Investment Canada Act
Table of Contents
- Related-Business Guidelines
- Guidelines — Investment by state-owned enterprises — Net benefit assessment
- Guidelines — Administrative Procedures
- Mediation Guideline
- Guidelines — Acquisitions of Oil and Gas Interests
The following guidelines are issued by the Minister responsible for the administration of the Investment Canada Act (the "Act"), under the authority of section 38 of the Act, to assist investors in determining whether certain new activities carried on in Canada would be subject to notification under section 11 of the Act.
The establishment of a new Canadian business which is either unrelated to a business presently carried on in Canada, or if related falls within a specific type of business activity that has been prescribed by regulation under the Act as being related to Canada's cultural heritage or national identity, is subject to notification under section 11 of the Act at any time prior to implementation, or within 30 days thereafter.
However, the expansion of an existing business, or the establishment of a related new Canadian business which is not within a type of business activity prescribed by regulation, is not subject to either the notification or review provisions of the Act.
Continuity of an Existing Business
An expansion or reorganization of an existing business, merely because of new premises, new personnel or internal reorganization, is not considered to be the establishment of a new business.
Expansion of an Existing Business
A new business activity commenced by an investor is regarded as the expansion of an existing business, rather than the establishment of a new business, if the new activity produces goods or services which are substantially similar to the goods or services produced by the existing business or if all of the goods or services produced by the new business are used in carrying on its existing business.
Publication, Distribution or Sale of Magazines or Periodicals
Nothwithstanding any other provisions of these guidelines, where a business activity is in the publication, distribution or sale of magazines or periodicals in print or machine readable form, an investment by a non-Canadian to, directly or indirectly, publish, distribute or sell a magazine or periodical in print or in a machine readable form in Canada, whether or not the non-Canadian, directly or indirectly, already publishes, distributes or sells, in print or in machine readable form, another magazine or periodical in Canada or the same magazine or periodical in Canada from another country, is deemed to be a new Canadian business and is subject to notification pursuant to section 11 of the Act rather than deemed to be an expansion of an existing business.
Relatedness of a New Business to an Existing Business
1. Vertical Integration
A new business is related to an existing business if one business produces goods or services used as inputs into or in furtherance of the activities of the other business and the goods or services so provided represent at least 50% of the output in value terms of the business which provides those goods or services.
2. Import Substitution
A new business is related to an existing business if it is predominantly engaged in the manufacture or assembly of proprietary goods (goods readily identifiable with the investor through patents, trademarks, or the equivalent) which are currently being imported into Canada by the existing business.
3. Product Substitution
A new business is related to an existing business if it produces a product or service which is directly substituted for an existing product or service being produced in Canada by the existing business provided that the substituted product or service represents at least 50% of the output in value terms of the new business.
4. Similar Technology
A new business is related to an existing business if the technology and production processes used in the new business are essentially the same as those used in the existing business.
5. Research and Development
A new business is related to an existing business if the products or services produced by the new business are based on research and development carried out in Canada by or on behalf of the existing business.
6. Industry Sector
A new business is related to an existing business if both fall within the same industrial sector as defined at the three-digit level in the Standard Industrial Classification published by Statistics Canada.
7. General Principle
A new business is related to an existing business if the central purpose of the new business is the more effective carrying on of the existing business.
Further information is available from Industry Canada, 240 Sparks Street, 5th Floor West, Ottawa, Ontario, K1P 6A5 or by calling 613-954-1887.top of page
Guidelines — Investment by state-owned enterprises — Net benefit assessment
The following guidelines are issued by the Minister responsible for the administration of the Investment Canada Act (the "Act"), under the authority of section 38 of the Act, to inform investors of certain procedures that will be followed in the administration of the review and monitoring provisions of the Act where the investors are state-owned enterprises (SOEs).
Recognizing that increased capital and technology would benefit Canada, the purpose of the Act is "to encourage investment in Canada by Canadians and non-Canadians that contributes to economic growth and employment opportunities and to provide for the review of significant investments in Canada by non-Canadians in order to ensure such benefit to Canada".
