Foreign Ownership Rules in Canada : What Founders Must Know

Introduction

Canada is a perfect base for a business set-up for foreign entrepreneurs. There are several underlying reasons for the same, but first, it’s essential to know the foreign ownership rules in Canada.

The country is perfect for businesses, welcoming Foreign Direct Investment (FDI), and offers a regulated framework. Its proximity to the US’s, skilled workforce, strong legal protections, and abundant natural resources, make, the country, Canada a commercially attractive jurisdiction for foreign entrepreneurs looking for company incorporation in Canada.

What Makes Foreign Ownership Rules in Canada so Attractive?

The Government of Canada mandates rules and regulations for business operations, making the country an ideal destination to invest in. It naturally led Canada to attract the second-largest foreign direct investment (FDI) stock to GDP ratio among G20 countries in 2023, according to the United Nations Conference on Trade and Development, November 2024.

Highlighting foreign ownership rules in Canada, the country continues to rank among the top countries in terms of ease of set-up and operations of business. According to the GEM Consortium, Global Entrepreneurship monitor – 2023/2024 Global Report, 2024, Canada positions itself on top among G7 nations for early-stage entrepreneurship.

Out of 25 countries in the Kearney FDI Confidence Index, a measure of the likelihood of a market attracting investment in the next three years, Canada ranks 2nd overall after the United States.

Economic Stability

Apart from investor-friendly foreign ownership rules in Canada, another key factor that makes Canada one of the most lucrative destinations for foreign ownership is the economic stability.

Investors are naturally drawn to stable economies because stability reduces risk and uncertainty. Part of the reason for Canada’s economic stability is its net debt to GDP ratio. According to IMF, Canada has enjoyed the lowest net debt to GDP ratio in the G7 for the last 20 years (13.1% in 2023) and is expected to maintain this position for the next six years.

A predictable fiscal and monetary environment ensures steady returns, while low inflation and strong banking systems safeguard investments. Economic reliability also means that even during global downturns, markets remain reliable and business operations continue smoothly. It further results in long-term security and confidence to foreign investors.

Learn More : AML & KYC Basics for Fintech Startups in Canada: The Complete Compliance Guide

Governing Act for Foreign Ownership Rules in Canada and Its Purpose

The Investment Canada Act (ICA) is part of a broader framework to help Canada attract needed, positive foreign investment. It essentially governs a broad range of investments including acquisitions, greenfield and minority investments. The ICA allows the federal government to review significant in-bound foreign investments to ensure the overall economic benefit to Canada. It also allows the federal government to review investments of any size for national security concerns.

Across the spectrum of all the different investments, only certain acquisitions that are considered significant acquisitions of control of Canadian businesses are reviewed in order to determine whether they would result in “net benefit” to the Canadian economy, ensuring that the foreign ownership rules in Canada maintain a balance between being open and strict.

The whole Section 2 of the Investment Canada Act (R.S.C. 1985, c. 28 (1st Supp.)) reads as the following:

“Recognizing that increased capital and technology benefits Canada, and recognizing the importance of protecting national security, the purposes of this Act are to provide for the review of significant investments in Canada by non-Canadians in a manner that encourages investment, economic growth and employment opportunities in Canada and to provide for the review of investments in Canada by non-Canadians that could be injurious to national security.”

Can Foreigners Own Company in Canada?

According to the foreign ownership rules in Canada, any foreign investor planning to take control of an existing Canadian business or establish a new one must file either a notification or a formal review application, unless a specific exemption applies.

The Investment Canada Act (ICA) law allows the government to scrutinize such investments to ensure they benefit Canada’s economy and do not pose national security risks, striking a balance between encouraging foreign investment and safeguarding their key and sensitive sectors.

Overall, it can be inferred that the purpose of the legislation is to provide for the review of significant investments in Canada by non-Canadians to benefit the country.

