Canada: Canada Lowers The Wall To Foreign Investment

Last Updated: November 16 2016
Article by Mark C. Katz, Anita Banicevic and David Feldman

At a time when trade globalization is attracting new controversy, the Canadian government has taken steps to encourage increased foreign investment in Canada. These measures promise a more attractive and welcoming foreign investment climate.

First, the Canadian government has announced that one of the key thresholds under the Investment Canada Act (ICA) will be increased two years earlier than originally planned. The objective is to encourage more foreign investment by reducing the number of transactions subject to the ICA's "net benefit" review process.

Second, the Canadian government has announced plans to issue guidelines regarding the ICA's national security review process, which prohibits investments that are "injurious" to Canada's national security interests. The purpose of these guidelines is to inject greater transparency into the process, thereby alleviating the uncertainty and unease currently confronting foreign investors.

Finally, the Canadian government intends to liberalize foreign investment restrictions for Canadian airlines. Specifically, the government plans to permit non-Canadians to own up to a 49% voting interest in Canadian airlines, an increase from the current cap of 25%. The goal is to promote greater competition in Canada's airline industry by opening up additional sources of investment for new entrants.

Higher Net Benefit Review Threshold

Under the ICA, non-Canadians acquiring control of Canadian businesses may be obliged to obtain pre-closing approval from the Canadian government if certain financial thresholds are exceeded. In these circumstances, the non-Canadian investor is required to satisfy the government that its proposed acquisition is likely to be of net benefit to Canada.

The most commonly applied net benefit review threshold governs"direct" acquisitions of non-cultural Canadian businesses by (or from) non-Canadians who qualify as "WTO investors." Under current rules, investments of this nature are subject to review if the "enterprise value" of the assets of the Canadian business exceeds C$600 million in value. The threshold was scheduled to increase to C$800 million in 2017 and to C$1 billion in 2019, when it would increase annually according to a prescribed indexing formula.

The concept of an escalating enterprise value threshold was introduced by the former Conservative government as part of its effort to gradually limit reviews under the ICA to very large transactions and a few other types of acquisitions: (i) acquisitions by non-WTO investors; (ii) acquisitions by foreign state-owned enterprises (SOEs); (iii) foreign acquisitions of Canadian "cultural" businesses; and (iv) foreign investments that raise "national security" concerns. The first three do not benefit from the higher enterprise value threshold and the fourth is governed by an entirely separate review process (discussed below).

On November 1, 2016, the current Liberal government announced in its Fall Economic Statement for 2016 that it intends introduce legislation to implement the planned C$1-billion threshold for direct WTO acquisitions two years earlier than originally planned. This decision to accelerate implementation of the C$1 billion threshold is consistent with the government's overall stated objective of encouraging investments in Canada (both foreign and domestic) that will create new jobs and opportunities for Canadians.

The government's announcement came on the heels of another development that will also serve to modify the ICA's net benefit review process. On October 30, 2016, Canada signed a Comprehensive Economic and Trade Agreement with the European Union (CETA), which, among other things, will require Canada to increase the ICA net benefit review threshold to C$1.5 billion for acquisitions of control by non-SOE investors from European Union member countries (as well as other countries entitled to "most-favoured nation" treatment under Canada's current free trade agreements). Legislation is now before Parliament to implement the provisions of CETA into Canadian law (see Bill C-30).

Note that neither the new C$1-billion threshold for direct WTO investments nor the CETA C$1.5-billion threshold will apply to investments by non-WTO investors, to investments by foreign SOE investors (whether WTO or not), or to acquisitions of Canadian cultural businesses. These categories of investments will continue to be governed by lower (and in some cases, much lower) thresholds.

Even with the above carve-outs, it is certain that these changes to the ICA thresholds will reduce the number of foreign investments subject to ICA review. That number could diminish even further if the Trans-Pacific Partnership (TPP) is implemented, because it would raise the net benefit review threshold for investments from TPP member countries to C$1.5 billion.

National Security Guidelines

The Fall Economic Statement's second important announcement in the foreign investment area states, "Before the end of 2016, the government will also publish guidelines under which investments are examined under national security provisions." According to the government, this "increased transparency will help investors better understand and navigate the review process, while ensuring the integrity of our national security processes is maintained."

Since the ICA's national security review was enacted in 2009, critics have complained about the lack of transparency that envelops the process. Just to cite a few of the more troublesome aspects, the ICA does not define what constitutes a "national security" interest, nor does it clarify when an investment could be "injurious" to such interests. And from a process perspective, no mechanism exists whereby an investor can apply for "clearance"; the authorities are often opaque and evasive about explaining concerns to the parties; and public disclosure of decisions (and reasons for those decisions) is virtually non-existent. As a result, even though only a few national security reviews have apparently been conducted  since 2009 (reportedly fewer than 10), the shroud of secrecy surrounding the process has elevated the national security review issue into a major source of unease for many foreign investors.

It would be a welcome accomplishment if the proposed guidelines are truly useful in helping foreign investors (and  counsel) understand what to expect from Canada's national security review process. We will be offering our assessment once the guidelines are released.

Changes to Foreign Ownership Rules Governing Airlines

In addition to the restrictions on foreign investment represented by the ICA review processes, certain sectors of the Canadian economy are subject to government-imposed limits on foreign ownership.

One of the more prominent examples is the airline industry, which is subject to a statutory cap of 25% on the foreign ownership of voting interests in Canadian airlines. This cap has been criticized as depriving potential new airlines of an important source of investment needed to establish themselves and remain viable competitors.

The Canadian government has now responded to these criticisms by reviving a Conservative proposal to raise the cap on foreign ownership of  Canadian airlines to 49%, from 25% (although any individual foreign investor or investor group would be prohibited from owning a greater than 25% voting interest). As explained by Canada's Minister of Transport, the  government's stated objective is to encourage more competition and lower fares through the creation of new, ultra-low-cost airlines in Canada. Indeed, as a sign of its commitment in this area, the government also announced that, even though amending legislation is expected in 2017, it will issue exemptions to two existing airline companies to allow them to immediately pursue increased foreign investment, with appropriate conditions.

While moving to liberalize current restrictions, the government has obviously decided not to cross the foreign ownership Rubicon by permitting non-Canadians to control Canadian airlines, either by owning a majority of voting interests or via "control in fact." It's open to question whether that day will ever come. What also remains to be seen is whether the government will eventually seek to liberalize foreign ownership restrictions governing other protected sectors of the Canadian economy, such as telecommunications and broadcasting.

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 Mondaq.com.

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

Authors
Mark C. Katz
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (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 www.mondaq.com

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 Mondaq.com’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.

Disclaimer

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.

Registration

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 unsubscribe@mondaq.com 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.

Cookies

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.

Links

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.

Mail-A-Friend

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.

Security

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 webmaster@mondaq.com.

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 EditorialAdvisor@mondaq.com.

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 enquiries@mondaq.com.

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