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Cablegate: 2003 Canadian Investment Climate Statement

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

UNCLAS SECTION 01 OF 09 OTTAWA 002002

SIPDIS

SENSITIVE

DEPT FOR EB/IFD/OIA FOR NEIL EFIRD AND ANN MCCONNELL

DEPT FOR WHA/CAN AND WHA/EPSC

STATE PASS CEA FOR YELLEN, FRB FOR C. BERTAUT

STATE PASS USTR

TREASURY FOR OASIA/IMI - D. MATHIEU

PARIS ALSO FOR USOECD

E.O. 12958: N/A
TAGS: ECON EINV KTDB KSPR CA OPIC
SUBJECT: 2003 CANADIAN INVESTMENT CLIMATE STATEMENT

REFS: (A) STATE 128494 (B) OTTAWA 1543

THIS MESSAGE IS BEING E-MAILED TO NEIL EFIRD AND ANN MCCONNELL
IN EB/IFD/OIA

1. This message is sensitive but unclassified; please
protect accordingly.

INVESTMENT CLIMATE STATEMENT FOR CANADA

Openness to Foreign Investment

General Attitude
----------------

2. 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,
and foreign investment is prohibited or restricted in several
sectors of the economy.

3. Canada's economic growth depends on foreign investment
inflows. The stock of global foreign direct investment in
Canada in 2002 was US$223 billion, or 32.5% of Canadian GDP.
In terms of revenue, four foreign-owned firms rank among the
top ten corporations in Canada and the government estimates
that foreign investors control about one-quarter of total
Canadian non-financial corporate assets.

4. The United States and Canada agree on important foreign
investment principles, including right of establishment and
national treatment. The 1989 FTA recognized that a hospitable
and secure investment climate would be indispensable if the
two countries were 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. In
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 with rights under
the agreement. It also created the right to binding investor-
state dispute settlement arbitration in specific situations.

Legal Framework: The Investment Canada Act
------------------------------------------

5. Since 1985, foreign investment policy in Canada has been
guided by the Investment Canada Act (ICA) that replaced the
more restrictive Foreign Investment Review Act. Industry
Canada is the federal department that administers most
investments, although the federal department of Canadian
Heritage administers investments in Canada's "cultural
industries" (broadcasting, publishing, audio-visual production
or sound recording).

6. 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 in Canada 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. The text of the ICA is available at the
following web site: www.investcan.ic.gc.ca.

7. Investment Canada must be notified of any investment by a
non-Canadian establishing a new Canadian business (regardless
of size); acquiring direct control of any existing business
that has assets of at least C$5 million; or acquiring indirect
control of any existing Canadian business with assets
exceeding C$50 million in value. However, the C$5 million
threshold was increased to C$223 million in 2003 if the
acquiring non-Canadian entity is a member of the World Trade
Organization (WTO), and there is no review process for
indirect acquisition of a Canadian business by any member of
the WTO (with the exception of foreign acquisitions of any
size in "cultural industries").

8. While the ICA provides the basic legal framework for
foreign investment in Canada, investment in specific sectors
may be covered by special legislation. For example, the Bank
Act administers foreign investment in the financial sector
that is within federal jurisdiction; investment in Canada's
securities sector is covered under provincial legislation (see
paragraph 7). The federal Broadcast Act governs foreign
investment in radio and television broadcasting. Under
provisions of the federal Telecommunications Act, foreign
ownership of transmission facilities is limited to 20% direct
ownership and 33% through a holding company, for an effective
limit of 46.7% total foreign ownership.

9. Canada's federal system of government subjects investment
to provincial as well as national jurisdiction. Provincial
restrictions on foreign investment differ by province, but are
largely confined to the purchase of land and to certain types
of provincially regulated financial services. In addition,
provincial government policies in the areas of labor relations
and environmental protection can have an important impact on
foreign investors.

