Ottawa changes foreign-investment rules to guard against ‘predatory’ acquisitions amid tariff battle

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The federal government has given itself more power to block foreign investments in Canadian companies, a day after sweeping U.S. tariffs on goods from Canada took effect.

Ottawa’s guidelines that determine when a foreign investment could face a national-security review were updated on Wednesday to include “the potential of the investment to undermine Canada’s economic security.”

Innovation Minister François-Philippe Champagne said in a statement that the change was necessary “as a result of the rapidly shifting trade environment.” He did not specifically refer to the continental trade war that U.S. President Donald Trump launched on Tuesday, though he did warn of “opportunistic or predatory investment behaviour by non-Canadians.”

Prime Minister Justin Trudeau said in a speech Tuesday outlining Canada’s response to the U.S. tariffs that Ottawa “will take measures to prevent predatory behaviour that threatens Canadian companies because of the impacts of this trade war, leaving them open to takeovers.”

While the new guidelines apply to all investments in Canadian companies from abroad, the addition of “economic security” is “clearly part of the government’s response to the Trump tariff announcement,” according to lawyer Omar Wakil.

“It is a warning to U.S. investors,” said Mr. Wakil, co-chair of the competition and foreign investment review practice at law firm Torys LLP. “The minister is effectively saying that, if your U.S. businesses are trying to exploit weaknesses and vulnerabilities that are created by tariffs by buying Canadian companies at reduced values, we might take action.

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“This is an important change. The government is formally changing their policy to say that national security includes economic security.”

Canadian merger and acquisition activity was already facing a slowdown from the threat of U.S. tariffs. Given the sweeping nature of Wednesday’s update – it is much broader than a similar change made during the early days of the COVID-19 pandemic that singled out investments from foreign state-owned entities – Mr. Wakil said any transaction involving a non-Canadian buyer could face extra scrutiny.

“It is a signal that the government is prepared to review any investment, no matter how significant,” he said. “There aren’t any thresholds.”

Ian Macdonald, a partner in the Toronto office of law firm Gowling WLG specializing in foreign investment reviews, said it is no coincidence the national-security review guidelines were updated one day after U.S. tariffs on Canadian goods took effect.

“But the government has to walk a real tightrope here,” he said. “Foreign investment is critical to the Canadian economy, and the U.S. has consistently been, by far, the number one source of foreign investment in Canada.”

The U.S. was the ultimate source of $697.3-billion worth of foreign direct investment in Canada in 2023, according to data from Statistics Canada. The combined investments in Canada made that year from Britain, Japan, Germany and China – the other top five sources of FDI – amounted to $222.4-billion, less than one-third of the U.S. total.

Despite that dominance, Mr. Macdonald said American investors might have their Canadian deals face heightened scrutiny under the new review guidelines.

“Historically the U.S. has not been an adversary or had problems with the Investment Canada Act, but in light of the recent rhetoric about weakening the Canadian economy to make it easier to annex, this could be a new area where Americans, at least in some transactions, start having trouble.”

Ottawa already has very broad authority to block, condition or even unwind deals on national-security grounds, and the power of courts to reverse those decisions “are very limited,” according to Mr. Macdonald.

“Courts will not get into the merits and say, ‘We actually don’t think there is a national-security concern here,’” he said. “It is more limited to whether the process was fair, whether the investor had the opportunity to address the concerns.

“What does police them is that if there is too much uncertainty or the answer is too frequently no, then that will scare off foreign investment or even attempted foreign investment.”

Mr. Champagne said in his statement that the goal of the update was to “balance the objectives of encouraging foreign investment while safeguarding Canada’s interests by refusing foreign investments that would be harmful to the Canadian economy, Canadian workers, or our national security.”

For Mr. Wakil, the new guidelines also represent the continuation of a trend toward tighter foreign-investment restrictions.

“Over the past several years, the government has clearly adopted a more restrictive policy toward critical minerals that has created some degree of uncertainty for investors in that space,” he said.

“This now extends that to every potential investor in every space, but with a clear message to Americans.”