For foreign companies considering doing business in Canada, the Investment Canada Act (the “ICA”) provides complex, comprehensive rules designed to ensure that investments by non-Canadians result in a net benefit to Canada. In addition to the net benefit review, all transactions are potentially reviewable on national security grounds. Transactions involving companies operating in certain regulated industries (e.g. telecommunications, broadcasting, financial services, transportation and natural resources) may be subject to several multi-jurisdictional regulatory requirements and approvals. And, there are separate guidelines for investments by state-owned enterprises (“SOEs”).

When Does The ICA Apply?

The ICA applies to acquisitions of control of a Canadian business or the establishment of a new Canadian business by a non-Canadian. A Canadian business has a place of business in Canada, assets in Canada used for the business and (an) individual(s) employed in connection with the business. The ICA applies where a new Canadian business that is established by a non-Canadian is either unrelated to any other business that the non-Canadian is operating when the new business is established or, if so related, considered connected to Canada’s cultural heritage or national identity.

The ICA defines who a Canadian person is (e.g. a citizen or certain permanent residents) and provides detailed rules and presumptions regarding Canadian status (e.g. circumstances in which an entity is considered Canadian–controlled). Despite the rules regarding acquisitions of control, the Minister of Industry or Minister of Canadian Heritage (as applicable) can override both the general rules regarding an investor’s “Canadian” status and the rules and presumptions regarding “control” and acquisition of control. In so doing, the Minister may determine that an investor is not Canadian-controlled, or an entity does not control another entity, or control has (not) been acquired.

Review vs. Notification

Where the ICA is applicable, investments are subject to either pre-closing review or post-closing notification. Generally, a reviewable direct acquisition of control of a Canadian business may not be completed until approved by the relevant Minister. Whether an investment is reviewable or requires notification depends on criteria such as whether: the business being acquired is cultural; the transaction is a direct (acquisition of a Canadian company) or indirect (acquisition of a non-Canadian parent) investment; and the purchaser or vendor is a resident of a WTO member country. All investments are subject to national security review (see “Review on National Security Grounds” below).

Which Investments Are Subject to Review Under the ICA?

Both direct and indirect acquisitions may be subject to review. The ICA considers a direct acquisition to be the acquisition of all or substantially all of a Canadian business’s assets or a majority (or, in some cases, one-third or more) of the shares of the entity carrying on the business in Canada. A direct acquisition by a WTO investor (other than one involving a cultural business) is reviewable where the book value of the acquired Canadian assets exceeds $354 million for 2014. This threshold is expected to be replaced at some point in the future by a new $600 million “enterprise value” threshold (please see comments below under the heading “New Notification Thresholds”). A direct acquisition by a non-WTO investor is reviewable where the value of the acquired Canadian assets is $5 million or more.

The ICA considers an indirect acquisition to be the acquisition of control of a Canadian business by virtue of the acquisition of a non-Canadian parent entity. Indirect acquisitions by WTO investors (other than those involving a cultural business) are not reviewable. Indirect acquisitions by non-WTO investors are reviewable where the value of the Canadian assets is $50 million or more. The $5 million threshold will apply if the asset value of the Canadian business being acquired exceeds 50% of the asset value of the global transaction.

New Notification Thresholds

Upon certain of the 2009 amendments to the ICA taking effect, the $354 million asset-based threshold for direct acquisitions by WTO investors will be replaced with an “enterprise value” threshold. The new enterprise value threshold will be set initially at $600 million, increasing in steps, first to $800 million in the two years following the adoption of the new threshold and then to $1 billion. The threshold will be indexed annually based on Canada’s GDP.

What is a “Cultural Business”?

The higher WTO threshold for direct investments and the review exemption for indirect investments (as discussed above) do not apply where the relevant Canadian business is a “cultural business.” A cultural business is a Canadian business that carries on any of the following activities:

  • The publication, distribution or sale of books, magazines, periodicals or newspapers in print or machine-readable form, other than the sole activity of printing or typesetting of books, magazines, periodicals or newspapers;
  • The production, distribution, sale or exhibition of: film or video recordings, audio or video music recordings, or music in print or machine-readable form;
  • Radio communication in which the transmissions are intended for direct reception by the general public;
  • Any radio, television and cable television broadcasting undertakings; and
  • Any satellite programming and broadcast network services.

The Department of Canadian Heritage has also issued specific policies applicable to book and periodical publishing and distribution. Note that even if the “cultural business” components of a Canadian business are minimal or incidental to the overall business, the investment is reviewable. A Canadian business that has both cultural and non-cultural components must file ICA notifications and/or applications for review with both Industry Canada and the Department of Canadian Heritage. Depending on the asset value of the transaction as a whole, each department will process the notice and/or conduct a review of activities relevant to its jurisdiction.

