Guide to Doing Business in Canada: Regulation of foreign investment

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Regulation of foreign investment

Foreign investment in Canada is regulated by the federal Investment Canada Act (ICA). Its purpose is to encourage foreign investment on terms that are beneficial to Canada.
While the ICA is primarily administered by Innovation, Science and Economic Development Canada, the Department of Canadian Heritage administers the Act in relation to defined "cultural businesses," which is discussed later in this chapter.

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1. Canadian business
2. Foreign investor
3. Acquisition of control
4. Review thresholds
5. Review
6. National security
7. State-owned enterprises
8. Sector-specific legislation

In general, the acquisition of control of an existing Canadian business or the establishment of a new Canadian business by a foreign investor is subject to notification or review.

Notification involves the completion of a prescribed form to provide certain information about the foreign investor, the Canadian business and the vendor. It is not an impediment to the closing of an acquisition - in fact, it can be submitted within 30 days of closing and is often submitted after closing.

Where review is required, the foreign investor must submit more detailed information about itself and comprehensive plans for the Canadian business before closing. Where review is necessary, the foreign investor may only complete the proposed investment if the minister of Innovation, Science and Industry or the minister of Canadian Heritage and Multiculturalism, as applicable, determines it to be of "net benefit to Canada."

Whether the investment is reviewable, or merely notifiable, depends on a combination of the following factors:

• The enterprise value of the target Canadian business
• Whether the investor is controlled by residents of a country with which Canada has a free trade agreement (a "Trade Agreement investor")
• Whether the investor is controlled by residents of a World Trade Organization member state (a "WTO investor")
• Whether the investor is a state-owned enterprise (SOE)
• The value of the assets of the target Canadian business
• Whether the target Canadian business is already foreign controlled by a non-Canadian WTO investor
• Whether the Canadian target carries on a defined cultural business
• Whether the investment is to be effected directly, through the acquisition of a Canadian business, or indirectly, through the acquisition of a foreign business of which the Canadian business is a subsidiary

Certain transactions involving foreign investors are exempt from the provisions of the ICA, including internal corporate reorganizations that involve no change of ultimate control, realization of security held by a foreign entity on Canadian assets, bona fide estate transfers, and acquisitions of control of Canadian businesses subject to review under other Canadian legislation, such as the Bank Act (Canada).

1. Canadian business

A Canadian business is a business that has:

• A place of business in Canada;
• One or more individuals in Canada who are employed in connection with (but not necessarily by) the business; and
• Assets in Canada that are used to carry on the business

2. Foreign investor

A foreign investor is essentially a non-Canadian.

With respect to individuals, a Canadian is a Canadian citizen or, subject to certain qualifications, a permanent resident of Canada within the meaning of Canada's immigration legislation.

With respect to a business undertaking - including one owned by a government - the undertaking is considered Canadian if it is Canadian-controlled. Provisions relating to Canadian control are detailed and complex, but generally:

• If one Canadian, or two or more Canadian members of a voting group, owns a majority of the voting interests of an entity, the entity is Canadian-controlled.
• Conversely, if one non-Canadian, or two or more non-Canadian members of a voting group, owns a majority of the voting interests of an entity, the entity is not Canadian-controlled.
• With respect to a widely held public company that is not controlled in fact through the ownership of voting shares, the corporation is deemed to be Canadian-controlled if at least two-thirds of the board of directors is Canadian.

3. Acquisition of control

The ICA contains detailed and complex provisions relating to the acquisition of control of a Canadian business by a foreign investor. To summarize:

• The acquisition of a majority of a corporation's voting shares is deemed to be an acquisition of control.
• The acquisition of less than a majority, but more than one-third, of a corporation's voting shares is considered an acquisition of control - unless it can be established that the acquiring party will not have control in fact of the corporation. For example, a 40 per cent acquisition would not result in control if another shareholder owned the remaining 60 per cent, and a shareholders' agreement limiting the larger shareholder's rights did not exist.
• The acquisition of less than one-third of a corporation's voting shares is deemed to not be an acquisition of control.

