Canada: foreign investment review
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The Investment Canada Act governs foreign investment in Canadian businesses. Generally, investments by non-Canadians in Canadian businesses, or the creation of new Canadian businesses by a non-Canadian, require notification or approval under the Act if the investments meet certain structural or monetary thresholds, or both. This article sets out the basic thresholds for notification and approval, as well as the process and timelines for both net benefit and national security reviews, under the Act.
- Notifiable transactions
- Review thresholds
- Net benefit reviews
- National security reviews
- Transactions blocked for national security reasons
Referenced in this article
- Investment Canada Act
- State-Owned Enterprise Net Benefit Assessment Guidelines
- National Security Review Guidelines
- Policy Statement on Foreign Investment Review and Covid-19
- Policy Statement on Foreign Investment Review and the Ukraine Crisis
Canada’s foreign investment review regime under the Investment Canada Act (the Act) continues to generate controversy and present challenges in relation to a select number of transactions each year.
The first formal rejection of a transaction (outside the cultural arena) under the Act occurred in 2008 in relation to a bid by US-based Alliant Techsystems Inc to acquire MacDonald Dettwiler and Associates Ltd, a Canadian aerospace company.
In 2010, a preliminary rejection under the Act resulted in Australia-based BHP Billiton abandoning its bid for Potash Corporation of Saskatchewan.
The effort by the London Stock Exchange to merge with TMX, the operator of the Toronto Stock Exchange, in 2011 attracted the foreign investment regime’s attention, although the failure of that transaction was not attributable to the regime.
The 2012 proposed acquisitions by CNOOC (a Chinese state-owned enterprise) of Nexen and by Petronas (a Malaysian state-owned enterprise) of Progress Energy served as catalysts for changes to the way foreign state-owned enterprises (SOEs) are treated under the Act.
In 2013, Orascom Telecom (a Russian entity) withdrew its offer to acquire Wind Mobile, a Canadian cellular business. While the reasons for the decision to withdraw were not publicised, national security concerns were almost certainly raised during the review process under the Act.
Also in 2013, the proposed acquisition of Allstream, a division of MTS Telecom Services, by Accelero Capital Holdings Inc (a Luxembourg-based entity), was blocked based on national security concerns, and Lenovo (a Chinese entity) reportedly did not proceed with a possible bid for Blackberry because the Canadian government had expressed similar security concerns with its proposed ownership of the communications and hardware company.
In 2015, Chinese investor Beida Jade Bird Group’s attempted construction of a plant to build fire alarm systems in Quebec was blocked on the basis of national security, due to the fact that the plant was too close to the Canadian Space Agency headquarters.
In 2018, the government announced that it had blocked Chinese state-owned CCCC International Holding Ltd’s proposed acquisition of Canadian engineering firm Aecon Group Inc on national security grounds. Notably, competitors had complained that this transaction would result in an SOE from China bidding on projects in sensitive sectors, including the refurbishment of nuclear power stations and the building of military facilities.
Most recently, Chinese state-owned Shandong Gold Mining Co’s acquisition of TMAC Resources Inc was blocked in 2020 by the Canadian government due to national security concerns. Notably, this occurred soon after the government announced increased scrutiny of certain foreign investments in the face of the covid-19 pandemic, and coincided with growing tensions with China related to the detention of Huawei’s chief financial officer in Canada.
While the vast majority of investments by non-Canadians in Canadian businesses are not reviewable under the ‘net benefit to Canada’ test, and while almost all of those that are reviewable secure the requisite clearance in a reasonably timely fashion, albeit subject to various negotiated undertakings in certain cases, transactions continuing to encounter uncertainty under the Act include those involving certain types of cultural businesses, Canadian ‘champions’ as targets, SOE purchasers or national security concerns. Hence, prospective investors are well advised to take the review process under the legislation seriously and, in that regard, to engage capable counsel early in the deal process. Public and government relations experts may, on the advice of counsel, also need to be engaged.
The following discussion provides a practical summary of the regime.
Relevant legislation and administering entities
While there are a number of federal and provincial statutes that are sector-specific and that limit foreign investment, the Act is the only statute of general application in Canada that provides for the review and approval of foreign investments.
