The Prohibition on the Purchase of Residential Property by Non-Canadians Act (the "Act") took effect in January. The Act bans "non-Canadians" from buying "residential property" for two years and it is intended to increase the supply of housing to Canadians. Much has been written about the Act since it has come into force, with some questioning whether it will have the desired effect or whether it will be mired by unintended consequences. While time will tell, there are two key ways the Act is presently effecting builders and developers.
Sales management
There is a positive obligation for sellers of residential property to verify that their purchasers are not non-Canadians within the meaning of the Act (or are otherwise exempt persons under the Act). For builders of pre-construction homes, it is necessary to ensure sales staff are trained on the new processes to verify appropriate individual and corporate identification and documentation in order to properly qualify buyers, and to keep organized records in this regard. It is also prudent to include certain representations, covenants, and indemnities in purchase agreements that will assist vendors in complying with the Act and provide remedies in the event of a breach by purchasers. Vendors need to also be mindful of compliance in the context of assignments, and can use the vendor consent process to properly qualify assignees and meet the requirements under the Act.
Acquisition of development lands
The definition of "residential property" includes vacant land that is zoned for residential or mixed use, and the definition of "non-Canadian" includes any corporation with a 3% or more ownership interest by a foreign national. It is not only vacant land that poses the issue, however, as the regulations to the Act can catch real property acquisitions that include commercial and industrial buildings. As a result of the broad definition and low ownership threshold, the Act is having an adverse effect on the commercial real estate and residential development markets. Many developers are being prohibited from buying certain development lands that may otherwise be used to construct residential real estate, including condominiums and purpose-built rental. This is limiting transactions and development in larger urban areas, the opposite of what the Act set out to achieve. This issue is getting a lot of attention and we anticipate that the government will examine this issue closely with a view to amending the regulations.
Going forward
As there are numerous risks and potential penalties (including but not limited to a fine of $10,000 for each instance of a failure to comply, and for inducing, aiding or abetting non-compliance, with Act), builders and developers are urged to exercise caution and seek professional advice.
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