Canada: Investment Canada Act: 2021/22 Annual Report
National Security Law Bulletin

On October 28, 2022, the Director of Investments issued his Annual Report on the administration of the Investment Canada Act (“ICA”) for the fiscal year commencing April 1, 2021 and ending March 31, 2022 (the “2021/2022 fiscal year”). The Annual Report provides insight on key trends relating to foreign investment and national security reviews in Canada.

The key trends from this Annual Report are as follows:

• Investment is up: During the 2021/2022 fiscal year, a total of 1,255 filings (applications and notifications) were certified under the ICA, representing a 51.9% increase from the filings made in the previous year. This represents a new all-time high in total number of filings and a 21.6% increase over two years prior, which was the previous high for number of filings. These numbers indicate a return to the upward trend for foreign direct investments into Canada, which was recently interrupted by a brief downturn resulting from the COVID-19 pandemic in 2020/2021.
• No disallowances under the ‘net benefit to Canada' test: Eight investments were subject to a ‘net benefit to Canada' review, which is consistent with the three years previous. All eight investments were approved by the Minister as likely being of net benefit to Canada.
• Increased national security scrutiny of investments continue: In the previous fiscal year, the number of foreign investments subjected to national security reviews sharply increased from 10 (2019/2020) to 24 (2020/2021). In the fiscal year 2021/2022, 24 investments were subject to extended review, maintaining the increase observed from the previous year. This trend is expected to continue as global investment activity increases, along with a sustained focus on security and critical infrastructure highlighted by the Canadian government's concerns over the COVID-19 pandemic, security implications of climate change, the disruption to global supply chains, and geopolitical considerations such as Russia's war in Ukraine.

These trends are discussed in further detail below.

Net Benefit Reviews

Under the ICA, every acquisition of control of a Canadian business, whether direct or indirect, and every establishment of a new Canadian business, by a non-Canadian is subject to either notification or a ‘net benefit to Canada' review where certain monetary thresholds are exceeded, and in each case, requires that a filing be made to the Investment Review Division of Innovation, Science and Economic Development Canada (“ISED”). When a transaction is subject to a ‘net benefit to Canada' review, non-Canadian investors are required to obtain ministerial approval by demonstrating to the Minister that their investment will likely be of net benefit to Canada, which essentially involves an evaluation of the potential economic benefits (versus any burdens) that such foreign ownership could generate for Canada.

Of the 1,255 filings made in the 2021/2022 fiscal year, eight investments were subject to a ‘net benefit to Canada' review. This increase brings the number of applications within the same range as the three years previous. On average, the length of time of those eight reviews took 88 days from certification to completion. All eight investments were approved by the Minister as likely being of net benefit to Canada.

The top five investors into Canada by number of investments were: (1) the United States, (2) the European Union, (3) the United Kingdom, (4) China, and (5) Australia. A little over half of the filings made in the 2021/2022 fiscal year were from US investors (731). The number of investments from the UK (2021/2022: 88) increased slightly from the prior year (2020/2021: 61), but still represents a significant decrease from two years ago (2019/2020: 184). The number of investments from China increased from 42 (2020/2021) to 50 (2021/2022), although this still falls within the average range of filings from China over the last five years.

Investments by Country or Region of Origin

National Security Reviews

The national security review provisions of the ICA provide for a much broader review mechanism than the ‘net benefit to Canada' review process described above. All investments, whether implemented or proposed, by non-Canadians into Canada may be subject to a national security review in situations where the ISED Minister has reasonable grounds to believe that such an investment could be injurious to Canada's national security. 

All of the 1,255 investment filings made under the ICA in the last fiscal year and an unknown number of additional investments by non-Canadians that, because they did not represent an acquisition of control (and, as such, did not require a filing under the ICA), were scrutinized pursuant to the ICA during the same period. (Other federal legislation, such as the Bank Act and the Insurance Companies Act, also provide for certain investments to be considered from a national security perspective. The statistics in the Annual Report do not include these reviews.)

Twenty-four of those foreign investments were subjected by the ISED Minister to an additional period of national security scrutiny under section 25.2 of the ICA and 12 of those investments were then subjected to the formal national security review process under section 25.3 of the ICA. Of those 24 investments, 16 were cleared to proceed, seven were withdrawn by the non-Canadian investors prior to the formal national security review being completed, and one review is still ongoing.

A trend of significance is the sharp increase in the number of extended national security reviews. Among all the investments subjected by the ISED Minister to an additional period of national security scrutiny in the last five years, nearly 70% of them have taken place within the last two years.

