OVERVIEW
The Investment Canada Act is federal legislation that governs foreign investment in Canada and is primarily administered by the federal Minister of Industry and Investment Review Division (“IRD”) of Industry Canada. The federal Minister of Canadian Heritage is responsible for investments relating to Canadian cultural businesses.
Mergers in Canada are also subject to mandatory pre-merger notification under the federal Competition Act where a transaction exceeds certain prescribed monetary thresholds (see: Canadian Merger Control and Canadian Merger Control FAQs).
The Investment Canada Act applies where a “non-Canadian” acquires “control” of a “Canadian business” (or establishes a new Canadian business), all as defined in the Investment Canada Act. The application of the Investment Canada Act, and in particular what constitutes a “non-Canadian”, “control” and a “Canadian business” in specific circumstances, however, can be complex.
Where a foreign investment in a Canadian business is subject to review under the Investment Canada Act, an investor must show that the investment is likely to be of “net benefit to Canada” (discussed in more detail below). Alternatively, where the applicable monetary thresholds under the Investment Canada Act are not met, investors are only required to file simple notifications with basic information within thirty days of the completion of a transaction.
“Non-Canadian”
“Non-Canadians” under the Investment Canada Act are defined as individuals, entities or governments (or agencies of governments) that are not “Canadian”. A person will be considered to be a “Canadian” under the Investment Canada Act if they are a Canadian citizen or are a permanent resident of Canada who has been ordinarily resident in Canada for not more than one year after they first became eligible to apply for Canadian citizenship.
In the case of corporations, a corporation will be “Canadian” if the ultimate controlling shareholders of the corporation are “Canadian”. In the case of widely held corporations, a corporation will be “Canadian” if at least two thirds of its board of directors are Canadians and the corporation is not controlled in fact through its shares (i.e., there is no de facto control).
Acquisition of “Control”
The second general test to determine whether the Investment Canada Act applies is whether there will be an acquisition of “control”. Control for the purposes of the Investment Canada Act can be achieved as a result of: (i) the acquisition of voting interests (in the case of non-corporate entities), (ii) all (or substantially all) of the Canadian assets of a business or (iii) the acquisition of voting shares (for corporations).
The provisions regarding acquisition of “control” under the Investment Canada Act are complex. The Investment Canada Act, however, sets out a number of presumptions regarding the acquisition of control as follows: (i), where a majority of voting shares is acquired, control is deemed to have been acquired, (ii) where 1/3 or more (but less than a majority) of the voting shares of a Canadian business has been acquired, control is presumed, unless it can be demonstrated that the shares that will be acquired will not confer control in fact (de facto control) and (iii) where less than 1/3 of the voting shares of the Canadian business will be acquired, control is deemed not to have been acquired. In sum, control may be acquired under the Investment Canada Act with the acquisition of as little as 1/3 of the voting shares of a Canadian business.
Acquiring the shares of a non-Canadian corporation that has a Canadian division, but no Canadian subsidiaries, will not constitute control under the Investment Canada Act.
The Canadian Minister of Heritage may also determine that there has been an acquisition of control of a Canadian business, in relation to Canadian cultural businesses, even in circumstances where the general tests under the Investment Canada Act for determining control are not met.
“Canadian Business”
Under the Investment Canada Act, a “Canadian business” is defined as a business carried on in Canada that has: (i) a place of business in Canada, (ii) an individual (or individuals) employed or self-employed in connection with the business and (iii) assets in Canada used for carrying on the business. In other words, to constitute a Canadian business, there must be at least one Canadian employee, a place of business in Canada and some Canadian assets.
A “business” under the Investment Canada Act is defined as an enterprise or undertaking that is capable of generating revenue and is carried on in anticipation of profit. As such, in considering whether there is an investment in a “Canadian business”, it is important to determine whether the target is operational (e.g., mining properties that are not yet producing, and only at the exploration stage, are not “Canadian businesses”).
REVIEW UNDER THE INVESTMENT CANADA ACT
Investments are reviewable under the Investment Canada Act when they exceed the prescribed financial thresholds (discussed below). Where the prescribed financial thresholds are not met, foreign investors are only required to file a simple notification with basic information within thirty days of the completion of the transaction.
Whether a particular investment will be subject to Investment Canada review depends on several factors. These include: (i) whether the investment is direct or indirect, (ii) whether the Canadian business in which the investment is being made is a Canadian cultural business and (iii) whether the investor is a WTO or non-WTO investor. As such, determining whether an investment is reviewable under the Investment Canada Act requires an analysis of the structure of a transaction and the nature of the acquirer and target.
CANADIAN CULTURAL BUSINESSES
For investments in Canadian cultural businesses there are lower review thresholds. A “cultural business” under the Investment Canada Act includes a Canadian business that: (i) publishes, distributes or sells books, magazines, periodicals or newspapers in print or machine readable form, (ii) produces, distributes, sells or exhibits film or video recordings, (iii) produces, distributes, sells or exhibits audio or video music recordings or (iv) publishes, distributes or sells music in print or machine readable form.
It is worth noting also that a Canadian business can still be a “cultural business” if the cultural activities engaged in comprise only a small portion of the total business (i.e., there is no specific financial threshold). Moreover, the Canadian Minister of Heritage has the power to review the acquisition of Canadian cultural businesses even where the general relevant monetary thresholds are not met.
