Acquisitions of control of Canadian businesses by non-Canadians are reviewable by the Canadian government under the Investment Canada Act and must be of “net benefit to Canada” and not “injurious to national security” to secure approval. Although Canada’s foreign investment rules do not affect many transactions, those transactions which are affected may be subject to delay while the foreign buyer negotiates undertakings with the Canadian government as a condition of securing approval.

Under the Investment Canada Act (ICA), the Canadian government reviews a foreign acquisition of a business in Canada where its value exceeds specified thresholds. The ICA applies whether or not the business being acquired is Canadian-controlled.

Review and Approval

Under the ICA, the requirement for government review and approval is generally limited to direct acquisitions of control of large Canadian businesses by non-Canadians. In general, a “non-Canadian” means an individual who is neither a Canadian citizen nor a permanent resident of Canada, or an entity that is controlled or deemed to be controlled by one or more non-Canadians.

A review may be required in the case of smaller acquisitions and the establishment of new businesses by non-Canadians in prescribed “cultural” industries. Special policies which, in some cases, prohibit or limit foreign investment, apply to investments in certain cultural businesses. For instance, the federal Cabinet, on a case-by-case basis, may order a review in the public interest of an acquisition of a cultural business where the requisite monetary threshold is not met.

Finally, pursuant to a new provision of the ICA, a review (known as a “National Security Review”) may be required for any investment by a non-Canadian that is potentially injurious to national security. The broad range of investments by non-Canadians potentially subject to a National Security Review include the acquisition of control or establishment of a Canadian business, as well as the acquisition, “in whole or in part,” or the establishment of an entity carrying on any part of its business in Canada, even if it has a minimal presence in Canada. There are currently no de minimis exemptions from the National Security Review process (nor are there expected to be any).


The Minister of Canadian Heritage has authority for the review and approval of investments in cultural industries. The Minister of Industry has authority for the review and approval of investments in all other industries. For all reviews other than National Security Reviews, the initial review period can take up to 45 calendar days. This review may be extended by the responsible Minister for an additional 30 days (and potentially for an additional period with the consent of the acquiring party). The review period for National Security Reviews has yet to be prescribed; however, the review period could be prescribed in new ICA regulations which are expected to be published in July 2009.

Net Benefit to Canada

The general test that must be satisfied for an acquisition to secure approval under the ICA is that the investment be of “net benefit to Canada.” To demonstrate net benefit, it is often necessary for the non-Canadian investor to undertake to the Canadian government that it will commit to maintain: certain levels of employment; Canadian management and a Canadian head office; capital expenditures; technology transfer, etc.

The negotiation process to demonstrate net benefit by way of undertakings may be difficult and protracted. This may be the case, for example, where: (1) the business being acquired is a Canadian multinational or Canadian public company and there are numerous Canadian employees; (2) the acquired business has significant operations in the Province of Québec; (3) a significant employment reduction is proposed; or (4) there are no obvious synergies between the acquiror and the acquired business (as in the case of a private equity firm acquiror).

Special Rules for National Security Transactions

The test that must be satisfied for a National Security Review is that the investment not be “injurious to national security.” The ICA does not contain a definition of what is considered injurious to national security, nor does it provide a list of factors to be considered as part of a review.

It had been hoped that a list of factors or activities considered to be potentially injurious to national security would be included in forthcoming regulations under the ICA, as has been done in the U.S. by the Department of The Treasury (Treasury) (e.g., businesses that provide products and services to government agencies; industry segments such as weapons, munitions, aerospace, energy, etc. affecting security or vulnerability to sabotage or espionage; maritime shipping and port terminal operations; aviation maintenance, repair and overhaul; critical infrastructure including energy assets; and several others). However, it is our understanding that it is unlikely that there will be any guidelines or regulations to expand on what is considered to be injurious to national security. This will leave the Minister with wide discretion in identifying and evaluating national security concerns.

The ICA does not prescribe a voluntary or mandatory pre-closing filing process for National Security Reviews. The ICA does, however, provide a three-step review procedure:

  1. Notice. If the Minister believes, on reasonable grounds, that an investment by a non-Canadian could be injurious to national security, a notice will be provided to the non-Canadian. Upon receipt of a notice, the proposed investment cannot be completed until the issue is resolved.
  2. Review by the Minister and referral to the Cabinet. The Minister may order a formal review if it is deemed necessary, during which the non-Canadian can argue its case. The Minister can then refer the matter to the Cabinet if national security concerns are unresolved after his review, or inform the non-Canadian that no further action will be taken (following which the transaction may be completed, subject to any requirements imposed under the “net benefit to Canada” test).
  3. Cabinet decision. Upon an investment being referred to it, the Cabinet may prohibit the investment or authorize the investment subject to certain undertakings and/or conditions. Where the investment has already been implemented, the Cabinet may order divestiture to alleviate any national security concerns.

