Investing In... 2024 Comparisons

Canada is a federal state in which legislative and executive jurisdiction is constitutionally divided between the federal government and the ten provincial governments. There are also three territorial governments to which legislative authority can be delegated by the federal government. The federal government has exclusive jurisdiction over some matters; others are reserved for the provincial governments. In other areas, however, both levels of government may regulate different aspects of a particular activity. In addition, provincial governments delegate certain powers to local governments. A business may therefore be regulated at three levels: federal, provincial and local.

Most general commercial law of concern for businesses is provincial law. There is considerable consistency between most of such provincial laws across Canada. However, key regulatory laws, such as competition law and foreign investment law, fall under federal jurisdiction. Both the federal and provincial (or territorial) levels of government have the constitutional authority to levy income and sales taxes.

In practice, all the provinces, except Québec, are common law jurisdictions, which derive their legal systems from British common law. Québec is a mixed common law/civil law jurisdiction in which private law matters, such as contracts and property, are governed by a civil code. Although Québec civil law is historically derived from France, today, it is strongly influenced by Canada’s North American location and orientation.

Investments by non-Canadians in existing Canadian businesses, or to establish a new business in Canada, are subject to the federal Investment Canada Act (ICA). The Foreign Investment Review and Economic Security (FIRES) branch of Innovation, Science and Economic Development Canada (ISED) is responsible for administering the ICA in respect of non-cultural investments by non-Canadians. Investments in cultural businesses are reviewed under the ICA by the Department of Canadian Heritage. The Department of Public Safety and Emergency Preparedness Public Safety Canada is also involved in national security reviews.

There are two aspects to review under the ICA: net benefit and national security. The “net benefit” review process requires a non-Canadian investor to apply for government approval for any acquisition of control of a Canadian business that exceeds prescribed thresholds. If the thresholds are not met, the investor is only obliged to file a notification either before or within 30 days after closing. A similar notification obligation applies when a foreign investor establishes a new business in Canada. Legislative amendments expected to be passed in early 2024 will mandate pre-closing notifications for certain investments in to-be-prescribed sectors. The “national security” review process applies more broadly, including to foreign investments that are not subject to the net benefit process, such as acquisitions of minority interests in Canadian businesses. The ICA authorises the Canadian government to intervene against any investment that it finds would be “injurious” to Canadian national security.

Finally, other statutes provide for specific restrictions on foreign ownership applicable to certain industries, such as airlines (Canada Transportation Act), telecommunications (Telecommunications Act), broadcasting (Broadcasting Act) and banks (Bank Act).

The most significant recent development affecting foreign investment review is the Canadian government’s shift towards a more stringent application of the ICA’s national security review provisions, at least where the investor is a state-owned enterprise (SOE) from certain jurisdictions.

In March 2022, the government issued a policy regarding Russian investments in Canada in response to Russia’s invasion of Ukraine. This policy states that investments from Russia (whether or not connected to the Russian state) that are subject to net benefit review under the ICA will be approved only on “an exceptional basis”, and that all investments that have “ties, direct or indirect, to an individual or entity associated with, controlled by or subject to influence by the Russian state” will provide grounds for a full and formal national security review under the ICA.

In October 2022, the government issued a policy regarding investments by SOEs in Canada’s critical minerals sector. The policy states that foreign SOEs and private investors subject to foreign state influence investing in Canadian critical minerals businesses will be able to obtain net benefit approval only “on an exceptional basis”, and that they can expect to face a full national security review for any such investments.

In December 2022, the government proposed amendments to the ICA’s national security provisions, including the following:

• a new pre-closing filing regime applicable to foreign investors in sensitive sectors (not yet defined), including certain minority investments – investors would be prohibited from closing until the prescribed review time frames lapse or are terminated and those who fail to comply with the pre-closing filing obligation would be subject to a penalty of up to CAD500,000;
• enhanced ministerial powers, including new powers to (i) agree on binding undertakings with an investor without the requirement for federal Cabinet approval and (ii) unilaterally impose interim conditions on a non-Canadian investor during a national security review process;
• expanded jurisdictional boundaries for the national security review regime;
• updated penalties for non-compliance including maximum monetary penalties per day of non-compliance being increased to CAD25,000;
• a more permissive approach to sharing information about national security reviews with international counterparts; and
• new rules to shield detailed sensitive information about national security reviews from being disclosed in judicial proceedings.

These amendments, which are expected to be adopted in early 2024, also provide the federal Cabinet with the power to call in a notifiable investment for net benefit review where the investor is an SOE from a country without a trade agreement with Canada.

Acquisitions of public companies in Canada usually take the following forms.

Takeover Bid

This is an offer made by the acquirer to the shareholders. The offeror may not take up shares deposited under the takeover bid if 50% or less of the outstanding shares (excluding shares held by the offeror and any person acting jointly or in concert with it) have been deposited. If 90% or more of the outstanding shares have been tendered, the offeror may “force out” the remaining shareholders. If less than 90% but more than 66⅔% of the outstanding shares have been tendered, the offeror may proceed to a second-step amalgamation with the target to squeeze out the remaining shareholders, requiring 66⅔% shareholder approval including the shares acquired by the offeror under bid. The remaining shareholders are entitled to the same price paid under the takeover bid subject to the exercise of dissent rights.   

Arrangement or Amalgamation

An arrangement is a flexible statutory procedure, that is very common in negotiated deals in Canada. An amalgamation is a statutory combination or “merger” of two or more corporate entities. Both require approval by the shareholders of the target (typically 66⅔%) and arrangements also require court approval.

Acquisitions can occur on a negotiated (friendly) basis or unsolicited (hostile) basis, in which case, a takeover bid is generally the only practical structure.

Acquisitions of private companies are typically done through shares, assets or hybrid deals. From a tax perspective, the seller will prefer a share deal (capital gains treatment) and the buyer, an asset deal (to “step-up” the tax base of certain assets). An asset deal allows the parties to choose the assets that will be acquired or the liabilities to be assumed, while in a share deal, the buyer inherits all assets and liabilities of the target. Third-party consents for contracts or permits are often less onerous to obtain in a share deal. Some government permits may not be transferable in an asset deal. Private acquisitions may also be structured as amalgamations or plans of arrangement, which may be appropriate where there are a large number of shareholders or option holders.

