Several trends will dominate foreign investment and national security review under the Investment Canada Act (ICA) in 2022:

• “Net benefit to Canada” reviews of acquisitions outside of the cultural sector¹ will continue at low levels while the ICA’s national security review regime will be the predominant concern for foreign investors under the ICA.
• The scope of national security reviews will continue to expand and evolve beyond conventional defence-related security risks to encompass an array of concerns including economic-based security threats (e.g., affecting sensitive goods and technology, critical infrastructure) and related issues that touch upon sustainability (e.g., access to minerals critical to developing clean energy), public health and safety, and personal data protection. We will be closely watching for any government proposals to reform the ICA and its national security review process to protect against these threats.
• Investments by state-owned enterprise will continue to attract elevated scrutiny from the Canadian government, especially in sectors linked to critical infrastructure, advanced technology, and sensitive data.
• Canada’s increased focus on national security review will be mirrored with the introduction or bolstering of national security regimes in countries around the globe. For example, on January 4, 2022, the UK’s National Security and Investment Act 2021 came fully into force.

1. Decline in “net benefit to Canada” reviews will continue while national security reviews will figure more prominently

For the three decades following its passage, the centrepiece of the ICA was the review of a foreign investment under the “net benefit to Canada” test, a type of public interest that considers a range of economic and social criteria². However, the number of “net benefit to Canada” reviews has declined significantly over the past several years (to nine in 2019-20³) as a result of dramatically increased financial thresholds for review of non-cultural business acquisitions over the past decade.⁴

The counterpoint to that decline has been an increase in the number of investments subject to national security review. Such a review can lead to draconian remedies as the federal Cabinet has the power to take any measures advisable to protect national security, including a prohibition of a proposed investment, authorization subject to terms and conditions, and divestiture for completed investments.

We expect to see an uptick in national security reviews in 2022 in view of significant global tensions, cybersecurity threats, greater recognition of Canada’s vulnerability to supply chain disruptions with implications for Canadian industry (particularly, advanced technology, health care and clean energy sources), elevated use in business of databases containing sensitive personal information, and the importance of critical technologies (for a variety of applications).

The risk of a national security review applies to a large number of transactions as every foreign investment that is subject to a filing (over 1000 in 2019-20) is subject at least to an initial screening (as opposed to an in-depth national security review), there are no monetary thresholds for review and, unlike “net benefit to Canada” review, control does not need to be acquired. Moreover, unlike “net benefit to Canada” review⁵, national security review applies not only to acquisitions of existing Canadian businesses but also to establishments of new Canadian businesses by non-Canadians. That said, the number of formal in-depth national security reviews is likely to remain a small fraction of total investments. (In 2019-20, around 1%of investments for which filings were required were subject to an extended or formal national security review.)

2. Scope of national security review broadening to include threats to a wider range of challenges including “economic security”

Given the relatively small number of transactions subject to in-depth national security reviews, why should a foreign investor pay attention?

The answer is that the scope of national security has moved well beyond traditional national security concerns focussed on defence and territorial integrity concerns. In 2020 and 2021, we saw a broadening of the national security risks set out in the Canadian government’s guidance and initiatives – with the government seeking to achieve protection of its citizenry across a range of dimensions including economic (e.g., preventing loss of sensitive technology or compromised infrastructure, ensuring capacity to produce advanced technology), sustainability (e.g., critical minerals as inputs to clean energy), public health and safety⁶ (e.g., protecting supply chains for personal protective equipment, vaccines) and personal data protection. We fully expect this trend to continue in 2022.

More risks spelled out in National Security Guidelines

Although the breadth of national security risks was apparent even in the government’s original Guidelines on the National Security Review of Investments (the National Security Guidelines) published in late 2016, in March 2021, the Canadian government added to or elaborated on these risks in revisions to the National Security Guidelines.⁷ In particular, the guidelines indicate consideration will be given to:

• The potential impact of the investment on critical minerals and their supply chains (with 31 minerals identified). A key government objective is to ensure a steady supply of minerals for a lower carbon economy (e.g., for use in renewable energy and clean technology applications) and of rare earth metals used in high tech sectors such as aerospace, manufacturing and defence;
• The potential effects of an investment on the transfer of sensitive technology or know-how outside of Canada, with the addition of a detailed description of the types of “sensitive technology” (e.g., AI and robotics) that could raise national security concerns;⁸
• The potential of the investment to enable access to certain types of sensitive personal data (e.g., personally identifiable health or genetic data biometric (e.g., fingerprints), financial, private communications, geolocation, or, personal data concerning government officials). This risk factor potentially applies to a broad array of Canadian businesses given that many businesses – from financial services to dating applications – rely upon vast stores of personal information in their daily operations.