For investments other than investments in cultural businesses, the Act is administered by the Investment Review Division (IRD) of the federal department of Innovation, Science and Economic Development Canada (ISED). Investments in cultural businesses are administered by Cultural Sector Investment Review (CSIR) within the federal Department of Canadian Heritage. Where a transaction involves both non-cultural and cultural businesses, both IRD and CSIR may be involved. IRD is solely responsible for the administration of the national security provisions of the Act.
Decisions to approve or disallow investments are made by the Minister of ISED (the ISED Minister), in the case of transactions not involving cultural businesses, and by the Minister of Canadian Heritage and Official Languages (the Cultural Minister), in the case of transactions involving cultural businesses. Both ministers may be involved in the review of transactions involving both cultural and non-cultural businesses. The federal Governor in Council (GIC) – in essence, the federal Cabinet – is the ultimate decision maker with respect to investments considered potentially injurious to national security.
Types of investments captured by the Act
The Act generally applies to the establishment of new Canadian businesses and to the acquisition of control of existing Canadian businesses by non-Canadians. In most cases, non-Canadian investors are only required to file a notification. However, in some cases, the approval of the investment based on a ‘net benefit to Canada’ test is required. The Act also provides for the review of foreign investments that may be injurious to national security.
Establishment of new Canadian business
With the potential exception of new cultural businesses and national security reviews, the establishment of a new Canadian business by a non-Canadian is merely notifiable and not subject to approval. Establishment of a new Canadian business in the cultural sector may require approval where the GIC determines the review of the investment to be in the public interest. The Industry Minister may initiate a national security review in respect of the establishment of a new Canadian business.
Acquisition of control of Canadian business
Subject to a limited number of exceptions, acquisitions of control of Canadian businesses (whether or not already foreign controlled) by non-Canadians, whether direct or indirect, are at a minimum subject to notification under the Act. Direct and certain indirect acquisitions of control by non-Canadians of Canadian businesses that exceed specified monetary thresholds are ‘reviewable’, meaning that they require the approval of the Industry Minister or the Cultural Minister (collectively, the Ministers) or both, based on a ‘net benefit to Canada’ test.
National security review
The GIC may review a proposed or implemented investment by a non-Canadian where the Industry Minister has reasonable grounds to believe that the investment could be injurious to national security. The national security review provisions apply to a broader range of transactions than those covered by the notice and net benefit review provisions of the Act.
Net benefit to Canada review
In the case of corporations, an acquisition of control is deemed to have occurred when more than 50 per cent of the voting shares of a corporation have been acquired by a person. An acquisition of control of a corporation will also be presumed to have occurred when one-third or more of the voting shares of the corporation have been acquired by a person, although this presumption may be rebutted by establishing that, upon the acquisition, the corporation is not in fact controlled by the acquirer through the ownership of voting shares.
For an acquisition of assets, an acquisition of control is considered to occur when all or substantially all of the assets used in carrying on a Canadian business are acquired.
Other rules for the acquisition of control apply in the case of acquisitions of interests in partnerships, trusts, etc.
In general, where the Canadian business does not involve a cultural business and where the acquirer is a World Trade Organization (WTO) investor or a trade agreement investor (provided they are not an SOE), or the target corporation in a share purchase transaction is, immediately prior to the transaction, controlled by a WTO investor or trade agreement investor:
- direct acquisitions of a Canadian business require approval only if the enterprise value of the Canadian business whose control is being directly or indirectly acquired in the transaction is equal to or greater than C$1.141 billion (2022 threshold) where the investor is a WTO investor or C$1.711 billion (2022 threshold) where the investor is a trade agreement investor; and
- indirect acquisitions (eg, an acquisition of a foreign corporation that controls a Canadian corporation carrying on the Canadian business) are not subject to the approval requirement.
Analogous rules apply in the case of asset purchase transactions. These review thresholds are revised annually based on changes to domestic GDP.
The method for determining value (except in respect of investments by SOEs and investments in cultural businesses) is an enterprise value test. This test is meant to reflect the value of a business as a going concern and the increasing importance of service and knowledge-based industries in which much of the value of a business may reside in intangible assets that are typically not recognised on a balance sheet. Other investments, including investments by SOEs and investments in cultural businesses, are subject to asset value thresholds.
