Canadian Regulations Banning Foreign Homebuyers: Article by Aird & Berlis
Canadian Regulations Banning Foreign Homebuyers
Aird & Berlis LLP – the articles references can be read in their entirety on Aird & Berlis’ website here and here.
Canada’s Parliament recently passed the Prohibition on the Purchase of Residential Property by Non-Canadians Act (the “Act”), which has prohibited the purchasing of residential real estate by non-residents, directly or indirectly, for a two-year period beginning January 1, 2023[1] Individuals who do not have Canadian citizenship or permanent residency will not be able to purchase Canadian residential real estate during this two-year window, unless liability under the agreement of purchase and sale was assumed prior to January 1, 2023.[2]
Who Is Deemed “Non-Canadian”?
For the purposes of the Act, a “non-Canadian” is defined as follows:[3]
- an individual who is not:
- a Canadian citizen,
- a person registered as an Indian under the Indian Act,or
- a permanent resident of Canada;
- a corporation that has not been incorporated in Canada;
- a corporation incorporated in Canada that is controlled by foreign corporations or foreign individuals; and
- a prescribed person or entity pursuant to regulations.
What Type of Properties Are Affected?[4]
Non-Canadians will not be able to purchase detached houses or similar buildings that contain up to three dwelling units. Semi-detached houses, rowhouse units, residential condominium units, or any part of these buildings that are intended to be owned separately from other units in the building are also captured. Notably, detached houses that contain more than three dwelling units are not captured by the Act.
Exceptions to the Act[5]
The following are exempt from the application of the Act:
- temporary residents within the meaning of the Immigration and Refugee Protection Act;[6]
- non-Canadians who purchase residential property in Canada with their spouse or common-law partner, if the spouse or common-law partner is:
- a Canadian citizen,
- a person registered as an Indian under the Indian Act, or
- a permanent resident of Canada; and
- foreign states that purchase residential property in Canada for diplomatic or consular purposes.
Offences and Penalties[7]
Under the Act, every non-Canadian that contravenes the Act and every “person or entity” that “counsels, induces, aids or abets or attempts to counsel, induce, aid or abet” the contravention of the Act is: (1) guilty of an offence and (2) is liable on summary conviction to a maximum fine of $10,000.
Directors, officers, senior officials and managers of corporations can also be found liable if they aid or authorize a corporation to commit or aid in the offence, whether the corporation has been prosecuted or convicted. The superior court of the province in which the residential property is located may also, on application by the Minister, order the property to be sold in a manner and with conditions to be addressed in supporting regulations. Furthermore, upon the court-ordered sale of the property, the non-Canadian purchaser would not receive more than the amount paid for the property, and may even receive less.
This offence provision of the Act imposes a broad range of liability that is not limited to the contracting parties of an agreement of purchase and sale. It is currently unclear whether and under what circumstances any non-contracting party that is involved in a transaction, such as developers, mortgage agents, professional advisers, lawyers and others, may be considered to have been counselling, inducing, aiding, or abetting the contravention of the Act.
Takeaways for Developers, Vendors and Purchasers
Agreements of purchase and sale entered into that do not comply with the Act will not be deemed invalid simply due to such contravention of the Act.[8] In effect, contracting parties will still be required to adhere to their contractual legal obligations. It may be prudent for contracting parties to negotiate contractual terms regarding the validity of agreements of purchase and sale contravening the Act. For example, participants in Canadian residential real estate transactions may seek to include contractual provisions confirming whether the purchasers are residents within the meaning of the Act and involve ancillary documents, such as requiring a statutory declaration or other evidence.
Developers, mortgage agents, real estate agents, lawyers and others should inform their respective staffs of the requirements of the Act to avoid potential liability by inadvertently entering into agreements of purchase and sale with non-Canadians.
Meanwhile, the Act could face constitutional challenges on the basis that property rights fall under the purview of provincial governments, pursuant to Section 92 of the Constitution Act, 1867.
The Regulations
On December 21, 2022, the Canadian federal government released the Prohibition on the Purchase of Residential Property by Non-Canadians Regulations (the “Regulations”)[9] made pursuant to the Act.
Who Is Deemed “Non-Canadian” under the Regulations?
