Attitude toward Foreign Direct Investment
With few exceptions, Canada offers full national treatment to foreign investors within the context of a developed open market economy operating with democratic principles and institutions. Canada reviews investments under the Investment Canada Act (ICA). Foreign investment is prohibited or restricted in several sectors of the economy. The United States and Canada agree on important foreign investment principles, including right of establishment and national treatment.
The United States has long been Canada's primary source for foreign investment, and Canada is the fourth largest source of foreign direct investment in the United States after the United Kingdom, Japan, and the Netherlands.
About 49 percent of Canada's foreign direct investment comes from the United States. At the end of 2014, the most recent year available, Canada's stock of U.S. FDI was $386 billion, slightly down from $390 billion in 2013. U.S. investors with large direct investments in Canada include major automakers (GM, Ford, Chrysler), integrated energy, chemical and mineral producers (e.g., ExxonMobil, ChevronTexaco, ConocoPhillips), financial services firms (e.g., Citibank), and retailers (e.g., Wal-Mart). U.S. retailers have had mixed results in Canada with Nordstrom and Whole Foods showing positive results from their expansion into the Canadian market and Best Buy closing its Future Shop outlets and Target closing all of their 133 stores in Canada in early 2015. According to the UN Conference on Trade and Development, Canada attracted 4.3 percent of the world’s FDI in 2014.
Canadian residents have become increasingly active as worldwide investors. The United States is the top destination for Canadian Direct Investment Abroad (CDIA). CDIA stocks in the United States rose about 11 percent ($26 billion) in 2014 to $261 billion. The United States' share of CDIA in 2014 was 42 percent.
Other major destinations for Canadian FDI are the United Kingdom, Barbados, Cayman Islands, and other European Union countries.
Other Investment Policy Reviews
Canada has not conducted an Investment Policy Review through OECD, WTO, or UNCTAD in the past three years.
Laws/Regulations on Foreign Direct Investment
Foreign investment policy in Canada has been guided by the Investment Canada Act (ICA) since 1985. The ICA liberalized policy on foreign investment by recognizing that investment is central to economic growth and key to technological advancement. The ICA provides for review of large acquisitions by non-Canadians and imposes a requirement that these investments be of "net benefit" to Canada. For the vast majority of small acquisitions and the establishment of new businesses, foreign investors need only notify the Canadian government of their investment. Fewer than 10 percent of foreign acquisitions are subject to ICA review. The threshold for investments subject to ICA review for 2016 is C$600 million for WTO Members. (Indirect control acquisitions by WTO Members do not have to be reviewed.) New regulations that come into effect on April 24, 2017 will implement revised review thresholds for WTO investors, other than SOEs, and will increase the review threshold to C$800 million, and ultimately to C$1 billion in 2019. Thereafter the review amount will be subject to indexation. Additionally, the time periods for the security review process will be increased from 130 days to 200 days. For non-WTO Members, the threshold remains at $5 million for direct control and $50 million for indirect control acquisitions.
In 2015, Canada amended its National Security Review of Investment Regulations to provide the government with the flexibility to extend time periods for the review of investments that could be injurious to national security.
Canada announced new SOE guidelines in December 2012, which included the statement that future SOE bids to acquire control of a Canadian oil-sands business will only be approved on an “exceptional basis.” Canada altered the definition of an SOE in its 2013 Budget Implementation Bill to an entity or individual that is influenced directly or indirectly by a foreign government. The Bill also established a separate threshold review for SOE acquisitions of control, and allows Canada’s Industry Minister to review minority SOE investments for the first time. SOE investments from WTO member countries over $375 million are subject to review.
Investment in specific sectors is covered by special legislation. Foreign investment in the financial sector is administered by the Finance Department. Investment in any activity related to Canada's cultural heritage or national identity is administered by the Heritage Department. Foreign ownership of Canadian telecommunications firms is governed by the Telecommunications Act, while the Broadcast Act governs foreign investment in radio and television broadcasting.
Investment in Canada is also subject to provincial jurisdiction. Restrictions on foreign investment differ by province, but are largely confined to the purchase of land and to provincially-regulated financial services. Provincial government policies relating to culture, language, labor relations or the environment, can be a factor for foreign investors.
U.S. foreign direct investment in Canada is subject to provisions of the ICA, the WTO, and the NAFTA. Chapter 11 of the NAFTA ensures that regulation of U.S. investors in Canada and Canadian investors in the United States results in treatment no different than that extended to domestic investors within each country, i.e., "national treatment." Both governments are free to regulate the ongoing operation of business enterprises in their respective jurisdictions provided that the governments accord national treatment to both U.S. and Canadian investors.
