In response to rising housing prices, Parliament passed the Prohibition on the purchase of residential property by non-Canadians Act (the "Act") in 2022. Intended to be in effect during the calendar years 2023 and 2024 only, the Act prohibits non-Canadian individuals and entities from purchasing, directly or indirectly, individual dwellings (such as detached houses containing up to 3 residential units, semi-detached houses, individual row house units and individual condominium units). The legislation is not aimed at corporate ownership of larger multi-family residential developments.
The legislation imposes fines, including on those who knowingly participate or assist in the purchase of residential real estate by a non-Canadian.
The Act prohibits non-Canadians from directly or indirectly purchasing residential real estate in Canada from January 1, 2023 to December 31, 2024. The prohibition generally does not apply outside of urban areas (as defined in the legislation).
This prohibition is predicated on a number of definitions that are included in the Act or in the associated regulation adopted on December 2, 2022 ("the Regulation").
Any acquisition, with or without conditions, of a legal or equitable interest, or real right, in residential property, constitutes a purchase.
A "non-Canadian" includes the following individuals, corporations and entities:
- an individual who is not a Canadian citizen, permanent resident of Canada or registered as an Indian under the Indian Act;
- a corporation that is not incorporated under the laws of Canada or a province;
- a corporation that is incorporated under the laws of Canada or a province, if (and only if), it is both (i) not listed on a Canadian stock exchange and (ii) controlled by an individual or corporation referred to in (1) or (2), above.
- an entity that is not formed under the laws of Canada or a province; and
- an entity that is formed under the laws of Canada or a province, if (and only if) it is controlled by any of (1) to (4), above.
The following are exempt from the application of the Act:
- an individual who is a non-Canadian, but who purchases residential real estate with a spouse or common-law partner who is not a non-Canadian;
- a refugee or an individual granted temporary resident status on humanitarian and compassionate grounds;
- foreign states or nationals for diplomatic or consular purposes; and
- certain temporary residents (e.g., workers and students) satisfying prescribed conditions.
The Regulation defines "control" with respect to a corporation or other entity as either:
- direct or indirect ownership of shares (or ownership interests) that represent 3% or more of the value of the entity's equity, or which carry 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.
A "residential property" is defined in the Act and Regulation as the following:
- a detached house or similar building, containing no more than three dwelling units;
- a semi-detached house, rowhouse unit, residential condominium unit or other similar premises that is a separate parcel owned apart from another parcel in the building; and
- land that does not contain any habitable dwelling, but which is zoned for residential or mixed use.
Exemption for Most Rural Areas
The Regulation specifies that the Act's provisions apply only to residential properties within census metropolitan areas ("CMAs") and census agglomerations ("CAs"). These are cities and towns whose populations, including surrounding areas, exceed 10,000 (CA) or 100,000 (CMA), as determined by Statistics Canada. Currently, Statistics Canada recognizes about 150 Canadian urban areas as CAs or CMAs.
It is very important to note that the prohibition applies to the entirety of each CA and CMA, which in many cases will include some surrounding districts that would ordinarily be thought of as "rural". This list of municipalities that are included in Canada's CAs and CMAs may be of assistance when considering whether the Act applies in a given situation.
Exemption for Purchases in Process Before 2023
The subsection of the Act that contains the prohibition does not apply if a non-Canadian becomes liable or assumes liability under an agreement of purchase and sale by December 31, 2022 — as a result, parties that entered into an agreement of purchase and sale before January 1, 2023 may not be caught by the scope of the Act.
Exemptions for Certain Transfers Under Law
Certain types of transactions are also exempted from the definition of a "purchase" under the Act, including:
- an acquisition of an interest or right resulting from death, divorce, separation, or a gift;
- a transfer under the terms of a trust that was created prior to January 1, 2023; and
- a transfer resulting from the exercise of a security interest or secured right by a secured creditor.
Penalties and Orders
Under Section 5 of the Act, a contravention of the Act does not itself affect the validity of the sale of residential real estate. However, contraventions attract fines and penalties.
Anyone who contravenes the Act is guilty of an offence, as is anyone who counsels, induces, aids, or abets a non-Canadian, or attempts to do any of the foregoing, knowing that the non-Canadian is prohibited from purchasing the residential property. Upon summary conviction, a fine of up to $10,000 may be levied.
Further, if an officer, director, agent, senior official, or other individual exercising managerial or supervisory functions on behalf of an entity, directs, authorizes, assents to, acquiesces in or participates in the commission of an offence, they are also liable on summary conviction to a fine of up to $10,000. These individuals may be prosecuted and convicted regardless of whether the entity itself was prosecuted or convicted.
Under Section 7 of the Act, a court can order a sale of a residential property purchased in contravention of the Act. The Regulations set out an order for the distribution of proceeds under which the Government of Canada recovers its costs and any unpaid fines first, followed by a distribution to those who are not non-Canadians. If any proceeds remain, the non-Canadian purchaser will receive no more than the purchase price of the residential property. Any remainder will be paid to the Government of Canada.
As a result of the Act's broad application, those involved in the real estate industry should exercise diligence when purchasing or selling residential property or assisting in these transactions. Penalties under the Act extend to professionals such as real estate agents and brokers, sales staff for developers, lawyers, and notaries.
In addition to reasonable inquiries and diligence, those who are involved in real estate transactions may consider additional representations and warranties to have a purchaser confirm they are not a non-Canadian under the Act. They should also ensure that they are aware of the geographical application of the Act, which can (as noted above) encompass some areas that appear to be rural but are not considered as such under the legislation.
We note that the Minister may make further regulations at any time until the Act expires on December 31, 2024. It is also possible that the legislation will face constitutional challenges, notably from those who would argue that it intrudes on matters of provincial jurisdiction.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.