In brief

The Government of Canada recently passed Bill C-34, the National Security Review of Investment Modernization Act (“Bill C-34“), marking a turning point in the review of foreign investment in Canada. Bill C-34 enhances the Canadian government’s national security review powers under the Investment Canada Act (“ICA“) and introduces mandatory pre-closing filings for certain investments. The amendments are intended to address evolving threats arising from foreign investment and to ensure Canada’s economic security and prosperity. Bill C-34 will come into effect on dates to be set in the future, with certain amendments taking effect soon, and those that require implementing regulations likely taking effect in late 2024 or early 2025 and will therefore be highly relevant to future transaction planning, including discussions already underway. 

Key takeaways

The Canadian government is focused on modernizing foreign investment law and policy in response to evolving threats to Canada’s national security. Bill C-34 was first introduced in December 2022 and was ultimately passed by the Canadian government on 22 March 2024. As explained in a prior client alert, while the amendments significantly reform Canada’s existing national security review framework, they are consistent with recent policy developments related to Canada’s national security, and with trends in other jurisdictions.

Foreign investors and Canadian businesses should be aware of the following key aspects of the amendments:

• Mandatory Pre-Closing National Security Notifications. The amendments will require all foreign investors to make pre-closing notifications for investments in prescribed business sectors, even if they fall below the financial thresholds for mandatory net benefit review, and will be prohibited from completing their investments until the prescribed national screening periods have expired. The prescribed business sectors, which are expected to build upon existing national security guidance, and the prescribed timelines that will apply, have yet to be announced and will be set out in regulations. This is a significant change from the current regime, where the mandatory notification may be filed post-closing, and non-controlling acquisitions of Canadian businesses do not trigger any mandatory filing (though may be filed voluntarily).
• Asset Acquisitions Subject to National Security Review Provisions. The amendments will expand the application of the ICA’s national security provisions to all asset acquisitions irrespective of the stake acquired in a Canadian business. The national security regime was previously limited to acquisitions of interests (e.g., minority equity interests) in entities with some operations in Canada. The national security provisions will also include any form of asset acquisition, which captures transfers of intangible assets like intellectual property.
• Prior Corruption Convictions as New Basis to Trigger National Security Review. The amendments introduce a new independent ground for triggering a national security review under the ICA – prior convictions for corruption inside or outside Canada. As the amendments do not specify any historical boundaries for a foreign investor’s corruption history, investors should plan to conduct a thorough review of their corruption-related history to fully assess the potential national security risk of an investment.
• Expanded National Security Related Powers for the Minister of Innovation, Science and Industry (“Minister”). The Minister will now have new powers, including the authority to take interim measures to protect Canada’s national security during the course of a national security review, accept undertakings to mitigate an investment’s potential risk to Canada’s national security, and extend national security review timelines. Significantly, the Minister is required to impose interim conditions during the national security review process where it is deemed necessary to prevent harm to Canada’s national security, and doing so would not introduce significant new risks of harm to national security, which may delay post-closing integration, for example, pending the completion of a national security review. The Minister’s new powers are intended to introduce greater flexibility and discretion within the existing national security review framework, particularly where foreign investors are motivated to work with the Canadian government to mitigate any national security concerns.
• New Scrutiny of SOE Investments through Net Benefit Review. The amendments will permit the Canadian government to order an economic net benefit review of a foreign investment by an SOE investor where only a notification was required (e.g., acquisition of control or establishing a new Canadian business that falls below the ICA’s financial thresholds for a net benefit review). If the SOE is a so-called “trade agreement investor”, then the investment will continue to be exempt from this form of net benefit review. If a net benefit review is initiated, SOE investors will receive a notice of review within 45 days of filing a complete notification, increasing the importance of filing notifications pre-closing (whether or not mandatory) to avoid post-closing regulatory surprises.
• New Factors in Net Benefit Reviews – Canadian Intellectual Property and Personal Data. The list of factors that the Minister must consider in a net benefit review will be expanded to include the effect of the investment on any rights relating to intellectual property, whose development has been funded, in whole or in part, by the Canadian government, and the effect of the investment on the use and protection of personal information about Canadians. While these factors are newly codified, they have been considered under net benefit reviews for several years. Foreign investors should be prepared to address any concerns related to Canadian intellectual property and personal data in potential undertakings.
• Sharing Investor-Specific Information with Canada’s Allies. The amendments expressly permit the Minister to share information with Canada’s allies, on any terms and conditions that the Minister deems appropriate, to support foreign investment reviews and national security assessments. Legislative announcements indicate that information raising confidentiality or other concerns will not necessarily be shared, and that information will only be shared as part of a national security review. These changes are similar to amendments made to facilitate coordination with allies that were made to the US CFIUS regime in 2018.
• New Financial Penalties for Missed Filings and Increased Financial Penalties for Non-Compliance. The Canadian government’s authority to pursue remedies to address non-compliance under the ICA, including by issuing demands to cease the contravention or remedy a default or by seeking a court order, will be enhanced. The amendments introduce new financial penalties, increase existing financial penalties for non-compliance with the ICA, and permit future adjustments through regulations. Non-compliance may result in a fine of CAD 25,000 for each day that the contravention continues, and failure to file a required pre-implementation notification or application for net benefit review may result in a fine of CAD 500,000. The Canadian government will be required to seek a court order to impose any penalties; however, the reasonable size of the penalties suggests they are more likely to be imposed in practice.

The amendments heighten the importance of proactive planning to address the Canadian government’s increased focus on national security risks arising from commercial transactions and other forms of foreign investment, and their likely near-term implementation will be relevant to future transaction discussions, and in some cases, those already at the planning stage.