A Canadian portfolio company discovers that a co-investor it has held alongside for three years has been designated under Canadian sanctions regulations. The deal documents say nothing about this scenario. Legal is asking whether the shareholding must be disposed of, who must authorise the exit, and what happens if the proceeds flow back through a blocked account. These are not theoretical concerns. They are the live questions that land in a compliance officer's inbox on a Wednesday morning.
Divesting a sanctioned interest under the Canadian regime requires more than locating a buyer. Under the Special Economic Measures Act ("SEMA"), the governing statute administered by Global Affairs Canada ("GAC"), a business holding an interest that touches a designated person must establish whether dealing is prohibited, determine whether a permit or specific authorisation is required, and structure the exit so that no value flows to or for the benefit of a designated person in the process. The divestiture route is available – but it is conditional, documented, and time-sensitive.
This guide walks through each stage in sequence: the governing authority and legal basis, how to identify a prohibited interest, the divestiture decision tree, the permit mechanics, cross-regime risk from OFAC and OFSI, and the record-keeping obligations that apply after completion. As of January 2026, the Canadian sanctions list maintained under SEMA continues to expand; businesses with cross-border holdings should treat this guide as a starting point and verify the current position before acting.
Step 1: Understand the governing authority and legal basis
The Canadian sanctions regime that governs most economic-measures divestiture questions is built on SEMA, administered by GAC's Sanctions Bureau, with criminal-enforcement jurisdiction shared with the Royal Canadian Mounted Police and the Public Prosecution Service of Canada. SEMA is not the only instrument; the United Nations Act implements Security Council resolutions through separate regulations, and the Export and Import Permits Act covers controlled-goods transfers. In practice, most commercial divestitures of a sanctioned interest engage the SEMA-based country or thematic regulations rather than UN-derived prohibitions, though both can apply simultaneously to the same transaction.
GAC's Sanctions Bureau is the operational contact for permit applications, technical guidance, and interpretive requests. It does not give legal advice, but it will confirm, on written request, whether a named person appears on the current consolidated Canadian sanctions list. That confirmation is time-stamped and worth obtaining before any transaction closes. The Bureau also publishes the country-specific and thematic regulations that set out the precise prohibitions applicable to each designated person category.
Practitioners advising on Canadian sanctions matters note a structural point that catches clients unfamiliar with the regime: SEMA grants broad Governor-in-Council authority to make regulations, and those regulations can – and do – contain different prohibition language across different country regimes. A prohibition in the regulations applicable to one country regime may be worded materially differently from the prohibition in another. Before assuming that the divestiture analysis from a prior matter transfers directly, counsel must read the specific regulation that applies to the designated person in question.
The position above covers the standard case. Your facts – the counterparty, the nature of the interest, the applicable country regulation, and any UN overlay – change the analysis. For an initial assessment of your position under the Canadian regime, contact Calder & Vance at info@caldervance.com.
Step 2: Identify whether the interest is a prohibited dealing
Not every commercial relationship with a business that has a connection to a designated person constitutes a prohibited dealing; the question is whether the interest itself falls within the prohibition as drafted in the applicable SEMA regulation. SEMA regulations typically prohibit dealings in property, the provision of financial services, and transactions that directly or indirectly benefit a designated person. A shareholding in a company where a designated person holds a controlling or significant interest will almost always engage at least the property-dealing prohibition, but the analysis is fact-specific.
The first task is a designated-person identification exercise: confirm whether the counterparty, co-investor, or underlying asset holder appears on the Canadian consolidated sanctions list, the UN Consolidated List as implemented in Canada, or both. GAC updates the consolidated list on a rolling basis; the list as at the date of the triggering event is the operationally relevant version, but ongoing compliance requires monitoring from that date forward.
The second task is an interest-mapping exercise. Identify the precise nature of the holding: direct shareholding, debt instrument, contractual right, partnership interest, or a hybrid structure. Each instrument has different treatment under the property-dealing prohibition. A convertible note with a designated person as co-investor may engage the prohibition differently from a straightforward equity stake. In our experience, businesses underestimate how broadly GAC interprets the phrase "dealing in property" in the relevant regulations; a charge or pledge over assets in which a designated person has any interest can itself be a prohibited dealing absent authorisation.
Third, map the ownership chain one level up and one level down. Canadian regulations do not contain a mechanical ownership threshold equivalent to OFAC's 50 percent rule (the OFAC test that treats an entity as blocked if blocked persons own it 50 percent or more in the aggregate). GAC's approach is closer to the EU and UK models, which assess both ownership and control (the test for whether a non-listed entity is caught through a listed person's direction or influence). This means a minority shareholding held by a designated person may still bring the company within the prohibition if the designated person exercises effective control. Document your analysis in writing; the record will be essential if the matter is later reviewed.
