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Archived - Appendix 2 - Canada's Sectoral Investment Regimes

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There are six sectors of the Canadian economy for which acquisitions of Canadian businesses by non-Canadians are subject to review at lower thresholds under the Investment Canada Act. In addition, Canada has sector-specific legislation and/or foreign ownership restrictions in telecommunications, cultural industries, broadcasting, transportation services and uranium production.57 As well, the financial services sector is subject to ownership restrictions of general application but not specific foreign ownership restrictions.

Telecommunications

The decision to introduce foreign investment restrictions in the telecommunications sector was taken during the Canada-U.S. Free Trade Agreement (FTA) negotiations to mirror existing U.S. restrictions and to ensure these could be "grandfathered" within the FTA. Restrictions also reflected more general concerns about ensuring economic benefits. Other considerations, reflected in the Telecommunications Act's policy objectives, were that telecommunication systems are essential to safeguarding Canada's social and economic fabric, and that increased competition would lead Canadian service providers to use Canadian facilities. There is also the objective of addressing heightened concerns about national security and the use of telecommunication facilities to enable crime and terrorism.

Under the Telecommunications Act (under the responsibility of the Minister of Industry), a carrier is eligible to operate as a Canadian common carrier if it is Canadian owned and controlled.58 With respect to ownership of Canadian telecommunications carriers, the Canadian Telecommunications Common Carrier Ownership and Control Regulations set a minimum for Canadian beneficial ownership of holding companies of Canadian carriers at 66.66 percent of voting shares. Corresponding regulations were established under the Radiocommunication Act (RA) governing radio-based common carriers as an eligibility requirement in order to be issued a radiocommunication licence. The requirements under the RA are the same as those of the Telecommunications Act (TA) and they are applied by the Department of Industry. Under both the TA and the RA, the test provides that the carrier cannot be controlled in fact by non-Canadians. Similar rules apply in broadcasting. Ownership and control restrictions under the Broadcasting Act often apply concurrently with those under the TA and the RA, since many telecommunications carriers have been granted licenses and/or provide services under the Broadcasting Act.

Comparisons to other OECD countries show that Canada has a relatively restrictive foreign investment regime in the telecommunications sector (only Australia, China, South Africa are reported to have an equal or more restrictive regime). However, while some countries have no explicit foreign investment restrictions, they may have public equity investment in main fixed-line carriers (for example in France, Germany, Sweden, and Finland) or rely on other informal barriers. Informal barriers may include national security reviews (for example, by the Committee on Foreign Investment in the United States), licensing or regulatory regimes allowing discretionary control of foreign investments, and imposition of conditions.

Broadcasting

Governments around the world regulate foreign ownership in the broadcasting industry differently, since each country's broadcasting system operates in a different social or cultural environment and competitive marketplace. In Canada, broadcasting policy is the responsibility of the Minister of Canadian Heritage. While some developed countries have no restrictions, others like the U.S., France and Japan have foreign ownership limits on over-the-air broadcasters. In Canada, our relatively small, diverse population and the availability of U.S. broadcasts limit the degree to which market forces alone can ensure the provision of a range of Canadian news and entertainment programming in both official languages. Canadian ownership rules in broadcasting and broadcasting distribution, established under the Broadcasting Act,59 ensure that Canadian news and entertainment programming is made from a Canadian perspective and with Canadian audiences in mind.

Cultural Industries

Given Canada's relatively small, diverse market and given that its cultural businesses are small in comparison with their global competitors, successive Canadian governments have based public policy in this area on the premise that market forces alone are insufficient to ensure the availability of a suitable range of Canadian cultural products.

Cultural exemptions in international trade agreements such as the NAFTA recognize that cultural goods are unlike any other product. The right of countries to maintain measures to protect and promote cultural expression is reaffirmed by the UNESCO Convention on the Protection and Promotion of the Diversity of Cultural Expression. Canada is open to foreign investment across most sectors of the cultural industries. In sectors where there are policy measures in place, the government maintains targeted, industry-specific policies under the ICA rather than a single broad policy.

In Canada, policy measures in support of culture are the responsibility of the Minister of Canadian Heritage. Such cultural support measures are not unique to Canada. Other countries use a combination of measures to develop and sustain domestic cultural products such as direct funding programs, foreign investment restrictions and/or tax credits.

