Annual Reports 2010–11, 2011–12 and 2012–13 (lk81150)

1. Overview

Canada has a modern 21st-century economy based on competition, free enterprise, the rule of law and consumer choice. Our market-based system has created prosperity for our citizens.

The global exchange of goods, services and capital underpins our economic performance. Two-way trade and investment boost productivity, drive innovation and widen access to international markets.

Canada has a broad framework to promote trade and investment while, at the same time, protecting Canadian interests. The Investment Canada Act (ICA or the Act) is the primary mechanism for reviewing foreign investments. Its purpose is twofold: to review significant foreign investments to determine if they are likely to be of net benefit to Canada and to review investments that could injure national security.

The ICA came into force on June 30, 1985, replacing the Foreign Investment Review Act. Responsibility for its administration and enforcement rests with the Minister of Industry, with the exception of notifications and reviews related to cultural businesses, which was transferred to the Minister of Canadian Heritage in 1999.

How a proposed foreign investment will be treated under the Act depends primarily on the value of the assets of the Canadian business being acquired. In general, an acquisition of control of a Canadian business by a foreign investor is subject to review where the business' asset value is equal to, or above, the established threshold. The investor must file a notification where the value of the assets of the Canadian business falls below the established threshold.^{Footnote 2}

The review process itself is thorough and rigorous. Industry Canada consults with other federal departments with policy responsibilities that are relevant to the proposed transaction, as well as the Competition Bureau, and affected provinces and territories. In addition, any person or group can provide comments on an investment proposal to the Minister of Industry in writing during the review process.

In approving an application, the Minister of Industry must be satisfied that the proposed investment is likely to be of net benefit to Canada. To determine net benefit, six factors come into play. The six factors include the effect on the level and nature of economic activity in Canada, including employment, resource processing and utilization of parts, components and services; the degree and significance of participation by Canadians in the Canadian business; an investment's effects on productivity, industrial efficiency, technological development, product innovation and product variety; the effect on competition; the investment's compatibility with industrial, economic and cultural policies; and its contribution to Canada's ability to compete in world markets. The complete factors are clearly laid out in section 20 of the Act. Together, they provide predictable guidance for investors, while maintaining the flexibility required to protect Canada's interests.

In general terms, net benefit is assessed against an investor's plans and undertakings addressing the six factors, and may include commitments on matters such as employment levels, capital expenditures, research and development activities, and corporate governance.

In recent years, the Government of Canada has taken steps to update the Act to respond to global economic realities.

Specifically, in 2007 new guidelines were introduced for state-owned enterprises (SOE) investing in Canada. For such enterprises, the Minister is required to examine whether the investor adheres to Canadian standards of corporate governance and whether the Canadian business, if acquired, will continue to have the ability to operate on a commercial basis.^{Footnote 3}

Additional improvements were made to the Act's administration in both 2009 and 2012, which saw the introduction of a national security review process, further improvement to the SOE guidelines, changes to transparency requirements, and the raising and redefinition of the review threshold.^{Footnote 4} Since 1985, this model has served Canadians well. These improvements have helped ensure the Act remains relevant and responsive to the realities of a changing global economy.

Administering the Act requires balancing the need for investor confidentiality with public disclosure. Strong protection is necessary to ensure that investors provide the Government with the information required to conduct reviews, and to prevent harm to both investors and Canadian businesses.

While respecting these considerations, the Government's recent modernization efforts now allow the Minister greater ability to inform Canadians about specific reviews and decisions. As part of this, annual reports are published and information on decisions and notifications is posted on Industry Canada's website.

Summary of Activity in 2010–11

In 2010–11, the Minister of Industry approved 16 applications under the ICA and 580 notifications were filed.

The United States (U.S.) continued to be Canada's biggest source of foreign investment in terms of dollar value and number of transactions, accounting for more than half of the total number of investments. The European Union (EU) ranked second, with almost 26 percent.

In terms of the sectors that have attracted the most foreign investment, the resource sector led all others with a total investment of $16.51 billion, followed by manufacturing, which captured about half that amount.

On average, the time taken to review an application and make a determination of net benefit was 70 days in 2010–11.

The 2010–11 fiscal year was noteworthy because of the circumstances surrounding BHP Billiton's proposal to acquire Potash Corporation of Saskatchewan. The Minister of Industry was not satisfied that BHP's proposed transaction was likely to be of net benefit to Canada. BHP subsequently withdrew its application.

The year also saw the first-ever court decision on the enforcement sections of the Act. In 2009, the federal government launched legal proceedings against United States Steel Corporation (U.S. Steel) because the Minister was not satisfied the company had upheld the commitments made when it took over Stelco Inc. in 2007. In the course of that litigation, U.S. Steel brought an application challenging the validity of the enforcement provisions of the ICA. The Federal Court dismissed U.S. Steel's application and affirmed the Minister of Industry's ability to enforce the regulation of foreign investment under the ICA.