4. Review thresholds

Thresholds differ depending on the characteristics of the investor and the investment in question. If the review thresholds are not exceeded, the investment is subject to the notification procedure previously described.

Direct acquisition of a Canadian business

		Non-cultural Target Canadian Business	Cultural Target Canadian Business
Trade Agreement Investors Applies where the Investor is controlled by residents of a country with which Canada has free trade agreement (U.S., EU, UK, Mexico, Chile, Peru, Columbia, Panama, Honduras, South Korea, Australia, Japan, New Zealand, Singapore, Vietnam, Malaysia, Brunei) or where the Canadian business that is the subject of the investment is, immediately prior to the implementation of the investment, controlled by a Trade Agreement Investor.	Non-SOE	C$1.931 billion enterprise value	C$5 million book value of assets
	SOE	C$512 million book value of assets	C$5 million book value of assets
WTO Member State Investor   Applies where the Investor is controlled by residents of a World Trade Organization member country or where the Canadian business that is the subject of the investment is, immediately prior to the implementation of the investment, controlled by a WTO Investor.	Non-SOE	C$1.287 billion enterprise value	C$5 million book value of assets
	SOE	C$512 million book value of assets	C$5 million book value of assets
Non-WTO Member State Investor Applies where the Investor is controlled by residents of a country that is not a WTO member and where the Canadian business that is the subject of the investment is not, immediately prior to the implementation on the investment, controlled by a non-Canadian that is a WTO investor	Non-SOE or SOE	C$5 million book value of assets	C$5 million book value of assets

Statistically, the most common permutation of foreign investment is the direct acquisition of a non-cultural Canadian business by a Trade Agreement Investor, to which the $1.565 billion enterprise value threshold applies.

The formula for determining the enterprise value (EV) varies depending on whether the foreign investor is acquiring shares of a publicly traded company, 100 per cent of the shares of a private company, less than 100 per cent but more than a controlling number of shares of a private company, or assets.

In summary:

EV of publicly traded company = market capitalization + liabilities other than operating liabilities - cash and cash equivalents.

Market capitalization is based on the average closing price of the target's quoted equity securities in its principal market during the 20 trading days ending before the first day of the month immediately preceding the month in which the foreign investor submits its application for Review or Notification Form.

EV of private company = acquisition value + liabilities other than operating liabilities - cash and cash equivalents.

EV of assets = acquisition value + liabilities assumed by the investor other than operating liabilities - cash and cash equivalents.

In the following situations, the board of directors or other authorized body of the foreign investor are required to determine the fair market value of the applicable item for inclusion into the balance of the applicable enterprise value formula:

• Where not all of a public company's equity securities are quoted
• Where the acquisition value cannot be precisely determined until a future date (e.g., there is an earn out or some other form of post-closing adjustment)
• Where the foreign investor is acquiring less than 100 per cent of the shares of a private company
• Where the parties are non-arms-length or the consideration is nominal or zero

In some cases, it may be difficult to determine whether a foreign investor is an SOE and, by extension, which threshold applies. This is because the Act's definition of SOE includes an entity that is "controlled or influenced, directly or indirectly" by the government of a foreign state, whether federal, state or local, or an agency of such a government.

Cultural businesses include:

• The publication, distribution or sale of books, magazines, periodicals or newspapers in print or machine-readable form, but not including the sole activity of printing or typesetting books, magazines, periodicals or newspapers
• The production, distribution, sale or exhibition of film or video recordings
• The production, distribution, sale or exhibition of audio or video music recordings
• The publication, distribution or sale of music in print or machine-readable form
• Radio communications in which the transmissions are intended for direct reception by the general public; any radio, television and cable television broad casting undertakings; and any satellite programming and broadcast network services

The ICA does not provide an exemption for de minimis involvement in a cultural business. Thus, even if a Canadian business is primarily involved in non-cultural business activities, a minimal involvement in cultural business activities will trigger the review obligation if the $5-million threshold is exceeded.

When review is required for a proposed acquisition of a Canadian business that involves both non-cultural and cultural business activities, applications for review must be submitted to Innovation, Science and Economic Development Canada (with respect to the non-cultural aspects of the business) and the Department of Canadian Heritage (with respect to the cultural aspects of the business).

