Oliver Borgers (McCarthy Tétrault LLP) authored this publication

The Investment Review Division (IRD), which is part of the Ministry of Innovation, Science and Economic Development Canada (ISED), is the government department responsible for the administration of the Investment Canada Act (ICA), the statute that regulates foreign direct investments (FDI) in Canadian businesses by non-Canadians.

The IRD interfaces with investors and other parties as part of a preliminary (informal) review of an investment to determine whether there are potential national security concerns. Where concerns arise, the IRD will work with the Minister of ISED, in consultation with the Minister of Public Safety and Emergency Preparedness, who may refer investments to the Cabinet (the Canadian Prime Minister and his appointed ministers, formally known as the Governor in Council), who may order a formal review if the investment could be injurious to Canada's 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.

Recent updates

As of 2022, investments that are not subject to mandatory review or notification (such as the acquisition of a non-controlling investment or setting up new Canadian entities that do not qualify as "businesses") may be notified voluntarily to obtain national security clearance.

Non-notifiable investments for which no voluntary notification is filed are subject to review for up to five years following the investment.

Who files 

The ICA is a statute of general application that applies to any acquisition of control¹ of a Canadian business by a foreign investor. If the relevant financial threshold under the ICA is exceeded (subject to certain exceptions), the statute provides for a process of pre-merger review and approval of foreign investments to determine if they are of "net benefit" to Canada, also referred to as "net benefit review". The indirect acquisition of a Canadian business through the acquisition of a foreign non-Canadian parent is typically exempt from having to obtain approval.

Where approval is required, the investor must file an application for review and the transaction must be approved by the relevant minister. A key element in the application for review is the requirement to set out the investor's plans for the Canadian business, including plans related to employment, participation of Canadians in the business, and capital investment. An application for review is a much more detailed document than a notification.

Where approval is not required, the investor has an obligation only to file a simple administrative notification form, which can be filed up to 30 days after closing. In either case (filing of an application for review or just a notification), the Canadian government has jurisdiction for 45 days after receipt of such a filing to order a national security review if there are concerns.

The entry point for national security review screening will usually be the obligatory filing under the ICA (either an application for review if the financial threshold is exceeded and approval is required, or a simple administrative notification form in other cases). The government also has the power to subject non-controlling minority investments to a national security review.

As of August 2, 2022, non-controlling investments in Canadian businesses or establishing new Canadian entities (that do not qualify as Canadian businesses under the ICA) may be notified voluntarily, either before or after closing, pursuant to amendments to the National Security Review of Investments Regulations. For non-notifiable investments for which no voluntary notification is filed, the government has five years following implementation to initiate action.

Types of deals reviewed

It is important to keep in mind that the Canadian government has the power to review any transaction (including minority investments) in which there are "reasonable grounds to believe that an investment by a non-Canadian could be injurious to national security." Unlike the net benefit review process under the ICA, there is no financial threshold for investments under the ICA's national security review regime.

Further widening the potential scope of the national security review regime is the fact that there is no statutory definition of "injurious to national security." This lack of definition creates wide discretion for the minister and some uncertainty for foreign investors.

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, 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 American companies (although ultimately controlled outside the United States), as well as investors from emerging markets, but particular scrutiny can be expected for state-owned investors.

Scope of the review

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, technology 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 Government of Canada.

Review can occur before or after closing. Transactions that run the risk of raising national security concerns can seek clearance by making any ICA filings well before the proposed time of closing (at least 45 days in advance, although giving the officials more time to review would be prudent). The Canadian government may deny the investment, ask for undertakings and/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.

The national security review process can take up to 200 days (or longer with the consent of the investor) from the date the initial notice of the transaction is sent to the Minister of ISED. The minister has 45 days (which can be extended by up to an additional 45 days) after an application or notification under the ICA has been certified, or after the implementation of a minority investment that does not require notification, to refer an investment to the Governor in Council for an order for national security review. If an order is made, it can take 110 more days (or longer with the consent of the investor) for the review to be completed.

How foreign investors can protect themselves

Where a transaction gives rise to national security risks, non-Canadian investors should consider filing notice of the transaction with the minister at least 45 days prior to closing to obtain pre-clearance (assuming the minister does not seek further time under the national security review regulations). For an investment that does not require notification (e.g., a minority investment), the Canadian government encourages non-Canadian investors to contact the Investment Review Division at the earliest stage of the development of their investment projects to discuss their investment.

As in other jurisdictions, it is therefore critical for foreign investors to consider Canadian national security review issues in planning and negotiating transactions. In particular, an investor should ensure that it secures a closing condition predicated on obtaining national security clearance in Canada, where appropriate. It may also be appropriate for merging parties to allocate the national security risk.

_{1 Generally, an acquisition of greater than 50 percent of the equity or voting interests of an entity, though in certain cases an acquisition of greater than one-third of the voting interests of a corporation, will be considered an acquisition of control.
2 Advanced Materials and Manufacturing, Advanced Ocean Technologies, Advanced Sensing and Surveillance, Advanced Weapons, Aerospace, Artificial Intelligence (AI), Biotechnology, Energy Generation, Storage and Transmission, Medical Technology, Neurotechnology and Human-Machine Integration, Next Generation Computing and Digital Infrastructure, Position, Navigation and Timing (PNT), Quantum Science, Robotics and Autonomous Systems, and Space Technology.}

_{White & Case means the international legal practice comprising White & Case LLP, a New York State registered limited liability partnership, White & Case LLP, a limited liability partnership incorporated under English law and all other affiliated partnerships, companies and entities.}

_{This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.}

_{© 2023 White & Case LLP}