Investments completed prior to February 6, 2009 cannot be subject to National Security Review. Investments completed between February 6, 2009 and March 12, 2009 (the implementation date of the provisions governing National Security Reviews) are potentially subject to a National Security Review if the Minister sends a notice by May 11, 2009 (being 60 days following implementation). All investments completed after March 12, 2009 are potentially reviewable under the National Security Review process.

Investments Requiring Review

The ICA review thresholds (referred to below) apply where either the acquiror or the vendor of the Canadian business being acquired is (or is controlled by) a World Trade Organization (WTO) investor (as defined in the ICA). For example, investors controlled by the governments or nationals of China, India, Korea, Kuwait, Saudi Arabia and the United Arab Emirates are all WTO investors for purposes of the ICA; investors controlled by the governments or nationals of Russia and a number of former Soviet republics are not.

Subject to limited exceptions, a direct acquisition of control of a Canadian business by a WTO investor is only reviewable, currently, where the acquired business has assets with a book value of more than $312 million. As a result of recent amendments which are not yet in force but which are to be implemented at a date yet to be fixed by the federal government, this threshold for review will be raised to $600 million in enterprise value. The threshold will increase over a four-year period to an enterprise value of $1 billion, following which the threshold will be adjusted annually to reflect changes to the Gross Domestic Product.

The calculation of enterprise value has yet to be prescribed; however, the concept of enterprise value generally is a measurement of what the market believes a business is worth (i.e., the value of the gross assets of the business plus the value of the business’ intangible assets, such as goodwill, know-how, intellectual property, etc. less cash). The threshold applicable to a WTO investor also applies to direct acquisitions of control of a Canadian business by a non-WTO investor where, immediately prior to the implementation of the investment, the Canadian business is controlled by a WTO investor.

An indirect acquisition of control by a WTO investor, involving an acquisition of a non-Canadian corporation with a Canadian subsidiary, is not reviewable, except in very limited circumstances and on a post-closing basis. Similarly, an indirect acquisition of control by a non-WTO investor of a non-Canadian corporation with a Canadian subsidiary where the non-Canadian corporation is controlled by a WTO investor immediately prior to the implementation of the investment, is not reviewable.

For transactions involving neither a WTO buyer nor a WTO-controlled seller/target, the relevant threshold is $5 million book value of worldwide assets for the Canadian business in a direct acquisition, and $50 million of such assets in an indirect acquisition (where the Canadian business represents less than half of the worldwide assets acquired).

The low $5 million threshold also applies to acquisitions or dispositions by WTO and non-WTO investors of a Canadian business that engages in cultural activities (Cultural Business). A direct acquisition of control of a Canadian Business is reviewable where the book value of the assets of the business exceeds $5 million. An indirect acquisition of control of a Cultural Business, where the value of the Cultural Business represents less than fifty percent of the worldwide assets being acquired, is reviewable where the book value of the assets of the business exceeds $50 million.

Investments Requiring Notification

Non-Canadians must notify Industry Canada in the prescribed form and not later than 30 days following an acquisition of control involving Canadian businesses falling below the monetary thresholds for review, and of the establishment of a new business that is unrelated to any business then being carried on in Canada by such non-Canadian.

It is generally not necessary to notify Industry Canada of a new business investment that represents an expansion of a non-Canadian’s existing business in Canada, or of an investment related to an existing business.

Investments by State-Owned Enterprises (SOEs)

In December 2007, guidelines were announced for the review of acquisitions of control by investors that are owned or controlled, either directly or indirectly, by a foreign government. While investments by SOE investors are not prohibited, they are now subject to additional scrutiny in determining whether their investments meet the “net benefit to Canada” test. The following additional criteria will be considered:

  • Whether the enterprise adheres to Canadian standards of corporate governance; and
  • Whether a Canadian business to be acquired by an SOE will continue to have the ability to operate on a commercial basis.

SOE investments may undergo careful scrutiny under the new National Security Review process referred to above.