National Security Review

Foreign ownership rules in Canada are mainly governed by the Investment Canada Act (ICA). It establishes two review mechanisms for foreign investments:

1. A Net Benefit Review for significant acquisitions of control of a Canadian business by non-Canadians to ensure the investment benefits Canada; and

2. A National Security Review for any foreign investment, including minority stakes, to assess whether it could harm national security.

In recent years, the National Security Review has become Canada’s primary screening tool, with expanded powers allowing the government to scrutinize and block investments posing risks to defence, economic stability, or other security interests.

What constitutes as National Security Review?

The ICA in its legislation has not defined the term “national security”, but the recently updated Guidelines on the National Security Review of Investments, sets out the approach the government will take in reviewing foreign-controlled inbound investments. Practically speaking, NSR can be ascertained to be called into action for the review of investments by non-residents that are likely to:

• Cause a negative impact on the defence sector of Canada, or to the defence capabilities of any of its allies. 

• Cause a negative impact on the public health or the supply of critical goods and services like energy, food, health and water. 

• Impacts access to any minerals included in Canada’s Critical Minerals List 

• Led to the transfer of sensitive technology or expertise outside Canada 

• Create risks of foreign surveillance, espionage, or interference with Canadian intelligence and law enforcement operations; 

• Support or enable the actions of illicit entities such as terrorist groups or organized crime networks.

Application for review under the ICA for Non-Canadian Citizen

An application for Review must be filed before closing of the investment or before establishing a new business, and the investor must wait until the Minister of Innovation, Science and Economic Development (or the Minister of Canadian Heritage for cultural businesses) approves of the investment.

The approval by the Minister of Innovation, Science and Economic Development (or the Minister of Canadian Heritage for cultural businesses) is based on the answer to the question of whether the investment is of “net benefit” to Canada.

The initial review period is 45 days, which the Minister may extend by 30 days, with further extensions possible. Until the Minister issues a positive determination, the investor cannot complete the transaction. The duty to file an Application for Review lies solely with the non-Canadian investor. The Canadian business has no filing obligation, though it typically assists by supplying required information. There are no filing fees for either process.

Canada Shareholding Rules : Factors Determining Whether and investment qualifies as “Net-Benefit” to Canada

When deciding if a foreign investment is beneficial to Canada, the Minister evaluates several key considerations that are a part of the process of foreign ownership rules in Canada.

• Economic Impact: The effect on overall economic activity, including job creation, resource development, use of Canadian-made materials and services, and potential to increase exports.
• Canadian Participation: The extent to which Canadians are involved or will participate in the business or in the broader industry that the investment influences.
• Industrial and Technological Advancement: The investment’s influence on productivity, operational efficiency, technological innovation, new product development, and diversity of products in the Canadian market.
• Market Competition: The effect of the investment affects the level of competition within the relevant Canadian industry.
• Policy Alignment: Whether the investment aligns with national and provincial economic, industrial, and cultural policies
• Global Competitiveness: The degree to which the investment enhances Canada’s capacity to compete internationally.

Foreign Ownership Rules in Canada : Things to Keep in Mind  

Any acquisition or establishment of a Canadian business by a non-Canadian (an individual, corporation, or government) is subject to either a notification or a review to ensure it is of “net benefit to Canada.” 

So, before choosing whether to incorporate, form a partnership, or invest through a joint venture, you need to confirm whether your level of control or ownership would trigger ICA thresholds. 

Options to Run a Business in Canada as a Foreigner 

1. Corporations 

A Canadian corporation is a separate legal entity. A corporation also generally has the capacity of a natural person. This generally provides limited liability protection to the shareholders as owners of the corporation. 

Foreign ownership rules in Canada allows business corporations’ statutes to provide significant flexibility in setting the terms of different share classes. There is no minimum or maximum dollar amount of share capital required. 

Federal and provincial legislation allow for corporations with share capital (which are generally incorporated under the business corporations’ statutes) and non-share capital corporations. The latter are used for charitable and non-profit activities. 

