The Trans-Pacific Partnership (TPP) was concluded on October 5, 2015, and the text was released to the public on November 5, 2015. The TPP is an ambitious free trade agreement between 12 countries in the Asia-Pacific region including Canada, the United States, Australia, Brunei Darussalam, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam. Among its 30 chapters, the TPP’s Investment Chapter includes provisions outlining Canada’s intentions to raise the threshold for Investment Canada Act (ICA) reviews, which, if implemented, will facilitate significant investments in Canadian businesses by foreign nationals of the partnership signatory countries.
This is one of a series of bulletins Blakes is publishing on TPP-related topics of interest to clients. This bulletin focuses on the changes to the ICA made by the TPP. The TPP is expected to come into force in 2017 following ratification by all 12 signatory countries. If all parties have not ratified the TPP within two years after signature, then the TPP may still come into force if at least six of those countries meeting certain gross domestic product (GDP) thresholds have completed their domestic ratification procedures.
ICA THRESHOLD TO INCREASE TO C$1.5-BILLION
The most significant feature of the TPP as far as foreign investment is concerned is the fact that the TPP contemplates a significant increase in the review threshold for direct acquisitions of Canadian businesses by TPP investors under the ICA. Under current ICA rules, a direct acquisition of control by a World Trade Organization-controlled investor of a Canadian business with an enterprise value of more than C$600-million is subject to review and approval — typically on the basis of undertakings made by the investor in relation to the going forward operation of the Canadian business — by the responsible Minister under the ICA. This threshold is set to raise to C$800-million and C$1-billion by 2017 and 2019 respectively. The TPP contemplates a C$1.5-billion review threshold for TPP investors. As a result, acquisitions of control of Canadian businesses with an enterprise value of less than C$1.5-billion by investors of an original signatory to the TPP will not be subject to ICA review, with some industry-specific exceptions. The C$1.5-billion threshold will be adjusted in subsequent years in accordance with the ICA.
The higher thresholds under the TPP will apply only to investors who are nationals of an original TPP party, or entities controlled by nationals of those TPP parties, if those parties have completed their domestic procedures to have the TPP enter into force. The TPP envisions a period of two years from the date of signature of the TPP for the original 12 parties (or at least six of them) to have completed their domestic ratification procedures.
There are a number of existing limitations relating to the TPP’s foreign investment regime that Canada intends to maintain as “non-conforming measures.” For example, the higher ICA review threshold included in the TPP does not apply to the acquisition of a cultural business; acquisitions by foreign state-owned enterprises, which remain subject to a lower asset value based threshold; ownership by non-Canadians in uranium mining property remains limited to 49 per cent at the stage of first production; and foreign investment in facilities-based telecommunications service suppliers remains restricted to a maximum, cumulative total of 46.7 per cent voting interest, based on 20 per cent direct investment and 33.3 per cent indirect investment.
CETA MAKES EQUIVALENT CHANGE TO ICA THRESHOLD
Canada and the European Union concluded negotiations for a Comprehensive Economic and Trade Agreement (CETA) in August 2014 and the legal text of the CETA was released to the public on September 26, 2014. When the CETA is ultimately implemented, it too will result in an increase in the ICA review threshold to C$1.5-billion for European investors. Therefore, Canada’s commitment made under the TPP is equivalent to the ICA commitments made under CETA.
Both the TPP and CETA will ultimately result in more acquisitions of Canadian businesses being made exempt from foreign investment review, and therefore heightened interest of foreign investors in Canada and Canadian businesses. However, the TPP and CETA are still works in progress since the ratification process is in the very early stages for either agreement. In addition, the change in federal government due to the October 19, 2015 election raises some uncertainty about the Liberal government’s enthusiasm for and commitment to implementing free trade agreements that its governing party did not negotiate. Despite the foregoing, new Canadian International Trade Minister Chrystia Freeland and her Liberal party are supporters of free trade in general and there is no reason to believe that the new Canadian government will not proceed to implement both agreements in Canada.