INDIRECT INVESTMENTS
An indirect acquisition under the Investment Canada Act is where a foreign investor acquires control of a corporation that is incorporated in a jurisdiction other than Canada, which in turn controls a Canadian entity carrying on a Canadian business. The significance of determining whether an investment is direct or indirect is that the thresholds for review are different depending on whether a transaction is direct or indirect. As well, indirect acquisitions by WTO investors are generally not reviewable.
INVESTMENTS BY WTO INVESTORS
Finally, with respect to WTO investors, generally speaking an individual will be a WTO investor where they are a national of a member of the WTO or have a right of permanent residence in a country that is a member of the WTO. In the case of corporations, a corporation will be a WTO investor where ultimate control rests with one or more WTO investors. In the case of widely held corporations, a corporation will be a WTO investor where the majority of the corporation’s voting shares are owned by WTO investors or, where no person or group of persons controls the corporation, where a minimum of 2/3 of the corporation’s board are comprised of Canadians and WTO members.
FINANCIAL THRESHOLDS FOR REVIEW
Acquisitions of a Canadian business where the following financial thresholds are exceeded will be subject to review.
WTO INVESTORS
Where the investor is a WTO investor (discussed above) or, alternatively, the Canadian business being acquired is controlled by a WTO investor, the following thresholds apply:
Direct Acquisitions. Direct acquisitions will be subject to review when the value of the assets of the Canadian business is equal to or exceeds the review thresholds for WTO investors (which is currently Cdn. $330 million and based on the gross book value of the Canadian business being acquired). However, as a result of the recent amendments that are not yet in force, the financial threshold for review in the case of direct acquisitions of Canadian businesses will be if the “enterprise value” of the assets of the Canadian business is equal to or exceeds Cdn. $600 million, which threshold will apply for the first two years after the new thresholds come into force. This threshold will increase annually.
Indirect Acquisitions. Indirect acquisitions by WTO members are generally not reviewable (except where the Canadian business being acquired is a cultural business and the relevant threshold of Cdn. $50 million is exceeded), but only trigger a notification requirement.
NON-WTO INVESTORS
Where the investment is by a non-WTO member lower review thresholds apply as follows:
Direct Acquisitions. In the case of direct acquisitions by non-WTO investors, an investment will be subject to review if the value of the assets of the Canadian business exceeds Cdn. $5 million.
Indirect Acquisitions. In the case of indirect acquisitions by non-WTO investors, an investment will be subject to review if the value of the assets of the Canadian business exceeds Cdn. $50 million.
TEST FOR REVIEW
“Net Benefit to Canada” Test
Under the Investment Canada Act, where an acquisition is subject to review, the foreign investor must show that the acquisition is likely to be of “net benefit to Canada”. This is the relevant test against which the Minister will evaluate a reviewable investment.
In evaluating whether an investment is likely to be of “net benefit to Canada”, a number of factors are considered including employment, exports, productivity, technology development and compatibility with Canada’s national industrial, economic and cultural policies.
It is rare for an investment to be refused under the “net benefit to Canada” test under the Investment Canada Act. For example, the recent Competition Policy Review Panel stated in its 2008 Report Compete to Win that of the 1500 non-cultural sector reviews undertaken by the Minister of Industry under the Act since 1985, only one investment proposal had been refused. Similarly, between 1999 and 2008, the Minister of Canadian Heritage has reviewed and approved 98 cultural investments, while only disallowing three investment proposals.
Having said that, in one relatively recent case, involving MacDonald Dettwiler’s proposed sale of its space division in 2008, the transaction was blocked on national security grounds.
Review Application, Review Periods and Undertakings
Where an investment is reviewable, an application must be filed setting out the information about both the investor and the Canadian business (and in particular, the investor’s plans for the Canadian business and why the investment will be of net benefit to Canada).
Once an application has been filed, the Minister has an initial 45 days to approve or refuse the investment. Where a review is not completed within the initial 45 days, the Minister may extend the review period for another 30 days (and the review period may be further extended with an investor’s consent).
If the Minister concludes that an investment would not be of “net benefit to Canada”, an investor may make representations and file undertakings within thirty days of the Minister’s notice.
Where binding undertakings are required for approval of an investment, they may involve terms in relation to maintaining certain employment levels in Canada, Canadian participation in the management of the business, undertaking capital expenditures, and commitments to invest in research and development and the location of the head office of the Canadian business.
PENALTIES
Where an investor fails to comply with the Investment Canada Act, for example fails to file an application for review or notification, fails to comply with undertakings or completes a reviewable investment without the requisite approval, a number of penalties may be imposed. These include divestiture of assets, the revocation (or suspension) of voting rights and financial penalties of up to Cdn. $10,000 per day that an investor is in contravention of the Investment Canada Act.
While the imposition of penalties under the Investment Canada Act is rare, the recent U.S. Steel case, involving U.S. Steel’s undertakings in relation to its acquisition of Stelco, illustrates that the Government is increasingly intent on ensuring that foreign investors comply with their commitments. See: Federal Court of Canada Dismisses U.S. Steel’s Motion Challenging the Constitutionality of Section 40 of the Investment Canada Act.
INVESTMENT CANADA ACT LINKS & RESOURCES
Industry Canada and Investment Canada
Legislation
Regulations Respecting Investment in Canada
National Security Review of Investments Regulations
Reports
Competition Policy Review Panel – Final Report: Compete to Win
Regulations Not in Force
Regulations Amending the Investment Canada Regulations
Investment Canada Guidelines
Guidelines – Investment by state-owned enterprises – Net benefit assessment
Investment Canada Interpretation Notes
Review Thresholds
Investment Canada Forms
Investment Canada Administrative Documents
Decisions
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