Step 3: Map the divestiture options and the decision tree
Once the interest is confirmed as a prohibited dealing, the business faces a structured choice among three possible routes, and selecting the wrong one can convert a compliance exercise into an enforcement matter. The routes are: divestiture without a permit (where the applicable regulation contains a specific exception allowing the unwinding of a pre-existing interest), divestiture under a GAC-issued permit, and application to the court where the property has been formally seized or restrained.
Route A: Regulatory exception for pre-existing interests. Some SEMA regulations include a standing exception permitting a party to complete or unwind a transaction entered into before the designation, provided the completion occurs within a defined window and no new value flows to the designated person. Whether such an exception exists – and on what terms – is entirely regime-specific. Do not assume it is available; read the applicable regulation.
Route B: GAC permit. Where no standing exception applies, a business wishing to divest must apply to GAC for a permit authorising the transaction. The permit application sets out the nature of the interest, the proposed transaction structure, the identity of the buyer, the disposition of proceeds, and the rationale. GAC has a statutory discretion to grant or refuse. Processing times are not fixed by statute and vary with caseload and the complexity of the transaction; in our experience, applicants should plan for a period of several months for a contested or complex permit, and should not execute any transaction step before the permit is granted. The permit will contain conditions – typically including how proceeds are to be held, whether an escrow is required, and reporting obligations after completion.
Route C: Court-supervised disposal. Where property has been restrained or seized under a SEMA enforcement action, the exit route runs through the court rather than through GAC's permit process. This route is beyond the scope of a standard commercial divestiture and requires specialist litigation counsel in addition to sanctions-law advice.
The decision matrix in practice: if your interest is a direct equity stake and a standing exception is absent → apply for a GAC permit, preserve all current corporate rights but take no action that increases value to the designated person, and document the holding position throughout. If the interest is indirect (through a fund or an intermediate holding company) → the analysis of who "holds" the interest for SEMA purposes must be completed before a permit application is prepared, because GAC will ask. If a transaction has already been flagged or a filing refused, an early legal review can preserve options that narrow with time – contact info@caldervance.com.
Step 4: Prepare and submit the GAC permit application
A GAC permit application for divestiture of a sanctioned interest is a legal filing, not a short-form query, and its quality directly affects both the outcome and the processing time. GAC expects the application to be complete on submission; material gaps trigger requests for further information that reset the clock. In our cross-border practice, we prepare permit applications that address each element GAC requires, structured to anticipate the questions the Sanctions Bureau is most likely to raise.
The application should address, at minimum, the following points:
- The identity and designation status of all relevant persons, with the applicable regulation cited generically.
- The nature, structure, and current value of the interest to be divested, supported by documentary evidence.
- The proposed buyer and confirmation that the buyer is not itself a designated person or an entity controlled by one.
- The proposed mechanism for handling sale proceeds – including whether proceeds will be held in escrow, the identity of the escrow agent, and the conditions for release.
- Confirmation that no step in the proposed transaction structure will directly or indirectly benefit the designated person.
- Any cross-border dimensions of the transaction: if the interest involves assets or parties in a jurisdiction where OFAC, OFSI, or EU sanctions also apply, this must be disclosed and addressed.
Supporting documentation typically includes the share register or instrument evidencing the interest, corporate charts showing the ownership structure, and any valuation prepared for the transaction. GAC may also request evidence of the steps taken to identify the designated person's interest – in other words, the designated-person identification and interest-mapping analysis from Steps 2 and 3 above.
One procedural point that consistently matters: do not take any interim steps – accepting distributions, exercising votes in respect of the designated person's position, or entering a sale agreement – before the permit is granted. Any such step may itself be a prohibited dealing, regardless of the divestiture intent. A court injunction freezing the assets of the enterprise pending the permit is a risk in contested or enforcement-adjacent situations; take advice before acting.
Step 5: Manage cross-regime risk from OFAC, OFSI, and the EU
A Canadian divestiture rarely involves only Canadian law. Where the interest has any connection to the United States, the United Kingdom, or the EU – through the nationality of the parties, the location of assets, the currency of the transaction, or the correspondent banking chain used to settle proceeds – the divestiture must be assessed against OFAC, OFSI, and EU sanctions simultaneously.
The OFAC dimension is frequently the most consequential. OFAC's jurisdiction reaches US persons wherever located, non-US persons who transact in US dollars or use the US financial system, and – through the secondary sanctions (US measures that restrict access to the US market for non-US persons who engage with designated persons under certain programmes) – non-US financial institutions that process payments for or on behalf of designated persons. A divestiture structured to satisfy GAC's permit conditions but that routes proceeds through a US correspondent bank may trigger a separate OFAC licensing requirement. In our experience, this is the single most common cross-border gap in Canadian divestiture transactions.
