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Canadian foreign investment review – what to watch for in 2017

Author(s): Shuli Rodal, Michelle Lally, Peter Glossop, Margaret Kim

Dec 21, 2016


Liberalization is expected to be a dominant foreign investment theme in 2017, consistent with the Canadian government’s stated focus on attracting investment to Canada. On December 19, 2016, Innovation, Science and Economic Development Canada (ISED) confirmed its previously announced intention to increase the generally applicable threshold for “net benefit” review under the Investment Canada Act (ICA) from C$600 million to C$1 billion in 2017, two years sooner than expected. In addition, following the provisional implementation of the foreign investment review provisions of the Comprehensive Economic and Trade Agreement between Canada and the European Union (CETA), also expected in 2017, many foreign investors will benefit from an even higher generally applicable review threshold of C$1.5 billion. These higher thresholds will significantly reduce the scope of investments that are subject to review and approval under the ICA.

At the same time, ISED has confirmed that the Canadian government will continue to carefully scrutinize investments in Canada, regardless of size, that  may be “injurious to national security.” On December 19, 2016, ISED released the long-awaited Guidelines on the National Security Review of Investments under the Investment Canada Act (National Security Guidelines). This is the first time the government has provided official insight into the national security process that has been in place since 2009. The National Security Guidelines provide useful insight into the types of investments that may give rise to national security concerns, and provide guidance on process matters for dealing with transactions where national security considerations may be a factor. Consistent with the focus on attracting foreign investment, the Government news release highlighted the pro-investment purpose of the National Security Guidelines in terms of offering greater transparency in the administration of the national security provisions. These provisions had been viewed by investors as a “black box,” within which some speculated the government exercised discretion to disapprove investments on vague grounds that did not need to be publicly disclosed.

New significantly higher ICA “net benefit” review thresholds    

Under the ICA, most direct acquisitions of control of Canadian businesses by World Trade Organization (WTO) investors  are subject to pre-closing “net benefit” review where the enterprise value of the Canadian business exceeds the applicable threshold. The current review threshold of C$600 million in enterprise value of the Canadian business for direct investments by WTO investors is scheduled to increase to C$800 million in April 24, 2017, and then to C$1 billion commencing April 24, 2019. However, following on the government’s December 19, 2016 news release and consistent with its 2016 Fall Economic Statement [PDF] released on November 1, 2016, the review threshold will be increased to C$1 billion in enterprise value in 2017, two years sooner than the expected. The date of implementation as well as transitional rules have not yet been announced.

While an increase in the review threshold from C$600 million to C$1 billion is significant, for many WTO investors, the effective ICA review threshold is anticipated to increase further to C$1.5 billion following the expected provisional application of CETA in 2017. Under CETA, the investment review threshold will be raised to C$1.5 billion, not only for European Union investors, but also for investors from other Free Trade Agreement (FTA) partners, as a result of Most-Favoured-Nation (MFN) commitments. The FTA partner countries that are entitled to such MFN treatment for higher ICA threshold are the United States, Mexico, Chile, Colombia, Panama, Peru, Honduras and South Korea.

Direct acquisitions by state-owned enterprises (SOEs) and acquisitions of “cultural businesses” remain subject to the book value test. For more information or questions concerning the ICA, see our previous publication here.

National Security Guidelines

The federal cabinet has a broad right to intervene in virtually all foreign investments in Canada regardless of size or structure, that may be “injurious  to national security.”  The National Security Guidelines follow through on the government’s promise to increase transparency in its administration of the national security review process. While only eight transactions were subjected to a full national security review since 2009,  in our experience, more transactions have been subject to some degree of preliminary scrutiny on national security grounds. The potential risk of a national security review therefore has become a consideration in the planning and negotiation of transactions generally. Accordingly, increased transparency is a welcome development.

As expected, the National Security Guidelines focus on both the nature of the Canadian business that is the subject of the investment as well as the identity of the foreign investor. The National Security Guidelines list nine factors the Government considers when assessing whether an investment poses a national security risk:

  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;
  3. Involvement in the research, manufacture or sale of controlled goods identified in the Defence Production Act (e.g. firearms, military equipment, weapons, aircraft and defence systems);
  4. The potential impact of the investment on the security of Canada’s “critical infrastructure.” Critical infrastructure is broadly defined with reference  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;
  5. 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;
  6. The potential of the investment to enable foreign surveillance or espionage;
  7. The potential of the investment to hinder current or future intelligence or law enforcement operations;
  8. The potential impact of the investment on Canada’s international interests, including foreign relationships; and
  9. The potential of the investment to involve or facilitate the activities of illicit actors, such as terrorists, terrorist organizations or organized crime.

Significantly, the country of origin of the investment is not listed as a factor. Although the National Security Guidelines are silent on the issue, investments by SOEs from certain jurisdictions may raise national security issues. Reviewable SOE investments are subject to special net benefit review considerations (SOE Guidelines). 

The risk factors identified in the National Security Guidelines are, not surprisingly, not exhaustive. In addition, some are capable of being interpreted very broadly, particularly the concept of critical infrastructure, which is defined to include 10 sectors ranging from the more obvious ones of transportation, utilities, and safety to broad sectors such as finance, manufacturing, food, and information and communication technology. Nevertheless, the identification of specific categories provides a useful reference point for investors and their advisors.

The National Security Guidelines also provide guidance on process matters confronted by foreign investors that are not directly addressed through the statutory national security review process, including a recommendation to take steps both formally and informally to proactively identify national security considerations at an early stage of transaction planning. Recommendations in the  National Security Guidelines (which reflect good practice), include:

  • Early filing – For investments that do not trigger the pre-closing review process, investors may file the notice of investment at least 45 days prior to closing, in order to allow the 45-day period within which notice of a potential national security review may be sent by the government to elapse prior to closing. If no such notice is sent, the investor can be certain that a national security review will not be undertaken.
  • Meeting with the Investment Review Division – An early meeting is particularly recommended in the case of investments that may raise issues but do not require pre-closing review or a notification, where the government will not be formally notified of the investment.  There is no formal process in Canada for submitting a transaction for voluntary national security review (unlike in the United States in connection with CFIUS approval) where it does not otherwise require pre-closing review or a notification under the ICA.

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