Canada: Foreign State-Owned Investors Spark “National Security” Concerns

Last Updated: October 23 2007

Article by Cliff Sosnow, Eric Elvidge, Elysia Van Zeyl, Alexis Von Finckenstein, © 2007, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on International Trade, October 2007

Canada Signals its Intention to Place Restrictions on Foreign Investment

Foreign state-owned enterprises hoping to invest in Canadian industry may face an additional hurdle in the near future. In a recent address to the Vancouver Board of Trade, Minister of Industry Jim Prentice indicated that the federal government intends to revise the Investment Canada Act (ICA), citing the need to examine acquisitions by so-called state-owned enterprises and the absence of a national security review mechanism as concerns necessitating a full review of the ICA this fall.

Minister Prentice’s statements illustrate the government’s intent to strike a difficult balance between maintaining Canada’s free-market system that encourages foreign investment while protecting Canada’s industries and resources from enterprises whose objectives may not be strictly commercial.

Somewhat puzzling is the government’s simultaneous praise for Canada’s accessible investment climate and calls for tighter controls on that same investment environment. There was an explicit recognition of the numerous benefits Canada enjoys because of foreign investment, including job creation, enhanced innovation and increased productivity. Despite these benefits and the government’s position that the ICA has been working well, the Minister stated "[F]ree markets do not mean a free pass. Canada is open for business, but it’s not for sale. And like other countries around the world, it’s important that we have safeguards in place to protect our interests." He concluded that the ICA needs some updating to ensure "that we are maximizing the benefits of foreign investment for Canadians while retaining our ability to protect our national interests." Minister Prentice framed the national interest sought to be protected as "national security."

The Canadian government’s concern regarding foreign state-owned enterprises stems from the observation that certain of these enterprises fail to comply with market principles and fail to adhere to transparent corporate governance practices. In addressing these concerns, the government is considering the introduction of guidelines for foreign state-owned enterprises and a national security test to be incorporated into foreign investment reviews under the ICA.

It is not yet clear whether Minister Prentice intends to fold the new guidelines for foreign state-owned enterprises into the current "net benefit" test under the ICA, or whether it will entail new criteria. The net benefit test that is currently used during investment reviews examines the effect that the proposed investment will have on economic activity, productivity and competition in Canada, compatibility with Canadian national industrial and cultural policies, as well as the impact on employment, resource processing and Canadian export activity. On past occasions, Minister Prentice has indicated his opinion that the net benefit test is broad enough to allow him to stipulate that transactions must be transparent and comply with market principles.

The address was sparse on specifics about what a national security test might entail or when a bill will be officially introduced in Parliament. Further, it is also unclear at this point whether this national security test will fall within the scope of the current net benefit test as an amendment to the test or whether amendments will be required to the ICA to create an entirely new category of review. Minister Prentice did say that any legislative or policy changes would not apply to take-overs currently in progress.

Adding an additional layer to this complexity, in July 2007 the federal government established a review panel and charged it with the responsibility of examining the key elements of Canada’s foreign investment legislation and competition policies. The core mandate of the panel is to review the ICA and the Competition Act. Among the issues the panel will be considering are the treatment of state-owned enterprises, the possibility of a national security review clause and sectoral investment restrictions (i.e., in telecommunications, mining and resources, etc.). The panel’s report, which is scheduled to be released in June 2008, is expected to provide recommendations on how foreign investment can be used to strengthen Canadian businesses. Minister Prentice indicated that further details regarding the proposed changes to the substance of reviews under the ICA will be announced prior to the completion of the panel’s report. This urgency results from the position, as expressed by the Minister, that state-owned enterprises and national security are a high priority and need to be addressed immediately. It is unknown at this time how the panel’s examination of the same issues and the recommendations based on their examination of the issues will fit into the government’s analysis and timelines.

Amendments to the ICA: Compliance with Canada's International Trade Obligations

An examination of the net benefit test and its modifications, consideration of a national security test and the application of criteria for the review of investments by state-owned enterprises invariably raise, as Minister Prentice correctly points out, complex compliance issues regarding Canada’s international obligations under the World Trade Organization (WTO) and the North American Free Trade Agreement (NAFTA). In considering changes to the treatment of foreign state-owned enterprises under the ICA, he pledged to look carefully at the provisions in other G8 countries, as well as in Canada’s NAFTA and WTO obligations. Proposed modifications to the net benefit test as it applies to certain state-owned enterprises or the application, out of a whole cloth, of a new national security test to review foreign investments by state-owned enterprises raise compelling questions about compliance with WTO and NAFTA investment rules.

Under the NAFTA (and indeed under the WTO), Canada has agreed to provide equal treatment to investors from NAFTA countries with certain specific exceptions. Using NAFTA as an example, Article 1102 requires each NAFTA country to place all NAFTA investors on an even playing field with regards to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments (the "national treatment" standard). Investors from Mexico and the United States, for example, are to be treated no less favourably than Canadian investors acquiring existing Canadian businesses or establishing new businesses in Canada. Although the goals of a policy that limits investments to entities that show transparency, demonstrate good governance practices and operate according to free-market principles are laudable, placing limits on the ability of state-owned enterprises to invest in Canadian businesses may raise legitimate trade law compliance issues given the obligations Canada has undertaken with respect to its North American neighbours (and countries under the WTO).