As mentioned above, Section 2 of the Act defines a non-Canadian as:[10]
- an individual who is neither a Canadian citizen nor a person registered as an Indian under the Indian Act nor a permanent resident;
- a corporation that is incorporated otherwise than under the laws of Canada or a province;
- a corporation incorporated under the laws of Canada or a province whose shares are not listed on a stock exchange in Canada for which a designation under section 262 of the Income Tax Act[11]is in effect and that is controlled by a person referred to in paragraph (a) or (b); and
- a prescribed person or entity.
Section 2(d) of the Act requires that the Regulations clarify what would constitute a prescribed person or entity. Accordingly, the Regulations outline the following as a prescribed person or entity:[12]
- entities not formed under the laws of Canada or a Canadian province; and
- entities formed under the laws of Canada or a Canadian province that are (a) controlled by entities not formed under the laws of Canada or (b) entities that are controlled by non-Canadianindividuals or entities, as per Section 2 of the Act.
Both the Act and the Regulation use the word control as a tool in determining whether an entity is non-Canadian. The “control test” outlined in the Regulations particularly clarifies which corporations and entities are impacted by the Act.
Section 1 of the Regulations defines control as, with respect to a corporation or entity:
- 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.
While neither the Act nor the Regulations provide any guidance, the “control in fact” (de facto control) requirement in the definition of control has been similarly applied in foreign buyer legislation in British Columbia and Ontario, as well as in British Columbia’s unique Land Owner Transparency Act.
Furthermore, while the Act and the Regulations do not define “Entities”, it is clear that the intention was to include partnerships and trusts (in addition to corporations).
What Is Residential Property?
The Regulations do, however, exclude properties not located within a census agglomeration (“CA”) or a census metropolitan area (“CMA”) from the definition of Residential Property.[13]
The definitions of CA and CMA are derived from the Standard Geographical Classification (SGC) 2021, which explains that a CA or CMA is formed:
by one or more adjacent municipalities centred on a population centre (known as the core)… To be included in the CMA or CA, other adjacent municipalities must have a high degree of integration with the core, as measured by commuting flows derived from data on place of work.[14]
A CA must have a core population of at least 10,000 based on data from the previous Census of Population Program (“CPP”). A CMA must have a total population of at least 100,000, based on data from the then-current CPP and 50,000 or more must live in the core based on adjusted data from the previous CPP.[15] Statistics Canada outlines these areas here.
Accordingly, this definition includes many smaller cities, towns and villages across Canada, in addition to major urban centres.[16] Additionally, the Regulations widened the reach of the Act to capture land that is available for future residential use by adding to the definition of Residential Property in Section 2 of the Act to include land that does not contain any habitable dwelling, that is zoned for residential use or mixed use, and that is located within a CA or a CMA.[17]
What Purchases Are Excluded?
A purchase, for the purposes of the Act, is the acquisition, with or without conditions, of a legal or equitable interest or a real right in a residential property.[18] While this definition does not expressly indicate the precise moment in time when the transaction is caught by the Act, it is quite obvious that it was intended to include any transaction upon the parties executing the agreement of purchase and sale even if the transaction is conditional innature. However, the Regulations do specify Purchases that are not subject to the Act:[19]
- the acquisition of residential property resulting from death, divorce, separation or a gift;
- the rental of a dwelling unit to a tenant for the purpose of its occupation by the tenant;
- the transfer under the terms of a trust that was created prior to the coming into force of the Act; and
- the transfer resulting from the exercise of a security interest or secured right by a secured creditor.
Who Is Exempt from the Requirements?
