The Government of Canada recently introduced the Prohibition on the Purchase of Residential Property by Non-Canadians Act (the “Act”). The Act, which comes into force on January 1, 2023, prohibits non-Canadians from purchasing (directly or indirectly) residential real estate in Canada for a period of two years.[1] Although the Act sets out the general prohibition, the precise details of this statutory scheme have yet to be determined. The government is expected to address these outstanding details in the supporting regulations (the “Supporting Regulations”), which will follow in the coming months.

Prohibition on the Purchase of Residential Property by Non-Canadians

The key operative provision in the Act is section 4(1), which prohibits non-Canadians from purchasing, either directly or indirectly, any residential property.

A “non-Canadian” is defined as the following:

  1. an individual who is not a Canadian citizen, permanent resident of Canada or registered as an Indian under the Indian Act;
  2. a corporation that is not incorporated under the laws of Canada or a province;
  3. a private corporation that is incorporated in Canada but that is controlled by a person referred to in subparagraphs (a) or (b) above; and
  4. any prescribed person or entity that is set out in the Supporting Regulations.

The Act defines “residential property” as including any property that is located in Canada and that is:

  1. a detached house or similar building, containing not more than three dwelling units;
  2. a part of a building that is a semi-detached house, rowhouse unit, residential condominium unit or other similar premises that is a separate parcel owned apart from another unit in the building; or
  3. any other types of property that are set out in the Supporting Regulations.

The prohibition does not apply to contracts of purchase and sale entered into or assumed before January 1, 2023, provided the non-Canadian becomes liable or assumes liability under the contract prior to this date.[2]

Exemptions Available

Section 4(2) of the Act narrows the scope of the prohibition by carving out a number of exemptions for the following categories of persons:

  1. a temporary resident within the meaning of the Immigration and Refugee Protection Act who satisfies the conditions set out in the Supporting Regulations;
  2. a refugee;
  3. an individual who is a non-Canadian and who purchases residential property with their spouse or common-law partner, if the spouse or common-law partner is a Canadian citizen, permanent resident of Canada, a person registered as an Indian under the Indian Act or a person referred to in subparagraphs (a) or (b) above; or
  4. a person or a prescribed class of persons, as set out in the Supporting Regulations.

The Supporting Regulations

The Supporting Regulations are intended to provide further details on the scope and application of the prohibition and are expected to be similar in content and approach to a recently published consultation paper (the “Consultation Paper”). The Consultation Paper indicates that the Supporting Regulations will clarify:

  • the definition of certain terms, including “non-Canadian”, “purchase” and “control” as they relate to the prohibition;
  • additional exemptions available to non-Canadians and the precise conditions under which they may be exempted from the prohibition; and
  • the treatment of certain types of residential property.

a. Meaning of “non-Canadian”, “purchase” and “control”

It is expected that the Supporting Regulations will define, and may expand the scope of, terminology that is used in the Act. The Consultation Paper notes that the policy intent is to “establish an all-encompassing definition of purchase”, which recognizes that non-Canadians may purchase residential property indirectly through different types of investment vehicles. Accordingly, the Consultation Paper proposes:

  1. expanding the definition of “non-Canadian” to include any partnerships, trusts or unincorporated associations formed outside of Canada, and any partnerships, trusts or unincorporated associations that are formed in Canada but controlled by a non-Canadian; and
  2. defining “purchase” to mean to “acquire, or agree conditionally or unconditionally to acquire, a legal or equitable interest or an immovable real right in a residential property”.

The Consultation Paper proposes that a “purchase” would not include: (i) an acquisition resulting from succession; (ii) an acquisition resulting from divorce or separation; (iii) rental of residential dwelling unit; (iv) a transfer under the terms of a trust that pre-dated the Act coming into force; and (v) an order for foreclosure, provided such order is registered prior to the prohibition coming into effect.

The Consultation Paper also proposes defining “control” to mean: (i) direct or indirect ownership of shares or interests in the corporation representing three percent or more of the value of the equity or of the voting rights; or (ii) control in fact, through ownership, agreement or otherwise. If implemented, this means that any private Canadian corporation will be deemed to be “non-Canadian” under the Act if it has any foreign corporation or any individual that is not a Canadian citizen or permanent resident of Canada that holds, directly or indirectly, shares or interests meeting this threshold.

b. Additional exemptions for non-Canadians

The Supporting Regulations are expected to clarify the conditions that a non-Canadian must satisfy in order to be eligible for an exemption, as well as identify certain classes of prescribed persons to whom the prohibition does not apply. The government has committed to providing exemptions for international students, foreign nationals with work permits, and refugees, and the Consultation Paper indicates that there will likely be an exemption for diplomats, consular staff and employees of international organizations that meet the criteria set out in the Supporting Regulations as well.

c. Recreational property and vacant land

The Consultation Paper indicates that treatment of certain types of residential property will be clarified in the Supporting Regulations. For example, the government has committed to providing an exemption for recreational property, a term which the Supporting Regulations are expected to define. The proposed definition in the Consultation Paper is residential property that is “not located with a Census Metropolitan Area or Census Agglomeration”.

The government is also considering whether the prohibition on the purchase of “residential property” by non-Canadians should include vacant land that has been zoned for residential or mixed use and is within a Census Metropolitan Area or Census Agglomeration.

Penalty and Enforcement Provisions

Under section 6(1), anyone that contravenes the Act, or “counsels, induces, aids or abets” a contravention of the Act, or attempts to do so, is guilty of an offence and is liable on summary conviction to a fine of not more than $10,000.

If the offending party is a corporation, then any officer, director, agent or other authorized individual that “directed, authorized, assented to, acquiesced in or participated in” the commission of the offence is also a party to the offence and may be held equally liable, regardless of whether the corporation was prosecuted.

Notably, the Act specifies that the sale of a residential property to a non-Canadian in violation of the Act remains legally binding.[3] However, a court may order a sale of any residential property that has been purchased by a non-Canadian in violation of the Act and the non-Canadian cannot recover more than what was paid for the property.[4]

Practical Implications of the Act

Given the broad scope of the Act’s penalty provisions, people involved in the real estate industry must be diligent when assisting in the purchase and sale of residential property. The Act penalizes anyone who aids or abets in the contravention of the Act, in addition to the purchaser themselves. As a result, notaries, lawyers, mortgage brokers and real estate agents could find themselves liable should they knowingly assist in an offensive transaction.

Those involved in the sale of residential real estate may wish to include provisions in purchase contracts to protect themselves from liability. These protective provisions could include representations and warranties from purchasers confirming that the purchaser is not a non-Canadian under the Act and/or restrictions on assignment to non-Canadians. Reasonable inquiries should also be made to determine whether a purchaser is not a non-Canadian for the purposes of the Act.

The Act may also cause issues for land developers that have foreign investors and are captured under the definition of non-Canadian, as it is currently unclear whether the prohibition will include vacant land that is zoned residential or mixed use.

Despite the penalty provisions, the Act does not undermine the validity or enforceability of contracts of purchase and sale that contravene the prohibition. This means that vendors and purchasers will still be legally bound to contracts that violate the prohibition, subject to any protective provisions to the contrary included in the Supporting Regulations.

What comes next?

It remains to be seen precisely how the government will develop and implement the proposed regulatory scheme. As more information becomes available, those involved in the real estate industry should be diligent to ensure that they do not contravene the Act and take the appropriate protective measures when dealing with residential property.

To obtain further information on the Act or the prohibition, please contact Sarah Batut, Cara Chu or Jennifer Nguyen.