What You Need to Know Re: The New Prohibition on Foreign Purchases of Real Estate

The Government of Canada has enacted the Prohibition on the Purchase of Residential Property by Non-Canadians Act (the “Act”) which came into effect January 1, 2023. The Act prohibits the “purchase” of any “residential property” directly or indirectly by “non-Canadians.”; It is presently only intended to be in effect for the calendar years 2023 and 2024. The Prohibition on the Purchase of Residential Property by Non-Canadians Regulations (the “Regulations”), released on December 21, 2022, provide additional detail on key elements of the Act.

While the stated intention of the Act is to make homes more affordable for people living in Canada by excluding foreign buyers, the Regulations include certain provisions that may have significant unexpected (and arguably unintended) implications for commercial property transactions.

Implications of the Act

The Act provides that “it is prohibited for a non-Canadian to purchase, directly, or indirectly, any residential property.”

The Act defines “non-Canadian” as:

a) an individual who is not a Canadian citizen, permanent resident of Canada or registered as an Indian under the Indian Act;

b) a corporation that is not incorporated under the laws of Canada or a Canadian province;

c) a corporation incorporated under the laws of Canada or a Canadian province whose shares are not listed on a recognized Canadian stock exchange and that is controlled by a person referred to in paragraph (a) or (b); and

d) a prescribed entity.

The Act defines “residential property” as:

a) a detached house or similar building containing not more than three dwelling units;

b) a part of a building that is a semi-detached house, rowhouse unit, residential condominium unit or other similar premises; and

c) prescribed real property or immovable.

The Act states every non-Canadian that contravenes the Act will be guilty of an offence. Every person or entity that counsels, induces, aids or abets or attempts to counsel, induce, aid or abet a non-Canadian to purchase, directly or indirectly, any residential property knowing that the non-Canadian is prohibited is guilty of an offence and will be subject to a fine of not more than $10,000.

While a contravention of the Act does not render a sale itself invalid, the government may ask a court to order the sale of a residential property purchased in contravention of the Act. In such an event, the non-Canadian purchaser will receive no more than the purchase price of the residential property.

Implications of the Regulations

The Regulations provide guidance on the Act’s operation, applicability, and enforcement. They significantly expand the scope of the Act and its potential consequences on commercial transactions. To understand these consequences, the following aspects of the Regulations must be considered:  (i) the expanded definition of “residential properties”, (ii) control by a non-Canadian, and (iii) the broad definition of “purchase”.

(i)  Expanded Definition of “Residential Properties”

The Regulations state “residential property” includes all land “that does not contain any habitable dwelling, that is zoned for residential use or mixed use, and that is located within a census agglomeration or a census metropolitan area.” On their face, the Regulations could be argued to significantly expand the definition of “residential property” to include all land, whether vacant or not, that is zoned “mixed use” in many population centres in Canada.¹

(ii)  Control by a Non-Canadian

The definition of “control” in the Regulations will cause many entities in commercial real estate transactions to be caught under the prohibition even though they would not regularly be considered a “non-Canadian.” The Regulations define “control” to include “direct or indirect ownership of shares or ownership interests of the corporation or entity representing 3% or more of the value of the equity in it or carrying 3% or more of its voting rights”, or control in fact of the corporation or entity, whether directly or indirectly, through ownership, agreement or otherwise.

The threshold of a 3% direct or indirect ownership interest by any non-Canadian in an entity that has been formed under Canadian laws is very low, which will cause many Canadian corporations, partnerships and trusts to be captured by the prohibition.

Further, in addition to corporations, the Regulations expand the prohibition to capture partnerships, trusts and other persons who are not individuals or corporations.

Although there is an exception for publicly traded corporations that would otherwise be non-Canadian, the exemption does not cover non-corporations that are publicly traded, such as real estate investment trusts, that are non-Canadian as a result of the definition of control.

(iii)  Broad Definition of “Purchase”

The Regulations provide that a “purchase” includes “the acquisition, with or without conditions, of a legal or equitable interest or a real right in a residential property.” This broad definition may apply to almost any direct or indirect acquisition, including the acquisition of shares, limited partnership interests, or other interests in an entity that owns “residential property.” Unfortunately, the majority of the exemptions provided for in the Regulations do not apply in most commercial contexts. That said, there is an exception where the non-Canadian assumed liability for the residential property under an agreement of purchase and sale prior to January 1, 2023. There is also an exemption for transfers resulting from the enforcement of security by a secured creditor.

Looking Forward

The Act and Regulations will have significant implications on commercial transactions in Canada and will likely prohibit many transactions that were likely not intended to be captured by the legislation. As a result, we understand that a consortium of real estate participants has been established to lobby the federal government for revisions to address these issues. In the meantime, given the broad application and significant implications associated with the new legislation, anyone who may be impacted by it should seek legal advice.

For further information, please contact any member of our Real Estate Group.

The authors would like to thank Jaclyn Jesin-Neuberger, Articling Student-At-Law, for her assistance in writing this Update.

¹This includes major centres such as Vancouver, Toronto and Montreal, but also many smaller centres such as Kelowna, Peterborough, and Sherbrooke are captured under the definition.