• Foreword
• Introduction
• Parliament and Ethics
• Social Affairs
• Justice and Human Rights
• Government Spending, Debt and Taxation
• International Affairs, Trade and Investment
• Digital World
• Energy and Environment
• About the Library
 
• Current and Emerging Issues - 41^st Parliament - PDF version 4.27 MB

Foreign Investment in Canada: The Net Benefit Test

Foreign investment can be highly beneficial for the Canadian economy. When a foreign firm purchases a Canadian company, innovative technology and new management ideas may be implemented by the foreign investor, and they can lead to higher productivity and superior competitiveness. At the macroeconomic level, foreign investment can therefore translate into increased exports and employment and, more generally, into a faster-growing Canadian economy.

Foreign investment may also come at a cost in terms of reductions in employment or value-added activities at the firm level. National security and cultural sovereignty could also be affected by a foreign takeover of a Canadian firm, which adds non-economic considerations to reviews of foreign investment.

The Investment Canada Act

The Investment Canada Act is the principal mechanism for conducting foreign investment reviews in Canada. It came into force on 30 June 1985. Under the Act, foreign investments are classified into two categories: investments that are subject to notification, and investments that are reviewable.

Foreign investments are deemed reviewable – meaning that they are subject to approval by the federal government – if at least one of the following three scenarios arises:

• Scenario 1: The investor is from a World Trade Organization (WTO) member country and the investment is made to directly acquire ownership and control of a non-cultural Canadian business that has assets over $312 million (in 2011).1 In the case of non-WTO countries, the threshold is $5 million or more for direct acquisitions and $50 million or more for indirect acquisitions.
• Scenario 2: The investment is made to directly acquire control of a Canadian cultural business that has assets of $5 million or more,2 or the Government of Canada considers that an investment in a cultural business should be reviewed in the public interest.
• Scenario 3: The Government of Canada considers that the investment may be injurious to national security.

Foreign investments under Scenario 1 can be approved only if the minister of Industry is satisfied that the transaction is likely to be of “net benefit” to Canada. Factors that are considered in the net benefit “test” under the Act are:

1. the effect of the investment on economic activity in Canada;
2. the degree of participation by Canadians in the business in question;
3. the effect of the investment on productivity, efficiency, technological development, product innovation and product variety in Canada;
4. the effect of the investment on competition;
5. the compatibility of the investment with national industrial, economic and cultural policies; and
6. the contribution to Canada’s ability to compete globally.

In making a determination under Scenario 1, the minister consults with provincial governments, other federal departments, and the Competition Bureau. Also, the minister examines in detail the foreign investor’s future plans for the Canadian business. The foreign investor may offer legally binding undertakings (e.g., job creation, R&D activities or new investments) to demonstrate “net benefit” to Canada.

Acquisitions of Canadian Businesses by Foreign Investors, 1985–2010

Source: Figure prepared by the Library of Parliament using data from Industry Canada. (“Business and services industries” includes business, education, health, social services, accommodation, food, beverage and other services industries. “Other services” includes construction, transportation and storage, communication and other utilities, finance and insurance industries and real estate businesses.)

The authority to review a foreign investment in a cultural business under Scenario 2 (cultural business) rests with the minister of Canadian Heritage. The net benefit test under this scenario consists of determining whether the investment is compatible with the strategic objectives of the Department of Canadian Heritage.3

Finally, there is no definition of “national security” under the Act, or of the elements that can be considered injurious to national security. This provides the government additional flexibility in making its determination under Scenario 3 (national security).

If none of the above scenarios applies, non-Canadians planning to establish a new Canadian business or to acquire control of a Canadian business give notice to the Director of Investments within Industry Canada and provide the required information.

Recent Notable Reviews under the Investment Canada Act

In May 2008, the Government of Canada rejected the proposed takeover of the information system and geospatial businesses of MacDonald, Dettwiler and Associates Ltd. by a U.S.-based company on the grounds that the transaction was not likely to be of net benefit to Canada. This was the first time that a transaction was rejected under the Act.

In November 2010, the Government of Canada sent a notice indicating that it was not satisfied that the proposed takeover of Potash Corporation of Saskatchewan Inc. by BHP Billiton, headquartered in Australia, was likely to be of net benefit to Canada. BHP Billiton subsequently withdrew its application for review under the Act.

In February 2011, the Government of Canada stated that the proposed merger between the Toronto Stock Exchange and the London Stock Exchange will be reviewed under the Act.