Which Activities May Be Related to Canada’s Cultural Heritage or National Identity?

The acquisition of control of an existing Canadian business or the establishment of a new such business may also be reviewable, regardless of asset value, if the business is engaged in: the publication, distribution or sale of books, magazines, periodicals or newspapers in print or machine-readable form; or the production, distribution, sale or exhibition of film or video products, audio or video music recordings, or music in print or machine-readable form. These activities are deemed to be related to Canada’s cultural heritage or national identity and fall under the jurisdiction of the Department of Canadian Heritage. An investor must be informed within 21 days of filing its completed ICA notification with the Department if a review is to be conducted.

What Procedures Govern an ICA Review?

  • An application for review must include annual reports or financial statements for the three most recent fiscal years and set out particulars of the proposed transaction, including information about the investor, the Canadian business and the investor’s plans for the business.
  • The relevant Minister has 45 days to determine whether to allow the investment. The Minister can unilaterally extend the 45-day period by an additional 30 days by sending a notice to the investor prior to the expiration of the initial 45-day period. Further extensions of time must be agreed to by the investor.
  • If the investor does not receive approval or notice of extension within the applicable time then the investment is deemed approved. The investor may close a direct acquisition only after the Minister has approved, or is deemed to have approved, the investment. Failure to comply with these rules opens the investor to enforcement proceedings that can result in fines of up to $10,000 per day.
  • Where the Minister determines that the investment will not be of “net benefit to Canada,” the investor is provided with an opportunity to make additional representations and to submit undertakings (discussed below) that demonstrate the “net benefit” of the investment.

What Factors Are Considered in Connection With the “Net Benefit” Test?

The ICA requires the responsible Minister to consider certain factors (where relevant) in determining whether an investment is likely to be of net benefit to Canada. Submissions accompanying an application for review should address:

  • The effect of the investment on the economic activity in Canada, including employment, use of Canadian products and services, and exports from Canada;
  • How many Canadians will be employed, and in what positions, in the acquired or newly formed business or in the relevant industry;
  • The effect of the investment on productivity, industrial efficiency, technological development, product innovation and product variety in Canada;
  • The effect of the investment on competition within the relevant industry or industries in Canada;
  • The compatibility of the investment with national industrial, economic and cultural policies; and
  • The contribution of the investment to Canada’s ability to compete internationally.

Typically, during the initial 45-day review period, the investor and Investment Canada or Canadian Heritage will negotiate a mutually acceptable set of time-limited (e.g. usually three to five years) binding undertakings to be provided in connection with the Minister’s approval of the transaction. These undertakings comprise investor commitments concerning operation of the Canadian business following the completion of the transaction.

Usually, these commitments:

  • Obligate the investor to keep the head office of the Canadian business in Canada;
  • Ensure that a majority of senior management of the Canadian business is comprised of Canadians;
  • Maintain certain employment levels at the Canadian business;
  • Make specified capital expenditures and conduct research and development activities based on specified budgets; and
  • In some cases, make a certain level of charitable contributions.

These undertakings normally are reviewed on a 12- to 18-month basis to confirm the investor’s performance. Note that the ICA’s enforcement provisions include potential fines of up to $10,000 per day for a breach of undertakings given in connection with ICA approval.

Review on National Security Grounds

All investments may be reviewed on national security grounds, even if they are not otherwise reviewable. The applicable test is whether an investment is “injurious to national security.” Note that as there is no minimum review threshold for a national security review, even minority or passive investments may be reviewable. In addition, a national security review may occur where the target entity has a place of business in Canada and/or individuals employed or self-employed in connection with the business and/or assets in Canada used in the business. The review may be triggered pre- or post-closing. If the review is triggered pre-closing, the transaction may not be completed until the Minister completes the review. An investor may be notified that an investment will be subject to a national security review or simply advised that the review is taking place. Timelines for clearance of reviewable transactions under the ICA will be extended to accommodate such reviews.

Investments by State-Owned Enterprises

In December 2012 the federal government announced that further acquisitions of control of Canadian oil sands businesses would only be of net benefit to Canada in exceptional circumstances. Amendments to the ICA adopted in June 2013 (but not yet in force as of the date hereof) will subject investments by SOEs to heightened scrutiny. Reviews of such acquisitions will consider the degree of control or influence that the SOE would likely exert over both the acquisition and the industry in which that acquisition operates, as well as the extent to which the foreign government in question would be likely to exert control or influence over the SOE making the acquisition.

When is an ICA Notification Required?

Where a non-Canadian acquires control of an existing Canadian business or establishes a new Canadian business and, on its facts, the acquisition is not reviewable, the non-Canadian must submit notification to Investment Canada before (or within 30 days of) closing, indentifying the parties to the transaction, the number of employees employed by the business and the value of the business’s assets.