The shifting sands of Canadian foreign investment review

 
These changes come in the context of an uncertain economic environment where the Canadian government is seeking, with greater priority, to encourage investments in Canada that are consistent with its policy objectives.

In March, the Government of Canada announced updates to its foreign direct investment review policy and expressly recognized the importance of economic security as a national security consideration. In assessing the potential economic security risks of an investment, the government will consider factors such as the size of the Canadian business, its role in the innovation ecosystem, and its impact on Canadian supply chains.

The government also indicated that, as a result of the “rapidly shifting trade environment”, it will review investments that could result in “the enhanced integration of the Canadian business with the economy of a foreign state”. Perceived “opportunistic or predatory investment behaviour” by non-Canadians in the current economic environment may also trigger scrutiny.

The changes were formally made to the Guidelines on the National Security Review of Investments under the Investment Canada Act (the Guidelines) and in an accompanying broad policy statement.

The March 2025 changes come on the heels of a July 2024 policy statement in which the government announced that acquisitions of control over Canadian mining companies engaged in significant critical minerals operations would only be approved “in the most exceptional of circumstances”. The government issued the July 2024 policy statement because it believes that Canada must seize opportunities in exploration, extraction, processing, downstream product manufacturing and recycling of critical minerals. The government thinks leadership in the development of critical minerals value chains is vital to Canada’s long-term security and prosperity. The policy sent a clear signal that the government may intervene in critical mineral transactions to achieve industrial policy outcomes. The new Guidelines suggest that that willingness to intervene should now be expected across all sectors of the economy. (No transactions have been reviewed under either the July 2024 policy or the new Guidelines, so their application in practice is unknown.)

On the other hand, in a parallel development, investors should expect an increase in the number of conditionally approved investments and a decrease in the historic binary “approval or non-approval” approach taken to date by the government. There are two reasons for this.

• First, aggressive enforcement may be backfiring, and the government may want to re-calibrate its approach. Canadian critical minerals companies with assets overseas have started to move overseas themselves to avoid ICA jurisdiction. Numerous companies have recently redomiciled to Switzerland, the UAE and elsewhere so they can accept investments from China and elsewhere without Canadian national security scrutiny. There have also been challenges to ICA jurisdiction by some foreign investors which have resulted in government back downs. The government may be realizing that some of its enforcement positions are on thin legal ice.
• Second, since last September there is a new legal ability to approve transactions conditionally—the process for doing so is now easier—so the government has an obvious off-ramp if it is minded to change its enforcement course. A government minister may now conditionally approve investments during a national security review. Historically, conditions had to be imposed by the full Cabinet at the end of an in-depth review. That rigid process tended to result in at-risk transactions being blocked. The new rules permit the government to take a nuanced approach to potentially problematic deals because it is now easier to approve investments by mitigating risk to acceptable levels through bespoke arrangements. 

So, although more transactions may be subject to scrutiny, more transactions may be approved, albeit conditionally. There are signs that this may already be happening, with the conditional approval of a foreign investment in a uranium business late last year. Conditions in that case included requirements that executives be nationals of Canada, the United States, the United Kingdom, New Zealand and/or Australia and a bar on any of them having contractual, financial or fiduciary relationships with any state-owned enterprise of the People’s Republic of China.

Businesses should consider these new policies and rules in their strategic planning and gauge risks associated with national security reviews. Although the policies are broad in scope and the enforcement environment is fluid and rapidly changing, case-by-case risk assessments will be important. This may involve an evaluation of regulatory risk allocation in the transaction’s initial assessment and negotiation phases, tailored provisions in agreements to address risk allocation and mitigation measures, and de-risking strategies like early upfront interactions with regulators or the early submission of mandatory or voluntary notifications. Although the vast majority of foreign investment transactions will continue to be approved unconditionally in the ordinary course, investors in significant Canadian businesses will need to be thoughtful about the new rules and creative in how they address political and regulatory risk in order to secure approvals under the ICA.