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### Viewing cable 06OTTAWA119, CANADA: 2006 INVESTMENT CLIMATE STATEMENT

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
06OTTAWA119 | 2006-01-13 21:11 | 2011-04-28 00:00 | UNCLASSIFIED | Embassy Ottawa

`

    This record is a partial extract of the original cable. The full text of the original cable is not available.

` `

    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

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