EXTRA Vol. 151, No. 1

Canada Gazette

Part Ⅱ

OTTAWA, THURSDAY, SEPTEMBER 7, 2017

Registration

SOR/2017-168 September 1, 2017

INVESTMENT CANADA ACT

Regulations Amending the Investment Canada Regulations

P.C. 2017-1117 August 31, 2017

His Excellency the Governor General in Council, on the recommendation of the Minister of Industry, pursuant to sections 14.2 (see footnote a) and 35 (see footnote b) of the Investment Canada Act (see footnote c), makes the annexed Regulations Amending the Investment Canada Regulations.

Regulations Amending the Investment Canada Regulations

Amendments

1 Paragraph 3.1(1)(a) of the Investment Canada Regulations (see footnote 1) is replaced by the following:

  • (a) a non-Canadian, other than a WTO investor or a trade agreement investor, if the Canadian business that is the subject of the investment is controlled by an investor, other than a WTO investor or a trade agreement investor, immediately prior to the implementation of the investment;

2 The heading before section 3.2 of the Regulations is replaced by the following:

Acquisitions Subject to Subsection 14.1(1) and Section 14.11 of the Act

3 Paragraphs 3.2(a) and (b) of the Regulations are replaced by the following:

  • (a) a WTO investor or trade agreement investor, that is not a state-owned enterprise; or
  • (b) a non-Canadian, other than a WTO investor or trade agreement investor, that is not a state-owned enterprise if the Canadian business that is the subject of the investment is controlled by a WTO investor or a trade agreement investor immediately prior to the implementation of the investment.

4 Subsection 3.3(1) of the Regulations is replaced by the following:

3.3 (1) For the purposes of subsections 14.1(1) and 14.11(1) and (2) of the Act, if control of a publicly traded entity that is directly or indirectly carrying on a Canadian business is acquired by a non-Canadian in the manner described in paragraph 28(1)(a) or (b) or subparagraph 28(1)(d)(i) or (ii) of the Act, the enterprise value of the assets of the Canadian business is equal to the market capitalization of the entity, plus its liabilities, minus its cash and cash equivalents.

5 Subsection 3.4(1) of the Regulations is replaced by the following:

3.4 (1) For the purposes of subsections 14.1(1) and 14.11(1) and (2) of the Act, if control of an entity that is not publicly traded and that is directly or indirectly carrying on a Canadian business is acquired by a non-Canadian in the manner described in paragraph 28(1)(a) or (b) or subparagraph 28(1)(d)(i) or (ii) of the Act, the enterprise value of the assets of the Canadian business is equal to the total acquisition value of the entity, plus its liabilities, minus its cash and cash equivalents.

6 Subsection 3.5(1) of the Regulations is replaced by the following:

3.5 (1) For the purposes of subsections 14.1(1) and 14.11(1) of the Act, if control of a Canadian business is acquired by a non-Canadian in the manner described in paragraph 28(1)(c) of the Act, the enterprise value of the assets of the Canadian business is equal to the total acquisition value, plus its liabilities, minus its cash and cash equivalents.

7 Item 5 of Schedule I to the Regulations is replaced by the following:

5 An indication of whether the investor is a WTO investor, a NAFTA investor or a trade agreement investor.

8 Items 26 and 27 of Schedule I to the Regulations are replaced by the following:

26 If the investor is not a WTO investor, a NAFTA investor or a trade agreement investor, an indication of whether immediately before the implementation of the investment the Canadian business was controlled by a WTO investor, a NAFTA investor or a trade agreement investor.

27 If the investor is a WTO investor, a NAFTA investor or a trade agreement investor or if immediately before the implementation of the investment the Canadian business was controlled by a WTO investor, a NAFTA investor or a trade agreement investor, an indication of whether the Canadian business is a cultural business as defined in subsection 14.1(6) of the Act.

9 Item 5 of Schedule II to the Regulations is replaced by the following:

5 An indication of whether the investor is a WTO investor, a NAFTA investor or a trade agreement investor.

10 Item 26 of Schedule II to the Regulations is replaced by the following:

26 If the investor is not a WTO investor, a NAFTA investor or a trade agreement investor, an indication of whether immediately before the implementation of the investment the Canadian business was controlled by a WTO investor, a NAFTA investor or a trade agreement investor.

