Frozen out of the Great White North: Thawing the Canadian real estate iceberg

For many real estate investors, owning Canadian real estate is a no-brainer. The Canadian real estate market is resilient – even in the midst of a global pandemic, it managed to experience unprecedented growth despite uncertain conditions. Up until recently, Canadian residential real estate was available to anyone who could afford it, regardless of residency or citizenship. And let’s face it, Canada is a great place to own a home for city dwellers and outdoor enthusiasts alike – from the longest coastline in the world extending over the Arctic, Atlantic and Pacific Oceans to snow-capped Rockies and glaciers that are home to the endangered polar bears, narwhals and even beluga whales! Indeed, Canada has a lot to give to the world, including a robust rate of return on real estate investments that has attracted cash-paying foreign speculators for decades. But that streak may soon be coming to an end with recently implemented legislation which freezes out foreign investors from the Canadian real estate market for 2 years. Let’s call it, a “chillaxing”.

Canada’s foreign buyer ban on residential real estate

Effective January 1, 2023 through December 31, 2024, foreign buyers are precluded from directly or indirectly purchasing Canadian residential real estate. The law banning foreign buyers was passed by the Canadian Parliament last June 23, 2022 as the Prohibition on the Purchase of Residential Property by Non-Canadians Act (the “Act”) as part of the government’s broader policy response to address the prevailing housing affordability concerns experienced by Canadians. The Act allows for the imposition of penalties on any party found guilty of knowingly assisting a non-Canadian in contravening the prohibition, which would include a $10,000 fine and a judicial sale order of the property. 

Supporting regulations were issued on December 21, 2022 and provide specific exceptions, definitions and clarifications necessary to implement the Act. Below is a brief summary of the legislation and what it means for non-Canadians (the “foreign buyers”) who are interested in acquiring Canadian residential real estate for investment. 

It is important to note that Act does not apply in circumstances where it would conflict with Indigenous rights recognized and affirmed by section 35 of the Constitution Act, 1982.

Foreign buyers

The Act defines a “non-Canadian” in such a manner as to discourage the use of various holding structures by foreign buyers to hold Canadian property. A “non-Canadian” is defined as:

• An individual who is neither a Canadian citizen nor a permanent resident of Canada (“foreign person”) or
• A corporation that is incorporated outside of Canada (“foreign corporation”) or a Canadian corporation that is controlled by a foreign corporation or foreign person (“controlled corporation”). With respect to a foreign corporation, the term “control” means control by (i) ownership of shares or interests in the entity representing 3% or more of the equity or voting rights; or (ii) control in fact.
• A prescribed person or class of persons. Under the Regulations, prescribed persons  include:
  
  • entities formed otherwise than under the laws of Canada or a province; and
  • entities formed under the laws of Canada or a province and controlled by a foreign person, foreign corporation, or a controlled corporation.

Essentially, the Regulations bring business structures other than just corporations (for example, partnerships) under the purview of the Act.

Notwithstanding the foregoing, the Act and Regulations provide exceptions for certain groups of people from the prohibition. These include exceptions for the following:

• refugees;
• diplomats, consular staff and members of international organizations residing in Canada;
• non-Canadian individuals who purchase residential real estate with a spouse or common law-partner provided that their spouse or common law-partner is a Canadian citizen, a person registered as an Indian under the Indian Act or a permanent resident referred to as a protected person or refugee under the Immigration and Refugee Protection Act; and
• temporary residents, for example:
  • international students who are enrolled in a program of authorized study at a designated learning intuition where the students:
    • have filed all required income tax returns under the Income Tax Act for each of the five taxation years preceding the year in which the purchase was made;
    • were physically present in Canada for a minimum of 244 days in each of the five calendar years preceding the year in which the purchase was made;
    • are purchasing a residential property with a purchase price not exceeding $500,000; and
    • have not purchased more than one residential property; or
  • individuals who hold a work permit or are otherwise authorized to work in Canada and:
    • have worked in Canada for a minimum period of three years within the four years preceding the year in which the purchase was made, if the work is full time;
    • have filed all required income tax returns under the Income Tax Act for a minimum of three of the four taxation years preceding the year in which the purchase was made; and
    • have not purchased more than one residential property.

