendations stating that POP is a must to have a coordinated approach to this problem of securities fraud with probably, an optimal national fraud enforcement agency workable through a dynamic data-base based on psychometric analysis of demographic, psychological and behavioral attributes of investors with lateral inputs from other programs like FINTRAC system, investors’ tools, deterrence, whistleblower program, multi-agency co-operation and international enforcement co-operation.

The Troubling Case of Proxy Advisors: Some Policy Recommendations

The Troubling Case of Proxy Advisors: Some Policy Recommendations

Mutual Funds Regulation in Canada

This paper outlines how mutual funds are regulated in Canada. Canada doesn't have a Federal Regulatory Authority. In this case, how do different regulatory systems come together? What is the role of Canadian securities Administrators, Self Regulatory Organization, Mutual Fund Distributors etc., and how is the fund asset protected are discussed in this paper.

Canadian Evidence of Adherence to “Comply or Explain” Corporate Governance Codes: An International Comparison

AbstractThis study documents the rate of compliance by Canadian public firms with corporate governance recommendations imposed by the Canadian Securities Administrators. Canada uses a “comply or explain” governance structure in which harmonized provincial regulation establishes mandatory disclosure of governance practices. Firms can be compliant with these requirements either by voluntarily adopting the recommended best practices (i.e., adopt) or by explaining the alternative practices implemented to achieve the same governance principle (i.e., explain). Firms that fail to comply (i.e., neither adopt nor explain) are in violation of Canadian securities regulation with respect to governance. Using a hand‐collected sample of 742 Canadian public companies and 16 governance recommendations, our results show that an average of 82 percent of firms complied by adopting the best practice and an additional 4 percent complied by explanation. Our study also shows that 39 percent of Canadian publicly traded firms were completely compliant with all 16 recommendations examined in this study, either by adoption or explanation. To provide a broader context for these results, we compare rates of compliance in Canada to rates in Australia, a country broadly similar to Canada with comparable governance recommendations. The Australian Securities Exchange supplied data sample of 1334 Australian companies reports a complete compliance rate of 74 percent compared to Canada's 39 percent complete compliance rate. Our analysis shows that compliance by adoption of best practice is more common in Canada, whereas compliance by explanation is more common in Australia. In our analysis of compliance with individual recommendations, we find that half of the recommendations are more likely to be complied with in Australia, and the other half are more likely to be complied with in Canada.

The disclosure of enterprise risk management (ERM) information: An overview of Canadian regulations for risk disclosure

This paper discusses the mandatory risk disclosures in Canada under International Financial Reporting Standards (IFRS). U.S. mandatory accounting disclosures of risk are also briefly examined, since some Canadian companies are cross-listed in the US. Mandatory disclosures of risk under the Basel II and Basel III Accords for the international regulation of banks are discussed as well as the assessment of ERM by Standard & Poor’s. The risk disclosures in the Management Discussion & Analysis (MD&A) section of the annual report prescribed by the Canadian Securities Administrators (CSA) in National Instrument 51-102 Continuous Disclosure Obligations are examined. Since these risk disclosures are voluntary, the actual disclosures in the MD&A section of the annual report are entirely at the discretion of management subject to effective board oversight.

The Ontario Securities Commission on Accounting and Auditing from the 1960s to 2008 - Part 3: The Fifth Chief Accountant, 1996-2008

John Carchrae, Fifth Chief Accountant of the Ontario Securities Commission, served 1996-2008. This term was greater than that of all predecessors combined and covered momentous events concerning accounting and auditing that produced substantial regulatory reform. During this period the OSC challenged the accounting and auditing profession to better serve the public interest. These calls were matched with regulatory action on a series of matters including, inter alia, non-GAAP measures; revenue recognition; and the development of a response to Sarbanes-Oxley that was constitutional in the Canadian context. OSC joined with other provincial regulators through the Canadian Securities Administrators (CSA) to seek harmonization of Canadian securities regulation through a series of National Instruments. Later events included the explosion of income trusts and regulatory concern regarding their accounting, especially for cash. The era closed with adoption of international accounting standards, a project encouraged by OSC for over a decade.

Audit Committees on Canada’s 'Big Board' Fall into Line; Little Guys Continue to Lag

After a rough introduction to the post-Sarbanes Oxley era, Canadian audit committees for TSX listed firms have mostly fallen into line with the reforms enacted by the Canadian Securities Administrators in 2004. A new study just completed shows that for a sample of over 450 Canadian companies that 90% or more complied with the regulatory requirements for Audit Committee member independence and financial literacy, assigned responsibilities acknowledged and audit firm fee disclosures. The ‘made in Canada’ approach of providing ‘daylight’ by requiring disclosure of poor governance practices hoping that it would lead to substantive changes quickly does not seem to be born out given the predominance of Venture firms having management members on Audit Committees despite several years of disclosure of this departure from ‘best practice’. The lack of compliance in the area of mandated audit committee financial literacy disclosures among TSX companies is also problematic. ‘Negotiations’ among Canada’s thirteen regulators lead to the requirement for a financial expert on the audit committee to be dropped and replaced with this disclosure - yet even that disclosure is not being uniformly followed. Compounding this is the practice of nearly 90% of Venture companies voluntarily disclosing they have financially literate audit committees but with almost a third not providing any information about how they support that assertion. Nonetheless, the study concludes that the overall story is a good news one for Canadian regulators. In one of the rare cases where regulators went public with a strong statement of disapproval of the level of noncompliance in their first study and kept their promise to carry out the follow up study in the next fiscal year, corporate Canada as represented by those listed on the “Big Board” seemed to be convinced that the regulators were serious about enforcement of this regulation.

