The Investment Canada Act applies whenever a non-Canadian, directly or indirectly, acquires control of a Canadian business regardless of whether it was owned by Canadians or other non-Canadians. A non-Canadian acquirer must either file an application for review or a post-closing notification of the investment unless a specific exemption applies.
To determine whether an investment is reviewable under the Investment Canada Act, it is necessary to consider whether the investor or the vendor is a ‘Trade Agreement Investor’ (ie, an entity controlled by citizens of states that are party to the Comprehensive Economic and Trade Agreement between Canada and the European Union, an entity controlled by citizens of states that are party to (and have ratified) the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, as well as citizens of the United Sates, Chile, Colombia, Honduras, Mexico, Panama, Peru and South Korea), whether the investor or the vendor is a ‘WTO investor’ (ie, an entity controlled by citizens of member states of the World Trade Organization) and whether the investor is a state-owned enterprise (SOE). Depending on the nationality of the ultimate controller of the investor or the vendor, there are different size thresholds that apply with respect to the need to obtain approval of a transaction. There are also separate and very low thresholds that apply where the Canadian business being acquired engages in cultural activities (such as those involving books, magazines, film, television, audio or video recordings, or radio or television broadcasting).
The threshold test changed for non-SOE WTO investors from an asset value test to an enterprise value test on 24 April 2015. As of January 2019, if the Canadian business is being acquired directly, by or from a WTO Investor and is not engaged in cultural activities, an investment is reviewable only if the Canadian operating business being acquired has an enterprise value of C$1.045 billion. Also, as of January 2019, if the Canadian business is being acquired directly by or from a Trade Agreement Investor and is not engaged in cultural activities, the investment is reviewable only if the Canadian operating business being acquired has an enterprise value of C$1.568 billion. Both the WTO investors threshold and the Trade Agreement Investors threshold undergo annual inflation adjustments each January. Where the investment involves the acquisition of publicly traded shares, enterprise value is calculated as the sum of the market capitalisation of the target and its liabilities minus its cash and cash equivalents. Where the investment involves the acquisition of privately held shares, enterprise value is calculated as the sum of the acquisition value and the target’s liabilities (based on its most recent quarterly financial statements) minus its cash and cash equivalents (based on its most recent quarterly financial statements). Where the investment involves the acquisition of assets, enterprise value is calculated as the sum of the acquisition value and assumed liabilities minus cash and cash equivalents.
Where an SOE WTO investor is involved, and if the Canadian business is being acquired directly and is not engaged in cultural activities, an investment will be reviewable only if the Canadian operating business being acquired has assets with a book value in excess of C$416 million. That threshold is expected to rise by an inflation-adjusted amount in early 2020.
If the acquisition by or from a WTO investor is indirect (ie, the acquisition of shares of a foreign corporation that controls a Canadian business) and does not involve a cultural business, the transaction is not reviewable.
Where the Canadian business engages in any of the activities of a cultural business, or if both the investor and the vendor are not WTO investors, the applicable thresholds for direct and indirect investments are assets with a book value of C$5 million or C$50 million, respectively.
An application for review is made to the Investment Review Division of the federal Department of Innovation, Science and Economic Development (or the Department of Canadian Heritage, where the merger involves any cultural businesses). There is an initial review period of 45 calendar days, which may be extended by 30 calendar days at the discretion of the agency, and further upon consent of the investor.
On an application for review, the substantive test applied is whether the proposed transaction is likely to be of net benefit to Canada. Any economic impact on Canada may be considered, including employment, investment, productivity, R&D, exports, Canadian management participation in the business and other factors. If the acquirer is an SOE, the review will also examine whether it is likely to operate the acquired Canadian business in an ordinary commercial manner. The Investment Canada Act approval is parallel to but separate from Competition Act reviews, and the Bureau provides input into this process with respect to a transaction’s effects on competition in addition to completing its own review. Very few transactions are rejected under the Investment Canada Act net benefit to Canada test, but it is common for investors to provide undertakings to the government to confirm that the net benefit test will be fulfilled.
An acquisition of control of a Canadian business by a non-Canadian that falls below the thresholds for review under the Investment Canada Act does not require an application for review. However, even where the transaction falls below the thresholds, it must still be notified by way of a filing form to the Investment Review Division of the Department of Innovation, Science and Economic Development (or the Department of Canadian Heritage for cultural cases). Notifications may be submitted by the acquirer any time before or up to 30 days after consummation of the transaction. If the transaction is in the cultural sector, a review may then be ordered (regardless of the asset value) by the Federal Cabinet within 21 days of receipt of the notification.
The Investment Canada Act also establishes a national security review regime, under which transactions can be reviewed regardless of the size of the business or transaction, the nationality of the acquirer, whether the transaction involves an acquisition of control or of a minority interest and whether or not the transaction has closed. To date, limited guidance has been provided as to the types of transactions that may be injurious to national security. A recent annual report on the administration of the Investment Canada Act noted that national security factors that have given rise to reviews include: the potential for injury to Canada’s defence capabilities; the potential for transfer of sensitive dual-use technology or know-how outside Canada; the potential impact of the investment on the supply of critical goods and services to Canadians; the potential to enable foreign surveillance or espionage; the potential for injury to Canada’s international interests; and the potential of the investment to involve or facilitate organised crime. A number of transactions have been rejected or have been abandoned based on concerns about the investor in question acquiring telecommunications assets that were regarded as critical infrastructure. There has also been a ‘proximity’ case in which the establishment of a new Canadian business was required to find a new location that was not nearby a facility of the Canadian Space Agency. One transaction has been blocked because the geomapping assets in issue were sensitive on a national security basis. In addition, a Chinese firm was ordered to divest a recently acquired interest in a Canadian fibre components and modules company, but this decision was challenged and on a re-review the government cleared the transaction. In early 2018, the proposed takeover of a Canadian construction services firm by a Chinese state-owned enterprise was blocked. While the precise reasons for this decision were not made public, the Canadian firm’s work with nuclear power facilities, telecommuications infrastructure, and military housing and training facilities may have raised concerns related to critical infrastructure.
In addition to the general reviews under the Competition Act and, if applicable, the Investment Canada Act, there are sector-specific ownership limits and review regimes in areas such as financial services, transportation, broadcasting and telecommunications.
Back to top