The Investment Canada Act in Rapidly Changing Times

The decision of the U.S. government to at least temporarily impose 25% tariffs on most Canadian exports raises novel questions about the treatment of U.S. investments into Canada. This update summarizes the framework for treatment of U.S. investment into Canada and considers how recent developments might impact that treatment. It also describes how the Canadian government is responding to the new tariffs with changes to how it administers the foreign investment framework.

Status Quo: Preferred Treatment for U.S. Investors

The Investment Canada Act (ICA) gives preferred treatment to “trade agreement investors” – that is, investors from countries that have entered into free trade agreements with Canada, including U.S. investors. As trade agreement investors, U.S. investors only have to obtain prior approval from the Canadian government for the direct acquisition of a Canadian business if the target’s Enterprise Value exceeds CAD $2.079 billion. By contrast, investors from countries that do not have free trade agreements with Canada must obtain approval for smaller investments (e.g., private sector investors from other countries in the World Trade Organization face an Enterprise Value threshold of CAD $1.386 billion). In addition, the Canadian government has discretion under the ICA to conduct a national security review of any foreign investment in Canada (regardless of value or whether the investment has closed); with minor exceptions, U.S. investors have not been subject to such reviews.

Will U.S. Investors Still Get Preferential Treatment?

The U.S. government’s 25% tariffs were imposed in the face of, and likely in violation of, the free trade agreement with Canada.. Under the current text of the ICA, the mere breach of the free trade agreement does not alter or eliminate U.S. investors’ preferential treatment. However, if politics continue to move forward, it is conceivable that the U.S. might withdraw from the free trade agreement. Withdrawal becomes effective six months after delivering a written notice of withdrawal. If the U.S. were to withdraw, or if the free trade agreement were otherwise terminated, U.S. investors would no longer benefit from preferred treatment. If the U.S. took even more drastic action – for example, withdrawing from the World Trade Organization – the consequences under Canadian law would be even more impactful (e.g., a direct acquisition of a Canadian business with more than $5 million in assets would be subject to pre-closing approval by the Canadian government).

What has the Canadian Government Done?

On Wednesday morning, the Canadian government announced an update to Canada’s National Security Guidelines. The update is largely technical and was expected (e.g., implementing prior policy changes), but one aspect of the change stands out – the government has made it clear that, in administering the ICA, it will take into account “the potential impact of the investment to undermine Canada’s economic security through the enhanced integration of the Canadian business with the economy, or any sector of it, of a foreign state.” The Minister responsible for administering the ICA warned against “opportunistic or predatory investment behavior by non-Canadians.” At minimum, the Canadian government appears to be granting itself additional flexibility in administering the ICA, and warning foreign investors that regulatory scrutiny may increase in specific circumstances.

What are the Consequences for U.S. Businesses Contemplating Investments in Canada?

U.S. investors contemplating an investment in Canada should watch three things:

1. Timing. U.S. investors should keep timing in mind. The world is changing quickly and it is possible that investments that currently can close without approval could become subject to pre-closing approval requirements under the ICA (e.g., if the U.S. withdraws from the free trade agreement). U.S. investors should confirm with Canadian counsel which approvals are required for their planned investments, and then double and triple check again as the time for closing approaches. In some transactions not presently subject to pre-closing approvals, it may be advisable to move forward the timing for filing the ICA notification, the certification of which has the effect of “locking in” the status of certain investments as not subject to pre-closing approval.
2. Heightened Scrutiny for Approvals. For those deals that require approval from the Canadian government, U.S. investors should expect a heightened level of scrutiny. At present, obtaining approval requires that investors agree to undertakings about how they will operate the acquired Canadian business. The regime for the Canadian government to enforce those undertakings is not well developed. One possibility is that the Canadian government expresses uncertainty about its ability to take enforcement action against U.S. investors, including as a result of deteriorating trade relations between the countries, and seeks greater assurances about the performance of undertakings (e.g., the posting of performance bonds).
3. Broader National Security Implications. U.S. investors should recognize the dawning possibility that the Canadian government will investigate the national security implications of their investments in Canada. U.S. investments – especially in innovative or supply-chain critical Canadian businesses, or other businesses that are relevant to Canada’s national and economic security – should be expected to face stricter scrutiny from the Canadian government.

For further information on the changing landscape for U.S. investors into Canada, please contact any member of our Competition and Foreign Investment Group.