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Cablegate: Canada: Investment Climate Statement

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R 152200Z JAN 08
FM AMEMBASSY OTTAWA
TO RUEHC/SECSTATE WASHDC 7151
INFO RUCNCAN/ALL CANADIAN POSTS COLLECTIVE
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RUCPCIM/CIMSNTDB WASHDC
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UNCLAS SECTION 01 OF 08 OTTAWA 000085

SIPDIS

SIPDIS

STATE FOR EB/IFD/OIA
TREASURY FOR DO
COMMERCE FOR ITA
PASS TO USTR (MARY SULLIVAN)

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

REF: 07 STATE 158802

1. (u) Per reftel instructions, post has updated the
Investment Climate Statement for the 2008 Country Commercial
Guide.

2. (u) Begin Text of ICS Update

Chapter 6: Investment Climate
Openness to Foreign Investment
General Attitude

Strong economic fundamentals, proximity to the U.S. market,
highly skilled employees, and abundant resources are key
attractions for American investors in Canada. 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 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 relies on foreign investment
flows to a significant extent. The Canadian government
estimates that foreign investors control about one-quarter of
Canada,s non-financial corporate assets. The stock of
global foreign direct investment in Canada over the first
three quarters of 2007 totaled CDN $495 billion, with U.S.
investment accounting for about 65 percent of all foreign
direct investment (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 is
necessary to achieve the full benefits of reducing barriers
to trade in goods and services. The FTA established a
framework of investment principles sensitive to U.S. and
Canadian interests while assuring that investment flowed
freely between the two countries and investors were treated
in a fair and equitable manner. The FTA provided higher
review thresholds for U.S. investment in Canada than for
other foreign investors, but the agreement did not exempt all
American investment from review nor did the agreement
override specific foreign investment prohibitions, notably in
&cultural industries8 (e.g., publishing, film, music).

The 1994 North American Free Trade Agreement (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. The NAFTA 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), 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 key to
technological advancement. The ICA also 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 CDN $5 million; or to acquire the indirect
control of an existing Canadian business with assets
Qcontrol of an existing Canadian business with assets
exceeding CDN $50 million in value. However, the review
threshold is higher for firms from World Trade Organization
(WTO) member countries, including the United States. In
2007, the review threshold for WTO members was CDN $281
million, rather than the CDN $5 million level applicable to
non- WTO investors. For 2008, the review threshold is CDN
$295 million.

Investment in specific sectors is covered by special
legislation. For example, foreign investment in the
financial sector is administered by the federal Department of

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Finance. Investment in an activity that is related to
Canada's cultural heritage or national identity is
administered by the Department of Canadian Heritage. 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.)

In addition to federal regulation, investment in Canada is
also subject to provincial 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 relating to, inter alia, culture,
language, labor relations or the environment, can be a factor
for foreign investors.

U.S. foreign direct investment in Canada is subject to
provisions of the Investment Canada Act, the WTO, and the
NAFTA. Chapter 11 of the NAFTA ensures that future
regulation of U.S. investors in Canada (and Canadian
investors in the United States) results in treatment no
different than that extended to domestic investors within
each country --"national treatment." Both governments are
free to regulate the ongoing operation of business
enterprises in their respective jurisdictions provided the
governments accord national treatment to both U.S. and
Canadian investors.

Existing U.S. and Canadian laws, policies, and practices were
"grandfathered" under the NAFTA except where specific changes
were required. This &grandfathering8 froze various
exceptions to national treatment provided in Canadian and
U.S. law, such as foreign ownership restrictions in the
communications and transportation industries. The Canadian
government retains the right to review the acquisition of
firms in Canada by U.S. investors at the levels applicable to
other WTO members and has required changes before approving
some investments.

The U.S. and Canadian 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. The governments can also
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

NAFTA grants U.S. firms that operate from the United States
national treatment for most Canadian federal procurement
Qnational treatment for most Canadian federal procurement
opportunities. Inter-provincial trade barriers, however,
often exclude U.S. 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. In an attempt
to further reduce inter-provincial trade barriers, the
provinces of British Columbia and Alberta signed a Trade,
Investment, and Labor Mobility Agreement (TILMA) in 2006 to

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ensure that any provincial measures will not "operate to
impair or restrict trade between or through the territory of
the Parties, or investment or labor mobility between the
Parties.8 The Agreement will come into full force in April
2009.

Besides the areas described above, the NAFTA includes
provisions that enhance the ability of U.S. 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 Industries8

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; and

- any radio, television and cable television broadcasting
undertakings and any satellite programming and broadcast
network services.

The Investment Canada Act (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. 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.

While Canada allows up to 100 percent foreign equity in an
enterprise to publish, distribute and sell periodicals, 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 issue8 of a
foreign-owned periodical. One-half of advertising costs may
be deducted in the case of publications with zero to 79
percent original editorial content, and the full cost of
advertising may be deducted in the case of publications with
Qadvertising may be deducted in the case of publications with
80 percent or more original editorial content. This regime
is the result of a 1999 agreement between the United States
and Canada, 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.

Investments in the Financial Sector

Canada is open to foreign investment in the banking,
insurance, and securities brokerage sectors, but there are
barriers to foreign investment in retail banking. Foreign
financial firms interested in investing submit their

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applications to the Office of the Superintendent of Financial
Institutions (OSFI) for approval by the Minister of Finance.
U.S. firms are present in all three sectors, but play
secondary roles. Canadian banks have been much more
aggressive in entering the U.S. retail banking market because
there are no barriers that limit access. Although U.S. and
other foreign banks have long been able to establish banking
subsidiaries in Canada, no U.S. banks have retail-banking
operations in Canada, which is regarded as a fairly
"saturated" market. Several U.S. financial institutions have
established branches in Canada, chiefly targeting commercial
lending, investment banking, and niche markets such as credit
card issuance.