11 Items 29 to 31 of Schedule II to the Regulations are replaced by the following:

29 In the case of an investment referred to in subsection 14.1(1) or 14.11(1) or (2) of the Act to which section 3.3 of these Regulations applies,

  • (a) the market capitalization of the acquired entity, its liabilities and its cash and cash equivalents, calculated in each case in the manner described in that section 3.3; and
  • (b) the most recent quarterly financial statements of the Canadian business on which the enterprise value of the assets of the Canadian business is based.

30 In the case of an investment referred to in subsection 14.1(1) or 14.11(1) or (2) of the Act to which section 3.4 of these Regulations applies,

  • (a) the total acquisition value of the acquired entity, its liabilities and its cash and cash equivalents, calculated in each case in the manner described in that section 3.4; and
  • (b) the most recent quarterly financial statements of the Canadian business on which the enterprise value of the assets of the Canadian business is based.

31 In the case of an investment referred to in subsection 14.1(1) or 14.11(1) or (2) of the Act to which section 3.5 of these Regulations applies, the total acquisition value of the Canadian business acquired, its liabilities and its cash and cash equivalents, calculated in each case in the manner described in that subsection 3.5.

Coming Into Force

12 These Regulations come into force on the day on which section 80 of the Canada–European Union Comprehensive Economic and Trade Agreement Implementation Act, chapter 6 of the Statutes of Canada, 2017, comes into force, but if they are registered after that day, they come into force on the day on which they are registered.

REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the Regulations.)

Issues

The regulatory amendments are technical in nature and are required to bring into effect legislative amendments to the Investment Canada Act (ICA or “the Act”) contained in Bill C-30, the Act to implement the Comprehensive Economic and Trade Agreement between Canada and the European Union and its Member States and to provide for certain other measures (the CETA Implementation Act). Bill C-30 received royal assent on May 16, 2017.

The amendments to the ICA pertain to Canada’s commitment to introduce a net benefit review threshold of $1.5 billion in enterprise value for non-state-owned enterprise (non-SOE) investors from CETA countries and other free trade agreement partner countries. An SOE is an organization that is owned, controlled or influenced, directly or indirectly, by a foreign government; a non-SOE is any other enterprise, such as a private sector investor.

The Regulations are being modified to include the new category of “trade agreement investor” which will be in the amended ICA. Canada is a party to a number of bilateral trade agreements with other countries that have relevant forward looking most-favoured-nation provisions, which means that the CETA commitment to raise the threshold will also be extended to them. These partner countries are Chile, Colombia, Honduras, Mexico, Panama, Peru, South Korea, and the United States. “Trade agreement investor” means an investor from any CETA country or another bilateral free trade agreement partner country.

Background

As part of the CETA, Canada committed to introduce a net benefit review threshold of $1.5 billion in enterprise value for non-SOE investors from CETA countries. The manner of calculating the enterprise value of the Canadian business that is the subject of the investment is prescribed in sections 3.3, 3.4, 3.5 and 3.6 of the Investment Canada Regulations and depends on whether the Canadian business is a publicly traded entity, a non-publicly traded entity or is acquired by the acquisition of assets, respectively. Under a separate process from the net benefit review, the ICA also provides for the review of investments in Canada by non-Canadians that could be injurious to national security. The scope for national security review is not affected by the net benefit review threshold increase; foreign investments are and would remain subject to the national security review provisions, regardless of their value. The threshold increase therefore does not affect the Government’s authority to act to protect national security.

Canada announced it would increase the net benefit review threshold on October 29, 2013, when the Technical Summary of Final Negotiated Outcomes of CETA (http://international.gc.ca/trade-commerce/assets/pdfs/ceta-technicalsummary.pdf) was published. At the time of the announcement in 2013, the threshold was $344 million in asset value. The manner of calculating the value of the Canadian business that is the subject of the investment was prescribed in section 3.1 of the Investment Canada Regulations and was based on the Canadian business’s asset value as shown on the balance sheet of the Canadian business at the end of the last completed fiscal year before its proposed acquisition.

Since the CETA announcement was made, in April 2015, Canada introduced a higher threshold of $1 billion in enterprise value for non-SOE investors from World Trade Organization (WTO) countries, on June 22, 2017. The change to enterprise value captures the increasing importance of people, know-how, intellectual property and other intangible assets in the valuation of modern, knowledge-intensive businesses. The regulations were also amended to prescribe the calculation of enterprise value. The review threshold remained unchanged for acquisitions of control by foreign SOE investors, investors from non-WTO countries, and foreign acquisitions of control of Canadian cultural businesses.

