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Dec 23, 2022

Federal Foreign Buyer Legislation Prohibits Purchase of Existing Homes and Vacant Residential Land

By: Ladislav Kovac

Housing was a critical issue during the 2021 federal election. While the federal parties disagreed on solutions, most agreed that foreign investment needed to be addressed and was exacerbating the affordability problem. Most parties promised some kind of ban on the purchase of residential properties by foreigners, with the only difference being the length of ban. The government has now acted on these promises, and the prohibition starts on January 1st, 2023 with the coming into force of the aptly named Prohibition on the Purchase of Residential Property by Non-Canadians Act (the “Act”). Regulations for the Act were recently passed on December 21, 2022. After the passing of the regulations, the prohibition has become significantly broader than restricting the purchase of residential properties by foreigners and can now impact the purchase of vacant or commercial land for development purposes.

General Prohibition

In general, the Act prohibits the purchase of “residential property” by “non-Canadians”. These are defined terms in the Act, and the definitions are much broader than expected. We attempt to summarize the definitions and exceptions below, but careful attention should be made to the actual definitions in the Act and regulations. This prohibition will remain in effect for 2 years, after which the legislation will be automatically repealed.

Residential Property

The Act defines a residential property as any property within a census agglomeration or census metropolitan area in Canada that:

  1. for a detached house or similar building, has not more than 3 dwelling units, together with any adjacent land reasonably necessary to its use;
  2. any part of a building that is a semi-detached house, rowhouse unit, residential condominium unit, or other similar premises that is intended to be a separate parcel, together with any adjacent land reasonably necessary to its use;
  3. any land which does not contain a habitable dwelling that is zoned for residential use or mixed use.

Careful attention should be paid to (c). While the name of the Act implies that it only applies to residential properties, with the inclusion of this portion of the definition from the regulations to the Act, the purchase of any type of land may be prohibited if it is zoned for residential use or mixed use. This could include vacant land, commercial or industrial properties depending on the current zoning.

Census Agglomeration and Census Metropolitan Areas are defined by statistics Canada, and in general mean areas having a core population of at least 10,000. As the prohibition only applies to these census areas, the purchase of cottage properties by non-Canadians will continue to be possible, depending on the specific location of the cottage.

Non-Canadians

The definition of non-Canadian comes with its own surprises. The Act defines a non-Canadian as a person that is:

  1. not a Canadian citizen, permanent resident or Indian register under the Indian Act;
  2. a corporation incorporated otherwise than under the laws of Canada or a province;
  3. a corporation incorporation under the laws of Canada or a province whose shares are not listed on a stock exchange in Canada and that is controlled by a person referred to in paragraph (a) or (b);
  4. any other entity formed otherwise than under the laws of Canada or a province; and
  5. any other entity formed under the laws of Canada or a province and controlled by any person or entity referred to above.

While this seems straightforward, the regulations have defined control to mean (i) direct or indirect ownership of shares or ownership interests representing 3% or more of the value of equity in it, or carrying 3% or more of its voting rights; or (ii) control in fact of the corporation or entity.

The result of this definition of control is that the prohibition will apply to a Canadian corporation or entity but with a non-Canadian owning as little as 3% of the equity. Entities with complex structures may not even be aware that the prohibition applies to them because the 3% of equity can be indirect. For example, if a 10% investor in a purchaser is itself owned 33% by a non-Canadian, the prohibition would apply to that purchaser.

When combining this definition with that of a residential property, a developer may be prohibited from buying vacant land or commercial properties which are zoned for residential or mixed use depending on whether their direct or indirect investors constitute non-Canadians. Caution should be used and certifications and representations provided by investors confirming that they are aware of and do not constitute non-Canadians for the purpose of the Act.

