The Investment Canada Act (the “Act”) is a statute of general application governing investments in “Canadian businesses” by non-Canadians. The purpose of the Act is to encourage foreign investment into Canada and to provide for the review and approval of significant investments in Canadian businesses and investments in Canada’s cultural businesses which are described below. Recently, the Act has been amended to include the further purpose of protecting national security by requiring the review of foreign investments that could be injurious to national security.
Under the Act, an investment in a Canadian business by a non-Canadian is either “notifiable” or “reviewable”. A notifiable investment requires a relatively simple notice be filed with Investment Canada at any time prior to the completion of the investment or within 30 days thereafter. A reviewable investment involves a more complicated process requiring the submission of a detailed application and the approval of the Minister responsible for the Act prior to the closing of the investment. While very few investments have been refused, the review process can increase costs and cause considerable delay in completing an investment transaction. Additionally, in some cases, approval will be subject to the foreign investor providing undertakings to the Minister regarding the future of the Canadian business. Undertakings are negotiated and may, among other things, require the investor to maintain employment levels, make certain capital expenditures and ensure a certain level of Canadian participation. These undertakings are legally binding on the investor and will be periodically reviewed by Investment Canada staff to confirm performance and compliance.
The Act is applicable whenever a non-Canadian acquires the control of an existing Canadian business or establishes a new Canadian business.
The Act defines a “non-Canadian” as any individual or entity that is not “Canadian”. In brief, under the Act, an individual is a “Canadian” if he or she is a Canadian citizen, or a permanent resident of Canada who was ordinarily resident in Canada for not more than one year after the time which he or she first became eligible to apply for Canadian citizenship. A privately owned company is a “Canadian” if its ultimate controlling shareholders are “Canadian”. Using a Canadian corporate subsidiary to act as the investor does not establish “Canadian” status if the corporate subsidiary’s ultimate controlling ownership is not Canadian. For a publicly traded company, if at least 2/3 of its board of directors is comprised of “Canadian” individuals, and control in fact is not with the shareholders, the company is considered “Canadian”. The Act contains similar rules for other entities.
Under the Act, a “Canadian business” mean 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.
The Act’s rules for determining “control” are complex and beyond the scope of this article. In brief, any acquisition of 50% or more of the voting shares or, in the case of a partnership or trust, voting or ownership interests, is an acquisition of control as is the acquisition of all or substantially all of the assets of a Canadian business. In certain circumstances, the acquisition of less than a 50% interest may also be considered an acquisition of control and therefore a detailed analysis of each investment is required. With respect to “cultural businesses”, the Minister of Canadian Heritage may determine there has been the acquisition of “control” of a Canadian “cultural business” even though the rules for determining control have not been met.
Investments by non-Canadians in Canadian businesses (other than cultural businesses) are subject to review if they exceed the monetary thresholds described below, otherwise the only requirement is the submission of a notification of the investment prior to or within 30 days of closing. Regardless of size, investments to establish a new Canadian business (other than a cultural business) are not subject to review but are notifiable.
The review thresholds for the acquisition of control of Canadian “cultural businesses” are much lower than for non-cultural businesses. Cultural businesses are defined in the Act as Canadian businesses that carry on any of the following activities:
- publication, distribution or sale of books, magazines, periodicals or newspapers in print or machine-readable form;
- production, distribution, sale or exhibition of film or video recordings;
- production, distribution, sale or exhibition of audio or video music recordings;
- publication, distribution or sale of music in print or machine-readable form; and
- radio communications in which the transmissions are intended for direct reception by the general public, any radio, television and cable television broadcasting undertakings and any satellite programming and broadcast network services.
While in most cases it will be clear whether or not the Canadian business is a “cultural business”, there are businesses where it is less obvious. For example, Canadian video game developers of high quality console games may come within the prescribed cultural business activities and, consequently, be considered a “cultural business” for the purposes of the Act. Such game developers often utilize production values similar to a film employing writers, actors, musicians, art directors and other creative artists. We have first hand experience with such an investment having recently submitted an application for review and obtained approval for an investment by Capcom in a Canadian video game business in October, 2010 (see the Canadian Heritage website). It is important that an investor carefully assesses all of the activities of the Canadian business to determine whether it carries on a cultural business. If there is some doubt, the investor may file a notification but it is open to Canadian Heritage to subsequently (within 21 days after the filing of the notification) order the investor submit a review application. When there is uncertainty and the parties do not wish to suffer a possible delay of 21 days in addition to the time it takes Investment Canada to complete its review, the more cautious approach is to file a review application from the outset.