For the purposes of these guidelines, an SOE is an enterprise that is owned, controlled or influenced, directly or indirectly by a foreign government.
As currently required by the Investment Canada Regulations, in their applications for review, non-Canadian investors, including SOEs, are required to identify their controller, including any direct or indirect state ownership or control.
It is the policy of the Government of Canada to ensure that the governance and commercial orientation of SOEs are considered in determining whether reviewable acquisitions of control in Canada by the SOE are of net benefit to Canada. In doing so, investors will be expected to address in their plans and undertakings, the inherent characteristics of SOEs, specifically that they are susceptible to state influence. Investors will also need to demonstrate their strong commitment to transparent and commercial operations.
The Minister will apply the principles already embedded in the Act to determine whether a reviewable acquisition of control by a non-Canadian who is an SOE is of net benefit to Canada. Under the Act, the burden of proof is on foreign investors to demonstrate to the satisfaction of the Minister that proposed investments are likely to be of net benefit to Canada.
When assessing whether such acquisitions of control are of net benefit to Canada, the Minister will examine, as part of the assessment of the factors enumerated in section 20 of the Act, the corporate governance and reporting structure of the non-Canadian. This examination will include whether the non-Canadian adheres to Canadian standards of corporate governance (including, for example, commitments to transparency and disclosure, independent members of the board of directors, independent audit committees and equitable treatment of shareholders), and to Canadian laws and practices, including adherence to free market principles. The Minister will assess the effect of the investment on the level and nature of economic activity in Canada, including the effect on employment, production and capital levels in Canada. The examination will also cover how and the extent to which the non-Canadian is owned, controlled by a state or its conduct and operations are influenced by a state.
Furthermore, the Minister will assess whether a Canadian business to be acquired by a non-Canadian that is an SOE will likely operate on a commercial basis, including with regard to:
- where to export;
- where to process;
- the participation of Canadians in its operations in Canada and elsewhere;
- the impact of the investment on productivity and industrial efficiency in Canada;
- support of on-going innovation, research and development in Canada; and
- the appropriate level of capital expenditures to maintain the Canadian business in a globally competitive position.
Specific undertakings related to these issues may assist to supplement a non-Canadian's plans for the Canadian business. Examples of undertakings that have been used in the past and could be used in the future, include, among other undertakings, the appointment of Canadians as independent directors on the board of directors, the employment of Canadians in senior management positions, the incorporation of the business in Canada, and the listing of shares of the acquiring company or the Canadian business being acquired on a Canadian stock exchange. Appropriate monitoring will be conducted in accordance with the ICA.top of page
Guidelines — Administrative Procedures
The following guidelines are issued by the Minister responsible for the administration of the Investment Canada Act (the "Act"), under the authority of section 38 of the Act, to inform investors of certain procedures that will be followed in the administration of the review and monitoring provisions of the Act.
Investors are encouraged to contact officials of the Investment Review Branch of Industry Canada at the earliest stages of the development of their investment projects and prior to the filing of applications. Such consultations provide a useful forum for discussion and the exchange of views which may serve to eliminate possible difficulties and encourage the development of investments of benefit to Canada. Industry Canada Investment Review Branch officials are ready at all times to meet with investors for such discussions.
Investors are encouraged to put as much detail and precision into their plans for the Canadian business as is possible. This will reduce the likelihood that undertakings will be necessary to supplement those plans. Nevertheless, in certain cases, specific undertakings may be helpful to provide greater assurances when issues, critical to the determination of net benefit, arise.
Third Party Representations
While other federal government departments and provincial governments are regularly consulted, representations are not solicited from any other persons. However, where unsolicited representations are received that could have an adverse bearing on the determination of net benefit, applicants will be advised of the substance of those representations and given an ample opportunity to respond to them, if this is desired. The identity of the persons making such representations will not be disclosed to applicants. Information provided to the Government by the applicant will not be divulged to a third party intervenor without the consent of the applicant.
Where relevant to the factors used in the determination of net benefit, the Minister will be advised both of any outside representations made with respect to an investment and of any response to those representations made by the applicant.
