Most foreign investors will enter Canada without a hiccup. However, a small number of transactions may receive closer scrutiny under Canada’s foreign investment review law, the Investment Canada Act (ICA). In 2021, that scrutiny is increasingly likely to be in the form of review under the ICA’s national security review process rather than its “net benefit to Canada” review process.

As the monetary thresholds for “net benefit to Canada” review have risen dramatically in the past six years (at least for private sector investors), fewer transactions are subject to ministerial approval under this process. At the same time, however, the ICA’s national security review process gives the Canadian government wide discretion to screen a broader range of investments - the acquisition of an existing business or the establishment of a new Canadian business, whether large or small, and whether involving minority interests or control stakes. As “national security” is an undefined term in the ICA, it is an elastic concept that has the flexibility to apply not only to traditional security and defence considerations but also to concerns such as economic security (e.g., self-sufficiency in the health care sector). As a consequence, “national security” can evolve, and is evolving, to encompass new circumstances, including the digitalization of the economy and related risks such as data protection. But while the government has this adaptable instrument to address perceived threats from foreign investment, the lack of clarity and predictability about the scope of potential national security concerns has created uncertainty for some foreign investors.

In addition, Canadian investments by companies controlled by foreign governments or individuals with close ties to foreign investments are continuing to be subject to elevated scrutiny as demonstrated by the government’s recent rejection of a Chinese SOE acquisition of a gold mining company in northern Canada.

As a result of these trends, foreign investments in certain sectors and by certain investors may face longer and more difficult clearance processes under the ICA, while the vast majority of foreign investments will continue to sail through ICA screening with relative ease. Canadian companies investing abroad could also face tougher restrictions on planned acquisitions outside of Canada given the proliferation of new and more stringent foreign investment rules abroad.

In summary, our pick of regulatory trends on foreign investment and national security for 2021 includes:

• Heightened use of the national security review process to monitor and potentially block, or require mitigation of risks related to, certain investments by foreigners in Canada. In particular, the Canadian government has indicated it will more closely scrutinize transactions involving the acquisition of companies in health care-related sectors and other sectors involving the supply of critical goods and services to Canadians and the Canadian government and the sale of Canadian companies at distressed values.
• Closer review of investments by state-owned enterprises (SOEs) and individuals or entities closely linked to foreign governments.
• Broader scope of national security review to increasingly encompass risks related to the digital economy, including access to data involving personal information.
• “Thicker” borders for Canadians investing abroad as foreign investment/national security rules multiply at a global level, especially in relation to critical technology, infrastructure (e.g., 5G networks) and data.

A. Investment Canada Act – The basics

The key elements of the foreign investment review regime under the ICA are:

• Acquisitions of control of Canadian businesses, whether currently foreign-owned or not, are subject either to:
• • “net benefit to Canada” review and pre-closing approval by the responsible Minister for investments meeting certain monetary thresholds, or
  • notification (pre or post closing) for all other foreign acquisitions of control.
• Notifications are required for the establishment of a new Canadian business.
• National security screening applies to foreign acquisitions of all sizes including minority interests and to investments in new businesses.

Net benefit to Canada review

Certain direct acquisitions of control of Canadian businesses are subject to review under the “net benefit to Canada” test, a type of national interest test that applies only to acquisitions exceeding very high monetary thresholds for investors ultimately controlled by nationals of a World Trade Organization (WTO) member country or of a country with a trade agreement with Canada, where the target is not engaged in a “cultural business”.¹ Such transactions must be approved by the Minister of Innovation, Science and Industry. (The responsible minister for cultural business investments is the Minister of Canadian Heritage). Where a transaction falls below the “net benefit to Canada” review threshold, the foreign investor is obliged to file a notification, a short form that includes information on the investor (e.g., who ultimately controls and the extent of foreign government influence over the investor), the Canadian business being acquired and the size of the investment.

As we noted in our 2020 regulatory trends forecast, “net benefit to Canada” review has been on the decline for several years due to a sharp increase in review thresholds over the past six years. There are two main exceptions. First, investments by SOEs from WTO countries are subject to a lower asset value threshold (CA$415 million in target’s book value of assets in 2021). Second, investments in businesses that carry on some cultural business activities continue to be subject to very low review thresholds (book value of target assets of CA$5 million) as are acquisitions of Canadian businesses by investors not controlled by WTO nationals from non-WTO sellers (there are very few non-WTO countries).

