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The Investment Canada Act (ICA) provides for federal government review of foreign investments in Canada. Under the ICA, direct acquisitions of control of Canadian businesses by non-Canadians are subject to notification to Industry Canada or the Department of Canadian Heritage. Investments are subject to review and the need for ministerial approval if they exceed the 2008 monetary threshold of $295 million in gross asset value of the acquired business.1 Reviews of foreign investment at the $5-million threshold level are required in the case of financial services, transportation services (including pipelines), uranium mining and cultural businesses.2
A proposed acquisition is approved where the relevant minister is satisfied that the investment is likely to be of "net benefit" to Canada. The criteria used to assess net benefit, as set out in section 20 of the ICA, include employment, exports, productivity, technology development, and compatibility with Canada's national industrial, economic and cultural policies. Industry Canada reviews typically involve foreign acquirers providing specific undertakings to address these criteria. However, such undertakings are seldom made public for reasons of commercial confidentiality.
The ICA replaced the Foreign Investment Review Act (FIRA) in 1985. FIRA was enacted on the premise that the ability of Canadians to maintain effective control over their economic environment was a matter of national concern. The ICA changed course, seeking to reduce actual and perceived protectionism, and acknowledging that foreign investment typically delivers important economic benefits. Greater focus on Canada's investment review regime was achieved by raising review thresholds, changing the test of "significant benefit" to one of "net benefit," eliminating reviews for greenfield investments outside the cultural sector, and establishing stricter time limits for reviews.
Source: John R. Baldwin, Guy Gellatly and David Sabourin, Insights on the Canadian Economy: Changes in Foreign Control under Different Regulatory Climates: Multinationals in Canada, March 2006, Statistics Canada Cat. no. 11-624-MIE — No. 013.
The ICA has not been an obstacle to foreign direct investment. Of the over 1500 non-culture sector reviews undertaken by the Minister of Industry under the ICA since 1985, only one proposal has been disallowed. Since 1999, the Minister of Canadian Heritage has reviewed and approved 98 cultural investments, while disallowing three proposals.3
Despite this track record, the ICA has been criticized as being unduly restrictive of foreign investment. In particular, the OECD has consistently ranked Canada as having among the most restrictive barriers to foreign direct investment among industrialized nations.4
This perception is not supported by the facts, and the Panel rejects it. Although Canada's global share of foreign direct investment (FDI) has fallen, Canada's total stock of inbound FDI as a proportion of gross domestic product is relatively high among industrialized countries, being more than twice the level in the US and over 12 times the level in Japan.5 A recent Conference Board of Canada report indicates that, when the actual practices regarding foreign investment are taken into account, the impact of Canadian government intervention is not materially different from that of other industrialized countries.6
Source: United Nations Conference on Trade and Development, World Investment Report 2007.
Canada is one of only a few countries (Australia being another) with a formal investment review process for foreign acquisitions that exceed prescribed monetary thresholds. This approach is more explicit and visible than the approach adopted in many other countries that employ informal barriers to foreign investment. These range from state-owned enterprises and special government rights in certain companies to overt political interference in the engineering of "national champions."7
The Panel subscribes to the widely held view that Canada benefits from openness to the world and that attracting greater foreign investment is in Canada's economic interest. Given that there has been no policy review of the ICA in more than 20 years, we believe that it is timely to update Canada's foreign investment policies to make Canada more competitive and align the appearance of such policies with the reality.
In addition, the Panel believes that it is in Canada's interests in a post-9/11 world to have in place an explicit national security test to support its trade and investment policies. As such, we support the Minister of Industry's statement that the government intends to carefully consider the creation of a new review requirement for transactions that raise "national security" concerns.8 We respectfully suggest that the scope of this review requirement should be aligned with that of the investment review process used by the Committee on Foreign Investment in the United States.9 This would bring Canada into line with other countries that have introduced a national security screening procedure, including the United Kingdom, China, Japan and Germany.
