Cross-border real estate issues: Investing in Canada and Mexico

Real Estate Issues, Winter 2003 by Canuel, Edward T

Industry Canada: Interpreting the Review of a "Net-Benefit"-Real estate investors must additionally contend with another governmental agency, Industry Canada. This entity administers the Act through the Canadian Ministry of Industry, prepares a detailed report analyzing the requirements noted with respect to "Foreign Investors" under the Act and NAFTA, and the strict rules regarding investment in Canadian corporations. In its document entitled "An Overview of the Investment Canada Act/' Industry Canada discusses ministerial review under the Act. For example, in determining whether a "net benefit" is achieved under a foreign investment, Industry Canada considers several factors, including the effect on the local economic activity in Canada, the degree and significance of participations by Canadians in the Canadian business or new Canadian business, the effect of investment on competition with any industry in Canada and the contribution the investment makes to Canada's ability to compete in more markets. The Overview also discusses the procedure with respect to challenging an application for review. Investors may need to deal with additional governmental agencies other than the Ministry of Industry or Industry Canada; transactions involving business activities relating to Canada's cultural heritage or national identity fall under the jurisdiction of the Cultural Industries Branch of the Department of Canadian Heritage.

Statistical Overview of Canadian and U.S. Trade under NAFTA-Various statistics indicate, with few exceptions, that the trading relationship between Canada and the United States provides ample investment opportunities, despite the complex requirements of the Act, NAFTA and various governmental agencies such as Industry Canada. U.S. transactions with Canada reached $434 billion dollars in 1999, 53% more than those with Japan, which then formed the United States' second largest trading relationship.18 Additionally, the United States sold $167 billion dollars worth of goods to Canada in 1999, a 7% increase over the previous year.19 Also, as of 1999, Canada bought more U.S. goods than all 15 countries of the European Union combined.20 From 1985-2000, U.S. merchandise exports to Canada tripled, with Canada being the lead foreign export market for U.S. goods since 1946.21 Further, Canada ranks third in the consumption of U.S. services, with purchases of $21 billion dollars in 1999, while providing the United States with $16 billion dollars worth of services that year.22 Two way trade between Canada and the United States grew 46% between 1994 and 1999.23

MEXICO AND REAL ESTATE TRANSACTIONS

The stringent private property ownership restraints (particularly for foreign investors) imposed under the Mexican Constitution have been ameliorated through the Agreement, although several foreign investment limitations and guidelines continue to exist. With respect to acquisitions in general, the right for the Mexican government to review the acquisition of more than 49% of a Mexican enterprise exists if the value of the gross assets of that enterprise exceeds certain levels which, under NAFTA, eventually increases to $150 million. Additionally, in the instances of real property acquisitions, investment by foreign nationals or enterprises (except as a beneficiary of a Mexican trust) is prohibited for real property within 50 kilometers of the coast of Mexico, or 100 kilometers of Mexico's border with the United States (so-called "Restricted Zones").24 Notwithstanding the foregoing, and following the implementation of Mexico's New Foreign Investment Law of 1993, as amended (the "NFIL"), a foreign-owned Mexican company may directly acquire real property within the Restricted Zone to conduct non-residential activities (e.g., industrial commercial or tourism activities such as marinas, hotels, or restaurants).25 Additional legal formalities also exist when foreign corporations acquire real property, including, among other things, the use of a public notary (depending on the value of the real property) and required permits from the Mexican Ministry of Interior (which may be obviated through the use of a local attorney-in-fact).26 Further, investors should note that the lease of land for more than 10 years is deemed to be an "acquisition" under Mexican federal law.27