Insider trading is one of the most serious offences in Canada's securities market. It happens when someone with access to non-public information about a company buys or sells securities for personal gain. This type of trading is illegal because it undermines the integrity of the market and gives certain individuals an unfair advantage over other investors.
In this article, Lexpert will talk about everything you need to know about insider trading in Canada. We'll discuss who can be considered an insider, how tipping works, and other valuable insights!
What is considered insider trading in Canada?
Insider trading involves buying or selling securities when you have access to information that hasn't been released to the public yet. This non-public information could influence how the stock price moves once people find out about it. The core problem is that the person with this advantage uses it to profit while others operate with incomplete information.
This practice violates the law because it creates an uneven playing field. Some investors have access to information that others do not. Those with access can make trades knowing something that would change other people's decisions if they knew it too. That advantage translates into unfair profits taken from other market participants.
Watch this video to learn more:
For businesses and professionals dealing with mergers, acquisitions, or other corporate transactions, working with a securities lawyer can help you navigate these complex rules. Find one when you browse through our list of the best corporate finance and securities lawyers in Canada.
How insider trading in Canada damages market trust
Beyond individual investors, insider trading harms the broader market. When people believe that insiders are using confidential information to trade, they lose trust in the system. Investors start to wonder if the market is honest or if they are always at a disadvantage.
Canada addresses this problem through both criminal law and provincial regulations. The Canadian Securities Administrators (CSA) oversee enforcement across provinces and territories. This dual approach means that authorities can pursue both criminal charges and regulatory penalties against violators.
Not all insider trading in Canada is illegal
Being an insider does not automatically make someone a lawbreaker. People who work for a company or have connections to it can legally buy and sell its securities. What matters is whether they possess non-public information when they trade.
The illegal part occurs when someone has access to confidential information and then uses it to make trading decisions. If you know something about a company that would move the stock price, and you trade based on that knowledge, you have broken the law. The information must be both material (meaning it would influence investment decisions) and non-public (meaning it hasn't been released to everyone yet).
This distinction explains the purpose behind insider trading laws. When insiders profit from confidential information, the company itself suffers damage to its reputation. More critically, public faith in the financial system weakens.
Investors need to believe that markets operate fairly and that they have a genuine chance of competing on equal footing.
Who counts as an insider?
According to Ontario's Securities Act, an insider can be:
- a director or officer of a reporting issuer
- a director or officer of a person or company that is itself an insider or subsidiary of a reporting issuer
- a person or company designated as an insider in an order made under subsection 11 of the Act
- a person or company that is in a class of persons or companies designated under subparagraph 40 v of subsection 143 (1) of the Act
A person or company is also an insider if they own or control (directly or indirectly) more than 10 percent of all voting shares in a public company.
The same is true if you combine the ownership of shares of a person or company with their power to control or direct other shares. If this combined total exceeds 10 percent of all voting rights in a public company, that person or company is considered an insider.
When calculating these percentages, exclude any shares that the person or company is temporarily holding as an underwriter during a share distribution or offering.
What is a special relationship?
A special relationship exists between a person and a company in several important situations. British Columbia's Securities Act provides the framework that helps determine who has obligations regarding confidential information.
Direct special relationship
Someone is in a special relationship if they work as an insider, affiliate, or associate of the company itself. They also occupy this status if they work for someone planning to make a takeover bid. A takeover bid is simply an offer to purchase shares made by someone other than the company itself.
The definition extends to people connected to firms considering a merger, reorganization, or arrangement with the company. This includes those working with parties who might acquire a substantial portion of the company's assets.
Employment and professional activities
If you conduct business or professional activities on behalf of the company or with any of the parties described above, you are in a special relationship. Directors, officers, and employees of the company or any related party fall into this category. Your job title or employment role creates the relationship automatically.
Another type involves people who learn confidential information while in one of these relationships. For instance, if you gain knowledge about a material fact or important change to the company's circumstances through your work connection.
In these scenarios, you occupy a special relationship even if your formal role doesn't.
Indirect recipients
Suppose that someone tells you confidential information. You know or should reasonably know that the person who told you was in a special relationship with the company.
If that's the case, then you enter a special relationship as well. This recognizes that information flows between people, and the law wants to stop the chain of unauthorized sharing.
Remember, if you are in a special relationship, you cannot disclose material non-public information to others for purposes of trading. You also cannot trade on such information yourself.
Information sharing and the tipping concept
When someone in a special relationship tells another person about confidential information that could affect trading decisions, that is called tipping. The person sharing the information (the tipper) is engaging in an unauthorized disclosure.
Tipping doesn't require that the tipper personally trades on the information. They can be guilty simply by passing it along. The person receiving the information can then use it to trade. Both people can face liability in some circumstances.
The law recognizes that business professionals sometimes need to share confidential information to carry out legitimate work. This exception is called the necessary course of business (NCOB). When information sharing happens as part of normal, required business activity, it doesn't violate tipping rules.
What happens when someone is convicted of insider trading?
The Criminal Code sets the maximum prison sentence at ten years for insider trading charges treated as indictable offences. This places insider trading among the most serious crimes prosecuted in Canada.
Ontario's Securities Act adds additional penalties. People or companies found guilty can face imprisonment for up to five years less a day. They also face financial penalties, with maximum fines reaching five million dollars per conviction. Courts often impose both the jail time and the fine together.
For insider trading specifically, the law ties the financial penalty to the profit made or loss avoided. The fine becomes whichever is greater: five million dollars or three times the profit gained or three times the loss prevented.
For tipping offences, criminal penalties include up to five years imprisonment for indictable charges. Summary conviction charges carry lower penalties.
These substantial consequences exist for good reason. The combination of criminal penalties and financial punishment aims to prevent people from attempting insider trading in Canada. The penalties also send a message that Canada enforces these laws seriously.
How insider trading laws developed in Canada
The concept of insider trading originally centred on company officers who profited from knowledge that their firms were about to merge. Over time, the definition expanded.
It came to include lawyers working on mergers, bankers financing deals, financial reporters who heard information, and even office workers who found discarded documents. Each group had access to confidential information through their work.
Canada formally made insider trading a criminal offence in 2004 when it was added to the Criminal Code. Before this, provincial laws and business legislation already prohibited it. The Criminal Code addition recognized that the worst cases warranted criminal punishment, not just regulatory penalties.
The decision to criminalize insider trading reflected Canada's response to major corporate scandals in the United States. Watch this video on the 2004 Martha Stewart insider trading case:
Moving forward with insider trading awareness
If you work in a position where you have access to non-public information about a publicly traded company, you have responsibilities under insider trading laws. You must refrain from trading on that information and from tipping others who might trade.
Remember, the penalties for violating these rules are substantial and can affect your career and finances permanently.
To learn more about insider trading in Canada and related topics, just browse through our Legal FAQs page.