PESTLE Analysis 13

Country Profile Series Canada In-depth PESTLE insights

PESTLE Country Analysis Report: Canada ML00002-006/Published 11/2014 REFERENCE CODE: ML00002-006 © MarketLine. This report is a licensed product and is not to be photocopied Page 1 PUBLICATION DATE: November 2014 WWW.MARKETLINE.COM MARKETLINE. THIS PROFILE IS A LICENSED PRODUCT AND IS NOT TO BE PHOTOCOPIED

OVERVIEW

Catalyst

This profile analyzes the political, economic, social, technological, legal and environmental (PESTLE) structure in Canada. Each of the PESTLE factors is explored on four parameters: current strengths, current challenges, future prospects and future risks.

Summary

Key findings

Canada has a strong democratic setup, but tensions between federal and provincial government undermines effective governance

In Canada, democratic principles have been predominant since the late 19th century, when the provinces were self- governed. After World War II, either the Conservatives or the Liberals have ruled the country. Canada ranked in the 95.26 percentile on voice and accountability parameter and in the 94.79 percentile on rule of law parameter in 2013 World Bank Worldwide Governance Indicators, indicating the stability of the democratic system. Canada has a loose federal structure, and the provincial governments are given independent legislative powers in local matters. However, this sometimes leads to conflicts of interest between central government and the provinces. The loose federal structure can create situations where there are clashes of interests between the federal and provincial governments.

Canada's sound banking sector has kept the economy on a firm footing, but high household debt is a risk

The World Economic Forum (WEF) has ranked Canada's banking sector as the most sound in the world for seven years in a row from 2008-14 and has lauded the sector for its adequate capitalization and efficient regulation. In March 2013, the federal financial regulator, the Office of the Superintendent of Financial Institutions (OSFI), ordered the top six Canadian banks, considered systemically important, to maintain a common equity tier 1 capital (a financial indicator measuring core equity capital as a proportion of total risk-weighted assets) of 8% against 7% for other financial institutions from January 2016 onwards. The fact that all the six banks meet these requirements adequately as of July 2014 is a reflection of the sector's strength. Moreover, the OSFI also adopted the Basel III leverage standard of 3%, which is a more accurate measure of banking sector strength as it also takes into account off-balance sheet exposures.

However, high household debt levels in Canada represent a major vulnerability for the economy. According to Statistics Canada, the country's household debt, which began an uptrend in the mid-1980s, was at 163.6% of GDP in July 2014. Much of this appreciation had been driven by Canadian population's propensity to buy homes, which again stems from record-low mortgage rates in the country. The Canadian housing market has appreciated sharply since the beginning of the last decade, growing by 87% since 2000. Moreover, it experienced an increase in household prices even after the 2008 financial crisis, unlike the US, where housing prices collapsed. Subsequently, price-income and price-rent ratios in Canada are among the highest among developed nations. Despite increasing housing costs, the level of investment in households has continued to increase and has outpaced its pre-crisis peak on the back of low interest rates and loose credit conditions, and household debt to GDP has surged to new highs.

Canada does well in human development, but aging population could strain public finances in future

Canada has performed well on various social parameters. According to the UNDP's Human Development Report 2014,

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the country was ranked 9th out of 187 countries with a HDI value of 0.902. According to CIA - The World Factbook, as of 2014, life expectancy for the male population was 79.1 years, whereas for females it was 84.4 years. All in all, Canada has performed quite well in terms of HDI. Like most developed economies, Canada is facing the problem of aging population. This is evident from the whopping increase in the number of seniors and a drastic fall in the young population over the last few years. The median age of the country is 41.5 years in 2013, which indicates that half of the population is above this age. The population belonging to the baby boomer generation is growing older, with many of its members nearing (or already having reached) retirement. According to the OECD, the dependency rate of the Canadian population will also increase. The long-term forecasts by the OECD estimate that seniors will account for 47.7% of the working age population (20-64) in 2050 against just 22.5% in 2010.

Despite the rollout of some of the most generous tax incentives, business R&D expenditure in Canada remains low

Canadian R&D tax incentives for business innovation are among the most generous in the world. The B index measures the before-tax income needed by a firm to break even on $1 of R&D outlays. The 1 minus the B index shows the government's focus on R&D, especially for small and medium enterprises. In fact, the incentives given by Canada are much above even the US. Giving impetus to R&D is important for the Canadian economy to raise its productivity and living standards and the government rightly provides high subsidies to R&D activity. This could be helpful in the long run, as companies will find it more attractive to invest in innovation. However, Canada lags behind other nations in terms of R&D spending. Canada's total expenditure on R&D as a percentage of GDP—also known as R&D intensity—stood at around 1.8% in 2011, lower than the 2.1% in 2004. The major reason for this decline in R&D intensity has been a weak trend of business spending on R&D since 2000.

Canada's flexible business environment attracts foreign investors, but restrictions in foreign ownership in some sectors may prove a deterrent

Canada has a comprehensive legal and regulatory framework that provides transparency to the business environment. The regulatory processes are favorable for foreign investors, with national laws providing freedom to start, operate and close a business. Starting a business in Canada is far easier than in other nations, as it takes an average of five days and one procedure, compared to the OECD average of 9.2 days and approximately five procedures according to the World Bank's Doing Business 2015 report. The procedures needed to set up an enterprise are less cumbersome and more transparent. Canada's system for registering a business has been entirely online since 2006, and there is no need for minimum capital to set up a business. These factors make Canada a favorable destination for foreign investment. Despite Canada being an advanced nation, the government's restrictions on foreign ownership in sectors such as telecom, radio and broadcasting, and aviation still exist. Moreover, it is one of the few developed countries that have an investment review process. While Canada maintains a 46.7% FDI limit for domestic telecom services providers, foreign ownership of Canadian air carriers is limited to 25% of voting equity. Nevertheless, Canada amended its Telecommunications Act in mid-2012 allowing foreign ownership of telecom carriers with less than 10% market share by revenue to increase competition in the sector. Telecom carriers are permitted to continue operations even if their market share grows beyond 10% provided the increase is not an outcome of an acquisition or a merger with another domestic carrier. Nonetheless, the results of the 2014 spectrum auction, where three major domestic telecom players (Bell, Telus and Rogers) acquired the majority of licenses, show that further liberalization in the sector is desired. Other industries in which foreign investment is restricted include oil and gas, farming, book publishing and selling, fisheries, liquor sales, mining, collection agencies, engineering, optometry, pharmacies and securities dealers. There will be a rise in investment activities if these sectors are fully liberalized

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Canada has comprehensive environmental policies, but its poor environmental record remains a concern

The Canadian government has established mechanisms to meet the environmental challenges that come with economic development. The focus of environmental policies has broadened from local and regional issues to challenges of a global nature. Climate change, global biodiversity, ozone layer depletion, and the transportation of chemicals and hazardous waste are some of the areas that have appeared at the top of the country's environmental agenda. The country has made some progress in meeting its domestic environmental objectives and international commitments. Some advances have also been made in cutting air pollution, and policies have been created to reduce greenhouse gas emissions. However, the country performs poorly in many environmental indicators including sewage treatment, species at risk, greenhouse gas emissions, pesticide use and nuclear waste. According to Environmental Performance Index 2014 published by the Yale University, the country ranks 104th out of 178 countries in conservation of forest. Additionally, per capita emissions per unit of GDP are one of the highest among the OECD countries, which suggests inefficiencies in the consumption of energy. At the same time, Canada is heavily reliant on non-renewable energy resources, which is an important factor for the economic growth of the country. Its inability to use alternative sources of energy will add to the already high levels of emissions in the country.

PESTLE highlights

Political landscape

Canada's proactive attitude towards foreign relations has resulted in the development of significant trade and investment links. The country is in FTA negotiations with several countries.

In April 2013, Justin Trudeau, the son of former Prime Minister Pierre Trudeau was elected as the leader of the Liberal party. Opinion polls indicate that support for the Liberals has strengthened considerably after Justin Trudeau's election.

Economic landscape

The Canadian economy is heavily dependent on the US for international trade. According to CIA - The World Factbook, the US accounted for 74.5% of Canada's exports and 50.6% of its imports in 2012.

Social landscape

Canada has a stable income security program that delivers pension and benefits through the Old Age Security program and the Canada Pension Plan (CPP). CPP is a contributory, earnings-related social insurance program that ensures a measure of protection for the contributor and his or her family against loss of income due to retirement, disability, or death. Old Age Security provides additional funding to eligible low-income seniors.

Although Canada's economic output has been increasing, growth has not been evenly spread across all provinces and territories. Certain provinces such as Quebec, Ontario, British Columbia and Alberta have emerged stronger—economically and politically—than others. These four provinces together contribute more than 85% of the country's GDP.

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Technological landscape

Business software piracy also remains a significant concern according to Business Software Alliance (BSA), a representative body of world's largest software groups. BSA, in its Global Piracy Study, has estimated piracy losses occurring from unlicensed usage of business software at $1.09 billion in 2013. According to the study, the levels of piracy in the country were around 25% in 2013.

Legal landscape

Canada has one of the most flexible labor markets in the world, operating under liberal employment regulations that enhance employment opportunities and productivity growth.

Despite having a lower rate of taxes, the multiplicity of business regulations across provinces acts as a deterrent to investors.

Environmental landscape

Key fundamentals

Table 1: Canada - key fundamentals

2012 2013 2014f 2015f 2016f 2017f 2018f GDP, constant 2005 prices ($ trillion) 1.3 1.3 1.3 1.4 1.4 1.4 1.5 GDP growth rate (%) 1.7 2.0 2.2 2.5 2.4 2.3 2.1 GDP, constant 2005 prices, per capita ($) 37208.0 37520.6 38135.2 38781.2 39419.2 40030.8 40566.6 Inflation (%) 1.5 0.9 2.0 2.0 2.0 2.1 2.1 Exports, total as a percentage of GDP 29.3 29.4 28.6 28.1 27.5 26.9 26.3 Imports, total as a percentage of GDP 31.9 31.7 30.7 30.0 29.3 28.6 28.0 Mid-year population (million) 34.8 35.2 35.4 35.6 35.9 36.2 36.4 Unemployment rate (%) 7.3 7.1 6.9 6.9 6.8 6.7 6.6 Mobile penetration (per 100 people) 80.1 78.4 79.7 80.8 81.7 82.4 83.0

Source: Country Statistics, MarketLine M A R K E T L I N E PESTLE Country Analysis Report: Canada ML00002-006/Published 11/2014 © MarketLine. This report is a licensed product and is not to be photocopied Page 5

TABLE OF CONTENTS

Overview 2

Catalyst 2

Summary 2

Key Facts and Geographic Location 10

Key facts 10

Geographic location 12

PESTLE Analysis 13

Summary 13

Political analysis 15

Economic analysis 18

Social analysis 23

Technological analysis 26

Legal analysis 29

Environmental analysis 33

Political Landscape 35

Summary 35

Evolution 35

Structure and policies 37

Performance 41

Outlook 42

Economic Landscape 43

Summary 43

Evolution 43

Structure and policies 44

Performance 46

Outlook 53 PESTLE Country Analysis Report: Canada ML00002-006/Published 11/2014 © MarketLine. This report is a licensed product and is not to be photocopied Page 6

Social Landscape 55

Summary 55

Evolution 55

Structure and policies 55

Performance 58

Outlook 60

Technological Landscape 61

Summary 61

Evolution 61

Structure and policies 61

Performance 62

Outlook 63

Legal Landscape 64

Summary 64

Evolution 64

Structure and policies 64

Performance 66

Outlook 66

Environmental Landscape 68

Summary 68

Evolution 68

Structure and policies 68

Performance 70

Outlook 70

Appendix 72

Ask the analyst 72

Disclaimer 72 PESTLE Country Analysis Report: Canada ML00002-006/Published 11/2014 © MarketLine. This report is a licensed product and is not to be photocopied Page 7

TABLE OF FIGURES

Figure 1: Map of Canada 12

Figure 2: Common Equity Tier 1 Ratio of six biggest Canadian Banks, July 2014 19

Figure 3: Canada's dependence on the US for trade and investments 20

Figure 4: Position of households in Canada since 1990 21

Figure 5: Population aging in OECD countries 25

Figure 6: Tax subsidy rates on R&D expenditures, 2013 28

Figure 7: Marginal Effective Tax Rate on New Business Investment, 2014 30

Figure 8: FDI Restrictiveness in select sectors in Canada, 2013 31

Figure 9: Canada - political events timeline 36

Figure 10: Canada - key political figures 37

Figure 11: Canadian political structure (central government) 38

Figure 12: Canada - composition of parliament 40

Figure 13: Evolution of GDP growth in Canada, 1993-2013 44

Figure 14: GDP and growth rate in Canada, 2008-18 46

Figure 15: Sectoral composition of GDP in Canada, 2013 47

Figure 16: Agricultural output of Canada, 2008-13 48

Figure 17: Industrial output of Canada, 2008-13 49

Figure 18: Service output of Canada, 2008-13 50

Figure 19: External trade of Canada, 2008-13 51

Figure 20: Consumer price index and index-based inflation in Canada, 2008-18 52

Figure 21: Unemployment in Canada, 2008-18 53

Figure 22: Canada - composition by religion, 2011 57

Figure 23: Expenditure on healthcare in Canada, 2002-12 59

Figure 24: Expenditure on education in Canada, 2002-12 60

Figure 25: Internet users in Canada, 2003-13 63

Figure 26: Canada: judicial structure 65

Figure 27: Carbon dioxide emissions in Canada, 2003-12 70

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TABLE OF TABLES

Table 1: Canada - key fundamentals 5

Table 2: Canada - key facts 10

Table 3: Analysis of Canada's political landscape 15

Table 4: Analysis of Canada's economy 18

Table 5: Analysis of Canadian social system 23

Table 6: Analysis of Canada's technological landscape 26

Table 7: Patents granted by USPTO per million population, 2008-13 27

Table 8: Analysis of Canada's legal landscape 29

Table 9: Analysis of Canada's environmental landscape 33

Table 10: Mid-year population by age (as a percentage of population), 2014 56

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Key Facts and Geographic Location

KEY FACTS AND GEOGRAPHIC LOCATION

Key facts

Table 2: Canada - key facts

Country and capital Full name Canada Capital city Ottawa

Government Government type a parliamentary democracy, a federation, and a constitutional monarchy Head of state Queen Elizabeth II, represented by Governor General David Johnston Head of government Prime Minister Stephen Harper

Population (2014 est.) 35.4 million

Currency Canadian dollar

GDP per capita, adjusted by PPP (2013) $43,100

Internet domain .ca

Demographic details Life expectancy (2014 est.) 81.7 years (total population) 79.1 years (men) 84.4 years (women)

Ethnic composition (2011 est.) Canadian (32.2%), English (19.8%), French (15.5%), Scottish (14.4%), Irish (13.8%), German (9.8%), Italian (4.5%), Chinese (4.5%), North American Indian (4.2%), other (50.9%)

Major religions (2011 est.) Roman Catholic (40.6%), Protestant (20.3%), other Christian (6.3%), Muslim (3.2%), none (23.9%), other (5.7%)

Country area 9,984,670 sq. km

Language (2006 census) English [official] (58.7%), French [official] (22%), Punjabi (1.4%), Italian (1.3%), Spanish (1.3%), German (1.3%), Cantonese (1.2%), Tagalog (1.2%), Arabic (1.1%), other (10.5%) Exports motor vehicles and parts, industrial machinery, aircraft, telecommunications equipment; chemicals, plastics, fertilizers; wood pulp, timber, crude petroleum, natural gas, electricity, aluminum Imports machinery and equipment, motor vehicles and parts, crude oil, chemicals, electricity, durable consumer goods

Source: CIA - The World Factbook and Country Statistics. M A R K E T L I N E

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Key Facts and Geographic Location

MarketLine

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Key Facts and Geographic Location

Geographic location

Canada is located in North America with the North Atlantic Ocean to the east, the North Pacific Ocean to the west, and the Arctic Ocean to the north. It borders the US.

