By Ladislav Kovac
On Jan. 1, 2023, the Prohibition on the Purchase of Residential Property by Non-Canadians Act came into force. As many of you know, the Act prohibits non-Canadians from purchasing residential properties. But have you heard that the Act also prohibits the purchase of vacant land, commercial or industrial properties? And has anyone told you that a minority of foreign investment will turn your Canadian enterprise into a non-Canadian that is prohibited from making such purchases? With the release of regulations to the Act unceremoniously before the Christmas holidays, some of these surprises have now come to light.
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.
The Act defines a residential property as any property within a census agglomeration or census metropolitan area in Canada that:
- Is a detached house or similar and has three or less dwelling units;
- Is any part of a building that is a semi-detached house, rowhouse unit, residential condominium unit, or other similar premises; and
- 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.
And a prohibited purchase includes a legal or beneficial interest or other real property interest in a residential property so it is very broad.
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.
The definition of non-Canadian comes with its own surprises. The Act defines a non-Canadian as a person that is:
- Not a Canadian citizen, permanent resident or Indian register under the Indian Act;
- A corporation incorporated otherwise than under the laws of Canada or a province;
- 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);
- Any other entity formed otherwise than under the laws of Canada or a province; and
- 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 direct or indirect ownership of shares or ownership interests representing three per cent or more of the value of equity in it, or carrying three per cent or more of its voting rights.
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 three per cent of the equity. Entities with complex structures may not even be aware that the prohibition applies to them because the three per cent of equity can be indirect. For example, if a 10 per cent investor in a purchaser is itself owned 33 per cent by a non-Canadian, the prohibition would apply to that purchaser. Many joint venture parties will be reluctant to share information concerning their capital structure, but given the ambit of the Act, you will now need to investigate into such structures to ensure you are not inadvertently contravening the Act.
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. This means even commercial developers with no intention of creating residential units could prohibited from purchasing properties. Developers are currently discussing this issue with the hope of having amendments drafted so they can continue to create much needed supply without preventing capital investment into Canada as the Act now does.
REITS and limited partnership vehicles
A similar problem which has come to light recently concerns the publicly traded REITS and limited partnership vehicles. In what appears at first glance to be an oversight, in its definitions the Act only provides an exception from the control test for publicly traded corporations. Given the breadth of the definitions, this could impact almost any REIT which intends to purchase property in Canada. We have to hope that this was oversight in not including a similar exception for public non-corporate entities in the definitions, but no correction has yet been made and so purchases of residential properties by these entities continue to be prohibited.
The Act has many exceptions. You may have heard, for instance, that purchase agreements pre-dating the Act are not prohibited. But the way this is worded in the Act is that the prohibition does not apply if the non-Canadian becomes liable for the agreement before the Act came into force.
If you were intending to rely on a “grand-fathered” purchase agreement this again creates a bit of a nuance. Many developers will enter into purchase agreements with a wholly owned holding company having no assets, and subsequently assign the purchase agreement to a fully structured project entity once equity and debt financing has been put into place. If the project entity was not fully organized before Jan. 1, 2023, then the prohibition will apply when the project entity (which is a non-Canadian) is assigned the purchase agreement post Jan. 1, 2023 and becomes liable for its completion.
Other exceptions are to specific types of non-Canadians and include the following:
- Temporary residents, provided they meet the prescribed requirements. These requirements are onerous and will rarely be met. The requirements include years of having made tax filings, and in the case of foreign students, a $500,000 purchase price limitation. By the time a temporary resident would qualify under the criteria, they could very well have already become a permanent resident;
- Non-Canadians who purchase residential property with their Canadian spouse or common law partner; and
- Foreign nationals with valid diplomatic, consular or similar acceptances.
Notwithstanding the prohibition, transactions are not void if they are made in contravention of the Act. Instead, the Act has two 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. It is not known to what extent you would need knowledge that a non-Canadian is prohibited, and caution should be exercised until it is known. I suspect trying to ignore red flags or being otherwise wilfully blind would not be a defence to this offence.
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.
With the Act now in full force, caution should be exercised. If you are purchasing, investing to or soliciting equity or debt financing in real property, you should consider whether the property is captured by the broad language of the Act. Efforts are being made by CHBA to lobby for new exceptions, both where land is acquired for development purposes, as preventing foreign capital from being used in the creation of the supply goes against the goal of creating housing affordability, and to soften the three per cent control test for any foreign buyer. Until those efforts have borne fruit, the prohibitions remain.
The above summary is only a paraphrase of the legislation. For a more detailed analysis of the Act and how it may impact your project you should speak to your legal counsel.
Ladislav Kovac is Partner at Robins Appleby LLP, Toronto. robinsappleby.com