Existing U.S. and Canadian laws, policies, and practices were "grandfathered" under the NAFTA except where specific changes were required. The "grandfathering" froze various exceptions to national treatment provided in Canadian and U.S. law, such as foreign ownership restrictions in the communications and transportation industries. Canada retains the right to review the acquisition of firms in Canada by U.S. investors at the levels applicable to other WTO members and has required changes before approving some investments.
Under the NAFTA, Canada is free to tax foreign-owned companies on a different basis from domestic firms, provided this does not result in arbitrary or unjustifiable discrimination. The governments can also exempt the sale of Crown (government-owned) corporations from any national treatment obligations. The Canadian government retains some flexibility in the application of national treatment obligations and need not extend identical treatment, as long as the treatment is "equivalent."
Canada-U.S. trade in services is largely free of restrictions and has doubled over the past decade. U.S. services exports to Canada totaled more than $57 billion in 2015, while Canada’s services exports to the United States totaled over $30 billion. The NAFTA ensured that restrictions on bilateral services trade would not be applied following the agreement. Preexisting restrictions, such as those in the financial sector, were not eliminated by the NAFTA. The NAFTA services agreement is primarily a code of principles that establishes national treatment, right of establishment, right of commercial presence, and transparency for a number of service sectors specifically enumerated in annexes to the NAFTA. The NAFTA also commits both governments to expand the list of covered service sectors, except for the financial services covered by NAFTA Chapter 14.
Business Registration
Innovation, Science, and Economic Development Canada (formerly Industry Canada) works with Global Affairs Canada (formerly Department of Foreign Affairs, Trade, and Development) to encourage foreign companies to invest in Canada and to promote an open, rules-based global investment regime. The Canadian Trade Commissioner Service has a comprehensive website “Invest in Canada” with the needed information for starting and registering a business in Canada. It can be found at the following website: http://www.international.gc.ca/investors-investisseurs/index.aspx?lang=eng. The process is complete, and while the website is available in several languages, navigation can be complex. It scores 7 out of 10 on the Global Enterprise Registration scale. In addition to Federal registration, businesses may also be required to register with the provincial, territorial, municipal and revenue agencies (http://www.cra-arc.gc.ca/tx/bsnss/tpcs/bn-ne/bro-ide/menu-eng.html) Canada ranks third on the World Bank’s Doing Business Scale. For more general information on the Canadian business climate, see:
http://iab.worldbank.org
http://ger.co/how-it-works/information-portals.
http://www.doingbusiness.org/data/exploretopics/starting-a-business
Canada defines business enterprises as follows:
Industrial Promotion
The Canadian Trade Commissioner Service manages the Advanced Manufacturing Fund (AMF) and the Industrial Research Assistance Program (IRAP). The AMF promotes continued growth of Ontario's advanced manufacturing sector by supporting efforts to develop cutting-edge technologies and large-scale activities that will improve processes and increase productivity, establish clusters or global supply chains and collaborate with private sector, and research and post-secondary institutions. The IRAP program assists firms to develop, adopt and adapt technologies and incorporate them into competitive products and services to be commercialized in the global marketplace. IRAP provides advisory services and funding to help SMEs undertake innovation projects.
Limits on Foreign Control and Right to Private Ownership and Establishment
Commercial Aviation: Canada limits foreign ownership of Canadian air carriers to 25 percent. In addition, foreign interests may not control a Canadian air carrier. One Canadian airline is has put a special procedure in place for foreign share transfers which reclassifies its stock as variable voting shares. This allows non-Canadians to own more than 25% of the equity while reducing foreign voting rights and allowing the airline to remain Canadian with at least 75% of its voting interests owned and controlled by Canadians. The Canada-EU Aviation Agreement, signed in December 2009, envisions changes to Canadian legislation that will allow up to a 49 percent foreign stake in Canadian airlines, but they have yet to take place. A government review of the Canada Transport Act released in February 2015 recommended that foreign ownership limits for commercial airlines be increased to 49 percent to foster competition. Canada also passed an amendment to the Canada Transportation Act in March 2009 that provides the Governor in Council (appointed by the Governor General) with authority to increase foreign ownership of Canadian airlines to a maximum of 49 percent. The current government has not taken action on the recommendations of the review panel and the Governor in Council has not exercised his power to raise ownership limits to date.
Electric Power Generation and Distribution: Regulatory reform in electricity continues in Canada in expectation that increased competition will lower costs of electricity supply. Province-owned power firms are interested in gaining greater access to the U.S. power market. Since power markets fall under the jurisdiction of the Canadian provinces, they are at the forefront of the reform effort. Several Canadian provinces have introduced initiatives to encourage the development and implementation of renewable sources of electricity.
