In the recent past, Canadian residential real estate has been very tough on Canadian citizens and permanent residents. The real estate market has seen escalated home prices particularly in the GTA area and Vancouver. Home prices soared due to foreign investments as foreign buyers purchased residential properties for investment purposes and flipped them for profit. These inflated prices led to an affordability crisis making it very difficult for Canadians to purchase houses. A race began where Canadians residents were competing with foreign buyers. Affordable housing became a challenge especially for first-time homebuyers who struggle to purchase houses.
A change was necessary. It became necessary to limit the foreign ownership of real estate and make residential real estate market more accessible and affordable to Canadians.
To deal with this situation, a new law came into force. On June 23, 2022, the Prohibition on the Purchase of Residential Property by Non-Canadians Act, [1] (the Act) was passed by Canadian Parliament along with a supporting regulation, The Prohibition on the Purchase of Residential Property by Non-Canadians Regulations [2] (the Regulations). The Regulations explain the definitions, provide clarifications and exemptions to the Act. The Regulations further broaden the scope of the definitions under the Act. The Act and the Regulations became effective on January 1, 2023, prohibiting non-Canadians, individual foreign investors and foreign corporations from purchasing residential real estate for a period of two years, i.e., until January 1, 2025. The government recently announced that this prohibition is extended for another two years, and the restrictions will be in effect until January 1, 2027.
Let’s understand the salient features of this new law and how it will curtail the purchase of houses by non-Canadians for foreign investments.
This Act along with the Regulations prohibit the purchase of residential property, directly or indirectly, by non-Canadians for a period of two years beginning January 1, 2023. The title of the Act has four important key terms, “prohibition” [3], “purchase”[4], “residential property”[5] and “non-Canadians”[6]. For convenience, I have divided this article into three parts to focus on the following:
1. The three terms, “prohibition”, “purchase”, “residential property” and “non-Canadians” as defined under the Act and interpreted under the Regulations.
2. The enforcement measures if there is a violation of the Act and the Regulations.
3. Key take aways from the Act and Regulations.
SECTION 1
Under the Act, it is prohibited for non-Canadians to purchase, directly or indirectly, any residential property.
Who is a Non-Canadian?
Section 2 of the Act defines Non-Canadian as:
a) An individual who is neither a Canadian Citizen nor a person registered as an Indian under the Indian Act [7] nor a permanent resident.
b) A corporation that is incorporates otherwise than under the laws of Canada or a province;
c) A corporation incorporated under the laws of Canada or a province whose shares are not listed on a stock exchange in Canada for which a designation under section 262 of the Income Tax Act [8] is in effect and that is controlled by a person referred to in paragraph (a) or (b) and
d) A prescribed person or entity.
A prescribed person or entity is further clarified under section 2 of the Regulation, according to which the following entities are prescribed:
a) An entity formed otherwise than under the laws of Canada or a province;
b) An entity formed under the laws of Canada or a province-whose shares or ownership interest are not listed on a stock exchange in Canada for which a designation under section 262 of the Income Tax Act [9] is in effect and controlled by an entity referred to in paragraph(a) or controlled by a person referred to in paragraph (a),(b) or (c) of the definition non-Canadian in section 2 of the Act.
An important aspect relating to corporations or entities is the definition of “control” under section 2 of the Act which has been explained under section 1 of the Regulations. “Control” with respect to a corporation or entity deals with the ownership structure. This ownership structure will determine whether the prohibition to purchase residential property will apply or not. Control means:
a. direct or indirect ownership of shares or ownership interests of the corporation or entity representing 10% or more of the value of the equity in it or carrying 10% or more of the voting rights; or
b. control of the corporation or entity whether directly or indirectly through ownership, agreement or otherwise.