Figure 1: Map of Canada

Source: CIA - The World Factbook M A R K E T L I N E

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PESTLE Analysis

PESTLE ANALYSIS

Summary

The Canadian political arena is dominated by the Conservative, New Democratic and Liberal parties. The Conservative government came to power in 2006 as a minority government after 12 years of Liberal rule, before gaining a majority in the 2011 elections, removing all threat of political instability. However, fissures within the seemingly monolithic party do not bode well for the uninterrupted passage of contentious legislation in parliament. A loose federal structure, which gives significant authority to the provinces—especially in matters of health, education, social security and securities regulation—could also halt reforms. Moreover, divisive politics in the predominantly French-speaking province of Quebec risks alienating immigrants and could raise allegations of religious intolerance. Canada has a strong banking system and an environment that is highly suitable for businesses; however, the country's high dependence on the US economy due to strong trade and financial linkages has rendered policymaking inefficient sometimes. The federal government managed to bring its fiscal deficit under control by reverting to a path of fiscal consolidation once the economy was out of recession. A wide current account deficit remains a major external concern. The major domestic risk facing the Canadian economy is from bulging household debt, which has raised concerns about the existence of a housing bubble. Canada has a strong social welfare system and scores high on human development. However, uneven growth in the provinces is a cause for concern and the aging population affects the country's competitiveness and economic productivity due to higher social costs. To address the latter, the government is contemplating changes to the Canadian Pension Plan (CPP). Canada's liberal immigration policy could also create tensions for the government.

Canada's achievements in technological development do not reflect its full potential. The country's total expenditure on R&D as a percentage of GDP stands at around 1.8%, as of 2011, much lower than the US or even the EU average despite the rollout of some of the most generous R&D tax incentives for business innovation. The country also performs poorly against other developed economies in terms of patents received from the US Patent and Trademark Office (USPTO). The lack of involvement of business enterprises and the education system in R&D are important factors for this lack of innovation. Furthermore, the weak enforcement of the anti-piracy laws has raised questions in the international arena about Canada's intellectual property regime. Nevertheless, Canada has potential to perform well in emerging technologies such as wireless telecommunication services and networking. The country has one of the most flexible labor markets in the world: it operates under flexible employment regulations that enhance employment opportunities and productivity growth. Canada's corporate tax rates are low compared to other developed nations, which provide an incentive for foreign investors to establish businesses in the country. Although Canada provides a number of competitive advantages for external players, the regulation of foreign investment discourages liquid capital transfers in few services sectors Moreover, it is one of the few developed countries having an investment review process. Nevertheless, the government is slowly but steadily opening up its services sector, a process that has started with the reform of the Telecommunications Act in 2012. The Canadian government has established mechanisms to meet the environmental challenges that come with economic development. It has made some progress in meeting its domestic environmental objectives and international commitments. However, managing pollution, natural resources, and biodiversity remain a challenge. While advances have been made in cutting air pollution, and policies have been created to reduce greenhouse gas emissions, the

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PESTLE Analysis

country's performance in preserving biodiversity, increasing energy efficiency, and managing hazardous waste has been far from satisfactory.

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PESTLE Analysis

Political analysis

Overview

The Conservative, New Democratic and Liberal parties dominate the Canadian political arena. The Conservative government came to power in 2006 as a minority government after 12 years of Liberal rule, before gaining a majority in the 2011 elections, removing all concerns of political instability. A loose federal structure, which gives significant authority to the provinces—especially in matters of health, education, social security and securities regulation—could impede reforms.

Table 3: Analysis of Canada's political landscape

Current strengths Current challenges ▪ Democratic setup ▪ Federal-provincial tensions ▪ Flourishing foreign relations and trade ▪ Resource development vs. Environmental protection

Future prospects Future risks ▪ Redrawing of electoral boundaries for 2015 elections ▪ Extremist threats ▪ Emergence of new political classes

Source: MarketLine M A R K E T L I N E

Current strengths

Strong democratic setup

In Canada, democratic principles have been predominant since the late 19th century, when the provinces were self- governed. Throughout the early 20th century, the nation was ruled by a coalition of the Conservative and Liberal parties. After World War II, however, either the Conservatives or the Liberals have ruled the country. Canada ranked in the 95.26 percentile on voice and accountability parameter and in the 94.79 percentile on rule of law parameter in 2013 World Bank Worldwide Governance Indicators, indicating the stability of the democratic system.

Flourishing foreign relations and trade

Canada's proactive attitude towards foreign relations has resulted in the development of significant trade and investment links. The country's economy is dependent on trade, especially with the US, and the value of exports and imports makes up a significant proportion of its GDP. In February 2011, the US and Canada strengthened their links by creating the US-Canada Regulatory Cooperation Council, which supports businesses by reducing red tape in many sectors. The Canadian government has also strengthened its relationship with the European Union (EU) by agreeing upon a comprehensive economic and trade deal (CETA) in 2013. The deal, which awaits ratification from both sides, will not only eliminate 98% of tariff lines between them, but will also address larger issues concerning red tape, international investment, public procurement by sub-national governments and labor regulations. The Americas are a foreign policy priority for the country, and Canada is developing agreements within the region to

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PESTLE Analysis

pursue bilateral and regional free trade, avoid double taxation, protect foreign investment, strengthen financial and banking institutions, and assist development. The country already has free trade agreements with Israel, Chile, Costa Rica, Colombia, Peru, Jordan, Panama and Honduras. South Korea also signed a free trade deal with Canada in September 2014, which is Canada's first free trade agreement in the Asia-Pacific region. The government is undertaking more free trade agreement (FTA) negotiations with Ukraine, Morocco, Japan, India, Singapore, the Dominican Republic, El Salvador, Guatemala, Nicaragua, and Andean and Caribbean countries.

Current challenges

Federal-provincial tensions

Canada has a loose federal structure, and the provincial governments are given independent legislative powers in local matters. However, this sometimes leads to conflicts of interest between central government and the provinces. The loose federal structure can create situations where there are clashes of interests between the federal and provincial governments. A prime example of such a conflict is Prime Minister Stephen Harper's inability to reform/abolish the Senate (the upper house of the parliament stricken with corruption scandals) despite the Conservative Party holding a majority in the House of Commons (the lower house). His ability to reform/abolish the Senate is hindered by the constitution, which requires that Senate reform needs consent of at least seven provinces and half of Canada's population, while abolition requires the consent of all 10 provinces. The Canadian Senate is modeled after Britain's House of Lords and consists of 105 members appointed by the governor general on the advice of the prime minister. In 2013, the Conservative government introduced a bill in the parliament that would set a nine-year tenure limit on newly elected senators and permit the provinces to hold direct elections for Senate nominees; however, the province of Quebec and some Liberal senators challenged the bill's constitutionality. The big blow to the government came in April 2014, when the Supreme Court deemed the reform unconstitutional. Any further prospect of success on the issue would need constitutional amendments, which can be lengthy and inconclusive.

Resource development vs. Environmental protection

One of the biggest challenges facing Canadian governments has been maintenance of balance between resource development and environmental protection. The proposed Northern Gateway pipeline from Alberta to the Pacific, which will pass through British Columbia, represents an excellent instance of this policy uncertainty. The federal government approved the proposal in June 2014, which is conditional on the fulfillment of 209 federal and provincial regulations by Enbridge Inc. (company responsible for development of twin pipelines). The project continues to face opposition from the New Democratic Party, the Liberal Party and aboriginal groups in British Columbia due to environmental concerns and its future remains uncertain. Overall, the business-friendly Conservative government has failed to build consensus between environmentalists and resource developers in the country.

Future prospects

Redrawing of electoral boundaries for 2015 elections

In October 2013, the Canadian government completed the arduous task of redrawing electoral boundaries for the upcoming elections in October 2015. In Canada, independent boundary commissions revise the number of electoral districts and their boundaries every ten years following a census to reflect population shifts and growth. The new boundaries were drawn as per the 2011 census. The upcoming elections in 2015 will have 338 seats in the House of

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PESTLE Analysis

Commons, 30 more than the current capacity of the parliament. The distribution of new seats includes the allocation of 15 more seats to Ontario, six new seats to Alberta and British Columbia each, and three more to Quebec.

Emergence of new political classes

Canada is continuing to evolve into a multicultural society, witnessing an amalgamation of different social and linguistic classes into its mainstream. For example, the country has a very pro-immigrant policy that has attracted up to a quarter of a million immigrants into the country annually since 1990. There are currently around 260 "ethnic enclaves" (defined as communities where more than 30% of residents are of an ethnicity other than English or French) across the country. Over the years, immigrants have played an important part in Canadian elections. In the 2011 federal elections, a significant proportion of the voters were immigrants, and nearly 11% of the candidates that were elected were non- native. With immigrants holding high office at the federal and national levels, it is expected that the emergence of related political groups will influence policy in favor of minorities.

Future risks

Extremist threats

Extremist attacks have rocked the country in the past, which is a big risk to the political stability of the country. In October 2014, a lone gunman named Michael Zenaf-Bibeau shot a soldier and entered the parliament, where the security officers killed him in an exchange of gunfire. As of November 2014, it remains unclear whether the gunman had terrorist links with a jihadi organization. The incident followed another terror attack in Montreal (just a week before the parliament attack), where an ISIS-inspired terrorist attacked two soldiers, killing one and injuring the other before police killed him. These instances imply that Canada is not immune from extremist attacks and the government needs to strengthen both the police force and the national security forces to deal with these threats. Apart from extremist threats, the country also faces security risks from some 130 Canadians believed to be fighting for foreign terrorist organizations such as ISIS and another 80, who have returned to the country after fighting in the Middle East.

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PESTLE Analysis

Economic analysis

Overview

Canada has a strong banking system and an environment highly suitable for businesses; however, the country's high dependence on the US economy due to strong trade and financial links has rendered policymaking difficult. The federal government has managed to bring its fiscal deficit under control by reverting to a path of fiscal consolidation once the economy was out of recession. The major domestic risk facing the Canadian economy is from rising household debt, which has raised concerns about a housing bubble.

Table 4: Analysis of Canada's economy

Current strengths Current challenges ▪ Strong banking system ▪ High degree of dependence on the US economy ▪ Rich in natural resources

Future prospects Future risks ▪ Duty free manufacturing tariff scheme ▪ High household debt ▪ Federal budget balance by FY2015

Source: MarketLine M A R K E T L I N E

Current strengths

Strong banking system

The World Economic Forum (WEF) has ranked Canada's banking sector as the most sound in the world for seven years in a row from 2008-14 and has lauded the sector for its adequate capitalization and efficient regulation. In March 2013, the federal financial regulator, the Office of the Superintendent of Financial Institutions (OSFI), ordered the top six Canadian banks, considered systemically important, to maintain a common equity tier 1 capital (a financial indicator measuring core equity capital as a proportion of total risk-weighted assets) of 8% against 7% for other financial institutions from January 2016 onwards. The fact that all the six banks meet these requirements adequately as of July 2014 is a reflection of the sector's strength. Moreover, the OSFI also adopted the Basel III leverage standard of 3%, which is a more accurate measure of banking sector strength, as it also takes into account off-balance sheet exposures. Canada's sound banking system is also an important feature of its economy. In 2013, it added 3.1% to the nation's GDP and provided financing to 1.6 million small- and medium-sized businesses, which are crucial to the country's economy. The sector is also a significant job generator and provides employment to around 300,000 people in Canada and more than 109,000 outside of the country.

