Interpretation Note: Canadian Ownership Requirement
Table of Contents
The following sets out information on the Canadian ownership requirement for air licensing by the Canadian Transportation Agency pursuant to the Canada Transportation Act (CTA). Additional information is available in Interpretation Note: Control In Fact.
Canadian Ownership Requirement
Canada's airline ownership requirements have been established to ensure that strategic decisions regarding air services within Canada, or operated in the right of Canada under an air transport agreement or arrangement, are conducted by Canadians. In addition, substantial ownership and effective control of airlines by nationals is a fundamental feature of Canada's bilateral air transport agreements. Many states include provisions in their agreements that allow either party the right to refuse, authorize, withdraw, suspend or condition the authorizations of an airline of the other party if it is not substantially owned and effectively controlled by that state or its nationals.
Applicability of the Canadian Requirement
Domestic air service - The CTA requires that air carriers operating or proposing to operate a domestic air service be Canadian unless they obtain an exemption from the Minister of Transportation, Infrastructure and Communities pursuant to section 62 of the CTA (See Request for Ministerial Exemption below).
Scheduled international air service: A non-Canadian is eligible to hold a licence for a scheduled international air service if, among other items, the non-Canadian has been designated by a foreign government or its agent to operate under the terms agreed to by that government and the Government of Canada. All other air carriers operating or proposing to operate a scheduled international air service must be Canadian.
Non-scheduled international air service: A non-Canadian is eligible to hold a licence for a non-scheduled international air service when the non-Canadian holds a document issued by the government of the non-Canadian's state or an agent of that government that provides for services that are equivalent to the non-scheduled international licence for which the non-Canadian is applying. All other air carriers operating or proposing to operate a non-scheduled international air service must be Canadian.
The Canadian requirement is a market entry as well as an ongoing requirement that must be complied with at all times. Where the Agency determines that a licensee ceases to meet the requirement, it has no discretion and must suspend or cancel the appropriate licence. Only carriers exempt from the requirement by the Minister of Transportation, Infrastructure and Communities are not subject to this statutory obligation.
Definition of Canadian
"Canadian" is defined within subsection 55(1) of the CTA to mean:
"a Canadian citizen or a permanent resident within the meaning of subsection 2(1) of the Immigration and Refugee Protection Act, a government in Canada or an agent of such a government or a corporation or other entity that is incorporated or formed under the laws of Canada or a province, that is controlled in fact by Canadians and of which at least seventy-five per cent, or such lesser percentage as the Governor in Council may by regulation specify, of the voting interests are owned and controlled by Canadians."
With respect to a corporation, partnership, proprietorship or other legal form of business enterprise:
- It must be incorporated or formed under the laws of Canada or a province;
- At least 75% of its voting interests must be owned and controlled by Canadians; and
- It must be controlled in fact by Canadians.
Failure to meet these criteria would result in the entity being considered to be non-Canadian. Where the ownership of an entity consists of one or more corporations or other entities, the definition of Canadian would also be applied to those entities. If they are subsequently owned by other entities, the Agency must determine who controls the company up to the top of the ownership chain, applying the definition of "Canadian" under the CTA at each step.
Incorporation or Formation Requirement
As noted above, for a corporation, partnership, proprietorship or other form of business enterprise to be Canadian, it must be incorporated or formed under the laws of Canada or one of its provinces.
To be considered "Canadian", at least 75 percent of the voting interests, meaning voting securities and the votes assigned to those securities, need to be both owned and controlled by Canadians. To be considered "owned" by Canadians, the securities need to be owned on a beneficial ownership basis by Canadians. It is not enough for them to be registered to Canadians. To be considered "controlled" by Canadians, the Canadian beneficial owners should have the ability to exercise the votes attached to the securities.
For an entity that lists its securities on a publicly-traded stock exchange, the percentage of voting interests owned by Canadians can be quite fluid and subject to constant fluctuations. To ensure that the entity continues to meet the ongoing requirement to be Canadian, the Agency may require the entity to establish a security constraint and control system which restricts any purchase or transfer of the corporation's securities if it would result in non-Canadians holding over 25 percent of the entity's outstanding voting securities.
Generally, an acceptable alternative approach is the adoption of a variable voting regime where variable voting securities are issued to non-Canadians which, as a class, cannot ever carry more than 25 percent of the aggregate votes attached to all issued and outstanding voting securities of the company. Where the percentage of the variable voting securities, either outstanding or cast at a meeting, exceeds 25 percent of the total voting shares outstanding or that may be cast at that meeting, the vote attached to each variable voting security automatically decreases to ensure that the 25 percent threshold is not surpassed.
Control In Fact
To be Canadian, the company needs to be "controlled in fact" by Canadians. Although the term is not defined in the CTA, control in fact is the power, whether exercised or not, to control strategic decision-making activities of an enterprise and the ability to manage and run its day-to-day operations. Minority owners and their designated representatives normally have the ability to influence a company, as do others, such as financial institutions and employees. The influence, which can be exercised either positively (i.e., the requirement for a positive approval to be given for a decision to be made) or negatively (i.e., the ability to veto a decision), needs to be dominant or determining, however, for it to be considered control in fact.
