PublicationsLegal Aspects of Doing Business in Canada (Eighteenth Edition) I. THE CANADIAN POLITICAL SYSTEM
VII. IMMIGRATION LAW AND POLICY 51
I. THE CANADIAN POLITICAL SYSTEM A. INTRODUCTION Canada is an independent and self-governing member of the British Commonwealth and is presently comprised of ten provinces and three territories. The country operates under a federal system of government originally created under the Constitution Act, l867 (formerly, the British North America Act, 1867), a statute of the British Parliament which united Canada's four original provinces. On April 17, l982 the Canadian Constitution was "patriated", that is to say, re-enacted with certain amendments as a statute of the Parliament of Canada. The new Canadian constitution, contained in the Constitution Act, 1982, is discussed in greater detail in the following chapter. A federal system represents, in essence, a division of powers and responsibilities between two autonomous levels of government - the federal or central government on the one hand and the provincial governments on the other. For a nation as large and diverse as Canada, the federal principle seems well suited to political exigencies. The federal and the provincial governments are, within their appropriate spheres of jurisdiction, independent and sovereign. In functional terms, the federal system was designed to reconcile the need for national unity and a strong central government with the desire for local or regional autonomy. However, federalism as experienced in Canada has evolved to meet the
present needs of a nation which is significantly different from the
one that existed in 1867. The demands placed on the government and the
immense financial resources of the central authority have forced a co-operative
form of federalism upon the two levels of government in Canada, in which
revenue collection and government expenditures have become, in essence,
joint ventures. In certain circumstances law-making, theoretically divided
between the federal government and the provinces along exclusive jurisdictional
lines originally drawn in 1867, has become in practice the product of
close contact between the federal and provincial governments. C. FEDERAL GOVERNMENT The current federal Parliament, or legislature, is a bicameral body: it comprises two bodies, a lower chamber known as the House of Commons and an upper chamber known as the Senate. The present House of Commons has 301 members, who are popularly elected at irregular intervals of no more than 5 years, pursuant to the electoral system. The Senate has 104 members, who are appointed until the mandatory retirement age of 75 by the Governor-General on the advice of the federal government of the day. The House of Commons is, by constitutional convention, the more influential of the two legislative bodies. The Prime Minister is the head of government and is usually the leader of the majority political party in the Hose of Commons. If no party is able to fill a majority of seats (currently, 151) or more with elected members, then a minority parliament exists. In the case of a minority parliament, the party with the most seats in Parliament will usually depend upon the support of smaller parties on an issue-by-issue basis to govern. If two or more parties with a majority of the seats between them are willing to form a coalition, then Parliament will be governed by a majority coalition. But this is rare. Since Confederation, there has only been one coalition government in Canada. The federal cabinet is appointed by the Prime Minister from the members of his/her party then sitting in the House of Commons or the Senate. In a coalition government, members of cabinet are appointed from all parties in the coalition. Each cabinet minister usually heads a department or a ministry of the Government. Canada's head of the state is the Sovereign of the United Kingdom, presently Queen Elizabeth II. The personal representative of the Sovereign in Canada is the Governor-General. However, the Governor-General is now only a ceremonial position, filled by a person recommended to the Sovereign by the Prime Minister and the Cabinet. Further, the Governor-General acts only on the advice of the Prime Minister and the Cabinet. Canada's capital is located in the City of Ottawa, Ontario. The capital city lies on the border between the provinces of Ontario and Quebec, the two most populous provinces and which historically have had divergent interests. D. THE TERRITORIES E. PROVINCIAL GOVERNMENTS Each provincial legislature consists of a one chamber, or unicameral, elected assembly. Members are elected through the use of the plurality electoral system in each riding. The provincial Prime Minister, more commonly referred to as the Premier, heads the provincial government. This position is usually filled by the leader of the political party which wins a majority of the seats in the legislative assembly. The cabinet is selected by the Premier from among the members of his/her party, except where a coalition government makes it necessary to appoint cabinet ministers from more than one party. The head of the provincial state is the Sovereign of the United Kingdom. The Sovereign is personally represented in the province by the Lieutenant-Governor. However, this is now a largely nominal and ceremonial position, filled by a person recommended to the Sovereign by the federal government and acting only on the advice of the Premier and Cabinet F. MUNICIPAL GOVERNMENTS A. THE CHARTER OF RIGHTS Prior to the enactment of the Canadian Charter of Rights and Freedoms (the "Charter of Rights") as part of the Constitution Act, 1982, the Canadian constitutional system was based on the supremacy of the Parliament, like the British parliamentary system. In theory, the federal Parliament and the various provincial legislatures had, between them, absolute power to legislate with respect to all matters. In other words, the "legislative pie" was completely divided up between the two levels of government pursuant to the Constitution Act, 1867 which set out the particular heads of power, or areas of responsibility, in relation to which each level of government was competent to legislate. There was no notion of basic rights and freedoms belonging to the people that were beyond the legislative reach of both levels of government. The rights and freedoms now enshrined in the Charter were not protected by constitutional entrenchment. Rather, there existed certain constitutional conventions whereby both levels of government, in their respective legislative capacities, would voluntarily respect fundamental individual rights and freedoms and would, in effect, restrain themselves from legislating in such a manner as to abrogate or diminish such rights. Accordingly, before the enactment of the Charter, legislation (including regulations and orders-in-council) could only be challenged on the grounds that it was beyond the legislative competence of the particular level of government which enacted it. Only legislation that encroached upon the legislative jurisdiction of another level of government could be challenged