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PESTLE Analysis

Figure 2: Common Equity Tier 1 Ratio of six biggest Canadian Banks, July 2014

10.0%

9.0%

8.0%

7.0%

6.0% Royal Bank of Toronto-Dominion Bank of Nova Bank of Montreal Canadian Imperial National Bank of Canada Bank Scotia Bank of Canada Commerce

Q2 2014 Q2 2013

Source: Bank Filings M A R K E T L I N E

Rich in natural resources

Canada is one of the few countries in the world, which is richly endowed with a variety of natural resources such as petroleum, natural gas and coal. The country's oil reserves at 173 billion are the world's third largest oil reserves after Venezuela and Saudi Arabia and it is the world's fifth largest oil producer. Canada is also the world's fifth largest producer of natural gas and fourth largest exporter after Russia, Qatar and Norway. Estimates from U.S. Energy Information Administration (EIA) suggest that Canada has proven natural gas reserves worth 67 trillion cubic feet (Tcf) in 2012. In addition, the country is believed to have an estimated 573 Tcf of technically recoverable shale gas resources. Canada also has substantial coal reserves, which is placed at 9.6 billion short tons by Natural Resources Canada (NRCan).

Current challenges

High degree of dependence on the US economy

Although Canada's export dependence on the US has declined from almost 90% in 2000, it still accounts for three- quarters of the Canadian exports. In 2013, Canada exported goods worth $358.7 billion to the US, out of which, commodities exports accounted for a third. With the US poised to reduce its dependence on external suppliers thanks to its abundant shale gas reserves, Canada needs to develop new export partners. Along with the trade channel, Canada is also highly connected to the US through the financial channel. The US foreign direct investment (FDI) stock in Canada was $352.1 billion in 2013, more than half of its total FDI stock of $686.3 billion. Moreover, financial conditions in the US also affect the Canadian economy.

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PESTLE Analysis

Figure 3: Canada's dependence on the US for trade and investments

Exports by country, 2013 FDI stock by country, 2010-13 800 EU Other, 16% (excluding 700 UK), 4% 600 United 500 Kingdom, 3% 400

$ billion 300 200 Japan, 2% 100 0 United States, 75% 2010 2011 2012 2013 United States Netherlands United Kingdom Others

Source: Bank Filings M A R K E T L I N E

According to the IMF, changes in lending standards and corporate bond spreads in the US bear a strong correlation to similar changes in Canada. In a 2010 research paper (The Impact of the Global Crisis on Canada), Duttagupta and Barrera found that a shock to US lending standards has a greater impact on Canada's economic prospects than a similar increase in Canadian lending standards. According to another research paper by Klyuev in 2008, a percentage point increase in the 3-month Treasury-bill rate could cut Canada's economic growth by one percentage point after 3 quarters. The high degree of inter-linkages between Canadian and the US economy are a cause for concern.

Future prospects

Federal budget balance

Since 2011, the Canadian government's fiscal policy has revolved around controlling the deterioration in public accounts that occurred in 2008-10 due to the increase in government expenditure to support the falling consumption demand. The prudent management of public finances since 2011 led to decline in federal budget deficits in consequent years, with shortfalls falling to as low as C$5.2 billion ($4.4 billion) in FY2013 (April 2013-March 2014) from C$55.6 billion ($47.8 billion) in FY2010. The FY2013 federal budget deficit also outperformed the government's expectation of C$16.6 billion ($14.2 billion), forecasted in the 2014 budget plan. As a percentage of GDP, the FY2013 shortfall was just 0.7% of GDP, down from 2.5% of GDP in FY2010. The country's finance ministry expects the deficit to be lower at C$2.9 billion ($2.4 billion) in FY2014 before achieving a surplus in 2015-16. The government's spending cuts do not involve any cuts in social expenditure or increases in taxes, which is a positive sign for the Canadian economy, as decreases in expenditure are considered a better way of eliminating deficits than increases in revenues.

Duty free manufacturing tariff scheme

The country has implemented a new initiative under which tariffs on all manufacturing inputs will be reduced to zero by 2015. The campaign is part of the government's efforts to reduce the tax burden on businesses. The tariff reductions, much of which occurred in 2010, effectively convert Canada into one large free-trade zone. All products classified in chapters 25-90 of the Harmonized System, including chemicals, fibers, tools, machinery, and equipment, are all eligible PESTLE Country Analysis Report: Canada ML00002-006/Published 11/2014 © MarketLine. This report is a licensed product and is not to be photocopied Page 20

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for duty free entry into the country. This enables companies to import advanced machinery and equipment from their parent firms without worrying about import duties. This is expected to provide a fillip to the manufacturing industry in Canada.

Future risks

High household debt

High household debt levels in Canada represent a major vulnerability for the economy. According to Statistics Canada, the country's household debt, which began an uptrend in the mid-1980s, was at 163.6% of GDP in July 2014. Much of this appreciation had been driven by Canadian population's propensity to buy homes, which again stems from record- low mortgage rates in the country. The Canadian housing market has appreciated sharply since the beginning of the last decade, growing by 87% since 2000. Moreover, Canada experienced an increase in household prices even after the 2008 financial crisis, unlike the US, where housing prices collapsed. Furthermore, price-income and price-rent ratios are among the highest among developed nations. Despite increasing housing costs, the level of investment in households has continued to increase and has outpaced its pre-crisis peak on the back of low interest rates and loose credit conditions, and household debt- GDP ratio has surged to new highs.

Figure 4: Position of households in Canada since 1990

Household Debt in Canada 14.0 180.0

12.0 150.0 10.0 120.0 8.0 90.0 6.0

Percentage 60.0 Percentage 4.0

2.0 30.0

0.0 0.0 1990 1993 1996 1999 2002 2005 2008 2011 2014

Debt service ratio Household Debt to disposable income ratio (RHS)

House prices House price-to-income and -rent 300 200

250 160

200 120

term averageterm 150 - 80 100 40 50 100 100 = Long term average 100 100 = Long 0 0 1990 1993 1996 1999 2002 2005 2008 2011 2014 1990 1993 1996 1999 2002 2005 2008 2011 2014

Nominal house prices Real house prices House price-to-income ratio House price-to-rent ratio

Source: OECD and Statistics Canada M A R K E T L I N E

High indebtedness exposes Canadian households to the risk of rising interest rates or fall in house prices, and has the potential to affect the balance sheets of households as well as banks. In Canada, mortgages typically have fixed rates PESTLE Country Analysis Report: Canada ML00002-006/Published 11/2014 © MarketLine. This report is a licensed product and is not to be photocopied Page 21

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for only a period of five years, post which, a floating rate applies. According to the OECD, an interest rate hike of 2.0 percentage points could push around 10% of indebted households into commonly believed unaffordable debt-service ratios (more than 40%). The debt-service ratio for the bottom quintile rises to a staggering 70% reflecting that they are more prone to risk of default.

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Social analysis

Overview

Canada has a strong social welfare system and scores high on human development. However, the imbalanced growth of the provinces is a challenge and the aging population affects the country's competitiveness and economic productivity due to higher social costs. The government is has proposed a host of reform measures to strengthen the labor market.

Table 5: Analysis of Canadian social system

Current strengths Current challenges ▪ Efficient social welfare system ▪ Regional disparities ▪ High HDI

Future prospects Future risks ▪ Reform to reduce skill shortages and strengthen the labor market ▪ Aging population ▪ Increasing immigrant population

Source: MarketLine M A R K E T L I N E

Current strengths

Efficient social welfare system

Canada has an extensive list of social welfare measures at the federal and provincial levels. The Department of Human Resources and Social Development is the federal government department responsible for providing social welfare policies. The government supports the unemployed and underemployed through employment insurance, working parents through childcare plans and seniors through pension programs and old-age security. The Employment Insurance program provides temporary income support to those who are between jobs or are out of work for certain critical personal reasons. The country uses labor market development agreements, which are bilateral agreements made between the Canadian government and all provinces and territories for this purpose. For childcare, the government has an initiative known as the Universal Child Care Benefit system, which provides parents with direct financial assistance to support the childcare choices that help them to balance work and family. Canada has a stable income security program that delivers pension and benefits through the Old Age Security program and the Canada Pension Plan (CPP). CPP is a contributory, earnings-related social insurance program that ensures a measure of protection for the contributor and his or her family against loss of income due to retirement, disability, or death. Old Age Security provides additional funding to eligible low-income seniors.

High HDI

Canada has performed well on various social parameters. According to the UNDP's Human Development Report 2014, the country was ranked 9th out of 187 countries with a Human Development Index value of 0.902. According to CIA -

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The World Factbook, as of 2014, life expectancy for the male population was 79.1 years, whereas for females it was 84.4 years. All in all, Canada has performed quite well in terms of HDI.

Current challenges

Regional disparities

Although Canada's economic output has been increasing, growth has not been spread across all provinces and territories. Certain provinces such as Quebec, Ontario, British Columbia and Alberta have emerged stronger— economically and politically—than others. These four provinces together contribute more than 85% of the country's GDP.

Furthermore, the per capita incomes of Alberta, Saskatchewan and Newfoundland and Labrador have registered higher growth compared to the rest of the country. This is because they are rich in resources and benefitted from high commodity prices during the last decade. This regional disparity in growth also explains the high unemployment in some provinces. Programs such as employment insurance may be discouraging the migration of some unemployed people from underperforming areas to "hot" labor markets.

Future prospects

Reform to reduce skill shortages and strengthen the labor market

The government's new Canada job grant program announced in 2014 is a positive step in the right direction to reduce labor shortages. It will enable employers to participate in decisions about who needs training and the type of training that needs to be given. This is expected to help in better aligning skills with job opportunities. One third of the cost will be shared by the employers and the rest by the government. In budget 2014, the government announced it will spend C$75m ($64.5m) over the next three years to help unemployed older workers by renewing and expanding the Targeted Initiative for Older Workers program. Further, it will spend C$11.8m ($10.1m) over two years and C$3.3m ($2.8m) per year ongoing to start an enhanced Job Matching Service to help connect Canadians with available jobs. In addition the government proposed to reform the reform the Temporary Foreign Worker Program to make sure that Canadians are given preference for available jobs.

Future risks

Aging population

Like most developed economies, Canada is facing the problem of an aging population. This is evident from the whopping increase in the number of seniors and a drastic fall in the young population over the last few years. The median age of the country is 41.5 years in 2013, which indicates that half of the population is above this age. The population belonging to the baby boomer generation is growing older, with many of its members nearing (or already having reached) retirement. According to the OECD, the dependency rate of the Canadian population will also increase. The long-term forecasts by the OECD estimate that seniors will account for 47.7% of the working age population (20-64) in 2050 against just 22.5% in 2010.

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Figure 5: Population aging in OECD countries

Population over 65 as a percentage of population in the age cohort 20−64 90 80 70 60 50 40 Percentage 30 20 10 0 Italy Chile Israel Spain Japan Ireland Austria France Mexico Poland Greece Finland Estonia Norway Canada Belgium Sweden Portugal Slovakia Hungary Slovenia Australia Denmark Germany Switzerland Netherlands South Korea South Luxembourg New Zealand New United States United CzechRepublic United Kingdom United 2010 2050

Source: Statistics Canada and MarketLine Analysis M A R K E T L I N E

The aging population represents a challenge to the country in the medium term as it could strain the healthcare and pension systems.

Increasing immigrant population

Canada's immigration policy is among the most lenient in the world, making it a favored destination of entrants from third world countries. The authorities have been accused of favoring immigrants to capture their votes. Furthermore, there are still some groups that find it difficult to integrate with the mainstream. The favorable government policy toward immigrants may become a socially contentious issue. Reservations have been expressed in some quarters with respect to the government's silence on immigration in view of declining employment conditions and the high unemployment rate.

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Technological analysis

Overview

Canada's achievements in technological development do not reflect its full potential. The country's total expenditure on R&D as a percentage of GDP stands at around 1.8%, as of 2011. It is a recognized fact that the country faces an innovation gap, as its R&D spending as a percentage of GDP has not improved despite the rollout of some of the most generous R&D tax incentives for business innovation. The country also performs poorly against other developed economies in terms of patents received from the US Patent and Trademark Office (USPTO). The lack of involvement of business enterprises and the education system are important factors for this lack of innovation. Furthermore, the weak enforcement of anti-piracy laws has raised questions about Canada's intellectual property regime. Nevertheless, Canada has potential to perform well in emerging technologies such as wireless telecommunication services and networking. Traditionally, its machinery and equipment industry has served the manufacturing sector, and the country has an advantage in terms of meeting requirements for technologically advanced goods in the aerospace industry.

Table 6: Analysis of Canada's technological landscape

Current strengths Current challenges ▪ Developed manufacturing industry ▪ Declining spending on R&D ▪ Low number of patents

Future prospects Future risks ▪ Generous R&D incentives ▪ Weak intellectual property rights regime

Source: MarketLine M A R K E T L I N E

Current strengths

Developed manufacturing industry

Canada is home to a well-developed manufacturing industry, which serves as the base for the further development of high end products. The industry is supported by a low overall tax rate, R&D incentives, a qualified labor force, and integration with the North American market. The machinery and equipment industry provides required components for the newly developed aerospace industry. More than 70% of the goods manufactured in Canada are exported to the US, and the same trend holds true for value-added goods, for which the returns are a lot higher. The country has low production costs compared to similarly advanced countries. Along with manufacturing, it has also emerged as an ideal location for ICT manufacturing.

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Current challenges

Declining spending on R&D

Canada lags behind other nations in terms of R&D spending. Canada's total expenditure on R&D as a percentage of GDP—also known as R&D intensity—stood at around 1.8% in 2011, lower than the 2.1% in 2004. The major reason for this decline in R&D intensity has been a weak trend of business spending on R&D since 2000. Traditionally, the Canadian IT sector was the major funder of business R&D in the country; however, the bankruptcy of the country's biggest R&D performer, Nortel and problems in another major R&D funder, BlackBerry have affected business R&D expenditure in the sector. One more reason for low R&D by business is the Canada-US Auto Pact, under which Canada manufactures and assembles models developed in the US and performs almost no automotive R&D domestically. Moreover, the resource-rich sectors relating to extraction of oil and gas perform very little R&D. The recent economic weakness and lack of funding avenues in early stage venture capital has also added to weakness in business innovation. Nevertheless, for the country to gain a technology advantage in future, it needs to shore up its business innovation profile.

Low number of patents

The low number of patents received by Canadian firms reduces the nation's technological advantage. A lack of innovation in the private sector is one of the main reasons for this trend. Compared to the US, Japan, and Korea, the country's patent count on per million capita basis is very low.