Minority investments can take the form of convertible debt, preferred or common shares and can be combined with a shareholders’ agreement providing for comprehensive minority rights.

Among other regulatory reviews/approvals that may be required in domestic M&A transactions are the following:

• Competition Act (CA) – the CA establishes a framework for merger review (see 6. Antitrust/Competition).
• Other – mergers within certain industries may also be subject to public interest reviews (see 1. Legal System and Regulatory Framework).

The main sources of corporate governance requirements include corporate statutes, which impose a:

• duty to manage the business and affairs of the corporation;
• fiduciary duty to act honestly and in good faith with a view to the best interests of the corporation; and
• duty to exercise care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.

These statutes also include rules regarding the composition of the board (numbers, qualifications and residency), voting rules, remuneration, other duties and liabilities. Additionally, for private companies, shareholders may limit the powers of directors and transfer them to themselves through a unanimous shareholder agreement.

For public companies, further rules and guidelines are found in securities legislation and stock exchange rules, including director independence, board diversity, composition of committees, board effectiveness, nominating directors and executive compensation. Corporate governance practices are also influenced by guidelines issued by shareholder advocacy groups and proxy advisory services.

There are also several forms of business organisations in Canada:

• Corporation – this is the most common form of business organisation in Canada; a corporation has a legal personality distinct from its shareholders and management.
• Partnership – this is a relationship between persons carrying on business in common with a view to profit; the partners may be individuals, corporations or other partnerships and a partnership is not regarded as a separate legal entity from its partners.
• Trust – trusts are not frequently used as business vehicles other than for real estate ventures.

Shareholders’ rights under corporate statutes include:

• access to books and records;
• attendance and voting at shareholder meetings;
• subject to the number of shareholdings, the making of proposals at meetings or the requisitioning of meetings; and
• for certain types of transactions, either a higher percentage of approval (66⅔%), class votes, votes of non-voting shares and, for squeeze-out transactions by private companies, the exclusion of voting rights for affiliates of the corporation and the shareholders that would, following the squeeze-out transaction, be entitled to consideration of greater value, or to superior rights or privileges than those available to other shareholders of the same class.

For public companies, Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions provides protection to minority investors when the transactions below are proposed and a significant shareholder has an advantage by virtue of voting power, board representation or increased access to information:

• Insider bids – takeover bid by the holder of shares carrying more than 10% of voting rights or by directors or officers.
• Issuer bids – acquisition by the issuer of its own securities.
• Business combinations – transaction whereby the holder of equity security can be required to sell its shares, regardless of whether the equity security is replaced by another security, but only if the transaction involves a related party of the issuer that is acquiring the issuer, is not treated identically or receives consideration of greater value than other holders.
• Related party transactions – transaction between the issuer and a significant shareholder or other related party, such as a holder that has the ability to materially affect control of the issuer and a holder of securities carrying more than 10% of voting rights.

Minority shareholder protections include independent valuation, minority shareholder approval, enhanced disclosure and special committee of independent directors.

Key disclosure obligations for public companies include the below.

Early Warning Reporting Requirements

Purchasers of equity or voting securities representing 10% or more of a class (together with securities beneficially owned by the purchaser and its joint actors) must issue a press release no later than opening of trading on the business day following acquisition, and file an “early warning” report within two business days. The purchaser and its joint actors are prohibited from making additional acquisitions of shares until the expiry of one business day from the date the early warning report is filed, unless the purchaser and its joint actors beneficially own 20% or more of the class of securities. The disclosure requirement threshold is reduced to 5% when a takeover bid by another party or issuer bid is outstanding, but the restriction on acquisitions until after the report is filed does not apply. Changes in material facts in the report or increases or decreases in ownership equal to 2% of outstanding shares require the purchaser to “promptly” issue a further press release and file a report. Shareholders are also required to report when they have fallen below a 10% threshold.

Insider Reporting Requirements

Purchasers of more than 10% of voting securities, including securities issuable on exercise of conversion or purchase rights or obligations, within 60 days, must file an initial insider report within ten days. An insider must make a report within five days of (i) any change in ownership of securities of the company or related financial instruments or (ii) any material amendment or termination of agreement, arrangement or understanding required to be disclosed. Directors, CEOs, CFOs and COOs and certain other insiders of the purchaser also become reporting insiders and must file insider reports that include transactions that occurred during the prior six-month period in which they held such positions. Exemptions are available for directors and officers of the purchaser who do not, in the ordinary course, receive or have access to information about material facts and material changes of the company and are not otherwise insiders.

Corporations may raise capital in several ways, the most common of which are equity financing and debt financing. Debt financing may be provided to private or public corporations by shareholders, third parties (such as banks, trust and loan companies and life insurance companies), or by offering debt securities in capital markets. Corporations may also issue equity securities or raise capital through private equity funds or venture capital.

In Canada, securities regulation is within provincial jurisdiction. Regulation across the country is generally similar, as provincial and territorial securities regulators co-ordinate regulation through Canadian Securities Administrators (CSA) (an umbrella organisation). The CSA formulates national or multilateral instruments and policies, which each province and territory then adopts. CSA proposals often respond to US Securities and Exchange Commission (SEC) proposals, rendering Canadian securities legislation broadly comparable to that of the United States.

Generally, in each Canadian jurisdiction, a distribution of debt or equity securities is qualified by a prospectus that is cleared by securities regulatory authorities unless an exemption from requirement is available, including:

• the accredited investor exemption, available to certain qualified institutional investors and persons or companies that meet income or asset tests, including foreign investors;
• the substantial purchase exemption, available to a person (other than an individual) who invests CAD150,000 or more in cash; and
• the private issuer exemption, for private issuers selling securities to groups familiar with the issuer (eg, directors, officers and employees).

Misrepresentations in either prospectus or voluntary disclosure documents may create a right of action or right of rescission. Resale restrictions may apply for securities issued pursuant to an exemption.

Canadian securities legislation requires continuous disclosure of any material changes in affairs of reporting issuers and includes provisions relating to insider trading and takeover bids. Foreign issuers that are reporting issuers in Canada may, under certain conditions, meet their continuous disclosure obligations in Canada by complying with their national requirements. The multijurisdictional disclosure system (MJDS) allows for eligible Canadian and US issuers to publicly offer securities in neighbouring countries, largely in accordance with offering and reporting rules of the home country.

