As of January 1, 2023, non-Canadians are prohibited from purchasing residential real estate in Canada for a period of two years under the Prohibition on the Purchase of Residential Property by Non-Canadians Act (the Act). We provided a summary of this prohibition in a previous insight.
New regulations were published in the Canada Gazette on December 21, 2022, and clarify key aspects of the Act:
1. Foreign corporations and entities – A corporation, partnership, trust or other entity (that is not traded on a designated stock exchange) will be deemed to be controlled by a non-Canadian and subject to the prohibition, if a non-Canadian has:
(a) Direct or indirect ownership of its shares or ownership interests representing 3% or more of the value of its equity or voting rights; or
(b) Control in fact, whether directly or indirectly, through ownership, agreement or otherwise.
This 3% threshold established by the regulations is anomalous when compared to control and foreign-ownership tests already familiar to those in the real estate industry, and will prohibit a broader range of entities from purchasing residential properties.
2. Residential / mixed-use properties – The prohibition will apply to properties within a Census Metropolitan Area or a Census Agglomeration1 that are zoned for residential-use or mixed-use, but do not have any habitable dwelling units. This may capture vacant land as well as developed properties that are seemingly non-residential, but which have zoning that allows some residential use. For example, a strip mall that happens to be located in zoning district that also allows for single-family housing may be considered residential property.
3. Rural properties – Residential properties outside a Census Metropolitan Area or a Census Agglomeration are exempt from the prohibition.2
4. Exceptions and exclusions – The regulations establish some exceptions for temporary residents working or studying in Canada, individuals fleeing international crises, and foreign nationals with diplomatic, consular or other special statuses, provided that such individuals satisfy the criteria for exemptions. Further, the following transactions will be excluded from the prohibition: (i) transfers to an individual arising from a death, divorce or separation or a gift, (ii) transfers under the terms of a trust created prior to the Act coming into force, (iii) rentals to tenants occupying the residential properties and (iv) transfers resulting from exercise of a security interest or secured right by a secured creditor.
5. Purchases – The "acquisition, with or without conditions, of a legal or equitable interest or a real right in a residential property” will constitute a purchase. This suggests that entering into a contract, assigning rights under a contract and completing a transaction will be prohibited while the Act is in force. A “purchase” is not limited to acquisitions of fee simple interests in land, and can include the acquisition of interests under leases, easements and mortgages. For instance, a non-Canadian business may be prohibited from leasing a commercial unit in a building zoned for mixed-use. Contractual obligations that arose prior to January 1, 2023 will not be subject to the Act.
The Act and new regulations will have impacts across Canada’s real estate industry and beyond.
In particular, buyers with complex ownership structures may consider updating their internal due diligence processes to ensure that they will not contravene the Act. The extension of the prohibition to certain mixed-use zoned properties may also have implications for business transactions involving seemingly non-residential properties, which may require review for compliance with the Act and its accompanying regulations. As well, the prohibition is not limited to acquisitions of fee simple interests, and applies to the acquisition of any legal or equitable interest in residential property (including interests under leases, mortgages and easements). Vendors, real estate professionals and other parties involved in transactions may be found liable for offences under the Act and subject to penalties if they knowingly provide services to non-Canadian buyers or otherwise support a prohibited transaction, and they should familiarize themselves with the new legislation.