Air Canada has filed a challenge with the country's transport regulator over WestJet Airlines Ltd.'s acquisition by Onex Corp.

Canada's biggest airline argues the $3.5-billion takeover would breach federal rules that limit foreign ownership of carriers.

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

Air Canada says in a letter to the Canadian Transportation Agency that co-investors in Onex — a private equity firm whose funds include cash from foreign investors — may come from outside the country. 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 says it is pleased the deal has received approval from federal Transport Minister Marc Garneau and the Competition Bureau.

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.