Update: major changes to new federal restrictions on foreign acquisitions of residential property

Earlier this year we wrote about the wide scope and unintended effects of 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 New Regulations). We noted that the broad definition of “residential property”, low foreign ownership threshold and limited exemptions for publicly traded entities were impacting many transactions of commercial real estate and appeared to be having a chilling effect on the broader commercial real estate market.

Appearing to recognize these unintended consequences, the Minister of Housing and Diversity and Inclusion announced on March 27 certain amendments to the Regulations in the Regulations Amending the Prohibition on the Purchase of Residential Property by Non-Canadians Regulations (the New Regulations). The New Regulations appear to address the majority of the concerns raised by stakeholders from the commercial real estate industry and are a welcome development. The New Regulations have been supplemented by additional frequently asked questions (FAQ) issued by Canada Mortgage and Housing Corporation (CMHC), which provide useful guidance on both the interpretation and the implementation of the Act and Regulations.

What you need to know

• On March 27 the federal government released amendments to the Prohibition on the Purchase of Residential Property by Non-Canadians Regulations. These amendments came into force on the day they were released.
• The New Regulations include the following amendments:
  • repeal of the previous regulation (section 3(2)) that prohibited the purchase by non-Canadians of lands zoned for residential use or mixed use but that contained no habitable dwelling;
  • clarification of the exemption for publicly traded Canadian corporations trading on a Canadian stock exchange, extending it to certain other publicly traded vehicles (such as Canadian public REITS); and
  • the increase of the control threshold for direct or indirect foreign ownership—from 3% to 10%.
• Furthermore, an additional exemption to the prohibition was added that permits non-Canadians to purchase residential property for the purposes of development.

Repeal of prohibition against acquisition of residential/mixed-use lands with no habitable dwelling

One of the most significant provisions in the previous Regulations stated that “… land that does not contain any habitable dwelling, that is zoned for residential use or mixed use, and that is located within a census agglomeration or a census metropolitan area …” was deemed to be residential property for purposes of the Act¹. This had the unintended consequence of capturing lands which were zoned for mixed use but were used exclusively for commercial, industrial or other non-residential purposes solely because they contained no “habitable dwelling”. The New Regulations have resolved this issue by repealing the provision. With this provision removed, non-Canadians can now freely acquire lands which do not contain any habitable dwelling and are zoned for residential use or mixed use.

Change in the definition of “control”

Prior to March 27, the definition of “control”, for the purposes of deeming an entity to be “non-Canadian” under the Act, included the direct or indirect ownership of at least 3% of the equity value or voting rights of an entity, or “control in fact” of such entity². This low threshold of control had the effect of capturing private Canadian corporations and limited partnerships with nominal foreign ownership and prohibiting these entities from purchasing residential property. The New Regulations increase this control threshold to 10% of the equity value or voting rights of an entity³. While this is a fairly significant increase, it is still a low threshold, and market participants will have to remain aware that a small amount of ownership by a foreigner could result in being deemed “non-Canadian” under the Act.

Clarification of Canadian public entity exemption

A significant complaint regarding the Regulations was that while there was a distinct carve-out in the Act stating that domestic public corporations trading on a stock exchange in Canada would not be deemed to be non-Canadian, the Regulations at section 2(b) created ambiguity by prescribing that any Canadian entity controlled by a non-Canadian―including a Canadian public corporation―would be deemed to be non-Canadian. This seemingly eliminated the exemption under the Act.

Another critique of the Act and Regulations was that the foregoing exemption for Canadian public corporations, without considering the ambiguity in section 2(b) of the Regulations, did not extend to other Canadian entities with publicly traded ownership interests, such as REITs, mutual funds or other ownership vehicles commonly used in the commercial real estate space.

The New Regulations address these points by amending section 2(b) of the Regulations to exempt all Canadian entities listed on a Canadian stock exchange from being considered non-Canadian⁴. Regarding REITs, CMHC has further clarified in its FAQ that the prohibition does not apply to such investment vehicles if it is:

• formed under the laws of Canada or a province, is publicly traded on a stock exchange in Canada and is controlled by a non-Canadian;
• formed under the laws of Canada or a province, is not publicly traded on a stock exchange in Canada and less than 10% of it is controlled by a non-Canadian; or
• purchasing residential property for the purposes of development irrespective if it is privately held or publicly traded.  

Note that the prohibition continues to apply to non-Canadian REITS and Canadian REITs which are not publicly traded on a stock exchange in Canada if 10% or more of the REIT is controlled by a non-Canadian.

Exception for development purposes

The New Regulations also add an exception to the definition of “purchase” which allows non-Canadians to purchase residential property for “… the purposes of development”⁵. This new exception effectively allows non-Canadians to purchase residential property so long as that property is being acquired with the good faith intention of developing it.

This is a welcome addition for market participants, as it allows for land assemblies, site acquisitions and other acquisitions of development sites to proceed in the normal course. Further guidance on the application and interpretation of this exemption is provided by CMHC here. The exemption for development specifically would not apply to the purchase by a non-Canadian for the mere purpose of leasing or renting the property or managing the property as part of a portfolio or for simply undertaking repairs, renovations or other similar modifications.

One residential category that remains prohibited

The Act continues to prohibit the purchase by non-Canadians of houses and buildings containing three or fewer dwelling units and other residential buildings such as semi-detached houses, rowhouse units, residential condominium units or other premises which are, or intended to be, a separate parcel or similar residential property. Acquisitions by non-Canadians of residential buildings containing four or more dwelling units (such as apartment blocks or towers) remain permissible under the Act.

A look ahead

The New Regulations appear to have been warmly welcomed by the industry and address the majority of concerns previously raised by stakeholders. They also bring much needed certainty and clarity to the Act by limiting the effect of the legislation to its intended purpose of ensuring housing stock is available to Canadians, namely by prohibiting non-Canadians, in most instances, from purchasing residential property.