Navigating the Legal Landscape of Foreign Investment in Canada

Introduction

Canada has consistently maintained its identity as an open trading economy, where foreign investment plays a pivotal role in enhancing the vitality of its business sector. This article focusses on key statutory considerations for foreign investors looking to enter the Canadian market, specifically the choice of investment vehicle and Investment Canada Act requirements. These two areas are commonly the first two considerations facing investors.

Choice of Investment Vehicle

Like other jurisdictions, there are numerous legal structures available for conducting business activities in Canada, with the two preferred investment vehicles for foreign investors being: (a) corporations; and (b) limited partnerships (“LP”).

(a) Canadian Corporations: Federal or Provincial?

The federal government and the provinces have concurrent jurisdiction to incorporate corporations, allowing incorporators to choose between federal or provincial incorporation. A federal corporation operates under the Canada Business Corporations Act (“CBCA”), whereas each province has its own incorporation act and regulations; for instance, an Ontario corporation follows the Business Corporations Act (“OBCA”). Whether incorporating under the CBCA or the OBCA, the process involves filing articles of incorporation, appointing directors, officers, and shareholders, and establishing bylaws.

While these statutes share significant similarities, certain distinctions could influence their suitability from an investor’s perspective, especially that of a foreign investor. The primary distinction lies in the CBCA’s allowance for national business operations, contrasting with the OBCA’s limitation to provincial business activities. This means that a corporation incorporated under the CBCA can carry on business in any province or territory without needing to incorporate separately in each one (although registration may still be required in those provinces or territories).

Another crucial consideration for foreign investors looking to incorporate involves the residency of directors. Federal corporations must comply with the CBCA’s requirement that at least 25 percent of directors must be resident Canadians — a requirement not mandated by the OBCA. The CBCA’s residency requirement for directors can add complexity and costs for foreign investors, whereas the OBCA’s lack of such a requirement offers more flexibility and ease in appointing directors, simplifying incorporation and governance.

(b) Limited Partnerships

Limited partnerships are popular for investments because they limit the liability of limited partners to their contributions and allow profits to pass through directly to partners without entity-level taxation. Limited partnerships in the Province of Ontario are governed by the Limited Partnerships Act (“LPA”). An LP consists of at least one general partner who assumes full liability for the LP’s debts and obligations, and one or more limited partners whose liability is limited to their agreed contributions. Forming an LP involves filing a Declaration under the LPA, which includes basic details. This declaration expires after five years, but the LP is not dissolved by such expiry; it merely requires the renewal of the Declaration before the expiry date.

Foreign Investment Notifications and Review under the ICA

Before foreign investors can establish or acquire a business in Canada, they may need to obtain approval from the federal government or provide notification under the Investment Canada Act (“ICA”). The ICA requires foreign investments to undergo either notification or, in certain cases where the value of the investment exceeds specified thresholds, a ministerial review to ensure the investment provides a net benefit to Canada. This process helps ensure that foreign investments contribute positively to the Canadian economy while safeguarding national interests.

Foreign investors are required to submit a notification to the Investment Review Division of Innovation, Science, and Economic Development Canada when initiating a new business activity in Canada or acquiring control of an existing Canadian business valued below the threshold. The notification must be filed no later than thirty days after the implementation of the investment.

When certain large-scale foreign investments exceed the specified thresholds, they must undergo a formal review and approval process known as the ‘net benefit review’. This assessment considers six key factors:

i. the investment’s impact on the level and nature of economic activity in Canada;

ii. the extent and importance of Canadian participation in the Canadian business;

iii. the investment’s impact on productivity, industrial efficiency, technological development, product innovation and diversity;

iv. the investment’s effect on competition;

v. its alignment with industrial, economic, and cultural policies; and

vi. its contribution to enhancing Canada’s competitiveness in global markets.

When assessing net benefit, the Minister of Innovation, Science and Industry or the Minister of Canadian Heritage and Multiculuralism, as applicable, considers these factors and other contextual considerations, offering predictability to investors while ensuring investments contribute to Canada’s economic interests.

Foreign investments may also be subject to a national security review if the Minister of Innovation, Science and Industry has reasonable grounds to suspect that the investment could be injurious to national security. This review can be initiated at any time within specified timelines and entails a thorough evaluation by relevant government agencies. Importantly, this review may occur independently of any notification or net benefit review required under the ICA.

Conclusion

These considerations for foreign investors illustrate Canada’s commitment to welcoming investments, while also safeguarding national security and economic integrity. Foreign investors should carefully select the appropriate Canadian business structure and ensure compliance with ICA regulations. By carefully navigating the regulatory landscape, foreign investors can thrive in the Canadian economy. Choosing the appropriate investment vehicle and complying with the foreign investment notifications and review requirements under the ICA are vital steps for establishing a successful business presence in Canada.

Paola Gonzalez is an Associate in Perley-Robertson, Hill & McDougall LLP/s.r.l.’s Corporate Law Group. Paola is fully bilingual in English and Spanish. She can be reached at [email protected]