Incorporation and Choosing a Jurisdiction 

In order to understand foreign ownership rules in Canada so that one is aware enough to make the right calls, it is important to understand the intricacies involved when it comes to incorporating a business and choosing a jurisdiction for incorporation.  

To operate across Canada, a company must be incorporated under the federal Canada Business Corporations Act (CBCA). Alternatively, it can incorporate under the laws of a specific province or territory. 

If a provincially incorporated company wants to conduct business in another province or territory, it must register extra-provincially in each additional jurisdiction. While this process has been simplified under Canadian law, it still requires annual renewals and payment of registration fees. 

Because of the set-up of foreign ownership rules in Canada, many companies choose federal incorporation under the CBCA because it offers greater flexibility and mobility, making it easier to expand or relocate operations anywhere in Canada without needing separate provincial registrations. 

2. Partnerships 

Unlike a corporation, a partnership is a relation between persons carrying on business together. They share a common motive to derive profit out of the business. According to foreign ownership rules in Canada, partnerships in Canada are not governed by a single federal statute. Instead, the applicable law is provincial or territorial, meaning each province/territory has its own legislation, often called the Partnership Act. Other than the relevant Partnership Act, a partnership agreement is another document that can govern the terms, conditions, rules and regulations of a partnership business. 

After carefully going through the foreign ownership rules in Canada in order to set-up a partnership, it is recommended to have a comprehensive partnership agreement that clearly defines how the partnership will be governed and operated. This also allows the partners to modify or exclude certain default provisions of the law that would otherwise apply if no specific agreement were in place. Carrying on a business as a sole-proprietorship is not seen commonly among non-Canadians due to the residency regulations in most of the provinces. 

For someone who prefers a partnership style of business and trying to understand the foreign ownership rules in Canada, it is important to know that general partnerships, limited partnerships and limited liability partnerships are three forms of partnership seen in Canada.  

• General Partnership: 

In a general partnership, the management and profits are shared by all partners. Further, the liability aspect entails that each partner shall be held accountable towards any or all liabilities of the other partners, and all actions. 

• Limited Partnership: 

A limited partnership has general partners as well as limited partners. General partners manage the partnership and have unlimited liability. Then there are limited partners who act essentially as investors and their liability is to the extent of their contributions. But they lose their limited liability protection if any of the limited partners start participating in management. 

• Limited Liability Partnership (LLP): 

A limited liability partnership is usually seen as common among professionals like lawyers, accountants and architects. Unlike a general partnership, each partner is not personally liable for another’s negligent actions. In terms of management, all the partners can have a say. 

3. Opening a Branch Office in Canada 

Opening a branch office in Canada is another option available to foreigners wanting to own a company in Canada. A branch office is essentially an extension of the foreign parent company. Unlike a corporation, it is not a separate legal entity and its liabilities, contracts and other legal ties belong to the foreign parent. It allows the foreign company to conduct business in Canada under its own name. 

Foreign Ownership Rules in Canada: Extra-Provincial Registration Process

Extra-provincial registration is mandatory. As mentioned earlier, it essentially refers to the rule that a foreign company is required to register in every jurisdiction where it conducts business.

The process includes:

• File application with provincial corporate registry
• Provide certified copies of foreign incorporation documents
• Appoint a local agent for service (Canadian resident)
• Pay registration fees
• File annual returns to maintain status

Compliance : Non-Resident Corporations

Even if once claims treaty-based exemptions, a non-resident corporation must file the Canadian corporate income tax form (T2) if doing business in Canada. Foreign ownership rules in Canada mandate that non-resident corporations must pay in Canadian dollars when filing the T2, schedules and financial statements.

Non-resident corporations must submit extra schedules, to assist the CRA in understanding the nature of income, assess eligibility for treaty relief, and determine if special tax rules apply to that non-resident entity.

