Real Estate Law Blog

Introduction

Earlier this year, the federal government introduced the Prohibition on the Purchase of Residential Property by Non-Canadians Act (the “Act”)^[1], which comes into force on January 1, 2023. The stated purpose of the Act is to address Canada’s housing affordability crisis.

The Prohibition

The Act will prohibit non-Canadians from purchasing residential property anywhere in Canada, directly or indirectly^[2], for a period of two years ending December 31, 2024 (the “Prohibition”).

Non-Canadians are defined in the Act^[3] as:

1. an individual who is neither a Canadian citizen nor a person registered as an Indian under the Indian Act^[4] nor a permanent resident;
2. a corporation that is neither incorporated under the laws of Canada nor of a province;
3. a private corporation incorporated under the laws of Canada or a province and that is controlled by a person referred to in paragraph (a) or (b) above; and
4. a prescribed person or entity.

The Prohibition on the Purchase of Residential Property by Non-Canadians Regulations^[5] (the “Regulations”), issued on December 21, 2022 and which come into force on January 1, 2023, have clarified provisions in the Act which previously raised uncertainty.

Under the Regulations, entities that were not formed under the laws of Canada or a province, and entities that were formed under the laws of Canada or a province but are controlled by (1) an entity that was not formed under the laws of Canada or a province; or (2) one of (a), (b) or (c) listed above, are all prescribed as non-Canadian.^[6]

The Regulations also clarified the meaning of “control”^[7] under the Act. With respect to a corporation or entity, “control” means either:

1. 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
2.  “control in fact” of the corporation or entity (meaning having power and influence over the corporation or entity), whether directly or indirectly, through ownership, agreement, or otherwise.

The Prohibition ultimately applies to highly populated areas. Under the Act and Regulations, “residential property”^[8] means any real property or immovable (other than real property that is located in an area of Canada that is not within either a census agglomeration or a census metropolitan area^[9]) that is situated in Canada and:

1. is a detached house or similar building, containing three or less dwelling units;
2. is a part of a building that is a semi-detached house, rowhouse unit, residential condominium unit or other similar premises that is, or is intended to be, a separate parcel or other division of real property or immovable owned, or intended to be owned, apart from any other unit in the building; or
3. does not contain any habitable dwelling (e.g. bare land), is zoned for residential use or mixed use, and is located within a census agglomeration or a census metropolitan area.^[10]

The Regulations also confirmed that the acquisition (with or without conditions) of a legal or equitable interest or a real right in a residential property constitutes a “purchase” under the Act.^[11]

Exceptions

There are, however, exceptions to the Prohibition. The following circumstances^[12] do not constitute a “purchase” under the Act:

1. acquiring an interest or a real right in a residential property resulting from death, divorce, separation or a gift;
2. renting to a tenant, for the tenant’s occupation;
3. transferring a residential property under the terms of a trust created prior to January 1, 2023; or
4. transferring a residential property as a result of the exercise of a security interest or right by a secured creditor.

Further, the Act will not apply to the following classes of persons:

a). a temporary resident^[13] within the meaning of the Immigration and Refugee Protection Act^[14] (the “Immigration Act”) who is either:

i). enrolled in a program of authorized study at a designated learning institution and:

1. have filed all required income tax returns for each of the five taxation years preceding the year in which the purchase was made;
2. were physically present in Canada for a minimum of 244 days in each of the five calendar years preceding the year in which the purchase was made;
3. the purchase price of the residential property does not exceed $500,000; and
4. have not purchased more than one residential property; or

ii). authorized to work in Canada under the Immigration and Refugee Protection Regulations or hold a work permit, and:

1. have worked in Canada for a minimum period of three years within the four years preceding the year in which the purchase was made, if the work is full-time work;
2. have filed all required income tax returns for a minimum of three of the four taxation years preceding the year in which the purchase was made; and
3. have not purchased more than one residential property;

b). a protected person within the meaning of the Immigration Act^[15];

c). an individual who is a non-Canadian and who purchases residential property in Canada with their spouse or common-law partner if the spouse or common-law partner is a Canadian citizen, person registered as an Indian under the Indian Act, permanent resident, or person referred to in paragraph (a) or (b)^[16];

d). foreign states purchasing residential property for diplomatic or consular purposes^[17];

e). foreign nationals who hold a passport that contains a valid diplomatic, consular, official or special representative acceptance issued by the Chief of Protocol for the Department of Foreign Affairs, Trade and Development^[18];

f). foreign nationals with valid temporary resident status, whose temporary resident visa was issued or granted following an exemption under the Immigration Act, if the Minister of Housing and Diversity and Inclusion decides that the exemption was justified based on public policy considerations to provide safe haven to those fleeing conflict^[19]; or

g). persons that have made a claim for refugee protection in accordance with the Immigration Act, if that claim has been found eligible and referred to the Refugee Protection Division under the Immigration Act.^[20]

The Regulations also confirmed that the Prohibition will not apply if it is incompatible with the existing aboriginal and treaty rights of the aboriginal peoples of Canada (which includes the Indian, Inuit, and Métis peoples).^[21]

