On January 13, 2023 and February 3, 2023 , we wrote about various unexpected commercial impacts arising from the Prohibition on the Purchase of Residential Property by Non-Canadians Act (the “Act”) and the Prohibition on the Purchase of Residential Property by Non-Canadians Regulations (the “Regulations”).
Those unexpected impacts, particularly those affecting commercial properties with no nexus to residential property, resulted in a chilling effect across the commercial real estate market in Canada, with numerous market participants either unable or unwilling to enter into transactions until the Act and/or Regulations were clarified. In the past four months, stakeholders have lobbied and sought clarification from the federal government for clarification to the Act and Regulations and their efforts appear to have had the intended impact, as on March 27, 2023, the Minister of Housing and Diversity and Inclusion announced the Regulations Amending the Prohibition on the Purchase of Residential by Non-Canadians Regulations (the “New Regulations”). The New Regulations provide significant clarity on the application of the Act and Regulations and will be welcomed by participants across the commercial real estate market.
In particular, the New Regulations make the following amendments:
- The test for “control” of an entity set out in the Regulations, which is used to determine if an entity is a “non-Canadian” has been amended to include “direct or indirect ownership of shares or ownership interest of the corporation or entity representing 10% or more of the value of the equity in it, or carrying 10% or more of its voting rights”. This is a significant increase from the prior 3% threshold, which we previously noted would capture many entities in the commercial real estate industry that would not intuitively be considered to be “non-Canadian”.
- The Act previously contained an effective carve-out from the definition of “non-Canadian” for Canadian controlled publically traded corporations, but not for other public entities, such as real estate investment trusts. The New Regulations amend Section 2(b) of the Regulations to provide an effective carve-out for other publically traded entities, including real estate investment trusts, so long as they are not controlled by a “non-Canadian”.
- The definition of “prescribed real property” in Section 3(2) of the Regulations, which was tied to the definition of “residential property” in the Act was previously a major source of contention and uncertainty for market participants, as the reference to “mixed use zoning” resulted in many commercial or industrial properties, with no nexus to residential property, being considered “residential property” for the purposes of the Act. The New Regulations provide a welcome clarification by simply repealing Section 3(2) of the Regulations, such that land which does not contain any habitable dwelling, which is zoned for residential or mixed use, and which is located in a census agglomeration or census metropolitan area is deemed not to be residential property. This is a significant clarification that will allow many commercial transactions that were not intended to be captured by the Act or Regulations, but which were stalled or put off as a result of the mixed used zoning of the underlying lands, to proceed.
- Finally, the New Regulations add a new paragraph (e) to Section 4(2) of the Regulations which provides that a “purchase” does not include “the acquisition by a non-Canadian of residential property for the purposes of development”. This is another very welcome clarification which will allow land assemblies, site acquisition, and other acquisitions of development sites or proposed development sites to proceed in the normal course, having now been effectively carved out of the scope of the Act.
Taken together, the New Regulations provide much needed certainty and clarification about the scope and application of the Act. The New Regulations effectively limit the scope of the Act to what would commonly be considered residential housing and the housing market in Canada and will allow market participants to deal with mixed use, industrial, office, and other commercial classes of property in the normal course. In addition, the development of critical new housing supply, which is needed to address the state of the residential housing market in Canada, will be able to proceed unabated.
Despite the New Regulations, there will still be transactions and foreign investors that will be impacted by the Act and Regulations (as amended by the New Regulations), and it is strongly recommended that anyone who is potentially impacted seek legal advice immediately. The McCarthy Tétrault real property, and international trade and investment groups are available to assist parties across Canada and can be reached at the contacts below.