Foreign investments in Canada are subject to the federal Investment Canada Act (ICA).1 The purpose of the ICA is to encourage foreign investment in Canada while at the same time ensuring that foreign investment contributes to economic growth and employment opportunities. In addition, amendments in 2009 added that the ICA has the further purpose of protecting national security by providing for the review of foreign investments in Canada that could be injurious to national security.
The principal responsibility for enforcing the ICA belongs to the federal Minister of Industry;2 investments in "cultural businesses" are the responsibility of the federal Minister of Canadian Heritage (collectively, these ministers are referred to here as the "Responsible Minister").3
Foreign investors whose acquisitions are subject to review under the ICA must satisfy the Responsible Minister that the acquisition is likely to be of "net benefit to Canada".4 Acquisitions are rarely refused approval under the net benefit test — the only two rejections of proposed acquisitions in non-cultural sectors being one in 2008 and the other in 2010.5 However, the ICA review process can introduce delay into the transaction timetable.6 In addition, foreign investors are usually obliged to provide binding undertakings to the Responsible Minister in order to obtain approval. These can involve commitments to undertake capital expenditures, maintain certain employment levels and ensure Canadian participation in the management of the business, among other things.7
In addition to this general net-benefit-to-Canada review process, amendments to the ICA in 2009 gave the Responsible Minister, and ultimately the federal Cabinet, broad discretion to review investments on grounds that they could be injurious to national security. If an investment (whether completed or proposed) is found to be injurious to national security, the federal Cabinet has authority to block the investment in whole or in part (including ordering divestiture when the investment is already completed) or impose conditions on the investment.
The ICA has been subjected to criticism both by those who believe it is too lax in controlling foreign investments and by those who believe that it represents too great an impediment to foreign investment. One issue of debate has revolved around the treatment of state-owned enterprises (SOEs). As a result, there are now specific provisions and guidelines governing investments in Canada by foreign SOEs.8
Application of the ICA
The ICA applies whenever a "non-Canadian" (i) establishes a new "Canadian business" or (ii) acquires "control" of an existing Canadian business. Furthermore, as discussed below under National Security Review, there is scope to review an investment under the ICA on national security grounds even when there has been no acquisition of control of a Canadian business.
A "non-Canadian" is defined under the ICA as an individual, entity, government or government agency that is not "Canadian".
The ICA rules governing who/what is a "Canadian" (and therefore who/what is a "non-Canadian") can be complex. Briefly, however, an individual is a Canadian for the purposes of the ICA if he or she is a Canadian citizen or a permanent resident of Canada who has been ordinarily resident in Canada for not more than one year after first becoming eligible to apply for Canadian citizenship. (Permanent residents may apply for Canadian citizenship after four years in Canada.)
A corporation is Canadian if the ultimate controlling shareholders are Canadian. In the case of widely held companies, it may be practically impossible to determine whether shareholders are Canadian. Accordingly, the test for widely held companies is based on the citizenship or permanent resident status of the members of the company's board of directors. If at least two-thirds of the board are Canadian individuals, and the company is not controlled in fact through the ownership of its shares, the corporation will be considered Canadian; if not, the corporation is non-Canadian. (There are similar status rules for partnerships and trusts.)
The term "Canadian business" is defined in the ICA to mean a business carried on in Canada that has (i) a place of business in Canada; (ii) an individual or individuals in Canada who are employed or self-employed in connection with the business; and (iii) assets in Canada used in carrying on the business. Note that a Canadian business need not be controlled by Canadians – the acquisition of a foreign-controlled business operating in Canada is also subject to the ICA. In addition, a business need not be carried on entirely in Canada to qualify as Canadian.
"Business" is defined to include any undertaking or enterprise capable of generating revenue and carried on in anticipation of profit. Thus, for example, an enterprise that is carried on for a charitable or other non-profit objective is not a business for these purposes.
An entity that is in a "pre-operational state" because of the lack of an essential asset or the source of supply or manpower is also not considered a business for these purposes. Consequently, an oil and gas property that is only at the exploration stage is not considered a business under the ICA. However, an oil and gas property that contains recoverable reserves and is capable of production (or is already in production) will be treated as a business. Similarly, mineral properties that are only at the exploration stage are not considered to be businesses. However, a producing mine is considered to be a business as is a property on which development of a mine has been commenced for the purpose of production.
Acquisition of Control
The ICA contains detailed provisions defining the concept of an "acquisition of control". In summary, these provisions state that control can be acquired only through the acquisition of (i) voting shares of a corporation; (ii) "voting interests" of a non-corporate entity (which for partnerships and trusts means an ownership interest in the assets thereof that entitles the owner to receive a share of the profits and to share in the assets on dissolution); or (iii) all or substantially all of the assets of a Canadian business. Note that the acquisition of shares of a non-Canadian company with a Canadian division, but no Canadian subsidiaries, is not an acquisition of control of a Canadian business within the meaning of the ICA.
For the purposes of determining whether an investor has acquired "control" of a corporation, the following general presumptions apply:
- The acquisition of a majority of voting shares is deemed to be an acquisition of control.
- The acquisition of one-third or more but less than a majority of voting shares is presumed to be an acquisition of control unless it can be shown that the acquired shares do not give the investor "control-in-fact" over the corporation.
- The acquisition of less than one-third of the voting shares is deemed not to be an acquisition of control.
Similarly, for the purposes of determining whether an investor has acquired control of a non-corporate entity, the following general presumptions apply:
- The acquisition of a majority of voting interests is deemed to be an acquisition of control.
- The acquisition of less than a majority of voting interests is deemed not to be an acquisition of control.
Because of the unique sensitivities attached to "cultural businesses" in Canada, the Minister of Canadian Heritage may deem there to have been an acquisition of control of a Canadian cultural business even if the general criteria for establishing control are not met.
The ICA contains several exemptions that preclude its application. For example, the ICA does not apply to corporate reorganizations in which the foreign party that ultimately controls the Canadian business in fact does not change. The ICA also does not govern certain transactions to which the federal Bank Act applies.
1. R.S.C. 1985, c. 28 (1st Supp.). There are also sector-specific rules governing foreign investments in certain key industries, such as telecommunications, broadcasting, airlines and banking. These rules are beyond the scope of this guide.
2. The Investment Review Division (IRD) is the specific part of Industry Canada charged with administering the ICA.
3. The definition of "cultural business" is provided in Thresholds for Review, later in this guide. The Cultural Sector Investment Review division is the counterpart of the IRD in Heritage Canada.
4. The "net benefit" test is discussed in more detail under Net Benefit Test, later in this guide.
5. In 2008, the Minister of Industry denied approval of the proposed $1.325-billion acquisition by Alliant Techsystems Inc. of the space division of MacDonald, Detwiler and Associates Ltd. In 2010, the Minister of Industry announced that BHP Billiton's proposed $38-billion acquisition of Potash Corporation of Saskatchewan Inc. was not likely to be of net benefit to Canada. (BHP Billiton subsequently abandoned the transaction during the 30-day "appeal" period during which BHP Billiton could submit additional representations and undertakings.) These are the only two non-cultural acquisitions to be turned down since the ICA came into force in 1985.
6. The timing of the ICA review process is discussed in more detail under Review Process, later in this guide.
7. Undertakings are discussed in more detail under Undertakings, later in this guide.
8. The SOE guidelines are discussed in more detail under State-Owned Enterprises, later in this guide.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.