Canada’s residential real estate market will undergo a fundamental shift when a two-year ban on foreign buyers takes effect in January. Recently released regulations provide greater clarity on how the ban will work in practice.
In a November blog post, we discussed the impact of the Prohibition on the Purchase of Residential Property by Non-Canadians Act (the “Act”) and the upcoming two-year ban on foreign buyers purchasing certain residential real estate in Canada (the “Ban”). Notably, the ban includes significant penalties for Canadian residents who knowingly help a person or entity subject to the ban buy property in Canada.
In our blog, we noted that certain key components of the Ban would be subject to additional regulations (the “Regulations”) that had yet to be released. On December 21, 2022, the Canada Gazette published those Regulations, which will come into force along with the Act on January 1, 2023.
Who Is Impacted by the Ban?
In our previous blog we noted that persons who meet the definition of “non-Canadian” under the Act will be subject to the Ban, including corporations that are “controlled” by foreign corporations or individuals who are not permanent residents of Canada or Canadian citizens.
The Regulations define “control” as follows:
- with respect to a corporation or entity, direct or indirect ownership of shares or ownership interests of the corporation or entity representing 3% or more of the value of the equity in it, or carrying 3% of more of its voting rights; or
- control in fact of the corporation or entity, whether directly or indirectly, through ownership, agreement or otherwise.
Furthermore, Section 2 of the Regulations expands the definition of “non-Canadian” under the Act to include:
- entities formed outside of Canada; and
- entities formed in Canada that are controlled by an entity formed outside of Canada, or controlled by a person who is not a Canadian citizen, permanent resident, or a person registered as an Indian under the Indian Act.
The expansion of the definitions of “control” and “non-Canadian” in the Regulations results in a number of corporations, partnerships and other legal entities being subject to the Ban, and it sets a significantly low threshold for “control” as compared to other definitions in Canadian corporate law. Accordingly, in light of the wide scope of the Regulations and the wide application of the Ban, professionals involved in Canada’s residential real estate industry may want to err on the side of caution when conducting due diligence and undertaking know-your-client measures.
What Constitutes a Purchase?
The Regulations specify that “the acquisition, with or without conditions, of a legal or equitable interest or a real right in a residential property constitutes a purchase.”
Notably, while the word “acquisition” is not defined in the Regulations, the language is likely broad enough to include the unlawful conveyance of property subject to the Ban, as well as the entering into of an agreement for the purchase and sale of such property. Practically speaking, this means legal practitioners and others involved in the purchase and sale of residential real estate in Canada should be cautious with respect to the assignment of residential purchase agreements to non-Canadian assignees if that assignment effectively occurs after January 1, 2023.
The Regulations also provide certain carve outs regarding what constitutes a “purchase” under the Act in an attempt to meet certain public policy objectives, including the avoidance of undue hardship.
In particular, the Regulations state that a purchase under the Act does not include the:
- acquisition by an individual of an interest or a real right resulting from death, divorce, separation or gift;
- rental of a dwelling unit to a tenant for the purpose of its occupation by the tenant;
- transfer under the terms of a trust that was created prior to the coming into force of the Act; or
- transfer resulting from the exercise of a security interest or secured right by a secured creditor.
Types of Property Affected
The Regulations further clarify that residential property that is not located within either a census agglomeration or a census metropolitan area will not be subject to the Ban. In effect, this generally means that municipalities with a core population of less than 10,000 people will not be subject to the Ban, whereas communities with a core population that is greater than 10,000 people will be impacted. The foregoing impact touches upon the federal government’s desire to exempt certain recreational properties from the Ban. However, it is noteworthy that some smaller municipalities where people own recreational property will still be affected.
For greater clarity, a map of the areas that will be impacted by the Ban can be found on this website.
The Regulations also clarified that residential property subject to the Ban includes property that is zoned for mixed use or residential use even if no habitable dwelling is currently part of the property. Effectively, this means that the Ban will apply to certain property that would not generally be considered to be residential at the time that a purchase occurs, but rather focuses on the potential of such land to be developed into residential property at some point in the future.
Available Exemptions
As stated in our previous blog, there are a number of exemptions available to persons subject to the Ban, including refugees and non-Canadian individuals who purchase residential real estate with a spouse or common-law partner – provided that their spouse or common-law partner is a Canadian citizen, a permanent resident of Canada, a person registered as an Indian under the Indian Act or a refugee.
In addition to the foregoing exemptions, the Regulations also provide that temporary residents of Canada will also be exempt from the Ban if:
- they are enrolled in a program of authorized study at a designated institution, and
- they filed all required income tax returns under the Income Tax Act for each of the five taxation years preceding in which the purchase was made;
- they were physically present in Canada for a minimum of 244 days in each of the five calendar years preceding the year in which the purchase was made;
- the purchase price of the residential property does not exceed $500,000; and
- they have not purchased more than one residential property, or
- they hold a work permit or are authorized to work in Canada under the Immigration and Refugee Protection Regulations, and
- they worked in Canada for a minimum period of three years within the four years preceding the year in which the purchase was made, if the work is full-time work as defined in subsection 73(1) of the Immigration and Refugee Protection Regulations;
- they filed all required income tax returns under the Income Tax Act for a minimum of three of the four taxation years preceding the year in which the purchase was made; and
- they have not purchased more than one residential property.
Finally, the Regulations also provide exemptions to the Ban for foreign diplomats and refugees who meet certain defined criteria.
Section 35 of the Constitution Act, 1982
In response to public consultation prior to publication, the Regulations also highlight that the Ban does not apply in situations where it would conflict with Indigenous rights recognized and affirmed by section 35 of the Constitution Act, 1982.
Penalties and Enforcement
The Regulations further provide that the following conditions must be met for a court to make an order that residential property be sold pursuant to the Act:
- the non-Canadian is the owner of the residential property at the time the order is made;
- notice has been given to every person who may be entitled to receive proceeds from the sale; and;
- the superior court of the province is satisfied that the impact of the order would not be disproportionate to the nature and gravity of the contravention, the circumstances surrounding the commission for the contravention and the resulting conviction.
If the previous conditions are met, then the proceeds for any sale of residential property pursuant to the Act will be distributed in accordance with the respective priorities set out in Section 7(2) of the Regulations.
Conclusion
The Act and the newly announced Regulations represent a fundamental shift in the Canadian residential real estate market. Notwithstanding the fact that the new legislation applies for only two years, the wide application and significant penalties associated with contravening the Ban should be noted by homeowners, real estate professionals, legal counsel and other persons actively participating in the Canadian residential real estate market.
For further information on the upcoming Ban and how the Act and Regulations may affect you or your business, please contact a member of our Real Estate Group.
Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.