National security review
As noted above, a foreign investment, whether implemented or proposed by a non-Canadian, may be reviewed where the ISED Minister has reasonable grounds to believe that the investment could be injurious to national security. There are no monetary thresholds that must be met for a national security review to be initiated.
Timetable and process for notifications and reviews
Investments that are merely subject to notification may be notified up to 30 days post-closing. However, where the investment involves a cultural business or where national security issues could arise, filing on an earlier basis may be prudent to ensure any issues are resolved prior to closing.
Net benefit review
A transaction that is reviewable may not proceed until approval has been received or is deemed to have been received. There are limited exceptions to this general rule. For example, a transaction may be implemented where the minister sends a notice to the investor that they are satisfied that a delay in implementing the investment would result in ‘undue hardship to the non-Canadian or would jeopardise the operations of the Canadian business that is the subject of the investment’.
After receiving an application for review in respect of an investment, the minister has 45 days to review it and decide whether to approve the investment on the basis that it is likely to be of net benefit to Canada. If no notice is sent by the minister to the investor within the 45-day period, the investment will be deemed to have been approved.
The ISED Minister may extend the initial 45-day review period by 30 days or longer, as agreed by the investor and the ISED Minister. If the investor does not receive notice of the Minister’s decision within the extended period, the investment will be deemed to have been approved.
If, within the extended period, the ISED Minister informs the investor that they will not allow the acquisition because it will not be of net benefit to Canada, the investor has the right to make further representations and to submit undertakings (as discussed further below) within a further extended period, as agreed by the investor and the ISED Minister. On expiry of the extended period, the ISED Minister must inform the investor of their decision.
National security review
Where a transaction is subject to a net benefit review, the ISED Minister has 45 days after the application for review is certified as complete to initiate a national security review. Where a transaction is subject only to notification, the ISED Minister has 45 days after certification of the notification to initiate a national security review. Based on amendments to the Act, which came into force on 2 August 2022, where a transaction is neither reviewable nor subject to notification, a notification may be filed voluntarily. If a non-Canadian investor chooses to make a voluntary filing, the government will be required to decide whether it will take any action within 45 days of the date on which the filing is certified as complete. Under the amendments, where a transaction is neither reviewable nor subject to notification, and no voluntary filing has been made, the ISED Minister has five years after implementation of the transaction to initiate a national security review. Where a notification or application is filed, the national security review process can take up to 230 days from the implementation of the transaction, or longer if the foreign investor agrees to an extension. Where a national security review is invoked, the deadlines for the ISED Minister to make a net benefit determination are postponed.
Notifications are not burdensome to complete. Among other things, they require information respecting the investor, the Canadian business being acquired, whether the investor is controlled or influenced by any foreign state or SOE and, importantly, whether the investment falls within the categories of business activities that comprise cultural businesses.
Applications for review
Applications for review are much more substantial than notifications. As with notifications, they require information respecting the investor and the Canadian business being acquired. However, they also require submission of plans for the Canadian business, together with a comparison of the plans with the current operations of the Canadian business and having regard to the net benefit factors. It is common for undertakings to be proposed in connection with the application for review (as discussed further below) to establish net benefit to Canada.
In general, information obtained by the Ministers, IRD or CSIR, with respect to an investor or the Canadian business in connection with the administration or enforcement of the Act, is privileged and no one may knowingly communicate this information or allow it to be communicated. The Act provides for limited exceptions to this general rule but the practice of the government has been (with few exceptions) not to disclose information without the investor’s consent. Additionally, the ISED Minister may make public disclosure in various additional circumstances pertaining to notices issued by the ISED Minister under the Act.
Substantive tests for clearance
There are two potential types of substantive assessment depending on whether the transaction is subject to a net benefit review or a national security review, or both.