The issue of compliance with international trade law obligations is particularly germane regarding the net benefit test and the national security review question. Non-conforming measures (i.e., measures that are otherwise inconsistent with international obligations) that existed at the time the NAFTA came into effect may remain in force; however, laws cannot be amended to become less consistent with NAFTA rules, including the investment rules under NAFTA Article 1102. Canada’s schedule under Annex I of the NAFTA outlines Canada’s reservations regarding national treatment. Canada has reserved the discretion to review foreign investments further to the net benefit test of the ICA that rise beyond specified monetary thresholds and that affect Canada’s cultural heritage or national identity. It is not clear whether the application of new guidelines to certain foreign state-owned enterprises would increase the level of inconsistency of the net benefit test.

Similarly, a national security test currently exists under the NAFTA and it applies to all NAFTA rules including the national treatment standard in Article 1102. Canada, as expressed in Article 2102, has the ability to take non-conforming actions that are necessary for the protection of national security interests. The national security exception in the NAFTA generally addresses concerns relating to the international traffic in arms and ammunition, the non-proliferation of nuclear weapons and measures that must be taken for national security in times of war or international conflict. It is uncertain whether the Minister’s proposed imposition of a national security test under the ICA is consistent with the way the national security exception is cast in the NAFTA. If it is not, then questions arise as to whether a new test applicable to ICA reviews is NAFTA (and WTO) consistent.

Prudence suggests that foreign general counsel and CEOs diligently examine the new tests to ensure that amendments to the ICA are consistent with Canada’s international trade obligations.

Impact on Investment Review Process for Foreign Investors

Apart from the trade law implications and assuming the proposed amendments are NAFTA and WTO compliant, the adoption of new rules designed to address concerns related to investors owned or controlled by a foreign state and national security interests will have a measurable impact on the investment review process for foreign investors.

Currently, the acquisition of control of a Canadian business, and the establishment of a new Canadian business, by a non-Canadian are subject to the ICA. Transactions that do not exceed prescribed monetary thresholds are subject to a simple notification requirement. Where the monetary thresholds are exceeded (or where the proposed investment falls within a prescribed business activity related to Canada’s cultural heritage or national identity), the proposed investment is subject to a substantive review.

A reviewable transaction may not be completed unless the relevant Minister is satisfied, in part based upon negotiated undertakings provided by the investor, that the investment is likely to be of net benefit to Canada. As earlier indicated, the ICA requires the Minister, in determining net benefit, to take into account a number of specific factors. At the moment, these factors do not address either state-owned or controlled investors or national security interests.

As earlier noted, it is not clear from the public announcements made to date by Minister Prentice how the ICA might be amended to deal with a proposed investor that is owned or controlled by a foreign state. Minister Prentice highlighted the government’s interest in ensuring that such investors operate under the same standards as any other commercial enterprise operating in Canada, "including those related to transparency, good governance practices and whether they operate according to free market principles." One can easily imagine that such standards might well constitute the subject matter of new forms of undertakings beyond the scope of those that the Minister has traditionally required in connection with the approval of a proposed transaction.

Similarly, regarding Minister Prentice’s comments on national security interests in an amended ICA, it will be very important that any test ultimately enacted indeed be explicit. The previous federal government also proposed changes to the ICA legislation to permit the review of a proposed investment based on national security concerns. However, that proposed legislation (which was never enacted) rightly attracted criticism on the basis that the term "national security" was not defined. As a result, the proposals not only could potentially have been very broad in application, they could also have allowed significant government discretion.

Regardless of how these proposed new rules might ultimately be drafted, it is almost certain that the practical impact on the investment review process for foreign investors will be more delay and negotiation. Even under the current regime, it is often difficult to obtain the Minister’s approval before the expiration of the initial waiting period of up to 45 days set out in the ICA. As a result, the initial waiting period often is extended. In future, if new rules dealing with state-owned or controlled investors and national security interests are in fact adopted, it is likely that negotiations with government officials will simply take longer, and involve a more extensive set of undertakings, before the Minister ultimately makes his "net benefit" determination.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
1 Nov 2016, Seminar, Toronto, Canada

What is the emotional culture of your organization?

Every organization and workplace has an emotional culture that can have an impact on everything from employee performance to customer or client satisfaction.

3 Nov 2016, Seminar, Toronto, Canada

Join leading lawyers from the Blakes Pensions, Benefits & Executive Compensation group as they discuss recent updates and legal developments in pension and employee benefits law as well as strategies to identify and minimize common risks.

3 Nov 2016, Other, Vancouver, Canada

“Risk” is the new black. It’s on the lips of every CEO, CFO, GC and board member — as it should be. Can you spot it? How do you analyze it? Are you equipped to manage it?

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.