The Canadian government is anxious to foster a business climate that is receptive to investment from outside the country. At the same time, it is determined to monitor the level of new foreign investment in Canada and to screen a limited number of such investments. Generally speaking, transactions screened are significant in terms of their size or due to the business sector in which they are made. When such screening occurs, it involves consideration by government officials of the plans for the Canadian business, with the likelihood of a decision favoring the investment as being of net benefit to Canada. In a very small number of cases, the process will involve meetings with government officials and the requirement to provide undertakings. The statutory framework for the monitoring and review processes is provided by the Investment Canada Act.
The Investment Canada Act is concerned with the establishment of new Canadian businesses and the acquisition of control of existing Canadian businesses (the “triggering events”) by non-Canadian interests. Therefore, it does not reach:
- Any new offshore financing of a Canadian foreign-controlled business, which does not involve a change in control;
- A passive or portfolio investment in a Canadian business from abroad; or
- The expansion of a foreign-controlled business into a broader range of Canadian activities that are related to its previous Canadian activities.
For the purposes of the Investment Canada Act, a “non-Canadian” is an individual, government, government agency or entity that is not Canadian. An individual is “Canadian” under the Investment Canada Act, if he or she is a Canadian citizen or a permanent resident of Canada who has not been ordinarily resident for more than one year after he or she first became eligible to apply for Canadian citizenship. The determination of whether a corporation is “Canadian” under the Investment Canada Act is more complex and requires a determination of whether the individuals who are the ultimate controlling shareholders of a corporation are “Canadians”, or whether certain specific deeming provisions are satisfied.
Establishment of new business
Of the two triggering events that bring the Investment Canada Act into play, the establishment of a new business, regardless of size, normally requires no more than the filing of a short notice by the foreign investor. The notice is simply for information purposes. It may be given at any time up to 30 days after the new business becomes operative. The two possible exceptions to the notice-only requirement on the establishment of a new business are: the establishment of a new business in a culturally-sensitive sector, such as publishing, which can be made subject to full review within 21 days after the notice is filed; and a new business that triggers a national security review.
Direct acquisition of a Canadian business
In the event that the control of an established Canadian business is directly acquired through a purchase of assets or voting interests of a corporation, partnership, trust or joint venture, the foreign acquirer may be required either to file a notice or an application for review and approval, depending on the circumstances.
Neither obligation will arise if the transaction falls within one of the general exceptions under the Investment Canada Act (which general exceptions are, in turn, subject to specific exceptions for certain types of business). These general exceptions include, among other things:
If none of the exceptions applies, the direct purchase of control of an active Canadian business by a foreign investor will be subject to pre-closing review under the Investment Canada Act, if the Canadian business has assets in excess of certain limits. The review threshold for investors from countries that are members of the World Trade Organization (WTO), other than for Canadian cultural businesses, is $354 million for 2014 (based on the book value of the assets of the Canadian business for the fiscal year immediately preceding the implementation of the investment). This threshold is adjusted annually. Where neither the seller nor the investor is controlled by WTO nationals, the threshold for pre-merger review is $5 million. This lower threshold also applies to direct acquisitions of control, whether by WTO investors or not, of Canadian businesses that are cultural businesses.
As a result of recent amendments to the Investment Canada Act, the review threshold for direct acquisitions of non-cultural businesses will increase upon the promulgation of implementation regulations. When these threshold amendments come into force, the basis for calculating the monetary threshold will be changed from “assets” to “enterprise value” (a term that will be defined by regulation). The new financial thresholds triggering review will be $600 million for the year this amendment comes into force and the following year, $800 million for two subsequent years, and $1 billion following that time, indexed to inflation on an annual basis thereafter. A draft regulation will be published for public comment prior to the new threshold coming into force.
The timing of the introduction of the new enterprise value thresholds is not known and the existing book value thresholds are still in effect.