Net benefit to Canada
Where an investment is subject to a net benefit review, the relevant minister must be satisfied that the investment is likely to be of net benefit to Canada. The Act sets out the following factors to be taken into account, where relevant, in assessing net benefit to Canada:
- the effect of the investment on the level and nature of economic activity in Canada;
- the degree and significance of participation by Canadians in the Canadian business and in any industry or industries in Canada;
- the effect of the investment on productivity, industrial efficiency, technological development, product innovation and product variety in Canada;
- the effect of the investment on competition within any industry or industries in Canada;
- the compatibility of the investment with national industrial, economic and cultural policies, taking into consideration industrial, economic and cultural policy objectives enunciated by the government or legislature of any province likely to be significantly affected by the investment; and
- the contribution of the investment to Canada’s ability to compete in world markets.
In respect of acquisitions of Canadian businesses by SOEs, the Canadian government issued guidelines in 2007 (and updated in 2012 in the context of the CNOOC/Nexen and Petronas/Progress Energy transactions) in relation to how these acquisitions are to be assessed under the net benefit to Canada test (the SOE Guidelines). The SOE Guidelines provide that in its assessment of net benefit to Canada in relation to an SOE acquisition, the government will evaluate, among other things:
- whether the SOE adheres to Canadian standards of corporate governance (eg, commitment to transparency and disclosure, independent members of the board, independent audit committees and equitable treatment of shareholders);
- the extent to which the SOE is owned, controlled or influenced by a foreign state; and
- whether, post-acquisition, the Canadian business will continue to operate on a commercial basis, including with regard to:
- where it will export;
- where it will process;
- the participation of Canadians in its operations in Canada and elsewhere;
- the impact of the investment on productivity and industrial efficiency in Canada;
- its support of ongoing innovation, research and development in Canada; and
- the level of capital expenditures that it will make to maintain the Canadian business in a globally competitive position.
National security review
An investment may be subjected to a national security review if the industry minister has reasonable grounds to believe that an investment by a non-Canadian could be injurious to national security. The term ‘national security’ is not defined by the Act or the regulations thereunder. However, in 2021, the Canadian government issued guidelines with respect to national security reviews under the Act (the National Security Guidelines). The National Security Guidelines note that, in assessing proposed or implemented investments under the national security provisions of the Act, the nature of the assets (including intangible assets) or business activities and the parties involved in the transaction, including the ultimate controller and potential for third-party influence, are considered. In particular, a national security review is more likely if the transaction involves state-owned investors or private investors assessed as being closely tied to or subject to direction from foreign governments. The National Security Guidelines include a list of factors that the GIC may take into account when conducting a national security review, including but not limited to the following:
- the potential effects of the investment on Canada’s defence capabilities and interests;
- the potential effects of the investment on the transfer of sensitive technology or know-how outside of Canada, on the supply of critical goods and services to Canadians, on critical minerals and critical mineral supply chains or on the security of Canada’s critical infrastructure;
- involvement in the research, manufacture or sale of certain goods or technology identified in the Defence Production Act;
- the potential of the investment to enable foreign surveillance or espionage, or to hinder current or future Canadian intelligence or law enforcement operations;
- the potential impact of the investment on Canada’s international interests;
- the potential of the investment to involve or facilitate the activities of illicit actors; and
- the potential of the investment to enable access to sensitive personal data that could be leveraged to harm Canadian national security through its exploitation.
Notably, the Canadian government issued a policy in April 2020 at the outset of the covid-19 pandemic, stating that under those extraordinary circumstances, the government would subject certain foreign investments into Canada to enhanced scrutiny under the Act. Pursuant to this policy, the government would scrutinise with particular attention foreign direct investments in Canadian businesses that are related to public health or involved in the supply of critical goods and services to Canadians or to the government. It is unclear precisely how long this enhanced security will remain in effect, as the policy notes that it will apply until the economy recovers from the effects of the covid-19 pandemic.
Additionally, in February 2022, the government issued a policy statement with respect to the Ukraine crisis, noting that this elevated risk environment will directly affect both net benefit reviews and national security reviews under the Act. In particular, with respect to national security reviews, should it be determined that an investment has ties, direct or indirect, to an individual or entity associated with, controlled by or subject to influence by the Russian state, this will support a finding by the Minister that there are reasonable grounds to believe that the investment could be injurious to Canada’s national security. With respect to net benefit, the policy statement noted that investments by Russian investors will be found to be of net benefit to Canada on an exceptional basis only. This policy is noted as being applicable during the period of escalated risks of national security and economic injury associated with Russia’s unprovoked attacks on Ukraine and ‘until further notice’.