Corporate Governance: Platitudes, Principles or Best Practices

Since 2005 corporate governance disclosure requirements for Canadian public companies have been set by the Canadian Securities Administrators. The requirements are essentially a system of voluntary compliance with “best practices” but with mandatory disclosure of compliance or explanation of how it complied “in principle.” A company would be compliant if “best practices” were not followed, as long as compensating disclosure was made about the alternative approach taken. In December of 2008 the CSA proposed revisions to their requirements. The proposed new requirements support a so-called “principles approach” to governance, a substantial change from the “best practices” which are used as benchmarks in the 2005 requirements. Our study featured 307 TSX registrants and 148 TSX Venture registrants. We found the non-compliance rate for TSX firms ranged from 11% to 20%, using the lenient test of whether the company ignored the requirement to disclose and explain the company’s approach alternative approach to governance if they did not comply with best practices suggested in the nine areas we reviewed. We did not judge the appropriateness of the alternative approaches taken by firms that complied by making disclosure of differences with best practices, just as would be done under the new proposed “principles” based policy. For TSX Venture companies, non-compliance, in individual non-required areas, ranged from 25% to 84%, are of which are significantly higher than the current TSX rates of non-compliance. Overall, the non-compliance rate should give the investment community, and therefore the CSA, cause to hesitate.

Preventing and Detecting Accounting Irregularities: The Role of Corporate Governance

This study examines the extent to which corporate governance acts as an efficient means of protecting investors against accounting irregularities, thus contributing to the literatures on governance, on fraudulent financial statements and on the public enforcement of securities laws by market authorities. It does so by empirically testing the prediction that the seriousness or level of non compliance of irregularities detected by market authorities is negatively associated with the quality of governance. For that purpose, a sample of 107 firms identified as reporting issuers in default by the Canadian Securities Administrators and the Ontario Securities Commission is matched with 107 other control firms based on industry, size, stock exchange membership and date of default.

Regulatory networks for accounting and auditing standards: A social network analysis of Canadian and international standard-setting

Rose and Miller [Rose, N., & Miller, P. (1992). Political power beyond the state: Problematics of government. British Journal of Sociology, 43(2), 173–205] note that governmentality is exercised through “centers of calculation” embedded in “networks of rule;” we focus on the “networks of rule” and use social network analysis to document the linked organizations, both domestic and international, that affect the creation of accounting and auditing standards in Canada. The network is defined as the set of regulatory bodies and other organizations that have the right to appoint (or approve the appointment of) members of another organization’s standard-setting body. The network consists of 61 organizations, sharing 131 interlocks. These organizations are clustered into four groups centered on, respectively, the Canadian Institute of Chartered Accountants, the Canadian Securities Administrators, International Federation of Accountants and the IOSCO/World Bank. The analysis identifies the boundaries of these clusters and the key organizations that maintain the cohesion of the network. The conclusion identifies research opportunities opened by this perspective on accounting and auditing regulation.

Corporate Performance and the Chief Executive Officer`s Compensation in the Service Industry

This study examines the relationship between corporate performance and the CEO compensation. Data were collected from www.sedar.com (the official site that provides access to most public securities documents and information filed by public companies and investment funds with the Canadian Securities Administrators (CSA) in the SEDAR filing system), www.sec.gov/edgar.shtml, and www.hoovers.com to examine the relationship between corporate performance and the CEO compensation. Results suggest that CEO compensation is the function of net profit margin. This paper offers useful insights for the service industry owner/operators based on empirical evidence.

Assessing Board Leadership

The Canadian Securities Administrators’ National Policy 58-201 Corporate Governance Guidelines (the “Policy”),1 released 15 April 2005, on which the author provided detailed advice, reads that: • “[t]he board should develop clear position descriptions for the chair and the chair of each board committee” (section 3.5); • the board should engage in an explicit two-step “competencies and skills” recruitment of individual directors (sections 3.12 and 3.14);2 and • individual directors should be regularly assessed and that these assessments should consider “the applicable position description(s), as well as the competencies and skills each individual director is expected to bring to the board” (section 3.18). The Canadian Securities Administrators, subject to receiving the required approvals, intend for the Policy to come into force in Canadian jurisdictions on 30 June 2005. This article canvasses some of the aspects in assessing board leadership.