successfully. Subordinate legislation was also susceptible to challenge on the ground that it represented an improper delegation of the law-making power. However, such legislation could not be attacked solely on the basis that it infringed any of the basic rights of the people. Legislation can still be challenged on this jurisdictional basis. The Constitution Act, 1982 did not change the division of the legislative powers between the federal government and the provinces. However, the Charter of Rights effected a revolutionary change in Canadian constitutional law by entrenching certain individual rights as part of the supreme law of Canada, thereby placing such rights beyond the legislative reach of any government, and providing recourse to the courts for remedies in the event that such rights are infringed. The Canadian Charter of Rights provides as follows: Section 1: "Guarantee of Rights and Freedoms" The Canadian Charter of Rights and Freedoms guarantees the rights and freedoms set out in it subject only to such reasonable limits prescribed by law as can be demonstrably justified in a free and democratic society. These freedoms include:
Everyone has the following fundamental freedoms:
Every citizen of Canada has the right to vote in an election of members
of the House
(1) Every citizen of Canada has the right to enter, remain in and leave
Canada;
7. Everyone has the right to life, liberty and security of the person
and the right not to 8. Everyone has the right to be secure against unreasonable search or seizure. 9. Everyone has the right not to be arbitrarily detained or imprisoned. 10. Everyone has the right on arrest or detention: (a) to be informed promptly of the reasons therefore; 11. Any person charged with an offence has the right: (a) to be informed without unreasonable delay of the specific offence; 13. A witness who testifies in any proceedings has the right not to
have any 14. A party or witness in any proceeding who does not understand or
speak the
(2) Subsection (1) does not preclude any law, program or activity
that has as its object
This section guarantees citizens of Canada who form part of an English
or French These rights and freedoms are given legal effect by virtue of subsection 52(1) of the Constitution Act, 1982 which provides that the Constitution of Canada (which, as noted, includes the Charter of Rights) is the supreme law of Canada and that any law which is inconsistent therewith is, to the extent of such inconsistency, of no force or effect. Subsection 52(1) allows a person subjected to any proceedings under any law of Parliament or of the provincial legislatures to oppose any such proceedings on the basis that the law in question is inconsistent with the Charter of Rights or with any other part(s) of the Constitution Act, 1982 and therefore is of no force or effect. Subsection 24(1) of the Charter of Rights permits a person whose rights and freedoms guaranteed thereunder have been infringed or denied to apply to a court of competent jurisdiction for such remedy as the court considers appropriate and just in the circumstance. An application under this section is limited to the protection of the rights and freedoms guaranteed under the Charter of Rights and permits a person whose Charter rights have been infringed to take positive action to protect those rights. B. INTERPRETATION OF THE CHARTER OF RIGHTS The Charter of Rights entrenches certain basic principles into the Constitution Act, 1982 without attempting to formulate specific rules for the application of those principles. In any of the proceedings described above, one of the prime issues relevant to the interpretation of the Charter of Rights will be the extent to which the challenged legislative enactment represents "reasonable limits prescribed by law as can be demonstrably justified in a free and democratic society", in which case it is permissible according to section 1 of the Charter of Rights. Consequently, the responsibility for formulating such rules and applying the broad principles of the Charter of Rights to particular circumstances has been imposed upon the courts. Two important conclusions follow from the foregoing paragraph. First, it is difficult to predict with certainty how the Charter of Rights will affect any particular individual right until that right and the laws affecting it have been considered by the higher levels of courts across the country. Second, the development of the constitutional law of Canada relating to the Charter of Rights will be a long and gradual process. In the United States, this judicial process has been evolving for over 200 years with new developments still occurring every day. A similar process is occurring in this country, with accompanying public debate over whether the courts have in effect become legislators when they employ an expansive view in interpreting the Charter of Rights and the remedies to be granted pursuant to it. What makes it more difficult to predict how the Charter of Rights will be interpreted is the fact that its enactment represents a marked departure from Canadian judicial traditions. Historically, Canadian courts, following their British heritage, have generally preferred to avoid an active policy-making role. Consequently, despite the fact that the Charter effectively bestowed upon the courts a significant policy-making role it had been generally anticipated that the Canadian courts would approach this new role conservatively. However, experience over the past twenty years has shown that Canadian courts have not hesitated in giving full force to the Charter of Rights and to interpret its provisions liberally - especially those provisions dealing with legal rights (i.e. sections 7 to 14) and mobility rights (i.e. section 6). Whether Canadian courts are engaging in the kind of full blown judicial activism that has occurred in the United States Supreme Court remains an open question. Some of the issues that the Canadian courts will have to address in interpreting the Charter of Rights are of particular interest to the businessperson. They are discussed below. C. APPLICATION OF THE CHARTER OF RIGHTS 1. Corporations The Charter of Rights only affects the activities of the various levels of government, and their respective agencies. The Charter of Rights represents a compact between the various levels of government, on the one hand, and the people of Canada, on the other. It also represents a compact between the various levels of government. However, non-governmental bodies and private individuals are not obligated to comply with the Charter of Rights. Regulation in the private sector is achieved through specific legislation by the federal and the provincial governments; for example, the Human Rights Codes enacted by many of the provinces. 2. Competition Act The Charter of Rights' impact on corporations is again seen at work vis-à-vis the Competition Act. The Competition Act once contained a provision permitting an accused to be found guilty despite the existence of a reasonable doubt as to their guilt in the mind of the trier of fact. However, the courts have since struck down this provision as violating the Charter right contained in section 11(d), the presumption of innocence. Subsection 2(b) of the Charter of Rights, which provides for freedom
