Canada’s FIPA Program: Its Purpose, Objective and Content
International investment is an essential corporate strategy for many Canadian companies competing in today’s global economy. By investing abroad, companies can gain access to overseas markets, reduce input costs, secure access to key resources, acquire new technologies and provide better support to foreign customers. Canadian consumers and businesses can also benefit from inbound foreign direct investment (FDI), through access to a wider variety of international products and services, improved job opportunities and added sources of tax revenue, which can go on to fund valuable domestic public services and infrastructure projects.
Still, each country operates with its own unique political, legal and regulatory environments. Many of these can be unfamiliar for Canadian investors looking to expand globally. Similarly, Canada places special importance on the autonomy of our indigenous communities, the protection of our natural environment and our commitments to international cooperation, highlighting the need to preserve policy flexibility in certain areas.
For this reason, the Canadian government pursues a policy of negotiating Foreign Investment Promotion and Protection Agreements (FIPAs) that set out reciprocal binding obligations for signatory states in order to provide a more transparent and predictable climate for investors.
FIPAs are part of the expanding global network of bilateral investment treaties (BITs). According to the 2015 United Nations Conference on Trade and Development (UNCTAD) World Investment Report, there are nearly 3,000 BITs worldwide. To date, Canada has 29 FIPAs in force. These FIPAs, combined with the investment obligations contained in Canada’s free trade agreements, provide protection for 57.1% of the known stock of outward direct investment of Canadian businesses at the end of 2014Footnote 1.
In addition to the information provided below, view the information session on FIPAs for an overview of Canada's FIPA program, including the obligations contained in the FIPA and common myths.
What is a FIPA?
A FIPA is an international treaty providing binding obligations on host governments regarding their treatment of foreign investors and investments. By setting out clear rules and an effective enforcement mechanism, a FIPA provides a stable legal framework to promote and protect foreign investment. It typically sets out a range of obligations that host governments guarantee pertaining to non-discriminatory treatment, expropriation, transfer of funds, transparency, due process and dispute settlement.
While Canada concludes FIPAs to protect Canadian investment abroad, the disciplines are reciprocal and serve to reinforce Canada as a stable and predictable destination for foreign investment. In this respect, FIPAs help enhance two-way investment flows between signatory countries.
In the absence of a FIPA, investors risk being subjected to potentially arbitrary or discriminatory measures of host country. These measures are often motivated by the unique political, geographic and economic characteristics of each country. While FIPAs play a critical role in setting a level playing field for investors, they also provide important exceptions to allow states to regulate in public interest.
The importance of foreign investment
The 2015 UNCTAD World Investment Report estimates that the global stock of outward foreign direct investment (FDI) has experienced phenomenal growth over the past two decades, increasing more than tenfold from US $2.3 trillion in 1990 to US $25.9 trillion in 2014Footnote 2.
The stock of foreign direct investment (FDI) in Canada has increased 92.6% since 2004, from $380 billion in 2004 to $732 billion in 2014Footnote 3. In the same time, the stock of Canadian direct investment abroad (CDIA) increased 84.6% from $449 billion in 2004 to $829 billion in 2014Footnote 4.
CDIA is important for Canadian companies to take advantage of global value chains and maximize efficiencies at every step of the production process. CDIA is a tool for companies to gain access to foreign markets (for example by establishing or acquiring international distribution systems), lower their input costs, secure access to key resources (both human and natural), and acquire strategic assets (for example by acquiring leading edge technologies, specialized skill sets or better management techniques) – thereby increasing their own productivity and profitability. In the services sector, CDIA is often the most effective way of meeting the needs and expectations of foreign customers.
CDIA is beneficial to the Canadian economy, particularly over the long term. For example, CDIA contributes to increased R&D and technology spillovers to the home economy leading to productivity improvements. It can also lead to increased exports of goods and services from Canada.
Most CDIA is concentrated in the finance and natural resources sectors. In 2014, 37.8% of CDIA stock was in finance and insurance, 18.4% in mining and oil and gas extraction, 14.6% in the management of companies and enterprises, and 8.3% in manufacturingFootnote 5. In the same year, 29.4% of inward FDI stock in Canada was in the manufacturing sector, 16.6% in the management of companies and enterprises, 20.9% in mining and oil and gas extraction, and 12.5% in finance and insuranceFootnote 6.