There were no legislative, regulatory or policy developments during the year.

Summary of Activity in 2011–12

In 2011–12, the Minister of Industry approved 15 applications under the ICA and 696 notifications were filed.

On December 12, 2011, the Minister of Industry announced an out-of-court settlement with U.S. Steel, based on new and enhanced undertakings under the Act.

U.S. Steel committed to:

• continue to produce steel in Canada;
• operate at both Lake Erie and Hamilton plants until 2015, generating continued economic activity;
• make at least $50 million in capital investments to maintain the Canadian facilities by December 2015, over and above its original undertaking to invest $200 million by October 31, 2012; and
• make a financial contribution of $3 million toward community and education programs in Hamilton and Nanticoke.

Notable transactions approved in 2011–12 included China National Offshore Oil Corporation's (CNOOC) acquisition of OPTI Canada Inc. (November 2011) and China Petrochemical Corporation's (Sinopec Group) acquisition of Daylight Energy Ltd. (December 2011).

The resource sector again attracted the highest level of investment in 2011–12, with a total value of $17.11 billion, an increase from the previous year.

The U.S. remained Canada's top source of foreign investment, accounting for more than half of the total number of investments over this time period. The EU was our second highest investor, with approximately 35 percent of the total number of investments.

On average, the time taken to review an application and make a determination of net benefit was 80.6 days in 2011–12.

There were no legislative, regulatory or policy developments during the year.

Summary of Activity in 2012–13

In 2012–13, the Minister of Industry approved 18 applications under the ICA and 664 notifications were filed.

The United States again led in terms of the amount of investment, totalling over $15 billion in asset value and accounting for just over half of the total number of investments. The EU was again second with investments worth $7.5 billion in asset value.

The 2012–13 year was noteworthy for two high-profile investments in Canada's resource sector. The first was the purchase of Canadian resource company Nexen by Chinese state-owned enterprise CNOOC—the largest international purchase by a Chinese company. This came alongside the purchase of Progress Energy by Petronas, Malaysia's state-controlled oil and gas company.

Policy Developments

In April 2012, the Government of Canada proposed amendments to the Investment Canada Act to provide greater information to the public and more flexibility in enforcement. These amendments, included in Bill C-38, the Jobs, Growth and Long-term Prosperity Act, came into force on June 29, 2012. These amendments give the Minister:

• greater ability to publicly communicate information on the review process while preserving commercial confidences;
• authority to accept security, when offered by an investor, for payment of any penalties ordered by a court for a contravention of the Act, promoting investor compliance with undertakings;
• the ability to publicly disclose the fact that he has sent a preliminary notice to an investor that he is not satisfied that the investment is likely to be of net benefit to Canada; and
• the ability to explain publicly his reasons for sending the notice as long as it would not cause harm to the Canadian business or the investor.

In May 2012, a new guideline was issued to make formal mediation procedures available under the Act. The guideline, establishing an alternative to potentially costly and time-consuming litigation that may be initiated under the Act, provides a voluntary means of resolving disputes when the Minister believes an investor has failed to comply with an undertaking.

In June 2012, the Government published proposed amendments to the Investment Canada Regulations in the Canada Gazette, which are necessary to:

• raise the threshold for net benefit reviews to $1 billion over a four-year period;
• establish the methodology for calculating the enterprise value of a Canadian business;
• remove references to the transportation, financial services and uranium production sectors because lower thresholds for these sectors have been eliminated; and
• formalize the process for collecting additional information relevant to the net benefit and national security processes.

In December 2012, the Government made additional changes to the investment review process to ensure Canada continues to benefit from foreign investment. Specifically, the Government:

• revised the guidelines for foreign SOEs;
• clarified how proposed investments by SOEs are assessed under the Act; and
• announced it would proceed with legislative amendments to exclude SOE investors from the $1 billion enterprise value net benefit threshold increase and to give the Minister the flexibility to extend the timelines for national security reviews, as necessary.

In Economic Action Plan 2013, the Government reaffirmed its intention to amend the Act.

Conclusion

In general, the 2010–11, 2011–12 and 2012–13 fiscal years saw continued activity under the Act. This reflected the broader economy, which experienced some growth. Canada is not immune to external economic developments. While the global economic environment remains fragile and there is weak growth in advanced economies, the Canadian economy continues to expand, albeit at a modest pace.

The Government of Canada continues to strongly encourage investment that benefits Canada. As a result, after rigorous review the majority of investment proposals have been approved.

For more information

For a general description of how the Act is administered, consult the Investment Canada Act website.