MONTREAL -- Air Canada is challenging WestJet Airlines Ltd.'s $3.5-billion acquisition by Onex Corp., arguing the deal breaches federal rules that limit foreign ownership of carriers, it wrote in a filing to the country's transportation regulator.

In May, Toronto-based Onex entered into an agreement to pay $31 per share for WestJet, that would operate as a private company.

Air Canada said in a letter to the Canadian Transportation Agency that co-investors in Kestrel Bidco Inc. -- the Onex subsidiary that is buying WestJet -- may come from outside the country, amounting to a "serious risk."

Federal legislation limits foreign ownership of a Canadian airline to 49 per cent, with a maximum of 25 per cent for any one foreign investor. Onex, which managed $23.2 billion of invested capital as of Dec. 31, is a private equity firm whose funds include cash from foreign investors.

The "opaque nature" and "flexibility" of the takeover's private equity structure introduces a "significant risk" that non-Canadian co-investors could have de facto control of WestJet, Air Canada lawyer David Perez said in the Aug. 15 filing, obtained by The Canadian Press.

Though co-investors can hold only a minority stake, "Onex lacks necessary internal controls to ensure that WestJet remains Canadian," the letter states, citing the possibility of veto rights, unanimous shareholder consent requirements and dependence on foreign financing -- all of which "can skew control."

Currently, Onex chief executive Gerry Schwartz holds all of the outstanding multiple voting shares (MVS), which entitle the holder to elect 60 per cent of Onex's board. If he steps down, however, those shares will immediately lose most of their rights, the letter says.

"The potential for the MVS extinguishment is real given Mr. Schwartz's current career stage. At 77 years old and having served as CEO since 1983, his eventual retirement should not be considered a remote eventuality," Perez writes.

The letter also highlights concerns about potential partnership with a foreign airline.

"For instance, we understand from recent press reports that WestJet and Air France-KLM have expressed an interest in acquiring Transat A.T. If true, these reports suggest a potential future threat to Transat's status as Canadian in addition to WestJet's," according to the filing.

Onex said in an email it is "pleased the deal has received approval" from federal Transport Minister Marc Garneau and the Competition Bureau.

"The arrangement is still subject to the receipt of the Canadian Transportation Agency's review of ownership structure," noted WestJet spokeswoman Lauren Stewart.

WestJet shareholders approved the proposed acquisition in July, with 92.5 per cent voting in favour. The same month, an Alberta court approved the deal, which Onex and WestJet expect to complete following further regulatory green lights later this year.