Doing business in Canada – Exploring regulation of foreign investment

Doing business in Canada

A major advantage of immigrating to Canada is the attractive regulatory regime for foreign investment. In order to ensure that foreign investors, whether businesses or individuals are able to take advantage of all the opportunities in the Canadian economy, Canada is committed to ensuring that they are able to do so.

Foreign investors can deploy capital and receive a return in a secure, transparent, and well-regulated environment provided by the Canadian government. Foreign investors are protected from unfair practices as well as Canadian national security.

Federal law governs foreign investment in Canada(ICA). Canadians can benefit from it by promoting international investment at favorable terms. The Department of Canadian Heritage is in charge of the ICA, although Innovation, Science and Economic Development Canada is essentially in charge of managing it.

A foreign investor usually must be notified or reviewed prior to establishing a new Canadian business or acquiring control of an existing one.

In order to obtain information about foreign investment, the Canadian company, and the vendor, you must fill out a notification form. A closing statement can be submitted within 30 days after closing, so it does not prevent the transaction from being completed.

A foreign investor who requests a review must first submit more detailed plans for the Canadian firm and information about its own company. The foreign investor may only move on if the Minister of Innovation, Science and Industry or the Minister of Canadian Heritage and Multiculturalism deems that the intended investment will “net benefit Canada.

It is exempt from the ICA’s provisions if there is no change of ultimate control in a transaction involving foreign investors, such as internal corporate reorganizations, the realization of security held on Canadian assets, bona fide estate transfers, or the acquisition of control of Canadian businesses subject to review under other Canadian laws, such as the Bank Act. 

Canadian business

Business that is Canadian has the following characteristics:

  • Canada-based business.
  • An individual or persons working for (but not necessarily by) the company in Canada. 
  • Canadian assets that are used to operate the business

Foreign investor

Foreign investors are non-Canadians.

Depending on the requirements, a Canadian can also be a permanent resident of Canada if they meet specific criteria.

Canadian enterprises, including government-owned businesses, are considered to be Canadian if they are controlled by Canadians. Although the Canadian control provisions are complex and thorough, they can be summarized as follows:

  • The majority of voting interests of a company need to be owned by Canadians in order to be considered Canadian-controlled.
  • When one or more non-Canadians own the majority of the voting interests in a company, it is not considered to be managed by Canadians.
  • When at least two-thirds of the board of directors are Canadian citizens, a publicly traded company with a large number of shareholders is considered to be under Canadian control.

Control acquisition

For foreign investors looking to purchase control over a Canadian company, the ICA has intricate and detailed rules. Overall, we can say:

  • Acquired control of a corporation requires the purchase of a majority of the voting shares.
  • It is assumed that the purchase of more than one-third of voting shares of a corporation will result in the purchasing party having control of the corporation unless it can be proven that the purchasing party will not actually have control over the company. In those conditions, control would not be gained through a 40% acquisition if another shareholder owned the remaining 60%.
  • In order to be considered an acquisition of control, less than one-third of voting shares of a corporation must be purchased.

Review

An application for review must be submitted by a foreign investor in cases where a review is necessary, and the investment cannot be carried out until the Minister of Industry and/or the Minister of Canadian Heritage, as appropriate, conclude that it will “net benefit Canada.”

Applications must include detailed information on the foreign investor and the Canadian business, as well as the foreign investor’s plans.

To determine whether a proposed investment would benefit Canada, the government looks at the following variables: 

  • A study of how the investments will impact employment, resource processing, how goods and services produced in Canada will be used, and how exports will be affected.
  • Involvement of Canadians and the importance of that involvement.
  • In addition to enhancing Canada’s industrial efficiency, product innovation, technical progress, and product variety, this has an impact on the economy.
  • Canadian industrial competition is adversely affected by it.
  • National policies regarding industry, economy, and culture are adhered to.
  • Globalization’s impact on Canadian competitiveness.

In certain cases, the minister of industry or the minister of Canadian heritage, or both, will work with other relevant departments within the federal government, as well as the government of the provinces that are affected, which are usually the ones that have assets or employees owned by Canadian businesses.

Often, the net benefit to Canada is determined based on the undertakings made by the foreign investor. An undertaking is a legally enforceable promise made by a foreign investor, which is usually valid for three to five years and must be followed up on throughout the period.

The Canadian government has 45 days to decide whether a proposed investment is advantageous for Canada or not. The minister of industry and/or the minister of Canadian heritage can extend the review period by an additional 30 days if necessary. Further extensions must be agreed to by the foreign investor, otherwise, the relevant government will likely reject the deal.

A proposed investment can either be accepted or denied by the government. Governments and investors usually negotiate to approve most proposed investments. A few high-profile transactions or transactions with political implications have been declined, however. In situations where significant political considerations are present, it is crucial for foreign investors to have a robust government relations strategy to avoid rejection.

National security

As part of the 2009 changes to the ICA, the government has the authority to examine any investments that threaten national security. In 2013, and again in 2015, the administration changed the national security clauses to give itself more latitude when it comes to national security concerns.

These rights of review apply not only to the acquisition of existing Canadian enterprises, but also to minority investments, internal restructurings, and the establishment of new Canadian enterprises. If “any part” of the company’s operations are located here, a review may also be demanded for investments in companies with shaky ties to Canada. 

A national security review does not have a set minimum size for investments. Investments that could pose a threat to national security are decided at the government’s discretion, so no specific guidance has been provided. Because of this, the government is able to make decisions on a case-by-case basis and can complete the process within 200 days. A government may prohibit, condition, or require divestiture of the investment depending on the outcome. 

Canadian government officials have recently disclosed details about how they review foreign investments under national security powers.

In the past few years, eight reviews have been conducted, three of which have led to the suspension of the transaction before it could proceed. Several transactions were allowed to close with certain undisclosed conditions, such as the investor divesting the Canadian business after the transaction’s closing in two cases.

An investor cannot initiate a national security review more than 50 days after the government receives the notification. Even if the transaction does not exceed the mandatory review threshold, foreign investors are at risk of a review and possible divestiture. 

Enterprises owned by the state

To ensure that foreign state-owned enterprises (SOEs) acquiring Canadian businesses are subject to a lower review threshold than non-SOE purchasers and that the acquired In 2007, the government issued guidelines and revised different clauses of the Investment Canada Act (ICA) to ensure that Canadian companies are managed for commercial gain with clear corporate governance and disclosure standards instead of for non-commercial, political objectives of a foreign state-owned enterprise.