The 2018/19 Annual Report on the administration of the Investment Canada Act (Act) recently issued by the Act’s Director of Investments records a considerable increase in filings under the Act by non-Canadians establishing new businesses in Canada.
During the 4 prior years, the Investment Review Division received, on average, 175 new business filings a year. However, the 2018/19 Annual Report records 255 new business filings, a 45% increase over the prior 4 year average.
The increase in new business filings could be reflective of an increase in the attractiveness of Canada as a place for foreigners to start new businesses. While not discounting the fact that Canada welcomes new investment, another reason for the increase in filings could be foreign investor concerns that their new business activities could attract the attention of Canada’s security agencies under the national security review provisions of the Act.
The Act requires that every non-Canadian who is proposing to or has established a new business in Canada that is either (i) unrelated to any other existing business carried on in Canada by the non-Canadian; or (ii) involves an activity that is related to Canada’s “cultural heritage or national identity” must give notice of that investment to the Canadian government either before or within 30 days of the establishment of that new Canadian business.
A new “Canadian business” has three elements: (i) it must have a place of business in Canada; (ii) it must have an individual or individuals in Canada who are employed or self-employed in connection with the business; and (iii) it must have assets in Canada used in carrying on the business. A new Canadian business is considered to be established at the time that all three required elements are satisfied and a new business notification must be filed with the Director of Investments no later than 30 days from that date.
In the past, some foreign investors and their advisors may not have been aware of this obligation and therefore, did not make the required filings. The fact that the Act has no penalty for the failure to make a filing may have also contributed, in part, to some compliance laxity.
However, the power of the government to launch national security investigations with respect to the business activities of non-Canadians coupled with the right to order non-Canadians to divest of investments posing national security risks to Canada, creates an additional level of risk for foreign investors. It may be that, in an effort to better manage that risk, non-Canadian investors are choosing to have their proposed new business investments cleared by the Investment Review Division well in advance of the establishment of such businesses in Canada.
Under the Act, Canada has, following its receipt of a notification, an initial 45 day period during which to decide whether to initiate a further and potentially more formal national security review of a proposed investment. During this initial period, the security agencies and the other relevant investigative bodies, including Innovation, Science and Economic Development Canada, assess information and intelligence related to the business being established, the terms of the investment and the foreign investor. The Canadian government may also consult with its allies. Lastly, the non-Canadian investor may be required to provide information considered necessary by the government for the purposes of its review. At the completion of the initial review, the Minister may make a decision not to take any further action or, alternatively, may choose to continue with the national security review process prescribed under the Act.
While only a relatively small number of investments are subjected to the more intensive national security review process, a formal national security review can have disastrous consequences for a non-Canadian’s new business planning and implementation. For this reason, we recommend filing new business notices as early as possible in the planning process and before any irreversible business commitments are made.