The average review period for the concluded processes was 133 days from the date of certification (or where no filing was made, the date of first government action) to conclusion. Although still a lengthy period of time, the review process was much faster this fiscal year in comparison to the previous two fiscal years (2019/2020: 217 days and 2020/2021: 225 days). That said, one investment is still under additional review.

While the ICA protects the confidentiality of the foreign investors and their specific investment proposals, the Director of Investments provided the following information with respect to countries of origin of the investors, industry sectors involved, and the decisions made:

Key Takeaways

The 2021/2022 fiscal year represents a return to the upward trend for foreign direct investments into Canada following the downturn resulting from the COVID-19 pandemic in 2020/2021. This is an interesting development, as it means that Canada is a focus of foreign investment during a time of relative global unrest.

In the 2021/2022 fiscal year, there have been no disallowances under the ‘net benefit to Canada' test. This should be viewed as a positive sign for many investors.

However, national security scrutiny of investments is expected to increase in response to ongoing geopolitical tensions from the COVID-19 pandemic, climate change, and Russia's invasion of Ukraine. This trend of increased national security scrutiny is re-enforced by a number of recent policy developments:

• In April 2020, the Canadian government released an ‘enhanced scrutiny' policy statement (the “Enhanced Scrutiny Policy”), which states that the Canadian government will more closely scrutinize: (i) investments, both controlling and non-controlling, of any value in Canadian businesses that are “related to public health or involved in the supply of critical goods and services to Canadians or to Canadian governments”; and (ii) investments of any value by foreign state-owned enterprises and private investors assessed as being closely tied to or subject to direction from foreign governments.
• In March 2021, the ISED Minister announced updates to the National Security Guidelines, which sets out (among other things) broad, non-exhaustive factors that may be taken into account during a national security review. The update clarified a number of existing factors and it added two new ones concerning: (i) the exploitation of sensitive personal data; and (ii) the impact on critical minerals. The updated guidelines also re-affirm the Canadian government's position that it will subject all foreign investments by state-owned investors, or private investors assessed as being closely tied to foreign governments, to “enhanced scrutiny”— regardless of the value of the investment. A more detailed outline of the updated Guidelines is covered in a prior blog post titled “A Step in the Right Direction: Updated Guidelines on Canada's National Security Review Bring Greater Clarity”.
• In December 2021, the Prime Minister of Canada directed the ISED Minister to “[c]ontribute to broader efforts to promote economic security and combat foreign interference by reviewing and modernizing the Investment Canada Act to strengthen the national security review process and better identify and mitigate economic security threats from foreign investment.” Further, the ISED Minister has been directed to “use all tools, including the Investment Canada Act, to ensure the protection and development of our critical minerals.”
• In March 2022, the ISED Minister issued the Policy Statement on Foreign Investment Review and the Ukraine Crisis, which states that: (i) investments by Russian investors will be found to be of net benefit to Canada only on an exceptional basis; and (ii) investments controlled by or subject to influence by the Russian state will also support a determination by the Minister that there are reasonable grounds to believe such an investment could harm Canada's national security.
• On October 28, 2022, in recognition of the strategic importance of critical minerals to Canada's national security, the ISED Minister released the Policy Regarding Foreign Investments from State-Owned Enterprises in Critical Minerals under the Investment Canada Act. This policy provides that: (i) under a ‘net benefit to Canada' review, the approval of applications for acquisitions of control of a Canadian business related to critical minerals by a foreign state-owned enterprise will only happen on an exceptional basis; and (ii) under a national security review, the participation of a foreign state-owned enterprise or foreign-influenced private investor in an investment or proposed investment involving a Canadian business or entity operating in a critical minerals sector in Canada will support a finding by the Minister that there are reasonable grounds to believe that the investment could be injurious to Canada's national security and, as such, will be subject to a national security review. For more information on which minerals are considered critical in Canada, see our prior bulletin titled “Newly Critical: Copper, Helium and More – Canada's List of Critical Minerals has Expanded for 2021”.

In this context, it is unsurprising that the average number of formal national security reviews of investments from Chinese investors has doubled – up from three to six – since the 2019/2020 fiscal year. However, it is of note that the types of investments being heavily scrutinized are of the kind that can be expected to be analyzed at length.

While relatively few investments will be subjected to full national security reviews, if a formal national security review is ordered by the federal cabinet under section 25.3 of the ICA, the review process could be a lengthy one and there will be considerable uncertainty regarding whether the proposed investment will be allowed to proceed. Getting the right advice at the earliest opportunity can not only help investors make the critical “go/no-go” decision, but propel a transaction to successful conclusion, even against current odds.

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.