This update is further to our first blog post from December 23, 2022 on the Prohibition on the Purchase of Residential Property by Non-Canadians Act (the "Act").
Based on significant industry feedback from across the country with respect to the unintended consequences of the nationwide prohibition on the purchase of residential property by non-Canadians that came into effect on January 1st of this year, the federal government has now responded by introducing the Regulations Amending the Prohibition on the Purchase of Residential Property by Non-Canadians Regulations, which came into force on March 27, 2023.
The Amendment provides five changes to the Prohibition on the Purchase of Residential Property by Non-Canadians Regulations and was introduced, in part, to respond to the following significant issues:
- The control threshold of 3% ownership/equity by foreign entities which caused an entity to be considered a "Non-Canadian" was too low.
- "Residential Lands" that were the subject of the original prohibition included vacant lands zoned for residential use as well as commercially developed lands that were zoned for mixed use.
- Publicly traded entities listed on Canadian stock exchanges that were not corporations (such as REITs) were not exempt from the prohibition, and were subject to the 3% ownership/equity test.
As we note in more detail below, the government went even further with the Amendment by allowing for the purchase of residential property by non-Canadians for the purposes of development.
The five changes made to the Regulations were as follows:
Amendment #1: Control Threshold Increased to 10%
Originally, the control threshold was 3%. Pursuant to the Amendment, this threshold was increased to 10% such that entities formed under the laws of Canada or a Canadian province may now be controlled by foreign entities with a greater share of interest in those entities, without being deemed a non-Canadian.
Amendment #2: Stock Exchange Exemption Expanded
Pursuant to the Amendment, the prohibition will no longer apply to any publicly traded entities (not just corporations), even if they are controlled by non-Canadians, as long as the entity was formed under the laws of Canada or a Canadian province and the entity is listed on a designated stock exchange in Canada.
Amendment #3: Repeal of Vacant Land/Mixed Use Zoning Rule
The original Regulation which provided that "residential property" included "land that does not contain any habitable dwelling, that is zoned for residential use or mixed use, and that is located within a census agglomeration or a census metropolitan area" was repealed. So regardless of the zoning, non-Canadians are no longer prohibited from purchasing vacant land as well as developed commercial property.
Put another way, and subject to the exception for development described below, the prohibition now only applies to a detached house or similar building, containing not more than three dwelling units, and a part of a building that is a semi-detached house, rowhouse unit, residential condominium unit or other similar premises.
Amendment #4: Acquisition of Residential Land for the Purposes of Development Now Permitted
As a result of this newly added exception to the prohibition, non-Canadians may purchase residential property for the purposes of development. This will now allow for non-Canadians to purchase residential properties for the purposes of land assemblies for larger redevelopment projects.
Canada Mortgage and Housing Corporation ("CMHC") has recently updated its Frequently Asked Questions list (the "CMHC FAQs"), and has provided some clarification on the term, "development" - it refers to the process of evaluating, planning and undertaking of alterations or improvements to a residential property, or the land on which the residential property is located, whether or not there will be a change in the use of the property. The alteration or improvement should ideally engage the applicable review and approval processes of the relevant municipality or other land use planning regulator, and may be accompanied by a change of use. The term "development" also includes the redevelopment of an existing building. "Development" is not intended to include mere repairs, renovations and remodelling of residential property. For example, CMHC has indicated that steps such as expanding an existing dwelling unit, adding a porch, deck or patio, or completing an unfinished basement all do not constitute "development." Further, purchasing residential property for the purposes of leasing it out to tenants also does not constitute "development."
Amendment #5: Temporary Residents Holding a Work Permit
The government has amended the exception that allows temporary residents holding work permits to purchase residential property. Now, temporary residents who hold a work permit may purchase residential property so long as they have 183 days or more of validity remaining on their work permit or work authorization. The previous requirements, with respect to temporary residents holding work permits, have been removed (specifically, that (1) the temporary resident must have worked full-time in Canada for a minimum period of three years within the four years preceding the year in which the purchase was made; and (2) the temporary resident must 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).
Clarification on Non-Canadian Lenders
Lastly, the CMHC FAQs have offered some guidance with respect to the government's position as to how the Act applies to mortgage lending over residential properties. CMHC confirmed that the taking of a mortgage, hypothec or other security by a non-Canadian lender over residential property does not in itself constitute an offence under the Act. However, making a secured or unsecured loan to a non-Canadian to assist (whether directly or indirectly) that non-Canadian in purchasing residential property that is otherwise prohibited would be a breach of the Act. Lending to a non-Canadian who already owns residential property is not an offence under the Act.
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.