1. Schedule 91 if claiming treaty-based exemptions.
2. Schedule 97 to indicate the type of income earned in Canada.
3. Schedule 20 is subject to additional tax under Part XIV of the Income Tax Act.

According to foreign ownership rules in Canada, if a non-resident corporation gets paid for services in Canada, a 15% tax may be withheld by the payer. Also, passive income (dividends, interest, royalties) may be subject to tax under Part XIII or XIII.1 for foreign banks. Withholding ensures Canada collects tax on income flowing from Canada to non-residents, especially where ongoing assessment and compliance might be harder.

If a non-resident corporation disposes of taxable Canadian property (e.g., Canadian real estate, shares of Canadian corporations etc.), it must notify the CRA and obtain the required certificate. This acts as a dual protection for Canada’s interest as it ensures that appropriate tax is collected on gains from Canadian property, and that non-residents cannot simply sell and depart without Canada being aware.

If your non-resident corporation carries on business in Canada and employs people or makes payments requiring payroll or GST/HST, you must register with CRA and obtain a BN. A BN, or Business Number, is a unique 9-digit identification number issued by the Canada Revenue Agency (CRA) to identify a business for tax and regulatory purposes. Foreign ownership rules in Canada ensure that non-resident businesses are treated equally with the resident Canadian businesses under the same operational compliance regime as resident businesses, ensuring tax and remittance obligations (payroll, GST/HST) are properly met.

Corporate Ownership Restrictions

While understanding foreign ownership rules in Canada, it is crucial to note that both the federal and provincial governments impose corporate ownership restrictions in certain strategic or sensitive industries, these will apply even if the thresholds requiring an Application for Review set out above are not exceeded. This includes:

• Financial Institutions: Without the approval of ministry, a foreign bank generally can’t own more than 10% of any class of shares in a Canadian bank or its subsidiaries, though limited exceptions exist.

• Broadcasting : To maintain Canadian control over media, broadcasting licenses cannot be issued to non-Canadians or to companies that are directly or indirectly controlled by foreign interests.
• Télécommunications : Foreign ownership rules in Canada restricts telecom operations to corporations that are Canadian-owned and controlled, incorporated under Canadian or provincial law, to preserve national ownership in this strategic sector.
• Air Transportation : According to Foreign ownership rules in Canada, domestic airline must be majority-owned (at least 51%) and controlled by Canadians to hold a license. Foreign airlines may receive international service licenses if they meet certain eligibility requirements.

Priority- Investment Sectors in Canada 

Have a look at the priority-investment sectors in Canada-  

• Advanced Manufacturing : Canada is actively promoting foreign investment in advanced manufacturing including aerospace, automotive, and high-tech equipment.
• Clean Technology & EV Battery Supply Chain: The government considers cleantech and EV battery supply chains as priority industries for growth and foreign investment
• Life Sciences / Biotechnology : Canada’s life sciences sector includes biopharma, medical devices, and R&D-intensive operations. It stands as an excellent option for foreign investment. Other key sectors contributing to the Canadian economy that are also ideal for foreign ownership are agribusiness, entertainment and media and natural resources.

Incentives under Foreign Ownership Rules in Canada

Foreign ownership rules in Canada include various incentive programs for a foreign investor. These programs for starting business makes Canada one of the topmost contenders in terms of countries attracting foreign investments. Some of the programmes offering incentives to foreign investors are:

• Clean Economy Investment Tax Credits : Your business could qualify for tax incentives in Canada when making investments that contribute to the country’s shift toward a net-zero emissions economy.
• Scientific Research and Experimental Development (SR&ED) Tax Incentives : The Scientific Research and Experimental Development (SR&ED) program provides tax benefits designed to motivate companies to carry out research and innovation activities within Canada.
• Accelerated Investment Incentive : The Accelerated Investment Incentive (AII) offers increased first-year depreciation benefits on qualifying assets.

