On March 12, 2009, the federal government of Canada passed the Budget Implementation Act, 2009 (known as “Bill C-10”), amending the Investment Canada Act (the “ICA”). This is the first time the Act has been amended in over 20 years. The changes to the ICA followed a government-sponsored review of Canada’s competition policy and resulting report, Compete to Win, (the “Report”) released June 26, 2008. The Report amongst other items, noted that Canada is perceived to have an unduly restrictive foreign investment regime and cited legislative reform as a necessary measure in order to modernize Canada’s investment laws to welcome such investment. The ICA changes are intended to bring Canada in line with the rest of the world and to position Canada as a leading contender for foreign direct investment.
In Canada, a bill requires three readings in the House of Commons and the Senate before it becomes law, a process that typically takes months. Bill C-10 was passed within five weeks, and included the ICA changes as part of the economic crisis stimulus package within the federal budget implementation process. This context arguably resulted in less critical attention than one would typically expect for such changes.
The amendments include:
- Currently, Canada has a review process for foreign direct investment above a certain threshold. These amendments have increased the review threshold for all foreign investment in Canada from $312 million gross assets to $1 billion in enterprise value over five years, which means that many more modest investments will not require advance review. This applies to all sectors other than traditionally sensitive ones.
- The elimination of the $5 million threshold for traditionally sensitive sectors, including transportation (including pipelines), certain financial services and uranium mining. Only cultural businesses are still subject to the $5 million gross assets threshold.
- The introduction of a second (and new) ground for review, “national security”, wherein any investment that “could be injurious to national security” may be reviewed at the initiative of the Minister of Industry (the “Minister”) and is temporarily disallowed until a decision is made. There is no minimum threshold for this ground of review. In addition, the Minister is given broad ability to implement conditions on the investment and obtain information relating to it. Although this amendment is likely to affect a small proportion of foreign direct investment, it has been the subject of the most media scrutiny.
- In addition to the requirement to issue an opinion within 45 days of receiving sufficient information, an obligation is placed on the Minister to provide written reasons for any disallowance of an investment.
Not All Recommendations Included
Interestingly, the following recommendations put forth by the Report were not included in Bill C-10:
- Eliminating the notice requirement for investments and new businesses under the review threshold;
- Shifting the onus of the “net benefit” to Canada test currently placed on foreign investors—a “contrary to Canada’s national interest” test—that would have been placed on theMinister, which would have been, prima facie,more welcoming to investment; and
- Introducing an ancillary cultural business exemption whereby investments would not be subject to review if their cultural business activities are the lesser of $10 million or 10% gross revenues of the overall business.
National Security Test
The most interesting change to the Investment Canada Act is the ‘national security’ review, which could affect a small, but significant proportion, of investment into Canada. Uncertainty exists because this term was not defined in Bill C-10. Whereas this flexibility is desirable from the federal government’s perspective, it causes temporary regulatory uncertainty for investors as compared to other countries, including the United States and China, which, in their own way, provide substantive guidance on what may constitute a ‘national security’ investment. Based on past practice, it appears that the contours of national security would encompass sovereignty and physical security. We continue to await the definitional regulations, which are anticipated later this year.
Better Bottom Line – Canada Remains Open to Chinese Investment
Overall, investors from China should view the changes in Bill C-10 as helpful since review thresholds have increased, along with the number of sectors included in the higher review.. There are now, of course, two tests to be met in the review process. The first, the “net benefit” test, remains the same as before, with the higher threshold and wider application, and it is anticipated that the review will also continue as has been the case. The second test, that the investment not be “injurious to national security,” will likely be cause for some increased regulatory uncertainty until such time as regulations, administrative guidance, or a roster of foreign investments have cleared this test so that some form of precedent or practice can be observed. As the Canadian International Trade Minister David Emerson stated in January 2008: “Let me be clear…Canada welcomes Chinese investment. Canada remains open and welcomes foreign investment – both private and state-owned.”