Public Safety Canada’s Consultation on Economic-Based Threats to National Security

The Canadian government also signalled its concerns about economic-based threats to security in May of 2021. On May 31, 2021, Public Safety Canada announced an interdepartmental policy review “examining what, if any, additional measures are needed to ensure Canada’s continued ability to respond to the economic-based threats to national security now and in the future”.⁹ The ICA was considered one of the means of addressing these threats¹⁰. Possible threats were identified as “the loss of sensitive goods, technology and intellectual property, the malicious use of sensitive personal information of Canadians, and compromised critical infrastructure, not to mention the economic and financial toll and opportunity costs…. In addition to raising awareness about the current threat environment, the objective is to look at ways to make Canada and Canadians more secure while simultaneously promoting economic prosperity.”

Minister’s Mandate Letter identifies need for modernization of the ICA and the national security process to mitigate economic security threats

A focus on economic security threats is also reflected in the December 16, 2021 mandate letter for the Minister of Innovation, Science and Industry (the ISI Minister). Among other things, the ISI Minister is mandated to “contribute to broader efforts to promote economic security and combat foreign interference by reviewing and modernizing the Investment Canada Act to strengthen the national security review process and better identify and mitigate economic security threats from foreign investment”¹¹. Elsewhere in the mandate letter the ISI Minister is asked to support the attraction of “anchor investments” in key areas like minerals processing, cell manufacturing and zero-emissions vehicle parts and assembly manufacturing and to employ “all tools”, including the ICA, to ensure the protection and development of Canada’s critical minerals, i.e., inputs into sectors linked to Canada’s ability to achieve a sustainable future and economic prosperity.

3. State-owned enterprises investments will continue to face enhanced scrutiny

In March 2021, the National Security Guidelines were also revised to add investments by state-owned enterprises (SOEs) due to government concerns that SOEs may be motivated by non-commercial imperatives harmful to Canada’s national security. The guidelines expressly include not only SOEs but also private investors assessed as being closely tied to or subject to direction from foreign governments.

Although SOEs have long been subject to greater scrutiny than companies that are not government owned or influenced, these revisions highlight continued wariness of such entities as well as private investors seen to be doing the bidding of foreign states.

The concern that investments by foreign government entities can undermine national security was reflected in the Canadian government’s decision in August 2021 to require China Mobile International (Canada) Inc. (CMI Canada), a Canadian subsidiary of Chinese SOE, China Mobile Communications Group Co., Ltd., to divest or close its Canadian business. The basis for the Cabinet order was that China Mobile may be subject to the influence or demands of, or control by, a foreign government, may disrupt or compromise Canadian critical telecommunications infrastructure and may gain access to highly sensitive telecommunications data and personal information that could be used for non-commercial purposes such as military applications or espionage. CMI Canada has provided mobile communications services pursuant to an agreement with Canadian telecom provider, Telus, since 2016. CMI Canada did not submit the required notification when it established its business (the ICA requires a filing prior to or within 30 days following the establishment). Nevertheless, the Investment Review Division at Innovation, Science and Economic Development Canada learned of CMI Canada’s presence in Canada and contacted the company in the fall of 2020 regarding its failure to file. The government then initiated a national security review which in turn led to the Cabinet order to divest or close the business.¹²

While the CMI Canada case is significant for a number of reasons, including the potentially devastating consequences of failing to file a notification respecting the establishment of a new Canadian business, it illustrates the scrutiny faced by SOEs (particularly Chinese SOEs) when investing in targets seen as vulnerable (e.g., critical infrastructure).¹³

4. National security regimes will continue to be strengthened outside of Canada

In line with Canada, national security regimes are being introduced or bolstered in other countries around the globe. For example, on January 4, 2022, the UK National Security and Investment Act 2021 (the UK Act) fully entered into force. The UK Act establishes a mandatory notification regime for transactions involving targets that carry on specified activities in any of 17 key sectors and a voluntary notification regime for all other sectors¹⁴. Moreover, the Secretary of State may "call in" transactions (in any sector) for review on national security grounds and may impose conditions on, or block (or unwind) transactions, where a national security risk is identified. The 17 key sectors are: advanced materials; advanced robotics; artificial intelligence; civil nuclear; communications; computing hardware; critical suppliers to government; cryptographic authentication; data infrastructure; defence; energy; military and dual-use; quantum technologies; satellite and space technologies; suppliers to the emergency services; synthetic biology; and transport.