The Panel also welcomes the Minister of Industry's recent clarification concerning the ICA's application to state-owned enterprises. We believe that the new guidelines will improve transparency in the administration of the ICA.10
The Panel believes that Canada should retain an investment review process, but it should be one of exceptional application in keeping with the practices of similarly situated industrialized countries. Consistent with Canada's legal traditions and our international reputation for sound governance practices, the review process should be predictable, timely and transparent.11
To deal with the perception issue that clearly exists, the Panel concludes that the scope of the ICA should be narrowed in the manner set forth below. Based on the submissions we received and on our consultations, research and experience, we are confident that implementing our recommendations will enhance Canada's attractiveness to foreign capital without undermining our capacity to safeguard our national interests on a basis consistent with that of other industrialized countries.
We recommend raising the ICA's minimum review threshold to $1 billion in enterprise value from the current level of $295 million in gross assets of the acquired business, except for cultural businesses. We make this recommendation for two reasons. First, a higher threshold is consistent with the scope for intervention being narrower, and thus more exceptional, than under the current ICA. Second, a higher threshold would be aligned with Canada's underlying premise that foreign investment is, except in unique circumstances, beneficial to Canada.
The use of gross assets as the standard in the ICA for measuring the significance of Canadian businesses subject to foreign investment proposals is out of date. The concept of enterprise value12 better reflects the increasing importance to our modern economy of service and knowledge-based industries in which much of the value of an enterprise is not recorded on its balance sheet because it resides in people, know-how, intellectual property and other intangible assets not recognized in a balance sheet by current accounting methods.
The dollar amount of the review threshold should continue to be indexed for inflation in accordance with the current NAFTA formula. Furthermore, the revised threshold should also apply to non-WTO investors.
The Panel also recommends eliminating the current separate threshold of $5 million that applies to foreign investment in non-federally regulated financial services,13 transportation services (including pipelines) and uranium mining. Unlike the case of cultural businesses, the Panel has not been presented with any compelling policy rationale that would serve to distinguish foreign investment in these sectors from any other investment, given the broad array of other industry specific regulation as well as the forthcoming national security safeguards on foreign investment.
In the same connection, other than for cultural businesses, the Panel does not see the utility of mandatory reporting of foreign investment that does not exceed the review threshold in the ICA. If there is considered to be a continuing need to collect statistical information regarding foreign investment that is below the review threshold, the Panel is of the view that this activity should be undertaken by Statistics Canada.
The ICA currently requires applicants to demonstrate "net benefit" to Canada. We recommend narrowing the ICA by reversing the onus to require the relevant minister to assume the burden of being satisfied that the standard for disallowing a proposed foreign investment transaction has been met. The Panel also recommends narrowing the disallowance standard by changing it from "net benefit to Canada" to "contrary to Canada's national interest."
A number of issues would be addressed by these changes. First, it would align the test with Canada's basic policy premise that FDI generates positive benefits for the country. Second, it would counter the negative and misleading perception that the ICA discourages — and that Canada does not welcome — FDI.
In concrete terms, the change in the disallowance standard would mean that an investment that would not have been able to meet the former net benefit test would be able to proceed without intervention from the minister, unless it was a case where the minister's concern with regard to the factors required to be considered under the ICA rose to the level of the national interest.
In recommending this and other changes to the ICA, the Panel is mindful that, under NAFTA and other international treaty commitments, Canada may amend the ICA only to narrow, not broaden, the scope of its application.14 The changes to the ICA that we are recommending would satisfy these commitments because, as explained above, the intention and effect of the recommendations is to narrow the scope of the ICA's application and to raise the standard for disallowance. In this report, the Panel is making policy recommendations. We leave it to the appropriate authorities to give legislative expression to them.
In our consultations, the Panel heard criticisms that the administrative provisions of the ICA are deficient. In the fast-moving world of modern business, where significant investment decisions are made on a global basis, regulatory clarity and administrative efficiency are among the significant factors considered by foreign investors. As such, we believe that a key objective of the changes to the ICA should be to improve the transparency, predictability and timeliness of decision making in the review process. We recommend requiring ministers to report publicly on the disallowance of any individual transaction under the Act and, in doing so, to give reasons for the disallowance. The current inability of ministers to articulate the reasons for allowing or disallowing a foreign investment proposal does not meet contemporary standards for transparency.