Thresholds for Review
An investment by a non-Canadian is subject to review if the asset value (as shown on the balance sheet at the end of the last completed fiscal year before the acquisition) of the Canadian business being acquired equals or exceeds the following thresholds:
- $5 million for a direct acquisition by a non-WTO investor;
- $50 million for an indirect acquisition (acquisition of control of the parent/owner of the Canadian business outside Canada) by a non-WTO investor (the $5 million threshold will apply if the asset value of the Canadian business being acquired exceeds 50% of the asset value of the global transaction);
- $312 million (this threshold figure is an estimate for 2011 – the exact figure will be published in the Gazette later this month – the figure is adjusted annually for inflation) for a direct acquisition by a WTO investor in 2011; and
- the limits in (a) and (b) above apply to ALL investors for acquisitions of a Canadian cultural business.
Indirect acquisitions (other than in respect of cultural businesses) by WTO investors are not reviewable. The foregoing is a summary of the thresholds and should by no means be considered a comprehensive list of all criteria to be considered. The Act is complex and includes a number of additional rules and exceptions. Accordingly, a considered legal analysis should be undertaken for each investment.
Net Benefit Test
If an investment transaction is subject to review, the Minister must be satisfied that the investment is likely to be of “net benefit” to Canada. When determining if an investment is likely to be a net benefit to Canada, the Minister looks at the following factors:
- the effect of the investment on the level of economic activity in Canada, on employment, on resource processing, on the utilization of parts and services produced in Canada and on exports from Canada;
- the degree and significance of participation by Canadians in the Canadian business or new Canadian business and in any industry or industries in Canada;
- the effect of the investment on productivity, industrial efficiency, technological development, product innovation and product variety in Canada;
- the effect of the investment on competition within any industry in Canada;
- the compatibility of the investment with national industrial, economic and cultural policies; and
- the contribution of the investment to Canadas ability to compete in world markets.
Depending on the nature of and circumstances surrounding the investment and the business, some of the above factors are given more consideration than others. Each relevant factor should be addressed in the investor’s business plan required to be submitted with the application for review.
As part of the review process, Investment Canada and/or Canadian Heritage may consult with other governmental departments and agencies. For example, even though the investment may not be subject to competition review, Investment Canada may consult with the Competition Bureau regarding the effect of the proposed investment on competition.
In some instances, during the review period, the investor will negotiate undertakings with Investment Canada and/or Canadian Heritage which will be a condition of the Minister’s approval of the investment. As discussed earlier, the undertakings are legally binding commitments by the investor regarding the ongoing operation of the Canadian business after closing. The negotiated undertakings are the basis on which the Minister is willing to determine the investment is a “net benefit” to Canada. In less sensitive cases, there will be no requirement for undertakings by the investor.
Notification may be made before the investment closes or within 30 days after closing and consequently does not represent an obstacle to closing. On the other hand, if an investment is subject to review, the parties may not close until the transaction receives consent from the Minister, who has authority to order divestiture if the investment completed but the Minister is not satisfied that it is likely to be a net benefit to Canada.
Under the Act, the Minister has 45 days to determine whether or not to allow the investment. That 45-day period may be unilaterally extended by the Minister for another 30-day period by sending a notice to the investor prior to the expiration of the initial 45-day period.
Privilege and Disclosure
The Act contains confidentiality provisions regarding information received by Industry Canada and its officials in relation to the investor and the Canadian business. The information is to be treated by the Canadian Government on a “privileged and confidential information” basis and information may not be disclosed except in relation to the administration of the Act or with the consent of the parties. As most applications for review contain sensitive business information, it is prudent to submit your application with specific reference to the privilege provisions of the Act and request that Industry Canada advise you of any proposed Freedom of Information requests.
If you are a non-Canadian planning to establish a new Canadian business or invest in an existing Canadian business, please call us to discuss your obligations under the Act. We would be pleased to assist with your entry into the Canadian market.