of expression, may also have an impact upon the Competition Act. Its
application may cause certain provisions of the Competition Act, in
particular the part which deals with Restrictive Trade Practices and
which makes certain types of advertising and trade practices illegal,
to be unconstitutional as amounting to an abridgement of freedom of
expression. However, the courts have been reluctant to interpret business
advertisement as true "expression" in this context, and present
judicial view would likely be to interpret these restrictions as "demonstrably
justified in a free and democratic society," and thus permissible
under section 1 of the Charter of Rights. 4. Securities Act Subsection 11(d) of the Charter of Rights also requires that a finding of guilt be made only after a fair and public hearing before an independent and impartial tribunal. In practice, securities commissions (as will as numerous other regulatory bodies) have different branches which will carry out the functions of investigation and prosecution as well as adjudication, thus giving rise to an argument that they lack impartiality. Again, it appears to be established that proceedings before such bodies are not subject to constitutional challenge, as the rights contained in the Charter of Rights have been interpreted as being applicable only to criminal or quasi-criminal proceedings in which the accused may potentially be imprisoned as a penalty. 5. Employment and Labour Relations With respect to labour unions, the Charter of Rights may affect one's right to choose to belong or not to belong to such bodies by virtue of the freedom of association provision contained in subsection 2(d). In addition, current rules regarding "secondary picketing" and "closed shops" may be affected. At present, it is unlawful for union members to picket an employer who is not directly involved in a dispute in respect of which the picketing is taking place. This prohibition has been upheld under the Charter of Rights, where the picketers sought to induce other employees to breach the terms of their employment contracts. Certain pension schemes which provide for a minimum age for participation and different age requirements for men and women may come under attack as being in violation of subsection 15(1) of the Charter of Rights, which provides for equality regardless of age or sex. However, mandatory retirement provisions have been upheld as non-discriminatory, or justifiable under section 1. Employees who are transferred in the course of their duties may be interested in section 23 of the Charter of Rights, which provides that the children of such employees will have the right to be instructed in the language of their parents (that is, French or English), although that language may be that of the linguistic minority in their new province of residence.
III. FORMS OF BUSINESS ORGANIZATION A. INTRODUCTION Numerous different combinations of these fundamental structures may be utilized as well. This discussion, however, will be limited to a description of these four basic forms of business organizations. The business entity most suitable for a foreign businessperson in a particular set of circumstances will, of course, vary depending upon the nature of these circumstances and the individual businessperson's requirements. Factors such as exposure to liability, taxation, financing, management, control and continuity of business operations may influence the form of business entity which is ultimately selected. In our experience, the foreign businessperson will generally choose a corporation as the preferred vehicle to conduct business in Canada. There is no federal or provincial requirement to register the sole proprietorship, unless it is carried on under a name other than the individual's name. If one intends to carry on a sole proprietorship under a name other than the owner's personal name or with the word "company" as part of its name, a declaration in prescribed form must be filed in accordance with the laws of the province where the business is conducted. In keeping with the simplicity of this structure and the paucity of regulations governing this form of business arrangement, no auditor is required. Adequate financial books and records are to be maintained for tax purposes as well as to satisfy any regulations which might be applicable. From the point of view of taxation issues, the foreign businessperson may choose to carry on business in Canada as a sole proprietor during the initial stages of the operations, when the business is expected to be unprofitable. In this manner, the proprietor may use business losses arising from the sole proprietorship as deductions from his or her taxable income. C. PARTNERSHIP A partnership may be used as a business entity for most commercial activities; however, federal and provincial legislation prohibit certain business activities, such as banking, savings and loan, and insurance, from being carried on in partnership form. Any person, including any incorporated business entity, with the legal capacity to enter into a binding contractual agreement may legally enter into a partnership. A partnership may take the form of either a general partnership or a limited partnership. In a general partnership, each partner is the agent of the partnership and of his other partners in relation to the business of the partnership. The partners are jointly and severally liable for all debts and obligations of the partnership incurred while they are partners. A limited partnership is composed of one or more general partners,
who manage the business of the limited partnership and who are liable
for the debts, liabilities and obligations of the limited partnership,
and one or more limited partners, who take a passive role in the business
of the limited partnership. In most provinces of Canada, the liability
of each of the limited partners is limited to the amount of capital
contributed by them to the limited partnership. In order to maintain
this limited liability, limited partners may not operate or manage the
limited partnership. The limited partnership will be operated and managed
solely by the general partner and will be bound by all agreements made
by the general partner on its behalf. In the case of both the general partnership and the limited partnership, provincial legislation sets forth the duties and obligation among the partners. These provisions may be altered by a written agreement executed by all of the partners. In the absence of any written agreement to the contrary, the provisions contained in the provincial legislation will apply to the obligations and duties of the partners among themselves. As in the case of the sole proprietorship, both the general partnership and limited partnership have no legal obligation to prepare audited financial statements. However, proper books and records of the business of the partnership must be maintained. The tax considerations governing partnerships are dealt with later in Chapter VIII.
