OTTAWA — The federal government is weighing new measures to counter what it considers economic threats to Canada’s national security from foreign states and other hostile actors, The Logic has learned. That could include imposing new requirements for foreign investments and takeovers, stepping in with capital for firms developing sensitive technologies, and curbing exports to some foreign buyers.

Public Safety Canada said in March it would develop a “comprehensive policy framework” to “further counter economic threats to Canada’s national security.” In May, the federal department sent a discussion document detailing measures it was considering to industry associations, post-secondary groups, and think tanks for consultation. The paper, which The Logic obtained via access-to-information request and which has not previously been made public, says the government has “observed persistent and sophisticated state-sponsored threat activity for many years now and continues to see a rise in the frequency and sophistication of this threat activity,” noting that foreign states and linked actors could try to acquire sensitive technology and data via legal means like investments, purchases and research partnerships.

One set of potential changes would introduce new requirements for some foreign mergers, acquisitions and controlling investments, and give the government new powers to set deal conditions and issue fines for non-compliance.

Under the Investment Canada Act (ICA), foreign entities must already report such transactions to Ottawa, and those valued over certain thresholds—between $415 million and $1.57 billion, depending on the type—are subject to an economic review. Cabinet can also choose to investigate on national-security grounds; in updated guidelines released in March, the government signalled it would take an interest in deals involving critical minerals, important personal data and sensitive technologies like AI, quantum and robotics.

The Public Safety paper proposes requiring would-be investors to notify the government if they’re buying into or taking over a Canadian company in one of those sectors, or if a transaction includes state-owned or -controlled enterprises. Such a rule would “assure early visibility” for the government, “protect against national-security harms” and “prevent undue hardship on companies” from unwinding a done deal, it states. The paper cites similar provisions in the U.S. and Australia.

Subrata Bhattacharjee, national co-chair of the law firm BLG’s competition and investment group, says the federal government’s existing powers for national-security reviews are “already very broad.” Adding a pre-closing notification requirement, as proposed in the Public Safety paper, would make it “an extremely powerful test,” he said. Such investigations are “much less defined in terms of process and timing” than economic ones.

National-security concerns about investments have traditionally focused on technology and infrastructure with military use, said Bhattacharjee. But the proposals in the paper go beyond that, to investors and assets that “may be relevant to our overall integrity as a country.” For example, a state-linked business might acquire a business with access to Canadians’ personal information, or a buyer might plan to process data on servers in the jurisdiction of a hostile state. “Is there the possibility that data could be then used against Canadians?” he said.

Public Safety Minister Bill Blair and Innovation Minister François-Philippe Champagne did not respond to questions about whether the government is planning to implement the measures outlined in the consultation paper.

The document also suggests that Ottawa may take a more active role in funding companies developing sensitive technologies. It asks whether respondents in such fields have faced difficulties accessing venture capital, and what role the government should play in financing such firms “through alternative loan or grant programs.”

Ottawa has already made such moves. In May, the Business Development Bank of Canada (BDC) launched a $200-million deep-tech fund focused on companies working on technologies like quantum, foundational AI and photonics. Ottawa’s flagship Strategic Innovation Fund has also backed domestic companies working in these and other related fields, including Burnaby, B.C.-headquartered D-Wave, Boisbriand, Que.-based Kinova and Calgary’s Attabotics. And the Liberals’ April budget allocated hundreds of millions each to the AI and quantum sectors, including funds for commercialization and scaling up businesses.

“If capital is not readily available [domestically], then other sources become appealing to entrepreneurs and investors looking [to] fundraise,” said Kim Furlong, CEO of the Canadian Venture Capital & Private Equity Association (CVCA), calling federal programs which seed funds-of-funds and funds “extremely important.” 

In July 2019, the CVCA raised concerns after changes to the powers of the Committee on Foreign Investment in the United States (CFIUS) subjected more U.S. investments by Canadian firms to review. Canada, the U.K. and Australia were later exempted. “We have to prevent all the uncertainty that surrounded the rules around CFIUS,” Furlong said, noting that if Ottawa imposes new regulations, “allies and friendly countries” that apply similar scrutiny to foreign investments should be spared; the discussion paper proposes reciprocal exemptions.

The moves the document cites as inspiration came amid rising economic and geopolitical tensions between Canada’s allies and the Chinese government. Under the Trump administration, CFIUS focused particularly on deals involving Chinese firms, while policy experts cite Beijing as the target of the Australian government’s expanded powers to intervene in domestic organizations’ international agreements. Ottawa appears to have anticipated a similar perception about its proposals. In April, Public Safety Canada’s Economic Security Task Force sent Blair media lines to use should the discussion paper become public, which included responses to use if “pressed on whether this work is focused on China.” (Blair and his department were told to say the “efforts are not specific to any country.”)

