Government of Canada to Overhaul National Security Rules of the Investment Canada Act

The Government of Canada has introduced amendments to the Investment Canada Act (ICA) that propose to enhance the government’s ability to review, block or modify foreign investments in Canada on the basis of national security.

New Pre-Notification of Foreign Investments in Sensitive Sectors

The amendments propose a new regime of mandatory pre-notification of foreign investments in Canadians businesses that participate in certain sectors and activities, regardless of their size. Closing of transactions subject to mandatory pre-notification would be prohibited for at least 45 days. The obligation to pre-notify applies to minority non-controlling investments if certain conditions are met. We expect the pre-notification rules to come into force no earlier than mid-2023.

The Canadian government has not yet specified which sectors and activities will be subject to pre-notification, but based on prior guidance, we expect these to include: critical minerals (e.g., lithium), access to personal data of Canadians, and “sensitive technology areas” such as artificial intelligence, quantum sciences, advanced weapons, energy storage and generation technology, and medical technology (including vaccines).

Minority (non-controlling) investments in specified sectors will be subject to mandatory pre-notification if their investment allows them access to sensitive information and assets, and if they have special minority investor rights such as the right to nominate or appoint directors.

The proposed changes are similar to existing rules in the United States relating to “covered transactions” that require pre-notification to the Committee on Foreign Investment in the United States (CFIUS) that were expanded under the US Foreign Investment Risk Review Modernization Act (FIRRMA) in 2018.

Government’s Enforcement Powers Bolstered

The amendments propose further measures that expand the government’s national security enforcement powers, including:

• Sweeping powers to impose interim conditions and extend reviews. The Canadian government will have the unilateral ability to impose interim conditions to both unconsummated transactions and closed transactions if the government believes it is necessary to prevent injury to national security.
• Coordination with foreign allies. The Canadian government will have express discretion to communicate confidential information obtained from an investor with the agencies of foreign governments responsible for national security reviews of investments. This formalizes, and provides greater discretion for, cooperation that the Canadian security services already undertake with agencies in allied jurisdictions (e.g., CFIUS in the United States).
• New and expanded penalties. The amendments permit a court to impose a monetary fine for failing to notify, and increase the limits that can be imposed for other contraventions of the ICA. The new penalty for failing to file is up to CAD $500,000 or another amount that the government can prescribe by regulation.
• New limits on court appeals. Presently, there are few avenues available to bring court challenges to Canadian government decisions in respect of ICA national security orders. The amendments propose to further limit any challenges by allowing the government, with court authorization, to withhold from disclosure in litigation evidence and information that could injure Canada’s international relations, national defence or national security. Under this process, investors and their lawyers would receive only summaries of the withheld information.

Looking Forward

The proposed amendments do not single out any country. However, consistent with policy trends in Canada and among its close foreign partners, we anticipate enforcement will continue to focus on investors from (or with ties to) countries with which Canada is not aligned, and, in particular, Russia and China. For greater context:

• On March 8, 2022, in response to Russia’s invasion of Ukraine, Canada announced a new policy to apply the ICA in a manner that puts greater scrutiny on investors owned or influenced by the Russian state.
• On October 28, 2022, Canada announced a new policy to apply the ICA in manner that restricts the ability of certain state-owned enterprises to invest in Canadian businesses participating in the critical minerals sector. Days later, the Government ordered three Chinese companies to divest their recently acquired interests in Canadian lithium mining businesses (including Canadian public companies whose lithium mining assets are exclusively located outside of Canada).
• On November 27, 2022, Canada released a new Indo-Pacific Strategy that identifies certain national security challenges posed by China, and proposes the use and strengthening of the ICA to defend Canada’s interests.

For further information on these proposed amendments, please contact any member of our Competition and Foreign Investment Group.