The principal stock exchanges in Canada are the Toronto Stock Exchange (securities of larger, more established companies) and the TSX Venture Exchange (venture capital market). Other exchanges include the Canadian Securities Exchange (microcap and emerging companies), the NEO Exchange, the Montréal Exchange (derivatives) and the Montréal Climate Exchange (green products). While each exchange offers alternative methods for listing, the most common type of new listing is in connection with initial public offerings for which a prospectus has been filed with Canadian securities regulators. Once listed, a company must continue to comply with the exchange’s ongoing requirements including obtaining exchange approval prior to effecting certain share issuances or other changes in the company’s capital structure.

Investment funds established and operated by foreign investors are subject to review by securities regulatory authorities in provinces or territories in which the fund is sold. Exemptions that normally apply specifically to foreign issuers do not apply to investment funds, but certain transactions do qualify for prospectus exemptions:

• distributions under investment fund reinvestment;
• securities traded under additional investment in investment funds; and
• securities distributed under private investment clubs and private investment funds.

Canada has a merger control regime which is contained in the CA and administered by the Competition Bureau (the “Bureau”), which is part of ISED. The head of the Bureau is the Commissioner of Competition (the “Commissioner”), who has the statutory responsibility for administering and enforcing the CA.

All “mergers” are potentially subject to substantive review under the CA to determine if they are likely to result in a substantial prevention or lessening of competition (“merger” is defined in the CA as the acquisition or establishment, direct or indirect, of control over, or a significant interest in, all or part of a business of a competitor, supplier, customer or other person). In addition, mergers exceeding certain thresholds are subject to pre-merger notification.

The substantive and pre-merger notification regimes operate independently. A transaction may be subject to review even if not notifiable and a transaction may be notifiable even if it does not raise any substantive concerns.

As part of the government’s review and reform of the CA, amendments were passed in 2022 and 2023 that affected both the pre-closing notification requirements and the substantive review process. Further such amendments are expected to be implemented in 2024.

Notification

Subject to certain exceptions, a merger will be subject to mandatory pre-closing notification if applicable thresholds are met. These thresholds generally provide that notification is required if:

• the target is, or controls, an “operating business” in Canada – ie, a business undertaking to which employees ordinarily report for work;
• the target had either Canadian assets or annual gross revenues from sales in or from Canada exceeding a certain value in its most recent fiscal year (this threshold was CAD93 million in 2023 and is revised annually);
• the parties to the merger, together with their affiliates, had total assets in Canada or total annual gross revenues from sales in, from or into Canada exceeding CAD400 million in the most recent fiscal year; and
• in the case of share acquisitions, the buyer is acquiring more than 20% of the target’s voting shares if the latter is a public corporation, or more than 35% of its voting shares if the target is a private company (or, for both, more than 50% if these thresholds are already satisfied).

The CA was amended in 2022 to introduce an anti-avoidance provision to the pre-merger notification regime. If a transaction is deemed by the Bureau/Commissioner to be designed to avoid the application of the pre-merger notification requirements, these notification requirements apply nonetheless to the substance of the transaction. The CA is expected to be amended in early 2024 such that revenues from sales into Canada generated by foreign assets will count towards the target size (or “size of transaction”) calculation. Until such amendments are implemented, only revenues from sales in or from Canada generated by Canadian assets are included in this threshold calculation.

Parties to a notifiable merger cannot complete the transaction before the expiry or waiver/termination of the statutory waiting period. This waiting period expires 30 days after the pre-merger notification filing is certified as complete unless, prior to the end of that 30-day period, the Commissioner issues a “supplementary information request” (SIR) to the merging parties for production of documents and/or responses to questions. If such a request is issued, a new waiting period is triggered and expires 30 days after compliance with the request.

Additionally, the Bureau has adopted the following non-binding service standards reflecting the time in which it aims to complete reviews of mergers:

• 14 calendar days for “non-complex” mergers – ie, transactions where there are no competition issues, such as where there is no or minimal overlap between the parties. Most notifiable transactions reviewed under the CA fall into this category.
• 45 calendar days for “complex” mergers – ie, transactions that require more in-depth investigation to determine if they are likely to raise competition issues. If a SIR is issued, the service standard is extended to 30 calendar days from when the Commissioner receives a complete response to the request from all parties.

The Commissioner may terminate or waive the waiting period (including the initial 30-day waiting period) at any time by issuing an advance ruling certificate (ARC) or no-action letter indicating that the Commissioner does not intend to challenge the merger/transaction.

The Bureau will assess all notifiable transactions – and may assess non-notifiable transactions – to determine if they are likely to prevent or lessen competition substantially in a relevant market in Canada, which is generally equated with the ability to raise prices or reduce quality. In making this assessment, the Commissioner generally reviews factors such as the post-merger market share of the merged entity, the strength of remaining competition, and barriers to entry. The Bureau may also have regard to additional factors such as network effects, quality, consumer choice and consumer privacy in its review of a transaction. Further to proposals to amend the CA introduced in November 2023, more factors such as the transaction’s impact on labour markets are expected to be added to this list of permitted considerations.

Prior to recent amendments, it was possible to raise an “efficiencies” defence under which a merger with anti-competitive effects was permitted to proceed if efficiency gains from the merger were greater than, and offset, its anticompetitive effects. This defence has now been repealed, and it remains to be seen to what extent efficiencies brought about by a merger will be a relevant factor in determining whether the merger prevents or lessens competition substantially.

Merger challenges are adjudicated by the Competition Tribunal (the “Tribunal”), on application by the Commissioner. There is no private right of action to challenge mergers in Canada.

The Tribunal may order the transaction (or any part thereof) not to proceed in the case of a proposed merger. Where the merger has been completed, the Tribunal may order the merger dissolved or the disposition of assets or shares. Where the parties consent, the Tribunal may also order any other action it deems necessary.

In practice, most mergers that raise concerns in Canada are resolved by way of settlement (a “consent agreement”) between the Commissioner and the acquiring party, and will involve a structural remedy – ie, the divestiture of the problematic business that creates the competition issue. The Commissioner has a very poor track record of success in litigating merger challenges.

As noted in 6.3 Remedies and Commitments, the Commissioner can block a merger that they believe is anticompetitive, either before or after closing (they have one year after closing to bring a challenge for mergers that were notified to the Commissioner and three years after closing to bring a challenge for non-notified mergers). In addition, the Commissioner can seek interim relief to delay closing in situations where the waiting period has expired, but the Commissioner has not yet completed its review.

