Canada
Return to top A. Openness to Foreign Investment
With few exceptions, Canada offers foreign investors full national treatment within the context of a developed open market economy operating with democratic principles and institutions. Canada is, however, one of the few OECD countries that still have a formal investment review process, and foreign investment is prohibited or restricted in several sectors of the economy. Canada's economic development is, to a certain extent, reliant on foreign investment inflows. In terms of revenue, four foreign-owned firms rank among the top ten corporations in Canada, and the government estimates that foreign investors control about one-quarter of total Canadian non-financial corporate assets. The stock of global foreign direct investment in Canada in 2002 was US$223 billion, or 32.5 percent of Canadian GDP. The United States and Canada agree on important foreign investment principles, including right of establishment and national treatment. The 1989 FTA recognized that a hospitable and secure investment climate was indispensable if the two countries were to achieve the full benefits of reducing barriers to trade in goods and services. The agreement established a mutually beneficial framework of investment principles sensitive to the national interests of both countries, with the objective of assuring that investment flowed freely between the two countries and that investors were treated in a fair and equitable manner. The FTA provided higher review thresholds for US investment in Canada than for other foreign investors, but it did not exempt all American investment from review nor did it override specific foreign investment prohibitions, notably in the cultural area. The 1994 NAFTA incorporated the gains made in the FTA, expanded the coverage of the Investment Chapter to several new areas, and broadened the definition of investors with rights under the agreement. It also created the right to binding investor-state dispute settlement arbitration in specific situations.
Since 1985, foreign investment policy in Canada has been guided by the Investment Canada Act (ICA), which replaced the more restrictive Foreign Investment Review Act. The ICA liberalized policy on foreign investment by recognizing that investment is central to economic growth and is the key to technological advancement. At the same time, it provided for a review of large acquisitions in Canada by non-Canadians and imposed a requirement that these investments be of "net benefit" to Canada. For the vast majority of small acquisitions, as well as the establishment of new businesses, foreign investors need only notify the Canadian government of their investment. While the ICA provides the basic legal framework for foreign investment in Canada, investment in specific sectors may be covered by special legislation. For example, foreign investment in the financial sector is administered by the federal Department of Finance, and the Broadcast Act governs foreign investment in radio and television broadcasting. 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.
3. Investment Canada Act The Investment Canada Act is intended to regulate foreign investment in Canada. (Please see: www.investcan.ic.gc.ca.) For investments in a business activity that is related to Canada's cultural heritage or national identity, the federal department responsible for the administration of the ICA is Canadian Heritage. For investments in enterprises that are not related to Canada's cultural heritage or national identity, Industry Canada is responsible for the administration of the ICA. Investment Canada must be notified of any investment by a non-Canadian to establish a new business, regardless of size, or to acquire direct control of any existing business that has assets of at least C$5 million, or to acquire the indirect control of any existing Canadian business with assets exceeding C$50 million in value. However, the C$5 million threshold was increased to C$223 million in 2003 in cases where the acquiring non-Canadian entity is a member of the World Trade Organization (WTO). Also, there is no review process applicable to an indirect acquisition of a Canadian business by any member of the WTO, with the exception of foreign acquisitions of any size in "cultural industries" (publishing, film, music, etc.).
US foreign direct investment in Canada is subject to the Investment Canada Act, but the NAFTA further defines the investment relationship between the two countries and adopts the principle of national treatment. The basic obligation assumed by the two countries in Chapter Eleven of the NAFTA is to ensure that future regulation of Canadian investors in the United States, and of US investors in Canada, results in treatment no different than that extended to domestic investors within each country -- "national treatment." Both governments are completely free to regulate the ongoing operation of business enterprises in their respective jurisdictions under, for example, antitrust law, provided they do not discriminate. This principle is founded on the basis of existing practice and is detailed in the framework below. Canada retains the right to review the acquisition of firms in Canada by US investors, but agrees to phase in higher threshold levels. The current (July 2004) review threshold for direct acquisitions is C$237 million. Also, the Government of Canada has announced its intention to sell its remaining C$19 million shares in Petro-Canada, a publicly traded integrated oil company which was once government owned. Indirect acquisitions by WTO member investors do not require review, but are nonetheless subject to notification. Existing laws, policies and practices were "grandfathered" in, except where specific changes were required. The practical effect of this was to freeze the various exceptions to national treatment provided in Canadian and US law, such as restrictions on foreign ownership in the communications and transportation industries. Additionally, both governments remain free to tax foreign-owned companies on a different basis from domestic firms, provided