- In a move echoing Canada’s response at the start of the COVID pandemic[1], the Minister of Innovation, Science and Industry (ISI) bluntly announced, in a statement posted on X on March 5, that Canada’s “economic security is national security.” The implication of this is that all foreign investments into Canada may now be reviewed under the Investment Canada Act (ICA), to assess whether they cause injury to Canada’s economic security.
- The ICA guidelines relating to national security review have also been updated to expressly include the potential of an investment to undermine Canada’s “economic security” by enhancing integration of the target Canadian business with a foreign economy.
- The political context for this change signals that economic security issues may become an important focal point in foreign investment review for certain investments (for example, targets important to an innovation ecosystem), potentially turning national security screening in some cases into broader “national interest” reviews.
Economic security considerations could apply to investments from any country, including US investors who until now have received a “light touch” in national security reviews. It is clear that the Minister’s statements and update to the Guidelines are closely linked to the US government’s imposition of draconian tariffs on all Canadian goods on March 4 and the adverse impact this could have on Canadian businesses. In his statement, the Minister refers to the “rapidly shifting trade environment,” as a result of which “some Canadian businesses could see their valuations decline,” making them vulnerable to “opportunistic or predatory investment behaviour by non-Canadians.” Further, where such businesses “are important to Canada’s economic resiliency due to their size, their impact on the innovation ecosystem, or their place in Canadian supply chains or those of allies on whom we rely, it would run counter to Canada’s interests to allow them to fall victim to this type of behaviour to the detriment of Canada’s economic security.”
Under the Investment Canada Act (ICA), foreign investments in Canada can be reviewed under the “net benefit to Canada” review process (applicable primarily to large transactions) and/or under national security screening that applies to foreign investment of any size including non-controlling acquisitions.
Canada’s national security review process allows the Canadian government to screen foreign investments, whether currently foreign-owned or Canadian-owned, to determine if they are “injurious to Canada’s national security.” The federal Cabinet may order the prohibition of an investment or its approval subject to terms and conditions or if the transaction has closed, a divestiture.
The term “national security” is not defined and has been broadened over the years to apply to economic and environmental security (e.g., critical minerals and their supply chains which are viewed as important for the green transition) and health care security (during COVID) as well as more traditional national security concerns associated with territorial sovereignty and defence matters. What is new is that the Guidelines on the National Security Review of Investments (the Guidelines) have never formally referred to “economic security” as a risk factor.
In tandem with the Minister’s statement on X, the Guidelines have been updated “to ensure that the ICA continues to be responsive to the evolving threat environment.”[2] In particular, the Guidelines have added as a national security risk factor “the potential of the investment to undermine Canada’s economic security through the enhanced integration of the Canadian business with the economy of a foreign state.” The press release accompanying the Guidelines states that “in applying this factor, the Government will consider, among other things, the size of the Canadian business, its place in the innovation ecosystem, and the impact on Canadian supply chains.”
The political context for this change signals that economic security issues will become an important focal point in certain reviews, including with respect to, but not limited to, US investments. For US investors, this will be a sharp deviation from past national security screening. Until now, US investors have been viewed as among the most “likeminded” of Canada’s allies and therefore subject to “light touch” reviews under the ICA relative to other countries viewed as “non-likeminded”.
I. How are national security reviews triggered? What does “economic security” mean in this context?
All foreign acquisitions of control of Canadian businesses are subject to filing requirements under the ICA. Such filings trigger national security screening in which economic security considerations could be taken into account (Indeed, Canadian businesses subject to hostile foreign takeovers might now, in some circumstances, advocate that the government block a transaction on economic security grounds). The government may also review non-controlling acquisitions of which it becomes aware through the press or other sources or through a voluntary notification process designed to allow foreign acquirers to obtain national security clearance in advance of closing where an investment raises potential national security concerns. Finally, the government is expected to implement this year mandatory pre-closing notification requirements for investments in certain “prescribed business activities.” Such investments would not be able to close until national security clearance is secured.
The new risk factor in the Guidelines – undermining Canada’s economic security through the enhanced integration of the Canadian business with the economy of a foreign state – could apply to any sector and to an investor from any country. The description and the Minister’s commentary suggest that the government intends to prevent harm to the Canadian economy, businesses and workers from an acquisition (especially an opportunistic one) that leads to businesses in Canada being shut down and/or key operations or assets of Canadian businesses (e.g., manufacturing, research and development, intellectual property, head office functions) being shifted to a foreign economy. While such considerations are normally considered under the “net benefit to Canada” test, the application of such criteria under national security review means that any investment, whatever the size and whether controlling or not, could be subject to conditions or prohibition (or divestiture if the national security review occurs after the transaction has closed) – not just the mega-transactions that hit the ICA’s very high “net benefit” financial thresholds[3]. For example, a small transaction involving the acquisition of an innovative company with advanced technology or IP could be subject to this type of economic security review.
II. Is the upcoming federal election likely to have an impact on ICA review?
Decisions under the ICA are made by politicians – federal cabinet ministers (primarily the ISI Minister and the Minister of Public Safety) and for some decisions, the entire Cabinet. Despite this, most decisions under the ICA are generally based upon recommendations of the civil service, with Ministers becoming more involved as the public profile of an investment increases. However, this could change in the face of aggressive US economic measures against Canada, with not only high-profile investments but also more routine investments involving US investors subject to higher levels of political sensitivity and scrutiny under ICA review processes.