Bill C-30, the CETA Implementation Act, includes amendments to the ICA to introduce the new category of trade agreement investors. For trade agreement investors, inclusive of CETA, the $1.5 billion net benefit review threshold, specified in legislation, will be applied, with the manner of calculating enterprise value specified in the Investment Canada Regulations.

Objectives

The objective is to amend the Investment Canada Regulations so that non-Canadians to which the $1.5 billion in enterprise value net benefit review threshold applies are able to calculate the value of the Canadian business being acquired. The changes are necessary to meet Canada’s commitments in the CETA.

Description

The ICA identifies the relevant threshold for an investor. The manner of calculating the relevant threshold, which is expressed in either asset value or enterprise value, is defined in the Investment Canada Regulations.

The amendments to the Investment Canada Regulations will give effect to language in the ICA amendments. The “value of the assets” is described in section 3.1 of the Regulations and is equal to the value of the aggregate of all assets acquired, or of all assets of the entity, as shown in the audited financial statements of the entity carrying on the business for its fiscal year immediately preceding the implementation of the investment.

“Enterprise value for publicly traded Canadian businesses” is described in section 3.3 and is equal to the market capitalization of the entity, plus its liabilities, minus its cash and cash equivalents. “Enterprise value for entities that are non-publicly traded and Canadian businesses acquired by acquisition of assets” is defined in sections 3.4 and 3.5 respectively and is equal to the total acquisition value of the entity, plus its liabilities, minus its cash and cash equivalents. The enterprise value applicable to trade agreement investors is the enterprise-value calculation that is currently set out in the Investment Canada Regulations. The manner of calculation of enterprise value will not change for trade agreement investors, but the Investment Canada Regulations need to reflect that these investors will use the enterprise value method currently set out in the Investment Canada Regulations (rather than asset value) for the purpose of calculating the net benefit review threshold identified in legislation.

Those paragraphs requiring amendments to incorporate “trade agreement investors” are 3.1(1)(a) and 3.2 - definition of non-Canadian, item 5 of schedule I and items 26 and 27 of schedule I, item 5 of Schedule II and item 26 of schedule II. Consequential regulatory amendments, i.e. to incorporate a reference to ICA subsections 14.11(1) and (2), which establish the review thresholds, are 3.3(1) - publicly traded entities, 3.4(1) - entities that are not publicly traded, 3.5(1) - Canadian businesses acquired by acquisition of assets and items 29, 30 and 31 of Schedule II.

“One-for-One” Rule

The “One-for-One” Rule does not apply to this proposal, as there is no change in administrative costs to business.

Small business lens

The small business lens does not apply to this proposal, as there are no costs (or insignificant costs) on small business.

Consultation

The Regulations Amending the Investment Canada Regulations were published in the Canada Gazette, Part I on July 15, 2017, followed by a 15-day comment period. In the comment period, the European Union commented on the method of calculating the enterprise value of a Canadian business, contrasted to asset value, in the context of transitioning to a new threshold. Officials responded to the European Union’s comments by noting that the enterprise method of valuation has been in effect since April 2015, and that non-SOE European investors, who are also WTO members, have been calculating enterprise value in the manner prescribed by regulation since that time.

Rationale

Technical regulatory amendments are needed to implement the $1.5 billion in enterprise value net benefit review threshold for non-SOE trade agreement investors, substantially set out in the CETA Implementation Act. The regulatory changes will not affect the way in which asset value or enterprise value are calculated. The Regulations are only modified to include the new category of “trade agreement investor,” i.e. investors from CETA countries and countries with which Canada has free trade agreements with relevant most-favoured nation provisions. The changes in the threshold are made in the legislation, not the regulations.

Implementation, enforcement and service standards

The regulations come into effect when the relevant provisions of CETA Implementation Act come into force.

Investors will be able to visit the Innovation, Science and Economic Development Canada website (http://www.ic.gc.ca/eic/site/ica-lic.nsf/eng/Home) for information on the Regulations. New forms, including the new information requirements for notifications and applications for review, are available on this website.

Innovation, Science and Economic Development Canada does not anticipate the requirement for any significant increases to human or financial resources in order to implement these Regulations. The existing compliance and enforcement mechanisms are sufficient and would be applied as necessary.

Contact

Patricia Brady
Director General
Investment Review Division
C.D. Howe Building
235 Queen Street, Room 554A
Ottawa, Ontario
K1A 0H5
Telephone: 343-291-2706
Email: patricia.brady@canada.ca