There are two review processes under the ICA:

• net benefit, which obliges a foreign investor to apply for government approval for any acquisition of control of a Canadian business that exceeds certain thresholds; and
• national security, which allows the government to review all foreign investments in Canadian businesses to determine if they could be “injurious” to Canadian national security.

Net Benefit

The net benefit regime applies to acquisitions of control by a non-Canadian of a Canadian business. It is administered by the FIRES branch in respect of non-cultural investments and by the Department of Canadian Heritage in respect of cultural investments.

For these purposes:

• Control can be acquired through the acquisition of (i) voting shares of a corporation (generally a majority with a rebuttable presumption of control if between ⅓ and 50% of the voting shares are acquired), (ii) “voting interests” of a non-corporate entity (generally a majority), or (iii) all or substantially all of the assets of a Canadian business. The acquisition of shares of a non-Canadian company with a Canadian division, but no Canadian subsidiaries, is not an acquisition of control of a Canadian business within the meaning of the ICA.
• “Canadian business” means any undertaking or enterprise capable of generating revenue and carried on in anticipation of profit that has (i) a place of business in Canada, (ii) individual(s) in Canada who are employed or self-employed in connection with the business, and (iii) assets in Canada used in carrying on the business. The ICA applies even if the Canadian business being acquired is not Canadian-controlled.

In general, acquisitions of control will be subject to review under the ICA if they exceed the prescribed thresholds which vary with the following factors:

• Is the foreign investor or the Canadian business being acquired ultimately controlled by an individual or entity from a country (i) with which Canada has a trade agreement (trade agreement investor) or (ii) that is a member of the World Trade Organization (WTO) (a “WTO investor”)?
• Is the acquisition of control direct or indirect?
• Is the foreign investor an SOE?
• Is the Canadian business a “cultural business”?

Applying these considerations, the review thresholds for 2023 are as follows:

• CAD1.931 billion in enterprise value for investments to directly acquire control of a Canadian business by trade agreement investors that are not SOEs and by non-trade agreement investors that are not SOEs where the Canadian business that is the subject of the investment is, immediately prior to the implementation of the investment, “controlled by a trade agreement investor” and is not a cultural business.
• CAD1.287 billion in enterprise value for investments to directly acquire control of a Canadian business by WTO investors that are not SOEs and by non-WTO investors that are not SOEs where the Canadian business that is the subject of the investment is, immediately prior to the implementation of the investment, “controlled by a WTO investor” and is not a cultural business.
• CAD512 million in asset value for investments to directly acquire control of a Canadian business by WTO investors that are SOEs and non-WTO investors that are SOEs where the Canadian business that is the subject of the investment is, immediately prior to the implementation of the investment, “controlled by a WTO investor” and is not a cultural business.
• CAD5 million in asset value for investments to directly acquire control of a Canadian business by a non-WTO investor where the Canadian business that is the subject of the investment is not controlled by a trade agreement investor or a WTO investor.
• CAD5 million in asset value for investments by any investor to directly acquire control of a Canadian cultural business.
• CAD50 million in asset value for investments by non-WTO investors to indirectly acquire control of a Canadian business, unless the value of the assets of the Canadian business accounts for more than 50% of the value of all businesses acquired, in which case a CAD5 million threshold applies.
• CAD50 million in asset value for indirect investments by any investor to acquire control of a Canadian cultural business, unless the value of the assets of the Canadian business accounts for more than 50% of the value of all businesses acquired, in which case a CAD5 million threshold applies.
• Indirect acquisitions of control of Canadian non-cultural businesses by or from WTO investors are not subject to review at all.

Upcoming amendments to the ICA are expected to provide the federal cabinet with the power to call in, for net benefit review, acquisitions of control that fall below the applicable mandatory review threshold where the investor is an SOE from a country without a trade agreement with Canada. This “call in” power already exists for investments by any non-Canadian investor in a cultural business.

Investors that are subject to net benefit review must file an application for review setting out prescribed information, the most important of which consists of how they plan to generate a net benefit in accordance with the criteria set out in the ICA.

In the case of direct acquisitions, the application for review must be filed pre-closing and the investor cannot proceed with the transaction until approval is received. Applications for review involving indirect acquisitions may be filed pre-closing or up to 30 days following closing.

Net benefit reviews are generally completed between 75 to 105 days following certification of the application for review as complete.

Notifications

If the relevant thresholds for net benefit review are not exceeded, the foreign investor is only required to submit a straightforward notification advising the government of the acquisition of control. This notification must be filed at any time prior to 30 days following closing.

Investments to establish new Canadian businesses are also subject to the notification requirement.

Legislative amendments expected to be passed in early 2024 will also mandate pre-closing notifications for certain investments in to-be-prescribed sectors.

National Security

The ICA also authorises the Canadian government to investigate if foreign investments are potentially injurious to Canadian national security interests. There are no thresholds for the national security review process. The Canadian government can review all foreign acquisitions of an interest in a Canadian “entity”, regardless of the interest acquired or the value of the investment. The establishment of a new Canadian business is also potentially subject to national security review.

The national security review process is administered by the FIRES branch in conjunction with Public Safety Canada.

In cases where a filing must be made pursuant to the ICA’s net benefit review process, whether an application for net benefit review or a notification, it is the filing of these materials that triggers the national security review process. In cases where the investment is not caught by the net benefit review regime (eg, minority investments), foreign investors may voluntarily file a notification in order to trigger the national security review process. Investors that do not utilise this option face the risk of a national security review being commenced at any time within five years of closing.

Regardless of which type of filing is involved, the government has 45 days from the date that the filing is certified as complete to decide if it will initiate a national security review. If the government has not reached a decision within this time frame, it will send the investor a notice that an order for the review of the investment may be made and that the not yet implemented investment cannot proceed for another 45 days, within which time the government must decide whether or not to initiate a review.

If the government decides to initiate a review (whether after 45 days or 90 days), the process can take up to an additional 120 days to complete, subject to further extension. On average, national security reviews have taken between 210 to 220 days to complete.

