September 23 2009
Amendments made to the Canada Transportation Act in March 2009 have provided the governor in council, effectively the federal Cabinet, with the flexibility to increase the foreign ownership limit on Canadian carriers from the existing level of 25% to a maximum level of 49%. It is suggested that the impetus for these amendments was recommendations made by the Competition Policy Review Panel, which was established in 2007 by the minister of industry and given the mandate to "examine and report on the laws and policies that will underpin Canada's continued economic growth and development".(1)
By way of background, sectoral restrictions on foreign direct investment in Canada were a focal point of the panel's inquiry. With respect to Canada's air transport regime, the panel made specific recommendations in connection with increasing the limit of foreign ownership on Canadian air carriers, moving forward to complete Open Skies negotiations with the European Union and, interestingly, considering a right of establishment regime. The panel's recommendations with respect to the air transport sector were as follows:
On the latter point, the panel observed that there is a trend internationally towards greater liberalization of domestic aviation markets and urged consideration of 'right of establishment' carriers - that is, permitting 100% foreign ownership for carriers offering only domestic services. Notably, the panel did not accept the urgings of the commissioner of competition that Canadian laws should be changed to open up Canada's airline industry unilaterally to foreigners and to permit cabotage (ie, allowing a foreign carrier to fly point to point within Canada).
To date, the minister of transport has not acted on the panel's right of establishment recommendation. It remains to be seen whether Canada will follow the lead of Australia and New Zealand and permit right of establishment carriers.
In line with the panel's recommendation on the foreign ownership of Canadian carriers, the Canada Transportation Act has been amended to allow the federal Cabinet to pass regulations that would permit non-Canadians to own and control up to 49% of the voting interests of a Canadian air carrier (an increase from the previous 25%). This is subject to the requirement that the Canadian carrier be controlled, in fact, by Canadians. Non-Canadians will continue to have the right to hold non-voting interests, provided that the air carrier is controlled, in fact, by Canadians.
The Canada Transportation Act does not define what is meant by the term 'controlled, in fact, by Canadians'. Its meaning has been the subject matter of frequent and often lengthy proceedings before the Canadian Transportation Agency, a quasi-judicial tribunal responsible for the enforcement of the act.
A unique aspect of the amended legislation is the new provision that allows the federal Cabinet to specify classes of non-Canadians and specify a percentage of voting interests that may be owned and controlled by such classes of non-Canadians, subject to the 49% limit on foreign ownership and the requirement that the air carrier be controlled, in fact, by Canadians.(2) This provision effectively allows the federal Cabinet to decide, presumably on a reciprocal basis, whether to permit certain foreign nationals to own up to 49% of voting equity in a Canadian carrier. To date, regulations giving effect to these amendments have not been passed.
With the implementation of the Canada-European Union Comprehensive Air Transport Agreement expected later in 2009, the statutory framework is now in place to give effect to the provisions of the agreement, permitting nationals of each party to own up to 49% of the voting equity of the other party's airlines. Thus, in future there could be regulations that would allow European investors to own up to 49% of a Canadian carrier's voting interests. The question remains as to whether the requirement that a Canadian air carrier be controlled, in fact, by Canadians will act as a barrier to the equity participation of foreign investors in Canada's airlines and effectively diminish the impact of the new foreign ownership laws. To a large extent, this will depend on the Canadian Transportation Agency, a quasi-judicial tribunal that is responsible for determining whether an air carrier meets the 'controlled, in fact, by Canadians' test under the Canada Transportation Act. It remains to be seen whether the promise of liberalized ownership rules and the benefits of greater access to foreign capital and increased competition will be realized in Canada.
For further information on this topic please contact Catherine A Pawluch at Gowling Lafleur Henderson LLP by telephone (+1 416 862 7525), fax (+1 416 862 7661) or email (firstname.lastname@example.org).
(1) Competition Policy Review Panel, "Compete to Win" (Final Report - June 2008) available at www.ic.gc.ca/eic/site/cprp-gepmc.nsf/eng/h_00040.html.
"a corporation or any other entity incorporated or formed under the laws of Canada or a province, that is controlled in fact by Canadians where the percentage of voting interests owned and controlled by non-Canadians is not more than
(a) in respect of all non-Canadians, the percentage specified in the regulations, or
(b) in respect of any class of non-Canadians specified in the regulations, the percentage specified in the regulations in respect of that class."
Section 55.1 of the Canada Transportation Act has been added in order that the federal Cabinet may, by regulation: (i) specify a percentage for the purpose of paragraph (a) of the definition of 'Canadian' in Section 55(1), which percentage may be no more than 49%; and (ii) for the purpose of paragraph (b) of that definition, specify classes of non-Canadians and specify a percentage with respect to each such class, which percentage may be no more than 49%.
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