Exceptions

The Act comes with many exceptions which have been expanded by the regulations. These exceptions include:

  1. a temporary resident within the meaning of the Immigration and Refugee Protection Act provided they meet the prescribed requirements. These requirements are onerous and will rarely be met. A copy of these requirements are enclosed;
  2. a “protected person” as defined in the Immigration and Refugee and Protection Act (being, in general, a person with refugee protections);
  3. a non-Canadian who purchases residential property with their spouse or common partner, if that spouse or common law partner is a Canadian citizen, permanent resident, Indian registered under the Indian Act, or excepted by (a) or (b) above;
  4. foreign nationals with valid diplomatic, consular or similar acceptances;
  5. foreign nationals provided with a temporary resident permit issued under section 25.2 for the Immigration and Refugee Protection Act for public policy considerations;
  6. certain persons who have made an eligible claim for refugee protection;
  7. treaty Indians.

Some of these exceptions will be easier to prove than others. When a purchaser attempts to rely on these exceptions, appropriate documents such as work permits, student permits, marriage certificates and other documents should be examined to ensure that the exception applies.

Purchases

The regulations have defined purchases broadly. Remember that the prohibition is for the purchase of residential property by non-Canadians. A purchase is the acquisition, with or without conditions, of a legal or equitable interest or a real right in a residential property. Acquisition is not itself defined and could be broad enough to include the granting of mortgages or other security interests. This would make sense when considering the exceptions to the definition of a purchase. These exceptions are:

  1. acquisitions resulting from death, divorce, separation or a gift;
  2. rental of a dwelling unit to a tenant for the purpose of occupation by the tenant;
  3. transfer under the terms of a trust that was created prior to January 1, 2023;
  4. transfer resulting from the exercise of a security interest.

We would suggest that since one of the exceptions is a transfer resulting from the exercise of a security interest, it would be too simple a work around of the legislation to permit a mortgage in the first place.

Enforcement

Notwithstanding the prohibition, transactions are not void if they are made in contravention of the Act. Instead, the Act has 2 potential enforcement mechanisms.

The first is a fine of not more than $10,000 which is chargeable to any 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 a non-Canadian to purchase, directly or indirectly, any residential property knowing that the non-Canadian is prohibited under this Act. This fine can be applied broadly to realtors, mortgage brokers, lawyers and even vendors, however to be liable, these parties would need to have known that the non-Canadian was prohibited under the Act. With reasonable due diligence, a vendor or lender should be able to avoid any risk of this fine if they act appropriately. We have prepared a detailed provision for purchase and sale agreements to assist with compliance under the Act.

The second enforcement mechanism is the potential of a judicial sale of a property purchased in contravention of the Act. This sale requires a court process and court order, and in order for the court order to be granted, the non-Canadian must still own the property when the court order is granted. The court order would limit the net proceeds of sale payable to the non-Canadian to the purchase price which was paid. Given the limitations around this process, it remains to be seen whether it will be frequently used.

Summary

With the Act and its regulations coming into force on January 1, 2023, you should take a moment to consider the implications. If you have non-Canadian investors, you should consider their involvement during the 2 year prohibition period. If you are or will be selling units in a development, you should ensure that appropriate due diligence is being conducted to determine whether the purchase is prohibited, and ensure that your agreement provides you with the necessary protections. If you are lending money for construction financing, you should consider whether your borrower is taking appropriate steps to protect themselves.

If you have any questions on the Act or its regulations, please contact Leor Margulies or Ladislav Kovac.

Temporary Resident Qualifying Criteria

Student Visa Holders:

(a) enrolled in a program of authorized study at a designated learning institution;

(b) they filed all required income tax returns under the Income Tax Act for each of the five taxation years preceding the year in which the purchase was made,

(c) they were physically present in Canada for a minimum of 244 days in each of the five calendar years preceding the year in which the purchase was made,

(d) the purchase price of the residential property does not exceed $500,000, and

(e) they have not purchased more than one residential property.

Work Permit Holders:

(a) they hold a work permit, or are authorized to work in Canada under section 186 of those Regulations,

(b) they worked in Canada for a minimum period of three years within the four years preceding the year in which the purchase was made, if the work is full-time work as defined in subsection 73(1) of the Immigration and Refugee Protection Regulations,

(c) they filed all required income tax returns under the Income Tax Act for a minimum of three of the four taxation years preceding the year in which the purchase was made, and

(d) they have not purchased more than one residential property.



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