Kara Sears
Canada has a single foreign investment statute, the Investment Canada Act (ICA), which regulates foreign investment in the country. The ICA allows the federal government to review significant inbound foreign investments to ensure they provide an overall economic benefit to Canada and do not harm national security. The ICA applies to a broad range of investments, including acquisitions, greenfield and minority investments, and transactions involving the acquisition of all or part of a Canadian business by a non-Canadian investor. While Canada welcomes foreign investment, non-Canadian investors must satisfy the relevant minister that the transaction will likely be of 'net benefit' to the country. This typically involves agreeing to written undertakings, which are legally binding commitments that typically remain in effect for three to five years.
| Characteristics | Values |
|---|---|
| Purpose | To encourage foreign investment on terms that are beneficial to Canada and ensure they provide an economic net benefit and do not harm national security |
| Applicability | All sectors except residential real estate, telecommunication, airline, banking, and cultural sectors |
| Review | Required for significant foreign investments, including acquisitions, greenfield and minority investments |
| Notification | Mandatory for transactions valued below the net benefit review threshold |
| Approval | Requires satisfaction of relevant minister that the transaction will likely be of 'net benefit' to Canada |
| Scrutiny | Heightened for foreign investments into interactive digital media businesses and cultural businesses |
| Compliance | Undertakings are legally binding commitments made by a foreign investor that are subject to compliance reviews and audits |
| Enabling environment | Proximity to the United States, highly skilled workforce, strong legal protections, and abundant natural resources |
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What You'll Learn
The Investment Canada Act (ICA)
The ICA empowers the Canadian government to forbid foreign investments of "significant" size if they do not present a “net benefit to Canada." The threshold for what constitutes a "significant" investment has changed over time and also depends on whether the investor is part of the World Trade Organization (WTO). In 2017, investments over $1 billion were considered significant.
When a review is required, the foreign investor must submit detailed information about themselves and their plans for the Canadian business. The government considers factors such as the effect of the investment on economic activity, employment, resource processing, and exports from Canada. The inclusion of Canadians in management positions and the utilisation of Canadian-sourced technology are also considered.
While the ICA gives the government the power to restrict investment, its mandate is to "review... significant investments... in a manner that encourages investment, economic growth, and employment opportunities" unless the investments harm national security. Despite the ICA's existence, it has not been used to formally block any takeover bids or investments. However, its presence enables diplomats and civil servants to informally dissuade investors and creates a sense of government risk among foreign investment analysts.
Overall, the ICA aims to encourage foreign investment on terms beneficial to Canada, and foreign-owned investments are treated equally to domestic investments once established.
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National security reviews
Foreign investment in Canada is regulated by the federal Investment Canada Act (ICA). The ICA is primarily administered by the Ministry of Innovation, Science and Economic Development Canada (ISED), which is the government department responsible for the administration of the ICA. The purpose of the ICA is to encourage foreign investment on terms that are beneficial to Canada and to review significant foreign investments to ensure they provide an economic net benefit and do not harm national security.
The national security review process is supported by Public Safety Canada, Canada's security and intelligence agencies, and other investigative bodies described in the National Security Review of Investments Regulations. The Minister, in consultation with the Minister of Public Safety and Emergency Preparedness, is responsible for referring investments that could be injurious to national security to the Governor in Council, who may order a review. The Investment Review Division of ISED is the interface with investors and other parties to the investment before a national security review is ordered and throughout the review.
The national security review process is separate from the net benefit review process conducted by the Minister or Minister of Canadian Heritage under Part IV of the Act. However, the specific focus of the undertakings varies depending on the nature of the business. In general, the acquisition of control of an existing Canadian business or the establishment of a new Canadian business by a foreign investor is subject to notification or review. Where review is required, the foreign investor must submit an Application for Review and more detailed information about itself and comprehensive plans for the Canadian business before closing.
In March 2021, the Canadian government released revised national security review guidelines, which confirmed that state-owned enterprises (SOEs) will receive enhanced scrutiny, provided a non-exhaustive list of sensitive technologies, and expanded the list of national security factors to include critical minerals and sensitive personal data. The government will subject all foreign investments by state-owned investors, or private investors assessed as being closely tied to or subject to direction from foreign governments, to enhanced scrutiny. Investments that do not possess any of the above-listed characteristics may nevertheless present national security concerns where the investment would be injurious to Canada’s national security.
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Economic net benefit reviews
Foreign investment in Canada is regulated by the federal Investment Canada Act (ICA). The ICA applies to the review of foreign investments in Canadian businesses across all sectors and includes both national security and public interest ("net benefit") reviews.
The ICA mandates the review of significant foreign investments to ensure they provide an economic net benefit and do not harm national security. A determination of net benefit to Canada is based on undertakings made by the foreign investor. Undertakings are legally binding commitments that typically remain in effect for three to five years and are subject to compliance reviews and audits. The government is most concerned with securing undertakings related to specific levels of employment in Canada, the inclusion of Canadians in management positions, capital investment in the Canadian business, and the further development of Canadian-sourced technology.