Net Benefit

The relevant considerations for the assessment of an acquisition subject to ICA’s net benefit review include:

• the effect of the acquisition on the level and nature of economic activity in Canada (including employment in Canada);
• the degree and significance of participation by Canadians in the Canadian business in particular and in the relevant industry in general;
• the effect of the investment on productivity, industrial efficiency, technological development, product innovation and product variety in Canada, including, pursuant to amendments anticipated to be implemented in 2024, the effect of the investment on any rights relating to intellectual property whose development has been funded, in whole or in part, by the government of Canada;
• the effect of the investment on competition in the relevant industry or industries in Canada;
• the compatibility of the investment with Canadian industrial, economic and cultural policies, taking into account the policy objectives of affected provinces, and, if and when the expected amendments are implemented, the effect of the investment on the use and protection of personal information about Canadians; and
• the effect of the investment on Canada’s ability to compete in world markets.

When the acquirer is a foreign SOE, ICA guidelines state that the net benefit review will focus particularly on whether the acquirer adheres to Canadian standards of corporate governance and whether the Canadian business will continue to operate on a commercial basis.

National Security

Although the national security review process is generally characterised by a lack of transparency, guidelines published by the government provide some insight into the types of investments that are likely to raise issues. These include, for example, investments involving the defence sector, critical infrastructure, supply of critical goods and services to the Canadian government, sensitive personal data and critical minerals. The jurisdiction of the ultimate controller of the non-Canadian investor is also a key factor in identifying investments that pose a greater risk of being subject to national security review. In the 2022–2023 period, for example, Chinese investments accounted for 16 of the 22 investments subjected to a formal national security review.

In addition, the government has issued several policy statements indicating that certain types of investments will be regarded with particular concern, including foreign SOE investments (especially in critical minerals), foreign investments affecting the Canadian public health sector, and investments that have “ties, direct or indirect, to an individual or entity associated with, controlled by or subject to influence by the Russian state”.

Net Benefit

Under the net benefit review process, the government usually requires undertakings from the acquirer as a condition for approval. Typical undertakings relate to maintaining employment levels in Canada, guaranteeing participation of Canadians as directors and in management, making capital expenditures or investing in research and development in Canada.

National Security

If the government is satisfied following the review that the investment would be injurious to national security, the federal Cabinet is authorised to take any measures that it considers advisable to protect national security, including imposing conditions on the investment or the outright prohibition of a proposed investment, or divestiture in the case of a completed investment. Pursuant to anticipated 2024 amendments, the Minister of Innovation, Science and Industry will be authorised to agree on binding undertakings with an investor without the requirement for federal Cabinet approval.

Net Benefit

Where an acquisition is subject to net benefit review, it may not be completed unless the government is satisfied that the acquisition is likely to be of “net benefit” to Canada. Investments are rarely refused approval under the net benefit test — there have been only two refusals in respect of non-cultural investments since the ICA was enacted in 1985. As a result of increases in the relevant thresholds, net benefit reviews are also relatively infrequent.

National Security

The federal government has exercised its powers on numerous occasions to intervene against foreign investments on national security grounds. This has involved prohibiting transactions from proceeding, ordering investments to be divested and imposing conditions for approval. Indeed, it was rare until very recently for the government to approve any investment that was subject to national security review. Given this track record, it is also common for investors to abandon transactions once advised that a national security review will be commenced.

Foreign Ownership Restrictions on Real Estate

The Prohibition on the Purchase of Residential Property by Non-Canadians Act (Act) and associated regulations (the Regulations) prohibit non-Canadians (including corporations that are incorporated in Canada but are “controlled” by non-Canadians) from purchasing (directly or indirectly) residential property in Canada. This was initially set for a period of two years starting on 1 January 2023 and according to a recent announcement by the Canadian minister of France, will be extended until 23 January 2027. This prohibition, however, does not apply if the non-Canadian became liable or assumed liability under an agreement of purchase and sale of the residential property before 1 January 2023.

Amendments to the Regulations aimed at limiting the scope of the prohibition and providing more deal certainty for the commercial real estate industry came into force in March 2023. The key changes introduced by the amendments include:

• an exemption from the prohibition for land that does not contain a habitable dwelling, such as vacant land zoned for mixed use or residential use;
• an exemption for all entities formed and publicly traded in Canada, including REITs;
• an increase to the threshold for foreign control from 3% to 10% for non-publicly listed Canadian entities;
• the introduction of an exception for development purposes; and
• the relaxation of the criteria for temporary residents holding a work permit.

Some provinces (Ontario and British Columbia) have also adopted rules governing foreign ownership of real estate that impose additional taxes on the purchase of residential property by foreign nationals and corporations.

Anti-corruption and Sanctions Regimes

Canada has anti-corruption legislation prohibiting foreign and domestic bribery of public officials.

The Corruption of Foreign Public Officials Act (CFPOA) prohibits anyone from giving or offering a loan, reward, advantage or benefit of any kind to a foreign public official to obtain a business advantage and as consideration for an act or omission by the official. The CFPOA expressly applies to conduct outside Canada by Canadian citizens and Canadian incorporated entities. Otherwise, Canadian courts have generally recognised jurisdiction over conduct that has a real and substantial connection to Canada.

The Criminal Code prohibits anyone from giving or offering a loan, reward, advantage or benefit of any kind to a federal or provincial government official in Canada as consideration for co-operation, assistance, exercise of influence, or an act or omission in connection with any government business.

Prospective acquirers of businesses should consider, due diligence of a target company’s operations that directly or indirectly interface with government to help assess the risk of fines or penalties in relation to past conduct, as well as the risk of the buyer and its other affiliates becoming disqualified from government contracts in the event that an acquired company either has been convicted or is subsequently convicted of a corruption offence, even if the relevant conduct occurred under prior ownership.

Canada also imposes sanctions and related measures on individuals and businesses under the United Nations Act, the Special Economic Measures Act, the Justice for Victims of Corrupt Foreign Officials Act or the Freezing Assets of Corrupt Foreign Officials Act. These sanctions prohibit dealings with designated countries, individuals and entities as well as certain sectors.

