Foreign Investment in Canada (FDI)

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Foreign Investment in Canada (FDI)

Typically there are not many restrictions on foreign investment in Canada, but under the Investment Canada Act, some sectors are screened and there are certain limitations and factors that are reviewed at federal and provincial levels. The Act applies to all “non‑Canadians;” this includes any person that is not a Canadian citizen or permanent resident of Canada, along with any entity that is not controlled or beneficially owned by Canadians.

The Investment Canada Act has two separate review processes. Each process considers different procedures and factors. The first process evaluates significant investments with specific financial thresholds. The second process reviews investments by non-Canadians into Canada to evaluate whether or how the investment might affect Canada’s national security. To evaluate if your foreign company or investment is subject to some of these restrictions, we can guide you and provide partners that can assist with the process.

These are some of the factors that should be considered and that are applicable to doing business in Canada. For more detailed structural, legal and financial information, refer to the links at the end.

Types of Business Organizations

Branch or Subsidiary
Operating as a branch or subsidiary may prove beneficial to a foreign entity, as it provides benefits in foreign tax credits and ease of administration. There is also reduced liability for the foreign parent company of the entity, but it is still directly responsible for Canadian operations.

Corporation
A corporation is the most common form of a business entity. It is an entity that is separate and distinct from its shareholders. While there are exceptions, shareholders are generally not responsible for the debts and obligations of the corporation. There are both public and private corporations with different guidelines and liabilities.

Sole Proprietorship
A business owned by one person is a sole proprietorship. This person is liable for all the obligations of the business. This person’s personal assets are at risk if the business’s obligations are not met.

Partnerships
A partnership is a relationship between two businesses or entities carrying on business together and may be individuals or corporations. A partnership is not regarded as a separate legal entity from its partners.

Joint Ventures
A joint venture is a business arrangement in which two or more parties pool their investments and skills for the purposes of carrying out a specific task or business activity. It differs from a partnership in that that it can be weighted differently in scope, duration and profit for each entity involved. It typically involves a well-documented agreement that covers all the specific components of the arrangement.

Taxation

Income tax is imposed in Canada by both the federal government and the provincial governments. The federal tax rate is fixed, but each province has their own rate, and thus each province provides a combined rate of their tax and the federal tax. The combined corporate tax rate for Alberta is one of the lowest rates in Canada and is generally lower than most of the states in the United States.

Personal income taxes are imposed on both residents and non-residents, but non-residents have it enforced as a withholding tax and can have some differences or benefits depending on existing tax treaties with other countries.

Corporate income tax is imposed on the gain and/or profits of a corporation and may have some different considerations for structures, such as corporations, partnerships or trusts. There are also exceptions and credits that can be applied to certain structures.

Financing Canadian Operations

The two most common ways for a corporation to raise capital are through debt or equity financing.

For debt financing, domestic and international banks are the dominant provider and are used for operating and term loans. The banks typically require a form of security for their loan financing, which can be in the form of a personal guarantee from an owner, shareholders and/or security through existing capital assets. While banks are the main provider of debt in Canada, financing is also available from other sources such as insurance companies, trust companies, credit unions, finance companies, angel investors and venture capitalists. These sources often operate within smaller market ranges.

For equity financing, this can be done either through a private share offering or a public offering listed on one of Canada’s two stock exchanges. Private share offerings are commonly used for smaller companies requiring a small to medium amount of equity financing and done through investment dealers. Public share offerings are used when substantial equity financing is required and large costs are incurred when using this process. Public offerings are also done through investment dealers and then listed on either the Toronto Stock Exchange (TSX) or the TSX Venture Exchange (TSXV). Considered from a broad perspective, the equity markets in Canada are very similar to that of the United States.

Employment Law and Labour Considerations

Employment law in Canada exists to regulate all aspects of the relationship between employers and employees. Every province and the federal government have jurisdiction over employment and labour for specific types of employers, and each business will either be federally or provincially regulated. For example, certain industries that operate inter-provincially, like airlines, telecommunications and railways, are regulated by the federal government. Almost all the majority of other industries, which account for the majority of employers in Canada, fall under provincial jurisdiction.

For the labour costs of an employee in Canada, employers typically need to account for the hourly wage, vacation pay, statutory holidays, Canada Pension Plan and employment insurance. Additional costs that an employer can incur, that are also legislated, may also include such things as emergency leave and maternity leave.

Employment Standards
Both provincial and federal employment standards exist for all jurisdictions. These standards govern mandatory minimum conditions such as minimum wage rates, method and frequency of payment, hours of work, overtime pay, vacation pay, statutory holidays, emergency leave, maternity and other leaves and requirements for notice of termination of employment or pay in lieu thereof.

There are also minimum standards imposed by both provincial and federal legislation that govern health and safety in the workplace. Health and safety legislation in every Canadian jurisdiction requires that employers provide workers with a safe workplace. Most provinces also impose a number of specific conditions, including requirements that employers prepare written health and safety policies and establish health and safety committees. In most jurisdictions, a worker has the right to refuse unsafe work. Health and safety legislation violations can result in significant fines or criminal charges for failing to comply with these standards.

In regards to termination of employment, unless an employer has just cause, it cannot terminate an employee’s employment without notice or severance pay in lieu thereof. All employment standards contain minimum periods for notices of termination, and severance pay, if applicable.

Human Rights / Non-Discrimination
Every provincial and federal jurisdiction has legislation designed to protect human rights. This legislation is aimed at preventing discrimination in the workplace. For each provincial jurisdiction, the relevant legislation should be referred to, since the legislation is mostly similar but not exactly the same in each province. Most provinces prohibit discrimination on the basis of race, ancestry, nationality, ethnic or place of origin, political belief, colour, gender expression and/or identity, religion or creed, sex, sexual orientation, marital status, family status, age, physical or mental disability, or criminal conviction for which a pardon has been granted. Sexual harassment is considered discrimination on the basis of sex. With respect to disability, employers have a duty to accommodate employees with a disability to the highest extent possible.

Additional Foreign Investment (FDI) Resources
More in-depth information on foreign investment in Canada and additional business considerations, such as Canadian Trade Regulations, bankruptcies, director and officer liability, environmental law and protection of intellectual property (IP), can be found in the following publications.

Doing Business in Canada (2017)  (8.4MB)

(Borden Ladner Gervais LLP)

Doing Business in Canada – Your Complete Guide (2014) (7.3MB)

(Davies Ward Phillips & Vineberg LLP)

Doing Business in Canada (2014) (6.2MB)

(Osler, Hoskin & Harcourt LLP)