Oliver Borgers, Jason Gudofsky, Gideon Kwinter & Erin Keogh (McCarthy Tétrault) authored this publication

Foreign investment into Canada is subject to the Investment Canada Act (ICA). The ICA includes an industrial and economic policy regime that imposes a mandatory filing obligation on certain investments, some of which are subject to a review to assess whether they are of "net benefit" to Canada. The ICA also includes a national security regime, which applies more broadly and does not currently impose any filing obligations. The ICA is an act of general application, but includes particular rules for a defined class of cultural businesses.

Summary of major changes in 2024

• Significant amendments to the ICA's national security regime came into force, including provisions empowering the responsible federal cabinet minister to impose interim conditions during the course of a national security review, and to accept undertakings in order to mitigate national concerns and provide national security clearance.
• The Canadian government issued a policy on foreign investment in the interactive digital media sector, providing that investments in this sector by entities owned or influenced by foreign states, particularly hostile states, will be subject to enhanced scrutiny under the ICA.
• The Canadian government announced that investments in "important Canadian mining companies engaged in significant critical minerals operations" will only be found of net benefit and approved under the ICA's economic regime "in the most exceptional of circumstances."

Who files?

Under the ICA's industrial and economic policy regime, foreign investors must make a filing in connection with any acquisition of control of a Canadian business and the establishment of a new Canadian business. An acquisition of control is defined to include an acquisition of greater than 50 per- cent of the voting interests of a corporation or economic interests of a non-corporate entity, and, in certain cases, an acquisition of one-third or more of the voting interests of a corporation.

Acquisitions of control require either an application for net benefit review or an administrative notification, depending on whether prescribed financial thresholds are exceeded. The establishment of a new Canadian business is subject only to notification. The indirect acquisition of a Canadian business through the acquisition of a foreign non-Canadian parent is typically exempt from net benefit review and generally only requires notification.

The applicable financial threshold for net benefit review depends on the structure of the transaction, the investor's and the target's country of ultimate control, and whether the target is a cultural business. For the direct acquisition of a non-cultural Canadian business by a foreign investor ultimately controlled by nationals of a World Trade Organization (WTO) member state, the 2025 review threshold is an enterprise value of CAD 1.386 billion (US$961 million).

Higher thresholds apply to investors that are parties to certain free trade agreements with Canada. Lower thresholds apply to state-owned enterprises, non-WTO investors and to investments in cultural businesses.

If the relevant financial threshold is exceeded (subject to certain exceptions), approval is required on the basis of whether the investment is of net benefit to Canada, which must generally be obtained pre-closing. Where the applicable financial threshold is not exceeded, only an administrative notification is required, which can be filed up to 30 days after closing.

Under the ICA's national security regime, the government has the power to review on national security grounds both those investments subject to the industrial and economic policy regime and a broader range of investments into entities with operations in Canada, including minority investments. For investments subject only to the national security regime, foreign investors have the option to voluntarily notify the investment either before or after closing in order to benefit from a shorter limitation period, as described below.

Types of deals reviewed

Acquisitions of control that exceed prescribed thresholds are subject to net benefit review. Below the threshold, cultural business acquisitions may also be subject to net benefit review where Canada's federal cabinet determines such a review to be in the public interest.

Under the national security regime, the Canadian government has the power to review nearly any investment in an entity with operations in Canada if there are reasonable grounds to believe that the investment could be injurious to national security.

The types of transactions that have been the subject of formal review under the national security lens include those relating to critical minerals (including lithium), satellite technology, telecommunications, computer systems and software, fiber­laser technology and critical infrastructure, as well as where a non-Canadian investor proposed to build a factory located in close proximity to Canadian Space Agency facilities. Investors subject to Canadian national security reviews have included US companies, although ultimately controlled outside the US, as well as investors from emerging markets, but particular scrutiny can be expected for state-owned investors and investors from so-called "non-likeminded" countries.

Scope of the review

A net benefit review will focus on the investment's alignment with Canadian industrial policy, including the investment's impact on employment, economic activity, productivity, innovation, competition and the role of Canadians in the business. Net-benefit cultural business reviews will also focus on specific cultural policies. Generally, investors will be required to enter into binding commitments or "undertakings" related to these areas with the Canadian government in order obtain net-benefit approval.

A national security review will generally focus on the nature of the business to be acquired and the parties involved in the transaction, including the potential for third-party influence. In assessing whether an investment poses a national security risk, the Canadian government has indicated that it will consider factors that focus on the potential effects of the investment on defense, intelligence, sensitive technology and know-how, sensitive personal data, critical minerals and critical infrastructure and supply. The Canadian government will also focus on transactions related to public health or involved in the supply of critical goods and services to Canadians or to the Canadian government.

Where the Canadian government determines that an investment would be injurious to national security, it may deny the investment, ask for undertakings or provide terms or conditions for the investment—similar to mitigation requirements in the US—or, where the investment has already been made, require divestment.

Review process timeline

Obtaining approval under a net-benefit review can take anywhere from 45 days to a number of months, depending on the complexity of the investment. In recent years, the length of the average net-benefit review has varied between 69 days and 97 days.

The national security review process can take up to 200 days—or longer with the consent of the investor—from the date an initial filing is made with respect to the investment. The filing of a mandatory application for review or an administrative notification filing, or a voluntary notification under the ICA's national security regime, triggers a 45-day period within which the responsible federal cabinet minister may initiate the national security review process, either by issuing a notice of potential national security review or formally ordering such a review.

If the minister does not take any action within the initial 45-day period, the government's national security jurisdiction expires. For an investment that is subject only to the national security regime, and not the industrial and economic policy regime, and for which a voluntary filing is not made, the minister can initiate the national security review process at any time up to five years following the investment's implementation.

How foreign investors can protect themselves

For investments subject to net-benefit review, investors should expect to be required to enter into binding undertakings in order to obtain approval. Investors can establish limits on the commitments they are required to make through the applicable efforts covenants in the transaction agreement.

With respect to the national security regime, the Canadian government can initiate a national security review at any time from when the responsible minister first becomes aware of the transaction until 45 days from when a filing is made under the ICA. Accordingly, where an investment gives rise to national security risks, foreign investors should consider making a pre-closing ICA filing and including a closing condition predicated on obtaining national security clearance in Canada—for example, if the 45-day national security screening period has expired without the minister taking any action or a national security review has otherwise been dispensed with. The investor can also seek to allocate the national security risk through the efforts covenant in the transaction agreement.

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