Investor protection through Canada’s investment treaty network

The opportunity

Canada offers investors more than a stable legal system, independent courts, and rule of law tradition. Through a broad network of international investment agreements, Canada also provides investors with protections that can help mitigate political and regulatory risk for parties investing in Canada, as well as for Canadian businesses investing abroad.

Investment treaties encourage cross-border investment by promoting a predictable, rules-based framework between investors and host states. Qualifying investors enjoy a broad range of protections, such as prohibitions against discriminatory treatment and uncompensated expropriation, and the ability to pursue a claim against the host state directly for breach of these protections. This claim is pursued in a neutral forum outside of the host state’s courts.

For investors considering opportunities in Canada and Canadian businesses considering investing abroad, treaty protections can provide an additional layer of legal certainty and predictability beyond domestic law to manage political, regulatory, and even judicial risk.

Investment protection is particularly important in industries that involve long-term investment horizons, and that attract political and regulatory scrutiny, such as mining, energy, infrastructure, transportation, telecommunications, advanced manufacturing, and large-scale industrial development. In these contexts, project economics can be affected by government decisions relating to licensing, permitting, taxation, royalties, exports, environmental regulation, or local content requirements. Investor protection is also relevant to lenders, project financiers, and institutional co-investors, for whom the existence of investment protections can improve the overall risk profile of an investment and support long-term investment decision-making.

Market entry and investment strategies

Existing agreements. Canada has an extensive network of investment agreements spanning Europe, Asia, Latin America, Africa, and the Middle East, including the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) (with countries in the Indo-Pacific region and the United Kingdom), and Canada-European Union Comprehensive Economic and Trade Agreement (CETA) (with Europe). These agreements can take different forms: sometimes standalone agreements and other times chapters in a broader free trade agreement.

Network expansion. The Carney government is expanding Canada’s investment treaty network to diversify Canadian trade relationships and strengthen the Canadian economy. To date, it has entered into new agreements with Indonesia, the United Arab Emirates, and Ecuador, and is actively negotiating agreements with Mercosur (Argentina, Brazil, Paraguay, Uruguay, and Bolivia), ASEAN (Singapore, Thailand, Philippines, Indonesia, Cambodia, Laos, Malaysia, Myanmar, Timor, and Vietnam), and India, among others.

Investment structuring. Each treaty has unique requirements before an investor can avail itself of the substantive protections afforded by the treaty. Generally, it is not permissible to restructure an investment to take advantage of treaty protections once a dispute has arisen. As a result, sophisticated investors should assess treaty coverage before investing, and structure their investment accordingly.

Key risks and how to manage them

Protected investments

While each treaty is unique, under Canada’s modern treaty approach, protected investments generally include the following: equity interests and shareholdings; infrastructure assets; mining, energy, and natural resource projects; intellectual property rights; concessions, licences, and permits; joint venture interests; and certain contractual rights.

Less protected investments

Not every investment qualifies for treaty protection, however. For example, the 2021 Model Foreign Investment Protection and Promotion Agreement (FIPA), on which most of Canada’s recent treaties are based, narrows the definitions of “investor” and “investment”. Older treaties expressly require characteristics typically associated with a genuine investment, including the commitment of capital or resources; the expectation of gain or profit; and the assumption of risk. They also specify economic activities that do and do not constitute an investment under the treaty.

FIPA also introduced several important limitations, including a requirement that protected enterprise investors have substantial business activities in their home jurisdiction; restrictions on treaty shopping; limits on claims by dual nationals; and requirements that the investment comply with domestic law when established.

Collectively, these provisions heighten the importance of proactive structuring on the part of investors before committing capital.

Key protections

Investor-state dispute settlement

The hallmark of investor-state protections is investor-state dispute settlement, which permits an investor to pursue proceedings directly against a host government for treaty breaches through an independent dispute resolution mechanism (frequently, though not always, arbitration) that operates outside a host state’s domestic court system.

Qualifying investors enjoy a litany of substantive protections. While the precise content of these protections vary from treaty to treaty, they generally include the following:

• Protection against discriminatory treatment. Most Canadian investment agreements prohibit host states from discriminating against an investment based on the investor’s nationality.  
• Minimum standard of treatment. Historically, investment treaties often included obligations entitling an investor to “fair and equitable treatment,” leading to significant debate over the application of the standard. FIPA (and Canadian treaties based on it) removes this language, and instead focuses on the customary international law minimum standard of treatment of aliens. It identifies several categories of conduct that may violate the standard, including a denial of justice in judicial or administrative proceedings; fundamental breaches of due process; manifest arbitrariness; targeted discrimination on manifestly wrongful grounds; abusive treatment, coercion, duress, or harassment; and failures to provide an investment with full protection and security.
• Protection against expropriation. Investment agreements generally prohibit a host state from expropriating an investment, directly or indirectly, and require that any taking serves a public purpose; is non-discriminatory; follows due process; and entails prompt, adequate, and effective compensation.
• Transfer of funds. Canadian treaties commonly protect the ability of investors to transfer capital, profits, dividends, and other investment-related payments across borders, subject to limited exceptions, protecting an investor’s ability to repatriate capital during the term of the investment.
• Public interest regulation. Canada’s modern investment treaties also preserve the ability of governments to regulate in good faith in areas such as the environment; public health; Indigenous rights; labour standards; cultural policy; and national security. As a result, investors should not assume that every regulatory change affecting profitability will give rise to a treaty claim—further heightening the importance of assessing treaty eligibility and application before committing capital.

Availability and procedural considerations

Many recent treaties require mandatory consultations and/or mediation, cooling-off periods, and strict limitation periods before proceedings can be commenced.  

Canada’s modern treaties also aim to be effective tools not only for large corporations, but also for small and medium-sized enterprises. For example, recent treaties based on FIPA include procedural reforms such as expedited arbitration mechanisms and enhanced case management for smaller disputes (typically claims under $10 million) that make investment protection more meaningful by mitigating the cost of proceedings alleging treaty breaches. 

The bottom line

Canada’s investment treaty network provides investors considering committing capital in Canada, and Canadian investors considering investing abroad, with valuable tools to reduce political and regulatory risk. Modern Canadian treaties offer meaningful investor protections, while increasingly reflecting a balanced approach that preserves governments’ ability to pursue legitimate public policy objectives. For inbound and outbound investors, treaty planning is an essential component of investment strategy and risk management that should be undertaken before committing capital.

All dollar amounts in this primer are C$ unless indicated otherwise.