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The Investment Canada Act (ICA) provides a regulatory framework whereby the Government of Canada can review large-scale foreign investments in Canada which exceed a designated financial threshold.33 Review of foreign investment at a lower financial threshold is required in financial services, transportation services (including pipelines), uranium and culture.34 Approval of the acquisition is granted when the Minister is satisfied that the investment is likely to be of "net benefit to Canada".35
Prior to the ICA, the Foreign Investment Review Act (FIRA), introduced in 1973, regulated FDI in Canada. FIRA was predicated on the view that ". . . the ability of Canadians to maintain effective control over their economic environment is a matter of national concern . . . measures be taken to ensure that . . . [investments] . . . are likely to be of significant benefit to Canada."
By the mid-1980s, the Government decided to change course. The ICA, passed in 1985, acknowledged that foreign investment delivers important economic benefits. In particular, greenfield investments by foreign investors, apart from those in the cultural sector,36 were no longer subject to review, and the test of "significant benefit" was changed to one of "net benefit." Since 1985, all 1529 reviews that have been undertaken by the Minister of Industry under the ICA have been approved.37 This does not reflect applications that may have been withdrawn. Since 1999, the Minister of Canadian Heritage has reviewed and approved 98 cultural investments, while disallowing three proposals. The disallowance rates under FIRA and the ICA do not reflect proposals withdrawn before a decision was rendered.
There has not been a policy review of the ICA since it was enacted more than 20 years ago.38 During that time, the competitive landscape has evolved dramatically, as discussed in the previous section of this paper.
Under the ICA, a prospective investor has an obligation to demonstrate that the proposed transaction is of net benefit to Canada. The ICA provides a list of factors considered by the Minister of Industry in determining whether a transaction is of net benefit. The factors assessed are:
The ICA provides no specific weighting to the factors, nor is any single factor determinative. On balance, the positives must outweigh the negatives for an investment to be approved.
To ensure net benefit to Canada, negotiated undertakings39 with the prospective investor are standard practice. Areas of negotiation address specific concerns identified during consultations and, among other things, focus on future plans for the Canadian business following the completion of the transaction. According to Industry Canada, there has been a shift over time in emphasis and number of commitments towards those related to productivity, technology transfer and efficiency, and away from a focus on employment. Industry Canada indicates that potential improvements in the capacity and capabilities of the Canadian business, as well as the degree of Canadian participation, have taken on more weight in the review process.
Canada is signatory to a number of international trade agreements, the most important of these being the World Trade Organization (WTO) Agreement and the North American Free Trade Agreement (NAFTA). Under NAFTA and WTO, Canada is generally required to provide national treatment and most favoured nation status such that foreign investors are treated equally and no less favourably than domestic investors with respect to the establishment, acquisition, expansion, management, conduct, operation and sale or other disposition of investments. Canada has taken reservations in both agreements to preserve its ability to use the ICA to ensure that investments by non-Canadians provide net benefit to Canada. Under international trade law, Canada can amend legislation for which it has taken a reservation but it can only narrow, not broaden, its application.
Like Canada, most countries around the world have mechanisms in place, whether formal or informal, to review at least some elements of foreign investment. While investment flows have increased, and the economic importance of foreign investment has been accepted, most nations are sensitive to the control of the more strategic elements of their domestic economy. As such, most governments retain a degree of control over who invests and controls firms active in these strategic sectors. Recent U.S. legislation affecting foreign investment and national security is an example of a formal mechanism.
Australia has a general investment screening system similar to Canada's that reviews foreign investments based on monetary thresholds. Unlike the net benefit test in Canada, Australia's policy is framed such that it can block any foreign acquisition that is judged contrary to "national interest." Most other industrialized countries have general legal authority to block any mergers on the basis of national security considerations. The United States, France, Germany, the United Kingdom, Japan, and China all have such powers.
Two general concerns have been raised by critics of the ICA, one being transparency and the second being efficacy.
In its current form, the review mechanism under the ICA has raised concerns from foreign investors over a lack of predictability regarding how the net benefit test will be applied and what combination of factors is required to be met. On the other hand, the flexibility inherent to the net benefit test provides the Minister with discretion to ensure, on a case-by-case basis, that the FDI serves Canadian interests as they evolve over time.
For reasons of commercial confidentiality, details on the undertakings that foreign investors make to meet the net benefit test are not publicized. The absence of information makes it difficult for Canadians to ascertain whether undertakings with foreign investors are being fulfilled, and consequently whether the net benefit on which the approval of an investment was granted is being realized. The lack of transparency of the approval process also inhibits public discussion of the efficacy of the ICA, as the facts on the performance of the policy are not publicly available.
In addition to the foregoing general concerns, there has recently been increasing public discussion of reciprocity in connection with acquisitions of Canadian enterprises by acquirers which are based in jurisdictions in which a Canadian enterprise would not be able to make a corresponding acquisition because of formal or informal barriers in place in such jurisdictions.
INVESTMENT POLICIES QUESTIONS
Canada has sector-specific legislation and/or policies on foreign investment in five sectors:
As well, the financial services sector is subject to generally applicable ownership restrictions, but not specific foreign ownership restrictions.
Descriptions of the individual sectoral regimes are presented in Appendix 2.
Investment restrictions and controls in Canada were introduced to protect important aspects of the economy deemed essential to Canada's sovereignty, cultural identity, national security and overall economic well-being. Other restrictions were imposed to deal with a perceived inability of market forces to support the development of domestic activity. Each sectoral regime is unique and is based upon a distinct policy rationale.
The Panel will focus on the impact of such restrictions and limitations on Canada's competitiveness and will be interested in whether there are alternative, and equally effective, mechanisms that have less impact on Canada's competitiveness but nevertheless meet the objectives of the various sectoral investment regimes currently in place. It is beyond the scope of the Panel's mandate to comment in detail on the trade-off between economic competitiveness and other policy objectives of each sectoral investment regime.
SECTORAL INVESTMENT REGIMES - QUESTIONS
Canada maintains specific regimes to govern, review or restrict investment in six sectors: telecommunications, cultural industries, broadcasting, transportation services, uranium production and financial services.