Table 7: Patents granted by USPTO per million population, 2008-13

Year Canada United States Republic of Korea Germany Japan 2008 102.1 254.9 154.2 108.7 263.0 2009 108.7 268.5 178.2 110.0 277.3 2010 142.7 348.5 236.2 151.2 349.9 2011 146.0 348.6 246.3 146.0 361.0 2012 166.2 385.5 264.6 169.7 397.4 2013 186.2 422.2 289.7 190.2 408.0

Source: USPTO data and MarketLine Analysis M A R K E T L I N E

Future prospects

Generous R&D incentives

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Figure 6: Tax subsidy rates on R&D expenditures, 2013

0.70

0.60

0.50

0.40

0.30 B index - 1 0.20

0.10

0.00 PRT FRA ESP CHL NLD CAN HUN IRL FIN GBR BRA KOR NOR ZAF CZE AUS SVN BEL JPN CHN AUT USA POL DNK LUX MEX SVK SWE CHE DEU NZL -0.10

Large, profitable firm SME, profitable firm Large, loss-making firm SME, loss-making firm

Source: OECD M A R K E T L I N E

Future risks

Weak intellectual property rights regime

Although the country has put an intellectual property rights (IPR) regime in place through the Patent Act, the Trade- marks Act, the Copyright Act, the Industrial Design Act, the Integrated Circuit Topography Act and the Plant Breeders Act, enforcement is found to be wanting by many of its trading partners, particularly the US and the EU. The International Intellectual Property Alliance (IIPA) has retained Canada on its Piracy Watch List every year since 2006. Business software piracy also remains a significant concern according to Business Software Alliance (BSA), a representative body of world's largest software groups. BSA, in its Global Piracy Study, has estimated piracy losses occurring from unlicensed usage of business software at $1.09 billion in 2013. According to the study, the levels of piracy in the country were around 25% in 2013. Although Canada has reformed its copyright law in 2012, the effectiveness of its enforcement remains to be seen. A poor IPR regime will deter investment and hinder trade.

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Legal analysis

Overview

The country has one of the most flexible labor markets in the world: it operates under flexible employment regulations that enhance employment opportunities and productivity growth. Canada's corporate tax rates are low compared to other developed nations, which provide an incentive for foreign investors to establish businesses in the country. Although Canada provides a number of competitive advantages for external players, the regulation of foreign investment discourages liquid capital transfers in few services sectors such as telecom, radio and broadcasting, and aviation. Moreover, it is one of the few developed countries that have an investment review process. Nevertheless, the government is slowly but steadily opening up its services sector, a process that has started with the reform of the Telecommunications Act in 2012.

Table 8: Analysis of Canada's legal landscape

Current strengths Current challenges ▪ Comprehensive legal framework for business entities ▪ FDI restrictions in key sectors ▪ Favorable taxes and incentives for investors ▪ Loopholes in taxation system

Future prospects Future risks ▪ Low tax wedge ▪ Absence of a single capital markets regulator

Source: MarketLine M A R K E T L I N E

Current strengths

Comprehensive legal framework for business entities

Favorable taxes and incentives for investors

Canada has the lowest payroll taxes among the G7 countries, with a corporate tax rate of 15%, as of 2014. In addition, the country's marginal effective tax rate for new businesses is the lowest among G7 countries, which is an incentive for start-ups. Canada also has one of the most favorable tax regimes for scientific research and experimental development expenditure in the world. Generally, in addition to tax deductions for such expenditure, tax credits are available based

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on expenditure carried out in the country. Additional incentives from provincial governments supplement federal concessions.

Figure 7: Marginal Effective Tax Rate on New Business Investment, 2014

45 40 35 30 25 20 Percent 15 10 5 0 Japan United United France Germany Italy OECD Canada States Kingdom Average

Source: Canadian Ministry of Finance M A R K E T L I N E

The government's low tax rate has resulted in a strong recovery in business investment post the global financial crisis.

Current challenges

FDI restrictions in key sectors

Despite Canada being an advanced nation, the government's restrictions on foreign ownership in sectors such as telecom, radio and broadcasting, and aviation still exist. Moreover, it is one of the few developed countries that have an investment review process. While Canada maintains a 46.7% FDI limit for domestic telecom services providers, foreign ownership of Canadian air carriers is limited to 25% of voting equity. Nevertheless, Canada amended its Telecommunications Act in mid-2012 allowing foreign ownership of telecom carriers with less than 10% market share by revenue to increase competition in the sector. Telecom carriers are permitted to continue operations even if their market share grows beyond 10% provided the increase is not an outcome of an acquisition or a merger with another domestic carrier. Nonetheless, the results of the 2014 spectrum auction, where three major domestic telecom players (Bell, Telus and Rogers) acquired the majority of licenses, show that further liberalization in the sector is desired.

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Figure 8: FDI Restrictiveness in select sectors in Canada, 2013

0.8

0.7

0.6

0.5

0.4

0.3

0.2

0.1

0.0 0 (fully open) to 1 (fully closed) (fully to 1 open) (fully 0 Air Radio & TV Fixed telecoms Mobile telecoms broadcasting

Canada United States OECD Average

Source: OECD M A R K E T L I N E

Other industries in which foreign investment is restricted include oil and gas, farming, book publishing and selling, fisheries, liquor sales, mining, collection agencies, engineering, optometry, pharmacies and securities dealers. There will be a rise in investment activities if these sectors are fully liberalized.

Loopholes in taxation system

Canadian tax regulations are antiquated. CEOs and senior executives are offered stock option deductions that allow them to pay tax at half the rate of ordinary working income. A large number of loopholes also enable wealthy citizens to evade taxes—the foremost method being leaving the country as a tax resident. Under this provision, an individual can pay a one-time departure tax of 25% of their personal assets then place the assets into an offshore trust, which is run at arm's length by offshore trustees. Capital gains can be transferred to third parties in other countries to evade taxes. This money can be ploughed back into Canada in the name of a tax-free trust. These loopholes are leading to huge revenue losses for the government, which must take measures to plug them.

Future prospects

Low tax wedge

According to the OECD, in 2013, Canada had one of the lowest (married, one-earner couple, two children) total tax wedge (Income tax, employer and employee social security contributions and pay roll tax as a percentage of labor costs) among the OECD countries. Canada's family tax wedge as of 2013 stood at 18.7% (at 100% of average wage), compared to the OECD average of 26.4% in 2013. When it comes to the individual tax wedge (single, no child), Canada once again had one of the lowest total tax wedge among the OECD average. Canada's individual tax wedge as of 2013 stood at 31.1% (at 100% of average wage),

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compared to the OECD average of 35.9% in 2013. Low taxes on labor encourage prospective skilled migrants, who wish to migrate to Canada. This is good for businesses as it helps in attracting talent to the Canadian labor pool

Future risks

Absence of a single capital markets regulator

Currently there is no single capital markets regulator in Canada, and responsibility for regulating the securities trade is with the provinces. Due to this, there are inefficiencies in regulation, as the provincial authorities need to do extra paperwork and coordinate among themselves to maintain market efficiency. The Conservatives have been vying to set up a national securities regulator since 2006; however, provincial governments in some provinces have not agreed on the appropriate model so far. Although the provinces of Columbia, Ontario, Saskatchewan and New Brunswick signed a memorandum of agreement in 2014 formalizing the terms and conditions of a cooperative capital markets regulatory system, the prospects of a national securities regulator will remain elusive as long Alberta, Quebec and Manitoba resist. Substantial gains could be achieved by establishing a national security regulator throughout Canada. Factors that are expected to drive the idea of a single regulator are efficiency in allocating resources, the benefits of economies of scale, the advantages of information sharing, and clear accountability.

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Environmental analysis

Overview

The Canadian government has established mechanisms to meet the environmental challenges that come with economic development. The focus of Canadian environmental policies has broadened from local and regional issues to challenges of a global nature. Climate change, global biodiversity, ozone layer depletion and the transport of chemicals and hazardous waste are some of the areas that appear at the top of Canada's environmental agenda. It has made some progress in meeting its domestic environmental objectives and international commitments. Some advances have also been made in cutting air pollution and policies have been created to reduce greenhouse gas emissions. However, the country's performance in preserving biodiversity, managing pollution, increasing energy efficiency, and managing hazardous waste has been far from satisfactory. Climate change is a major issue on Canada's environmental agenda. Other priority areas include the protection of nature and human health, air and water quality, waste water collection, and waste disposal. Although Canada has made sustainable development a priority area, this has not yet resulted in practical policies and actions. Most of the implementing agencies lack the legal authority to carry out enforcement.

Table 9: Analysis of Canada's environmental landscape

Current strengths Current challenges ▪ Strong environmental policy framework and initiatives ▪ Weak environmental record

Future prospects Future risks ▪ Regulations to reduce greenhouse gas emissions from the transport ▪ Canadian oil sands raising environmental concerns sector

Source: MarketLine M A R K E T L I N E

Current strengths

Strong environmental policy framework and initiatives

Canada has a strong environmental policy, legislative framework, and well-established institutions at the federal and state levels. The Environment Act of Canada is an umbrella act, having different statutes for water, air, waste management, and preserving biodiversity. There are separate agencies under federal and provincial governments that are entrusted with the implementation of these policy measures. The Canadian government has made substantial improvements in legislation and the implementation of its national environmental policies. The government has also committed itself to international agreements.

Current challenges

Weak environmental record

The country had poor environmental record among the OECD countries. It performs poorly in many environmental indicators including sewage treatment, species at risk, greenhouse gas emissions, pesticide use and nuclear waste. PESTLE Country Analysis Report: Canada ML00002-006/Published 11/2014 © MarketLine. This report is a licensed product and is not to be photocopied Page 33

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According to Environmental Performance Index 2014 published by the Yale University, the country ranks 104th out of 178 countries in conservation of forest. Additionally, per capita emissions per unit of GDP are one of the highest among the OECD countries, which suggests of inefficiencies in the utilization of energy. At the same time, Canada is heavily reliant on non-renewable energy resources, which is an important factor for the economic growth of the country. Its inability to use alternative sources of energy will add to the already high levels of emissions in the country. The government faced extensive criticism from environmentalists for passing Bill C-38, which proposed major changes to the environmental legislation. The bill reduced the stringency of the federal environmental assessment process and included repeal of the Kyoto protocol, an international accord binding the member countries to reduce greenhouse gas emissions by a certain proportion from 1990 levels.

Future prospects

Regulations to reduce greenhouse gas emissions from the transport sector

The Canadian government plans to introduce tough new regulations to limit greenhouse gas emissions from the automotive sector. In September 2010, the government introduced the Passenger Automobile and Light Truck Greenhouse Gas Emission Regulations as part of its efforts to reduce greenhouse gas emissions. The plan aims to reduce on-road emissions by putting these regulations in place for vehicles that are manufactured from 2011 onwards. These regulations are expected to reduce the country's total greenhouse gas emissions by 20% by 2020 compared to 2006 levels. Since transportation accounts for approximately one quarter of Canada's total greenhouse gas emissions, these regulations will improve Canada's environmental quality.

Future risks

Canadian oil sands raising environmental concerns

Global oil companies' efforts to exploit the vast "tar sands" sands in Alberta are fraught with environmental risk. With proven reserves of more than 170 billion barrels, the province's oil resources are comparable to Saudi Arabia. However, the increased activity has led to an increase in emissions and toxic chemicals in waterways. Some environmental watchdogs advocate the withdrawal or suspension of new projects to address these concerns, while others are campaigning for the industry to adopt a green approach. The oil sand operations have a significant environmental footprint and the responsibility lies on the stakeholders to minimize the impact. However, the government has taken a lenient view of their emissions records, and has instead embarked on an expansion of oil production.

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Political Landscape

POLITICAL LANDSCAPE

Summary

In 1867, the nation came into existence under one dominion calling itself "Canada" after the provinces surrendered the right to self-governance. Both French and British forces colonized the country, which is the original cause of the east- west divide. Because of its colonial past, Canada recognizes Queen Elizabeth II as the formal head of state; the governor general represents her. However, the prime minister is the head of government. For the 12 years preceding 2006, the Liberal Party ruled Canada. However, a series of financial scandals involving the party led to the victory of the other leading party, the Conservative Party, in the 2006 elections. Stephen Harper, leader of the Conservative Party, became prime minister and headed a minority government. In the September 2008 elections, the Conservatives, led by Harper, won a majority of the seats but fell short of an absolute majority. The Conservative government's decision to prorogue the parliament from January 25, 2010 to March 3, 2010 to recalibrate economic policy proved to be unpopular. However, the Conservatives won a resounding victory in the 2011 elections and formed a majority government, which has brought stability to the country.

Evolution

Pre-1930s

Europeans had occasional contact with Canada, which was initially inhabited by aboriginals, at least as far back as the 10th century. France established its first permanent settlement as Quebec City in 1608. French and British forces colonized Canadian territories for more than three centuries. Because of the ample trade opportunities in fisheries and fur, there were constant conflicts between the French and the English. France ceded control of Newfoundland, Hudson Bay, and Nova Scotia (Acadia) in 1713. The treaty of Paris (1763) gave Britain authority over Canadian territories. The French and British populations of the Canadian provinces became self-governing in the 1840s. In 1841, the United Province of Canada was formed by uniting Canada East (Lower) and Canada West (Upper). By virtue of the British North America Act, one dominion under the name of "Canada" was created on July 1, 1867, consisting of four provinces: Ontario, Quebec, Nova Scotia, and New Brunswick. Five more provinces joined the state during 1807-1905. The political scene was dominated by the Conservative Party for most of the late 19th century (1866-96). Sir John Macdonald was the prime minister for this period, except during 1873-78. In 1896, the Liberal Party, under Sir Wilfrid Laurier, took over and ruled until 1911. Canada entered World War I in 1914 with Britain's declaration of war on Germany. In 1919, Canada joined the League of Nations independently from Britain.

