Although Canadian legislation requires that Canadians
substantially own and control certain targeted industries
(telecommunications operators, broadcasting licensees, domestic
airlines and a number of cultural industries such as certain book
publishing and retailing businesses), a few determined foreign
investors have found investment opportunities by carefully
navigating through these rules.
To be clear, the Canadian ownership and control rules do not
forbid all foreign investment in the targeted industries. But the
rules are complex, and they do make it difficult for an investor
seeking to make a sizeable investment, or to consummate a
trans-border merger. Still, in a number of prominent cases,
non-Canadians have achieved their investment objectives. For
example, despite Canadian ownership and control rules, American
Airlines was able to buy a majority interest in a Canadian airline
and operate much of its back-office activities; Goldman Sachs was
able to buy a majority interest in the Canadian broadcasting
business of Alliance Atlantis; US-based Loral was able to buy a
majority interest in Telesat, Canada's largest communications
satellite operator; and non-Canadian private equity firms were able
to acquire a large majority of the equity in Air Canada.
The Canadian ownership and control rules are structured in a
similar manner. They establish formal limits on measurable factors,
such as the percentage of voting shares that non-Canadians can hold
or the percentage of the board of directors that must be Canadian.
These are usually straightforward to understand and apply. A key
point is that no specific limits are imposed on non-voting shares
or other forms of equity participation. A foreign investor can
therefore obtain a greater equity participation in a Canadian
target than the ownership tests would suggest. Indeed, this is
The rules also include a requirement that Canadians exercise
"control in fact" over the enterprise — a
concept that is anything but straightforward. In making a
control-in-fact determination, the regulators undertake a
multi-faceted review of all points of influence by non-Canadian and
Canadian investors. This is done by looking at shareholders'
agreements and other agreements or arrangements that can bear on
governance, composition of the board or strategic decision-making
by the company.
Although the rules do not stipulate a numeric limit on
non-voting equity, when examining who exercises control in fact,
regulators become concerned if the overall equity stake held by
non-Canadians becomes too large. Where Canadians have too small an
economic stake in an entity, and non-Canadians too large a stake,
regulators simply do not believe that Canadians will be in
Although a non-Canadian equity participation level of up to 65
per cent does not seem to generate concerns, it is not a simple
matter to predict how high foreign equity participation can go
before regulatory resistance becomes significant. Much will depend
on the individual facts. For example, a single non-Canadian
investor is probably more troublesome than a large number of
unrelated foreign investors, given the difficulty likely to be
encountered by multiple investors in concentrating their individual
influence into control.
The rules are enforced by several federal regulators, depending
on the industry involved. Although enforcement, in theory, can
occur anytime, a foreign investor is most concerned at the time of
a business acquisition, when regulatory scrutiny is most intense.
The anticipated regulatory reaction under the Canadian ownership
and control rules thus becomes a key input on whether to make an
offer, and how to properly structure it.
For a more detailed analysis of these ownership and control
rules, please see our
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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