The Minister may use any facts revealed by an alternative buyer which are relevant to the factors to provide additional perspective in the assessment of the applicant's investment. However, any plans or intentions disclosed by an alternative buyer will not influence the assessment of the applicant's investment on its own merits.
Feedback to Applicants during Review Process
As an administrative practice, the Director will advise an applicant prior to the making of any recommendation to the Minister of any matters which the Director, in his best judgment, believes may delay or may cause the Minister concern or difficulty in making his decision. The applicant will be invited to respond to these identified issues in order to demonstrate more clearly net benefit.
In reaching a decision, judgments will be made both in measuring the effects of a proposal in relation to the relevant individual factors of assessment and in measuring the aggregate net effect after offsetting the negative effects, if any, against the positive ones. An investment will be determined to be of net benefit when the aggregate net effect is positive, regardless of its extent.
Monitoring of Investments
The following policies apply to the monitoring of investments that have been reviewed and implemented:
- an evaluation of performance will ordinarily be made 18 months after the implementation of the investment;
- investment performance will be judged in the context of the overall results;
- if the evaluation discloses implementation substantially consistent with the original expectations and subsequent economic circumstances, and there are no major commitments yet to be fulfilled, no further monitoring will ordinarily take place;
- if the evaluation discloses otherwise, the Government and the investor will together determine an appropriate time for future follow-up;
- plans and undertakings are based to some extent on projected circumstances and the monitoring of an investor's performance will recognize this factor. Where inability to fulfill a commitment is clearly the result of factors beyond the control of the investor, the investor will not be held accountable.
This guideline is issued by the Minister of Industry, under the authority of section 38 of the Investment Canada Act (the "Act"), to inform investors of the availability of mediation procedures in the administration of the Act. The guideline applies where the Minister believes that a non-Canadian investor has failed to comply with a written undertaking given in relation to an approved investment.
Recognizing that increased capital and technology benefit Canada, one of the purposes of the Act is to provide for "the review of significant investments in a manner that encourages investment, economic growth and employment opportunities in Canada".
Under the Act, where the Minister believes a non-Canadian investor has failed to comply with a written undertaking related to an approved investment, the following steps may be taken. Investment Review officials and the investor may engage in discussions to resolve concerns related to implementation of the undertakings; the Minister may accept new undertakings pursuant to section 39.1 of the Act; or the Minister may issue a demand under section 39 requiring the investor to comply or justify non-compliance and, if the investor fails to comply, may initiate court proceedings under section 40 of the Act.
The Minister recognizes that, in some instances, a resolution achieved through discussion may be preferable to potentially lengthy and costly legal proceedings. Therefore, in order to facilitate such resolutions, a process involving a third party mediator can be used to assist the Minister and the non-Canadian investor in their discussions. Where both the Minister and a non-Canadian investor agree that mediation may assist in resolving an issue relating to compliance with written undertakings, both parties may enter into an agreement to mediate. The terms of the agreement to mediate would include, but would not be limited to, provisions with respect to the appointment of a mediator, confidentiality, the duration and termination of the mediation process, and cost sharing.
It should be noted that, although new undertakings proposed by a non-Canadian under section 39.1 could be accepted by the Minister as a result of a mediation process, the Minister may also accept, new undertakings under section 39.1 at any time, regardless of whether the Minister and the investor have engaged in a mediation process.top of page
Guidelines — Acquisitions of Oil and Gas Interests
The following guidelines are issued by the Minister responsible for the administration of the Investment Canada Act (the "Act"), under the authority of section 38 of the Act, to assist investors in determining whether various transactions involving the acquisition of interests in oil and gas properties are subject to either notification or review under the Act.
The acquisition of a working interest in a property on which only exploration activities are conducted is not treated as the acquisition of an interest in a "business", and is not subject to either notification or review. The acquisition of a working interest in a property which contains recoverable reserves will usually be treated as the acquisition of an interest in a "business", and may be subject to either notification or review, depending on the size of the interest being acquired and the asset size of the business. Interpretation Note No. 4 provides further guidance as to when an oil and gas property is considered a "business".
Acquisition of Control
Under section 28 of the Act, control of a business may be acquired through the acquisition of either voting interests or assets.
