On December 19, 2016, the federal government released new guidelines on national security reviews under the Investment Canada Act (ICA). The guidelines are part of a new transparency initiative intended to encourage foreign investment by providing investors more information about a) the types of transactions that may require a national security review, and b) the factors considered by the government when assessing national security risk. Below we summarize the highlights from the guidelines and provide additional updates on the ICA.

BACKGROUND

Under the ICA, the government can review any investment by a non-Canadian in Canada on national security grounds. Under that process, the government has a 45-day window to commence a review from the date that it receives a complete application for review or notification filing (or from closing if no filing is required).

At the end of the review, the government can allow the investment to proceed, require that the investor adhere to binding commitments to mitigate a national security risk, prohibit closing, or even require that the investor divest its entire interest in the Canadian business if the investment has already closed.

NEW NATIONAL SECURITY GUIDELINES

The new guidelines set out the factors considered by the government when assessing national security risk including, in particular: the effect on Canada’s defence capabilities, transfers of sensitive technology or know-how, critical infrastructure, the enablement of foreign surveillance or espionage, the hindering of law enforcement operations and the potential involvement of illicit actors, such as terrorists or organized crime syndicates.

The guidelines also mention as factors the impact on the supply of critical goods and services to Canadians, the supply of goods and services to the federal government, and the impact of an investment on Canada’s international interests or foreign relationships.

The guidelines encourage investors to submit filings early or proactively engage with the Investment Review Division if there are potential national security concerns or questions. We expect that as the government reviews additional investments on national security grounds, the guidelines will be updated to reflect changes to the process.

“NET BENEFIT” REVIEW THRESHOLDS ARE INCREASING

The government intends to increase the “enterprise value” threshold for foreign investors from C$600-million to C$1-billion by introducing new legislation in 2017. Once that change is implemented, foreign investments originating in countries that are World Trade Organization members would only require a “net benefit to Canada” review if the enterprise value of the Canadian business being acquired exceeds C$1-billion. Absent this legislation, the threshold was slated to increase to C$800-million on April 24, 2017.

In addition, as part of the measures being taken to implement the Comprehensive Economic and Trade Agreement (CETA) with the 28 European Union countries, the government has introduced new legislation to increase the monetary threshold for investors from those countries as well as from other countries with trade agreements with Canada. Once the legislation is passed and declared in force, the new threshold will be C$1.5-billion in enterprise value.

Note that these thresholds do not apply to investments by state-owned enterprises or in Canadian cultural businesses.

OTHER DEVELOPMENTS

On November 3, 2016, the government entered into a settlement agreement with O-Net Communications, which applied for judicial review of a decision to divest its interest in ITF Technologies Inc. While reasons for the divestiture order were not publicly disclosed, ITF was in the business of developing communications equipment for military and space applications. Under the terms of the settlement, the Federal Court of Canada remitted the investment back to the minister for a fresh review.