1931-92

In 1931, the Statute of Westminster affirmed Canada's independence. During World War II, Canada declared war on Germany. The economy boomed on the back of meeting requirements following World War II, as the country supplied materials to Britain, China, and the Soviet Union. The economies of the US and Canada were closely integrated in the post-war period. The Liberal Party dominated Canadian politics during 1931-57, before being succeeded by the Conservatives in 1958. The Liberals, under the leadership of Lester B. Pearson, returned to power in 1963. On his retirement, Pierre Elliott Trudeau succeeded him as prime minister in 1968. The period also saw the emergence of secessionist movements, particularly in the French province of Quebec. In order to temporarily pacify the separatist movement, Trudeau enacted the Official Languages Bill, which gave recognition to the French language as the official PESTLE Country Analysis Report: Canada ML00002-006/Published 11/2014 © MarketLine. This report is a licensed product and is not to be photocopied Page 35

Political Landscape

language of Quebec. The Canada Act of 1982 cut the last legal ties between Canada and Britain and gave complete independence to the nation. The Canadian political landscape saw a change in 1984 when the Progressive Conservative Party, led by Brian Mulroney, won an overwhelming victory with the highest political majority in the country's history. His government won a second term in the 1988 elections. The free trade pact with the US, which was opposed by the Liberal Party, was the dominant issue in these elections. The two countries eventually agreed to pursue a free trade agreement in 1989. The US and Canada, along with Mexico finalized the terms of the North American free trade agreement (NAFTA) in 1992.

Figure 9: Canada - political events timeline

Source: MarketLine M A R K E T L I N E

1993-2014

In 1993, Mulroney resigned as the leader of the Progressive Conservatives and was succeeded by Kim Campbell, who became Canada's first female prime minister. She continued as the PM until the October 1993 elections, in which, the Progressive Conservatives suffered a humiliating defeat, winning only two seats compared to 169 seats in the previous elections. Jean Chretien, a liberal became the PM after the elections. Chretien won two more terms as Canada's PM after the 1997 and 2000 elections. He retired from office in 2003 and was replaced by Paul Martin. Under Martin, the Liberals were reduced to a minority government in the 2004 federal elections. As the Liberals did not have a majority,

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Political Landscape

the opposition parties were able to pass a motion of no-confidence against the government, which led to its dissolution in 2006. Early elections were called and the Conservatives were able to form a minority government as the Liberals los voter support over a financial scandal. Stephen Harper, the leader of the Conservative Party, took over as prime minister and was forced to form a minority government as his party fell 31 seats short of 155 seats. The Conservatives followed a policy of seeking alliances with smaller parties on an issue-by-issue basis rather than forming a permanent coalition. Due to conflict over the 2008 budget, the opposition parties formed a coalition to bring down the government, which led to Prime Minister Stephen Harper asking the governor general to prorogue the parliament in December. Parliament was prorogued until January 26 and the subsequent backlash against the coalition meant that the Conservatives had escaped a no-confidence vote. The Conservative-led government asked the governor general to prorogue the parliament for the second time in 12 months in December 2009. This was seen as a move to avoid a debate on the government's alleged involvement in the torture of Afghan detainees. Nevertheless, the Conservative Prime Minister Stephen Harper managed to prorogue the parliament, which postponed the start of parliament from January 25, 2010 to March 3, 2010. The opposition managed to move a no confidence motion against the government in March 2011 that ultimately led to the downfall of the minority government. In the ensuing May 2011 elections, however, the Conservatives won a resounding victory and formed a majority government.

Structure and policies

Key political figures

The key political figures in Canada are:

Prime Minister Stephen Harper

Governor general David Johnston.

Figure 10: Canada - key political figures

Stephen Harper is Canada’s 22nd prime minister (PM). He also heads the Conservative Party of Canada. He was first elected to the House of Commons in 1993 from the Reform Party. In 1997, he became vice president (and later president) of National Citizens’ Coalition, a Canadian advocacy organization. In 2002, he became leader of the opposition after being appointed the leader of the Canadian Alliance. In 2003, he co-founded the Conservative Party of Canada, which won the elections in 2006, 2008 and 2011. He was elected as the PM on all the three occasions.

David Johnston is the 28th governor general of Canada. He began his career as an assistant professor in Queen’s University in 1966, shifting to the University of To ro nto in 1968. He became dean of the law faculty of the University of Western Ontario in 1974. In 1979, he became principal and vice-chancellor of McGill University, where he returned as professor in 1994. In 1999, he was elected president of the University of Waterloo. He has also chaired the Board of Overseers at Harvard University. He has served on several provincial and federal task forces and committees, as well as company boards.

Source: MarketLine M A R K E T L I N E

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Political Landscape

Structure of government

Canada is a federal parliamentary democracy and a constitutional monarchy. The Queen is the constitutional head of the country, as Canada is a commonwealth nation. The governor general represents the Queen. However, real executive power is vested in a council of ministers, with the prime minister as its head. Parliament comprises the Senate and the House of Commons, which is the legislative body. Governance powers are shared between the federal and provincial governments as defined by the Canadian constitution. The provincial government in Canada is headed by a democratically elected premier.

Structure of the parliament

The bicameral parliament of Canada consists of the Queen, the Senate, and the House of Commons. The 105 senators are appointed by the governor general on the recommendation of the prime minster. The 308 members of the House of Commons are elected from the districts or ridings through a plurality voting system, where the candidate with the most votes is declared the winner. The size of the House of Commons, where seats are proportionately distributed among the provinces, is revised after every census, conducted once every five years.

Figure 11: Canadian political structure (central government)

Canadian Parliament (Center)

Governor General

Senate House of Commons (Upper House) (Lower House)

• Prime minister is the leader of • 105 members the house • Appointed by governor general • 308 members • Expected to give regional • Members elected by a plurality representation of popular votes in separate constituencies • 5-year term • 5-year term

Source: MarketLine M A R K E T L I N E

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Political Landscape

Key political parties

Conservative Party

The Conservative Party of Canada currently has a majority government, with Stephen Harper serving as prime minister. The party was formed in 2003 by the merger of the Canadian Alliance and the Progressive Conservative Party of Canada. The parties came together because neither was able to expand its national influence. Their strategy was to prevent the Liberal Party's victory in the elections by not allowing the splitting of the right-wing vote that resulted in Liberal Party victories in 1993, 1997 and 2000. Historically, conservatism has indicated the combination of a hard-right attitude with support for state-funded social programs. However, there is a second form of conservatism, mainly in Western Canada, which believes in the privatization and reform of the political system, including the decentralization of federal authority. The Conservative Party's policies indicate the coming together of these two disparate views. The party has adopted the middle way, and generally supports a market economy approach in the economic sphere, since most of the members of the new party are from the western provinces. The party favors lower taxes and takes a tough stance on issues of law and order. It also supports high military spending. In its current form, the party is seen as pro- American, and is attempting to establish its economic and social institutions along the same lines as those of the US.

New Democratic Party

The New Democratic Party counts former communists, immigrants and industrial workers among its members. The Canadian Labour Congress and the Co-operative Commonwealth Federation formed a joint committee, the National Committee for the New Party, in 1958 to bring together the political left and organized labor in the country. The union eventually evolved into the New Democratic Party in 1961. The New Democratic Party supported the minority government of the Liberals from 1972 to 1974. In 1974, the party passed a motion of no confidence along with the Progressive Conservatives to force an election, which backfired, with the New Democratic Party losing half of its seats. After lackluster performances between 1975 and 1987, the party saw 43 of its MPs elected to the house in 1988. However, the party was routed in the 1993 elections, winning only nine seats. After its fortunes fluctuated further in 1997 and 2000, the party elected Jack Layton as its new leader in 2002. Under his leadership the party fared well in the 2004 and 2006 elections, winning 19 and 29 seats respectively, before winning 37 seats in the 2008 elections. However, its crowning moment came in the 2011 federal election, when the party won a record 103 seats to become the official opposition. The party advocates gender equality, corporate tax increases, poverty reduction, environmental and human rights protection, expansion of public transport and healthcare, social assistance, wage hikes, and lower taxes for small businesses.

Liberal Party

The Liberal Party of Canada, whose members are known as "Grits," follows center-left ideologies with liberal social policies and moderate economic strategies. The Liberal Party is the only party remaining from the Confederation, and is Canada's oldest functioning party at the federal level. It came into existence in 1867. It was in power for most of 1921-48 and followed a progressive social policy. The party remained in power throughout the 1960s and 1970s, but was defeated in the 1984 elections. It regained power during 2000-06. In 2004, the Liberals faced the challenge of a united Conservative Party for the first time and although, they retained enough support to continue in government, but were reduced to a minority. A motion of no confidence against the then Prime Minister Paul Martin triggered snap elections in 2006, where the Liberal party suffered a huge defeat as it won just 103 seats compared to 133 in 2004. The party was relegated to third place in the 2011 elections and lost its position as the official opposition.

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Political Landscape

Composition of the parliament

The most recent federal elections were held in May 2011. The Conservatives won 166 of 308 seats and became the first government to have a majority in seven years. It is followed by the New Democratic Party with 103 seats, the Liberal Party of Canada with 34 seats, Bloc Quebecois with four seats, and greens one seat.

Figure 12: Canada - composition of parliament

Bloc Quebecois, Greens, 1 seats 4 seats Liberal Party, 34 seats

Conservative Party, 166 seats

New Democratic Party, 103 seats

Source: CIA - The World Factbook M A R K E T L I N E

Key policies

Economic

Restoration of the fiscal balance and improving skills of Canadians for job creation has been the prime focus of the economic policies of the Canadian governments at all levels. The federal government is consolidating its finances with the objective of returning to surplus in 2015-16 and it expects the provincial government to follow suit. Based on the budget plans of both federal and provincial/government, the general government deficit is expected to decline to 0.9% of GDP in FY2017 from 3.0% in FY2013. Consequently, the government projects the federal debt to fall to 15.0% of GDP by FY2021 from 33.0% of GDP in FY2013, giving the government enough room for maneuver during economic dips. In the skill development area, the government has started implementing its job-training program, Canada Jobs Grant (which was announced in its previous budget), since April 2014. The new program aims to create a culture of apprenticeship in the country to support the unemployed youth. The government continues to help apprentices by making occupational, trade and professional examination fees eligible for the Tuition Tax Credit.

Social

Under its Economic Action Plan 2014, the government has focused on enhancing childcare and making housing more affordable for Canadians. The government has announced introduction of a Universal Child Care Benefit, which will PESTLE Country Analysis Report: Canada ML00002-006/Published 11/2014 © MarketLine. This report is a licensed product and is not to be photocopied Page 40

Political Landscape

provide parents up to $100 per month per child until they turn six. It also plans to promote child adoption by enhancing the Adoption Expense Tax Credit to ease the costs of adopting a child. In order to reduce homelessness, the government will continue investing in the Homelessness Partnering Strategy using a "Housing First" approach.

International relations

The Americas are a foreign policy priority for the country, and Canada is developing agreements within the region to pursue bilateral and regional free trade, avoid double taxation, protect foreign investment, strengthen financial and banking institutions, and assist development. The country already has free trade agreements with Chile, Colombia, Costa Rica and Panama. The government is engaged in more free trade agreement (FTA) negotiations with Ukraine, Morocco, South Korea, India, Singapore, the Dominican Republic, El Salvador, Guatemala, Nicaragua, and Andean and Caribbean countries.

Performance

Governance indicators

The World Bank report on governance used voice and accountability, political stability and absence of violence, government effectiveness, regulatory quality, rule of law, and control of corruption as indicators for 215 countries and territories over 1996-2013. Daniel Kaufmann of the Brookings Institution, Massimo Mastruzzi of the World Bank Institute, and Aart Kraay of the World Bank Development Economics Research Group conducted the study. For any country, a percentile rank of zero corresponds to the lowest possible score and a percentile rank of 100 corresponds to the highest possible score. Canada had a percentile rank of 95.26 on voice and accountability in 2013. This measures the extent to which a country's citizens are able to participate in selecting their government, as well as freedom of expression, association, and the media. Democracy has been deep-rooted in Canadian politics since the beginning of self-governance in the 19th century. The democratic setup has strengthened with passing years, seeing the entry of new parties like the Greens. In comparison, its neighbor the US scored a percentile rank of 83.89, while the UK ranked in the 92.42 percentile. Canada had a comparatively high percentile rank of 83.89 on political stability and absence of violence in 2013. This measures perceptions of the likelihood that the government will be destabilized or overthrown by unconstitutional or violent means, including domestic violence and terrorism. Comparatively, the US and the UK were poor performers with percentile ranks of 65.88 and 63.03, respectively. Most developed nations perform well in terms of government effectiveness, which measures the quality of public services, the quality of civil services and the degree of their independence from political pressure, the quality of policy formulation and implementation, and the credibility of the government's commitment to such policies. Canada had a percentile rank of 97.13 in 2013, higher than both the US and the UK, which ranked in the 90.91 and 89.95 percentiles, respectively. The broad policy direction in Canada has remained stable under both Conservative and Liberal rule. Most policies have an element of continuity rather than change. Canada had a percentile rank of 95.22 on regulatory quality in 2013. This measures the ability of the government to formulate and implement sound policies and regulations that permit and promote private sector development. Canada's percentile rank was higher than the US's (86.60), but lower than the UK's (96.17). A well-developed and transparent regulatory structure explains the nation's high ranking.

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Canada had a percentile rank of 94.79 on rule of law in 2013. This measures the extent to which agents have confidence in and abide by the rules of society, and in particular the quality of contract enforcement, the police, and the courts, as well as the likelihood of crime and violence. The UK and the US had percentile ranks of 92.89 and 90.52, respectively. Canada had a high percentile rank of 95.22 on control of corruption in 2013. This measures the extent to which the elite and private interests exercise public power for private gain, including both petty and grand forms of corruption, as well as the capture of the state. Barring a few financial scandals, corruption is minimal in Canada. It fared well compared to other G8 nations, with both the US and the UK receiving lower percentile rankings of 85.17 and 93.30 respectively, in the same year.