In addition, the Panel recommends that ministers should publish annually a report on the operation of the ICA. The annual report should provide information on the development of any new policies or guidelines as well as an overview of all transactions subject to the ICA and undertakings provided by foreign investors in relation to the disallowance test under the legislation. The report should be required to provide sufficient detail, without breaching commercial confidences, to allow the Canadian public to assess whether the Act is meeting its objective of ensuring that foreign investment proposals are not contrary to Canada's national interests.
To further improve the administration of the ICA, we believe that the government should also make increased use of guidelines and other advisory materials to provide information concerning the review process, explain the basis for making decisions under the Act, and clarify interpretations by Industry Canada or the Department of Canadian Heritage regarding its application. The research finding that it generally takes longer to obtain a binding ministerial opinion than to conduct a complete review of a foreign investment proposal is perverse.15 Therefore, the procedures and timelines for issuing compliance instruments under the ICA need to be streamlined.
We received many submissions regarding the importance of protecting and nurturing Canadian culture. We affirm the importance of Canadian culture, and believe that the review of foreign investment related to cultural businesses should continue to be administered separately by the Department of Canadian Heritage.16 At the same time, the Panel believes that greater openness to two-way trade, foreign investment and talent would increase competitive intensity and ultimately ensure the long-term vitality of Canadian cultural businesses. Forgone competitive intensity may increase prices and reduce choice as well as incentives to innovate and seek out new markets. New technology and increased international exposure create new opportunities for Canadian cultural businesses in global markets, and the current Canadian cultural policy framework will need to be updated in light of this new economic reality.
The application of the ICA to cultural businesses differs in many respects from the general application of the Act. The threshold for review is set at $5 million in gross assets and has not been changed since the inception of the ICA in 1985. Foreign investment proposals involving Canadian cultural businesses are assessed against specific cultural business policies of the Department of Canadian Heritage. These policies are applied by the Minister of Canadian Heritage to foreign investment proposals involving cultural businesses whether they are above or below the $5-million threshold. Unlike in other sectors, these policies also apply to a review process governing the establishment of a new cultural business.
Over the past two decades, the federal government has issued a number of policy statements setting out its foreign investment policies for Canadian cultural businesses. Some of these policies are implemented through the ICA. For example, the 1988 Film Distribution Policy includes a prohibition on foreign takeovers of Canadian-owned and controlled film distribution businesses. The 1992 Revised Foreign Investment Policy in Book Publishing and Distribution includes provision for review under the ICA of all transactions involving book publishing, distribution and retailing businesses. The direct acquisition of Canadian-owned firms within the book publishing, distribution and retail sectors by non-Canadians is prohibited except in specific circumstances. In 1999, following the Canada–US Agreement on Periodicals, there was some liberalization of foreign investment restrictions in the periodical publishing, distribution and sales sector. However, Canada continues to prohibit foreign acquisitions of Canadian-owned periodical publishing businesses.17
Significant issues that emerged from the oral and written submissions received by the Panel as well as in the research conducted for the Panel included overreach of the review process to activities and transactions of minimal cultural significance, a lack of clarity on what constitutes cultural products, perverse incentives and outcomes, and adverse impacts on the ability to raise capital and on competition. The Panel believes that greater use of exemptions and guidelines and a more receptive approach to greenfield investment in the cultural sector would go a long way to resolving the deficiencies that have developed over the past two decades without eroding the ability of the ICA to serve as a tool to preserve Canada's cultural sovereignty.