Jim Balsillie, chair of scale-up lobby group the Council of Canadian Innovators, said the government’s proposals don’t adequately address the ongoing shift to an economy where value is derived from intangible assets like intellectual property and data. The Public Safety paper states that the “vast majority” of foreign investment, research partnerships with international entities and trade in goods and technology “benefit Canada and Canadians.” That’s “incorrect,” said Balsillie. “They just assume the spillovers are positive unless it’s China or Russia.”

While a foreign-owned factory might create jobs and stimulate a local economy, the profits that an international tech giant derives from the patents generated by its Canadian subsidiary flow to the parent company’s home country. Ottawa is keen to ensure IP developed in Canada remains in the country, Champagne told The Logic in April, saying he’d use “all the tools that I have” to do so.

Balsillie, former co-CEO of Research in Motion (now BlackBerry), also raised concerns that the current investment-review regime focuses on very large deals and state-owned or -linked enterprises. “Whether it’s Huawei partnerships at universities or foundational, taxpayer-funded technology going to Google, both have foundationally negative consequences [for] Canada as a prosperous, secure country,” he said. (CSIS has reportedly expressed concerns to post-secondary institutions about their researchers working with Huawei, the Chinese telecommunications-equipment firm; University of Toronto professor Geoffrey Hinton, a machine-learning pioneer, is a fellow at Google Brain, the search giant’s AI arm).

Some innovation-economy groups and policy experts warn that overly restrictive measures could stifle capital flows into Canada. “You’ve heard a lot of almost populist rhetoric coming out of the government of ‘No company with sensitive [or] valuable intellectual property should be sold. It should be kept here,’” said Furlong, claiming that imposing sale restrictions or clawing back federal funding from acquired firms would hurt the ecosystem over the long term. “If that is a signal that an exit value would be depressed … why would you build it here?”

While the government needs to address threats from state and private-sector actors, “it’s in Canada’s interest to project that we’re open for business [and] welcome foreign investment [and] engagement with foreign markets, especially big [ones],” said Jia Wang, interim director of the University of Alberta’s China Institute. And any new policy to safeguard Canada’s economic security “really shouldn’t be just focusing on one country.”

Fears that past changes to the ICA or other foreign investment restrictions would “kill inbound investment … haven’t been borne out,” said BLG’s Bhattacharjee.

The Public Safety paper suggests the government could also establish a list of foreign entities—businesses, research institutions and state agencies—and require special permits for any Canadian enterprise wanting to export to them. The U.S. Commerce Department’s Bureau of Industry and Security maintains such a roster, and has added dozens of Chinese firms to it in recent years, restricting their access to U.S.-made components. 

The paper also asks whether the government should be “identifying research areas defined as high risk or sensitive,” and asks the institutions receiving it to report any potential security breaches that have compromised IP or national security, citing guidelines that were under development at the time for national-security agreements in research partnerships.

In July, the government implemented a new risk-assessment questionnaire and review process for scientists and other academics seeking federal funding. The requirement will start with applicants for the Natural Sciences and Engineering Research Council of Canada’s (NSERC) Alliance Grants program, and expand to other granting councils.

Those rules are too broad, said Christopher Parsons, senior research associate at the University of Toronto’s Citizen Lab, which focuses on digital rights and security. “If you’re doing anything that you’re getting major grants for that’s leading-edge—which ideally is what you’re doing your academic research on—you’re probably going to be captured under it.” But universities don’t have the intelligence or training to make assessments about whether a potential research partner carries a national-security risk.

Parsons said he’s since heard from academics who are “ceasing projects, declining to bring on postdocs, or having a hard time getting students that they work with now to continue because [they] are scared [to] fall under some national-security umbrella.” The chill has focused on “Chinese students [and] individuals of Chinese descent.” Public Safety’s consultation fails to seriously consider the potential for “severe deleterious impacts on individuals who have done nothing wrong,” he said.

“Economic espionage is a serious and real issue,” said Parsons. But the government needs to expand its own capacity to identify hostile actors and investments that could undermine national security, instead of putting the onus on startups, VCs, exporters or research institutions. “You can’t and shouldn’t ask non-experts to pretend as though they’re experts when it could have serious impacts on people’s lives and livelihood.”

Public Safety’s closed consultation on the potential new measures is ongoing. In May, the department said it would publish a summary report “in the coming year.”