Outlook

Stephen Harper's Conservative Party came to power in a landslide victory in the 2011 elections that left the Liberals and the separatists in minority positions. The Conservatives were elected on promises of cutting taxes, fighting crime, boosting military spending and improving relations with the US. The majority government is expected to follow policies that will both serve the conservative agenda and help the prime minister's non-conservative support base. However, the expenses scandal that emerged in 2013 involving three Conservative Senators has tarnished the party's image. This has been aggravated by the increasing support for the Liberals in the opinion polls after the appointment of Justin Trudeau, son of former Prime Minister Pierre Trudeau, as the party's leader in 2013. The liberals have been leading the opinion polls ever since Justin Trudeau has taken over. Hence, the liberals are expected to be the foremost challenger to the conservatives in the next elections, since the NDP is struggling as of now. Nevertheless, by the time of the next elections in October 2015, the conservatives would have been in power for almost ten years.

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Economic Landscape

ECONOMIC LANDSCAPE

Summary

Canada is among the leading nations of the world, with real GDP of $1.3 trillion in 2014, according to MarketLine estimates. Although the economy contracted by 2.7% in 2009, it rebounded with growth of 3.4% in 2010 buoyed by the government's stimulus package and the central bank's easy monetary policy that revived employment and investments. The economy grew at a healthy rate of 2.5% in 2011, but growth slowed in the following year to 1.7%, as fiscal consolidation and high household debt pulled down household consumption, and external headwinds arising from the country's strong links with the US economy depressed exports and business spending. In 2013, the economy grew by 2.0%.

Evolution

Pre-1980

The Canadian economy has closely followed the US economy's booms and depressions. World War II led to fast economic growth in Canada, especially Western Canada, which is rich in natural resources. It also sowed the seeds of regional disparity that remain to this day. After the war, GDP growth gathered momentum, unemployment was low and consumer goods production increased. During this period, both the federal and provincial governments initiated a number of social welfare measures. The discovery of new oil fields in the late 1940s added to the economic boom. Financial growth continued unabated into the late 1970s.

1980-2014

After the economic growth that lasted for almost 25 years in the post-war era, the economy of Canada slipped into a recession during 1980-85. While international economic conditions were the major reasons for the recession, monetary policies pertaining to high nominal and real interest rates aggravated the situation. The economy expanded during 1985-90, but the growth rate declined markedly during the early 1990s. This economic slowdown was a result of high interest rates and a slowdown in the US and world economies. There were constraints on fiscal policy because of the burden of international payments on the federal debt. Although the economic slowdown during this period was less dramatic compared to the recession of the 1980s (GDP fell by 3.2% over 12 months in 1990-91 compared to 6.7% during 1981-82), it took longer to recover. An increase in exports and a moderate rise in retail spending drove the process of economic recovery as the GDP grew by 0.9% in 1992. The economy maintained steady growth during 1993-94, registering average annual growth of nearly 3.6%. However, rising public debt, tight monetary conditions and sluggishness of exports to the US affected the economy in 1995-96. Consequently, the economy grew by 2.7% in 1995 and just 1.7% in 1996. In the next two years, the better fiscal position of the government and the easy monetary policy of the central bank drove economic growth, which was underpinned by strong domestic demand by the private sector. The economic growth averaged 4.2% during this period. Economic activity slowed in 2001 due to the bursting of the IT bubble; however, the slowdown was not as pronounced as in the US. The economy grew by 1.7% in 2001, which was followed by a rebound of 2.8% in the following year. However, weak external demand due to sharp appreciation of the Canadian dollar again affected the economy in 2003, which pulled down the growth rate to 1.9%. Economic momentum recovered in subsequent years, with growth averaging 2.4% during 2004-08. Although the economy contracted by 2.7% in 2009 in the aftermath of the global

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Economic Landscape

financial crisis, it rebounded with growth of 3.4% in 2010 buoyed by the government's stimulus package and the central bank's easy monetary policy that revived employment and investments. The economy grew at a strong rate of 2.5% in 2011, but growth slowed in the following year to 1.7%, as fiscal consolidation and high household debt pulled down household consumption, and external headwinds arising from the country's strong links with the US economy depressed exports and business spending. In 2013, the economy grew by 2.0%. MarketLine estimates the economy to grow by 2.2% in 2014 as the US economy recovers.

Figure 13: Evolution of GDP growth in Canada, 1993-2013

4.0

3.0

2.0

1.0

0.0

Growth rate (%) rate Growth -1.0

-2.0

-3.0

-4.0 1993 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Year

Source: Country Statistics, MarketLine M A R K E T L I N E

Structure and policies

Overview

Canada has a well-developed financial system that comprises banks, insurance companies, trust dealers and security dealers. Over the years, most of the financial institutions, particularly banks and insurance companies, have consolidated their product offerings. The financial services sector comes under the shared jurisdiction of both the federal and provincial governments. Both levels of government regulate the insurance, trust and loan sectors.

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Economic Landscape

Financial authorities and regulators

The primary regulator of federally chartered financial institutions and federally administered pension plans is the Office of the Superintendent of Financial Institutions. This supervises and regulates all banks and federally incorporated or registered trust and loan companies, insurance companies, co-operative credit associations, fraternal benefit societies and pension plans. It functions as a regulator to safeguard policy holders, depositors and pension plan members from undue loss. The Canadian securities market is currently governed provincially, resulting in the system being administered by 13 different provincial and territorial securities regulators. A national securities regulator does not exist at present.

In the absence of a national securities regulator, the Investment Industry Regulatory Organization of Canada (IIROC) is working as the national self-regulatory organization to oversee all investment dealers and trading activity in Canada. The IIROC was established in 2008 by merging the Investment Dealers Association of Canada with Market Regulation Services. The IIROC undertakes its regulatory responsibilities by setting and enforcing rules covering the business and financial conduct of dealer firms and their employees and trading activity in Canadian equity markets. The country's major exchanges reached an agreement in 1999 to restructure along the lines of market specialization. While the Toronto Stock Exchange became the sole exchange for trading senior equities, the Montreal Exchange assumed responsibility for derivatives, and the Canadian Venture Exchange (created through a merger of the Vancouver, Alberta, and Winnipeg stock exchanges) handled junior equities.

Stock exchange

The TMX Group owns and operates Canada's two major national stock exchanges: the Toronto Stock Exchange, which serves the senior equity market, and TSX Venture Exchange, which serves the public venture equity market. The TMX Group also owns the Natural Gas Exchange, which is the North American exchange for the trading and clearing of natural gas and electricity contracts. The market capitalization of companies listed on TMX Group in November 2014 stood at $2.13 trillion.

Insurance

According to MarketLine, the Canadian insurance market had total gross written premiums (GWPs) of $117.1bn in 2012, representing a compound annual growth rate (CAGR) of 1.3% between 2008-12. In comparison, the US and Mexican markets grew with CAGRs of 0.6% and 11.2% respectively, over the same period, to reach respective values of $1,270.9 billion and $24.0 billion in 2012. The non-life insurance segment was the most lucrative for the Canadian insurance market in 2012, with total GWPs of $65.3 billion, equivalent to 55.8% of the market's overall value. In comparison, sales of life insurance generated GWPs of $51.8 billion in 2012, equating to 44.2% of the market's aggregate revenues.

The performance of the market is forecast to accelerate, with an anticipated CAGR of 2.9% for the five-year period 2012-17, which is expected to drive the market to a value of $135.0bn by the end of 2017. Comparatively, the US and Mexican markets will grow with CAGRs of 4.1% and 8.3% respectively, over the same period, to reach respective values of $1,552.1 billion and $35.7 billion in 2017.

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Economic Landscape

Performance

GDP and growth rate

Canada's economy was one of the best performing among the developed nations during 2002-07, with GDP growing at an average rate of around 2.6%. The global financial crisis in late 2008 pulled down the growth rate to 1.2% in 2008, which was followed by an economic contraction of 2.7% in 2009. The economy grew at a strong rate of 2.5% in 2011, but growth slowed in the following year to 1.7%, as fiscal consolidation and high household debt pulled down household consumption, and external headwinds arising from the country's strong links with the US economy depressed exports and business spending. In 2013, the economy grew by 2.0%. MarketLine estimates the economy to grow by 2.2% in 2014 as the US economy recovers.

Figure 14: GDP and growth rate in Canada, 2008-18

1.60 4.0

1.40 3.0

1.20 2.0 Growth Growth rate (%)

1.00 1.0

0.80 0.0 $ trillion$

0.60 -1.0

0.40 -2.0

0.20 -3.0

0.00 -4.0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Year

GDP Real GDP growth rate

Source: Country Statistics, MarketLine M A R K E T L I N E

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Economic Landscape

GDP composition by sector

Canada's sectoral composition is similar to most other developed economies, being primarily dominated by the services industry. The services sector is the best performer and the main driver of the economy. In 2013, services and industry contributed 70.2% and 28.2% of GDP respectively, with agriculture contributing a minuscule 1.6%.

Figure 15: Sectoral composition of GDP in Canada, 2013

Agriculture, 1.6%

Industry, 28.2%

Services, 70.2%

Source: Country Statistics, MarketLine M A R K E T L I N E

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Economic Landscape

Agriculture

The sector is heavily subsidized and is largely dependent on exports. Over 52 million acres of agricultural land is used primarily for grazing livestock, out of which 30 million acres is in natural vegetation. In 2013, agriculture growth was 2.4%, compared to 2.3% in 2012, according to MarketLine. Agricultural growth averaged 3.3% during 2007-13.

Figure 16: Agricultural output of Canada, 2008-13

35.0 25.0

20.0 30.0 15.0

25.0 10.0 Growth Growth rate (%) 5.0 20.0 0.0 15.0 C$ billionC$ -5.0

10.0 -10.0

-15.0 5.0 -20.0

0.0 -25.0 2008 2009 2010 2011 2012 2013 Year

Agriculture output Growth rate

Source: Country Statistics, MarketLine

Note: sectoral figures are given in local currency due to fluctuations in exchange rates. M A R K E T L I N E

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Economic Landscape

Industry

In 2013, industrial growth was 3.9% compared to 3.8% in 2012, according to MarketLine. Industrial growth averaged 2.5% during 2007-13. The majority of the manufacturing facilities in the country are branches of the US firms. Nevertheless, the country mainly produces aircraft, industrial machinery, telecommunications equipment, motor vehicles and automotive components.

Figure 17: Industrial output of Canada, 2008-13

600.0 15.0

10.0 500.0

5.0 400.0

0.0 Growth rate (%) 300.0 -5.0 C$ billionC$ 200.0 -10.0

100.0 -15.0

0.0 -20.0 2008 2009 2010 2011 2012 2013 Year

Industry output Growth rate

Source: Country Statistics, MarketLine

Note: sectoral figures are given in local currency due to fluctuations in exchange rates. M A R K E T L I N E

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Economic Landscape

Services

In 2013, services growth was 3.2% compared to 3.5% in 2012, according to MarketLine. Services growth averaged 4.2% during 2007-13. A significant element of this sector is business services, which includes financial services and real estate. The country also has an active entertainment industry, creating content for both local and international consumption. Tourism is of ever-increasing importance, with the majority of international visitors coming from the US, although the appreciating Canadian dollar has restricted the growth of this sector.

Figure 18: Service output of Canada, 2008-13

1400.0 6.0

1200.0 5.0

1000.0 4.0

800.0 Growth rate (%) 3.0 600.0 C$ billion 2.0 400.0

1.0 200.0

0.0 0.0 2008 2009 2010 2011 2012 2013 Year

Services output Growth rate

Source: Country Statistics, MarketLine

Note: sectoral figures are given in local currency due to fluctuation in exchange rates. M A R K E T L I N E

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Economic Landscape

Fiscal situation

The federal government is consolidating its finances with the objective of returning to surplus in 2015-16 and it expects the provincial government to follow suit. Based on the budget plans of both federal and provincial/government, the general government deficit is expected to decline to 0.9% of GDP in FY2017 from 3.0% in FY2013. Consequently, the government projects the federal debt to fall to 15.0% of GDP by FY2021 from 33.0% of GDP in FY2013, giving the government enough room for maneuver during economic dips.

Exports and imports

In 2013, Canada total trade was $1.1 trillion, which was nearly the same value of trade in 2012. The Canadian economy is heavily dependent on trade with the US. According to CIA - The World Factbook, the US accounted for 74.5% of Canada's exports and 50.6% of its imports in 2012. China was Canada's second largest trading partner accounting for 4.3% of its exports and 11.0% of its imports. Other major trading partners were Mexico and the UK.

Figure 19: External trade of Canada, 2008-13

1200 1,099 1,114 1,116 1,030 1000 958

791 800

569 580 579 600 523 499 507 530 533 537 411 459 $ billion 400 380

200

0 2008 2009 2010 2011 2012 2013 Year

Exports Imports Total Trade

Source: Country Statistics, MarketLine M A R K E T L I N E

Current account

In 2012, the country recorded a current account deficit of 3.4% of GDP, which came down to 3.2% in 2013 on the back

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Economic Landscape

of a strong Canadian dollar and sluggish global demand. In 2014, deficit is expected to narrow further to 2.7% of GDP according to IMF.

International investment position

Foreign direct investment

According to the United Nations Conference on Trade and Development, FDI inflows into the country increased from $43 billion in 2012 to $62.3 billion in 2013. Total FDI stock stood at $644.9 billion as of 2013.

Credit rating

Canada's local currencies and foreign exchange reserves are considered stable, with an AAA long-term and A-1+ short-term rating given by Standard & Poor's.

Key monetary indicators

Inflation

According to MarketLine, inflation was 0.9% in 2013. However, of late in 2014, the economy has experienced upward inflationary pressure. Nevertheless, lower commodity prices, especially of oil, will continue to put downward pressure on inflation.

Figure 20: Consumer price index and index-based inflation in Canada, 2008-18

130.0 3.5

3.0 125.0

2.5 120.0 Percentage (%)

2.0 115.0 1.5

110.0 1.0 Consumer Price Index Price Consumer 105.0 0.5

100.0 0.0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Year

Consumer price index Inflation

Source: Country Statistics, MarketLine M A R K E T L I N E

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Economic Landscape

Interest rate

The bank's overnight rate has remained at 1.0% since September 2010.

