Foreign Direct Investment and Canada

Canada has long been a great market for foreign direct investment (FDI). With its fairly stable and increasingly business-friendly environment, strong banking system, robust market conditions, and pro-immigration policies, Canada continues to be an attractive destination – even among other G7 economies – for foreign investors to establish and expand their operations and businesses.

When looking at the country’s overall fiscal performance, Canada’s historically low interest rates, set by Canada’s central bank (the Bank of Canada) have, until recently, provided ideal conditions for high levels of growth and business activity. Swift action and rate adjustments by the Bank of Canada early in 2020 also meant that the impacts of the COVID-19 pandemic experienced by many countries and markets largely failed to materialise in Canada. This allowed for a fairly stable flow of deals to be done during an extremely turbulent couple of years.

However, growing fears of a global recession in recent years have spurred the Bank of Canada to double down on its policy of quantitative tightening, and to increase its interest rates numerous times over a short period of time. As a result, Canada now has one of the highest policy interest rates among the G7 countries. Despite this, Canada’s open investment regime, and comparatively steady business environment over recent decades, have provided foreign investors with an extremely friendly and attractive destination for their investments and acquisitions. The country’s robust economic fundamentals, strong rule of law, political stability, educated workforce, respected research and development sector, and well-developed infrastructure combine to create an extremely favourable place to do business.

As a result, Canada is now seen by analysts as one of the top countries in the G20 for doing business over the next five years, and ranks 2nd (after the United States) in the Kearney FDI Confidence Index.

Canada has generally fostered a strong and open investment regime, allowing for unrestricted access to most sectors and markets. While there have been recent moves to enforce stricter frameworks for the review of foreign investments by the Investment Review Division (IRD), the part of Canada’s Ministry of Innovation, Science and Economic Development (ISED) tasked with the application of the Investment Canada Act (ICA), which regulates FDI in Canada, the Canadian business environment and the legal framework continues to evolve and move in a favourable direction, removing barriers and obstacles to make Canada more accessible for foreign investors. Additionally, the country has established a robust legal framework protecting the rights of foreign investors and offering reliable dispute resolution mechanisms.

The Canadian government has continued to offer financial incentives, tax benefits, and grants to attract and retain FDI. For example, Canada’s Strategic Innovation Fund (SIF) supports R&D projects, while the Canadian Trade Commissioner Service (CTCS) assists foreign investors in navigating Canadian markets. In particular, Canada’s tax treatment for new business investment regularly ranks the lowest in the G7: Canada’s combined federal-provincial statutory corporate income tax rate currently stands at approximately 26.2%.

Canada typically maintains low barriers to entry for immigration, which appeals to investors wishing to bring across specialist labour and expertise. With the lowest population of the G7 countries, the Canadian government continues to make moves towards lowering the requirements relating to corporate immigration, enacting policies and pathways aimed at fostering the opportunities and environments that are attractive to inbound skilled workers. Prime among its initiatives is Canada’s Global Skills Strategy, with the goal of ensuring that businesses can bring in skilled foreign workers.

Furthermore, in a major move intended to make it easier for foreign investors to establish companies in the province, Ontario recently repealed legislation that required that at least 25% of the directors of Ontario corporations be Canadian residents – something that many saw as an onerous legacy requirement that needed to be adjusted.

Canada’s participation in key international trade agreements has also boosted its position as one of the top G7 countries for FDI. Canada is a member of the North American Free Trade Agreement (NAFTA) and the Canada-United States-Mexico Agreement (CUSMA), providing preferential market access to businesses.

Canada also has numerous bilateral investment treaties (BITs) and double taxation agreements (DTAs) in place with various global economies, ensuring protection for foreign investors and increasing access to trade.

Sector-wise, FDI in Canada is relatively diverse. In particular, Canada’s skilled workforce and border with the US has meant that the country’s manufacturing sector, particularly automotive and aerospace industries, has long been an attractive prospect for FDI.

Additionally, while subject to greater regulatory scrutiny, Canadian industries such as energy, technology and telecoms are also attractive to foreign investors, and Canada’s access to natural resources means that FDI in resource-based sectors like oil, gas, mining, and forestry remains high.

The government has also increased incentives to business and investments in “clean” technologies. For example, Canada has one of the lowest statutory corporate income tax rates for zero-emission technology manufacturing and processing in the G7, and has been offering robust tax incentives for businesses manufacturing clean energy equipment.

Many would probably agree that Canada’s success with FDI has resulted from a commitment to fostering accessibility, innovation and collaboration. With a multi-faceted approach, Canada’s stable and supportive investment environment, pro-investment policies, diverse range of sectors, and market access, have made it an attractive destination for foreign investors. As such, FDI continues to be a major driving force behind Canada’s economic success, and that shows no current signs of abating.