Investment Canada Act (ICA) Definition

What Is the Investment Canada Act (ICA)?

The Investment Canada Act (ICA) refers to a Canadian law that regulates direct investment in the country by foreigners. The Act covers foreign ownership of new and existing businesses within the country. Under the law, any non-Canadians who wish to make a direct investment in the country must submit a notice or application for review. The law was passed in 1985 and was updated several times since then. The Act was intended to signal Canada's openness to new foreign direct investment (FDI).

Understanding the Investment Canada Act (ICA)

The Investment Canada Act was established in 1985 and replaced the Foreign Investment Review Act. The new law was signed by the federal Progressive Conservative government led by then-Prime Minister Brian Mulroney.

The ICA allows the government to review significant investments made by foreign parties within the country. It also recognizes that these investments benefit the country and its national security. This ensures that foreign investment not only advances Canada's economic growth but also encourages the expansion of the national job market.

As mentioned above, interested foreign parties must file a notice or application before they intend to make direct investments in Canada. Notices are filed every time someone wishes to start a new venture or whenever someone acquires a business in Canada. An application for review must be submitted whenever the value of an acquired business either meets or exceeds the thresholds set out by the Act.

According to the government's annual report, 826 notifications and applications were filed by non-Canadians and approved during the 2020-2021 fiscal year. That was a drop from the 1,032 filings that were made in the 2019-2020 fiscal year. Of these:

• Three were under review
• The remaining had an enterprise value of $37.26 billion and a total asset value of $22.50 billion
• As many as 247 were related to starting a new business in Canada.

Special Considerations

The Act put thresholds in place to keep Canadian interests front and center of the investment industry. As such, the Act specifies the following limits for FDI for review for 2021:

• Investments through private sector trade agreements: $1.711 billion in enterprise value
• World Trade Organization (WTO) investments by state-owned enterprises: $454 million in asset value
• Investments in cultural businesses and non-WTO investments: $5 million in asset value (direct investments) and $50 million (indirect transactions)

Investment values are calculated by either asset value or enterprise value. The former represents the value of assets according to a company's financial statements while the latter accounts for a corporation's cash, debt, and market value. Investments may be rejected if they do not meet threshold requirements or do not benefit the Canadian public.

Criticism of the Investment Canada Act (ICA)

Like any legislation that is meant to encourage foreign investment, the ICA is not without its fair share of criticism. Although many countries actively seek investment from external parties to support economic development, these investments may result in destabilizing economic or political environments. For example, certain vital strategic elements such as national security can be undermined by greater access to foreign investment vehicles.

Another common drawback to increased FDI is the idea of hot money. Hot money includes the destabilizing effects of a flood of money into and out of a country. As money rushes in, many projects become wasteful and frivolous. That's because their primary purpose isn't long-term or economic in nature. When money rushes out, it leaves fragile economies prone to greater instability or crises.

Even though the Act isn't used to formally block takeover bids and investment in Canadian entities, its vague mandate does enable diplomats, public representatives, and civil servants to informally dissuade investors at times. This creates a sense of government risk among foreign investment analysts, but the scale of impact is difficult to measure and ascertain.

The Bottom Line

Investors who take an ownership stake in a foreign company make what's called foreign direct investment. Certain countries have rules and regulations in place about how to deal with foreign direct investments. In Canada, these kinds of investments fall under the purview of the Investment Canada Act. The law allows the government to review investments made by foreign entities to ensure they meet the economic needs of the country.