Indirect acquisition of Canadian business

(i.e. acquisition of the shares of a non-Canadian corporation that has a Canadian subsidiary)

	Non-cultural	Cultural
WTO Member State Investor (this group includes Trade Agreement investors)	Not reviewable	C$5 million or C$50 million book value of assets depending on the proportion of Canadian assets
Non-WTO Member State Investor	C$5 million or C$50 million book value of assets depending on the proportion of Canadian assets	C$5 million or C$50 million book value of assets depending on the proportion of Canadian assets

It should be noted that structuring a transaction for the purpose of avoiding review - e.g., incorporating a corporation outside of Canada, the sole assets of which are the shares of the Canadian corporation, and then purchasing the shares of the foreign corporation - is not permissible.

d. Discretionary powers

In addition to reviews that result from the application of the aforementioned rules, the government has other discretionary powers to order a review. For example:

• The government can review any investment that "could be injurious to national security."
• The government can deem that an entity is an SOE in fact, or deem that there has been an acquisition of control.
• With respect to most types of cultural businesses, the government can:
  • Elect to review the acquisition of control of an existing business or the establishment of a new Canadian business within 21 days of receiving the foreign investor's notification
  • Deem a business that carries on, or proposes to carry on, any such business to be non-Canadian on the basis that the business is controlled in fact by one or more non-Canadians

5. Review

Where review is required, the foreign investor must submit an Application for Review and may not complete the proposed investment until the minister of Innovation, Science and Economic Development and/or minister of Canadian Heritage and Multiculturalism, as applicable, has determined it to be of "net benefit to Canada".

In the application, detailed information is required about the foreign investor, the Canadian business and the foreign investor's plans for the Canadian business.

To determine whether the proposed investment is likely to be of net benefit to Canada, the government considers factors such as:

• The effect of the investment on the level and nature of economic activity in Canada, including its effect on employment, resource processing, the utilization of parts, components and services produced in Canada, and exports from Canada
• The degree and significance of participation by Canadians in the business
• The effect on productivity, industrial efficiency, technological development, product innovation and product variety in Canada
• The effect on competition within any industry in Canada
• Compatibility with national industrial, economic and cultural policies
• Its contribution to Canada's ability to compete in world markets

In considering these factors, the minister of Innovation, Science and Economic Development or the minister of Canadian Heritage and Multiculturalism, or both as applicable, will consult with other relevant federal government departments as well as the governments of affected provinces, which are typically provinces in which the Canadian business has assets or employees.

A determination of net benefit to Canada is usually based on undertakings made by the foreign investor in relation to the factors outlined above. Undertakings are legally binding commitments made by a foreign investor that typically remain in effect for three to five years, and are subject to compliance reviews and audits over that time.

In our experience, the government is most concerned with securing undertakings that relate to specific levels of employment in Canada, the inclusion of Canadians in management positions, capital investment in the Canadian business and further development of Canadian-sourced technology in the country. However, the specific focus of the undertakings varies depending on the nature of the business.

a. Timing

The ICA provides the minister of Innovation, Science and Economic Development and/or minister of Canadian Heritage and Multiculturalism, as applicable, with 45 days to determine whether a proposed investment would be of net benefit to Canada, along with a unilateral right to extend the review period by 30 days. Additional extensions require the agreement of the foreign investor - without which the applicable minister would likely reject the investment.

In our experience, it is not uncommon for the review of large and complex transactions with significant political overtones to extend beyond 75 days.

b. Possible outcomes

The government may either approve the proposed investment or reject it. Almost all proposed investments are ultimately approved based on undertakings negotiated between the investor and the government. Only a handful of high-profile and/or politically controversial transactions have been rejected. For transactions that could raise significant political concerns, foreign investors should not underestimate the importance of an effective government relations strategy.

c. Fee

There is no filing fee for either an Application for Review or a Notification.

