In its 2016 Fall Economic Statement, the Government of Canada announced forthcoming changes to the review of foreign investments under the Investment Canada Act. Namely, the government intends to significantly increase the financial threshold above which foreign investments are subject to pre-closing “net benefit” review under the ICA, and provide additional guidance regarding the conduct of national security review.
Net Benefit Review Threshold
The ICA applies to every acquisition of control of a Canadian business by a non-Canadian investor. Transactions exceeding certain financial thresholds are subject to pre-closing “net benefit” review; these transactions cannot be completed until the responsible Minister or Ministers determine that the transaction will be of “net benefit” to Canada. Currently, for direct acquisitions of non-cultural Canadian businesses, transactions are typically subject to pre-closing review where the enterprise value of the acquired Canadian business exceeds C$600 million. Until recently, this threshold had been scheduled to increase to C$800 million in April 2017, and then to C$1 billion in April 2019 (and indexed annually to GDP growth beginning in January 2021).
As part of the Fall Economic Statement, the government has committed to increasing the threshold for review directly to C$1 billion in April 2017.
Raising the “net benefit” review threshold will significantly reduce ICA compliance costs and risks for foreign investments in Canadian businesses whose enterprise value is between C$600 million and C$1 billion. For investments that fall below the threshold, the ICA requires only that the foreign investor provide post-closing notice of the investment.
In addition to the across-the-board threshold increase, investors from certain states will see the “net benefit” review threshold rise to C$1.5 billion, due to the recently-signed Comprehensive Economic and Trade Agreement between Canada and the European Union. The C$1.5 billion threshold, which is to be indexed annually to GDP growth, will apply not only to investments flowing into Canada from the European Union and its member states but also to investments from the following countries with which Canada has pre-existing free trade agreements: the U.S., Mexico, Chile, Peru, Columbia, Panama, Honduras and Korea. The precise timing for the introduction of this increase remains unclear. However, Bill C-31, the amending legislation to introduce the increase, received its first reading in Parliament on October 31, 2016.
Not all foreign investors will benefit from the new higher thresholds. In particular, the higher thresholds will not apply to investments: (a) to acquire a Canadian “cultural business”; (b) by a state-owned enterprise (which includes an entity influenced by a foreign state); and (c) where neither the purchaser nor the seller is ultimately controlled by nationals of WTO member countries.
National Security Reviews
Under the ICA, any foreign investment, including those that do not meet the “net benefit” review threshold, can be subject to a national security review if the government believes that the investment could be injurious to Canadian national security. The government has promised to make the national security review process more transparent by publishing, by the end of 2016, guidelines according to which such reviews will be conducted.
Currently, the national security review process under the ICA is opaque. While the ICA allows for review of any foreign investment that “could be injurious to national security,” national security is not defined by the ICA and there are no published criteria according to which such a review is undertaken. The forthcoming guidelines have the potential to provide welcomed insight into the process and clarity to prospective foreign investors.