Regulation of Foreign Investment – Investment Canada Act
(Current as of December 2018)
Canada’s regime for foreign investment review is primarily governed by the Investment Canada Act (ICA). It provides for both net benefit and national security reviews of certain investments by “non-Canadians.” In the case of a corporation, the term “non-Canadian” is defined in the ICA as a business that is controlled through the ownership of voting shares by persons who are not citizens or permanent residents of Canada.
Net Beneﬁt Review Thresholds for 2018The ICA employs a “net benefit to Canada” test for investments that are subject to review and approval by the federal Minister of Innovation, Science and Economic Development (Innovation Minister) and/or the federal Minister of Canadian Heritage (Heritage Minister). The Heritage Minister is responsible for reviewing transactions involving the acquisition of a “cultural business.” The Innovation Minister is responsible for evaluating all transactions reviewable under the ICA, including those involving non-cultural businesses that are sometimes reviewable by the Heritage Minister. Examples of cultural businesses include those in the areas of print media, film, video, music, radio, and television.
Acquisitions of Canadian businesses by non-Canadians, whether direct or indirect, are subject to either notification or ministerial review under the ICA, with certain exceptions. A non-Canadian who establishes a Canadian business (as opposed to acquiring one) is also required to file a notification under the ICA, but such transactions are not subject to review under the ICA (except where they involve the establishment of a cultural business). Generally, investments will not be subject to review (will only be subject to notification) where applicable thresholds are not exceeded or where an exemption applies. A notification can be filed either prior to or within 30 days following implementation of the investment.The threshold for a ministerial review depends on whether the non-Canadian investor is (a) controlled by a person or an entity from a member of the World Trade Organization (WTO), (b) a state-owned enterprise (SOE), or (c) from a country considered a trade agreement investor under the ICA. As noted above, a different threshold applies if the Canadian business acquired carries on a cultural business.
Generally speaking, for a non-SOE WTO member other than a trade agreement investor directly acquiring a Canadian business that does not carry on a cultural business, the review threshold will be met if the Canadian business has an enterprise value greater than C$1 billion. For a non-SOE trade agreement investor directly acquiring a Canadian business that does not carry on a cultural business, the review threshold will be met if the Canadian business has an enterprise value greater than C$1.5 billion.
“Enterprise value” is meant to reflect the actual value of the Canadian business as a going concern. The method to be used for determining the enterprise value of a transaction varies depending on whether the target entity is private or publicly listed and whether the transaction involves the acquisition of the assets or the voting interests in an entity.
An indirect acquisition, such as an acquisition of a foreign corporation that controls a Canadian corporation carrying on the Canadian business, is not subject to the approval requirement.Where the Canadian business does not involve a cultural business and the acquirer is an SOE and a WTO investor (or the Canadian business is controlled by a WTO investor), a direct acquisition of a Canadian business requires approval if the aggregate book value of the assets of the entity carrying on the Canadian business is equal to or greater than C$398 million.
Where the Canadian business involves a cultural business or the acquirer is not a WTO investor (and the Canadian business is not at such time controlled by a WTO investor), a direct acquisition of the Canadian business requires approval if the aggregate book value of the assets of the target entity carrying on the Canadian business is equal to or greater than C$5 million.An indirect acquisition is subject to the approval requirement if the aggregate book value of the assets of the entity carrying on the Canadian business and all other entities in Canada (control of which is being directly or indirectly acquired in the transaction) is equal to or greater than C$50 million. However, if the aggregate book value of the assets exceeds C$5 million and represents 50% more of the book value of all assets of all entities being acquired in connection with the transaction, the transaction will require approval even if the asset value is less than C$50 million.
National Security ReviewThe Governor in Council (i.e., the federal Cabinet) may review an investment implemented or proposed by a non-Canadian to, among other things, acquire control of a Canadian business or to partially or fully acquire or establish an entity carrying on all or any part of its operations in Canada. Where the minister has reasonable grounds to believe that such an investment could be injurious to national security, a review may occur regardless of whether or not the investment is subject to a net benefit review or notification under the ICA.