National security review

The second review process under the ICA (introduced in 2009) allows the federal Cabinet to take measures to address national security risks related to foreign investments. Those measures include blocking the acquisition of an interest in a Canadian business (or the establishment of a new Canadian business) or authorizing an investment subject to terms and conditions. If an investment has already been completed, the Cabinet can also order a divestiture of the business and such disposition may occur at fire sale prices. Investments subject to national security review include acquisitions of control of Canadian businesses (whether or not Canadian owned) of any monetary value, minority investments and the establishment of a Canadian business. In addition, national security reviews can be lengthy – up to 200 days or longer with the investor’s consent.

B. Trends to watch in 2021

Trend #1:

National security screening, rather than “net benefit to Canada” review, will be the Investment Canada review process of greatest concern to most foreign investors

The government’s most recent Annual Report - Investment Canada Act (from 2018-2019) states 962 filings were made in the government’s fiscal year ended March 31, 2019 in respect of the acquisition of control of a Canadian business or the establishment of a Canadian business. However, only a small fraction (nine, or less than 1%) of that number received a notice of possible national security review (effectively an extension of the initial screening period) and/or a formal national security review order made by Cabinet.

Despite this small number, foreign investors need to consider the potential for national security review where the investment relates to a range of factors outlined in the government’s Guidelines on the National Security Review of Investments. These factors include, among other things, target businesses engaged in defence industries, critical infrastructure and sensitive technology or those whose physical plant is located close to sensitive military or communications facilities. What’s new is that the Minister of Innovation, Science and Industry (ISI) added a gloss to the list of risk factors in April 2020, a month into the COVID-19 pandemic. Then ISI Minister Bains issued a statement providing guidance on how the government would exercise its review discretion both under the “net benefit” review process and the national security review process. Specifically, the Minister flagged concerns about the economy during the pandemic including acquisitions of distressed Canadian companies at bargain basement prices. In addition, the Minister signalled that the government would more closely scrutinize investments involving health care-related industries as well as those providing critical goods and services to Canadians and governments. 

The Canadian government’s concerns in the health care sector likely reflect worries about the level of domestic capacity or self-sufficiency in health care (e.g., production of vaccines, drugs or personal protective equipment or PPE). With respect to “critical goods and services”, this term could encompass a broad array of industries from food to information and communication technologies to finance and manufacturing. Despite the Minister’s statement, 2020 did not witness a rash of rejected foreign investments in those sectors (at least publicly). Nevertheless, we expect that in 2021 the government will continue to closely review acquisitions of Canadian businesses, especially distressed Canadian businesses and firms in sectors related to health and critical goods, services and infrastructure, given the ongoing impact of the pandemic on the economy.

Trend #2:

Enhanced scrutiny of investments by SOEs and private investors closely tied to or subject to direction from foreign governments

In April 2020, the Minister of Innovation, Science and Industry indicated that investments by SOEs and by individuals closely tied to foreign governments would be subject to enhanced scrutiny – meaning more probing questions over a longer period of time. This policy applies to all investments in Canada, whether they are subject to “net benefit” review and/or national security review.

The first point of interest is that the statement expressly addressed investments not just by SOEs but also by investors controlled by individuals with strong links to foreign states. While SOEs are defined broadly in the ICA, it is noteworthy that in a short statement, the Minister chose to highlight its application to individuals with close ties to foreign states.

Second, the statement reflects the current government’s more sober view of SOE investment over the last few years. A number of factors are responsible: the rise in global geo-political tensions fueled by mercantilism and combative rhetoric, greater concerns about cyber-security (including in relation to 5G networks), and a chill in relations between Canada and China. Greater scrutiny of SOE investments (versus private sector investment) is not entirely new in Canada. SOE investments have been subject to a lower “net benefit” review threshold for several years and state-owned investor guidelines were first issued by the previous government in 2007. However, given increasing frictions at the international level, it is clear that Canada, along with many other countries, is applying more stringent screening to some SOE investments.

The most recent public rejection of an SOE acquisition occurred on December 21, 2020 when the federal Cabinet blocked Chinese provincial SOE, Shandong Gold Mining Co. Ltd., from acquiring TMAC Resources, a junior gold mining company in Nunavut (northern Canada) on national security grounds². The deal, which was first announced in May 2020, received notice of a national security review in October 2020. Although the Canadian government has not provided reasons for its decision, citing confidentiality under the Investment Canada Act, key concerns appear to have been TMAC’s location on an inlet to the Northwest Passage which serves as a shipping route between the Atlantic and Pacific Oceans – and potentially raises Canadian sovereignty issues - and TMAC’s proximity to one of a chain of Canadian early warning radar stations. Press reports also indicate that the US government had pressured Canada to reject the transaction.

