By Aaron Singer, Lina Kim

When a purchase target is a Canadian aviation business holding an Air Operator Certificate (“AOC”) issued by Transport Canada and a domestic licence issued by the Canadian Transportation Agency (“CTA”), the legal requirement that the Canadian aviation business maintain its “Canadian” status can complicate the deal when non-Canadian investors are involved.

The Canadian ownership and control requirements also apply to certain businesses operating Remotely Piloted Aircraft Systems (“RPAS”), or drones. Anyone conducting large-scale commercial drone operations—such as beyond visual line of sight for delivery, mapping, or industrial inspection—are required to hold an RPAS Operator Certificate (“RPASOC”) issued by Transport Canada. As with AOC holders, RPASOC holders must meet and maintain Canadian status requirements.

The Test – What It Means to Be “Canadian”

Under the Canadian Transportation Act, a corporation must meet three key criteria to qualify as Canadian:

1. Incorporation—the corporation or entity must be incorporated or formed under the federal laws of Canada or a province.
2. Canadian ownership of voting interests—at least 51% of the voting interests must be owned and controlled by Canadians (at each level of the ownership chain, up to the ultimate owner at the top) and where:
   1. no more than 25% of the voting interests are owned directly or indirectly by any single non-Canadian, either individually or in affiliation with another person; and
   2. no more than 25% of the voting interests are owned directly or indirectly by one or more non-Canadians air carriers, either individually or in affiliation with another person.
3. Control in fact—beyond the ownership numbers above, the corporation or other entity must be controlled in fact by Canadians.

These requirements operate together. Satisfying the incorporation and voting thresholds does not guarantee compliance if, on the facts, control appears to rest with foreign owners.

Publicly traded companies face additional considerations—they may need to adopt security constraints, control systems, or variable voting share structures to ensure compliance with the ownership and control requirements described above. For example, in one decision, the CTA found that an acquisition of a publicly traded company would be compliant with Canadian ownership requirements if the acquirer adopted a formal board resolution providing that, for any vote of its board relating to the acquired aviation businesses, (i) a majority of the directors participating in the vote must be Canadian; (ii) the Chair of the meeting must be Canadian; and (iii) if the vote is a tie, the Chair must cast the deciding vote. Further, in another decision, the CTA found that a special consideration for publicly listed companies was whether any non-Canadian shareholders held a large voting interest.

The stakes are high: If the CTA determines that an operator no longer meets the Canadian status requirement, the CTA is required to suspend or cancel the licence held, and the operator will lose its AOC or RPASOC and consequently the right to conduct flight operations.

The Control in Fact Test – Avoiding Turbulence

Even if the post-acquisition share ownership thresholds satisfy the requirements described above, with a change of ownership involving non-Canadians, the CTA will carefully assess whether control in fact remains with Canadians.

The control in fact requirement is met when Canadians hold the power, whether or not it is actively exercised, to control the strategic decision-making activities of an enterprise and to manage and run its day-to-day operations. To constitute control in fact, Canadian influence must be dominant or determining.

The CTA considers the following four factors in assessing control in fact:

1. corporate governance;
2. shareholder rights;
3. risk and rewards; and
4. business affairs and activities.

This is a holistic, fact-specific analysis. The CTA will examine the totality of the arrangements between the parties, including shareholder rights, financing arrangements, decision making authority, governance structures, and the overall nexus of influence of non-Canadians.  Agreements or arrangements that confer de facto control to non-Canadians, such as veto rights, approval requirements, financial dependency or significant influence over material decisions, can place the operator offside the Canadian control requirement.

Past CTA decisions illustrate this point. In one case, the CTA determined that control in fact did not rest with Canadians where a non-Canadian minority shareholder had essentially financed the entire operation and possessed the technical expertise necessary to operate the business. In another, exclusive reliance on a non-Canadian lessor for aircraft was sufficient to undermine Canadian control in fact.

Purchases of Canadian aviation businesses or drone operators with non-Canadian investors requires careful attention to governance structures and operational arrangements, but early engagement with these requirements helps avoid unexpected turbulence and keep transactions on track. For further guidance on aviation corporate compliance or other corporate matters, please contact Aaron Singer, Lina Kim or any member of our Aviation or Business Law Groups.