The Canadian government recently passed the Prohibition on the Purchase of Residential Property by Non-Canadians Act ("Act"). The Act, which comes into force on January 1, 2023, prohibits non-Canadians from directly or indirectly purchasing residential property (or property that includes residential property) anywhere in Canada. The legislative scheme is not fully developed, leaving many unintended consequences to foreign purchasers, lawyers, brokers, lenders and possibly trustees in charge of real property.
The government's short consultation process inferred an intention to restrict the Act to a two-year prohibition and exclude recreational properties outside of larger urban centres, but these would be the subject of future regulations (which, as of December 10, 2022 have not yet been proclaimed). As such, the prohibition is very broad and will capture much more than what the Federal Government likely intended with this legislation.
The prohibition, generally
The Act defines non-Canadian and residential property as summarized below:
A Non-Canadian is:
(a) an individual who is not: (i) a Canadian citizen; (ii) a person registered as an Indian under the Indian Act; or (iii) a permanent resident;
(b) a corporation that has not been incorporated under the laws of Canada or a province;
(c) a corporation incorporated under the laws of Canada or a province that is "controlled" by foreign corporations or foreign individuals; and
(d) a prescribed person or entity.
Residential property means any real property or immovable, other than a prescribed real property or immovable, that is situated in Canada and that is:
(a) a detached house or similar building, containing not more than three dwelling units;
(b) a part of a building that is a semi-detached house, row house unit, residential condominium unit or other similar premises that are intended to be owned separately from other units in the building; or
(c) any prescribed real property or immovable.
Liability
The Act prohibits a non-Canadian from purchasing, directly or indirectly, any Residential Property, and makes it an offence (with a maximum fine of $10,000) for any individual, corporation or entity to breach the Act or counsels, induces, aids or abets or attempts to counsel, induce, aid or abet in a contravention of the Act. Directors, officers, agents, senior officials, managers and supervisors of corporations or other entities can also be found liable if they aid or authorize the corporation or entity to commit or aid in the offence, regardless of whether the corporation or entity has been prosecuted or convicted.
As currently passed without regulations, the Act would prevent a non-Canadian from purchasing any property in Canada that contains 3 or fewer dwelling units. Non-residential property that has residential uses/dwelling units would fall under the prohibition, particularly in Ontario where the Planning Act would otherwise make it impossible to sever the residential from the non-residential uses.
Other key concepts and definitions are not expanded upon or included in the Act, until the regulations are proclaimed. For example, what constitutes a "purchase" for the purposes of the prohibition? Exchange of consideration where a non-Canadian receives an ownership interest in residential property would presumably be captured. This includes land exchanges or buying out other beneficiary interests in a distribution of a gift of land that includes residential property. There is no definition of "control" but the government has suggested it could deem a non-Canadian to have 'control' of a corporation if a non-Canadian shareholder owns more than 3 per cent of the shares in that corporation. Such a very low threshold would be a challenge to ascertain and is overly broad.
Exemptions
There are, however, narrow exemptions under the Act. The Act does not apply to:
(a) temporary residents under the Immigration and Refugee Protection Act;
(b) non-Canadians who purchase residential property with a spouse or common-law partner if the spouse or common-law partner is a Canadian citizen, a person registered as an Indian under the Indian Act, or a permanent resident of Canada; and,
(c) foreign states purchasing for diplomatic or consular purposes.
Agreements signed before January 1, 2023 will not be subject to the prohibition (as long as parties are committed and liable under the agreement) and any sales of residential property contravening the Act will continue to be valid and enforceable. However, if a non-Canadian is found liable under the Act, the Minister may apply to the Superior Court of the province in which the purchase occurred and order the residential property be sold. The Act is silent on this process and what happens to the proceeds following the forced sale, deferring to the regulations.
Concerning implications
The real concern and implications of the Act, at this stage, is the apparent placement of risk and liability on those surrounding the residential real estate transaction itself. Lawyers, real estate agents, brokers (real estate, business, mortgage, etc.), trustees, administrators, lenders, title insurers and intermediaries should all be cognizant that facilitating a residential real estate transaction to a non-Canadian can implicate them and lead to a fine. Significant extra due diligence is required to investigate purchasers, regardless of the side of the transaction in which they are involved.
The Act does not allow a non-Canadian purchaser who has entered into a prohibited transaction to rescind the agreement and the Act does not invalidate a sale to a non-Canadian. It is unclear what the purchaser can or ought to do in that situation, possibly leading to a negotiated release of the transaction after accounting for the vendor's costs or potential damages.
A significant challenge the Act brings is how it can be implemented and enforced across the country. The rights the Act seeks to curtail are within the jurisdiction of the Provincial governments (property and civil rights) and each province has its own systems, laws and processes to address the acquisition, disposition, registration and enforcement of real property. It is not consistent across the country and what may be permissible in one province may be prohibited in another, simply because of the way in which each province regulates property interests. This inconsistency may result in a discriminatory application of the Act and, depending on various factors, move non-Canadian purchasers to focus efforts in certain provinces that may enable acquisition of real property within the intent of the Act.
Unfortunately, there are no clear answers. The Act defers too much to the regulations which have not been disclosed and are not in effect. There is no consideration of the fact that some provinces, including British Columbia and Ontario, currently have non-resident taxes on the purchase of residential property in those provinces; the Act will have implications on that tax revenue and reporting requirement. Until then, non-Canadians, and anyone who is advising them, should explain to a non-Canadian who is interested in purchasing property in Canada that they are not able to do so, they are not able to set up a trust or nominee to do it on their behalf, and that process to home ownership in Canada for a non-Canadian has just become exponentially more difficult to attain.
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