Sweeping new federal restrictions on foreign acquisitions of residential real estate come in force

On January 1, 2023, the federal government’s Prohibition on the Purchase of Residential Property by Non-Canadians Act (the Act) and the associated Prohibition on the Purchase of Residential Property by Non-Canadians Regulations (the Regulations) came into effect.

The Act prohibits “non-Canadians”―which, by virtue of the Regulations, includes entities formed outside of Canada and Canadian entities with non-Canadian equity ownership of at least 3%―from directly or indirectly acquiring residential property in Canada for two years, until December 31, 2024.

Although the stated intention of the new law is to ensure that the domestic housing market remains available to Canadians and assist with affordability of residential property, the wide scope of the Act and Regulations, and the potentially broad application of these new legislative provisions, are expected to have a significant impact on both individual and business purchases of certain Canadian real estate assets.

What you need to know

• As of January 1, 2023, foreign individuals, entities formed outside of Canada, and Canadian entities “controlled” by foreign individuals or foreign entities are prohibited from purchasing residential real estate in certain specified urban geographic centres within Canada for two years.
• Control of an entity under the Act is defined to include the direct or indirect ownership of at least 3% of the equity value or voting rights of the entity, or “control in fact” through direct or indirect ownership, contractual agreement or otherwise.
• Significantly, while non-Canadians are not prohibited from acquiring larger residential buildings with multiple units, they are prohibited from acquiring vacant land in one of the prescribed urban geographic centres that is zoned for residential or mixed use.
• Certain limited exemptions exist, including transfers of real property resulting from the exercise of a security interest by a secured creditor.
• Contravention of the Act may result in a fine of up to $10,000, and a court-ordered sale of the property. Additionally, any directors, officers, managers, and agents (which would include counsel and other professional advisors) who directed, authorized, knowingly assisted or participated in the contravention of the ban may be found personally liable for such offence.

Who does the Act apply to?

Together, the Act and Regulations define non-Canadians broadly, including:

• individuals who are neither Canadian citizens, permanent residents of Canada, nor persons registered under the Indian Act;
• any entity formed outside of Canada (i.e., entities formed under the laws of a jurisdiction other than Canada or any of its provinces or territories); and
• any Canadian entity that is “controlled” by an entity formed outside of Canada, or by an individual who is not a Canadian citizen or permanent resident, which may include an entity whose equity interests are publicly traded in Canada¹;

Control is defined to include the direct or indirect ownership of at least 3% of the equity value or voting rights of an entity, or “control in fact” of the entity, whether directly or indirectly, through ownership, contractual agreement, or otherwise². This comparatively low threshold of “control”, as set out in the Regulations, would result in private Canadian corporations and limited partnerships with nominal foreign ownership being subject to the Act.

Notably, while the Act provides that Canadian corporations whose shares are publicly traded on a stock exchange in Canada would not be deemed to be non-Canadian for purposes of the prohibition, there is ambiguity as to whether Section 2(b) of the Regulations―which prescribes any entity which is controlled by a non-Canadian to be a non-Canadian―would capture public Canadian corporations³. While this appears to be an inadvertent and unintended consequence of the broad scope of section 2(b) of the Regulations, as currently drafted, a Canadian publicly traded corporation would be deemed to be a non-Canadian if at least 3% of its equity value or voting securities is owned by non-Canadians.

Finally, it is worth noting that the purported exemption for Canadian public corporations under the Act does not appear to extend to publicly traded partnerships, mutual fund trusts and real estate investment trusts.

What types of property are affected?

Residential property

The Act and Regulations limit the application of the ban to residential properties located within a municipality or grouping of municipalities of at least 10,000 people. More specifically, the property affected must be situated within a census metropolitan area (CMA) or census agglomeration areas (CA), as such terms are defined by Statistics Canada⁴.

A CMA consists of one or more adjacent municipalities of at least 100,000 people, of which 50,000 live within a “core” area. A CA consists of one or more adjacent municipalities having a “core” population of at least 10,000. Note that a CA and CMA may have multiple “cores”, and a municipality which is adjacent to the municipality or municipalities containing a “core” may be included in the CMA or CA based on the integration of such municipality with the “core” municipality, measured by commuting flows derived from data on place of work from the previous census. A link to Statistics Canada’s current reference map of CMAs and CA is provided here.

The Act defines “residential property” to include the following:

• a detached house or similar building containing three or fewer dwelling units;
• a part of a building that is a semi-detached house, rowhouse, residential condominium unit, or other similar premises intended to be owned apart from other units in the building; and
• land that does not contain any habitable dwelling, that is zoned for residential use or mixed use⁵.

To be considered residential property, it must also be located within a CMA or CA⁶.

