Canada Relaxes Restrictions on Non-Canadians Buying Residential Property

On March 27, 2023, the federal government announced amendments intended to relax the restrictions on non-Canadians purchasing residential property in certain circumstances.

These amendments came into force as of March 27, 2023, and are in response to concerns raised by several real estate industry groups to address unintended restrictions that resulted from the initial regulations, the Prohibition on the Purchase of Residential Property by Non-Canadians Regulations (Regulations).

The Regulations had come into force on January 1, 2023, in tandem with the Prohibition on the Purchase of Residential Property by Non-Canadians Act (Act). They are effective for two years and prohibit non-Canadians from purchasing residential property.

The broad scope of the Act and Regulations and ambiguity in definitions resulted in uncertainty on several commercial property acquisitions and lending transactions.

Industry groups identified some key challenges with the Act and the Regulations, such as:

1. The definition of non-Canadian with respect to corporate entities was set at a very low threshold, being 3% control by non-Canadians, and although there was an exemption for publicly traded corporations listed in Canada, such exemption only applied to corporations, resulting in other publicly traded entities that are not corporations such as REITs, funds and trusts not being exempt where they might otherwise be considered Canadian

2. The definition of residential property included mixed-use land as potentially being caught under the prohibition of the Act, including properties used for purely commercial purposes that had mixed use zoning

3. Uncertainty as to whether loans to Canadians or non-Canadians and by non-Canadian lenders were restricted by the Act and the Regulations.

The amendments announced in March 2023 (Amendments) clarify the application of the Act and the Regulations on these issues, and other issues. In addition, the Canada Mortgage and Housing Corporation (CMHC), which was instrumental in drafting the Act, Regulations and Amendments, published several new FAQs, which give further guidance. The CMHC FAQs are not considered law but provide a plain-language guide to interpreting the Act, Regulations and Amendments.

MIXED-USE ZONING RESTRICTIONS, DEVELOPMENT EXCEPTIONS

As part of the Regulations, land containing no dwelling units but zoned for residential or mixed use, and located in census agglomeration or census metropolitan area, was designated as “prescribed real property or immovable” and was not permitted to be purchased by non-Canadians under the Act. This provision has been repealed by the Amendments, allowing non-Canadians to purchase land containing no dwelling units irrespective of whether the zoning allows residential use on such land. As a result, commercial properties such as office buildings, shopping malls and industrial facilities are not caught by the Act, provided there are no dwelling units on the premises.

The Act and the Regulations continue to prohibit the acquisition by non-Canadians of buildings containing one to three dwelling units and therefore do not apply to larger, multi-unit rental buildings containing four or more separate dwelling units. The Act will continue to apply to buildings containing multiple units if they are intended to be separate parcels such as semi-detached houses, rowhouses or residential condominium units.

The Amendments also added a new specific exception in the Regulations, which allows non-Canadians to acquire residential property for the purposes of development without triggering the prohibition under the Act. The CHMC FAQs clarify that there must be clear evidence of intent to develop the property prior to the acquisition of the property such as consultant reports or correspondence or plans relating to development. The failure to develop the property may not breach the Act, but this should be considered in each circumstance. Prospective non-Canadian developers should be prepared to demonstrate good faith intentions to develop the purchased land, and any subsequent change that led to a good faith decision not to pursue the development.

FOREIGN CONTROL

The Act and the Regulations define non-Canadians as including privately held entities formed under federal or provincial laws, that are controlled by a non-Canadian individual or entity. Under the initial Regulations, “control” was defined as direct or indirect ownership of shares or interest of an entity, representing 3% or more of the value of its equity, or 3% or more of its voting rights. The Amendments have increased the threshold for the definition of control from 3% to 10%, allowing for entities to have a higher share of foreign interest before the prohibition under the Act is triggered.

Additionally, the Amendments have extended the exception to the Act currently applicable to publicly traded corporations. Now, publicly traded entities formed under federal or provincial laws, which are listed on a stock exchange in Canada designated by Canada’s Minister of Finance (as permitted under the Income Tax Act) and controlled by a non-Canadian are exempted from the application of the Act.

The CHMC FAQs clarify that the Act and Regulations do not apply to a REIT if it is:

1. Formed under Canada’s federal or provincial laws and is publicly traded on a stock exchange in Canada, whether or not controlled by a non-Canadian

2. Formed under Canada’s federal or provincial laws and is not publicly traded on a stock exchange in Canada, provided no non-Canadian has 10% or more control

3. Purchasing residential property for the purposes of development, irrespective of whether it is: privately held or publicly traded; and controlled by a non-Canadian.

REITs that do not meet the criteria above, or are privately held and of which a non-Canadian has 10% or more control, are still prohibited from purchasing residential real estate under the Act.

LENDING

While there is nothing in the Amendments to clarify that mortgage lending over residential property is not prohibited, the CMHC FAQs do provide some guidance. The responses in the CMHC FAQs state that the taking of a mortgage, hypothec or other security by a non-Canadian lender would not breach the Act unless the non-Canadian lender was providing the loan to assist a non-Canadian in acquiring residential property that would otherwise be an offence under the Act.

Providing a loan to a non-Canadian who already owns residential property is not in itself seen as a breach of the Act, unless it assists the non-Canadian to purchase, directly or indirectly, any residential property that contravenes the Act. This suggests that enforcement of the Act over lenders may be analyzed through the offence provisions of the Act, which provide that any person or entity that aids or abets a non-Canadian to breach the prohibitions in the Act is itself in breach of the Act.

TEMPORARY RESIDENTS

The Amendments will also allow those who hold a work permit or are otherwise authorized to work in Canada under the Immigration and Refugee Protection Regulations to purchase residential property on far less stringent conditions. Work permit holders will be eligible if they have 183 days or more of validity remaining on their work permit or work authorization at time of purchase, provided the purchase price of the residential property does not exceed C$500,000 and they have not purchased more than one residential property. Temporary residents will no longer be required to have filed their income tax returns, nor have worked in Canada for a minimum of three years within a four-year period preceding the year the purchase is made, to qualify for this exemption from the Act.

ENFORCEMENT

The Act maintains that a breach of the prohibitions in the Act is a criminal offence. Any person or entity aiding or abetting a breach of the Act is liable to a fine up to C$10,000 and any officer or director of a corporation that breaches or aids in a breach of the Act will likewise be liable for the criminal offence.

A court finding that a person has breached the Act and acquired residential property in violation of the prohibition in the Act can order sale of the property and the non-Canadian who has breached the Act will only receive the amount it paid to purchase the residential property and the remaining going to the Government of Canada.

For further information, please contact:

Greg Umbach                             604-631-3378
Jenny Ross                                  514-982-4112
Patrick Gordon                           416-863-3276
Rasheed Abouhassan                604-631-4155

or any other member of our Commercial Real Estate group.