Is the ICA’s review process likely to become more politicized because of the upcoming federal election? (October 2025 is the latest an election can be held, and most analysts believe it will happen sooner.) A change in government could, in theory, bring differing perspectives on ICA reviews[4]. However, given the current political context, it seems likely that any Canadian government, no matter its political stripe, would not wish to be seen as pulling back from enhanced scrutiny of foreign takeovers of Canadian companies under the ICA, including takeovers by US investors.
More US-controlled investment could also be subject to “net benefit” reviews in the future if the US chose to terminate the Canada-US-Mexico Agreement (CUSMA or as it is known in the US, the USMCA) without another agreement replacing it. In that event, US-controlled investors would no longer be considered to be from a trade agreement country and could therefore be subject to a lower “net benefit” review threshold. Of course, the importance of such a development would be diminished if national security reviews include an analysis of economic security.
III. What sources of investment would replace any decline in US Investment?
Since its inception, Canada has always benefitted from foreign capital to develop its economy. In a scenario where there is less investment from the US because the Canadian government begins to reject or discourage investments, US investors might be displaced in part by investors from other countries. However, this would be a tall order given that the US is Canada’s largest single investor by far. The US accounted for 51.5% of the total number of investments in Canada in 2023 – 2024 according to the Canadian government, representing 32.4% of total asset value of investments and 43.4% of total enterprise value of investments[5]. It is also quite possible that uncertainty triggered by tariff wars will lead to less investment generally, not just from US investors. Given this possibility, there may be pressure on the government from Canadian businesses to refine its assessment of the level of risk posed by investors from countries that have traditionally been viewed as higher risk (e.g., China).
If looking for a “made in Canada” solution and in keeping with the surge of Canadian patriotism, Canadian provincial and federal governments may have greater interest in revising the mandates of domestic pension funds to increase investments in Canada. Pursuant to the federal government’s Budget 2024, Stephen Poloz, the former Governor of the Bank of Canada, was tasked with consulting with, among others, pension funds and equity investors on ways to catalyze greater domestic investment opportunities for Canadian pension funds. The government’s Fall Economic Statement 2024 announced that the government is moving forward with a suite of measures to facilitate increased pension fund investment in Canada[6].
IV. Conclusion
Given the current chaotic economic climate, it’s a mug’s game to predict how the next few years will unfold for foreign investment and its review in Canada. The formal introduction of “economic security” into the Investment Canada national security review process indicates that the fallout from tariff wars goes well beyond trade and into other domains.
Whether you are a non-Canadian investor or a Canadian business, you will need to navigate an increasingly uncertain regulatory environment for foreign investment review. Dentons’ Competition and Foreign Investment Review group has the strategic expertise and experience to help you assess your options and find the best path forward.
Background on the ICA
Under the ICA, all acquisitions of control of Canadian businesses (whether foreign owned or not) by non-Canadians are subject to a filing requirement: either an application for “net benefit to Canada” review or a notification filing. As a result of very high review thresholds[7], very few acquisitions of control are subject to net benefit to Canada review outside of the cultural sector. Those that do meet the threshold require pre-closing approval by the ISI Minister (the Minister of Canadian Heritage for cultural sector investments). Although the responsible Minister under the ICA has wide discretion to approve or reject investments, historically rejections have been relatively rare and generally foreign acquirors do not have to make commitments that far exceed what they were already planning to do.[8] The vast preponderance of foreign investments in Canada fall below the “net benefit” review threshold and accordingly, the most common filing by far is the notification form which may be filed pre or within 30 days post-closing. The notification is more of an administrative formality and applies not only to acquisitions of control but also to the establishment of new Canadian businesses.
Rather than “net benefit” review, the predominant form of review under the ICA is national security review. This is led by the ISI Minister in consultation with the Public Safety Minister and applies to all Canadian investments, large or small, whether acquisitions of control of Canadian businesses, minority investments in Canadian businesses, or the establishment of new Canadian businesses. The federal Cabinet has the power to prohibit an investment on national security grounds, to authorize it subject to terms and conditions or to order a remedy such as a divestiture. Pursuant to amendments to the ICA in 2024, the Minister may also approve an investment conditional on commitments from the foreign investor to mitigate national security risks.
For more information on this topic, please reach out to the author, Sandy Walker.
[3] The ICA’s net benefit review thresholds relate to the target size. In 2025, they are: $1.386 in target enterprise value for investors from World Trade Organization (WTO) countries, $2.079 billion for trade agreement investors such as US or EU controlled investors, and $551 million in target asset value for WTO foreign state investors.
[4] For certain investments, national security risks are viewed as high based on a combination of the investor’s home country (e.g., China, Iran, Russia) and the nature of the target Canadian business (e.g., sensitive technology, critical minerals). For some investments, however, there may be less certainty about potential harm, and it is possible that governments with different priorities or perspectives might arrive at different assessments of national security risks.
[5] See https://ised-isde.canada.ca/site/investment-canada-act/en/home/annual-report-2023-2024#s4.
[6] See https://www.canada.ca/en/department-finance/news/2024/12/unlocking-pension-investment-in-canada.html.
[7]See footnote 3.
[8] Approval depends on the impact of the investments on a range of factors such as employment levels in Canada, capital expenditures in Canada, location of head office functions in Canada, and participation of Canadians in senior management and governance. Foreign investors generally offer the Canadian government binding commitments called “undertakings” relating to these and other factors to obtain Ministerial approval.
