Doing Business in Canada - Part 2 - Foreign Investment in Canada

Generally, there are few restrictions on foreign investment in Canada, although some screening does take place and some sectors are subject to special limits at the federal or provincial levels.

A non-Canadian investor acquiring a business with a presence in Canada or establishing a new Canadian business may be subject to foreign investment review or notification requirements under the Investment Canada Act (“ICA”). The process is separated by the type of investor and the type of business. The Investment Canada Act contains two separate review processes. These two processes are subject to differing thresholds and different procedures, and consider different factors. The first process provides for the review of only those significant investments over certain specified financial thresholds. This process considers whether such investments will be of “net benefit to Canada”. The second process applies generally to any investment by a non-Canadian in or into Canada, regardless of size, and considers whether the investment might reasonably be expected to injure Canada’s national security.

Private Sector WTO Investments

The review threshold is $1 billion in enterprise value for investments to directly acquire control of a Canadian business by:

1. WTO investors (a person or entity from countries, other than Canada, that are members of the World Trade Organization) that are not state-owned enterprises; and
2. by non-WTO investors that are not state-owned enterprises where the Canadian business that is the subject of the investment is, immediately prior to the implementation of the investment, "controlled by a WTO investor".

Starting January 1, 2021, and for subsequent years, the threshold level will be adjusted annually based on growth in nominal GDP in accordance with the formula in the ICA (i.e., the growth in nominal GDP at market prices multiplied by the threshold amount determined for the previous year.) 

The manner of calculating the enterprise value of the Canadian business that is the subject of the investment is the Investment Canada Regulations depending, on whether the Canadian business is a publicly traded entity, non-publicly traded entity or acquired by the acquisition of assets, respectively.

Private Sector Trade Agreement Investments

The review threshold is $1.5 billion in enterprise value for investments to acquire control of a Canadian business by:

1. trade agreement investors that are not state-owned enterprises; and
2. by non-trade agreement investors that are not state-owned enterprises where the Canadian business that is the subject of the investment is, immediately prior to the implementation of the investment, “controlled by a trade agreement investor”.

As defined in subsection 14.11(6) of the Act and the accompanying schedule, trade agreement investors include entities and individuals whose country of ultimate control is party to one of the following trade agreements:

• Canada-European Union Comprehensive Economic and Trade Agreement Implementation Act

• North American Free Trade Agreement

• Canada-Chile Free Trade Agreement Implementation Act

• Canada-Peru Free Trade Agreement Implementation Act

• Canada-Columbia Free Trade Agreement Implementation Act

• Canada-Panama Economic Growth and Prosperity Act

• Canada-Honduras Economic Growth and Prosperity Act

• Canada-Korea Economic Growth and Prosperity Act

Starting January 1, 2019, and for subsequent years, the threshold level will be adjusted annually based on growth in nominal GDP in accordance with the formula set out in subsection 14.11(3) (i.e., the growth in nominal GDP at market prices multiplied by the threshold amount determined for the previous year.)

The manner of calculating enterprise value of the Canadian business that is the subject of the investment is prescribed in sections 3.3, 3.4 and 3.5 of the Investment Canada Regulations depending on whether the Canadian business is a publicly traded entity or acquired by the acquisition of assets, respectively.

State Owned Enterprise WTO Investments

The review threshold for 2017 is $379 million in asset value for investments to directly acquire control of a Canadian business by: 

1. WTO investors that are state-owned enterprises; and
2. non-WTO investors that are state-owned enterprises where the Canadian business that is the subject of the investment is, immediately prior to the implementation of the investment, "controlled by a WTO investor".

The official amount was published on page 664 of the Canada Gazette on February 11, 2017.

This threshold will be annually revised to reflect the change in Canada's nominal gross domestic product (GDP) in accordance with the formula set out in subsection 14.1(2) (i.e., the annual change in nominal GDP at market prices multiplied by the threshold amount determined for the previous year).

The manner of calculating the value of the Canadian business that is the subject of the investment is prescribed in section 3.1 of the Investment Canada Regulations and is based on the Canadian business' asset value as shown on the balance sheet of the Canadian business at the end of the last completed fiscal year before its proposed acquisition.

Non-WTO Investments and Investments in Cultural Business

The thresholds for investments which are subject to review are 5 million dollars in asset value for direct investments and 50 million dollars in asset value for indirect transactions. These thresholds apply to investments by an investor who is not a "WTO investor", as defined in subsection 14(6) of the Act, which involve the acquisition of control of a Canadian business which is not "controlled by a WTO investor" immediately prior to the implementation of the investment.