While the current $5-million threshold seems to the Panel to be inordinately low with regard to purely economic considerations, the Panel has insufficient evidence and experience to suggest the magnitude of an increase in the threshold with confidence that the change would not undermine the ability of the Minister of Canadian Heritage to discharge responsibilities under the ICA. Accordingly, we are not recommending any change in the $5-million review threshold or the minister's ability to reach below it to review transactions involving cultural businesses. However, the Panel also believes that a change in the standard of measurement from gross assets to enterprise value would better reflect the economic value of cultural businesses, and this change should be considered along with an increase in the review threshold by the Minister of Canadian Heritage.
What is a Cultural Business?
Future Shop sells electronic equipment for home and office use. Yet when American retailer Best Buy acquired the Canadian company in 2001, the acquisition was reviewed by both Industry Canada (because the value of assets being acquired was over the existing review threshold) and the Department of Canadian Heritage (because Future Shop sold books as well as audio and video recordings). Foreign ownership in book retailing is subject to review, whatever the proportion of business this activity represents. Nevertheless, in another decision the following year, the Department of Canadian Heritage determined that the activities in Canada of the Internet book retailer Amazon were not subject to review under the ICA because Amazon does not own nor did it acquire a Canadian business.
The Panel doubts that a review is needed where cultural activities of a commercial nature are only an ancillary part of the business operations proposed to be acquired. Business activities that are currently prescribed under the ICA as being related to Canada's cultural heritage or national identity should be clarified.
There is also a need to differentiate activities that directly relate to the creation and distribution of cultural products as opposed to other incidental commercial activities and products. It should be made clear that products such as telephone directories or technical manuals are not cultural products. Similarly, the Panel believes that investment review requirements ought to be eliminated in cases where other government policies actively encourage foreign investment in a specific cultural industry. This is the case in the film production industry, where tax incentives encourage foreign investment in specific film projects.
The Panel's attention was drawn to current foreign investment policy for book publishing, which prohibits the direct acquisition of Canadian publishing companies by foreign investors. The Panel questions the necessity to apply this prohibition so broadly as to capture even those companies that publish virtually no Canadian authors, sell the vast majority of their books outside Canada, and have no printing and distribution activities in Canada. This is likely to have the unintended consequence of driving investment, opportunity and talent outside Canada.18
The commercial reality of cultural businesses is changing. Scale and the ability to export Canadian cultural products are key competitiveness factors for the future. At the same time, the Internet is undermining business models and creating new markets and competitive pressures. Maintaining a "closed" regulatory system for the creation, distribution and consumption of cultural products is no longer feasible in the Internet age. Accordingly, Canadian cultural policies require urgent and systematic review in light of the changes wrought by new technology.
Finally, we suggest a further step to narrow the scope of the ICA by changing the Act's purpose clause to remove Industry Canada's responsibilities to promote foreign investment in Canada. These responsibilities for a number of years have been performed elsewhere within the federal government.
1. The Minister of Industry should introduce amendments to the Investment Canada Act as follows:
2. The Minister of Industry and the Minister of Canadian Heritage should increase the use of guidelines and other advisory materials to provide information to the public concerning the review process, the basis for making decisions under the ICA, and interpretations by Industry Canada and the Department of Canadian Heritage regarding the application of the ICA. Additionally, amendments to the ICA should require the Ministers to:
3. The Minister of Canadian Heritage should establish and make public a de minimis exemption clarifying that the acquisition of a business with cultural business activities that are ancillary to its core business would not be considered a separate cultural business nor be subject to mandatory review by the Department of Canadian Heritage. For the purpose of applying this exemption, the cultural business activities would be considered de minimis if the revenues from cultural business activities are less than the lesser of $10 million or 10 percent of gross revenues of the overall business.
4. Consistent with recommendations for other sectors, the Minister of Canadian Heritage, with advice from stakeholders and other interested parties, should conduct a review every five years of cultural industry policies, including foreign investment restrictions. The first such review should be launched in 2008. As a matter of priority, the first review should consider:
5. In administering the ICA, the ministers of Industry and Canadian Heritage should act expeditiously and give appropriate weight to the realities of the global marketplace and, in appropriate cases, the ministers should provide binding opinions and other less formal advice to parties concerning prospective transactions on a timely basis to ensure compliance with the ICA.