The ICA applies to transactions involving the acquisition of all or part of a "Canadian business" by a ""non-Canadian-controlled" investor. It does not apply to domestic-to-domestic transactions where the acquiring entity is ultimately Canadian-controlled. A pre-merger 'net benefit review' or notification is only required when a non-Canadian acquires control of an existing Canadian business. The acquisition of control of a Canadian business is effected by acquiring substantially all of the assets of a Canadian business or the majority of the voting interests in an entity that carries on or controls a Canadian business.
When a review is required, the foreign investor must submit an Application for Review and may not complete the proposed investment until the minister of Innovation, Science, and Economic Development and/or the minister of Canadian Heritage and Multiculturalism has determined it to be of "net benefit to Canada". Detailed information is required about the foreign investor, the Canadian business, and the foreign investor's plans for the Canadian business.
To determine whether the proposed investment is likely to be of net benefit to Canada, the government considers factors such as the effect of the investment on the level and nature of economic activity in Canada, including its effect on employment, resource processing, the utilization of parts, components, and services produced in Canada, and exports from Canada. The government also considers the degree and significance of participation by Canadians in the business.
Canada actively encourages FDI and maintains a sound enabling environment. Investors are attracted to Canada's proximity to the United States, highly skilled workforce, strong legal protections, and abundant natural resources. Once established, foreign-owned investments are treated equally to domestic investments.
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Foreign investment prohibitions
Foreign investment in Canada is regulated by the federal Investment Canada Act (ICA). The ICA's purpose is to encourage foreign investment on terms that are beneficial to Canada. The ICA mandates the review of significant foreign investments to ensure they provide an economic net benefit and do not harm national security.
Despite a generally welcoming foreign investment environment, Canada maintains foreign investment prohibitions in the residential real estate, telecommunication, airline, banking, and cultural sectors.
Residential Real Estate
In January 2023, Canada enacted a prohibition on the purchase of residential real estate by non-Canadians, originally planned as a two-year prohibition but later extended by another two years to January 2027. The prohibition follows the implementation of the Underused Housing Tax in 2022.
Telecommunication
Ownership and corporate board restrictions prevent significant foreign telecommunication investment.
Airline
Foreign ownership of Canadian airlines is limited to 49 percent with no individual non-Canadian able to control more than 25 percent by mandate of the 2018 Transportation Modernization Act. Canadian airlines cannot be directly or indirectly controlled by non-Canadians to meet Canadian Transportation Agency “control in fact” licensure requirements.
Banking
Foreign banks can establish operations in Canada but are generally prohibited from accepting deposits of less than CAD 150,000 (approximately USD 112,000).
Cultural Sectors
Investments in cultural industries such as book publishing are required to be compatible with national cultural policies and be of net benefit to Canada. The Department of Canadian Heritage recently provided a clarification regarding the application of the Related Business Guidelines to foreign investments in Canada's cultural sector. Canadian businesses in the following areas are considered to be ‘cultural businesses’:
- The publication, distribution or sale of books, magazines, periodicals or newspapers in print or electronic form
- The production, distribution, sale or exhibition of film or video products
- The production, distribution, sale or exhibition of audio or video music recordings
- The publication, distribution or sale of music in print or electronic form
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Investor-state dispute settlement (ISDS)
ISDS emerged from a desire to depoliticize disputes by removing them from the realm of diplomacy and interstate relations. Previously, foreign investors had to resolve disputes with host states before the state's own local courts, but they often found themselves unable to obtain full recovery due to obstacles such as an absence of protections under local law, domestic sovereign or crown immunity rules, and a lack of judicial independence.
ISDS agreements typically provide for binding international arbitration, with arbitration tribunals appointed and paid for by one or both of the disputing parties. These tribunals are not bound by precedent and can order remedies, usually in the form of monetary awards, to investors if they find that states have breached treaty obligations. Monetary compensation is the most common remedy, but other remedies, such as declaratory relief and restitution, may also be available. Interim relief, such as interlocutory measures to prevent a party from aggravating the dispute, may also be available while proceedings are ongoing.
ISDS has been criticized for its perceived failures, including investor bias, inconsistent or inaccurate rulings, high damage awards, and high costs. There have been widespread calls for reform, and since 2015, the European Union has been seeking to create a multilateral investment court to replace investor-state arbitration. However, there are no concrete plans in place to implement these reforms.
It is worth noting that Canada is not a party to the USMCA's chapter on ISDS.
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Frequently asked questions
The ICA is a federal statute that regulates foreign investment in Canada. Its purpose is to encourage foreign investment on terms that are beneficial to Canada. The ICA allows the federal government to review significant inbound foreign investments to ensure an overall economic benefit to Canada.
The ICA applies to a broad range of investments, including acquisitions, greenfield and minority investments. It also covers both national security and public interest (“net benefit”) reviews.
The review process involves the submission of detailed information about the foreign investor, the Canadian business, and the investor's plans for the business. The government considers factors such as the effect of the investment on economic activity, employment, and resource processing in Canada.
Canada actively encourages foreign direct investment (FDI) and offers a sound enabling environment. Investors are attracted to Canada's proximity to the United States, its highly skilled workforce, strong legal protections, and abundant natural resources. Once established, foreign-owned investments are treated equally to domestic investments.
