Canada: Canada Raises Foreign Investment Review Thresholds

*Figures are in Canadian dollars.

The increased threshold is actually a result of the inflationary indexing formula prescribed under the Investment Canada Act (the ICA), rather than a liberalization of Canada’s foreign investment policy per se. In fact, the "rules" of foreign investment review have not changed. All acquisitions of control of a Canadian business (i.e., a business carried on in Canada that has a place of business in Canada, an individual or individuals in Canada who are employed or self-employed in connection with the business and assets in Canada used in carrying on the business) by a "non-Canadian" are subject to the provisions of the ICA – even where the Canadian business is already foreign-controlled (e.g., a Canadian subsidiary of a U.S. corporation). One common misconception is that the use of a Canadian-incorporated acquisition vehicle takes the transaction outside the scope of the ICA. This is not the case – the nationality of the persons ultimately controlling the acquisition vehicle is determinative for ICA purposes.

Depending upon the nationality of the investor, the nature of the Canadian business, and the book value of the assets of the Canadian business, a foreign investment may be subject to either advance review and Ministerial approval, or merely to ex poste notification. A notification is essentially an administrative formality, constituting notice of the investment (with certain required information in respect of the investment) to be filed within 30 days of closing. A review application, on the other hand, is more onerous and may constitute a bar to closing until requisite approval(s) are received under the ICA. That said, investments are only reviewable where certain monetary thresholds are met.

Assuming that either the purchaser or the vendor is a non-Canadian "WTO investor", a review application is required for direct acquisitions (i.e., acquisitions of the Canadian business itself) if the value of the assets (as set out in the financial statements for the most recently completed fiscal year) of the Canadian business(es), and all other entities in Canada the control of which is being acquired, exceed(s) $265 million (up from $250 million). It should be noted that purchase price has no bearing on this determination. Moreover, it is the book value of all the global assets used in connection with the Canadian business – regardless of whether or not the assets themselves are located in Canada – that is relevant. Indirect acquisitions (i.e., the acquisition of an entity outside Canada that controls a Canadian business) are exempt from review if either the purchaser or the vendor is non-Canadian and WTO-controlled.

There are two very significant caveats to the above review thresholds. In particular, in respect of investments made in certain "sensitive" industries, including uranium production, financial services, transportation services and cultural activities, the $265 million threshold for direct acquisitions drops to $5 million, and indirect acquisitions are reviewable where the value of the relevant assets exceeds $50 million.

As previously noted, the filing of an application generally gives rise to a statutory bar against implementation of a proposed transaction until a government review of the transaction has been completed and it has been determined to be of "net benefit" to Canada based on a number of criteria set out in the ICA (including, for example, the likely effect on Canadian employment and management participation, capital expenditure, investment in research and development, etc.). The process of obtaining a net benefit ruling usually takes a minimum of 45 days, but can take longer, and usually involves the entering into of legally binding undertakings regarding the future conduct of the acquired business for the purpose of satisfying the Minister(s) that the proposed investment will be of net benefit to Canada.