Incorporation under federal or provincial companies legislation is
accomplished by filing the constating documents, declaring the characteristics
of the corporation, with the appropriate authority, and receiving a
certificate or similar instrument issued by such authority evidencing
the incorporation. The process of incorporation is, relatively speaking,
quick and inexpensive. For example, in Ontario the constating document,
the articles of incorporation, may be composed of as little as six pages
prepared in response to ten inquiries. The corporation is incorporated
by means of a Certificate of Incorporation obtained in the office of
the Ministry of Consumer and Business Affairs, which can be issued shortly
after filing the constating documents and upon payment of the required
incorporation fee. 3. Directors and Officers The directors and officers of a corporation are required to exercise their authority and discharge their duties honestly and in good faith with a view to the best interests of the corporation and are required to exercise the care, diligence and skill that a reasonably prudent person would exercise. Directors of a corporation have a responsibility not only to the shareholders of the corporation but also to its employees and creditors, the government, and even, in some cases, the public. For example, directors and officers of corporations who have participated or acquiesced in remitting late or failing to remit employees' Canada Pension Plan or Employment Insurance deductions are personally liable, with the corporation, for the applicable penalties Where a corporation commits an offence under the Income Tax Act, an officer, director or agent of the corporation who directed, authorized, assented to, acquiesced in, or participated in the commission of the offence is a party to and guilty of the offence, and is liable to be punished for the offence whether or not the corporation has been prosecuted or convicted. In Ontario, directors are jointly and severally liable to the employees of the corporation for all debts not exceeding six months' wages that become payable while they are directors for services performed for the corporation and for the vacation pay accrued while they are directors for not more than twelve months, whether under the Employment Standards Act and the regulations thereunder, or under any collective agreement made by the corporation. This liability for employee wages exists only if a director is sued while he or she is director, or within six months after he or she ceases to be a director, and the action against the director is commenced within six months after the debts became payable, and the corporation itself is sued in the same action and execution against the corporation is returned unsatisfied in whole or in part. Also, the director is liable if before or after the action is commenced the corporation goes into liquidation, is ordered to be wound up or makes an authorized assignment under the Bankruptcy and Insolvency Act (Canada), or a receiving order under the Bankruptcy and Insolvency Act (Canada) is made against it, and in any such case, the claim for the debts is proved. Both the CBCA and the Ontario Business Corporations Act (the "Ontario Act") permit all of the shareholders of a corporation to enter into a written unanimous shareholder agreement which restricts, in whole or in part, the powers of the directors to manage, or supervise the management of, the business and affairs of the corporation. Where a unanimous shareholder agreement restricts the powers of the directors to manage or supervise the management of the business and affairs of the corporation the directors are relieved of their duties and liabilities to the extent of such restriction. 4. Auditors Under the provisions of the CBCA, a corporation whose securities are or were part of a distribution to the public and remain outstanding, and are held by more than one person, is required to file a copy of its financial statements, auditor's report and any further information respecting the financial position of the corporation with the Director appointed by the Minister for the purposes of the CBCA. A wholly owned subsidiary may apply for an exemption from this requirement if it falls within the exception provided for in the CBCA. The provincial statutes do not require public disclosure of financial statements, auditor's reports unless the corporation is an offering corporation. 5. Taxation E. BRANCH OF OPERATION F. THE BUSINESS CORPORATIONS ACT, In the preceding paragraphs, we reviewed the principal business structures which could serve as the form of Canadian business operations carried on by a businessperson. We reviewed, in general terms, the Canadian legislative requirements in relation to corporations and, in particular, those with respect to formation procedures, capital structure, directors and officers, the appointment of auditors and taxation considerations. The following section focuses on the company legislation of Ontario as contained in the Ontario Act. Most of the provisions of the Ontario Act came into force on July 29, 1983 pursuant to the Business Corporations Act, 1982, (Ontario) and the following discussion highlights certain significant sections of the current Ontario Act. 1. Overview 2. Rights of Dissent and Appraisal If a shareholder dissents and follows the procedure set forth in the Ontario Act, the shareholder will be entitled to be paid the "fair value" for the shares held by such shareholder in respect of which he dissents. 3. Compulsory Acquisition - Going Private A dissenting offeree in a "going-private" transaction may,
at his/her option, be paid the "fair value" of his/her securities
under section 188 of the Ontario Act. A "resident Canadian" is in the Ontario Act now again defined
as an individual who is: Under the CBCA a permanent resident who has been ordinarily resident in Canada for more than one year after the time at which he first became eligible to apply for Canadian citizenship cannot qualify as a director. The definition of "resident Canadian" is of particular significance when the foreign businessperson considers the composition of the board of directors of the Canadian corporation. The Ontario Act requires that a majority of the board of directors be resident Canadian. Although there is no limit on the maximum number of directors, the Ontario Act provides for a minimum of one director in the case of a non-offering corporation and three directors in the case of an offering corporation. However, notwithstanding the majority residency rule, the Ontario Act will permit a two member board of directors composed of one resident Canadian director and one non-resident Canadian. A quorum is required to properly transact the business of the board of directors. The Ontario Act provides that a quorum shall not be less than two-fifths of the number of directors or minimum number of directors permitted by the articles or by-laws of the corporation, of which a majority of directors present must be resident Canadians, in order to properly transact business at a meeting of directors. Since it may be difficult to comply with this requirement at all times, the Ontario Act permits directors to transact business at a meeting of directors notwithstanding that a majority of resident Canadian directors is not present, provided that one or more of the resident Canadian directors who are unable to be present approves the business transacted at the meeting and a majority of resident Canadian directors would have been present had the absent resident Canadian director(s) been present at the meeting. Furthermore, the Ontario Act provides that where a corporation has fewer than three directors, all directors must be present at any meeting of directors to constitute a quorum. 5. Unanimous Shareholder Agreement