5. Conclusion

While reviews under the “net benefit to Canada” test are now less frequent, national security reviews will continue to figure more prominently in Canada’s screening of foreign investment. While these latter reviews are anchored in the concept of “national security”, their scope extends beyond traditional conceptions of that term and is expanding to protect “economic security” and other objectives (whether as stand-alone concerns or under the rubric of economic security) such as sustainability and public health and safety. National security is clearly an elastic concept that the Canadian government can and will use to support a range of governmental goals.

Despite this, foreign investors do not need to fear a flood of in-depth national security reviews for every investment in a Canadian business. Only a small fraction of investments are likely to be subject to such review and require remedies. That said, given the draconian nature of national security remedies (e.g., prohibition, divestiture), investors would be well-advised to give careful consideration to how their investment might align with or, on the other hand, impede broader Canadian government “national security” objectives. If a proposed investment has the potential to raise national security risks, an investor should consider discussing its investment plans with the government and taking steps to mitigate and allocate such risk including through representations, covenants and conditions in the transaction agreement. Forewarned is forearmed - identifying possible risks early on in the investment process will enhance the likelihood of a smooth entry into Canada.

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¹ Review thresholds remain at very low asset values for direct acquisitions of control of cultural businesses ($5 million in target’s book value of assets).
² This assessment includes, among other things, the impact of the investment on the level of economic activity (e.g., capital expenditures, employment), participation of Canadians in senior management and the location of head office functions . 
³ See https://www.ic.gc.ca/eic/site/ica-lic.nsf/eng/h_lk81126.html#Toc528931170.
⁴ For private sector investors from the US and Europe, the 2021 review threshold is a target enterprise value of $1.565 billion, and for private sector investors from countries that are members of the WTO such as China, it is $1.043 billion.  It is expected that the threshold for review for private sector WTO investors will be $1.141 billion and for private sector trade agreement investors, will be $1.711 billion for 2022.
⁵ The exception to this is that the federal Cabinet has the discretion to review under the “net benefit to Canada” test the establishment by a foreigner of a new cultural business in Canada.
⁶ In April 2020, the Minister of Innovation, Science and Industry signalled that the government would more closely scrutinize investments involving health care-related industries as well as those providing critical goods and services to Canadians and governments. See https://www.ic.gc.ca/eic/site/ica-lic.nsf/eng/lk81224.html.
⁷ See our article at http://www.canadaregulatoryreview.com/national-security-review-updated-guidance-personal-data-critical-minerals-sensitive-technologies-and-soes/.
⁸ While the previous guidelines identified the potential effects of a foreign investment on the transfer of “sensitive technology”, the new guidelines offer greater specificity and indicate that the government will consider whether “the investment provides access to information not in the public domain related to the research, design or manufacture of sensitive technologies. Sensitive technology areas include those that have military, intelligence or dual military/civilian applications. Such technologies may be developed in multiple fields, including, but not limited to those listed at Annex A.”   Annex A includes a non-exhaustive list of technology areas that may be “sensitive” for national security review purposes and includes artificial intelligence, biotechnology, energy generation, storage and transmission and robotics and autonomous systems, among other things.
⁹ See https://www.canada.ca/en/public-safety-canada/news/2021/05/government-of-canada-expands-work-to-address-economic-based-threats-to-national-security.html.
¹⁰ Public Safety Canada engaged in a targeted public consultation, seeking input on measures relating to a number of topics, including those respecting the Investment Canada Act.
See the response of the Competition Law and Foreign Investment Review Section of the Canadian Bar Association at https://www.cba.org/CMSPages/GetFile.aspx?guid=ba48a810-114d-41b5-997c-9f4dcef2a52f
¹¹ See https://pm.gc.ca/en/mandate-letters/2021/12/16/minister-innovation-science-and-industry-mandate-letter.
¹² CMI Canada has since challenged the government’s decision and the matter is before the Federal Court.
¹³ In December 2020 the government also blocked a bid by China's SOE Shandong Gold Mining to acquire TMAC Resources. In addition, in May 2018, the Canadian Government prohibited the $1.5 billion acquisition of Canadian construction company Aecon Group Inc., by Chinese SOE, China Communications Construction Company International Holding Limited (CCCC), one of the world’s largest engineering and construction firms, for national security reasons. See https://www.dentons.com/en/insights/alerts/2018/may/25/canada-prohibits-chinese-soe-acquisition-of-aecon-on-national-security-grounds.
¹⁴ See https://www.dentons.com/en/insights/articles/2021/may/11/uk-national-security-and-investment-act-2021-creates-a-screening-regime-for-foreign-investment.