Anti-money Laundering

Canada also has anti-money laundering (AML) laws; contained mainly in the Criminal Code and the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA). The latter requires certain types of businesses (such as financial institutions and financial intermediaries) to comply with registration, screening, reporting and other obligations. On 11 October 2023, the government released the final versions of regulations that expand the reporting sectors, activities and transactions covered under the PCMLTFA to include the following:

• effective 1 July 2024, persons or entities engaged in the business of transporting currency, money orders, traveller’s cheques or other similar negotiable instruments, and effective 11 October 2024, persons or entities involved in the mortgage lending process (whether as administrators, brokers or lenders), will be subject to a number of compliance obligations related to the implementation of a compliance programme, client identification, reporting and record keeping;
• starting in October 2024, Canadian financial entities entering into a correspondent banking relationship will also be subject to additional AML requirements, such as conducting enhanced due diligence on foreign entities with which they have such arrangements;
• cross-border currency reporting penalties have been increased as of 11 October 2023; and
• the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) will be permitted to recover its expenses from reporting entities based on asset value or volume of threshold transaction reports starting from the 2024–2025 fiscal year.

Corporate Ownership Transparency

Since June 2019, the Canada Business Corporations Act (CBCA) requires federal corporations (excluding corporations that are reporting issuers or whose securities are listed on a “designated stock exchange” as defined in the Income Tax Act, and excluding, since 4 May 2023, wholly-owned subsidiaries of such public corporations and crown corporations or subsidiaries thereof) to prepare and maintain an up-to-date register of individuals with significant control (a RISC); generally, natural persons who have control in fact over a corporation, or who control or beneficially or legally own shares carrying 25% or more of the voting rights of the corporation’s voting shares or shares representing 25% of the fair market value of the corporation’s outstanding shares.

Effective 22 January 2024, non-exempted CBCA private corporations will be required to collect and maintain in their RISC additional information regarding individuals that have significant control and to report this information to Corporations Canada on an annual basis. Similar filing obligations will be triggered upon certain corporate events and upon any change to information already reported. Meaningful penalties will attach to contraventions.

Corporations Canada will be authorised to disclose all or part of the RISC information to FINTRAC, investigative bodies, or such other prescribed entities. Corporations Canada will also be permitted to provide RISC information to the provincial agencies or departments responsible for corporate law and compliance in their jurisdiction. Significantly, Corporations Canada will be required to make publicly available online some of the RISC information reported to it.

These changes form part of the federal government’s larger initiative to create a public, searchable beneficial ownership registry to combat the misuse of federally incorporated shell corporations for illegal activities such as money laundering and tax evasion. While initiated in the first instance to capture federal corporations, the registry is intended to be scalable to allow access to the beneficial ownership data collected by provinces and territories that wish to participate in what the federal government hopes will become a national registry. Most provinces, however, have already adopted some form of corporate transparency legislation.

Companies doing business in Canada are subject to differing combined federal and provincial (or territorial) income and sales tax rates depending on the province(s) (or territory/ies) in which they operate. In addition, other taxes, such as municipal property taxes and land transfer taxes, may be applicable.

Canada taxes Canadian-resident corporations on their worldwide income, and non-resident corporations on Canadian-source income (eg, income from business carried on in Canada, capital gains on the disposition of “taxable Canadian property” (TCP) and investment income subject to withholding tax). The rate of Canadian taxation applicable to resident corporations and non-resident corporations operating through an unincorporated branch is generally the same. A non-resident corporation carrying on business in Canada will also be subject to a branch profits tax at a 25% rate, which is generally reduced under Canada’s tax treaties.

Corporate income tax rates vary based on factors such as the location, nature and size of the business carried on. Currently, active business income is taxed at a general federal corporate income tax rate (after abatement and other reductions) of 15%, and at general provincial (or territorial) corporate income tax rates ranging from 8% to 16%. Lower rates may apply based on the nature of the taxpayer (eg, “Canadian-controlled private corporations” eligible for the “small business deduction”) and the nature of the income being earned (eg, manufacturing and processing income).

A partnership (as characterised under Canadian tax principles irrespective of its law of formation) is not regarded as a separate legal entity from its partners for Canadian tax purposes and therefore a partnership is generally not a taxpayer (except for certain publicly traded partnerships). Partnerships may not elect alternative classification for Canadian tax purposes. In general terms, provided that a partnership does not carry on business in Canada and does not own any TCP, any non-resident members of the partnership should not be subject to mainstream Canadian income tax.

The supply of goods and services in Canada is generally subject to a 5% federal value-added tax. With the exception of Alberta and the territories, which do not currently levy a value-added tax, the combined rate of federal and provincial (or territorial) value-added tax generally ranges from 11% to 15%. Manitoba, Saskatchewan and British Columbia levy retail sales taxes.

Canada levies a 25% final withholding tax on the gross amount of certain payments to non-residents, including dividends and certain interest payments. The domestic withholding rate may be reduced if the non-resident recipient is eligible to claim the benefits of one of Canada’s tax treaties. For example, for dividends, the typical treaty rate is 15%, except where the shareholder is a corporation that beneficially owns 10% or more of the voting shares of the dividend payer, in which case the rate is generally reduced to 5%. Similarly, for interest payments subject to domestic withholding tax (which generally encompasses only interest paid or credited by a Canadian resident to a non-arm’s length, non-resident person and participating debt interest), the typical treaty rate is 10%. Exceptionally, Canada’s treaty with the USA provides a withholding tax exemption in respect of non-arm’s length interest payments.

The most common tax planning strategy in the context of FDI is the use of a Canadian acquisition company to purchase a Canadian business. This allows the acquisition price to be reflected as cross-border paid-up capital which can be returned to the foreign investor at any time free of Canadian tax or can be refinanced as cross-border debt.

Cross-border interest-stripping is possible subject to Canada’s thin capitalisation rule and currently proposed excess interest and financing expense limitation regime, which implements the Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) Action 4 recommendation for a percentage-of-EBITDA limitation on interest deductibility.

Step-up of depreciable asset basis is generally not possible unless business assets are acquired instead of shares of a Canadian company.

Business losses can generally be carried forward for 20 years and become streamed upon an acquisition of control to be available to offset only the income from the same or a similar business. Capital losses generally expire on an acquisition of control but can be used to step up the basis of appreciated property.

While Canadian tax law does not permit formal loss consolidation within a corporate group, certain recognised techniques exist for using losses among members of the same corporate group.