Authorities’ powers to prohibit or interfere with a transaction
Net benefit to Canada
In the context of a net benefit review, the relevant minister has the authority to:
- reject a proposed investment if they are of the opinion that it is not likely to be of net benefit to Canada;
- approve the proposed investment without any undertakings; or
- approve the proposed investment subject to undertakings.
Undertakings are legally binding commitments entered into by the foreign investor. Undertakings are usually negotiated with the staff at IRD and traditionally last for three to five years, although some last for indefinite periods. In the context of a net benefit review, undertakings have often been given by the foreign investor and accepted by the relevant minister in respect of employment levels in Canada, Canadian participation in management, investment to be made in the Canadian business and location of head offices or other important facilities.
National security review
In the context of a national security review, the GIC ‘may take any measures in respect of the investment that the GIC considers advisable to protect national security’, including:
- prohibiting the implementation of the investment by the non-Canadian;
- authorising the investment on condition that the non-Canadian give undertakings or implement the investment on specified terms and conditions; or
- requiring divestiture of control of the Canadian business or of the non-Canadian investment in the entity.
To date, national security issues have played, or appear to have played, a part in the rejection or abandonment of multiple transactions. Documents disclosed by WikiLeaks suggest that the national security provisions were invoked by the Industry Minister in 2009 to prohibit the implementation of the acquisition of Forsys Metals by George Forrest International, pending further notice (ie, pending a national security review). The transaction was subsequently abandoned, presumably before the GIC made a final decision with respect to the national security issue.
National security issues likely played a role in the Wind Mobile/Orascom Telecom transaction, and the Accelero/MTS transaction was blocked based on national security concerns.
In 2015, a national security review of O-Net Communications’ acquisition of ITF Technologies was initiated following the closing of the transaction. Eventually, the government ordered that O-Net divest its acquired interest in ITF on the basis of national security concerns. O-Net applied for judicial review of this decision, and succeeded in causing a fresh national security review to be undertaken. Based on this second review, the transaction was allowed to close.
Also in 2015, Beida Jade Bird Group’s attempted construction of a plant to build fire alarm systems in Quebec was blocked due to national security concerns, as was CCCC International Holding Ltd’s proposed acquisition of Canadian engineering firm Aecon Group Inc in 2018 and Shandong Gold Mining Co’s acquisition of TMAC Resources Inc in 2020.
Remedies available to the ISED Minister
Where the ISED Minister believes that a non-Canadian has contravened the Act (including failing to file a notification or application when required, implementing a prohibited investment, failing to divest control of a business as required or failing to comply with an undertaking), they may send a demand requiring that the non-Canadian cease the contravention, remedy the default, show why there is no contravention or, in the case of undertakings, justify the non-compliance.
If the non-Canadian fails to adequately comply with a ministerial demand, the Minister may then make a court application for an order to enforce their demand. The court, in addition to any other order that it may consider appropriate in the circumstances, may impose a penalty not exceeding C$10,000 for each day that the non-Canadian remains in non-compliance. Failure to comply with a court order may also result in contempt proceedings.
In the only judicial action taken to date to enforce undertakings, the Industry Minister asked the court to order appropriate measures to remedy the alleged failure by US Steel to comply with certain undertakings that it had given in 2007 in connection with its acquisition of Stelco Inc regarding, among other matters, capital expenditures, research and development and production. This action, which expanded to include two interveners, was ultimately settled on the basis of US Steel providing enhanced undertakings.
Third-party rights in the review process
The practice of the ISED Minister is to consult with any province that is likely to be significantly affected by a proposed investment. While the provinces do not have a veto power under the Act, the views of a province can have a significant impact on the review process. In the case of BHP Billiton’s proposed 2010 acquisition of Potash Corporation of Saskatchewan, the province of Saskatchewan actively opposed the transaction. Ultimately, BHP Billiton withdrew its offer following receipt of a notice from the minister that he was, based on his review, unable to approve the investment without further representations from BHP Billiton regarding net benefit to Canada.
