What You Need To Know Re: The New Prohibition On Foreign Purchases Of Real Estate – Real Estate

The Government of Canada has enacted the Prohibition on the
Purchase of Residential Property by Non-Canadians Act (the
“Act“) which came into effect January 1,
2023. The Act prohibits the “purchase” of any
“residential property” directly or indirectly by
“non-Canadians.”; It is presently only intended to be in
effect for the calendar years 2023 and 2024. The Prohibition on
the Purchase of Residential Property by Non-Canadians
Regulations (the “Regulations“),
released on December 21, 2022, provide additional detail on key
elements of the Act.

While the stated intention of the Act is to make homes more
affordable for people living in Canada by excluding foreign buyers,
the Regulations include certain provisions that may have
significant unexpected (and arguably unintended) implications for
commercial property transactions.

Implications of the Act

The Act provides that “it is prohibited for a
non-Canadian to purchase, directly, or
indirectly, any residential property.”

The Act defines “non-Canadian” as:

The Act defines “residential property” as:

The Act states every non-Canadian that contravenes the Act will
be guilty of an offence. 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 is guilty of
an offence and will be subject to a fine of not more than
$10,000.

While a contravention of the Act does not render a sale itself
invalid, the government may ask a court to order the sale of a
residential property purchased in contravention of the Act. In such
an event, the non-Canadian purchaser will receive no more than the
purchase price of the residential property.

Implications of the Regulations

The Regulations provide guidance on the Act’s operation,
applicability, and enforcement. They significantly expand the scope
of the Act and its potential consequences on commercial
transactions. To understand these consequences, the following
aspects of the Regulations must be considered: (i) the expanded
definition of “residential properties”, (ii) control by a
non-Canadian, and (iii) the broad definition of
“purchase”.

(i) Expanded Definition of “Residential
Properties”

The Regulations state “residential property” includes
all 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.”
On their face, the Regulations could be argued to significantly
expand the definition of “residential property” to
include all land, whether vacant or not, that is zoned “mixed
use” in many population centres in Canada.¹

(ii) Control by a Non-Canadian

The definition of “control” in the Regulations will
cause many entities in commercial real estate transactions to be
caught under the prohibition even though they would not regularly
be considered a “non-Canadian.” The Regulations define
“control” to include “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% or more of its voting rights”, or control in fact
of the corporation or entity, whether directly or indirectly,
through ownership, agreement or otherwise.

The threshold of a 3% direct or indirect ownership interest by
any non-Canadian in an entity that has been formed under Canadian
laws is very low, which will cause many Canadian corporations,
partnerships and trusts to be captured by the prohibition.

Further, in addition to corporations, the Regulations expand the
prohibition to capture partnerships, trusts and other persons who
are not individuals or corporations.

Although there is an exception for publicly traded corporations
that would otherwise be non-Canadian, the exemption does not cover
non-corporations that are publicly traded, such as real estate
investment trusts, that are non-Canadian as a result of the
definition of control.

(iii) Broad Definition of “Purchase”

The Regulations provide that a “purchase” includes
“the acquisition, with or without conditions, of a legal or
equitable interest or a real right in a residential property.”
This broad definition may apply to almost any direct or indirect
acquisition, including the acquisition of shares, limited
partnership interests, or other interests in an entity that owns
“residential property.” Unfortunately, the majority of
the exemptions provided for in the Regulations do not apply in most
commercial contexts. That said, there is an exception where the
non-Canadian assumed liability for the residential property under
an agreement of purchase and sale prior to January 1, 2023. There
is also an exemption for transfers resulting from the enforcement
of security by a secured creditor.

Looking Forward

The Act and Regulations will have significant implications on
commercial transactions in Canada and will likely prohibit many
transactions that were likely not intended to be captured by the
legislation. As a result, we understand that a consortium of real
estate participants has been established to lobby the federal
government for revisions to address these issues. In the meantime,
given the broad application and significant implications associated
with the new legislation, anyone who may be impacted by it should
seek legal advice.

For further information, please contact any member of our Real Estate Group.

The authors would like to thank Jaclyn
Jesin-Neuberger, Articling Student-At-Law, for her
assistance in writing this Update.

Footnote

1. his includes major centres such as Vancouver, Toronto
and Montreal, but also many smaller centres such as Kelowna,
Peterborough, and Sherbrooke are captured under the
definition.

The content of this article does not constitute legal advice
and should not be relied on in that way. Specific advice should be
sought about your specific circumstances.