These thresholds also apply to investments made by all non-Canadian investors to acquire control of a Canadian business that is a cultural business as described in section 14.1(6) of the Act. Notwithstanding the above, any investment which is usually only notifiable, including the establishment of a new Canadian business, and which falls within a specific business activity listed in Schedule IV of the Investment Canada Regulations (cultural heritage or national identity), may be reviewed if an Order-in-Council directing a review is made and a notice is sent to the investor within 21 days following the receipt of a certified complete notification. 

The manner of calculating the value of the Canadian business that is the subject of the investment is prescribed in Section 3.1 of the Investment Canada Regulations and is based on the Canadian business' asset value as shown on the balance sheet of the Canadian business at the end of the last completed fiscal year before its proposed acquisition.

Cultural Business Activities

The prescribed business activities for which the Minister of Canadian Heritage is responsible are set out in Schedule IV to the Investment Canada Regulations

These are set out as:

• Publication, distribution or sale of books, magazines, periodicals or newspapers in print or machine readable form.

• Production, distribution, sale or exhibition of film or video products.

• Production, distribution, sale or exhibition of audio or video music recordings.

• Publication, distribution or sale of music in print or machine-readable form.

The Review

Investments that are subject to review require the filing of detailed information concerning the target business and the investor’s plans for it. The review process generally takes at least 45 to 75 days. A non-Canadian investor will be required to satisfy the relevant Minister that the transaction will likely be of “net benefit” to Canada before the Minister will approve the transaction. The Minister of Innovation, Science and Economic Development (formerly the Minister of Industry) or the Minister of Canadian Heritage in the case of cultural transaction are responsible for the reviews.

Net Benefit to Canada

In determining “net benefit to Canada,” the Minister must consider:

• The effect of the investment on the level and nature of economic activity in Canada;

• The degree and significance of participation by Canadians in the Canadian business and the industry of which it forms a part;

• The effect of the investment on productivity, industrial efficiency, technological development and product innovation and variety in Canada;

• The effect of the investment on competition within an industry 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 in world markets.

If the Minister initially decides that the investment will not be of such benefit, the non-Canadian will be given an opportunity to make representations and submit undertakings with respect to the investment with a view to satisfying these requirements.

Restrictions

Certain statutory provisions restrict foreign investment and ownership in specific areas, including the financial services, air transportation, and broadcasting and telecommunications sectors. There are also foreign investment disincentives for media and publishing. Transactions which the Canadian government believes may be injurious to Canada’s “national security,” including minority investments, can be reviewed and blocked or unwound by the government.

The ICA provides in section 38 certain guidelines on the national security review of investments. The factors considered include but not limited to the following, as they relate to national security:

• The potential effects of the investment on Canada's defence capabilities and interests;

• The potential effects of the investment on the transfer of sensitive technology or know-how outside of Canada;

• Involvement in the research, manufacture or sale of goods/technology identified in Section 35 of the Defence Production Act;

• The potential impact of the investment on the security of Canada's critical infrastructure. Critical infrastructure refers to processes, systems, facilities, technologies, networks, assets and services essential to the health, safety, security or economic well-being of Canadians and the effective functioning of government.

• The potential impact of the investment on the supply of critical goods and services to Canadians, or the supply of goods and services to the Government of Canada;

• The potential of the investment to enable foreign surveillance or espionage;

• The potential of the investment to hinder current or future intelligence or law enforcement operations;

• The potential impact of the investment on Canada's international interests, including foreign relationships; and,

• The potential of the investment to involve or facilitate the activities of illicit actors, such as terrorists, terrorist organizations or organized crime.

Exemptions

The ICA contains a number of exempt transactions, such as the acquisition of shares by a person whose business is dealing in securities. An investment to acquire an interest in an existing Canadian business that does not result in an acquisition of control under the ICA will also generally not be subject to notification or review.

General Restrictions on Corporate Investment in Canada Applicable to Non-Threshold Investments - Residency of Directors

The federal Canada Business Corporations Act (the “CBCA”) requires that at least one
quarter of the directors of most federal corporations be resident Canadians. For CBCA corporations doing business in certain industries, such as book publishing and uranium mining, the residency requirement for directors is higher. Some provinces also have residency requirements for directors.

To be a resident Canadian for federal purposes, a person must generally be either a Canadian citizen, or a permanent resident under the federal Immigration and Refugee Protection Act. In addition, subject to some limited exceptions, a person must already be ordinarily resident in Canada in order to be considered to have resident status.

In many cases, it is possible to avoid these residency requirements by incorporating in
a province or territory with less onerous or no residency requirements, such as British Columbia, New Brunswick, the Northwest Territories, Nova Scotia, Nunavut, Prince Edward Island, Québec and the Yukon, followed by extra-provincial registration in each of the other provinces and territories in which the corporation intends to conduct business.