In our previous discussion of the Ontario Act, we noted that the Ontario Act was designed to effect a measure of uniformity between Ontario's companies legislation and the companies legislation of the federal and the other provincial governments. We have already observed that the Ontario Act is in many respects similar to the CBCA, and accordingly we will confine our analysis to a review of how the CBCA may be more beneficial than the Ontario Act to a foreign businessperson considering doing business in Canada, rather than a review of the numerous similarities between the two statutes. 1. Comparison of the CBCA and the Ontario Act The CBCA, unlike the Ontario Act, requires the public filing of financial statements for certain corporations. Section 160 of the CBCA provides that a corporation which at any time made a distribution of its securities to the public shall file a copy of its financial statements at the public office of the Director of the Corporations Branch, Consumer and Corporate Affairs. A corporation that fails to comply with these financial statement filing requirements is guilty of and offence and liable on summary conviction to a fine not exceeding $5,000. The CBCA contains provisions similar to those of the Ontario Act respecting
a compulsory acquisition where a corporation proposes to execute a going-private
transaction. Unlike the CBCA, the Ontario Act also contains a provision
for a compulsory acquisition at the option of the holder of shares of
a class where 90% or more of such shares of a public corporation have
been acquired by or on behalf of a person or any of his affiliates or
associates. Under these circumstances, a holder of any of the remaining
shares of that class may require the corporation to purchase his shares
at their "fair value". The foreign businessperson must consider several factors in determining where to incorporate. Such factors include the nature of business to be conducted, the capacity to carry on business in different jurisdictions and the status or prestige of having a federal company. The nature of the business often will dictate the jurisdiction of incorporation. The nature of the business may be such that it is entirely within the legislative competence of either the provincial or federal government, e.g. the incorporation of a bank must take place pursuant to the federal Bank Act; and trust company operations are within the legislative competence of both the federal and Ontario governments and therefore the incorporation of a trust company can take place either under Canada's Trust Companies Act or under Ontario's Loan and Trust Corporations Act. The incorporation of a federal corporation would obviously take place pursuant to the CBCA; that of an Ontario corporation would occur under the Ontario Act. Both CBCA and Ontario corporations have the capacities, powers, rights and privileges of a natural person. However, a CBCA corporation is entitled to carry on business in Ontario without an extra-provincial licence. A federal corporation can also hold an interest in land located in any of Canada's provinces and territories. The foreign businessperson may prefer to incorporate under the CBCA because he or she may feel that when dealing with non-Canadians a federal corporation has greater prestige and status and is better known than a provincial corporation. IV. NORTH AMERICAN TRADE AGREEMENT North American Free Trade Agreement - Introduction The 1980s and 1990s have been a period of dynamic change for Canada. The last two decades have seen the establishment of a positive climate for foreign investment, growth in the manufacturing sector (aided by the Goods and Services Tax introduced on January 1, 1991, which replaced an outmoded manufacturers' sales tax that hit exports and was harmful to the economy), the expansion and internationalization of the financial services sector and an increase in exports of both goods and services. By 1999 the share of Canada's Gross Domestic Product (GDP) attributable to exports had risen to almost 40%. A striking achievement in creating the environment for these developments was the negotiation of the Canada/United States Free Trade Agreement (FTA), which became effective on January 1, 1989 and provided significant new opportunities for businesspeople to operate in the U.S. market by locating in Canada. The FTA has also offered new incentives for United States investors to establish new business in Canada. These opportunities were enhanced by the North American Free Trade Agreement (NAFTA) which, by adding Mexico, permits businesses operating in Canada to gain access to the entire North American market. NAFTA came into force on January 1, 1994. The provisions of NAFTA regarding investment are closely modeled on the counterpart provisions of the FTA. The principal effect of NAFTA was to extend the FTA benefits to Mexico as well. There are, however, certain additional provisions which are included in NAFTA but which were not contained in the FTA. These include the principle of "most-favoured-nation treatment" obligating each NAFTA country to accord investors of each other NAFTA country treatment no less favourable than it accords in like circumstances to investors of another NAFTA country or of a non-NAFTA country. In addition, each NAFTA country is to accord investments of investors of each other NAFTA country treatment in accordance with international law, including fair and equitable treatment and full protection and security.
NAFTA contains additional provisions with respect to performance requirements. Requirements which tie the volume or value of imports into, or sales within, a territory either to the volume or value of exports from the host country, or to its foreign exchange earnings, are prohibited. As well, provisions were added relating to technology transfers and product mandating. NAFTA not only prohibits the imposition of such performance requirements in undertakings or commitments given by other NAFTA country investors, but also proscribes the enforcement of performance requirements. Accordingly, Industry Canada is unable to enforce, as against any NAFTA country investor, any undertaking constituting or containing a performance requirement, irrespective of when such undertakings were given. There is an exception, however, for any undertaking enforced in connection with a review under the Investment Canada Act (ICA), whereby an investor is to locate production, carry out research and development, train employees, or construct or expand particular facilities in Canada. Similarly, NAFTA prohibits the imposition of performance requirements such as preferential domestic sourcing, export minimums or minimum domestic content on NAFTA investors as a condition of receiving or continuing to receive any advantage from the host NAFTA country. NAFTA prohibits a host NAFTA country from requiring that an entity of another NAFTA country appoint to senior management positions individuals of any particular nationality. However, a NAFTA country may require that a majority of the board of directors, or of any committee of the board of such an entity, be of a particular nationality or resident in the territory of the host NAFTA country, so long as that requirement does not materially impair the ability of the investor to exercise control over its investment.