How are FIPA countries selected?
Canada identifies FIPA partners primarily on the basis of commercial compatibility, both in terms of Canadian Direct Investment Abroad and inbound Foreign Direct Investment. Canada has made it a priority to pursue investment agreements with markets, where Canadian business identified the need for better frameworks in business environment and where, inter alia, there is a strong likelihood of achieving a high quality and ambitious agreement.
An instrument of protection for Canadian investors
Given the importance of international investment to the market strategies of Canadian firms, it is now more important than ever to promote a fair, open and secure environment for Canadian investment abroad. The protections provided by FIPAs address a number of key issues facing Canadian firms when investing abroad.
- FIPAs protect investors from discrimination on the basis of nationality. This guarantee is important to ensure that a Canadian investor can compete on equal footing with other investors, both national and foreign.
- FIPAs provide for fair and equitable treatment and full protection and security in accordance with the principles of customary international law. This is an undertaking to ensure that treatment does not fall below a basic international minimum standard, for example in cases where there is a lack of due process.
- FIPAs protect against expropriation without compensation. It requires that an expropriation be for a public purpose and provides for payment of prompt, adequate and effective compensation when expropriation does takes place.
- FIPAs guarantee the free transfer of capital and other payments relating to an investment into and out of the host country. This allows Canadian firms to make payments and repatriate their profits and capital without delay in hard currency using a market rate of exchange.
- FIPAs address a number of other issues that can affect the operation of Canadian investments such as the right to appoint individuals to senior management positions or to use suppliers of choice.
- FIPAs provide access to international arbitration to resolves disputes.
While FIPAs typically contain the same type of general protections, investors should be familiar with the specific treaty provisions relating to the foreign market in which they are operating.
How FIPAs are used
It is difficult to measure the immediate economic benefits of FIPAs, as the positive impacts of FIPAs are realized over time, whether in the form of enhanced investment flows or bilateral relations in general. The presence of a FIPA, however, is adding to stability and predictability for Canadian investors, and does enhance the investment climate of the host country. FIPAs also reinforce Canada’s image as a premier investment destination. Recent studies analysing the impact of investment treaties find they are most effective in promoting governance and improving investor perception of the host country.
In practical terms, the existence of a FIPA and its investor-state dispute settlement mechanism reduces risks and allows an aggrieved investor to prosecute their claims before an international tribunal.
More generally, FIPAs open a channel of communication with the host country regarding measures that may affect a Canadian investor. Over the years, Canadian investors have used FIPAs to make representations to host country authorities and engage the host country in constructive consultations towards resolution of the dispute. Recourse to investor-state dispute settlement has also been made in some instances to seek redress for damages incurred.
FIPAs are part of the growing body of international law governing foreign investment, and Canadian investors can benefit from their protections. A Canadian investor relying on a FIPA can look to a comprehensive and specific set of obligations with recourse to international arbitration for their enforcement. The added security and predictability provided by a FIPA supports and enhances Canadian investment activities in foreign markets.
Questions and Answers about FIPAs
The answers to the following questions reflect the nature of most of Canada FIPAs. Investors should review the details of each FIPA relating to the foreign market in which they are operating.
What types of investments are covered by a FIPA?
Various forms of investment are usually covered by a FIPA. They include tangible assets, such as real estate or other property acquired for business purposes; portfolio investments or other forms of participation in a company or joint venture; intangible assets; and property rights, such as intellectual property rights.
Does the FIPA eliminate restrictions to invest in the foreign country?
No. The FIPA is not an instrument of liberalization. It can, however, support the goals of liberalization. For example, most FIPAs, but not all, contain provisions that commit Parties not to adopt measures that are more restrictive with respect to investment; and not to reverse any new liberalization measures that they may adopt. That said, the FIPA does not prevent Parties from regulating in the public interest with respect to health, safety and the environment. Parties may also exempt sensitive sectors from the FIPA’s obligations.
Is minority participation in a joint venture with a local partner covered?
Yes. Typically, an equity security of an enterprise, including a joint venture, is considered to be an investment. More generally, an interest in an enterprise that entitles the owner to share in income or profits of the enterprise is considered an investment under the FIPA.
Is an investment made by a subsidiary via a third country covered?