The prohibition of the purchase of residential property applies to anyone falling into one of the categories mentioned above. There are some exceptions to this prohibition.[10] The following categories are exempt, and prohibitions under the Act do not apply to:
i. Temporary residents within the meaning of the Immigration and Refugee Protection Act [11] who satisfies certain conditions stipulated under the Immigration and Refugee Protection Regulations.
ii. A protected person within the meaning of Immigration and Refugee Protection Act.
iii. An individual who is a non-Canadian who purchases residential property in Canada with their spouses or common-law partner if the spouse or common law partner is a
a. Canadian citizen
b. Person registered as an Indian under the Indian Act
c. Permanent Resident
d. Non-Canadian who is a temporary resident or a protected person within the Immigration and Refugee Protection Act.
iv. Non-Canadians who purchased residential properties before January 1, 2023.
v. A person of a prescribed class of persons.
For the purposes of the above, a person of a prescribed class of persons is further clarified under section 6 of the Regulations to include:
i. Foreign nationals who hold a passport that contains a valid diplomatic, consular, official or special representative acceptance issued by the Chief of Protocol for Department of Foreign Affairs, Trade and Development.
ii. Foreign nationals, with valid temporary resident status whose temporary resident visa was issued, or temporary resident status was granted following an exemption under the Immigration and Refugee Protection Act. The exemption must be justified based on public policy considerations to provide safe haven to those fleeing conflict.
iii. Persons who have made a claim for refugee protection in accordance with the Immigration and Refugee Protections and the claim has been found eligible and referred to Refugee Protection Division of that Act.
Of course, documentary evidence is required. Every non-Canadian who wants to purchase a residential property must confirm that they fulfil the requirements of the Act and confirm their status in Canada. [12] Examples of documentary evidence could be, to name a few:
- Valid study permit
- Valid work permit
- Income tax returns
- Residency obligation as required
- Valid passports
- Temporary resident visa
What is a Purchase?
For the purposes of the Act, the Regulations under section 4(1) state that acquisitions with or without conditions of a legal or equitable interest or a real right in a residential property constitute a purchase. However, there are certain exceptions. [13] The purchase under section 4(1) of the Regulations does not include a non-Canadian who:
1. Has an interest or a real right in a residential property if he or she has acquired that interest or a real right due to a death, divorce, separation or a gift
2. Rents a dwelling unit to a tenant for the purpose of its occupation by the tenant
3. Acquires a residential property under the terms of a trust that was created prior to enforcement of the Act
4. Acquires a residential property resulting from the exercise of a security interest or secured right by a secured creditor
5. Acquires a residential property for the purpose of development.
What is a Residential Property?
Section 2 of the Act defines “residential property” as real property or immovable. other than a prescribed real property or immovable, situated in Canada and that is:
i. A detached home or a similar building with not more than three dwelling units. The same section also defines a “Dwelling unit”. It means a residential unit that contains a private kitchen facilities, a private bath and a private living area.
ii. A part of the building that is
a. a semi-detached house,
b. a rowhouse unit,
c. residential condominium unit or
d. other similar premises that or is intended to be a separate parcel or other division of property or immovable owned or intended to be owned together with that portion of any common areas and other appurtenances to the building.
iii. Any prescribed real property or immovable.
The residential property in (i) and (ii) above includes that proportion of the appurtenances to the building and land subjacent or immediately contiguous to the building that is reasonably necessary for its use and enjoyment as a place of residence for individuals.
The Regulations further clarify and limit the prohibitions to residential properties that are within:
i. Census agglomeration as defined within the meaning of the Statistics Canada document entitled Standard Geographical Classification.
ii. Census metropolitan area as defined within the meaning of the Statistics Canada document entitled Standard Geographical Classification.
The Act and Regulations only affect residential real estate and do not affect commercial real estate or land that is purchased for commercial real estate only and for non-residential use.
The prohibition does not apply to vacant lands, larger multi-unit buildings and commercial properties containing no dwelling units.
SECTION 2
Contravention of the Act and Regulation:
Contravention of the Act and Regulations is a criminal offence. Every non-Canadian that violates the Act and every person that counsels, induces, aids or abets or attempts to counsel, induce, aid or abet a non-Canadian to purchase a residential property is guilty of an offence and liable on summary conviction to a fine of not more than $10,000.00. [14]
If a corporation or an entity violates the Act, every person that directed, authorized, assented to, acquiesced in or participated in the commission of the offence is a party to the offence and liable for it [15] The party liable could be:
i. An officer, director or agent of the corporation or entity
ii. A senior official of the corporation or entity
iii. Any individual authorized to exercise managerial or supervisory functions on behalf of the corporation or entity.