NAFTA's principles respecting national treatment, most-favoured-nation treatment, performance requirements and nationality of senior management and boards of directors do not apply to any existing non-conforming measure (such as the ICA) that is maintained by the federal government and described in a NAFTA annex. They similarly do not apply to inconsistent measures of states and provinces that were in effect as of April 1996, thereby protecting such measures from challenge under NAFTA's dispute settlement provisions. Measures instituted after April 1996 that establish new or increased discrimination against investors from other NAFTA countries, however, may be submitted to dispute settlement. NAFTA contains an explicit acknowledgment that when selling or disposing of its equity interests in, or the assets of, an existing state enterprise or an existing governmental entity, Canada and each province has the right to prohibit or impose limitations on the ownership of such interests or assets by investors of another NAFTA country or non-NAFTA country or their investments, and on the ability of owners of such interests or assets to control any resulting enterprise. The national treatment, most-favoured-nation treatment and senior management principles are expressly stated not to be applicable to government procurement of goods or services or to subsidies and grants provided by a NAFTA country, including government-supported loans, guarantees and insurance. This means that NAFTA countries may discriminate against the investors of other NAFTA and non-NAFTA countries in regard to government procurement of goods and services or to the granting of subsidies or other assistance (except as otherwise prohibited; for example, in NAFTA's rules on government procurement). Transfers: NAFTA obligates each NAFTA country to permit transfers and international payments relating to an investment of an investor of another NAFTA country in the territory of the first mentioned NAFTA country to be made freely and without delay. Such transfers include: (a) profits, dividends, interest, capital gains, royalty payments,
management fees, technical assistance and other fees, returns in kind
and other amounts derived from the investment; These provisions effectively prevent a party from taking steps to block the transfer of funds out of the country. In addition, NAFTA investors will be able to convert local currency into foreign currency at the prevailing rate of exchange for any such transfers. Each NAFTA country is responsible for ensuring that such foreign currency may be freely transferred. This is intended to enhance the security of investments by other NAFTA country investors in NAFTA countries in the event that their investment is expropriated, by requiring that the compensation to be paid will be realizable and will not be tied up in a blocked currency. NAFTA countries are also prohibited from requiring their investors to transfer, or from penalizing its investors who fail to transfer, the income, earnings, profits or other amounts derived from or attributable to an investment in the territory of another NAFTA country.
A further exception to the national treatment principle permits a NAFTA host country to impose a requirement on investors of another NAFTA country that they must be residents of the host country and that investments made by such investors must be legally constituted under the laws of the host country (eg., be held in a locally-incorporated corporation) "provided that such formalities do not impair the substance of the benefits of any of the provisions" of Chapter 11. In addition, each NAFTA country is expressly permitted to require, from an investor of another NAFTA country or its investment, routine business information to be used solely for informational or statistical purposes concerning that investment.
As a general exception, NAFTA provides that nothing in Chapter 11 is to be construed as preventing a NAFTA country from adopting, maintaining or enforcing any measure that it considers appropriate to ensure that investment activity in its territory is undertaken in a manner sensitive to environmental concerns. In addition, it is expressly recognized that it is inappropriate to encourage investment by relaxing domestic health, safety or environmental measures. In this connection, the NAFTA countries have agreed to consult with one another if one of them considers that another may have offered such encouragement.
Cultural Industries - Under NAFTA, Canada preserves the exemption for "cultural industries" that is provided under the FTA. However, each NAFTA country reserves the right to take measures of equivalent commercial effect in response to any action regarding cultural industries which would have been a violation of NAFTA but for the cultural industries exemption. These compensatory measures are not limited by obligations imposed by NAFTA.
a) relating to the traffic in arms, ammunition and implements of war and to such traffic and transactions in other goods, materials, services and technology undertaken directly or indirectly for the purposes of supplying a military or other security establishment; b) taken in time of war or other emergency in international relations; or c) relating to the implementation of nuclear weapons or other nuclear explosive devices.
Subchapter B of Chapter 11 of NAFTA sets out a comprehensive code for the resolution of investment disputes involving a breach or an alleged breach of NAFTA investment rules by a NAFTA country. A NAFTA investor may either seek monetary damages through binding investor-state arbitration or remedies that are available in the domestic courts of the host country. In contrast, the FTA contains no provisions specifically enabling investors to require the resolution of investment disputes directly with a host country. Subchapter B establishes a mechanism to settle investment disputes that assures due process before an impartial tribunal. An investor of a Party has an option either to resolve a claim against a party for breach of any of the provisions of Subchapter A before the tribunals of the party where the investment was made, or to submit the claim to arbitration. Three arbitration options are provided: International Centre for Settlement of Investment Disputes Convention (ICSID) arbitration (if the two countries involved are parties to the ICSID); the Additional Facility Rules of ICSID (if only one country is a party to the ICSID) or arbitration under the rules of the United Nations Commission on International Trade Law ("UNCITRAL Arbitration Rules"). Accordingly, the NAFTA investor dispute resolution mechanism does not involve the establishment of a new arbitral process but instead confirms investors' rights to seek arbitration for violations of NAFTA investment rules under three existing international arbitration procedures. Currently only the United States is a signatory to the ICSID convention. Consequently, the option of arbitration pursuant to that convention will only become available if, as and when another NAFTA party signs on to it. However, the Additional Facility Rules of ICSID are intended for the purpose, among others, of specifically dealing with investment disputes between signatory and non-signatory countries. The UNCITRAL Arbitration Rules are rules which international parties frequently choose to govern disputes arising out of international contracts. The investment dispute resolution process provided for by Subchapter B overcomes problems which have been encountered in connection with the more traditional approach to the resolution of foreign investment disputes in an international context. Generally speaking, international rights are recognized as between states and, where international law is violated with reference to an individual investor from a state, it is the state and not the individual investor that has the right to assert a claim in regard to the injury sustained. Heretofore, individual investors, in dealing with a foreign state, have been constrained in their ability to petition directly for relief from a treaty breach by a host country. Instead, such investors were required to enlist the assistance of their own government to present their claims against the foreign state. Moreover, a further obstacle to the resolution of these kinds of disputes arose from the requirement that a private party must first have exhausted the remedies available to it under the domestic laws of the host state before presenting its claim through the diplomatic channels of its own state. The NAFTA investor dispute provisions represent a significant reform in this area in that an investor aggrieved by measures of a host government has standing to initiate dispute settlement directly against the host government without the involvement of its own government, using existing legal procedures for the resolution of international commercial disputes. If a breach of NAFTA investment rules and consequential injury to the investor can be made out, relief by way of damages and reversal of the offending measure may be available. Exception for Disapproved Acquisitions - NAFTA specifically exempts from the application of these investor dispute resolution rules any decision by a NAFTA country to prohibit or restrict the acquisition of an investment in its territory by an investor of another NAFTA country for national security reasons or under a foreign investment screening process. Accordingly, decisions regarding the approval or non-approval of investments under the ICA are not subject to NAFTA dispute settlement.