A wind power company owned by a New York-based investment group filed a NAFTA Chapter 11 a notice of arbitration against Canada in January 2013 in response to Ontario’s February 2011 moratorium on all new offshore wind projects. (Windstream Energy LLC v. Government of Canada) The company maintains that the moratorium breached Canada’s obligations under NAFTA to protect U.S. investors from expropriation without compensation and violates NAFTA’s minimum standard of treatment provision.
A list of current NAFTA Chapter 11 Arbitrations is below:
Note: See http://www.international.gc.ca/trade-agreements-accords-commerciaux/topics-domaines/disp-diff/gov.aspx?lang=eng for more information.
Energy: Canada continues to encourage additional foreign investment in its energy sector to develop its vast oil and gas resources. (See paragraph 9 for more information on SOE’s in the energy sector.)
Canada has faced several investment disputes involving energy in recent years. An American oil and gas company filed a notice of arbitration under NAFTA Chapter 11 in September 2013, following the Government of Quebec’s announced suspension of oil and gas exploration beneath the Saint Lawrence River in June 2011. The American company filed an additional Memorial in April 2015 stating that Quebec’s provincial legislation effectively destroyed the economic potential of its investment and deprived it of the ability to real any economic benefit from the investment. Further, the company claims the suspension breached NAFTA expropriation and minimum standard of treatment provisions. (Lone Pine Resources Inc. v. Government of Canada)
Fishing: Foreigners can own up to 49 percent of companies that hold Canadian commercial fishing licenses.
Financial Services: Chapter 14 of the NAFTA deals specifically with the financial services sector, and eliminates discriminatory asset and capital restrictions on U.S. bank subsidiaries in Canada. The NAFTA also exempts U.S. firms and investors from the federal "10/25" rule so that they will be treated the same as Canadian firms. The "10/25" rule prevents any non-NAFTA, nonresident entity from acquiring more than ten percent of the shares (and all such entities collectively from acquiring more than 25 percent of the shares) of a federally regulated, Canadian-controlled financial institution. The limit for single, non-NAFTA shareholders is 20 percent. Several provinces, however, including Ontario and Quebec, have similar "10/25" rules for provincially chartered trust and insurance companies that were not waived under the NAFTA.
The requirement that bank ownership be "widely held" with no more than 25 percent of its shares owned by a single shareholder is said to prevent ownership concentration without discriminating against foreign investors; however, Canadian influence is still exerted through certain requirements of the Bank Act:
- the head office of a bank must be located in Canada;
- shareholders’ meetings are required to be held in Canada;
- two-thirds of the directors must be resident Canadians;
- the chief executive officer of the bank must ordinarily be resident in Canada;
- important corporate and transactional documents must be kept in Canada;
- certain administrative changes require ministerial approval.
General Aviation: No non-Canadian (other than permanent residents) may register a general aviation aircraft for commercial or personal use in Canada.
Mining: Generally foreigners cannot be majority owners of uranium mines. On March 17th, 2015 the NAFTA tribunal found Canada liable for having breached its obligations under Articles 1105 and 1102 to Bilcon of Delaware, the parent company of Bilcon of Nova Scotia, for rejecting a project in part because it didn’t meet “community core values.” The company argued it was treated unfairly when it was forced to go before a federal-provincial environmental review panel that ultimately recommended rejecting the company’s planned basalt quarry and marine terminal development project in White Point (near Digby Nova Scotia). On June 16, 2015, Canada filed a notice of application in the Federal Court of Canada for the set aside of the Tribunal’s award. Arbitration has moved on to the damages phase where Bilcon is seeking damages of as much as C$300 million.
Real Estate: Primary responsibility for property law rests with the provinces. Prince Edward Island and Saskatchewan put limitations on real estate sales to out-of-province parties. Government authorities can expropriate property after paying appropriate compensation.
Telecommunications: Under provisions of Canada's Telecommunications Act, foreign ownership of transmission facilities is limited to 20 percent direct ownership and 33 percent through a holding company, for an effective limit of 46.7 percent total foreign ownership. Canada also requires that at least 80 percent of the members of the board of directors of facilities-based telecommunications service suppliers be Canadian citizens.
Canada amended the Telecommunications Act in June 2012 to rescind foreign ownership restrictions on carriers with less than 10 percent share of the total Canadian telecommunications market. Foreign-owned carriers are permitted to continue operating if their market share grows beyond 10 percent provided the increase does not result from the acquisition or merger with another Canadian carrier. The policy change was part of the Canadian government’s strategy to facilitate more competition in the telecom sector. Canada’s three largest telecomm providers acquired the majority of spectrum licenses sold at its 700 MHz spectrum auction in February 2014, and the auction did not feature any new foreign buyers. In March 2015, Canada announced results of an AWS-3 spectrum auction in which 60 percent of the spectrum was set aside for new entrants. No foreign companies received spectrum in this auction. Canada held a 2500MHz spectrum auction on April 14, 2015 with Canadian companies winning all of the licenses offered.
