Policies Towards 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 fifth largest source of foreign direct investment in the United States after the United Kingdom, Japan, Luxemburg, and the Netherlands.
Over 50 percent of Canada’s foreign direct investment comes from the United States. At the end of 2015, the most recent year available, Canada’s stock of U.S. FDI was USD 291 billion. The United States’ share of FDI Canada has declined considerably since 2005 when it was 63.2 percent of Canada’s total FDI stock. U.S. investors with large direct investments in Canada include major automakers (GM, Ford, Fiat-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 recently had poor results in Canada with Best Buy closing its Future Shop outlets; Target closing all of their 133 stores in Canada in early 2015; and Sears being forced to close stores and consolidate locations. However, high-end retailers like Nordstrom and Whole Foods have seen positive results from their expansion into the Canadian market and Lowe’s Home Improvement recently purchased Canada’s Rona home improvement stores. According to the United Nations Conference on Trade and Development (UNCTAD), Canada attracted 3.3 percent of the world’s FDI in 2015.
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 9 percent (USD 28 billion) in 2015 to USD 337 billion. The United States’ share of CDIA in 2015 increased to 44.6 percent from 42 percent in 2014.
Other major destinations for Canadian FDI are the United Kingdom, Barbados, Luxembourg, the Cayman Islands, and other European Union countries.
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 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 percent of the equity while reducing foreign voting rights and allowing the airline to remain Canadian with at least 75 percent 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 notice of arbitration against Canada in January 2013 in response to Ontario’s February 2011 moratorium on all new offshore wind projects. 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.
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. In Quebec, calls for tender for energy projects vary between 30 and 60percent of local content. (See paragraph 7 for more information on SOE’s in the energy sector.)
Canada has faced several investment disputes involving energy in recent years. U.S. 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 U.S. 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. The USD 118.9 million damages claim case is still active and the government of Canada filed a counter-memorial in January 2016. Further, the company claims the suspension breached NAFTA expropriation and minimum standard of treatment provisions.)
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 C300 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. British Columbia began a 15 percent tax on foreign buyers of residential real estate in the Metro Vancouver area in August 2016. In early 2017, the province announced that foreign buyers with work permits would be exempt from the tax.
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.
Other Investment Policy Reviews
Canada has not conducted an Investment Policy Review through the Organization for Economic Co-operation and Development (OECD), WTO, or UNCTAD in the past three years.
Screening of FDI
Canada amended the ICA in June 2012 to allow the Innovation, Science and Economic Development Minister (ISED, formerly Industry Canada) to publicly 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 ISED Minister believes a non-Canadian investor has failed to comply with a written undertaking.
In April 2015, the Act was amended to introduce the concept of “enterprise value” as compared to “asset value.” Asset value is based on the value of the assets according to the business’ financial statements (book value) where enterprise value takes into account market value, debt and cash. As a result of the amendments, direct investments resulting in the acquisition of control of a Canadian business by non-state-owned, WTO investors are measured by enterprise value. In contrast, establishments of new businesses, direct investments resulting in the acquisition of control of a Canadian business by state-owned or non-WTO investors, and indirect investments by any investor are measured in asset value.
In fiscal year 2015–16, there were 641 investments processed under the Act with a total value of C30.51 billion in asset value plus C26.20 billion in enterprise value. Investors from the United States made 386 investments, totaling C19.86 billion in asset value plus C18.69 billion in enterprise value.
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 USD 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 USD 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 a U.S. 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.
ISED works with Global Affairs Canada (GAC) 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 . The process is complete, and while the website is available in several languages, navigation can be complex. 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 22nd on the 2016 World Bank’s Doing Business Scale. For more general information on the Canadian business climate, see:
Canada defines business enterprises as follows:
Number of Employees
500 + employees
Canada does not restrict domestic investors from investing abroad. Canadian companies are encouraged to invest abroad through the Export Development Canada (EDC), which created the Canadian Direct Investment Abroad (CDIA) program. CDIA offers Canadian businesses a range of solutions to obtain financing and research international markets in support of long-term business objectives.