Identifier
Created
Classification
Origin
06OTTAWA119
2006-01-13 21:11:00
UNCLASSIFIED
Embassy Ottawa
Cable title:  

CANADA: 2006 INVESTMENT CLIMATE STATEMENT

Tags:  EINV EFIN ETRD ELAB CA KTDB PGOV NAFTA 
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UNCLAS SECTION 01 OF 07 OTTAWA 000119

SIPDIS

DEPT FOR EB/IFD/OIA AND WHA/CAN
STATE PLEASE PASS USTR

E.O. 12958: N/A
TAGS: EINV EFIN ETRD ELAB CA KTDB PGOV NAFTA
SUBJECT: CANADA: 2006 INVESTMENT CLIMATE STATEMENT

REF: 05 STATE 201904

INVESTMENT CLIMATE

Openness to Foreign Investment

General Attitude

Strong economic fundamentals, proximity to the US market,
highly skilled employees and abundant resources are key
attractions for American investors in Canada. 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 has a formal investment review process.
Foreign investment is also prohibited or restricted in
several sectors of the economy.

Canada's economic development is, to a significant extent,
reliant on foreign investment inflows. The Canadian
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 2004 was US$304 billion, with US investment
accounting for about 65% of total FDI in Canada.

The United States and Canada agree on important foreign
investment principles, including right of establishment and
national treatment. The 1989 Free Trade Agreement (FTA)
recognized that a hospitable and secure investment climate
would be necessary 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'
rights. It also created the right to binding investor-state
dispute settlement arbitration in specific situations.

Legal Framework: The Investment Canada Act

Since 1985, foreign investment policy in Canada has been
guided by the Investment Canada Act (ICA,
http://strategis.ic.gc.ca/epic/internet/inica -
lic.nsf/en/Home ),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 review of
large acquisitions 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.

Industry Canada must be notified of any investment by a non-
Canadian to establish a new business, regardless of size; to
acquire direct control of an existing business that has
assets of at least C$5 million; or to acquire the indirect
control of an existing Canadian business with assets
exceeding C$50 million in value. However, the review
threshold is higher for firms from member countries of the
World Trade Organization (WTO),including the US. In 2006,
the review threshold for WTO members is expected to be C$265
million, rather than the C$5 million level applicable to non-
WTO investors. The Canadian government must be notified of
an indirect acquisition of a Canadian business by firms from
WTO-member countries, but, with the exception of foreign
acquisitions of any size in "cultural industries" such as
publishing, film, and music, there is no review of indirect
acquisitions.

Investment in specific sectors is covered by special
legislation. For example, foreign investment in the
financial sector is administered by the federal Department
of Finance Investment in an activity that is related to
Canada's cultural heritage or national identity is
administered by Heritage Canada. 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.
The Broadcast Act governs foreign investment in radio and
television broadcasting. (See below for more detail on
these restrictions.)


Canada's federal system of government subjects investment to
provincial as well as national 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, either cultural, such as French-language
requirements in Quebec, or in the areas of labor relations
and environmental protection, can be a factor for foreign
investors.

US foreign direct investment in Canada is subject to
provisions of the Investment Canada Act, the WTO, and the
NAFTA. The basic obligation assumed by the two countries in
Chapter 11 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 accord national treatment.

Existing laws, policies and practices were "grandfathered,"
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. The Canadian government retains
the right to review the acquisition of firms in Canada by US
investors at the levels applicable to other WTO members and
has required changes before approving some investments.

Both governments are 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."

Services Trade

Bilateral services trade is largely free of restrictions and
the NAFTA ensures that restrictions will not be applied in
the future. However, pre-existing 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).

Federal Procurement

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 that 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 Canadian 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 intra-Canada 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 broad range of performance requirements,
including forced technology transfer; and expand coverage of
the NAFTA investment chapter to include portfolio and
intangible investments as well as direct investment.
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 production, distribution, sale or exhibition of film or
video recordings, or audio or video music recordings;

*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 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. (In other words, the importer would have to own
world rights or be a major investor). 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. 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 firms' board of directors.

All investments in newspapers and periodicals require review
by the Minister for Canadian Heritage. Under terms of an
agreement with the US signed in June 1999, Canada committed
to significantly lower its barriers to foreign magazines.
Canada has complied with its agreement 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.

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. Foreign financial firms
interested in investing submit their application to the
Office of the Supervisor of Financial Institutions (OSFI)
for approval by the Minister of Finance. US firms are
present in all three sectors, but play secondary roles.
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.
The NAFTA deals specifically with the financial services
sector. Chapter 14 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, non-resident from acquiring
more than ten percent of the shares, and all such non-
residents in the aggregate from acquiring more than 25
percent of the shares of a federally regulated, Canadian-
controlled financial institution. In 2001, the Canadian
government 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 that were not waived under the FTA.

Investments In Other Sectors

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 power 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 after paying appropriate compensation.

Privatization: Each privatization (federal or provincial)
is considered on a case-by-case basis, and there are no
overall limitations with regard to foreign ownership. As an
example, the federal Department of Transport did not impose
any limitations in the 1995 privatization of Canadian
National Railway, whose majority shareholders are now US
citizens.