Unemployment

Unemployment is still high in the country. In 2013, the unemployment rate in the country was 7.1%, which was still higher than pre-crisis rate of 6.1% in 2008. However, in 2014, it is expected to come down to 6.9% as the economy recovers.

Figure 21: Unemployment in Canada, 2008-18

1400.0 9.0

8.0 1200.0 7.0 1000.0 6.0 Percentage (%) 800.0 5.0

600.0 4.0

3.0 400.0 2.0

Number of unemployed (thousand) unemployed of Number 200.0 1.0

0.0 0.0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Year Total unemployment Rate of unemployment (%)

Source: MarketLine M A R K E T L I N E

Outlook

With the global economy showing signs of recovery, exports are also expected to be in better shape in 2014. Consequently, GDP growth in Canada is also expected to be better at 2.2% in 2014, higher than 2% growth in 2013. Fiscal consolidation by the government is expected to continue as planned, which means that the bulk of the demand is expected to be generated from the private sector. According to the OECD, business investment during 2014 and 2015

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Economic Landscape

should be buoyed by declining spare capacity and cheap credit. However, a hard landing of the indebted household sector presents downside risks to the economy as the subsequent deleveraging could curb household demand and hinder a smooth recovery.

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Social Landscape

SOCIAL LANDSCAPE

Summary

Canada's social landscape has most of the usual characteristics of a developed nation. The country's liberal immigration policy makes it one of the preferred destinations for migrants. Given the demographic situation, Canada is among the few countries in the developed world that has a large proportion of working age people. A steady increase in healthcare expenditure has been instrumental in improving the health of the Canadian population.

Evolution

Owing to its colonial past, Canada is home to a diverse population. In the post-war years, the country encouraged immigration to meet its labor force needs. A growing population with an increasing market size ensured the economic development of the country. During the 1960s, in the middle of the baby boom, the fertility rate was around 3.5. The decline in fertility after the baby boom and the increase in deaths due to the aging population played a role in slowing the pace of population growth. Fertility has remained at about 1.5-1.6 children per woman for the last 10 years and the government has been encouraging immigration to increase the population. The Canadian government has implemented a number of social security policies covering issues such as healthcare, pensions, and education. However, economic growth has not led to an equitable society. Income disparity has been widening over the years, with the higher income groups benefiting the most. The social safety net saw its beginning in 1940, with the federal government taking the lead when there was large-scale unemployment after the Great Depression. During the 1950s, besides industrial workers, seasonal workers in the agricultural, forestry, and fishery sectors were added to the list of unemployment insurance recipients. During the 1970s, it became easier to get unemployment insurance benefits—the coverage was widened and benefits increased. In 1996, unemployment insurance was renamed Employment Insurance under a new program that requires people to work longer to qualify, distributes fewer benefits, and links the level of those benefits to regional unemployment rates.

Structure and policies

Demographic composition

Composition by age and gender

According to MarketLine estimates, those aged 65 and over made up over 17% of the total population in 2014, while, around 67% of the population belongs to the 15-64 age group. Those in the 0-14 age group account for the rest. The sex ratio at birth in 2014 is estimated to be around 1.06 males per female.

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Social Landscape

Table 10: Mid-year population by age (as a percentage of population), 2014

Age Female Male 0-4 4.9 5.3 5-9 5.0 5.3 10-14 5.1 5.4 15-19 5.7 6.1 20-24 6.5 7.0 25-29 6.4 6.9 30-34 6.5 6.9 35-39 6.3 6.6 40-44 6.3 6.6 45-49 6.9 7.0 50-54 7.7 7.9 55-59 7.2 7.3 60-64 6.3 6.2 65-69 5.4 5.3 70-74 4.2 3.8 75-79 3.3 2.7 80+ 6.1 3.7

Source: Country Statistics, MarketLine M A R K E T L I N E

Urban/rural composition and migration

In 2011, nearly 80.7% of the Canadian population was urban. Most immigrants originate from China, India, Pakistan, Iran, the US, Romania, the UK, South Korea and Colombia.

Ethnic composition

According to the CIA - The World Factbook, Canadian comprises 32.2%, while English (19.8%), French (15.5%), Scottish (14.4%), Irish (13.8%), German (9.8%), Italian (4.5%), Chinese (4.5%), North American Indian (4.2%), other (50.9%) make up the rest.

Religious composition

Roman Catholicism is the dominant religion, with 40.6% of the population practicing this religion according to CIA - The World Factbook. Furthermore, Protestants constitute 20.3%, other Christians 6.3%, Muslims 3.2%, and others and none constitute the rest.

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Social Landscape

Figure 22: Canada - composition by religion, 2011

none, 23.9%

Catholic, 40.6%

other, 5.7%

Muslim, 3.2%

other Christian , 6.3%

Protestant, 20.3%

Source: CIA - The World Factbook M A R K E T L I N E

Education

In Canada, public education is free for all citizens and permanent residents until the end of secondary school. However, there is no integrated system of education under a single federal department for the whole country. The provincial departments of education are responsible for the delivery and assessment of education at the elementary and secondary levels within their boundaries. The institutions in the post-secondary system have varying degrees of autonomy from direct provincial government control. Local governance of education is usually entrusted to school boards, school districts, school divisions or district education councils. The schools cater to the needs of the English- and French-speaking population.

System of education

In most provinces and territories, local education authorities provide kindergartens. These centers offer one year of pre- first-grade, non-compulsory education for five-year-olds. Compulsory schooling varies from one jurisdiction to another, but most require attendance at school from age six to 16. In most provinces, elementary schools cover six to eight years of schooling, and are followed by middle school or junior high, then secondary school. Besides the government- run schools, there are also private institutions. Although these schools are privately funded, they are required to meet the general standards prescribed by the relevant Ministry of Education. These schools charge a tuition fee and offer a variety of subjects. In many cases, they receive partial funding from the province or territory. PESTLE Country Analysis Report: Canada ML00002-006/Published 11/2014 © MarketLine. This report is a licensed product and is not to be photocopied Page 57

Social Landscape

Secondary school covers the final four to six years of compulsory education. In the first few years, students take mostly compulsory courses, with some optional subjects. The proportion of options increases in later years, which enables students to prepare for the job market or to meet the differing entrance requirements of post-secondary institutions.

Healthcare

Healthcare services

The healthcare system in Canada is primarily dominated by the public sector, with more than 70% of healthcare contributions coming from the federal and provincial governments. Most of the government expenditure comes through Medicare, the universal health insurance system in Canada. There are also smaller programs in the provinces that are carried out in accordance with the regulations provided under the Canada Health Act. Healthcare services include insured primary healthcare, hospital care, and in some provinces and territories, supplementary health benefits like prescription drug coverage are not included under the act.

Social welfare

Canada has an extensive list of social welfare measures at the federal and provincial levels. The Department of Human Resources and Social Development is a federal government department responsible for providing social welfare policies.

Employment

Employment policies and programs are aimed at promoting labor force participation. The department provides support and labor market transitions to unemployed and underemployed people, and those facing barriers to employment. The majority of employment programs are decentralized.

The Employment Insurance program provides temporary income support to those who are between jobs or are out of work for certain critical personal reasons.

The country uses bilateral labor market development agreements made between the Canadian government and all provinces and territories.

Performance

Healthcare

Healthcare expenditure has been steadily increasing over the years. Average healthcare expenditure as a percentage of GDP was around 10.1% during 2001-12. In 2012, total healthcare spending was 10.9% of GDP. According to a 2013 report by the Fraser Institute, the national median wait time for elective treatment after a referral by a specialist was 18.2 weeks in 2013, about three days longer than in 2012 and almost double that in 1993. Reducing wait times, as a result, has become a priority concern for Canadian policymakers since 2004. Nevertheless, according to the OECD, Canada performs well in terms of providing primary care by preventing costly hospital admissions due to chronic conditions.

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Social Landscape

Figure 23: Expenditure on healthcare in Canada, 2002-12

240.0 12.0

200.0 10.0

160.0 8.0 Percentage (%)

120.0 6.0 $ billion $

80.0 4.0

40.0 2.0

0.0 0.0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Year Expenditure on healthcare, total Total healthcare expenditure as a % of GDP

Source: Country Statistics, MarketLine M A R K E T L I N E

Income distribution

Standard of living

On the income Gini coefficient, which ranges from zero (perfect equality) to 1 (perfect inequality), Canada scored 0.33 in 2010, which is significantly lower than the US (0.38) and Mexico (0.47) in household income inequality. The transfer of money to the poor, unemployed and other disadvantaged classes has been recognized as one of the major factors for reducing inequality. The prevailing social and economic conditions make Canada one of the best countries to live in.

Education

Canada has a literacy rate of 99%, with high literacy among males and females. Public funding for education comes either from the provincial government or through a mix of provincial transfers and local taxes collected either by the local government or by boards with taxing powers. In 2012, the public education expenditure on education was 5.5% of GDP.

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Social Landscape

Figure 24: Expenditure on education in Canada, 2002-12

140.0 8.0

120.0 7.0

6.0 100.0

5.0 80.0 Percentage (%) 4.0

$ billion $ 60.0 3.0

40.0 2.0

20.0 1.0

0.0 0.0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Year Expenditure on education, total Total education expenditure as % of GDP

Source: Country Statistics, MarketLine M A R K E T L I N E

Outlook

Canada has performed well on various social parameters, with high human development and an efficient social security system. Given the demographic situation, Canada is among the few countries in the developed world that have a large proportion of working age people (those between 15 and 64). However, like other developed countries, Canada is also witnessing the phenomenon of an aging population. Although fertility rates have improved marginally since the beginning of the last decade, they remain considerably lower than the replacement rate of 2.1. In such a scenario, immigration, which has accounted for two-thirds of population growth in recent times, will be the major source of population growth. However, the government's liberal immigration policy could also create tensions in the country. An aging population will also strain healthcare and pension expenditure; this has already begun as the baby boomers started retiring in 2011. To address these needs, the federal and provincial governments are working in collaboration to revamp the pension plan. In addition, the government has taken measures to reduce skills mismatch in the job market, which should make the labor market more efficient in the medium to longer term.

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Technological Landscape

TECHNOLOGICAL LANDSCAPE

Summary

Canada's progress in technological development has not been satisfactory. The country's annual expenditure on research and development (R&D) as a percentage of GDP stood at an average was around 2% during 2002-11 and has been declining since then, according to Statistics Canada. It is a recognized fact that Canada faces an innovation gap, as the country does not fare well in terms of R&D spending as a percentage of GDP. The number of external patent applications and the number of researchers in the nation are low relative to the size of its qualified labor force. Canada also performs poorly compared to other developed countries such as the US and Japan in terms of patents received. Canada's geographical proximity and trade and investment relations with the US make it an attractive destination for investment. Traditionally, its machinery and equipment industry has served the manufacturing sector. However, with the changing economic order and the emergence of the knowledge industry, its significance has declined. Nevertheless, Canada has an advantage in terms of meeting requirements for technologically advanced goods in the aerospace industry. The education system has not been overhauled to meet new industrial needs, and private firms are unwilling to spend money on developing new technology.

Evolution

During the post-war years, Canada's manufacturing industry blossomed. At first, large amounts of resources were devoted to atomic research. Later, the government started promoting innovative practices to meet the needs of other manufacturing industries. A number of national research councils existed during the 1950s and 1960s. The government also monitored research activities at universities. The Science Council of Canada was founded in 1966 to provide advisory services to the government. The research activities of the government gathered momentum during the late 1990s after it achieved a balanced budget in 1997-98. With increasing global competition, private enterprises in Canada have been encouraging innovation. Besides technological developments in industries, research activities in life sciences have also been receiving government funds.

Structure and policies

Canada has a centralized innovation system directed by its federal government. In 2007, Canada produced a new science and technology (S&T) and innovation policy, which set out a comprehensive, multi-year S&T agenda. The Innovation Management Association of Canada works to expand the commercialization of technologies. Provincial programs are being initiated to promote regional innovation clusters. The S&T strategy and its policy commitments will be guided by four core principles of promoting world-class science and technology excellence, focusing on priorities by targeting basic and applied research in areas of strength and opportunity, encouraging partnerships by supporting S&T collaborations involving the business, academic, and public sectors at home and abroad, and enhancing accountability by implementing strong governance and reporting practices to deliver and demonstrate results.

Intellectual property

The intellectual property policy group consists of two directorates: the Intellectual Property Policy Directorate and the PESTLE Country Analysis Report: Canada ML00002-006/Published 11/2014 © MarketLine. This report is a licensed product and is not to be photocopied Page 61

Technological Landscape

Patent Policy Directorate. The low number of patents received by Canadian firms reduces the nation's technological advantage. Lack of innovation in the private sector is one of the main reasons for the low number of patents received by Canadian firms. Compared to the US, Japan, and Germany, the country's total patent count is very low.

R&D

The Canadian government has identified the following as its priority research areas:

environmental S&T

natural resources and energy

health and related life sciences and technology

ICT

Technology agreements and pacts

The Department of Foreign Affairs and International Trade's S&T program plays a significant role in enhancing the country's S&T capacity, competitiveness, and prosperity by generating effective international collaborations for Canadian research institutions, universities and firms. The department has entered into bilateral agreements with China, the European Union, France, Germany, India, Israel, Japan, and South Korea. These agreements aim at fostering international R&D collaboration and its commercialization. It also hopes to identify world-leading research and incorporate it into the development of innovation processes. Under its International Science and Technology Partnerships Canada program, the country supports partnerships with Brazil, California, China, India, and Israel.

Performance

Internet access market

According to MarketLine estimates, mobile penetration stood at 79.7 per 100 people in 2014 with subscribers totaling 28.2 million in 2014. Internet users as a percentage of total population were around 85.5% with users totaling 30.0 million in 2013.