Additionally, because one of the factors that the ISED Minister must consider is the effect of the investment on competition within Canada, the Minister also consults with the Commissioner of Competition. Accordingly, even though a proposed investment may not require a pre-merger notification under the Competition Act, the Commissioner may still become involved in reviewing the transaction.
Lastly, interested third parties, such as unions, municipalities, competitors and customers, may make submissions to the Minister regarding a proposed investment. While not expressly contemplated in the Act, this information, to the extent that it may be considered relevant to the Minister’s deliberations, is likely communicated to the Minister by IRD.
 Industries with these restrictions include telecommunications, broadcasting, air transport, financial services and uranium mining.
 ‘Non-Canadian’ is a defined term in the Investment Canada Act (the Act). For example, in the case of a corporation, a non-Canadian is generally a corporation that is ultimately controlled, through the ownership of voting shares (either through a majority voting interest or control in fact through the ownership of voting interests), by persons who are not Canadian citizens or permanent residents of Canada.
 Canadian businesses in the following areas are considered to be ‘cultural businesses’: the publication, distribution or sale of books, magazines, periodicals or newspapers in print or electronic form; the production, distribution, sale or exhibition of film or video products; the production, distribution, sale or exhibition of audio or video music recordings; and the publication, distribution or sale of music in print or electronic form. The Canadian government has published policies with respect to the acquisition of certain types of cultural businesses by foreign investors (eg, in relation to book publishing and distribution, as well as the publishing, distribution and sale of periodicals, and the production, distribution, sale or exhibition of film or video products). In some instances, these policies prohibit the establishment or acquisition of these cultural businesses by foreign investors.
 If the Canadian business being acquired is engaged in a cultural business, or if the purchaser is not a World Trade Organization (WTO) investor or trade agreement investor and the target is not controlled by a WTO investor or trade agreement investor, the asset value review threshold for direct acquisitions is C$5 million and for indirect acquisitions is C$50 million. (‘Cultural business’ for these purposes is defined somewhat more broadly than as set out in footnote 3.) If the value of the assets of the Canadian business exceeds 50 per cent of the value of all assets being acquired in the transaction, the transaction is effectively deemed to be a direct acquisition and, as such, the C$5 million threshold applies to the investment.
 The rules as to whether a person is a WTO investor for purposes of the Act are complex. Very generally, WTO investors are nationals, permanent residents and governments of WTO members, and entities ultimately controlled by them. WTO members are the member countries of the WTO. The rules as to whether a person is a trade agreement investor for purposes of the Act are also complex. Very generally, trade agreement investors are nationals of trade agreement countries, governments of trade agreement countries and entities ultimately controlled by them. Trade agreement countries are countries that are parties to certain trade agreements with Canada as specified in the Act.
 Investment Canada Act, Section 16(2)(a).
 Innovation, Science and Economic Development Canada, ‘Guidelines – Investment by state-owned enterprises – Net benefit assessment’ (accessed 11 August 2022), available at https://www.ic.gc.ca/eic/site/ica-lic.nsf/eng/lk00064.html#p2.
 Innovation, Science and Economic Development Canada, ‘Guidelines on the National Security Review of Investments’ (24 March 2021), available at https://www.ic.gc.ca/eic/site/ica-lic.nsf/eng/lk81190.html.
 Innovation, Science and Economic Development Canada, ‘Policy Statement on Foreign Investment Review and COVID-19’ (18 April 2020), available at https://www.ic.gc.ca/eic/site/ica-lic.nsf/eng/lk81224.html.
 Innovation, Science and Economic Development Canada, ‘Policy Statement on Foreign Investment Review and the Ukraine Crisis’ (8 March 2022), available at https://www.ic.gc.ca/eic/site/ica-lic.nsf/eng/lk81228.html.
 Investment Canada Act, Section 25.4(1).
 See Government of Canada, ‘Industry Minister Clement Takes Further Steps to Hold U.S. Steel to Its Investment Canada Act Commitments’ (17 July 2009), available at https://www.canada.ca/en/news/archive/2009/07/industry-minister-clement-takes-further-steps-hold-steel-investment-canada-act-commitments.html.