6. National security

In 2009, the ICA was amended to provide the government with the right to review any investment that "could be injurious to national security." The government subsequently amended the national security provisions several times to provide itself with additional flexibility in relation to national security matters. This right to review applies to minority investments, internal reorganizations and the establishment of new Canadian businesses, not just the acquisition of control of existing Canadian businesses. It can also apply to investments in businesses with tenuous links to Canada, as a review can be ordered if "any part" of the business' operations are in Canada.

There is no minimum investment size below which a review on national security grounds may not be ordered. The national security provision empowers the government to prohibit any proposed investment, impose conditions on its completion, or require divestiture of a completed investment. A national security review can take up to 200 days or longer.

The government did not originally provide any guidance as to the factors that could trigger a national security review or influence its outcome. This degree of opaqueness resulted in significant criticism from stakeholders. Among other things, it made it difficult for potential investors to assess the risk of incurring significant pursuit costs in relation to acquisitions that could ultimately be rejected on national security grounds.

In the summer of 2016, in its annual report on the administration of the ICA the government released, for the first time, some high level information on the use of the national security review powers, including the number of reviews that had been conducted, broken down by year, and their outcomes. The government released similar information in its 2017 annual report. In its 2018 annual report, the government released, for the first time, the country of origin of the applicable foreign investors.

Summarized below are the number of national security reviews that have occurred, their outcomes and the buyer's country of origin, broken down by year, since the national security review powers were added to ICA in 2009.

Year	2018-19	2019-20	2020-2021	2021-22	2022-23
Number of Reviews	7	7	11	12	22
Outcome and Country of Origin of Buyer**	3 Terminated without remedy (2 China and Switzerland) 2 Divestitures Required (China and Switzerland) 2 Transaction Aborted by Parties (China, Singapore)	1 Terminated without remedy (Belarus) 3 Divestitures Required (2 China and France) 3 Aborted by Parties (China, UK, Luxembourg)	1 Blocked (China) 2 Divestiture Required (UAE, China) 4 Transaction Aborted by Parties (3 China, 1 UK) 4 Terminated without remedy (2 China, 1 Taiwan, 1 Russia)	4 Transaction Aborted by Parties (2 China, 1 Jordan, 1 Russia) 7 Terminated without remedy (3 China, 3 Russia, 1 Finland) 1 review ongoing***	8 Transaction Aborted by Parties (7 China, 1 Czech Republic) 3 Divestitures Required (China) 10 Terminated without remedy (5 China, 3 USA, 1 France, 1 Cyprus) 1 review ongoing

 

Year	2012-13	2013-14	2014-15	2015-16	2016-17	2017-18
Number of Reviews	2	1	5	0	5*	2
Outcome and Country of Origin of Buyer**	1 Blocked (China) 1 Transaction Aborted by Parties (Russia)	1 Blocked (Egypt)	2 Divestiture Required (United Kingdom; China) 1 Blocked (Russia) 2 Non-public Conditions Imposed (both China)		3 Divestitures Required (two China and one Cyprus) 2 Non-public Conditions Imposed (both China)	1 Blocked (China) 1 Transaction Aborted by Parties (China)

^{* One review was pursuant to a court order. Although not specified in the annual report, this would have been the O-Net Communications/ITF Technologies transaction, which was the subject of a great deal of media attention and controversy. The (former Conservative) government ordered Chinese controlled O-Net Communications to divest Montreal based ITF Technologies. O-Net Communications sought judicial review. The (current Liberal) government agreed to do a new review, the result of which was that O-Net Communications was permitted to continue own ITF Technologies subject to non-public conditions.
** The outcome may have occurred in a different fiscal year but relates to a review that commenced in the identified fiscal year.
*** It is unclear whether this review remains ongoing or was concluded and, if so, what was the outcome, as no update was provided in the 2022-23 annual report or otherwise.}

When considered in the context of all transactions that could have been reviewed under the national security powers, the percentage that have actually been reviewed is negligible, substantially less than 1%. However, if a national security review is conducted, there is a good chance that the result will be catastrophic to the transaction. Forty-three of the 74 reviews have resulted in the foreign investor not being able to own the target - either the transaction was blocked pre-closing, the parties aborted it during the review, or post-closing divestiture was required. Twenty-five reviews resulted in the foreign investor being permitted to own the target Canadian business subject to non-public conditions. Four reviews resulted in a clean termination, with no remedy being imposed and the foreign investor being permitted to own the Canadian business with no conditions. Finally, 1 review initiated in 2023 remains ongoing. Please note that because O-Net/ITF was reviewed twice, there have been 74 reviews of 73 transactions, and one of the "divestiture required" outcomes set out in the table above was converted to a "non-public conditions imposed" outcome.