The areas with policy measures are the book publishing, distribution and retail sectors; the periodical publishing and newspaper publishing sectors; and the film distribution sector. These polices generally prohibit the acquisition of an existing Canadian-owned business and prohibit or set conditions for the establishment of new businesses.

Foreign investments in the sound recording industry, the distribution and retail sectors of the periodical and newspaper industries, as well as the film production, exhibition and retail sectors are subject to "net benefit" definitions under the ICA.

Transportation Services

International air relations are governed largely by bilateral air agreements, which have the status of treaties and which, for the most part, incorporate national designation clauses that state only air carriers that are "substantially owned and controlled" by their government or home country nationals may be designated to operate air services under these agreements. There is no single internationally agreed upon definition for the concepts of "substantial ownership and effective control," and contracting states have discretion in choosing how to interpret it.

Under the Canada Transportation Act, administered by the Minister of Transport, ownership and control of voting interests held in a Canadian air carrier by non-Canadians may not exceed 25 percent. In particular, a Canadian air carrier must be controlled "in fact" by Canadians and at least 75 percent of the voting interests in an air carrier licensed to operate in Canada must be owned and controlled by Canadians. The Canadian Transportation Agency currently has a mechanism in place to review whether a Canadian carrier meets the ownership and de facto control requirements. It should be noted that, pursuant to the Canada Transportation Act, the foreign ownership limit may be increased by regulation as specified by the Governor in Council.

Internationally, some states have eased restrictions to allow up to 49 percent foreign ownership of their carriers. China and India are such examples. In addition, some also permit 100-percent foreign ownership for carriers offering domestic services only, such as Australia and New Zealand (subject to a national interest test) and the European Union (internal market).

Uranium Production

Most countries with significant uranium/nuclear programs have strong policies and programs in place to protect and support their domestic industries. Canada restricts nonresident ownership of uranium mining properties to 49 percent at the stage of first production. Higher levels of nonresident ownership are permitted if it can be demonstrated that the project remains Canadian controlled. The Minister of National Resources Canada can also grant an exemption, subject to Cabinet approval, in cases where it can be demonstrated clearly that no Canadian partners can be found. There are no restrictions in uranium exploration by foreign entities.

Policy approaches in other countries include investment prohibitions or restrictions in some or all parts of the nuclear fuel cycle, control of access to technology, intervention in the market through procurement policies, or direct political intervention. In the U.S., foreign investment is restricted in uranium enrichment and nuclear plants. China and Brazil bar foreign ownership altogether.

Financial Services

Federal financial institutions such as banks and insurance companies play a key role in the Canadian economy, as financial intermediaries engaged in the allocation of credit, in the safeguarding of deposits and other savings, and in the management of risk. Because of this role and because of the importance of minimizing prudential concerns, bank and insurance companies are subject to a unique regulatory framework.

As part of this framework, federal financial institutions are subject to certain ownership restrictions and residency rules.60 Importantly, this sector does not have foreign ownership restrictions: the same rules apply to both foreign and domestic investors. However, large banks and large demutualized life insurance companies are required to be widely held. These rules address the risk of inappropriate self-dealing in order to minimize the risk of failure of our largest institutions to the detriment of the entire financial system. The requirement for wide ownership also encourages transparency and sound governance practices.

The framework for federal financial institutions is reviewed every five years by virtue of a legislative requirement. The framework was most recently updated in March 2007 under Bill C-37. To recognize that valuations in this sector are growing, Bill C-37 raised the threshold that defines a large bank from $5 billion or more in equity to $8 billion or more. As well, the residency requirements for directors were adjusted to allow for financial institutions to appoint more foreign experts while assuring that Canadian directors remain a majority.

Most countries do not have explicit ownership restrictions in their legislation, but it is common for governments to require formal or informal approval of investments in financial institutions. Currently, the five largest banks in the U.S., the U.K., Australia, France and Germany are widely held and are not subsidiaries of a foreign entity. As in Canada, governments examine whether an investor is "fit and proper" to make an investment. Residency requirements for directors are also common in major jurisdictions, as are requirements that the head office be located where the institution is chartered.