Additionally, vendors can rest assured that the Prohibition will not apply to purchase and sale agreements that were entered into prior to January 1, 2023.^[22]

Offences and Penalties

Those who contravene the Act are guilty of an offence and may be subject to a maximum fine of $10,000.^[23] This penalty not only applies to non-Canadians, but also to every person or entity that attempts to or actually counsels, induces, aids or abets a non-Canadian to purchase, directly or indirectly, any residential property knowing that the non-Canadian is prohibited from purchasing the residential property under the Act.^[24] Any director, officer, senior official, agent, or anyone authorized to exercise managerial or supervisory functions on behalf of the entity who may have directed, authorized, facilitated or participated in the contravention will be personally liable in the offence.^[25]

It is uncertain what constitutes “counselling, inducing, aiding or abetting” under these circumstances. Anyone involved in real estate transactions (e.g. developers, builders, vendors, realtors, brokers, lawyers, and other advisors) should be cautious when entering into or advising on a potential transaction, and should make reasonable inquiries, where applicable, to ensure that the purchaser(s) is not a non-Canadian.

We encourage developers to (a) update their forms of purchase and sale agreement to contain representations from purchasers that they are not non-Canadians within the meaning of the Act; and (b) require all prospective purchasers to sign a statutory declaration declaring the same. Further, developers should ensure that their sales and marketing teams are familiar with the relevant provisions in the Act and the Regulations.

While contravention of the Act does not invalidate a sale^[26], the superior court of the province in which the residential property is situated (the “Court”) may order that the residential property be sold^[27] if the following conditions are met^[28]:

1. the non-Canadian owns the residential property at the time the order is made;
2. notice has been given to everyone who may be entitled to receive proceeds from the sale; and
3. the Court 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.

Such orders must provide that the proceeds of the sale are distributed in the following sequence^[29]:

1. the payment of the costs of the sale, including the costs incurred by the Minister of Housing and Diversity and Inclusion in bringing the application for the order and any unpaid fines by the non-Canadian under the Act;
2. the payment of those, other than the non-Canadian, who are entitled to receive the proceeds of the sale in amounts and according to priorities that the Court may determine;
3. the repayment of the non-Canadian of an amount not greater than the purchase price that the non-Canadian paid for the residential property; and
4. the payment of any amount remaining to the Receiver General for Canada.

Additional Considerations

The Prohibition raises an interesting constitutional question. Under section 92 of the Constitution Act, 1867^[30] (the “Constitution Act”), property rights are within the provincial jurisdiction. Since the Act imposes an offence and a penalty, the federal government may take the view that it is criminal in nature and thus under the federal jurisdiction in section 91 of the Constitution Act. The fact that the Act does not invalidate a sale or purchase per se may be relevant in this analysis.

Setting aside the constitutional question, a key consideration is whether the Act will meet its stated aim, which is to help address housing affordability. Notably, it offers no measures which directly increase housing supply in Canada. Measuring the impact of the Act will also be difficult: in a climate of rising interest rates and economic uncertainty, how will policy makers judge whether the Act has had an impact?

For any inquiries regarding this topic, please contact the writers or any other member of Lawson Lundell LLP’s Real Estate Group.

_{[1] Prohibition on the Purchase of Residential Property by Non-Canadians Act, SC 2022, c 10, s 235 [Act].}

_{[2] Ibid, s 4(1).}

_{[3] Ibid, s 2.}

_{[4] Indian Act, RSC 1985, c I-5.}

_{[5] Prohibition on the Purchase of Residential Property by Non-Canadians Regulations, SOR/2022-250 [Regulations].}

_{[6] Ibid, s 2.}

_{[7] Ibid, s 1.}

_{[8] Act, supra note 1, s 2.}

_{[9] Regulations, supra note 5, s 3(1). “Census agglomeration” means a census agglomeration within the meaning of the Statistics Canada document entitled Standard Geographical Classification (SGC) 2021, and “census metropolitan area” means a census metropolitan area within the meaning of the Statistics Canada document entitled Standard Geographical Classification (SGC) 2021.}

_{[10] Ibid, s 3(2).}

_{[11] Ibid, s 4(1).}

_{[12] Ibid, s 4(2).}

_{[13] Ibid, s 5.}

_{[14] Immigration and Refugee Protection Act, SC 2001, c 27 [Immigration Act].}

_{[15] Act, supra note 1, s 4(2)(b).}

_{[16] Ibid, s 4(2)(c).}

_{[17] Ibid, s 4(4).}

_{[18] Regulations, supra note 5, s 6(a).}

_{[19] Ibid, s 6(b).}

_{[20] Ibid, s 6(c).}

_{[21] Ibid, s 8.}

_{[22] Act, supra note 1, s 4(5).}

_{[23] Ibid, s 6(1).}

_{[24] Ibid.}

_{[25] Ibid, s 6(2).}

_{[26] Ibid, s 5.}

_{[27] Ibid, s 7(1).}

_{[28] Regulations, supra note 5, s 7(1).}

_{[29] Ibid, s 7(2).}

_{[30] Constitution Act, 1867 (UK), 30 & 31 Vict, c 3, reprinted in RSC 1985, App II, No 5 [Constitution Act].}