Provincial Investment RestrictionsAll Canadian provinces welcome foreign investment, but some have implemented measures to protect sensitive sectors. For example, some impose special taxes on the acquisition of agricultural land, while others have specific legislation covering cultural activities such as book publishing.
Remittance of FundsCanada does not restrict foreign investors from repatriating investments or profits by foreign investors. Canadian dollars are freely convertible into other currencies. Withholding taxes are applied to certain payments to non-residents. These include dividends, certain interest, royalties, and fees for services rendered in Canada (including commissions). The general rate of withholding tax is 25%, but this may be reduced or eliminated under various bilateral tax treaties. Generally, only interest paid to related parties or “participating interest” is subject to withholding tax.
Sensitive SectorsIn addition, other federal legislation sets specific limits on foreign ownership in broadcasting, fishing, telecommunications, and transportation.
BroadcastingA broadcasting licence will not be issued unless:
- The corporation is incorporated or continued in Canada
- The chief executive officer and not fewer than 80% of the directors of the corporation are Canadians
- Canadians own and control at least 80% of the voting shares of the corporation and 80% of its votes
TelecommunicationsSubject to the exceptions discussed below, foreign ownership of a Canadian telecommunications common carrier is limited to 20% of the voting shares, and Canadians must make up at least 80% of the directors. Non-Canadians may also own 33.33% of the voting shares of the carrier’s parent corporation. In either case, non-Canadians may not exercise “control in fact” of the carrier. There are no Canadian foreign ownership restrictions on a person who (a) has annual revenues from telecommunications services that represent less than 10% of total annual revenues from the provision of telecommunications services in Canada or (b) does not own or operate transmission facilities but merely leases facilities in bulk from a carrier and resells the same (i.e., is a “reseller”). A carrier that is eligible under (a) to operate in Canada remains eligible to operate if its annual revenues exceed 10% of total annual revenues from the provision of telecommunications services in Canada provided the growth in revenues did not result from the acquisition of control of another Canadian carrier or of assets used by another Canadian carrier to provide telecommunications services. Satellite and international submarine cable facilities are also exempt from these foreign ownership restrictions.
Foreign ownership is generally limited to 49% of voting rights in domestic air transportation. However, a single foreign corporation or entity can only own up to 25% of the voting rights of a “Canadian” airline and any number of foreign airlines may together only own a total of 25% of the voting rights of a “Canadian” airline. Maritime cabotage is generally restricted to duty-paid Canadian flag vessels. There is no foreign ownership restriction on companies incorporated in Canada that own such vessels, and companies incorporated outside Canada may own such vessels if a qualified company or individual is acting with respect to all matters relating to the vessel.In addition, if a proposed transaction requires pre-merger notification under the Competition Act and “involves” a federal “transportation undertaking,” a filing under the Canada Transportation Act (CTA) may be required. In that instance, the Minister of Transport (MOT) must assess whether or not the proposed transaction raises issues with respect to the public interest as it relates to national transportation. If the MOT is of the opinion that a proposed transaction does not raise such public interest issues, then further review under the CTA is not required. The MOT must inform the parties of this decision within 42 days of the filing.
On the other hand, where the MOT is of the opinion that a proposed transaction does raise public interest issues, he or she may direct the CTA or appoint and direct another person to examine those issues and report to him or her within 150 days (or such longer period as the MOT may allow). In addition, the Commissioner of Competition must, within 150 days of the pre-merger notiﬁcation under the Competition Act (or such longer period as the MOT may allow), report to the MOT and the parties on any concerns regarding a potential prevention or lessening of competition that may result from the transaction. The CTA provides for a bifurcated process for the consideration of public interest issues and competition issues and the settlement of undertakings, where appropriate. Ultimately, it is the Governor in Council, on the recommendation of the MOT, who determines whether or not the proposed transaction is in the public’s interest and may proceed.