Indirect acquisition of a Canadian business
Indirect acquisitions of control are treated somewhat differently under the
Indirect acquisitions of control are treated somewhat differently under the Investment Canada Act. If control of an entity (a corporation, partnership, trust or joint venture) carrying on a Canadian business is acquired indirectly, as an incidental result of the sale of its larger foreign parent corporation, the transaction is not reviewable if either the seller or the purchaser is WTO-controlled, unless it involves the acquisition of control of a Canadian business that is a cultural business. Where neither the seller nor the investor is WTO-controlled or the target is a cultural business, the review threshold is $50 million in book value of assets of the Canadian business (provided that if the assets of the Canadian business represent more than 50% of the assets involved in the total international transaction, the review threshold is $5 million in book value of assets).
Recent amendments to the Investment Canada Act also established a national security review process similar to the national security screening for foreign investment that exists in the US. The government now has the authority to review foreign investments to assess whether they are “injurious to national security”. A review of this nature may be triggered pre- or post-closing. If it occurs pre-closing, the parties will be prohibited from closing the transaction until the review has concluded favorably. Given that the Investment Canada Act does not define “national security”, the potential breadth of the term may create some unpredictability for foreign investors.
Notification and review procedures
An acquisition of control by a foreign investor of a Canadian business that falls below the relevant threshold will simply require notification, as in the case of the establishment of a new Canadian business. However, notifiable investments can be made subject to full review, if they fall into a limited class of culturally sensitive businesses, such as publishing, or become subject to national security review. Acquisitions of control by a foreign investor of a Canadian business above the relevant threshold will require review.
If an investment is reviewable, the foreign investor is obliged to complete an application providing certain prescribed information about the investor and the Canadian business in which the investment is to be made. In most cases, this application must be filed prior to the transaction being completed. There are, however, certain exceptions:
- Applications concerning indirect acquisitions may be filed up to 30 days after the investment is implemented.
- Applications concerning investments in culturally sensitive sectors that have been made specifically subject to review, are required upon receipt of the notice for review.
There is, moreover, provision for the federal Cabinet Minister responsible for the Investment Canada Act to permit an investment to be implemented prior to completion of the review, if the Minister is satisfied that delay would cause undue hardship to the investor or jeopardize the operations of the Canadian business which is being acquired, in which case the application must be filed within 30 days after the investment is implemented.
The application for review must incorporate a description of the investor’s plans for the Canadian business. The plans should be in terms that would indicate some benefit to Canada. The information provided will be assessed against the following factors, where they are relevant:
- The effect of the investment on the level and nature of economic activity in Canada, including the effect on: employment; resource processing; the utilization of parts, components and services produced in Canada; and on exports from Canada;
- The degree and significance of participation by Canadians in the Canadian business, and in any industry in Canada of which it forms a part;
- 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 federal government, or the 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.
To satisfy these criteria, the Minister may require undertakings from the foreign investor, committing the investor to certain courses of action or expenditures.
Time limits for review
To ensure prompt review and decision, the Investment Canada Act sets certain time limits for the Minister, assisted by the Director of Investments, to conduct a review and make a decision. Within 45 days after a complete application has been received, the Minister must notify the investor that either:
- The Minister is satisfied that the investment is likely to be of net benefit to Canada; or
- The Minister is unable to complete his or her review, in which case the Minister shall have 30 further days to complete his or her review (unless the applicant agrees to a longer period); or
- The Minister is not satisfied that the investment is likely to be of net benefit to Canada.
Where 45 days have elapsed from the date of receipt of a complete application without such a notice, or where 30 further days (or the number of further days agreed) have elapsed after notice that the Minister is unable to complete his or her review and no decision has been taken, then the Minister is deemed to be satisfied that the investment is likely to be of net benefit to Canada.
Where the Minister has advised the applicant, either within the initial 45-day period or any extension period, that he or she is not satisfied that the investment is likely to be of net benefit to Canada, the applicant has the right to make representations and submit undertakings within 30 days of the date of the notice (or any further period that is agreed between the applicant and the Minister). On the expiration of the 30-day period (or agreed extension), the Minister must quickly notify the applicant that:
- The Minister is now satisfied that the investment is likely to be of net benefit to Canada; or
- The Minister is not satisfied that the investment is likely to be of net benefit to Canada.
In the latter case, the applicant may not proceed with the investment or, if the investment has already been implemented, must relinquish control of the Canadian business. Information that is obtained in the course of the administration of the Act is treated as confidential.