An In-depth Look at the Investment Canada Act
Global Public Affairs
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Significant geo-political tension has put the issue of Canada’s foreign direct investment (FDI) framework into heightened focus. With Prime Minister Trudeau’s visit to South Korea and a new Special Envoy to the Indo-Pacific, the modernization of the Investment Canada Act is an active political and policy initiative. A more detailed note was provided to Global’s clients however here are some highlights.?
An In-depth Look at the Investment Canada Act
The Investment Canada Act (ICA), created in 1985, has been reviewed and amended several times to reflect shifts in domestic and international political and economic realities and the current modernization efforts are no different.
The ICA Regime
The purpose of the ICA is "to provide for the review of significant investments in Canada by non-Canadians in a manner that encourages investment, economic growth and employment opportunities in Canada and to provide for the review of investments in Canada by non-Canadians that could be injurious to national security.”?
The ICA establishes two “screens ” for accepting large scale foreign investments against certain thresholds :
1.????A Net Benefit Review (NBR) to ensure that employment and key sectors remain viable;
2.?A National Security Review (NSR) to ensure that proposed investment do not undermine Canada’s national security interests.
Bill C-34: Legislative Changes to the ICA
In December 2021, the Minister of Innovation, Science and Industry, was tasked to “strengthen the national security review process and better identify and mitigate economic security threats from foreign investment.” One year later, the Minister tabled Bill C-34 , An Act to amend the Investment Canada Act, with these key provisions:
Policy Statements: Critical Minerals and Ukraine Crisis
In tandem, the federal government through Innovation, Science and Economic Development (ISED) Canada published two policy papers covering changes to the ICA regime and informing the modernization efforts - one to the development of critical minerals, and another related to the crisis in Ukraine.
Critical Minerals
As domestic resources take on special significance in the current geopolitical context, the federal government has tightened interpretation of the provisions in the ICA concerning the development these minerals. On October 28, 2022 ISED published a policy framework to guide foreign investment in the development of these mineral deposits by state-owned enterprises (SOE) under the framework.
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The policy paper outlines specific treatment for foreign investments, particularly by State Owned Enterprises (SOEs) and foreign-influenced private investors. In all, there are four specific NBR related criteria outlined the paper, and five related to the NSR screen, all aimed to reduce the ability of SOEs, particularly those from authoritarian regimes, to invest in the development critical minerals.
Ukraine Crisis
On February 24, 2022, the Russian Federation invaded neighbouring Ukraine. International condemnation was swift, and the federal government took immediate steps to sanction the Russian Federation, including new restrictions on Russian investors seeking to enter the Canadian market. These new restrictions were detailed in a policy statement ?published on March 8, 2022.
The short policy statement was direct and began with a recognition that “the elevated risk environment will necessarily directly affect both net benefit reviews and national security reviews under the ICA with relation to Russia.” The statement recognized that the “burden of proof is on foreign investors to convince the Minister that a proposed acquisition of control of a Canadian entity above the relevant value threshold is likely to be of net benefit to Canada,” and that the Ministers responsible will “find the acquisition of control of a Canadian business to be of net benefit to Canada on an exceptional basis only.”
Canada’s Indo-Pacific Strategy
On November 22, 2022, the Government of Canada announced it’s new Indo-Pacific Strategy to support long-term growth, prosperity, and security for Canadians.
In its strategy, Global Affairs outlined five key objectives in deeping ties with these “like-minded” countries:
While much attention has been, rightfully, devoted to importance of the Canada United States Mexico Agreement (CUSMA) and Canada European Union Trade Agreement (CETA), the Indo-Pacific Strategy also represents an enormous economic opportunity to reshape Canada’s trade and investment activities on a similar scale in the long run.
Impacts of ICA Modernization Upon Foreign Investment
Overall, recent legislative amendments and policy statements create the ideal conditions for deeper economic integration with, and investment from, like-minded friendly states that embrace free-market economics and democratic ideals.
Private investors from friendly states that embrace open market and democracy, particularly those with established free trade agreements with Canada or that count themselves among the 40 states of the Indo-Pacific strategic zone, are likely to realize the greatest success under the modernized ICA regime. However, all investors, regardless of their category or location, should be prepared to address the updated and more stringent requirements under both the NBR and NSR screens.
Finally, potential investors should be prepared to develop relationships and work directly with the Minister for ISED, and other Ministers and their staff as appropriate, given their impending enhanced powers to intervene on an ad hoc basis with the review process at any stage of a proposal.
Regardless, it is highly recommended that potential investors engage in a well-defined public affairs engagement strategy that includes the appropriate Ministers, and their political staff, well in advance of submitting a formal proposal and throughout the review process. Such a strategy will ensure that any potential concerns that may arise in the NBR and NSR screens are identified early and can be remedied in a timely and transparent way that maximizes the likelihood of a successful review under the modernized ICA regime.