A necessary balance

Finding a balance between national security and continuing to attract foreign investment will be key for the new Liberal government, particularly in the middle of a trade fight.

That was the word from panellists at the Canadian Bar Association’s recent competition law conference.

In March, in the wake of broad tariffs imposed by the U.S., the federal government announced amendments to the national security review of investment guidelines under the Investment Canada Act.

The Act allows the government to review investments, especially acquisitions of control of Canadian businesses, for potential net benefits and national security risks. The new changes come amid what the government described as a “rapidly shifting trade environment.”

“In an increasingly geopolitically fractured world, Canada is facing more frequent threats to its national security through economic means,” the government said.

Ultimately, it was an ‘elbows up’ kind of move.

As part of the changes, “economic security” was added to the list of factors to consider when reviewing foreign direct investments, specifically their potential to undermine that, and determining whether it should face a national security review.

Possible predatory investment

Minister François-Philippe Champagne said the change was necessary in the current climate as “some Canadian businesses could see their valuations decline, making them susceptible to opportunistic or predatory investment behaviour by non-Canadians.”

While the government is formalizing the concept of economic security, Fraser Malcolm, a partner at Blake, Cassels & Graydon who moderated the conference panel on changes to the Act, doesn’t think there will be a dramatic shift in how investments are evaluated. That's because it’s something governments have always considered in the background.

However, whatever industry it is, the question is the same: is this critical to Canada?

“Is this something that rises to the level we saw in COVID, things people would not have thought were national security items — like masks,” he said.

Panelist Simon Kennedy, a former deputy minister at Innovation, Science, and Economic Development Canada, sees economic security as broader than traditional national security. He said Canada’s security services now are thinking about issues such as control of supply chains, access to critical minerals, cultural influence, ownership of intellectual property, and data sovereignty.

“It's not just a catch-all to reject investments, but captures broader concerns about economic vulnerabilities.”

According to Luci Hague, a partner at Kirkland & Ellis in Washington, D.C., the U.S. has also experienced a broadening of what constitutes a national security risk.

She told the conference that when the Committee on Foreign Investment in the United States (CFIUS ) was formed in 1991, its regulations included a list of sectors that everyone thought weren't sensitive, such as hotels, legal services, and agricultural land.

“Every single one of those sectors has in the past 10 years been the subject of a CFIUS block of Chinese investment,” Hague said.

Not the clearest concept

Pierre Alvarez, the vice-chair of Global Public Affairs with 40-plus years of experience in the energy industry, noted that economic security also means different things in different contexts. It means one thing in Ottawa and on Bay Street, but in remote areas like Cambridge Bay, it means something very different. For Indigenous communities, it's about resource development opportunities.

“This question of economic security is a tricky one,” he said.

"Politicians are going to have to think about how it applies to different circumstances.”

The panellists acknowledged that Canada’s interpretation of economic security can be opaque, with reasons for blocking investments sometimes unclear, which could cause concern for businesses that crave predictability.

Investors want to be able to put their best case forward and the uncertainty and lack of transparency around who is being consulted about national security issues creates an added and unnecessary level of friction.

“They don't know what the charge being made against them is or how to answer it. And they're just sort of dealing with a clearing house type person,” Malcolm said.

Net benefit and national security reviews under the Act need to be based on policies around things such as sovereignty of the country’s ports, but Kennedy said there aren’t enough of these solid policies in place. That leaves too much space for politicians to get involved, leading to more layers of uncertainty.

Consistency, transparency and predictability

The panel's overall message was that stability requires consistent rules, transparent processes, and predictable decision-making frameworks to attract foreign investment. 

Also part of the discussion was the upcoming introduction of pre-filing requirements under the Act in some instances, which are similar to rules under the Competition Act. Those regulations are still being drafted, but Malcolm said parties are aware and already planning for them. He predicts they’ll come into force at the beginning of 2026.

Pre-filing is becoming more important as the government wants to review potentially sensitive transactions before they are completed. Kennedy said the process can capture manipulative transaction models, threats to data sovereignty, and potential impacts on core infrastructure and public health systems.

Even though details are still to come, experience in other jurisdictions and other areas like competition law mean lawyers and clients will, in many cases, already have a strong sense of when they’ll have to prepare pre-closing filings, said Ian Macdonald, a partner at Gowling WLG.

Malcolm compared the emerging Canadian pre-filing process to existing U.S. practices for sensitive sectors, which lawyers and companies are already familiar with. 

Historically, China has been the focus of Canada’s national security reviews, particularly regarding technology and critical resource investments. However, amid President Donald Trump’s threats to use economic force against Canada and the fissures he’s created with threats against Five Eyes intelligence partners, the panel agreed there may be more intense scrutiny of U.S. companies, but no significant new barriers that drive away investment and hurt the Canadian economy.

“We need foreign investment in this country, and by far, historically, the number one source has been the U.S.,” Macdonald said.

As U.S. investments continue to be reviewed, a process that remains fact-specific, Malcolm stressed that the U.S.-Canada investment relationship remains stable, cooperative, and fundamentally open.