With respect to oil and gas properties, the relationship among the participants in a particular field or well will ordinarily constitute a joint venture, as defined under section 3 of the Act. A voting interest, with respect to a joint venture, is defined under section 3 of the as "an ownership interest in the assets thereof that entitles the owner to receive a share of the profits and to share in the assets on dissolution". The acquisition of a working interest is thus equivalent to the acquisition of a voting interest in a joint venture. The acquisition of less than a majority (50% or less) of the voting interests of a joint venture is deemed not to be an acquisition of control under paragraph 28(3)(b) of the Act. Therefore, if the interest being acquired, combined with any existing interest owned by the investor in the property, does not exceed 50%, there is no acquisition of control and the transaction is not subject to the Act.
However, if the minority interests being acquired represent all or substantially all of the oil and gas business of the vendor, there will be an acquisition of control of the vendor's business. Interpretation Note No. 3 assists investors in determining if there is an acquisition of "all or substantially all of the assets" of a business.
The acquisition of minority working interests may also be subject to the Act where there is an acquisition of a controlling interest in a corporation which holds the minority working interests. Depending on the facts however, it may be possible to view such an acquisition as in essence the acquisition of minority voting interests in a joint venture or ventures (rather than as the acquisition of shares in a corporation), in which case the transaction would not be subject to the Act.
A royalty interest is neither a voting interest nor an asset used in carrying on the Canadian business. The same is true for a net profit interest. Therefore, the acquisition of a royalty or net profit interest will not ordinarily be treated as the acquisition of control of a business.
Each property or well governed by a separate operating agreement is treated as a separate business. Therefore, if the investor is acquiring a package of interests in separate properties, and there is no acquisition of a majority working interest in at least one of those properties, there will be no acquisition of control of any business, notwithstanding the value of the investment.
Each set of properties subject to a unitization or pooling agreement is treated as one Canadian business. Therefore, where an investor is acquiring working interests in one or more properties that are the subject of a unitization or pooling agreement, he may acquire a majority interest in that or those properties without being subject to the Act, so long as his overall holdings will not constitute a majority of the interests in the unit or pool.
Calculation of Assets
If an investor determines that he is acquiring control of one or more oil and gas businesses, he must then determine which filing procedure applies under the Act — notification or application for review. This depends not simply on the value of the interest being acquired but on the overall asset value of the property or properties of which control is being acquired.
Under subsection 14(3) of the Act, the threshold for review for a direct acquisition of control of a Canadian business is $5 million. Subsection 3(1) of the Investment Canada Regulations (the "Regulations") states that, where control of an entity is acquired, the value of the assets shall be the value of all assets of the entity, as shown on the audited financial statements of the entity for its most recent fiscal year i.e. book value. With respect to the acquisition of a controlling interest in an oil and gas property or unit, the "entity" is the "joint venture" between the participants on the property or unit. Financial statements are not ordinarily prepared in relation to the activities of the "joint venture". Therefore, to determine the asset value of the joint venture, it is necessary to aggregate the value of the individual interests in the joint venture.
Where the investor encounters problems in aggregating the individual interests, the Act permits the investor to complete his notification or application for review by giving reasons for his inability to provide any required information (see subsections 13(1) and 18(1)). Assuming that Industry Canada is satisfied that the investor cannot provide an aggregated value of all interests in the joint venture, the best available approximation of the asset value of the joint venture will usually be accepted. For example, if the vendor of an interest is able to provide the purchaser with a book value for that interest, determined in accordance with generally accepted accounting principles (GAAP), then the purchaser will usually be permitted to extrapolate from that figure an approximate value for the entire joint venture.
Where control of more than one entity is acquired as part of the same investment, the investor must aggregate the value of all assets of all entities of which control is acquired, to determine if the investment is reviewable (see paragraph 14(3)(b) of the Act and subsection 3(2) of the Regulations). Therefore, if a number of controlling interests in different oil and gas businesses are being acquired as part of the same transaction, the investor must aggregate the values of the joint ventures in respect of all those businesses to determine which filing procedure, notification or application for review, applies.
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