Canada generally does not tax non-residents on capital gains arising on the disposition of capital property, including shares of a Canadian corporation or an interest in a partnership that carries on business in Canada, unless such gains are realised on the disposition of TCP. Very generally, TCP includes Canadian real or resource properties and, in certain circumstances, shares of a corporation or an interest in a partnership holding, directly or indirectly, substantial amounts of Canadian real or resource properties. There is also a notification, clearance certificate and withholding regime that applies to the disposition of TCP by a non-resident. If possible, it may be advisable to hold investments in TCP through a blocker corporation that is resident in a jurisdiction which has a treaty with Canada which includes a capital gains exemption (subject to certain recent developments discussed in 9.5 Anti-evasion Regimes).

Canada does not have any specific anti-treaty shopping legislation (other than a specific withholding tax anti-avoidance rule for back-to-back conduit arrangements). Instead, federal tax law and certain provincial tax statutes contain an overarching “general anti-avoidance rule” (GAAR) to prevent abusive tax avoidance that applies to all taxpayers, and which is in the process of being amended to make it more stringent. If the GAAR applies, the tax authorities may redetermine the tax consequences of an avoidance transaction to eliminate the tax benefit resulting from the transaction or a series of which it is part. In addition, as Canada has adopted and implemented the OECD’s Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI), Canadian tax authorities may apply the MLI’s “principal purpose test” anti-avoidance rule to deny treaty benefits where one of the principal purposes of an arrangement or transaction was to obtain such benefits in a way that is not in accordance with the object and purpose of the relevant treaty provisions.

Canada’s transfer pricing and thin capitalisation rules are also relevant in the context of inbound investments. Canada’s transfer pricing rules, which generally follow the OECD transfer pricing guidelines, require that transactions between non-arm’s length parties take place at arm’s length terms and may adjust amounts charged on the transfer of property or provision of services between non-arm’s length parties to reflect the amounts that would have been charged between arm’s length parties. The Department of Finance (Canada) is currently consulting on strengthening Canada’s transfer pricing rules. Canada’s thin capitalisation rule, which generally polices the non-arm’s length debt-to-equity funding of a Canadian subsidiary in accordance with a 60:40 debt-to-equity ratio, may disallow certain interest expenses and recharacterise such amounts as a dividend for withholding tax purposes.

Canada is in the process of enacting anti-hybrid instrument/arrangement rules, which will be retroactive to 1 July 2022, that generally conform with the OECD recommendations under BEPS Action 2. Canada does not currently have domestic anti-hybrid entity rules, but the Canada-US Tax Treaty contains some limitations in this regard.

Canadian employment legislation applies to employees who work in Canada even if the employer is outside Canada, subject to certain exceptions. Most employees are under provincial jurisdiction, but federal legislation governs employees of federally regulated undertakings, such as those involved in telecommunications, railways and banking.

Minimum Standards

The federal government and each province have employment standards legislation setting out minimum entitlements for employees. Areas covered include minimum wages, hours of work, overtime, vacation, holidays, pregnancy, parental leaves of absence, mass lay-offs and notices of termination. Employment standards legislation applies to most employees except senior managers. These standards cannot be contracted out of or waived by employees. Non-statutory legal principles may also impose additional obligations on employers.

Labour Relations

The federal government and each province have labour laws. Employees, excluding those in managerial positions, have a right to become unionised provided that a certain percentage of employees of a determined bargaining unit wish to be represented by a union (usually, 50% plus 1). Once a union has been certified, the union and the employer have a duty to bargain in good faith to reach a collective agreement. A number of statutory conditions must be met before employees can lawfully strike or an employer can lawfully lock them out. Conciliation, arbitration and mediation are tools available to help employers and unions settle disputes.

Equality

The federal government and each province have adopted human rights legislation which prohibits discrimination and harassment in the workplace on various bases such as race, sex, religion, political convictions and handicap.

Occupational Health and Safety and Workers’ Compensation

The federal government and each province have enacted legislation to establish certain standards for occupational health and safety and to compensate employees who are injured in the course of their employment.

Termination of Employees

In the absence of just cause for termination, all non-unionised employees are entitled to notice of termination. The notice may be by way of “working notice” or pay in lieu of such notice. The minimum statutory notice generally ranges between one to eight weeks. In some provinces and for employees of federally regulated businesses, statutory severance pay may also apply.

The amount of notice (or severance, if applicable) is, at a minimum, the statutory requirements as set out in the relevant employment standards legislation. Because minimum statutory employment standards for notice of termination cannot be contracted out of or waived, terms in an employment agreement that provide for “termination at will” or for notice of less than the statutory minimum will not be enforceable.

In addition, employees are entitled to receive a reasonable notice of termination which is determined on a case-by-case basis after consideration of the employee’s position, number of years of service, compensation, age and other circumstances such as whether an employee was solicited away from a stable employment. The reasonable notice includes (and usually exceeds) the statutory notice. It ranges from the statutory requirements to up to 24 months of compensation.

In common law provinces, employees can contractually agree to receive only the minimum statutory requirements (instead of the common law reasonable notice). In Québec, employees cannot validly waive their right to receive a reasonable notice (or payment in lieu thereof) upon termination of their employment without cause.

The common framework used for compensation of employees includes base salary (hourly or annual), bonuses, pensions/retirement benefits and group insurance coverage. Executives also often participate in long-term incentive plans (such as stock option plans, restricted share unit plans or deferred share unit plans) and receive various additional perquisites such as car allowance and executive health programs.

The impact of a change of control or other sale of business on employee compensation is largely determined by whether the transaction is a sale of assets or shares, and whether the employee has any contractual entitlement applicable in the event of a change of control.

Where the buyer acquires the shares of the target business, there is no change in the identity of the employer and the employment relationship continues. Compensation remains the same.

In all Canadian provinces, upon a sale of assets, in a unionised environment, the buyer becomes bound by the certification order(s) and the applicable collective agreement(s).

With respect to non-unionised employees, in an asset sale, in all provinces other than Québec, the employment relationship with the target terminates and the buyer can choose which employees it will hire. In those provinces, the buyer has to extend offers of employment to the employees it wishes to employ. The seller and buyer will often negotiate a covenant regarding the terms of employment to be offered by the buyer as the seller can incur termination liability to the extent these differ from the terms the employees had with the seller.

In Québec, employees are automatically transferred to the buyer upon the sale of a business, and the buyer becomes bound by their employment agreements. The employees, therefore, have a right to continue to be employed by the buyer on the same terms and conditions as those that existed immediately prior to the closing of the transaction.