this does not result in arbitrary or unjustifiable discrimination, and to exempt the sale of Crown (government-owned) corporations from any national treatment obligations. Finally, the two governments retain some flexibility in the application of national treatment obligations. They need not extend identical treatment, as long as the treatment is "equivalent." The NAFTA also deals more specifically with the financial services sector. Chapter Fourteen on financial services eliminates discriminatory asset and capital restrictions on US bank subsidiaries in Canada. It also exempts US 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 single non-NAFTA, nonresident from acquiring more than ten percent of the shares, and all such nonresidents in the aggregate from acquiring more than 25 percent of the shares of a federally regulated, Canadian-controlled financial institution. In 2001, the GOC raised the 10 percent rule to 20 percent for single shareholders. Both the ten percent and the 25 percent limitations were eliminated for American investors in federally chartered, non-bank financial institutions. Several provinces, however, including Ontario and Quebec, have similar "10/25" rules for provincially chartered trust and insurance companies which were not waived under the FTA. Bilateral services trade is largely free of restrictions and the NAFTA ensures that restrictions will not be applied in the future. However, existing restrictions were not affected by the NAFTA. The services agreement is primarily a code of principles, which 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 parties to expand the list of covered service sectors. The NAFTA grants US firms that operate from the United States national treatment for most Canadian federal procurement opportunities. However, inter-provincial trade barriers exist which often exclude US firms established in one Canadian province from bidding on another province's procurement opportunities. As a first step in the ongoing and difficult process of reducing trade barriers within Canada, the federal, provincial and territorial governments negotiated an Internal Trade Agreement that came into effect on July 1, 1995. The Agreement provides a framework for dealing with trade in ten specific sectors and establishes a formal process for resolving trade disputes. Besides the areas described above, the NAFTA includes provisions that: enhance the ability of US investors to: enforce their rights through international arbitration; prohibit a broader range of performance requirements, including forced technology transfer; and expand coverage of the investment chapter to include portfolio and intangible investments as well as direct investment. 5. Investments In "Cultural Industries" 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 publication, distribution or sale of music in print or machine-readable form; *any radio, television and cable television broadcasting undertakings and any satellite programming and broadcast network services. The ICA requires that foreign investments in the book publishing and distribution sector be compatible with 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 will only be allowed for importation and distribution of proprietary products. (In other words, the importer would have to own world rights or be a major investor). Indirect and direct takeovers of foreign distribution businesses operating in Canada are allowed only if the investor undertakes to reinvest a portion of its Canadian earnings. The Broadcasting Act sets out the broadcasting policy for Canada, the objectives of which include enriching and strengthening the cultural, political, social and economic fabric of Canada. The Canadian radio-television and telecommunications commission (CRTC) is charged with implementing the broadcasting policy. Under current CRTC policy, in cases where a Canadian 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 board of directors. All investments in newspapers and periodicals require Canadian government review. Authority for reviewing prospective foreign investments resides with the Minister for Canadian Heritage. Under terms of an agreement signed in June 1999, Canada committed to significantly lower its barriers to foreign magazines. Canada agreed to permit up to 51 percent foreign equity in a magazine enterprise, up from the previous 25 percent, and to increase this level to 100 percent by June 2000. As of June 2002, US magazines exported to Canada are permitted to carry 18 percent of total ad space with advertising aimed primarily at the Canadian market. Canada also committed to provide non-discriminatory tax treatment under Section 19 of the Income Tax Act. In this context, Canada eliminated the nationality requirement in June 2000, and Canadian advertisers may now place ads in any magazine regardless of the nationality of the publisher or place of production. Canadian advertisers, merchants and service providers may now claim a tax deduction for one-half of their advertising costs if they place ads in foreign magazines with zero to 79 percent Canadian editorial content. They may deduct full advertising costs if the magazine contains 80 percent or more original (specifically for the Canadian market) editorial content. 6. Investments in the Financial Sector Canada is open to foreign investment in the banking, insurance, and securities brokerage sectors, although, unlike the United States, Canada still has barriers to foreign access to retail banking. US firms are present in all three sectors, but play secondary roles, while Canadian banks have been much more aggressive in entering the US retail banking market because there are no barriers that limit access. Although American and other foreign banks have long been able to establish banking subsidiaries in Canada, no US banks have attempted to undertake retail banking operations in Canada, which is regarded as a fairly "saturated" market. Several US financial institutions have established branches in Canada, chiefly targeting commercial lending, investment banking, and niche markets such as credit card issuance.