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,
non-resident 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. In 2001, the Canadian government raised the 10
percent limit for single, non-NAFTA shareholders to 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.

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 in expectation that
increased competition will lower costs of electricity supply.
Province-owned power firms are also interested in gaining
greater access to the U.S. 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 further integrate the U.S. and Canadian electricity
markets.

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: Federal and provincial privatizations are
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
Qthe federal Department of Transport did not impose any
limitations in the 1995 privatization of Canadian National
Railway, whose majority shareholders are now U.S. persons.

Investment Incentives

Federal and provincial governments in Canada offer a wide
array of investment incentives, which municipalities are
generally prohibited from doing. None of the federal
incentives are specifically aimed at promoting or
discouraging foreign investment in Canada. The incentives
are designed to advance broader policy goals, such as
boosting research and development or promoting regional
economies. The funds are available to any qualified Canadian

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or foreign investor who agrees to use the monies 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 companies have a track record; 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.

Conversion and Transfer Policies

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. Canada's official export
credit agency, the Export Development Corporation (EDC),
provides political risk insurance to Canadian companies with
investments in foreign countries and to lenders who finance
transactions pursued by Canadian companies abroad.

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 ICSID legal enforcement mechanism 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
Qarbitration procedures for investment disputes separate from
the NAFTA's general dispute settlement provisions.

Under the NAFTA, a narrow range of disputes 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.

Performance Requirements and Incentives

The NAFTA prohibits the United States or Canada from imposing

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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.

Right to Private Ownership and Establishment

Investors have full rights to private ownership.

Protection of Property Rights

Foreigner investors have full and fair access to Canada's
legal system, with private property rights limited only by
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 World Intellectual Property
Organization (WIPO) "Internet Treaties") that the government
signed in 1997. (Please refer to the copyright section of
this report for more details.) U.S. (and many Canadian)
companies have 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.

Transparency of Regulatory System

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 of these activities 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.

Efficient Capital Markets and Portfolio Investment

Investment in Canada,s capital markets presents no problems
to investors. As described above, the markets are open,
accessible, and without onerous regulatory requirements.

Political Violence

Political violence occurs in Canada to about the same extent
as in the United States. For example, protests at the April
2001 Summit of the Americas in Quebec City sparked violent
confrontations that resulted in some property damage.
Protests at the North American Leaders, Summit in
Montebello, Quebec in August 2007 led to confrontation
between police and protesters.

Corruption

On an international scale, corruption in Canada is low and
similar to that found in the United States. There have been
recent investigations into inappropriate expenditure of
government funds to support political activities, but this
alleged activity was not related to foreign direct
investment. Reports have been received, particularly from
Quebec, of alleged mob activity, but again, not to the level
that would require undue concern by investors. In general,
the type of due diligence that would be required in the
United States to avoid corrupt practices would be appropriate
in Canada. Canada is a signatory to the UN Convention
against Corruption.
Qagainst Corruption.

Bilateral Investment Agreements

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

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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.

OPIC and Other Investment Insurance Programs

Because Canada is a developed country, the U.S. Overseas
Private Investment Corporation does not operate in Canada.

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 Canada Labour Code. 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 2007, the
employment rate of 63.8 percent set a record high; Canada's
employment rate was higher than that of the United States and
most European countries in the second quarter of 2007.
Strong market conditions in some regions have created
shortages of many types of skilled labor and a relative lack
of people willing to take customer service jobs.

In 2007, the proportion of union membership among those in
paid, non-agricultural employment was 30.3 percent.
According to 2007 figures, overall union membership reflected
a 17 percent unionized rate in the private sector and a 71.7
percent unionized rate in the public sector.

Foreign-Trade Zones/Free Ports

Under the NAFTA, Canada operates as a free trade zone for
products made in the United States. U.S.-made goods enter
Canada duty free. The city of Vancouver is working to
establish a free trade zone in association with its airport.
The zone would be primarily for imported goods from Asia,
allowing for pre-customs final assembly and for pick-and-pack
services to operate outside of the Canadian customs
territory. The proposed Vancouver FTZ would not apply to
U.S.-made products imported into Canada under a NAFTA
certificate.

Foreign Direct Investment Statistics

Statistics in this section are impacted by the strong
appreciation of the Canadian dollar against the U.S. dollar
since 2002.

The United States has long been Canada,s top foreign
investor, and Canada is the second largest recipient of U.S.
direct investment after the United Kingdom. At the end of
2006, Canada hosted US$237 billion in direct foreign
investment from U.S. residents ) growing by US$13 billion
(5.5 percent) during the year. U.S. investors with large
direct investments in Canada include the major automakers
(GM, Ford, Chrysler), integrated energy, chemical and mineral
producers (e.g., ExxonMobil, ChevronTexaco, ConocoPhillips),
financial services firms (e.g., Bank of America), and
retailers (e.g., WalMart). Canada's total inward FDI stock
was about 30 percent of GDP. The major industry sectors
hosting these investments were finance/insurance (21 percent)
and energy (20 percent).

Canadian residents have become increasingly active as
worldwide investors, and their net international liabilities
have been shrinking over the past decade relative to national
Qhave been shrinking over the past decade relative to national
income. The United States is the top destination for
Canadian foreign direct investment, and Canada has
consistently been one of the top ten FDI sources for the
United States. In 2006, Canadian residents' foreign direct
investment in the United States grew by US$16.8 billion to
US$193.4 billion. Other major destinations for Canadian FDI
are the United Kingdom, other European Union countries, and
Japan.

Web Resources


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Investment Canada Act

International Trade Canada

Canada Labour Code

End Text

Visit Canada,s Economy and Environment Forum at
http://www.intelink.gov/communities/state/can ada

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