While Canadian intellectual property (IP) legislation does not generally include restrictive provisions regarding foreign investment or ownership of IP in Canada, there are some exceptions in Section 12 of the Copyright Act for works published by or under the direction or control of Her Majesty, and Sections 19 and 20 of the Patent Act for the right of the government to use patented invention in certain cases, or regarding ownership in inventions made by an officer, servant or employee of the Crown. This could potentially change as the Strategic Intellectual Property Program Review (first announced in Budget 2021, with further support from Budget 2022) began with consultation in the spring of 2023 and is intended to be an extensive assessment of intellectual property provisions in Canada, aimed at making sure IP funded and developed in Canada remains in the country. Further, the Canadian government recently launched a Consultation on Copyright in the Age of Generative Artificial Intelligence, which extends an earlier Canadian government consultation into copyright issues arising from artificial intelligence technologies more generally. The purpose of the Consultation is to inform copyright policy in an era where content, including content that seems creative and original, can be routinely generated by an AI system.

Protection of IP in Canada is comparable to most other WTO countries. It is mainly governed by federal statutes, including the Patent Act, the Trademarks Act, the Copyright Act and the Industrial Design Act, which are administered by the Canadian Intellectual Property Office (CIPO). Canada has also aligned itself with the international community with the recent implementation and coming-into-force in Canada of the Patent Law Treaty in October 2019, the Madrid Protocol, the Singapore Treaty and the Nice Agreement for trade marks in July 2019, and the Hague Agreement for industrial designs in November 2018.

Trade Marks

Unlike many countries, Canada recognises trade mark rights arising from the commercial use of a mark in the territory, without need for registration. However, unregistered trade mark rights can be limited in scope and, at times, more difficult to enforce. Registration of a trade mark in Canada is therefore always recommended, and requires the trade mark to be and remain distinctive. Trade marks may be assigned or licensed. While not mandatory, written agreements to that effect are generally advisable and can be recorded with CIPO. Special consideration should also be given to the use of trade marks in the province of Québec with respect to the rules of the Charter of the French Language.

Copyright

Registration of copyright is not mandatory in Canada to confirm the existence of a copyright. However, registration with CIPO does serve as prima facie evidence of copyright ownership and strengthens the remedies available to a party whose copyright is infringed. Copyrights may be assigned or licensed, in whole or in part. Such assignments or licences must be in writing and must also be recorded with CIPO to be enforceable against third parties. Lastly, Canada recognises the existence of moral rights of an author in his work, which rights cannot be assigned. However, moral rights can explicitly be waived, in writing, in whole or in part. The assignment of copyright in a work does not by itself constitute a waiver of any moral right.

Patents

Unlike US patents, Canadian patents do not include designs, which are separately protected under the Industrial Design Act. Canada is a “first to file” country and registration is mandatory to secure rights under the Patent Act. It is not possible to obtain patents for scientific principles or theorems in the abstract, without a practical application. Patents can be assigned or licensed, in writing, and must also be recorded with CIPO to be enforceable against third parties.

Industrial Designs

Registration is mandatory in Canada for the protection of industrial designs, but no registration can be obtained if the industrial design application is filed more than 12 months after making the design public or offering it for commercial use. Industrial designs may be assigned or licensed and must also be recorded with CIPO to be enforceable against third parties.

Enforcement

Save for administrative proceedings conducted by CIPO, there is no specialised IP court in Canada. However, the Federal Court has developed expertise in these matters, and provincial courts have concurrent jurisdiction, save for declaratory relief in rem which can only be granted by the Federal Court.

In Canada, the processing of personal information is regulated by privacy laws and by Canada’s anti-spam legislation, supplemented in some cases by common law considerations. Given their salience to foreign investors in Canada, the focus of this section will be limited to private sector laws.

The federal Personal Information Protection and Electronic Documents Act (PIPEDA) governs the collection, use and disclosure of personal information by private sector organisations in all jurisdictions, except where a provincial law has been deemed substantially similar to PIPEDA. Alberta, British Columbia and Québec have passed substantially similar privacy laws of general application, and Ontario, New Brunswick, Nova Scotia, and Newfoundland and Labrador have adopted substantially similar laws governing personal health information. While such legislation applies instead of PIPEDA for intra-provincial matters, PIPEDA still applies for all inter-provincial and international transfers of personal information.

PIPEDA has extraterritorial application to foreign organisations where there is a real and substantial connection between the foreign organisation and Canada. Physical presence is not required, but no decisions have specifically treated the question of whether PIPEDA could extend to a foreign investor in their own jurisdiction.

With respect to enforcement, at present, the Canadian privacy law framework operates on an ombudsman model. Privacy regulators are empowered to make inquiries, publish findings, make recommendations and in some cases make orders, and fines are limited in scope and in practice are not applied. However, this model is changing in Québec owing to recent amendments to its privacy laws, and is likely to change in other Canadian jurisdictions if the federal Parliament passes a recently proposed bill. These amendments and proposals are materially influenced by the European Union’s General Data Protection Regulation.

In Québec, An Act to modernize legislative provisions as regards the protection of personal information (Law 25) became law on 22 September 2021. Its provisions come into force during 2022–2024. In addition to making important amendments to Québec’s private sector privacy law, as of September 2023, Law 25 introduces new administrative monetary penalties (AMPs) up to the larger of CAD10 million or 2% of the organisation’s annual worldwide turnover, penalties for some offences up to the larger of CAD25 million or 4% of the organisation’s annual worldwide turnover, and a private right of action for punitive damages where infringement of rights provided for under the law are intentional or result from gross negligence.

The government of Canada, on 16 June 2022, tabled the Digital Charter Implementation Act, 2022 (Bill C-27), which would significantly reform Canada’s private sector privacy law landscape. The second reading of the bill was completed on 24 April 2023 and it is now in consideration in committee. Among other important changes proposed by Bill C-27 are new AMPs up to the larger of CAD10 million or 3% of the organisation’s gross global annual revenue, penalties for some offences up to the larger of CAD25 million or 5% of the organisation’s gross global annual revenue and a private right of action for individuals affected by an organisation’s contravention of the law. Bill C-27 would also enact the Artificial Intelligence and Data Act, intended to regulate the design and use of artificial intelligence systems.