International Affairs, Trade and Investment
Issue | Certain foreign investments are subject to approval by the federal government, which reviews these investments within a regulatory framework.
Synopsis | Under the Investment Canada Act, foreign investments are classified into two categories: investments that are subject to notification and investments that are reviewable. For the latter, a foreign investment will be approved by the Government of Canada only if it is likely to be of net benefit to Canada and not injurious to national security.
Timing | As has been the case in recent years, the review of foreign investments by the Government of Canada under the Investment Canada Act will likely be a matter of debate in the new parliament.
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 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:
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:
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.
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.
© Library of Parliament 2011