Business Immigration Programs

Foreign ownership rules in Canada, to be specific Canada’s business immigration system, allows foreign entrepreneurs to establish businesses with ease while building their strong presence.

1. Federal Business Immigration Programs

a. Start-Up Visa

For entrepreneurs bringing innovative and growth-oriented businesses, this program offers permanent residence to entrepreneurs. However, applicants must secure support from a designated venture capital fund, angel investor group, or business incubator.

b. Self-Employed Persons Program

Canada offers business immigration program for individuals contributing to Canada’s cultural and athletic sector. Assessment for Self-Employed Persons Program is based on factors such as experience, language and adaptability to be self-employed in Canada.

2. Provincial Nominee Program (PNP) Entrepreneur Streams

The various provinces offer entrepreneurs various pathways that gradually evolve from a work-permit-first model to permanent residence; require investment, minimum net-worth and active business management.

3. Quebec Business Immigration Programs

Quebec’s own investor program allows applicants to either start or acquire businesses in the province. The Quebec Investor Program, historically aimed at high-net-worth individuals making passive investments has undergone changes but remains a notable pathway when open.

4. Labor Market Impact Assessment (LMIA)

Employment and Social Development Canada (ESDC) in certain situations can allow a Canadian employer to hire a foreign worker. This requires the employer to show that:

• No qualified Canadian citizens or permanent residents are available for the job.
• The employer made genuine efforts to recruit domestically.
• Hiring foreign workers will have a neutral or positive impact on the labor market.
• On the approval of a positive LMIA, the foreign worker may apply for a work permit.

5. Work-Permit–Based Business Entry Options

a. Intra-Company Transfer (ICT)

The ICT is commonly applied to set-up a new Canadian office that serves another purpose of later supporting permanent residency through federal programs. It essentially serves as a program allowing foreign companies to transfer executives, managers, or specialized employees to a Canadian branch or subsidiary.

b. CUSMA Investor/Trader Work Permits

Citizens of the U.S. and Mexico may qualify for investor or trader permits under CUSMA. These permits apply when substantial investment is made in a Canadian enterprise or when most trade occurs between Canada and the applicant’s home country.

Steps for Foreign Entrepreneurs to Start a Business in Canada

Given below are the significant steps for foreign entrepreneurs to start a business in Canada-

1. Review Canada’s Foreign Investment Rules: Understand the Investment Canada Act (ICA), including when a notification or review is required and whether national security provisions apply.

2. Choose a Business Structure: Decide between a corporation, partnership, or branch office.

3. Select a Jurisdiction: Incorporate federally under the CBCA or provincially. If incorporating provincially, register extra-provincially in other provinces where you will operate.

4. Complete Mandatory Registrations: Register for your foreign or newly incorporated business in each province in which it carries on business. It is ideal to appoint a local agent when taking this step.

5. Check Sector-Specific Restrictions: Ensure compliance with foreign ownership limits in regulated key and sensitive above-mentioned sectors such as banking, telecommunications, broadcasting, and aviation.

6. Obtain a Business Number and Register for Taxes: Register with the CRA for a Business Number and fulfill GST/HST, payroll, withholding, and corporate income tax obligations.

7. Explore Incentive Programs: Review federal and provincial incentives, including SR&ED credits, Clean Economy Investment Tax Credits etc. Ideal to appoint an agent for the same.

8. Determine Work Authorization Needs: Confirm whether a work permit is required. Options include business visitor status, LMIA-based permits, Intra-Company Transfers, or CUSMA investor/trader permits etc.

9. Fulfill Ongoing Compliance Requirements: Maintain corporate records, renew registrations, file taxes, and ensure continued compliance with ICA obligations for future investments.

The Final Words

All business enthusiasts all over the world seeking a Canada business setup must understand these foreign ownership rules in Canada. To get expert assistance in company formation in Canada and other compliance-related support, visit https://enterworld.io/.

Helpful Questions About Foreign Ownership Rules in Canada