The OFSI dimension turns on whether any party to the transaction is a UK person or a UK-connected entity. OFSI (the Office of Financial Sanctions Implementation, the UK authority for financial sanctions) applies an ownership-and-control test – similar to the EU approach – rather than the mechanical OFAC threshold. A UK-incorporated intermediate holding company in the ownership chain may bring OFSI into scope even if the underlying asset and the principal parties are non-UK. OFSI can require a licence before any step in a UK-connected transaction that involves frozen assets. The licensing process and the criteria differ materially from the GAC permit process.
The EU position requires separate assessment if any party is EU-based, the assets are located in the EU, or the designated person appears on EU lists in addition to the Canadian list. EU Council Regulations impose asset-freeze obligations with direct effect across Member States; the divestiture will need to be assessed against the relevant EU regulation as well as any national implementing measures.
Where all three regimes apply, the transaction timeline must accommodate the longest licensing process. Permits and licences from different regulators do not automatically align in scope or conditions; each permit may impose different escrow mechanics or reporting obligations. We regularly advise on the sequencing of multi-regime permit applications to avoid a situation where one permit lapses before another is obtained.
Step 6: Complete the divestiture and meet your post-completion obligations
Completion under a GAC permit is not the end of the compliance obligation. The permit conditions will typically specify a set of post-completion steps: confirmation of completion to GAC, evidence of the disposition of proceeds, and any ongoing monitoring requirements if the proceeds are held in escrow pending further release conditions. Failure to comply with permit conditions after the permit is granted can result in the permit being revoked and the completed transaction being treated as an unlicensed dealing.
Record-keeping is a statutory requirement, not a discretionary best practice. SEMA and the applicable regulations require parties to retain records of transactions and their compliance analysis for a defined period. Although the precise retention window is set by regulation and should be verified against the current rules, in practice a minimum of five years from the date of the transaction is the standard applied across comparable regimes – verify the applicable requirement before disposing of any records. In our cross-border practice, we advise clients to retain the full permit file, including all correspondence with GAC, the supporting documentation submitted, and any legal analysis prepared at each stage.
A separate reporting obligation may also apply. Where a business holds property belonging to, held by, or on behalf of a designated person, some SEMA regulations impose an obligation to report that holding to GAC within a defined period of becoming aware of it. This obligation can arise before the divestiture is complete – and in some cases before the permit application is filed. Do not assume the divestiture process discharges this reporting obligation; check the applicable regulation at the outset and again at each stage of the transaction.
In a recent matter, a financial services business with a minority stake in a fund vehicle discovered mid-process that one of the fund's co-investors had been designated under a SEMA country regime. We scoped the interest, prepared the GAC permit application incorporating the cross-OFAC analysis for the US-dollar settlement leg, and coordinated with local counsel in the relevant jurisdiction to address a parallel EU asset-freeze obligation. The matter resolved through an authorised divestiture with proceeds held to an agreed escrow structure pending GAC's confirmation of the release conditions.
Common mistakes and risk flags when divesting a sanctioned interest
Practitioners who work through Canadian divestiture matters repeatedly see the same errors. Knowing them in advance materially reduces the risk of an enforcement referral or a failed permit application.
Treating the deal as a standard commercial exit. The most common mistake is to instruct M&A or corporate counsel without simultaneously engaging sanctions counsel. The prohibition on dealing in property applies to every step of the transaction – not just the final transfer. A sale mandate, a confidentiality agreement that discloses deal terms to a prospective buyer, or a valuation process that involves the designated person's participation can each be a prohibited dealing. Sanctions review must begin at the moment the designated-person connection is identified, not at signing.
A myth we regularly encounter is that obtaining GAC's confirmation that a person is on the list is sufficient diligence. It is not. The confirmation tells you the person is designated; it does not tell you whether your specific interest structure engages the prohibition, whether a standing exception applies, or what permit conditions GAC is likely to impose. That analysis requires legal advice specific to your facts.
Failing to check the buyer. A divestiture permit will not authorise a sale to another designated person or to an entity that a designated person controls. GAC will require evidence of the buyer's sanctions status. If the buyer itself has a complex ownership structure, the same interest-mapping exercise applied to the original interest must be applied to the buyer before the permit application is filed.
Assuming the Canadian permit covers all regimes. As noted in Step 5, a GAC permit authorises the transaction under Canadian law only. Separate authorisations may be required from OFAC, OFSI, or EU authorities depending on the transaction structure. Processing times differ, and it is the longest clock that governs the transaction timeline.
Incomplete post-completion reporting. Some businesses complete the divestiture, close the file, and do not confirm completion to GAC or retain the records required by the applicable regulation. This leaves open a compliance gap that, if GAC subsequently audits the transaction, may result in scrutiny of the entire permit file.
Related practices
- Correspondent banking and de-risking under OFAC – managing OFAC exposure in correspondent and cross-border payment structures
- Divesting a sanctioned interest: cross-border guide – multi-regime comparison for complex cross-border divestitures
- Divesting a sanctioned interest under EU sanctions – EU Council regulation analysis and licensing route for EU-connected interests