Special Treatment for US Investment
-----------------------------------

10. United States foreign investment in Canada is subject to
the Investment Canada Act, but the NAFTA Chapter 11 further
defines the investment relationship between the two countries
and provides national treatment. Regulation of Canadian
investors in the United States and of US investors in Canada
should result in treatment no different than that extended to
domestic investors within each country. Both governments are
free to regulate the ongoing operation of business enterprises
in their respective jurisdictions under, for example,
antitrust law, provided they do not discriminate. This
principle is based on existing practice, detailed in the
framework below.

11. Existing laws, policies and practices were grandfathered,
except where specific changes were required. The practical
effect 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. Both governments remain free to
tax foreign-owned companies differently than 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."

12. The NAFTA also deals more specifically with the financial
services sector. Chapter 14 on financial services eliminates
discriminatory asset and capital restrictions on US bank
subsidiaries in Canada and exempts US firms and investors from
the federal "10/25" rule, treating them like Canadian firms.
The "10/25" rule prevents any single non-NAFTA, nonresident
from acquiring more than 10% of the shares, and all such
nonresidents in the aggregate from acquiring more than 25% of
the shares of a federally regulated, Canadian-controlled
financial institution. In 2001, the GOC raised the 10% rule
to 20% for individual (but not corporate) shareholders.

13. Both the 10% and the 25% 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 which were not waived
under the FTA.

14. The NAFTA commits both parties to expand the list of
covered service sectors and includes a services agreement, a
code of principles that establishes national treatment, right
of establishment, right of commercial presence, and
transparency for the service sectors enumerated in annexes to
the NAFTA. Bilateral services trade is largely free of
restrictions and the NAFTA ensures that new restrictions will
not be applied. However, existing restrictions were
grandfathered.

15. 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 which 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 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
trade in ten specific sectors and establishes a formal process
for resolving trade disputes (but does not apply to US firms).

16. 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 broader range of performance requirements,
including forced technology transfer; and expand coverage of
the Investment chapter to include portfolio and intangible
investments as well as direct investment.

Investments In "Cultural Industries"
------------------------------------

17. 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.

18. The Investment Canada Act requires that foreign
investments in the book publishing and distribution sector be
compatible with national cultural policies and be of net
benefit to Canada. Authority for reviewing prospective
foreign investments resides with the Minister for Canadian
Heritage. Takeovers of Canadian-owned and controlled
distribution businesses are not allowed. The establishment of
new film distribution companies in Canada will only be allowed
for importation and distribution of proprietary products. (In
other words, the importer would have to own world rights or be
a major investor). Indirect and direct takeovers of foreign
distribution businesses operating in Canada are allowed only
if the investor undertakes to reinvest a portion of its
Canadian earnings.

19. All investments in newspapers and periodicals require
Canadian government review. Authority for reviewing
prospective foreign investments resides with the Minister for
Canadian Heritage. Under terms of an agreement signed in June
1999, Canada significantly lowered its barriers to foreign
magazines. Canada agreed to permit up to 51% foreign equity
in a magazine enterprise, up from the previous 25%, and to
increase this level to 100% by June 2000. As of June 2002,
US magazines exported to Canada are permitted to carry 18% of
total ad space with advertising aimed primarily at the
Canadian market.

20. Canada also committed to provide non-discriminatory tax
treatment under Section 19 of the Income Tax Act (eliminating
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%
Canadian editorial content. They may deduct full advertising
costs if the magazine contains 80% or more original
(specifically for the Canadian market) editorial content.

21. The Broadcasting Act sets out the broadcasting policy for
Canada, the objectives of which include enriching and
strengthening the cultural, political, social and economic
fabric of Canada. The Canadian radio-television and
telecommunications commission (CRTC) is charged with
implementing the 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% Canadian control, represented both by shareholding and by
representation on the board of directors.

Investments in the Financial Sector
-----------------------------------

22. 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. US firms are present in all three sectors,
but play secondary roles, while Canadian banks have been much
more aggressive in entering the US retail banking market
because there are no barriers that limit access and because it
offers more promising opportunities for investment than does
the saturated Canadian market. 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. Several US
financial institutions have established branches in Canada,
chiefly targeting commercial lending, investment banking and
niche markets such as credit card issuance.