The determination of where control in fact lies is a question of fact and so can only be evaluated on a case-by-case basis. Each case is unique and therefore all managerial, financial and operational air carrier relationships, or proposed relationships, must be considered before making a determination. Ownership structures with little or no involvement from non-Canadians do not normally necessitate extensive analysis.
Nature of the Determination Process
The determination of an applicant's Canadian status is an administrative process and the applicant holds the burden of satisfying the Agency that it meets the regulatory requirement. In making such determinations, the Agency, as an economic regulator, draws heavily on the expertise it has acquired over the years in making similar determinations.
In most cases, Canadian status is considered within an unopposed application determination process. However, the Agency may grant intervener status to any person who has an interest in an application. Interveners may be granted participatory rights as appropriate, having regard to factors such as the nature of the proceeding, the contribution that the intervener may provide and confidentiality requirements.
When applying for a licence, applicants should consult the relevant Application Guide to identify all of the information required to demonstrate fulfillment of the Canadian status requirement. Applicants are also encouraged to file any additional information and documentation in support of their Canadian status in order to reduce the application processing time. The Agency may also request additional information and documentation as necessary.
Request for an Advance Ruling
Where a licensee is contemplating a transaction that could potentially alter its Canadian status, a Canadian compliance ruling can be requested prior to the completion of the transaction in order to determine the effect of the proposed transaction on its Canadian status. This allows for the opportunity to make changes necessary to ensure continued compliance and avoid administrative sanctions, including licence suspension and cancellation.
The Agency will only review a proposed transaction when it has advanced to the final stage and draft agreements are in place and awaiting execution. The Agency's decisions are always subject to the proposed transaction being implemented essentially as filed, and that all relevant facts and documents were disclosed to the Agency.
A decision will be rendered as expeditiously as possible, and given that these applications are time sensitive, the Agency will endeavour to meet an applicant's reasonable requested timelines.
Where financial or corporate information is filed with the Agency, it will be treated as confidential and not form part of the public record unless written authorization has been provided by the applicant. For all other documents, a claim for confidentiality, setting out the reasons confidentiality is required, must be submitted for consideration by the Agency. Given the confidential nature of the information typically filed, detailed rulings with reasons are normally issued in confidence to the applicant, while the public decisions generally contain limited information.
Requirement Regarding Changes to Canadian Status
Pursuant to paragraph 82(c) of the CTA, licensees are required to notify the Agency without delay, in writing, if any change occurs that affects, or is likely to affect, the licensee's status as a Canadian. This includes, without limitation:
- listing of shares or financial instruments on Canadian or foreign stock exchanges;
- the issuance or transfer of shares or units to non-Canadians;
- amendments to shareholders' agreements granting non-Canadian shareholders additional rights; and
- financing and aircraft acquisition agreements with minority non-Canadian shareholders.
Review and Appeal
The Agency may review, rescind or vary any Agency decision if there has been a change in the relevant facts or circumstances subsequent to the decision being made. A decision by the Agency can be appealed to the Federal Court of Appeal on a question of law or jurisdiction. An application requesting leave to appeal must be submitted within one month from the date of the decision or within a time period determined by a judge of the Federal Court of Appeal. At any time, the Governor in Council may vary or rescind any Agency decision, either by petition of a party or an interested person, or on its own motion.
Request for a Ministerial Exemption
Pursuant to section 62 of the CTA, where it is considered necessary or advisable in the public interest that a domestic licence be issued to a non-Canadian, the Minister of Transportation, Infrastructure and Communities has the statutory authority to exempt a person from the requirement to be Canadian. This authority does not extend to the issuance of a scheduled international licence or a non-scheduled international licence.
Given that the Minister has exclusive statutory authority, any such request would have to be made directly to the Minister. Ministerial exemptions and any associated conditions are binding on the Agency.
Related Public Decisions
Below are links to some of the Agency's previous public decisions that specifically address the requirement to be Canadian, with particular emphasis on the voting interest and control in fact requirements. The list is not meant to be exhaustive or to indicate a priority of one decision over another. This list will be updated semi-annually.
- Decision No. 297-A-1993 (Canadian Airlines Decision)
- Decision No. 299-A-2000 (Air Canada Decision)
- Decision No. 511-A-2004 (ACE Decision)
- Decision No. 10-A-2010 (Sunwing Airlines Decision)
- Public redacted version of October 6, 2010 Confidential Decision (CHC Helicopters Canada Decision)
All questions should be directed to the Agency c/o the Manager, Financial Evaluation.
All queries regarding requests for an exemption should be directed to the Minister of Transportation, Infrastructure and Communities c/o the Director, National Air Services Policy.