The Act does not apply to temporary residents within the meaning of the Immigration and Refugee Protection Act (“IRPA”) who satisfy the following prescribed conditions:[20]
- if they are enrolled in a program of authorized study at a designated learning institutionper the IRPA Regulations,
- they filed all required income tax returns under the Income Tax Actfor the five preceding taxation years,
- they were physically present in Canada for a minimum of 244 days in each of the five preceding calendar years,
- the purchase price of the property does not exceed $500,000, and
- they have not purchased more than one residential property; or
- if they hold a work permit pursuant to the IRPA Regulations, or are authorized to work under section 186 of the IRPA Regulations,
- they worked in Canada for a minimum period of three years within the preceding four years, if the work is full-timework as defined in subsection 73(1) of the IRPA Regulations,
- they filed all required income tax returns under the Income Tax Actfor a minimum of three of the four preceding taxation years, and
- they have not purchased more than one residential property.The Regulations also deem the following to be prescribed classes of persons to whom the Act does not apply:[21]
- foreign nationals who hold a passport that contains diplomatic, consular, official or special acceptance issued by the Department of Foreign Affairs, Trade and Development;
- foreign nationals with temporary resident status whose temporary resident visa was issued or temporary resident status was granted pursuant to an exemption under section 25.2 of IRPA;and
- persons that have made a claim for refugee protection in accordance with subsection 99(3) of
Further, the Regulations specify that the prohibition on non-Canadians looking to purchase residential property in Canada is not effective to the extent that the Act is incompatible with the Indigenous rights recognized and affirmed by section 35 of the Constitution Act, 1982, which recognizes and affirms Aboriginal and treaty rights of Aboriginal peoples.[22]
Orders To Sell Property
Pursuant to section 7(1) of the Act, if a non-Canadian is convicted of having contravened the Act, the superior court of the province in which the Residential Property is situated may order the property to be sold.[23] The Regulations clarify that such order can only be made if the following conditions are met:[24]
- the non-Canadian is the owner of the property at the time the order is made;
- notice has been given to every person who may be entitled to receive proceeds from the sale; and
- the superior court of the province is satisfied that the impact of the order would not be disproportionate to the nature and gravity of the contravention, the circumstances surrounding the commission of the contravention, and the resulting conviction.
Orders that are granted under section 7(1) of the Act must provide that the proceeds of the sale are distributed in the following order:
- payment of the costs of the sale, including the costs incurred by the Minister in bringing the application for the order, along with any unpaid fines by the non-Canadian;
- payment to the Canadians who are entitled to receive the proceeds of the sale according to priorities that the superior court may determine;
- the repayment to the non-Canadian of an amount that is not greater than the purchase price they paid for the property; and
- the payment of any amount remaining to the Receiver General for Canada.
Implications
Neither the Act nor the Regulations impose any compliance requirements related to information collection, processing or reporting by Canadian professionals when dealing with potential non-Canadians. However, any person or entity that counsels, induces, aids or abets a non-Canadian to purchase a residential property in contravention of the Act is liable. The Regulatory Impact Analysis Statement that was published with the Regulations creates an expectation that Canadian professionals will establish prudent business practices with respect to the review of information in the course of a business transaction that employs more rigorous due diligence practices in relation to non-Canadians. Unfortunately, there is a lack of helpful guidance as to what is expected in that regard. Real estate professionals such as builders, developers, real estate brokers and agents, and lawyers are advised to broaden their current “know your customer” due diligence systems to ensure compliance with the Act and Regulations over the next two years.
In addition, entities interested in purchasing residential property in Canada should especially pay attention to the definition of control. This definition creates a very low threshold and will ultimately capture a far broader group of corporations or entities than was originally expected. Such entities looking to purchase residential property should examine their ownership structure and composition to determine whether this Act will restrict their purchasing power for the next two years.
If you have any questions about how this may impact your business, please contact Nili Goldman.
[1] Prohibition on the Purchase of Residential Property by Non-Canadians Act, SC 2022, c 10, s 235.
[2] Ibid, s 5.
[3] Ibid, s 2.
[4] Ibid.
[5] Ibid, s 4(2).
[6] Subject to the satisfaction of prescribed conditions.
7] Ibid, s 6.
[8] Ibid, s 5.
[9] Prohibition on the Purchase of Residential Property by Non-Canadians Regulations: SOR/2022-250.
[10] Section 262 of the Income Tax Act gives the Minister of Finance authority to designate a stock exchange, or a part of a stock exchange.
[11] Supra note 1.
[12] Supra note 9.
[13] Supra note 9.
[14] Statistics Canada, Dictionary, Census of Population, 2021 Census metropolitan area (CMA) and Census agglomeration (Ottawa: Statistics Canada, 2021) < https://www12.statcan.gc.ca/census-recensement/2021/ref/dict/az/Definition-eng.cfm?ID=geo009> accessed December 27, 2022.
[15] Ibid.
[16] Ibid.
[17] Supra note 9.
[18] Supra note 9.
[19] Supra note 9.
[20] Supra note 9.
[21] Supra note 9.
[22] Supra note 9.
[23] Supra note 1.
[24] Supra note 9.