We anticipate that the Canadian government will continue to subject SOE investments to enhanced review in 2021. Nevertheless, many SOE investments will proceed undeterred either because the SOE investor is not regarded as a threat or the target Canadian business does not involve particular vulnerabilities.

Trend #3:

More national security concerns raised by the digitalization of the economy, including access to data

Given the diffusion of technology in all aspects of the economy and the significance of data and communication networks, national security is expanding well beyond traditional domains such as national defence, creating uncertainty for some investors about whether their proposed transaction will be delayed or threatened by a national security review.

For example, an acquisition that gives a foreign investor access to data, in particular, sensitive personal information, can raise national security risks. As many businesses rely upon vast stores of personal information, an investment in a wide variety of businesses from financial services to dating applications could trigger national security concerns.  In 2019, the Committee on Foreign Investment in the US or “CFIUS”, the body responsible for national security screening of US investments, required the divestiture by Beijing Kunlun Tech Co. Ltd., a Chinese gaming company, of its interest in Grindr, a dating app for the LGBTQ community. A key national security concern related to access by a Chinese company to a database containing personal information such as user location, messages and medical information. 

A government concern about foreign access to sensitive personal or business information does not necessarily mean that the investment will be prohibited outright. The Canadian government’s 2018-2019 annual report offers a list of potential mitigation measures that have been considered in national security cases, including a number that could be relevant to investments involving data and information flows:

• Requiring that all servicing and support for some or all business lines be conducted in Canada;
• Creating approved corporate security protocols to safeguard information and access to a site;
• Requiring employees with access to sensitive information to attest to compliance with approved security protocols;
• Providing notice to the Minister of new prospective employees who would have access to sensitive Information or technology as a part of their job description.

2021 is likely to witness even greater volumes of data being collected (e.g., with the Internet of Things) and used across a broader range of economic sectors. With this evolution, we can expect even more foreign acquisitions of Canadian businesses will be subject to close monitoring under the national security review process.

Trend #4:

Thickening borders to foreign investment around the world

2020 saw the proliferation of new and enhanced national security screening processes around the globe, including in the UK, Germany, France, Italy, Spain and Australia. Foreign investment review is widely regarded as an important policy instrument at a national and sometimes supra-national level as governments address concerns about threats to national security, critical infrastructure (e.g., communications networks) and sensitive technologies from foreign investors. Canadian investors in those sectors outside of Canada will need to be aware of these potential restrictions and how they may apply. Even Canadian pension funds will have to contend with more close questioning from some regimes (e.g., Australia) that characterize them as state-owned. For a survey of national security laws globally, please see Dentons’ Foreign Direct Investment (FDI) Global Tracker. 

C. Conclusion

In summary, our expectation is that a higher but still relatively small number of foreign investments in Canada may face greater headwinds due to heightened governmental scrutiny of a broader range of national security concerns. Foreign investors can address this risk by giving early consideration to the potential for national security concerns and possible mitigating measures as well as consultation with the federal government to gauge its likely reaction to the investment.

Over the past year, some Canadian politicians have openly advocated for much more stringent restrictions on foreign investment. In particular, in June 2020, some members of the House of Commons Industry Committee suggested a review of the Investment Canada Act and further restrictions such as lowering “net benefit” review thresholds to protect Canadian “strategic industries” as well as a temporary moratorium on acquisitions by SOEs from authoritarian countries.

Despite this, our expectation is that 2021 is unlikely to witness a raft of new rules restricting foreign investment into Canada. New legal measures are unlikely to find traction in part because the government already has the ability to block any transaction it chooses on the basis of “national security” concerns so the necessity of taking such drastic steps is questionable. Second, the Canadian government cannot ignore the significant role played by foreign capital in expanding the economy. And the COVID-19 pandemic has only amplified the need for foreign investment to spur economic growth and a much-needed recovery.

1. The 2021 “net benefit to Canada” review threshold for WTO investors is a target enterprise value of CA$1.043 billion while the threshold for trade agreement investors is CA$1.565 billion, where the target is not engaged in a “cultural business”.
2. See, for example, https://financialpost.com/commodities/mining/canada-blocks-china-shandong-gold-mining-buying-tmac; https://www.wsj.com/articles/chinas-move-to-buy-arctic-gold-mine-draws-fire-in-canada-11595764801; and https://www.theglobeandmail.com/business/industry-news/energy-and-resources/article-ottawa-rejects-bid-by-chinas-shandong-gold-for-canadian-miner-tmac/