Commercial Aviation: Foreigners are limited to 25 percent ownership of Canadian air carriers. Energy and Mining: Foreigners cannot be majority owners of uranium mines. Telecommunications: Under provisions of Canada's Telecommunications Act, direct foreign ownership of Type I carriers (owners/operators of transmission facilities) are limited to 20 percent. Ownership and control rules are more flexible for holding companies that wish to invest in Canadian carriers. Under these rules, two-thirds of the holding company's equity must be owned and controlled by Canadians. Fishing: Foreigners can own up to 49 percent of companies that hold Canadian commercial fishing licenses. Electric Power Generation and Distribution: Regulatory reform in electricity continues in Canada, motivated by the expectation that increased competition will lower costs of electricity supply. The provincially owned firms are also interested in gaining greater access to the US power market. Since power markets fall under the competency of the Canadian provinces, they are at the forefront of the reform effort. The reforms will also help to integrate the US and Canadian electricity markets more closely. Real estate: Primary responsibility for property law rests with the provinces. Prince Edward Island, Saskatchewan, and Nova Scotia all limit real estate sales to out-of-province parties. There is no constitutional protection for property rights in Canada. Consequently, government authorities can expropriate property, although appropriate compensation must be paid. Privatization: Each specific privatization (at the federal or provincial levels of government) is considered on a case-by-case basis, and there is no overall limitations policy with regard to foreign ownership. As an example, the federal Department of Transport did not impose any limitations in the privatization of Canadian National Railway, whose majority shareholders are now US citizens. 8. Investment Incentives Both federal and provincial governments in Canada offer a wide array of investment incentives, while municipalities are legally prohibited from doing so. None of the federal incentives, however, are specifically aimed at promoting or discouraging foreign investment in Canada. Rather, the incentives are designed to accomplish broader policy goals, such as investment in research and development, or promotion of regional economies. They are available to any qualified investor, Canadian or foreign, who agrees to use the funds for the stated purpose. Provincial incentives tend to be more investor-specific and are conditioned on applying the funds to an investment in the granting province. Provincial incentives may also be restricted to firms established in the province or that agree to establish a facility in the province. For example, the Canadian federal and Ontario governments have promised to contribute about US$150 million to support investment by Ford Canada in a new vehicle assembly plant. Incentives for investment in cultural industries, at both the federal and provincial level, are generally available only to Canadian-controlled firms. Incentives may take the form of grants, loans, loan guarantees, venture capital, or tax credits. Incentive programs in Canada generally are not oriented toward the promotion of exports. Provincial incentive programs for film production in Canada are available to foreign filmmakers. Conversion and Transfer Policies These areas are unregulated, and present no problem for investor. Dispute Settlement Canada accepts binding arbitration of investment disputes to which it is a party only when it has specifically agreed to do so through a bilateral or multilateral agreement, such as a Foreign Investment Protection Agreement. The provisions of Chapter 11 of the NAFTA guide the resolution of investment disputes between the United States and Canada. The NAFTA encourages parties to settle disputes through consultation or negotiation. It also establishes special arbitration procedures for investment disputes separate from the NAFTA's general dispute settlement provisions. Under the NAFTA, a narrow range of disputes (those dealing with government monopolies and expropriation) between an investor from a NAFTA country and a NAFTA government may be settled, at the investor's option, by binding international arbitration. An investor who seeks binding arbitration in a dispute with a NAFTA party gives up his right to seek redress through the court system of the NAFTA party, except for proceedings seeking non-monetary damages.
Right to Private Ownership and Establishment
Political Violence Corruption
Due in part to the lower value of the Canadian dollar relative to the US dollar, Canadian wage and benefit levels for most non-executive job categories are somewhat lower than levels paid in the United States. The union participation rate is about twice that seen in the United States.
For Americans, NAFTA means that Canada operates as a free trade zone for products made in the U.S. American made goods can enter Canada duty free, which negates any advantage that would traditionally be ascribed to a free trade zone. The city of Vancouver is working to establish a free trade zone in association with its airport, but this would be primarily for imported goods from Asia. This would allow for pre-customs final assembly and for pick-and-pack services to operate outside of the Canadian customs territory. Again, this would not apply to American made products imported into Canada under a NAFTA certificate. On historical cost basis, Canada is the second largest recipient of US direct investment abroad (after the UK), receiving 10.8% of US investment. US direct investment in Canada increased by $22.2 billion in 2003, reaching $192.4 billion (historical cost basis). Canada accounts for 7.6% of FDI in the US, following the UK, Japan, Germany, the Netherlands, France and Switzerland, and tied with Luxemburg. In 2003 Canadian FDI in the US increased by $8.8 billion to $105.3 billion. (The Manulife purchase of John Hancock will cause a blip in 2004.) According to Statistics Canada, net acquisitions in Canada have been negative for the third time in the past four quarters. (That is, Canadians are buying back from foreign investors.) From Statistics Canada, Canada's Balance of International Payments, 3Q2004, the following (in C$). Canadian to US(C$) US to Canada(C$) Exchange rate 1999 15.2 billion 36.5 billion .6730
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