Dwelling unit vs habitable dwelling and permitted use

The Act is not intended to prohibit the purchase by non-Canadians of residential property containing four or more dwelling units (e.g., apartment buildings, student housing residences or similar large multi-residence properties). Rather, the Act seeks to prohibit the purchase by non-Canadians of detached houses or residential lots containing three dwelling units or less. This will likely lead to significant complications for non-Canadians seeking to develop or redevelop residential and mixed-use lands as part of a land assembly process of smaller adjoining residential properties.

The Act defines a “dwelling unit” as a “residential unit that contains private kitchen facilities, a private bath and a private living area”. In contrast, section 3(2) of the Regulations, which establishes an additional set of “prescribed real property”, designates “land that does not contain any habitable dwelling [and] that is zoned for residential use or mixed use …” as “residential property” for purposes of the Act. Neither the Act nor the Regulations provides a definition of “habitable dwelling”. Accordingly, the rationale for the use of “habitable dwelling” in section 3(2) of the Regulations is unclear, particularly where the Act already references the defined term “dwelling unit”.

The likely explanation is that the federal government intended to expressly prohibit purchases by non-Canadians of vacant land situated in urban areas zoned for residential or mixed-use. The language of section 3(2) of the Regulations, however, and specifically, the use of “habitable dwelling”, may have the unintended consequence of capturing within the scope of “residential property” lands which are zoned for mixed-use but which are used exclusively for commercial or industrial purposes solely because they do not have a “habitable dwelling” thereon.

Moreover, there is further uncertainty as the Regulations are not clear on the determination of the zoning of a property. As such, it is possible that lands which may have been designated by a municipality in an official plan for residential or mixed use, but which have not yet been formally rezoned pursuant to a by-law for such purposes, may be subject to the Act. No definition of “mixed use” is contained in the Act or Regulations, though the presumption is that this is intended to capture zoning designations which permit residential use among other types of developments.

What constitutes a purchase?

The Regulations define purchase as the “acquisition, with or without conditions, of a legal or equitable interest or real right in a residential property”⁷. This broad definition could capture a variety of circumstances, including conditional agreements for the purchase of residential property and options to purchase residential property. Furthermore, whether the recharacterization of property previously purchased by way of a residential rezoning would fall within the scope of the ban remains to be seen.

In all cases the Act deals only with residential properties situated in a CA or CMA, so residential properties in most rural areas would not be subject to the restrictions.

Exemptions

The exemptions available under the Act are limited and predominantly aimed at individuals. Temporary foreign residents and refugees who meet certain defined criteria, foreign diplomats, and foreign individuals who purchase property with a spouse or common-law partner who is a Canadian citizen or permanent resident are all exempt from the Act⁸.

The Regulations include a limited exemption for lenders. Specifically, the acquisition of an interest in residential property resulting from the exercise of a security interest by a secured creditor would not constitute a purchase⁹. As such, a non-Canadian secured creditor would not be restricted from exercising any right of foreclosure or power of sale contained in security held on residential property.

Penalties and enforcement

Any person or entity that contravenes the ban, and every person or entity that knowingly assists someone in contravening the ban, may be liable to a fine of up to $10,000¹⁰. Notably, any officer, director, agent, mandatary, senior official or manager of a corporation or entity that contravenes the ban is personally liable if they directed, authorized, assented to, acquiesced in, or participated in the contravention¹¹. This potentially captures a wide range of professionals in the real estate industry, including real estate agents, lawyers, and other advisors.

Additionally, if a non-Canadian is found to have contravened the ban, the Minister of Housing and Diversity and Inclusion may, by application, seek an order of the superior court of the province in which the property is situated to sell the property subject to any terms that the superior court considers appropriate. Any order made must provide that the proceeds from such sale be distributed first to the Minister for the costs of the sale, the legal fees incurred thereby and any unpaid fines under the Act, second to those other than non-Canadians entitled to receive proceeds according to priorities determined by the superior court, third to the non-Canadian of an amount not greater than the purchase price paid, and lastly, to the Receiver General for Canada. In effect, such mandated sale would likely result in any profits realized from changes in market conditions be paid to the Government of Canada.

A look ahead

While the Act clearly meets the federal government’s stated intention of prohibiting the acquisition by non-Canadians of individual residences and residential property, it is the seemingly unintended consequences of the legislation (many of which arise from the recently published Regulations) which will be of most concern to the broader commercial real estate sector.

The expansive range of potential transactions which are prohibited by the Act and the Regulations has created a significant amount of ambiguity in the real estate industry, and potentially extends the ban to transactions which are unrelated to the acquisition of residential property. Analysis of the ban and its impacts is ongoing, but it appears that these new restrictions may have a significant chilling effect on parts of the Canadian commercial real estate market.

Finally, this scope of intervention by the federal government in real property transactions is unprecedented and may yet be subject to either constitutional challenge or dispute under the terms of one of Canada’s many international multi-lateral trade and investment treaties.