In December 2016, the government published Guidelines on the National Security Review of Investments under the Investment Canada Act, which it updated in March 2021.

The most important aspect of the Guidelines is the following non-exhaustive list of factors the government will consider in assessing national security risks:

1. The potential effects of the investment on Canada's defence capabilities and interests;
2. The potential effects of the investment on the transfer of sensitive technology or know-how outside of Canada, including consideration of whether the investment provides access to information not in the public domain related to the research, design or manufacture of sensitive technologies. Sensitive technology areas include those that have military, intelligence or dual military/civilian applications. Such technologies may be developed in multiple fields, including, but not limited to those listed at Annex A of the Guidelines, which may be updated periodically;
3. Involvement in the research, manufacture or sale of goods/technology identified in section 35 of the Defence Production Act;
4. The potential impact of the investment on the supply of critical goods and services to Canadians, or the supply of goods and services to the Government of Canada;
5. The potential impact of the investment on critical minerals and critical mineral supply chains. For more information, please consult the Government of Canada's Critical Minerals List;
6. The potential impact of the investment on the security of Canada's critical infrastructure. Critical infrastructure refers to processes, systems, facilities, technologies, networks, assets and services essential to the health, safety, security or economic well-being of Canadians and the effective functioning of government. For more information on Canada's critical infrastructure, see National Strategy for Critical Infrastructure and Action Plan for Critical Infrastructure;
7. The potential of the investment to enable foreign surveillance or espionage;
8. The potential of the investment to hinder current or future intelligence or law enforcement operations;
9. The potential impact of the investment on Canada's international interests, including foreign relationships;
10. The potential of the investment to involve or facilitate the activities of illicit actors, such as terrorists, terrorist organizations, organized crime or corrupt foreign officials; and
11. The potential of the investment to enable access to sensitive personal data that could be leveraged to harm Canadian national security through its exploitation, including, but not limited to:
    1. Personally identifiable health or genetic (e.g., health conditions or genetic test results);
    2. Biometric (e.g., fingerprints);
    3. Financial (e.g., confidential account information, including expenditures and debt);
    4. Communications (e.g., private communications);
    5. Geolocation; or,
    6. Personal data concerning government officials; including members of the military or intelligence community.

The Guidelines strongly encourage investors, particularly where they are state-owned or subject to state-influence, or in cases where the factors set out above may be present, to file their notification form at least 45 days before the planned closing date for the investment. The rationale behind this is that the government has 45 days from receiving a notification form to decide whether to do a national security review. While it is permissible to file a notification form up to 30 days after closing of the investment, the advantage of filing more than 45 days before closing is that doing so allows the investor to close the investment with certainty in relation to the national security review provisions - in effect, if the government has not initiated a national security review within 45 days then the investor can close the investment knowing that it will not subsequently face a potential divestiture order on national security grounds.

7. State-owned enterprises

In 2007, the government issued guidelines to clarify how the "net benefit to Canada" test will be applied in the context of proposed investments by foreign SEOs. The government subsequently provided additional guidance with respect to the application of the net benefit to Canada test, and amended various provisions of the ICA in relation to SOEs.

Essentially, the purpose of the guidelines is to ensure that the acquired Canadian business will continue to be operated on a commercial basis, with transparent corporate governance and reporting requirements, rather than to serve the non-commercial, political objectives of a foreign state. The purpose of the amendments is to subject SOE purchasers to a lower review threshold than non-SOE purchasers.

8. Sector-specific legislation

In addition to the general ICA process, various federal and provincial statutes place additional restrictions on foreign ownership in specific industries.