The Investment Canada Act (ICA) mandates that non-Canadians must notify or apply for a review by the Canadian government when they establish a new business or acquire control of an existing one in Canada. This process ensures that significant foreign investments benefit Canada's economy.
Who needs to submit an investment for review?
All non-Canadians (whether an individual, a foreign government, an agency thereof, or an entity that is not controlled or beneficially owned by a Canadian person) who either:
a. Acquire/purchase control of an existing Canadian business; or
b. establish/incorporate a new Canadian business;
are subject to the ICA and are required to file either a Notification or an Application for Review of the investment.
Who/What is a non-Canadian individual or business?
“Canadian” means
a. a Canadian citizen,
b. a permanent resident within the meaning of subsection 2(1) of the Immigration and Refugee Protection Act who has been ordinarily resident in Canada for not more than one year after the time at which he or she first became eligible to apply for Canadian citizenship,
c. a Canadian government, whether federal, provincial or local, or an agency thereof, or
d. an entity that is Canadian-controlled, as determined under subsection 26(1) or (2) and in respect of which there has been no determination made under any of subsections 26(2.1), (2.11) and (2.31) or declaration made under subsection 26(2.2) or (2.32)
“Canadian business” means a business carried on in Canada that has
a. a place of business in Canada,
b. an individual or individuals in Canada who are employed or self-employed in connection with the business, and
c. assets in Canada used in carrying on the business;
How is control established?
Control is established if a non-Canadian acquires:
a majority of the voting interests of a corporation, partnership, trust, or joint venture or of a majority of the undivided ownership interests in the voting shares of an entity that is a Corporation;
less than a majority but one-third or more of the voting shares of a corporation or of an equivalent undivided ownership interest in the voting shares of the corporation, unless it can be established that, on the acquisition, the corporation is not controlled in fact by the acquirer through the ownership of voting shares; or
all or substantially all of the assets of a corporation, partnership, trust, or joint venture used in carrying on the Canadian business.
Is a notification required or a formal application?
After determining whether the ICA applies to an investment, the next step is to determine the applicable procedure that will be followed by the government to oversee the investment. A foreign investment is subject to either a notification requirement, or a formal review process.
Generally, smaller investments are subject to a Notification, whereas larger investments over a certain monetary threshold require a more onerous Formal Review. Other important considerations include, whether:
a. the investment is direct or indirect;
b. the investor is controlled in one or more countries that are members of the World Trade Organization (“WTO”); and
c. the target is a cultural business, as defined in the ICA. An example of a cultural business is any business that is involved in cultural activities, including book publishing and distribution, recorded music and music publishing, film production and distribution, and online media development and distribution.
Foreign Investments Subject to a Notification
Any investment by a non-Canadian to establish a new Canadian business (one that is not already being carried on in Canada by that non-Canadian, or one that is related to another business being carried on in Canada by that non-Canadian that is deemed to relate to Canada’s cultural heritage or national identity), or any investment to acquire control of a Canadian business, is subject to a notification requirement.
The non-Canadian making the investment must give notice of the investment to the Director of Investments appointed by the Minister prior to the implementation of the investment or within thirty (30) days thereafter. Within twenty-one (21) days of receiving the completed notice, the government will provide notice confirming whether the investment is reviewable or not.
Foreign Investments Subject to a Formal Review (aka “Net Benefit” review)
A formal review is required when a non-Canadian acquires control of a Canadian business, in one of the ways specified in s. 28(1) of the ICA, and a certain financial threshold is exceeded.
The financial threshold for 2024 is $1.326 billion in enterprise value for investments to directly acquire control of a Canadian business by:
WTO investors that are not state-owned enterprises; and
non-WTO investors that are not state-owned enterprises where the Canadian business that is the subject of the investment is, immediately prior to the implementation of the investment, "controlled by a WTO investor".
An indirect acquisition, whereby an investor acquires shares of a non-Canadian corporation, which in turn owns shares in a Canadian corporation, is not subject to a formal review, except if the Canadian business is a “cultural business”, as defined in s.14.1(6)(a) to (e) of the ICA. In such case, the acquisition is only subject to review if the value of assets of the entity carrying on the Canadian cultural business, and all other entities in Canada, is fifty million ($50,000,000) dollars or more. However, when the value of the Canadian business represents more than 50% of the value of all the assets in the transaction, the review threshold is reduced to five million ($5,000,000) dollars.
If an investment is subject to a formal review, the investor/purchaser will be required to satisfy the Minister that the transaction will be a "net benefit" to Canada. Some of the factors considered in assessing whether this is the case are as follows:
how the investment will impact competition within Canadian industry;
the level of participation of Canadians in the Canadian business;
whether the investment is consistent with Canada's economic and cultural policies;
the impact of the investment on research and development, as well as productivity;
the impact of the investment on Canadian employment and resources; and
the impact of investment on services and parts produced in Canada.
If an investment is deemed to not be a net benefit to Canada, the Director of Investments, as appointed by the Minister, may:
direct the non-Canadian not to implement the investment;
authorize the investment on the condition that the non-Canadian investor provide undertakings or implement the investment on specified conditions; or
require the non-Canadian to divest themselves of control of the Canadian business or of their investment in the entity.
What transactions are exempt from the Investment Canada Act?
There are a number of transactions that are exempt from the ICA, as specified in section 10, such as:
an ordinary course acquisition of voting shares by a trader in securities;
the acquisition or control of a Canadian business whereby the ultimate control (direct and indirect) of the Canadian business remains unchanged;
the acquisition of control of a Canadian business in connection with the realization of security granted for a loan or other financial assistance and not for any purpose related to the ICA; and
certain transactions to which the federal Bank Act applies.
Notification forms for establishment of a new business or the acquisition of control of a Canadian business, as well as the application form for the Net Benefit Review, can be found on the Government of Canada website.
For guidance on foreign investment compliance and on business acquisitions in Canada, please reach out to a member of SVR’s corporate law group.
