https://gowlingwlg.com/en/insights-resources/guides/2021/doing-business-in-canada-foreign-investments/#pt5

d. Discretionary powers

In addition to reviews that result from the application of the aforementioned rules, the government has other discretionary powers to order a review. For example:

• The government can review any investment that "could be injurious to national security."
• The government can deem that an entity is an SOE in fact, or deem that there has been an acquisition of control.
• With respect to most types of cultural businesses, the government can:
  • Elect to review the acquisition of control of an existing business or the establishment of a new Canadian business within 21 days of receiving the foreign investor's notification
  • Deem a business that carries on, or proposes to carry on, any such business to be non-Canadian on the basis that the business is controlled in fact by one or more non-Canadians

5. Review

Where review is required, the foreign investor must submit an Application for Review and may not complete the proposed investment until the minister of Innovation, Science and Economic Development and/or minister of Canadian Heritage and Multiculturalism, as applicable, has determined it to be of "net benefit to Canada".

In the application, detailed information is required about the foreign investor, the Canadian business and the foreign investor's plans for the Canadian business.

To determine whether the proposed investment is likely to be of net benefit to Canada, the government considers factors such as:

• The effect of the investment on the level and nature of economic activity in Canada, including its effect on employment, resource processing, the utilization of parts, components and services produced in Canada, and exports from Canada
• The degree and significance of participation by Canadians in the business
• The effect on productivity, industrial efficiency, technological development, product innovation and product variety in Canada
• The effect on competition within any industry in Canada
• Compatibility with national industrial, economic and cultural policies
• Its contribution to Canada's ability to compete in world markets

In considering these factors, the minister of Innovation, Science and Economic Development or the minister of Canadian Heritage and Multiculturalism, or both as applicable, will consult with other relevant federal government departments as well as the governments of affected provinces, which are typically provinces in which the Canadian business has assets or employees.

A determination of net benefit to Canada is usually based on undertakings made by the foreign investor in relation to the factors outlined above. Undertakings are legally binding commitments made by a foreign investor that typically remain in effect for three to five years, and are subject to compliance reviews and audits over that time.

In our experience, the government is most concerned with securing undertakings that relate to specific levels of employment in Canada, the inclusion of Canadians in management positions, capital investment in the Canadian business and further development of Canadian-sourced technology in the country. However, the specific focus of the undertakings varies depending on the nature of the business.

a. Timing

The ICA provides the minister of Innovation, Science and Economic Development and/or minister of Canadian Heritage and Multiculturalism, as applicable, with 45 days to determine whether a proposed investment would be of net benefit to Canada, along with a unilateral right to extend the review period by 30 days. Additional extensions require the agreement of the foreign investor - without which the applicable minister would likely reject the investment.

In our experience, it is not uncommon for the review of large and complex transactions with significant political overtones to extend beyond 75 days.

b. Possible outcomes

The government may either approve the proposed investment or reject it. Almost all proposed investments are ultimately approved based on undertakings negotiated between the investor and the government. Only a handful of high-profile and/or politically controversial transactions have been rejected. For transactions that could raise significant political concerns, foreign investors should not underestimate the importance of an effective government relations strategy.

c. Fee

There is no filing fee for either an Application for Review or a Notification.

6. National security

In 2009, the ICA was amended to provide the government with the right to review any investment that "could be injurious to national security." The government subsequently amended the national security provisions several times to provide itself with additional flexibility in relation to national security matters. This right to review applies to minority investments, internal reorganizations and the establishment of new Canadian businesses, not just the acquisition of control of existing Canadian businesses. It can also apply to investments in businesses with tenuous links to Canada, as a review can be ordered if "any part" of the business' operations are in Canada.

There is no minimum investment size below which a review on national security grounds may not be ordered. The national security provision empowers the government to prohibit any proposed investment, impose conditions on its completion, or require divestiture of a completed investment. A national security review can take up to 200 days or longer.

The government did not originally provide any guidance as to the factors that could trigger a national security review or influence its outcome. This degree of opaqueness resulted in significant criticism from stakeholders. Among other things, it made it difficult for potential investors to assess the risk of incurring significant pursuit costs in relation to acquisitions that could ultimately be rejected on national security grounds.

In the summer of 2016, in its annual report on the administration of the ICA the government released, for the first time, some high level information on the use of the national security review powers, including the number of reviews that had been conducted, broken down by year, and their outcomes. The government released similar information in its 2017 annual report. In its 2018 annual report, the government released, for the first time, the country of origin of the applicable foreign investors.