Yes. Provided the subsidiary is owned or controlled by an investor in Canada, the investment of the subsidiary would be covered by the disciplines of the FIPA.
Does the FIPA address taxation measures?
In general, taxation measures are outside of the scope of a FIPA. Taxation matters are addressed through bilateral double taxation agreements. Canada has 92 such agreements in force and several others under negotiation. For further information visit the Department of Finance website. Canada does, however, negotiate its FIPAs on the basis that tax measures will be subject to the disciplines of the FIPA with respect to expropriation and that tax measures that form part of a private investment agreement or contract between an investor and the host government are covered by the disciplines of the FIPA.
Does a FIPA provide protection across all sectors and industries?
While a FIPA provides protection for investments in general, it does allow Parties to make exemptions from the FIPAs obligations. For example, Canada’s cultural industries are typically not covered by FIPA protections.
Is the FIPA applicable to actions taken by local governments?
Yes. The FIPA applies to actions taken by all levels of government - local, provincial and federal.
Does the Department provide assistance to resolve a dispute?
The investor-state dispute settlement mechanism in a FIPA allows an investor, on its own, to pursue a claim against the host government. The Government of Canada will not be a party to a dispute launched by a Canadian investor. The Department of Foreign Affairs and International Trade, however, can provide assistance to Canadian investors, for example in the form of diplomatic assistance in dealing with the host government or in identifying contacts in the host country. The dispute itself, however, is a legal matter between the investor and the host government.
Where do I go if I encounter a problem?
The first step in resolving an issue with a host government is to pursue the issue directly with that host government. Documenting your complaint and expressing it in clear unambiguous terms are important steps in this process. If you believe there has been a breach of a FIPA obligation, you may wish to obtain legal advice on your options concerning recourse under the FIPA. You can also contact the local Canadian diplomatic mission. They can provide you with relevant contacts should you wish to pursue the matter further.
How long does it take to get a matter resolved by international arbitration?
Each case is different, so it is it difficult to generalize, but resolving a matter through international arbitration is a long process and can take several years.
What is the cost of arbitration?
Arbitral parties are responsible for the costs of the arbitral tribunal, payable in advance. Costs depend on the amount of time needed by the tribunal to hear and decide the case. In recent cases, the investor’s share of tribunal costs has ranged from several hundreds of thousands of dollars to over a million. In addition, the investor would be responsible for its own legal costs. A tribunal may award costs. For example, it may order the losing party to pay some or all of the successful party’s costs.
What countries is Canada negotiating FIPAs with?
For a comprehensive list of Canada's FIPAs, Ongoing FIPA Negotiations, and Recently Concluded FIPA Negotiations, please see the Negotiations and Agreements section.
Are there any complementary instruments available to protect Canadian investors?
Export Development Canada (EDC) is a Crown Corporation that provides financing and risk management services to Canadian exporters and investors in up to 200 markets worldwide.
EDC provides political risk insurance to Canadian businesses investing in emerging markets, including countries with which FIPAs have not yet been negotiated, protecting investors against the effects of unpredictable political events that can have an adverse impact on their foreign operations. Examples of such events include war, civil strife, terrorism, restrictions on the conversion and transfer of currency, breach of contractual obligations by foreign governments, and other foreign government interference that affects investors’ ownership rights or business operations, such as expropriation without prompt and adequate compensation.
EDC can also provide financing to Canadian investors or their foreign investments in support of CDIA. EDC financing support can be at the time of the investment or through-out the term of the investment.
- C.D. Howe Institute, Investor Protection in the NAFTA and Beyond: Private and Public Purpose, Toronto, 2006.
- Conference Board of Canada, “The Benefits of Foreign Direct Investment: How Investment in Both Directions Drives our Economy” Ottawa, March 2006.
- Foreign Affairs, Trade and Development Canada, Global Markets Action Plan.
- Kinnear, Meg, Bjorklund, Andrea K, and Hannaford, John F.G., Investment Disputes Under NAFTA: An Annotated Guide to NAFTA Chapter 11. Kluwer Law International, 2006.
- Salacuse, Jeswald and Sullivan, Nicholas, “Do BITs Really Work? An Evaluation of Bilateral Investment Treaties and Their Grand Bargain”, Harvard International Law Journal Vol 46, 2005.
- United Nations Conference on Trade and Development (UNCTAD), World Investment Reports.
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