Farm land values have continued to appreciate in Saskatchewan and foreign investors have been looking for avenues to participate in that growth. The roadblock facing them is The Saskatchewan Farm Security Act (the “Act”), which limits how much Saskatchewan farm land can be owned by a foreign entity to 10 acres or less.
Briefly, if an entity is primarily engaged in farming, then it needs to be majority owned by persons resident in Canada to overcome the 10 acre limit. If it is not engaged in farming then it must be 100% owned by persons resident in Canada or other Canadian-owned entities.
Wanting to get into the action, Skyline Agriculture Financial Corp. (“Skyline”), a foreign-owned entity, devised a complicated structure involving several layers of companies, loans, swaps of revenues, and a derivative agreement where the ultimate parent would receive payments if an index of land values were to rise, and then some Saskatchewan farm land was purchased under the structure.
The structure came to the attention of the Farm Land Security Board (the “FLSB”), which is responsible under the Act to ensure compliance with the land holding limits. The FLSB held that, while the subsidiary companies satisfied the residency requirements themselves, the overall structure offended the Act. Skyline then appealed to the Saskatchewan Court of Queen’s Bench.
In Skyline Agriculture Financial Corp. et al. and The Farm Land Security Board, Mr. Justice Layh heard the appeal and upheld the FLSB’s decision. The judgment may be found here: http://canlii.ca/t/gh7kv
The structure is complex and fascinating and Justice Layh’s decision sets out several diagrams to illustrate it. The FLSB had determined that, while Skyline did not hold title to the lands in a traditional way, the structure’s effect was to provide Skyline with substantially all of the rights associated with land ownership, while leaving the legal title holder very few. In particular, it pointed to a derivative payable by the legal title holder to one of the Skyline subsidiaries which gave Skyline the benefit of any capital appreciation of the farmland. The FLSB concluded that this resulted in Skyline being the de-facto owner of the lands.
In dismissing Skyline’s appeal, Justice Layh noted that the FLSB had based its decision on “the substance of the Skyline structure, not its form.” The court found that this substantive assessment by the FLSB was reasonable on the facts, and therefore refused to overturn it.
Thus, in the face of new and innovative attempts by foreign investors to find ways around land holding restrictions, the FLSB clearly intends to enforce not only the black and white letter of the Act, but also its spirit and intent (or at least the spirit and intent as the FLSB sees it). Furthermore, it seems that the courts are prepared to defer to the FLSB where it does so, so long as the FLSB has not been unreasonable in its findings.
The effect is that Skyline must divest itself of its land holdings exceeding 10 acres. From a review of the court decision, it appears that only about 16 acres of land had been purchased under Skyline’s structure, presumably to create a test case without incurring significant financial risk. It seems unlikely that this will be the last foray into this area, but the “spirit and intent” approach may serve as a significant deterrent to many prospective international investors who want to participate in the capital appreciation of Saskatchewan farm land. For now at least, it seems that only resident Canadians may do so. Skyline has recently appealed the decision of the Court of Queen’s Bench, but until then, foreign investors are on the outside looking in.