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Technological Landscape

Figure 25: Internet users in Canada, 2003-13

35.0 90.0

80.0 30.0 70.0 25.0

60.0 Percentage (%)

20.0 50.0

15.0 40.0

30.0 10.0 Internet users (millions) users Internet 20.0 5.0 10.0

0.0 0.0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Year

Number of users Percentage of population

Source: Country Statistics, MarketLine M A R K E T L I N E

Outlook

Despite being a developed economy, Canada has not excelled in terms of innovation. The primary reason for this is the low involvement of provincial governments and less than optimal public-private partnerships for technological development. However, the government is planning to support innovation and R&D by providing financial assistance to small- and medium-sized businesses and young entrepreneurs, as well as establishing new Canada Excellence Research Chairs. The government has also increased the budgets of Canada Accelerator and Incubator Program to support entrepreneurs and realize the potential of their ideas.

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Legal Landscape

LEGAL LANDSCAPE

Summary

The Canadian legal system has an independent judiciary that is free from other branches of government. The federal structure of Canada has also been extended to its judicial system. Legislative authority and responsibility are divided between various levels of government. The Constitution of Canada is the supreme law of the country. It sets out the basic principles of democratic government and defines the powers of the three branches of government: executive, legislative, and judiciary. It also divides lawmaking powers and responsibilities between the federal and provincial levels of government. Another aspect of the legal system is the fact that criminal and civil law is based on the British system of common law, although civil law in Quebec is based on the French system. Canada has a complex labor law system, which has been a point of contention among different political parties. Employers in Canada have to keep abreast of the latest developments in employee relations and employment standards. This has been noted as an area witnessing amendments at a fast pace. The tax regime is to a large extent governed by the federal Income Tax Act and its regulations. Sales tax, corporate tax, and other laws of the provinces and territories are required to be followed by organizations doing business in Canada.

Evolution

The present legal system in Canada has evolved from various European systems that were prevalent during the 17th and 18th centuries. The British North America Act of 1867 serves as the constitutional document for Canada. The Constitution Act, 1982 made Canada's constitution independent from Great Britain, and affirms the Constitution of Canada to be the supreme law of Canada. The present legal system uses two different regimes: common law and civil law. In Quebec, civil law forms the basis of judgments, whereas common law applies in the other provinces and territories. Common laws are uncodified, while civil laws are based on a comprehensive statement of rules and general principles.

Structure and policies

Judicial system

Structure of the system

The final court of appeal in the country is the Supreme Court, and it has jurisdiction over constitutional, administrative, criminal, and civil law. The federal government appoints the chief justice and other judges of the Supreme Court. The court has eight judges apart from the chief justice and has a special role as advisor to the federal government. At times, the government may ask the Supreme Court to interpret the constitution. The provincial courts of appeal and Federal Court of Appeal are the next levels. The Federal Court of Appeal is a superior court with civil jurisdiction, but it can deal with matters specified in federal statutes (laws). The provincial courts mostly deal with criminal cases and family matters. At the provincial level, there are provincial/territorial superior courts and federal courts. Provincial courts/provincial tribunals and federal administrative tribunals are in the lowest level of the hierarchy.

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Legal Landscape

Figure 26: Canada: judicial structure

Supreme Court of Canada

Court martial Provincial Federal court of appeal court courts of appeal appeal

Provincial/ Military courts territorial Federal courts superior courts

Federal Provincial administrative courts tribunals

Provincial administrative tribunals

Source: MarketLine M A R K E T L I N E

Legislative relations between the union and the states

Canada has a federal system in place, and so does its judicial system. The central government is responsible for issues such as defense, foreign affairs, criminal law, immigration, banking and the national currency, international trade, and intellectual property. The provinces deal with regional issues such as direct taxation, education, social programs, and rights related to private property and commerce. The minister of justice is also the attorney general of the country. Most criminal code offences fall under the jurisdiction of the relevant province. The Department of Justice, which is headed by the attorney general, carries out prosecutions under all other federal laws.

Taxation

Income tax

Both the federal and provincial governments impose income tax on individuals. The federal government's tax rates are high compared to those of provincial governments. Income taxes throughout Canada are highly progressive, with high income individuals paying a significantly higher percentage than low income residents. Federal tax rates have a limit of 29%, while provincial tax rates range from 5.05% to 25.75%.

Corporation tax

The federal government's corporate tax rate is 15%. The provincial/territorial corporate tax rates also apply. There is a significant difference between rates in provinces.

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Legal Landscape

Other taxes to be incurred by employers

In some provinces of Canada, employer health tax is imposed on employers. In some provinces, it is referred to as the Health Services Fund. Employees pay premiums for the Employment Insurance system and the Canada Pension Plan, and employers pay premiums for workers' compensation. These premiums are not considered to be taxes, as they allow employees to receive payments from the programs, whereas taxes are used to fund government activities.

Labor laws

The government has attempted to balance employee-employer rights by making changes in legislation. Both federal and provincial governments are responsible for labor laws. The federal government is responsible for the regulation of all interprovincial industries such as airlines, telecommunications, and railways. Most other industries, covering the majority of employers in Canada, fall under provincial jurisdiction. Employment standards legislation gives mandatory minimum conditions of employment, governing areas such as hours of work, overtime pay, minimum wages, holidays, vacations, equal pay for male and female employees, employee benefit plans, leave, severance, and termination pay. There are exemptions for specified categories depending on the jurisdiction. For example, supervisory or managerial employees are often exempted from provisions surrounding hours of work and overtime pay. Labor laws in Canada are transparent, and do not allow discrimination between people based on social class or gender. Occupational health and safety laws are considered important in Canada, and employees have the right to refuse to work in an unsafe place. Fines are imposed for failure to adhere to health and safety requirements. Termination requirements differ across provinces.

An employee's entitlements are calculated based on his or her length of service. They range from one to eight weeks' written notice of termination or pay in lieu of notice.

Performance

Effectiveness of the legal system

The country has performed well in international business rankings that evaluate the business environment and economic freedom. The regulatory processes are favorable for foreign investors, with national laws providing freedom to start, operate and close a business. Starting a business in Canada is far easier than in other nations, as it takes an average of five days and one procedure, compared to the OECD average of 9.2 days and approximately five procedures according to the World Bank's Doing Business 2015 report. The procedures needed to set up an enterprise are less cumbersome and more transparent.

Canada's labor market is one of the most flexible in the world. It operates under flexible employment regulations that enhance employment and productivity growth. The non-salary cost of employing a worker is moderate, and dismissing a redundant employee is relatively costless. The labor laws do not necessitate retraining or replacement before firing a worker. Canada has comparatively high income tax and a number of loopholes are exploited by residents to evade this. The Canada Revenue Agency is the administrative agency for taxation.

Outlook

Canada has a comprehensive legal framework that ensures ease in doing business. The country offers a favorable

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Legal Landscape

business regime with ample business freedom, and is one of the most flexible labor markets in the world. Canada provides a number of competitive advantages for foreign investment; however, it is restricted in some sectors such as air transport, telecommunications and financial services. The liberalization of restricted sectors will create a large number of business opportunities for investors. Business enterprises operating in Canada have to adhere to a number of regulations at both the federal and the provincial level, which acts as a deterrent for investors. More often than not, these regulations as well as the rate of taxes vary widely across provinces. The legal climate for business could become more attractive if the federal and provincial governments agree to a uniform business legislation and taxation regime.

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Environmental Landscape

ENVIRONMENTAL LANDSCAPE

Summary

The Canadian government has taken many steps to establish mechanisms to meet the environmental challenges that come with economic development. The focus of environmental policies has broadened from local and regional issues to challenges of a global nature. Climate change, global biodiversity, ozone layer depletion and the transportation of chemicals and hazardous waste are some of the areas that have appeared at the top of the country's environmental agenda. The country has made some progress in meeting its domestic environmental objectives and international commitments. Some advances have also been made in cutting air pollution, and policies have been created to reduce emissions of greenhouse gases. However, the country's performance in preserving biodiversity, managing pollution, increasing energy efficiency, and managing hazardous waste has been far from satisfactory. The country was not able to achieve the emission reduction targets set under the first round of the Kyoto Protocol, which ran up to 2012; as a result, Canada withdrew from the protocol in December 2011. Additionally, the government has taken a lenient view of its emissions record and has instead embarked on the expansion of its oil production. This could be deleterious to the environment.

Evolution

The Canadian government began to recognize the environment as a significant issue in the 1970s, when it participated in a number of national and international debates. In 1971, the Department Environment Act combined different federal environment entities into Environment Canada. Conservation received most of the attention of environmental policymakers during the 1970s. The scope of environmental acts gradually widened throughout the 1980s, and many ecological policies on land use, forestry, wildlife, heritage, chemicals, and water were brought into effect. It was during this period that Canada began to explore the various options for sustainable development. During the 1990s, Canada became a proactive member in a number of international negotiations. The country has ratified some important environmental treaties and most of its domestic policies have centered on its international commitments.

Structure and policies

Environmental regulations

Some acts, such as the Canadian Environmental Protection Act, are intended solely to protect the environment from pollution. Others, such as the Canada Wildlife Act and the Canada Water Act, focus on conservation. The Clean Air Act takes a comprehensive approach to the problem of worsening air quality and greenhouse gas emissions. The government has initiated a plan called Eco Action that will require major industrial sectors to tackle climate change and help to clean the air. This is one of the main features of the government's comprehensive environmental agenda. Canada EcoTrust for Clean Air and Climate Change has been designed to provide financial support to provincial and territorial projects aimed at reducing greenhouse gas emissions and air pollutants. A series of new programs, such as EcoFreight, have been launched that aim to reduce pollution caused by freight transportation. EcoFreight is made up of six initiatives, two of which specifically focus on the trucking industry. The other initiatives involve air, rail, road, and marine transportation. A freight technology demonstration fund has also been established, which provides cost-shared funding and develops partnerships on shore-based power. In July 2011, the country also introduced a 2% renewable

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Environmental Landscape

fuels requirement for diesel fuel. Water pollution is another area receiving attention from regulators. The federal government has jurisdiction over fisheries, navigation, and federal lands. In a significant development in 2006, Environment Canada's Ice Service assumed operational responsibility of the Integrated Satellite Tracking of Pollution (ISTOP) program to fight marine pollution. ISTOP is a satellite surveillance program for the detection of possible discharges of oil due to marine transportation and offshore oil production. The Federal Sustainable Development Act, which became a law in 2008, requires the federal environment minister to develop a Federal Sustainable Development Strategy (FSDS) every three years. The government prepared the first FSDS for years 2010-13. In 2013, the government tabled a new Federal Sustainable Development Strategy to improve environmental sustainability, which addresses four themes: addressing climate change and air quality, maintaining water quality and availability, protecting nature and shrinking the environmental footprint—beginning with government. The government has also reiterated Canada's commitment to protecting the environment and citizens against the harmful effects of persistent organic pollutants. Furthermore, the government has implemented Renewable Fuels Regulation, which requires an average of 5% renewable content in gasoline. In addition to the Renewable Fuels Regulations, the government has also planned regulations to reduce greenhouse gas emissions from passenger and heavy duty vehicles. The government plans to reduce total greenhouse gas emissions by 17% under the Copenhagen Accord in 2009, which is a non-binding agreement unlike Kyoto Protocol.

Kyoto Protocol on climate change

The UN Framework Convention on Climate Change sets an overall framework for intergovernmental efforts to tackle the challenge posed by climate change. It recognizes that the climate system is a shared resource, the stability of which can be affected by industrial and other emissions of carbon dioxide and other greenhouse gases. The convention has universal membership, with 192 countries having ratified it. However, Canada's image was badly dented among environmentalists after the December 2009 climate change summit in Copenhagen. The Kyoto Protocol was ratified by the previous Liberal government, but both Liberal and Conservative governments have done little to meet greenhouse gas reduction goals. At the Bonn meeting in 2011, the Canadian government confirmed that it would not support the extension of the Kyoto Protocol after 2012, joining Russia and Japan in rejecting any extension of the global pact to control greenhouse gas emissions. In December 2011, Canada withdrew from the protocol. The government has taken a lenient view of its emissions record and has embarked upon expansion of its oil production. This could have a deleterious impact on the environment.

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Environmental Landscape

Performance

Environmental impact Among the developed countries, Canada's environmental performance has not been very good. The country had the worst environmental record among the OECD countries after the US. It performs poorly in many environmental indicators including sewage treatment, species at risk, greenhouse gas emissions, pesticide use and nuclear waste. According to Environmental Performance Index 2014 published by the Yale University, the country ranks 104th out of 178 countries in conservation of forest. Additionally, per capita emissions per unit of GDP are one of the highest among the OECD countries, which suggests of inefficiencies in the consumption of energy. Nevertheless, CO2 emissions fell from 567.56 million metric tons in 2002 to 549.0 million metric tons in 2012.

Figure 27: Carbon dioxide emissions in Canada, 2003-12

640.0 25.0

620.0 20.0

600.0 metric metric tons

15.0 580.0

560.0 10.0

540.0 Metric tons (millions) tons Metric 5.0 520.0

500.0 0.0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Year

Volume Emissions per capita

Source: Country Statistics, MarketLine M A R K E T L I N E

Outlook

The International Energy Agency (IEA) expects renewable energy capacity to expand by 22 GW, from 86 GW in 2012 to 108 GW by 2018, with the regions such as Alberta, Ontario and Quebec as the leaders. Wind energy is expected to

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Environmental Landscape

account for over 50% of the overall capacity addition in the renewables over the medium term. Nevertheless, lack of binding renewable energy targets and few financial incentives act as impediments to growth of renewable energy. Further, grid integration challenges in some provinces also remain a barrier for renewable energy production and distribution. Policymakers should look to address the above mentioned challenges as this would foster renewable energy growth and reduce Canada's carbon footprint.

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Appendix

APPENDIX

Ask the analyst

MarketLine's Country Analysis Practice consists of a team of economists, analysts, and researchers, all with expertise in their given fields. For any questions or comments about this report you can contact the author directly at [email protected]

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Appendix

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