If a non-Canadian is convicted of having contravened the Act, the Superior Court of the Province in which the residential property is situated, may order the residential property to be sold in the prescribed manner and prescribed conditions. The Minister may file an application in the Superior Court to sell the property. These prescribed conditions are further clarified under the Regulations. Under section 7(1) of the Regulations, an order may be made if the following conditions are met:
a. the non-Canadian is the owner of the residential property at the time the order is made;
b. notice has been given to every person who may be entitled to receive proceeds from the sale;
c. 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 of the contravention and the resulting conviction.
Section 7(2) of the Regulations provides that the proceeds of the sale are distributed in the following order:
a. The payment of the costs of the sale, including the costs incurred by the Minister in bringing the applications for the order and any unpaid fines by the non-Canadian under the Act.
b. The payment of those, other than the non-Canadian, who are entitled to receive the proceeds of the sale in amounts and according to the priorities that the superior court may determine.
c. The repayment of the non-Canadian of an amount that is not greater than the purchase price paid by the non-Canadian for the residential property;
d. The payments of any amount remaining to the Receiver General for Canada.
It is important to note that the contravention of the Act does not void the real estate transaction. Section 4 of the Act states that the contravention does not affect the validity of the sale of the residential property to which the contravention relates. If there is a contravention by a non-Canadian, the residential property will be sold by the Superior Court of Justice in accordance with the procedure stipulated in the Act and Regulation.
SECTION 3
Key Takeaways from the Act and Regulation
A critical analysis of the Act and the Regulations leads to the following:
1. Residential properties are limited to properties within a census agglomeration or a census metropolitan area.
2. Non-Canadians who are permitted to purchase residential properties must be aware that they will be subject to non-resident speculation tax as specified under the Land Transfer Tax Act.
3. The Act and the Regulations do not place any liability on those professions that are usually involved in residential real estate transactions like real estate agents, lawyers, brokers (real estate or mortgage) or title insurers. However, they are required to perform due diligence more strictly to know who their client is.
4. Agreements of Purchase and Sale entered into by non-Canadians are not invalidated or void. The contractual obligation remains.
5. Contravention and violation of the legislation is a criminal offence making the non-Canadian who violated the provisions of the Act and Regulation liable for a summary conviction to a fine not more than $10,000.00.
6. The Act and Regulations cannot be examined alone. They must be read in conjunction with other legislation, including the Immigration and Refugee Protection Act, Citizenship Act[16], Indian Act, and Income Tax Act.
In this article, I have tried to analyze the intent of the Act and Regulations that broadly aim at three key elements:
1. restrict the foreign buyer’s speculative investment
2. affordable housing for Canadian residents
3. reduction in home prices
However, whether this legislation fulfils these three key elements is yet to be seen.
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[1] Prohibition on the Purchase of Residential Property by Non-Canadians Act, S.C. 2022 c.10, s 235
[2] Prohibition on the Purchase of Residential Property by Non-Canadians Regulations, SOR/2022-250
[3] Section 4(1), supra note 1
[4] Section 4(1), supra note 2
[5] Section 2, supra note 1
[6] Section 2, supra note 1
[7] Indian Act (R.S.C., 1985, c. I-5)
[8] Income Tax Act (R.S.C., 1985, c. 1 (5th Supp.))
[9] id
[10] Section 4(2), supra note 1
[11] Immigration and Refugee Protection Act, S.C. 2001, c. 27
[12] Sections 5(a), 5 (b) and Section 6, supra note 1
[13] Section 4(2) supra note 1
[14] Section 6(1), supra note 1
[15] Section 6(2), supra note 1
[16] Citizenship Act (R.S.C., 1985, c. C-29)
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