Canada defines cultural industries to include: the publication, distribution or sale of books, magazines, periodicals or newspapers, other than the sole activity of printing or typesetting; the production, distribution, sale or exhibition of film or video recording, or audio or video music recordings; the publication, distribution or sale of music in print or machine-readable form; and any radio, television and cable television broadcasting undertakings and any satellite programming and broadcast network services.
The Investment Canada Act requires that foreign investment in the book publishing and distribution sector be compatible with Canadian national cultural policies and be of "net benefit" to Canada. Takeovers of Canadian-owned and controlled distribution businesses are not allowed. The establishment of new film distribution companies in Canada is permitted only for importation and distribution of proprietary products. Direct and indirect takeovers of foreign distribution businesses operating in Canada are permitted only if the investor undertakes to reinvest a portion of its Canadian earnings in Canada.
The Broadcasting Act sets out the policy objectives of enriching and strengthening the cultural, political, social, and economic fabric of Canada. The Canadian Radio-television and Telecommunications Commission (CRTC) administers broadcasting policy. When a Canadian broadcast service is licensed in a format competitive with that of an authorized non-Canadian service, the commission can drop the non-Canadian service if a new Canadian applicant requests it to do so. Licenses will not be granted or renewed to firms that do not have at least 80 percent Canadian control, represented both by shareholding and by representation on the firms' board of directors.
The CRTC denied a major Canadian broadcaster’s bid to acquire a leading Canadian media company in October 2012. The CRTC maintained that it did not believe the transaction would provide significant benefits to the Canadian broadcasting system and said the deal raised competitiveness concerns.
Canada allows up to 100 percent foreign equity in an enterprise to publish, distribute and sell periodicals but all foreign investments in this industry are subject to review by the Minister for Canadian Heritage, and investments may not occur through acquisition of a Canadian-owned enterprise. No more than 18 percent of the total advertising space in foreign periodicals exported to Canada may be aimed primarily at the Canadian market. Canadian advertisers may place advertisements in foreign-owned periodicals, and may claim a tax deduction for the advertising costs, including in cases where the periodical is a Canadian issue of foreign-owned periodical.
This regime is the result of a 1999 U.S.-Canada agreement, which balanced U.S. publishers' desire for access to the Canadian market against Canada's desire to ensure that Canadian advertising expenditures support the production of Canadian editorial content.
Privatization Program
Federal and provincial privatizations are considered on a case-by-case basis, and there are no overall limitations with regard to foreign ownership. As an example, the federal Ministry of Transport did not impose any limitations in the 1995 privatization of Canadian National Railway, whose majority shareholders are now U.S. persons.
Screening of FDI
Canada amended the ICA in June 2012 to allow the Innovation, Science and Economic Development Minister (formerly Industry Canada) to publically disclose why an investment proposal failed to satisfy the net benefit test, so long as disclosure will not harm the Canadian business or investor. Another amendment allows the Industry Minister to accept security of payment from an investor when a court finds the investor to be in breach of its ICA undertakings. Canada also introduced guidelines that provide foreign investors with the option of a formal mediation process to resolve disputes when the Innovation, Science and Economic Development Minister believes a non-Canadian investor has failed to comply with a written undertaking.
Canada has only turned down investment offers three times since the ICA came into force 25 years ago. Canada blocked a Cairo-based investment and management company’s proposed $520 million acquisition of Manitoba Telecom Services’ Allstream Division under the national security provisions of the ICA in October 2013. The Canadian government did not elaborate on the reasons behind its decision. Canada blocked a proposed $38.6 billion purchase of a potash producer in Saskatchewan by an Australian-based company in November 2010, claiming the hostile takeover failed to be of “net benefit” to Canada under the ICA. The third instance occurred in April 2008 when Canada denied the sale of Canadian communications company MacDonald Dettwiler’s satellite operations to an American buyer over security concerns.
Canada reviewed several other high-profile investment cases in recent years. The announced merger of Canada’s largest stock exchange and a major London-based stock exchange in February 2011 sparked an ICA review. The deal failed to draw sufficient support from the Canadian stock exchange’s shareholders and the deal was dropped before the ICA review process was completed. A rival bid for the Canadian stock exchange by a consortium of major Canadian banks, pension plans, and financial firms, was a significant factor in the merger’s eventual failure.
Competition Law
The Bureau of Competition Policy and the Competition Tribunal, a quasi-judicial body, enforce Canada's antitrust legislation.