Investments In Other Sectors
----------------------------

23. Commercial Aviation: Foreigners are limited to 25%
ownership of Canadian air carriers.

24. Energy and Mining: Foreigners cannot be majority owners
in uranium mines. However, there are no specific restrictions
in other mining investment.

25. Telecommunications: Under provisions of Canada's
Telecommunications Act, direct foreign ownership of Type I
carriers (owners/operators of transmission facilities) are
limited to 20%. 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.

26. Fishing: Foreigners can own only 49% of companies that
hold Canadian commercial fishing licenses.

27. Electric power is primarily under provincial jurisdiction
in Canada, and is traditionally dominated by provincial
government-owned firms. Several provinces have taken steps to
restructure their electricity sectors on competitive
principles. Alberta has achieved a degree of competition at
both wholesale and retail levels.

28. In Ontario in recent years, the provincial monopoly
utility was split up into generation, transmission and
distribution components, and some competition was introduced
at the retail level. However, in April 2002, a court ruling
blocked a planned initial public offering of the provincial
government-owned transmission grid operator, Hydro One. In
November 2002, the Ontario government froze retail power rates
at 4.3 cents/KWH for most customers until 2006. Since then,
the government has struggled to increase generating capacity
with little help from private investment.

29. Health Services: Hospitals in Canada are integral parts
of a public health system administered by the provinces.
Private hospitals would not be eligible to receive payments
from provincial health insurance funds, and, therefore, would
not be financially viable in most cases. However, the
provincial health systems have always relied on private sector
provision of many goods and services, and in recent years they
have increasingly turned to private firms to supply diagnostic
services and, particularly in Alberta, routine surgery. The
governments of Canada and Alberta have disputed whether the
latter is permissible under the Canada Health Act. To the
extent that private firms are allowed to provide these
services, U.S.-based companies are well positioned to compete.

30. 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, but appropriate compensation must be
paid. However, US individual investors have been troubled by
changes in zoning or environmental regulations that affect use
of their property (ref B).

31. Privatization: Each specific privatization (at the
federal or provincial levels of government) is considered on a
case-by-case basis, and there is no overall policy limitation
on foreign ownership. As an example, the federal Department
of Transport did not impose any limitations in the
privatization of Canadian National Railway, whose current
majority shareholders are now US citizens.
Investment Incentives
---------------------

32. Both federal and provincial governments in Canada offer a
wide array of investment incentives. (Municipalities are
legally prohibited from offering tax incentives.) None of the
federal incentives, however, are specifically aimed at
promoting or discouraging foreign investment in Canada.
Rather, the incentives are designed to accomplish broader
policy goals, such as investment in research and development,
or promotion of regional economies. They are available to any
qualified investor, Canadian or foreign, who agrees to use the
funds for the stated purpose. 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.

33. 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 and television production in
Canada are available to and used by foreign firms, so Canadian
taxpayers have heavily subsidized U.S.-financed productions in
recent years.

Protection of Property Rights
-----------------------------

34. Private property rights are fully protected by Canada's
legal system. Foreigners have full and fair access to
Canada's legal system. Only the rights of governments to
establish monopolies and to expropriate for public purposes
limit property rights. Investors from NAFTA countries have
mechanisms available to them for dispute resolution regarding
property expropriation by the Government of Canada.

Performance Requirements/Incentives
-----------------------------------

35. Canada does not explicitly negotiate performance
requirements with foreign investors. For investments subject
to review, the Canadian Government can examine resource
processing, domestic content, exports, and technology
development or transfer. A special duty remission scheme
exists for the automotive sector that makes certain benefits
contingent on trade performance. NAFTA Article 1106 prohibits
the United States or Canada from imposing export or domestic
content performance requirements. 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.