Investment Incentives

Federal and provincial governments in Canada offer a wide
array of investment incentives, which municipalities are, on
the whole, prohibited from doing. None of the federal
incentives are specifically aimed at promoting or
discouraging foreign investment in Canada; rather, they are
designed to accomplish broader policy goals, such as
investment in research and development, or promotion of
regional economies and are available to any qualified
investor, Canadian or foreign, who agrees to use the funds
for the stated purpose. For example, Export Development
Canada can support inbound investment under certain specific
conditions (e.g. investment must be export-focused; export
contracts must be in-hand or have a track record or there is
a world or regional product mandate for the product to be
produced).

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. Government
officials at both the federal and provincial levels expect
investors who receive investment incentives to use them for
the agreed purpose, but no enforcement mechanism exists.

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.

Protection of Property Rights

Foreigner investors have full and fair access to Canada's
legal system, with private property rights limited only the
rights of governments to establish monopolies and to
expropriate for public purposes. Investors from NAFTA
countries have mechanisms available to them for dispute
resolution regarding property expropriation by the
Government of Canada.

Canada has yet to ratify key treaties that protect copyright
works on the Internet (the WIPO "Internet treaties") that
the government signed in 1997. U.S. (and many Canadian)
companies have also complained that Canada's enforcement
regime against counterfeiting and piracy, both at the border
and internally, is cumbersome and ineffective, requiring
civil court orders before goods can be formally seized.

Performance Requirements

The NAFTA prohibits the United States or Canada from
imposing export or domestic content performance requirements
and Canada does not explicitly negotiate performance
requirements with foreign investors. For investments
subject to review, however, the investor's intentions
regarding employment, resource processing, domestic content,
exports, and technology development or transfer can be
examined by the Canadian government. Investment reviews
often lead to negotiation of a package of specific
"undertakings" such as agreement to promote Canadian
products.

Regulatory System: Laws and Procedures

The transparency of Canada's regulatory system is similar to
that of the United States. Proposed legislation is subject
to parliamentary debate and public hearings, and regulations
are issued in draft form for public comment prior to
implementation. While federal and/or provincial licenses or
permits may be needed to engage in economic activities,
regulation is generally for statistical or tax compliance
reasons. The Bureau of Competition Policy and the
Competition Tribunal, a quasi-judicial body, enforce
Canada's antitrust legislation.

Labor

The Federal government and Provincial/territorial
governments share jurisdiction for labor regulation and
standards. Federal employees and those employed in the
railroad, airline and banking sectors are covered under the
federally administered the Canada Labor Code
(http://laws.justice.gc.ca/en/L-2/ ),while employees in
most other sectors come under provincial labor codes. As
the laws vary somewhat from one jurisdiction to another, it
is advisable to contact a federal or provincial labor office
for specifics such as minimum wage and benefit requirements.
In 2005, unemployment dropped to the lowest level in 30
years and 233,000 new jobs were created. Labor at all skill
levels is generally available, with variation among
provinces.

Due in part to the 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. In 2004, the proportion of union
membership among those in paid employment was 32 percent,
which reflects a 19 percent union membership rate in the
private sector and a 76 percent union membership rate in the
public sector.
Expropriation and Compensation
Canadian federal and provincial laws recognize both the
right of the government to expropriate private property for
a public purpose, and the obligation to pay compensation.
The federal government has not nationalized any foreign firm
since the nationalization of Axis property during World War
II. Both the federal and provincial governments have
assumed control of private firms -- usually financially
distressed ones -- after reaching agreement with the former
owners.

Dispute Settlement

Canada is a member of the New York Convention of 1958 on the
Recognition and Enforcement of Foreign Arbitral Awards. The
Canadian government has made a decision in principle to
become a member of the International Center for the
Settlement of Investment Disputes (ICSID). However, since
the legal enforcement mechanism for ICSID requires
provincial legislation, the federal government must also
obtain agreement from the provinces that they will enforce
ICSID decisions. Although most provinces have endorsed the
agreement, full agreement is unlikely in the foreseeable
future.

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 (see below). 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.

Political Violence

Political violence occurs in Canada to about the same extent
as in the US. For example, protests at the April, 2001
Summit of the Americas in Quebec City sparked violent
confrontations that resulted in some property damage.

Bilateral Investment Agreements and Tax Treaties

While the terms of the FTA and the NAFTA guide investment
relations between Canada and the United States, Canada has
also negotiated international investment agreements with non-
NAFTA parties. These agreements, known as Foreign
Investment Protection Agreements (FIPAs),are bilateral
treaties that promote and protect foreign investment through
a system of legally binding rights and obligations based on
the same principles found in the NAFTA. Within Canada's
overall foreign investment strategy, FIPAs complement the
NAFTA. Canada has negotiated FIPAs with countries in
Central Europe, Latin America, Africa and Asia, and has over
100 international tax treaties in force. Please refer to
the following Internet web site for more information:
http://www.dfait-maeci.gc.ca/tna-nac/reg-en.a sp .

Capital Outflow Policy

The Canadian dollar is fully convertible. The Canadian
government provides some incentives for Canadian investment
in developing countries through Canadian International
Development Agency (CIDA) programs. Like OPIC, Canada's
official export credit agency, the Export Development
Corporation (EDC) provides political risk insurance to
support Canadian companies with investments in foreign
countries and to support lenders who finance transactions
pursued by Canadian companies abroad.


Average annual exchange rates:

2004 .7683
2005 .8250

WILKINS