Summarized below are the number of national security reviews that have occurred, their outcomes and the buyer's country of origin, broken down by year, since the national security review powers were added to ICA in 2009.

* One review was pursuant to a court order. Although not specified in the annual report, this would have been the O-Net Communications/ITF Technologies transaction, which was the subject of a great deal of media attention and controversy. The (former Conservative) government ordered Chinese controlled O-Net Communications to divest Montreal based ITF Technologies. O-Net Communications sought judicial review. The (current Liberal) government agreed to do a new review, the result of which was that O-Net Communications was permitted to continue own ITF Technologies subject to non-public conditions.
** The outcome may have occurred in a different fiscal year but relates to a review that commenced in the identified fiscal year.

When considered in the context of all transactions that could have been reviewed under the national security powers, the percentage that have actually been reviewed is negligible, substantially less than 1%. However, if a national security review is conducted, there is a good chance that the result will be catastrophic to the transaction. Twenty-one of the 29 reviews have resulted in the foreign investor not being able to own the target - either the transaction was blocked pre-closing, the parties aborted it during the review, or post-closing divestiture was required. Four reviews resulted in the foreign investor being permitted to own the target Canadian business subject to non-public conditions. Four reviews resulted in a clean termination, with no remedy being imposed and the foreign investor being permitted to own the Canadian business with no conditions. Please note that because O-Net/ITF was reviewed twice, there have been 29 reviews of 28 transactions, and one of the "divestiture required" outcomes set out in the table above was converted to a "non-public conditions imposed" outcome.

In December 2016, the government published Guidelines on the National Security Review of Investments under the Investment Canada Act, which it updated in March 2021.

The most important aspect of the Guidelines is the following non-exhaustive list of factors the government will consider in assessing national security risks:

1. The potential effects of the investment on Canada's defence capabilities and interests;
2. The potential effects of the investment on the transfer of sensitive technology or know-how outside of Canada, including consideration of whether the investment provides access to information not in the public domain related to the research, design or manufacture of sensitive technologies. Sensitive technology areas include those that have military, intelligence or dual military/civilian applications. Such technologies may be developed in multiple fields, including, but not limited to those listed at Annex A of the Guidelines, which may be updated periodically;
3. Involvement in the research, manufacture or sale of goods/technology identified in section 35 of the Defence Production Act;
4. The potential impact of the investment on the supply of critical goods and services to Canadians, or the supply of goods and services to the Government of Canada;
5. The potential impact of the investment on critical minerals and critical mineral supply chains. For more information, please consult the Government of Canada's Critical Minerals List;
6. The potential impact of the investment on the security of Canada's critical infrastructure. Critical infrastructure refers to processes, systems, facilities, technologies, networks, assets and services essential to the health, safety, security or economic well-being of Canadians and the effective functioning of government. For more information on Canada's critical infrastructure, see National Strategy for Critical Infrastructure and Action Plan for Critical Infrastructure;
7. The potential of the investment to enable foreign surveillance or espionage;
8. The potential of the investment to hinder current or future intelligence or law enforcement operations;
9. The potential impact of the investment on Canada's international interests, including foreign relationships;
10. The potential of the investment to involve or facilitate the activities of illicit actors, such as terrorists, terrorist organizations, organized crime or corrupt foreign officials; and
11. The potential of the investment to enable access to sensitive personal data that could be leveraged to harm Canadian national security through its exploitation, including, but not limited to:
    1. Personally identifiable health or genetic (e.g., health conditions or genetic test results);
    2. Biometric (e.g., fingerprints);
    3. Financial (e.g., confidential account information, including expenditures and debt);
    4. Communications (e.g., private communications);
    5. Geolocation; or,
    6. Personal data concerning government officials; including members of the military or intelligence community.

The Guidelines strongly encourage investors, particularly where they are state-owned or subject to state-influence, or in cases where the factors set out above may be present, to file their notification form at least 45 days before the planned closing date for the investment. The rationale behind this is that the government has 45 days from receiving a notification form to decide whether to do a national security review. While it is permissible to file a notification form up to 30 days after closing of the investment, the advantage of filing more than 45 days before closing is that doing so allows the investor to close the investment with certainty in relation to the national security review provisions - in effect, if the government has not initiated a national security review within 45 days then the investor can close the investment knowing that it will not subsequently face a potential divestiture order on national security grounds......

TM.