In general terms the country of origin of a good is that place where the good is grown, extracted, produced or manufactured. Where various steps in the processing or manufacturing of a particular good occur in different countries, rules of origin usually provide that the place where a threshold amount or more of costs of production were incurred, or where a prescribed classification change occurs, will be deemed to be the country of origin of the article upon its importation into Canada. Once country of origin is established, the tariff (the schedule of duty rates) accorded to that country is applied. Where goods meet the rules of origin prescribed in the North American Free Trade Agreement (NAFTA) and can be so certified, they are entitled to enter Canada at the preferential duty rate accorded to U.S. and Mexican origin goods under the NAFTA. Commencing in January 1998, all goods originating in the U.S. under the NAFTA rules of origin were entitled to duty free entry. For Mexico, and some U.S. Mexico original goods, all duties are to be eliminated by January 1, 2008. Under the tariff rate reduction scheduling prescribed in the NAFTA, the majority of commercial goods of certified U.S. origin are already duty free. Where goods do not meet the NAFTA rule of origin requirements, although they have undergone processing in and were exported from the U.S. or Mexico, the (usually higher) "Most Favoured Nation" (MFN) duty rates apply. The final tariff reductions of MFN duty rates negotiated in the Uruguay Round were implemented on January 1, 1999. Note that apart from NAFTA, Canada has also established preferential duty rates for goods of Chile and Israel pursuant to free trade agreements concluded with those countries.
As a result of NAFTA, perhaps the least costly and administratively burdensome method of obtaining advantageous tariff treatment involves planning ones sourcing and production activity in light of tariff rules of origin. Development of sourcing arrangements, or modifications of existing arrangements, should be considered to ensure that one has access to the duty reduced or duty free treatment accorded to U.S. exports to Canada by NAFTA. For example, if an input component of a finished product is deemed to meet the rules of origin based on the Canadian, U.S. or Mexican origin of a preponderance of the component's content, the entire cost of such a component may be included in the calculation of the total Canada-U.S. value content of the finished product. Since the entitlement of most processed goods to NAFTA-based duty reduced treatment depends on reaching a deemed 50% North American value added threshold, the declining or free NAFTA duty rates (in cases where products are not already duty free into Canada) increases such goods' margin of preference. Unlike the former situation under the FTA, and unlike the U.S. and Mexico, Canada established two new tariff levels upon implementation of the NAFTA - a Mexico tariff for goods processed there, and a Mexico-U.S. tariff (MUST) for products which undergo processing in both the U.S. and Mexico. The MUST tariff was implemented primarily to distinguish maquiladora goods (goods produced in specified duty-free zones in Mexico) from those of wholly U.S. geographic origin, and is generally equal to or higher than the Mexico tariff, which is in turn higher than the U.S. tariff, the latter a result of reductions under the older FTA.
The Marking of Imported Goods Regulations provide that prescribed goods must be indelibly marked with their country of origin. Where non-NAFTA finished goods are made from components whose countries of origin differ, Canada Customs deems the finished article's origin to be the country where it essentially took the form in which it is imported into Canada. Since this rule of origin for marking purposes is different from other rules of origin which determine eligibility for tariff preferences, an imported article may, for example, need to be marked as originating in one country, but may not be eligible for that country's preferential duty treatment. Under NAFTA, Canada, the U.S. and Mexico have established marking rules to identify the origin of goods in continental trade, which are similar to but not the same as the rules of origin which determine eligibility for lower NAFTA duties. This is particularly true in the textile and apparel sectors, so that inconsistencies of the sort noted above may continue to arise on NAFTA goods. Canada Customs may review marking determinations for up to four years after accounting, where the Minister considers it advisable. V. INVESTMENT CANADA ACT A. INTRODUCTION By the standards of most developed industrial nations, Canada has relatively
limited government regulation of foreign investment. Traditionally,
such regulation has taken the form of: With the coming to power of the Progressive Conservative Party in September of 1984, a change in policy direction in respect of foreign investment in Canada became evident. Where the previous government had occupied itself with hindering foreign investment, the new government summed up its outlook in a speech given by Prime Minister Brian Mulroney at the Economic Club dinner in New York City on December 10, 1984, when he stated: "our message is clear: Canada is open for business again." The Investment Canada Act (the "ICA"), which came into force on June 30, 1985, gives effect to this new policy direction. The ICA repeals the previous Liberal Government's much criticized Foreign Investment Review Act ("FIRA"), which had regulated foreign investment in Canada much more stringently and was a source of annoyance to non-Canadians seeking to invest in Canada. By its terms, the ICA acknowledges that increased capital and technology would benefit Canada. Its operates from the stated premise that its purpose is to encourage investments by both Canadians and non-Canadians that contribute to economic growth and employment opportunities in Canada, and to provide for a review of significant investments in Canada by non-Canadians in order to ensure such benefit to Canada. B. TRANSACTIONS SUBJECT TO REVIEW UNDER THE ICA Regulations published under the ICA attempt to define the types of business activities considered to be related to Canada's cultural heritage or national identity. Examples of such investments include the publication, distribution and sale of written material, films, video products, audio-video music recordings and sheet music. Notably, the business activities prescribed by the regulations as reviewable do not extend to the energy and high technology industries, considered so sensitive by the previous Government. It is expected that the discretion exercised by the Director in reviewing investments relating to Canada's cultural heritage or national identity will be exercised with caution, consistent with the spirit and intent of the ICA.
