This column was originally published by Daniel Waldman on the Real Estate News Exchange (Renx.ca).
In the latest attempt to curb the price of residential real estate in Canada, Parliament has introduced a new statute aimed at making housing more affordable and accessible to Canadians. The Prohibition on the Purchase of Residential Property by Non-Canadians Act, S.C. 2022, c. 10, s. 235 (the “Act”) officially came into force on January 1, 2023 and is intended to remain in effect for a period of two years until December 31, 2024.
In a nutshell, the Act places prohibitions on non-Canadians from directly or indirectly purchasing residential property. However, those parameters are not as simple as they may sound. The nuances of the Act, its implications, and the penalties for violating it should be understood appreciated be those in the real estate industry to avoid ending up on the wrong end of a prohibited transaction.
What is a “Non-Canadian”?
For the purposes of the Act, “non-Canadians” do not just refer to foreign individuals. Rather the prohibition extends to people who are not citizens, permanent residents or who are not registered as Indians under the Indian Act. It also includes corporations which are not federally or provincially incorporated in Canada or formed under Canadian laws. The prohibition also extends to corporations which are or formed or incorporated under Canadian law if their shares are not listed on Canadian exchanges and they are controlled by non-Canadians. For clarity, a corporation is “controlled” either through share ownership or voting rights, or by “control in fact” of the company, through ownership, agreement or by some other means.
The Act has a few exemptions to the rules for non-Canadians. For instances, non-Canadian people are exempted if they purchase an asset with a Canadian spouse or common-law partner. Refugees and people granted resident status on humanitarian and compassionate grounds are also exempted, as are foreign states and nationals for diplomatic purposes. There are also exemptions for temporary residents if they satisfy certain prescribed conditions.
What is a “Residential Property”?
In terms of what constitutes a “residential property” under the Act, set parameters are also prescribed. In order for a property to qualify as “residential”, it must be either: (a) a detached house (or similar structure) that does not contain more than three dwelling units; (b) a townhouse, rowhouse, semi-detached house or condominium which is a separate and distinct parcel of land that is owned independently of other parcels in the building; and (c) land that is zoned for residential or mixed residential use, even is does not have a habitable structure on it.
However, there are exemptions to these rules for “rural” areas. The provisions in the Act for residential properties are only applicable to residential real estate located in “census metropolitan areas” and “census agglomerations”, which are cities are towns that exceed a certain population, as determined by Statistics Canada. There are about 150 urban areas in Canada which are currently recognized as such. A list of Canadian municipalities which qualify as “census metropolitan areas” and “census agglomerations” can be found here and a map of such areas can be found here.
Exemptions under the Act
The parameters set out in the Act are broad when it comes to “non-Canadians” and “residential properties”. But there are a few exemptions to get around the rules in some circumstances.
First, even though the Act came into force at the beginning of this year, transactions that were entered into before that time will not necessarily be caught. Therefore if a non-Canadian has entered into an agreement of purchase and sale for a residential property before January 1, 2023, the transaction may not be prohibited by the Act, even if the closing is after that date.
There are also certain transactions that are not deemed to be a “purchase” for the purposes of the Act and are therefore exempted. For instance, if a property is acquired as an interest of right from a death or divorce or by a gift, the transaction will not qualify as a purchase under the Act and is therefore exempted. Similarly, if a property is acquired from a transfer by way of a trust that was created before the Act came into force, it will also be exempted. Transfers that originate from security interests or rights by secured creditors are exempted as well.
Penalties for Violating the Act
If the Act is violated by purchasing properties contrary to its terms, the purchaser can be liable for fines and penalties.
The Act will be violated not only by non-Canadians purchasing property, but also by counseling, inducing or helping (or attempting to help) a non-Canadian purchase residential real estate, while knowing they are prohibited from doing so. This prohibition also applies to principals and managers of corporations who authorize or acquiesce to such actions.
Individuals and corporations who contravene the Act will be guilty of an offence and may have to pay a fine of up to $10,000. Corporate officers and directors can be convicted under the Act even if the corporation itself is not.
If a transaction is held to violate the Act, the sale will not necessarily be voided. As such, if a transaction contravenes the Act, parties are not relieved of their obligations to complete the deal. However, there are some instances where a court can order that a property can be sold if it was purchased in violation of the Act.
Be Wary and Protect yourself
Given the wide parameters set out by the Act, caution should be exercised before entering into transactions for residential properties if the purchaser could be deemed to be a non-Canadian.
It should be noted that the penalties under the Act do not only apply to actual purchasers, but can also be levied on real estate agents, brokers, lawyers, notaries and salespeople working for development companies. As such, if there is any suspicion that a transaction would violate the Act, purchasers would be wise to consult a lawyer beforehand to ensure that the applicable party is not a non-Canadian and/or that the property in question is located outside of the affected areas.
Also, to protect themselves, sellers should consider having purchasers execute representations and warranties to confirm that the transaction complies with the Act. Specifically, sellers should obtain written representations from purchasers, which confirm that they are not non-Canadians for the purposes of the Act.
What will happen with the Act over its two-year application and beyond remains to be seen. It may be modified or challenged if it does not function on a practical level. Until then, however, purchasers of residential real estate should take it seriously to avoid being subject to its penalties.
About the Author:
Daniel Waldman is Of Counsel in the firm’s Toronto office. He has a broad commercial litigation practice with an emphasis on real property litigation, including commercial leasing, commercial real estate, construction law, and debt collection. Daniel can be reached at 416-644-2838 or email@example.com. To read his full bio, please click here.