Regulatory System: Laws and Procedures
--------------------------------------

36. Canada's regulatory system is similar to that of the
United States in terms of its transparency and broad array of
institutions involved. Proposed regulatory laws are 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, this
kind of 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
-----

37. The Federal government and Provincial/territorial
governments share jurisdiction for labor regulation and
standards. For example, employees in the railroad, airline
and banking sectors are covered under the federally
administered "Canada Labor Code" while employees in most other
sectors would 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. From
the 1960s to the 1990s, Canada's relatively generous federal
employment insurance and other social programs, combined with
its high rate of unionization compared to the United States,
made the Canadian labor force relatively inflexible and kept
unemployment rates relatively high. In recent years, however,
these differences have narrowed, due particularly to the
restructuring of the employment insurance program.

38. 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 2001, the proportion of union
membership among those in paid employment was 32%, which
reflects a 19% union membership rate in the private sector and
a 72% union membership rate in the public sector. This union
participation rate is about twice that seen in the United
States.

Expropriation and Compensation
------------------------------

39. 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 also assumed
control of private firms -- usually financially distressed
ones -- after reaching agreement with the former owners. (See
ref B for more detail on expropriation claims.)

Dispute Settlement
------------------

40. 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 would be the provincial court
system, the federal government must also obtain agreement from
the provinces that they will enforce ICSID decisions. It is
unlikely that this will happen in the foreseeable future.

41. 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. 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
------------------

42. Although rare, political violence does occur in Canada.
Serbian demonstrators protesting the air war in Kosovo
vandalized the United States Consulate General in Toronto in
1999. In addition, there have been some violent incidents
related to trade and environmental disputes.

Bilateral Investment Agreements and Tax Treaties
--------------------------------------------- ---

43. While the terms of the FTA and the NAFTA guide investment
relations between the United States and Canada, 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: www.fin.gc.ca

Capital Outflow Policy
----------------------

44. 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 OPIC-like insurance coverage for Canadian foreign
investment.
Tables: Foreign Direct Investment Data and
2002 Mergers & Acquisition Activity

Line 1 = C$ Millions
Line 2 = US$ Millions

Canadian Foreign Direct Invest Abroad

Other All
Year U.S. U.K. E.U. Japan Other Total

1998 133267 24956 29149 3268 70269 260909
89862 16828 19655 2204 47382 175931

1999 151775 25686 28384 3853 81032 290730
102141 17287 19102 2593 54535 195661

2000 177839 35164 39162 5664 95321 353150
148522 23676 26368 3814 64180 237776

2001 188791 39742 41607 7033 112486 389660
121921 25665 26870 4542 72643 251642

2002 201792 45241 54612 9203 120971 431819
128501 28809 34777 5860 77034 274982
Foreign Direct Invest In Canada

Other All
Year U.S. U.K. E.U. Japan Other Total

1998 146893 17042 31126 8393 15935 219389
99050 11491 20988 5659 10745 147934

1999 176045 15279 36341 8270 16629 252563
118478 10283 24457 5566 11191 169975

2000 191870 23184 63240 8126 21171 307591
129186 15610 42579 5471 14254 207101

2001 214227 25204 65954 7909 20342 333635
138348 16277 42593 5108 13137 215461

2002 224330 26273 67700 8600 22485 349388
142853 16731 43111 5476 14318 222490
Source: Statistics Canada

TOP FIVE LARGEST MERGERS AND ACQUISITIONS ANNOUNCED AND
COMPLETED IN CANADA IN 2002:(VALUES IN US$ AND C$ BILLIONS)

VALUE NAME ROLE

US$5.9 Alberta Energy Co. Ltd. Target
(C$9.2) PanCanadian Energy Corp. Target

US$4.1 Manulife Financial Corp. Acquirer
(C$6.4) Canada Life Financial Corp. Target

US$4.1 BCE Inc. Acquirer
(C$6.3) Bell Canada Target
SBC Communications Inc. Vendor

US$2.0 Petro-Canada Acquirer
(C$3.2) Oil & Gas Properties (Int'l) Target
British Petroleum Co. PLC Vendor
Veba Oil & Gas GmbH Vendor

US$1.9 ONTARIO TEACHERS PENSION
(C3.0) PLAN BOARD ACQUIRER
Kholberg Kravis Roberts & Co. Acquirer
Telephone Director Business (Can.) Target
BCE Inc. Vendor

Source: Crosbie & Company Investment Bank

Cellucci

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