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Foreign investment in Canadian Business: What are the Test for Approval Rules?

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    Foreign investment in Canadian Business: What are the Test for Approval Rules?

    Canada’s regime for foreign investment review is primarily governed by the Investment Canada Act (ICA). It provides for both net benefit and national security reviews of certain investments by “non-Canadians.” In the case of a corporation, the term “non-Canadian” is defined in the Investment Canada Act (ICA) as a business that is controlled through the ownership of voting shares by persons who are not citizens or permanent residents of Canada.

    Net Benefit Reviews:

    The Heritage Minister and Innovation Minister of the Government of Canada employs a “net benefit to Canada” test, which is basically a test for approval for business investments acquired in Canada by foreign investors. The Heritage Minister reviews cultural investments, such as those related to print media, film, video, music, radio, and television, while the Innovation Minister reviews all other types of foreign business investments for net benefit to Canadians and national security considerations.

    A non-Canadian who establishes a Canadian business (as opposed to acquiring one) is also required to file a notification under the Investment Canada Act (ICA), but such transactions are not subject to review under the ICA (except where they involve the establishment of a cultural business).

    Most foreign made investments within Canada will be subject to review under the ICS only when the business exceeds an applicable threshold or where an exception applies.

    What is that threshold? That depends on whether the investor is a member of the WTO (World Trade Organization), a member of a state-owned enterprise (SOE), or an investor from a country considered a trade agreement investor.

    WTO Investments

    The Investment Canada Act (ICA)

    The review threshold for 2020 is $1.075 billion in enterprise value to invest in the acquisition of a Canadian business by WTO investors that are not members of a state-owned enterprise or from a country considered a trade agreement investor.

    Private Sector Trade Agreement Investments

    The review threshold is $1.613 billion in enterprise value to invest in the acquisition of a Canadian business by trade agreement investors that are not state-owned enterprises.

    Trade agreement investors include entities and individuals whose country of ultimate control is party to one of the following trade agreements: Comprehensive and Progressive Agreement for Trans-Pacific Partnership; Canada-European Union Comprehensive Economic and Trade Agreement Implementation Act; Canada-United States-Mexico Agreement; Canada-Chile Free Trade Agreement Implementation Act; Canada-Peru Free Trade Agreement Implementation Act; Canada-Colombia Free Trade Agreement Implementation Act; Canada-Panama Economic Growth and Prosperity Act; Canada-Honduras Economic Growth and Prosperity Act; or the Canada-Korea Economic Growth and Prosperity Act.

    State-owned Enterprise WTO investments

    The review threshold is $428 million in enterprise value to invest in the acquisition of a Canadian business by WTO investors that are state-owned enterprises.

    Non-WTO Investments and Investments in a Cultural Business

    The threshold for non-Canadian investors who wish to acquire a Canadian-owned business is the same for investors who are not a WTO investor and investors who wish to acquire a cultural business. That threshold is $5 million in asset value for direct investments and $50 million for indirect transactions, which occurs when the acquisition is of a foreign corporation that controls a Canadian corporation.

    National Security Review

    Where the minister has reasonable grounds to believe that an investment made by a non-Canadian to acquire control of a Canadian business or establishes or acquires a business that carries on its business in Canada could be injurious to national security, a review may occur regardless of whether or not the investment is subject to a net benefit review or notification under the ICA.

    Withholding Taxes and Remittance of Funds

    The Investment Canada Act (ITA) imposes withholding tax at a rate of 25 per cent on the gross amount of certain payments made by a resident of Canada to a non-resident, including management fees, dividends, rents and royalties. This rate may be reduced pursuant to an applicable tax treaty.

    Sensitive Sectors

    While investments made by foreign investors in Canada are subject to notification and review where certain thresholds are met, there are certain sectors that are subject to more rigorous conditions; these are the broadcasting, fishing, telecommunications, and transportation industries.


    A broadcasting license will only be issued to a corporation incorporated in Canada or continued in Canada when

    • The chief executive officer and not fewer than 80% of the directors of the corporation are Canadians; and
    • Canadians own and control at least 80% of the voting shares of the corporation and 80% of its votes.

    If the above conditions are not met, then neither the parent corporation nor its directors may exercise control or have influence over programming decisions. Where the corporation is a subsidiary corporation, the parent corporation must be incorporated or continued in Canada and Canadians must own or control at least 66.66% of its voting shares and 66.66% of its votes.


    Foreign ownership of a telecommunications carrier are subject to the following limitations:

    • The foreign owner cannot own more than 20% of voting shares
    • At least 80% of the directors must be Canadian.
    • Non-Canadians own and control no more than 33.33% of the voting shares of the carrier’s parent corporation.


    In June of 2018, the federal Minister of Transport announced new rules for airline ownership, which increased international ownership limits from 25 to 49 per cent of voting interests for Canadian air carriers, while retaining a 25 per cent limit for specialty air services.

    Raising international ownership limits means that Canadian air carriers, including all-cargo services, have access to more investment capital. The Government of Canada expects this to bring more competition into the Canadian air sector, more choice for Canadians, greater connectivity in underserved regions, and benefits for airports and suppliers, including the creation of new jobs.

    A single international investor (individually or in affiliation) cannot  hold more than 25 per cent of the voting interests of a Canadian air carrier, and no combination of international air carriers can own more than 25 per cent of a Canadian carrier (individually or in affiliation).

    Foreign investments in Canada is beneficial for developing economies, pumping up productivity and worker skills, encouraging technical development, generating better-paying employment and boosting local businesses. While all this is true, the federal government must ultimately protect the interests of Canadians to ensure that these investments have a net benefit for the Canadian economy and Canadian citizens.

    To find out more about foreign investments in Canadian businesses, contact one of our corporate/commercial lawyers at Kalfa Law.

    -Shira Kalfa, BA, JD, Partner and Founder

    Shira Kalfa is the founding partner of Kalfa Law. Shira’s practice is focused in corporate-commercial and tax law including corporate reorganizations, corporate restructuring, mergers and acquisitions, commercial financing, secured lending and transactional law. Shira graduated from York University achieving the highest academic accolade of Summa Cum Laude in 2012. She graduated from Western Law in 2015, with a specialization in business law. Shira is licensed to practice by the Law Society of Ontario. She is also a member of the Ontario Bar Association, the Canadian Tax FoundationWomen’s Law Association of Ontario, and the Toronto Jewish Law Society. 

    © Kalfa Law, 2021

    The above provides information of a general nature only. This does not constitute legal advice. All transactions or circumstances vary, and specified legal advice is required to meet your particular needs. If you have a legal question you should consult with a lawyer.

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