On August 4, 2016, the Director of Investments at Innovation, Science and Economic Development Canada (ISED) issued the Investment Canada Act Annual Report for 2015-16 (the Report). The Report provides an overview of how the Investment Canada Act has applied to foreign investments in Canada in the latest fiscal year, and is replete with statistics categorizing investments based on a number of criteria.

Origin of investment

The Report confirms the unsurprising fact that the United States is the number one source of investments (by number and value), while investors from the European Union were the second largest source in 2015-16. The BRIC countries represent a distant third (by number), while Japan is fourth (by number).

Investment Canada processes

There are three categories of processes under the Investment Canada Act:

  • A notification filing (generally a post-closing administrative formality);
  • The more intensive “net benefit to Canada” review process; and
  • A Cabinet-ordered national security review.

The Report indicates that the largest category by far were notifications at 626. Such notifications are required in two instances: (a) where the investment is an acquisition of control of an existing Canadian business that is below the “net benefit to Canada” review threshold (currently CA$600 million in enterprise value for investors controlled by nationals of World Trade Organization member countries); and (b) where the investment involves the establishment of a new Canadian business.

In contrast to the high level of notifications, there were only 15 applications for review in 2015-16. A “net benefit to Canada” review is required where the review threshold is exceeded and Ministerial approval is generally required for the transaction to proceed. The review process is time-consuming and resource-intensive, and typically necessitates that the investor provide commitments to the Canadian government in the form of undertakings relating to key factors, such as participation of Canadians in senior management, location of head office functions, employment levels, capital and R&D expenditures in Canada, and community contributions.

The “net benefit to Canada” review process consists of a 45-day initial period and a 30-day extension that can be made unilaterally by the Minister—a total of 75 days. Any extensions beyond 75 days must be made with the investor’s consent. The Report notes that the average time for review of investments subject to approval by the Minister of ISED is very close to the full 75-day period, though it has declined to 71.5 days in 2015-16 from 75.3 days the previous year.

National security reviews

Of particular interest is the Report’s commentary on national security reviews; the first time the Director of Investments has disclosed ISED’s experience with this process. The national security screening mechanism applies to a much broader scope of transaction than the “net benefit to Canada” review. For example, there is no safe harbour for smaller transactions and minority investments are subject to review whether or not they constitute an acquisition of “control.”

The national security review process is frequently criticized for its lack of transparency regarding governmental concerns about investments and investors’ resulting inability to meet the case against their investment. In addition, there is uncertainty about how broadly “national security” will be construed, as there is no definition nor is there any government guidance on what is covered - unlike guidance provided by the US Committee on Foreign Investment (CFIUS) in the United States or in respect of the US national security review process, which identifies as meriting closer scrutiny investments in sectors such as critical infrastructure, critical technology and energy.

Not surprisingly, given the level of confidentiality accorded to national security, the Report provides no information on the types of threats to Canada’s national security that have been addressed in the reviews that have occurred to date. However, we are aware that certain industries, such as defence and telecommunications, have been subject to national security reviews and as well, there has been at least one so-called “proximity” case where an investment to establish a new manufacturing facility was rejected because its proposed location was close to the Canadian Space Agency.

Despite the lack of substantive information on the national security review process, the Report is welcome in that for the first time there is reliable data on the number of investments that have actually been subject to national security reviews: eight since the national security screening was introduced to the Investment Canada Act in 2009, with half of those reviews occurring in 2014/15. Of these eight reviews, seven resulted in Cabinet orders with one investment being withdrawn. Outcomes varied between the investments: there were three prohibitions, two divestitures and two cases where the investments were authorized subject to conditions mitigating the national security risks.

It is important to note that national security reviews still represent a miniscule fraction of the total of 4,471 notifications and applications since March 12, 2009. Nevertheless, ISED screens all investments for potential concerns, and it is very likely that more than eight transactions have been subject to closer scrutiny by the Minister, but ultimately a national security review was not ordered by Cabinet.

We will be watching to see whether the new Trudeau government will continue to order the same level of national security reviews as the former Harper government, the government under which most, if not all, of the national security reviews occurred.