An acquisition of control can be accomplished either directly or indirectly. A direct acquisition occurs when the non-Canadian acquires a majority of the voting shares of a corporation (or voting interests of a non-corporate entity), or acquires all or substantially all of the assets used in carrying on of the business of a corporation. Under the ICA, such direct acquisitions are reviewable only where the value of the assets of the Canadian business acquired is $5,000,000 or more. Acquisitions by non-Canadians of Canadian real estate businesses with gross assets of $5,000,000 or more that derive their revenue from rental properties are also reviewable under the Act. An indirect acquisition occurs when the non-Canadian acquires control
of a foreign corporation or entity, which in turn controls a Canadian
business. An indirect acquisition is reviewable under the following
circumstances: Similar rules apply in the case of acquisitions of foreign entities other than corporations having Canadian subsidiaries or businesses. The acquisition of the shares of a corporation, to which are attached one-third or more of the voting rights of that corporation, is deemed to constitute the acquisition of control of any business carried on by the corporation, unless it can be established that the acquiror does not in fact controlled the corporation through the ownership of the said voting shares. In this respect, the ICA is more lenient to the non-Canadian investor than was formerly the case under FIRA. Under FIRA, the acquisition of 5% or more of the voting shares of a public corporation, or 20% or more of the voting shares of a private corporation, was deemed to always constitute an acquisition of control. Under the ICA, no distinction exists between the acquisition of shares of a public corporation and those of a private corporation. C. NET BENEFIT TO CANADA (a) the effect of the investment on the level and nature of economic
activity in Canada including, without limiting the generality of the
foregoing, the effect on employment, on resource processing, on the
utilization or parts, components and services produced in Canada and
on exports from Canada;
The range of persons subject to the ICA is also narrower than under previous legislation. The notification and review process set out in the ICA applies to investments made by "non-Canadians", that is to say, by persons who are not Canadians. An individual is a "Canadian" within the meaning of the ICA if (s)he is a Canadian citizen or if (s)he is a permanent resident (within the meaning of the Immigration Act, R.S.C. l985, c-I-2) who has been ordinarily resident in Canada for not more than one year after first becoming eligible to apply for Canadian citizenship. The ICA sets out rules for determining whether a corporation or other
entity is Canadian controlled, in which case it will not be subject
to the ICA. If it is not Canadian controlled, it will be subject to
the notification and review provisions of ICA. These rules may be summarized
as follows: E. REVIEW PROCESS
Since 1994, the ICA was amended again by the World Trade Organization ("WTO") Agreement between the former parties of the General Agreement on Trade and Tariffs ("GATT"). The WTO Agreement replaced the GATT effective January 1, 1995. Therefore, the rules of the ICA governing investments in Canada by American or Mexican investors have been replaced by rules applicable to investments by a "WTO Investor". A WTO Investor is an individual, other than a Canadian, who is a national of a WTO Member, or who has the right of permanent residence in relation to that WTO Member. The review thresholds for direct and indirect acquisitions by WTO Investors under the current ICA are determined each year by the Minister responsible for Investment Canada, using a formula based on the Nominal Gross Domestic Products at market prices.
Where a review is required, the approval process is fast and relatively simple, because of the relatively limited range of reviewable transactions and because the Director must meet certain specified deadlines. Further, experience with the ICA confirms the tendency of the Government to approve the overwhelming majority of reviewable foreign investments. Thus, any non-Canadian investor looking at Canada now will surely feel more welcome than at any time under FIRA, and will have an excellent chance of carrying out his proposed investment in Canada. VI. THE FAMILY LAW ACT A. INTRODUCTION Since the mid-1970's spousal rights with respect to support and matrimonial property have undergone significant changes in Canada as a result of provincial legislation which generally reflects, among other things, a recognition of marriage as a form of partnership and the importance of non-monetary contributions to the economic well-being of the family. While divorce and the provision of financial support in connection with divorce proceedings are matters governed exclusively by federal legislation (which is uniform throughout Canada), matters relating to the division of matrimonial property on marriage breakdown and child and spousal support in the absence of divorce proceedings fall within provincial jurisdiction and, therefore, may vary from province to province. In 1986, the Province of Ontario introduced legislation known as the Family Law Act (the "FLA"). The FLA governs issues relating to the division of property upon the breakdown of a marriage, support for spouses and children, custody and access of children and the possession and disposition of the matrimonial home and domestic contracts governing these matters. Most legislation of the other provinces and territories governs the same matters. The focus of this discussion is to introduce the provisions of the FLA that relate to the division of property upon the separation of spouses. These provisions may also apply in the case of the death of one of the spouses. The property provisions of the FLA were enacted in recognition of the idea that marriage is a form of partnership. The FLA provides for the orderly and equitable settlement of the affairs of spouses upon the breakdown of the marital partnership, or alternatively the death of a spouse, by providing a scheme for the distribution of property. The FLA's definition of the property is broad and includes business interests of a spouse such as a partnership interest or shares in a corporation. Generally, the value of all assets acquired during the course of the marriage, together with any increase in the value of assets brought into the marriage, are equally divided among the spouses. This is accomplished by what the FLA refers to as a net equalization payment ("NEP"). The separation of spouses or death of a spouse does not give a non-titled spouse a proprietary interest in any particular asset. What is divided between the spouses is the total value of the assets owned by each spouse at the time of separation, not the assets themselves. The FLA, however, specifically empowers |