The Regulations narrow the exemptions provided for temporary residents. These individuals must have been Canadian tax residents for three to four years (depending on the residence category) prior to the purchase and must not have purchased more than one residential property. For international students the purchase price cannot exceed $500,000, severely limiting where and what kinds of property may be purchased.

Type of residential property

The Act specifically identifies types of residential property as being subject to the 2-year prohibition. These include the following:

• a detached house or similar building containing not more than three dwelling units;
• a part of a building that is a semi-detached house, rowhouse, residential condominium unit or other similar premises that is intended to be owned apart from other units in the building; or
• Any prescribed real or immovable property.  We note that under the Regulations, prescribed real or immovable property is defined as any land that does not contain any habitable dwelling that is zoned for residential or mixed use within a census agglomeration (“CA”) or census metropolitan area (“CMA”) in Canada.

Based on the above, the Act effectively precludes a foreign buyer from purchasing residential real estate in the most sought after Canadian cities, Toronto, Montreal, Vancouver, Ottawa-Gattineau and Calgary, to the extent such real estate or immovable is comprised of the above types of residential property.  

The good news is that not all Canadian residential property is subject to the prohibition.  A foreign buyer can still purchase detached houses or buildings with more than three dwelling units, certain recreational property, and vacant land in limited circumstances within these cities.  Moreover, the prohibition does to not extend to residential property outside of an area that has been designated as CA or CMA by Statistics Canada. 

A purchase transaction

For the sake of clarity, the Regulations provide a streamlined definition of a “purchase” as “the acquisition, with or without conditions, of a legal or equitable interest or a real right in residential property.” A purchase does not include the following:

• Acquisition of an interest or real right resulting from death, divorce, separation or gift;
• Rental of a dwelling unit to a tenant for occupation by the tenant;
• A transfer under the terms of a trust created prior to January 1, 2023; or
• A transfer resulting from the exercise of a security interest or secured right by a creditor.

We further note that the Act does not apply to any contracts for the purchase and sale of residential property entered into before January 1, 2023. 

Penalties

As previously noted, the Act establishes penalties for non-Canadians purchasing residential property (and those knowingly assisting them), and allowing for the responsible minister, following a conviction, to apply to a court for the judicial sale of a property that was purchased in breach of the prohibition.  To recap:

• every non-Canadian and every person or entity that knowingly counsels, induces, aids or abets a non-Canadian to purchase any residential property is guilty of an offence and liable on summary conviction to a fine of not more than $10,000;
• If a person or entity is found guilty of an offense under the Act, a federal minister designated by the Governor in council, has the authority to apply to a superior court for an order that the property be sold;

The Regulations clarify the conditions under which a court may issue an order and provide guidance for a court with respect to how any proceeds resulting from a sale would be distributed. If it is of any comfort, an order to sell the residential property can only be made if:

• The non-Canadian is the owner of the residential property at the time the order is made;
• Notice has been given to every person who may be entitled to receive proceeds from the sale; and
• The superior court of the province is satisfied that the impact of such an order would not be disproportionate to the nature and gravity of the contravention, the circumstances surrounding the contravention and the resulting conviction.

Given that the above 3 conditions must exist for a court order to be made, we anticipate a new cottage industry will arise to challenge the Act and its enforcement. 

It is important to note that in the event of a judicial sale of residential property, the Regulations provide that the proceeds of such sale would be distributed to (1) cover costs incurred by the Minister to apply for the court order, any penalties under the Act and the costs of the sale itself; followed by (2) payment to those who are entitled to receive the proceeds of the sale (as secured creditors, perhaps), then (3) payment to the non-Canadian buyer in an amount not greater than the purchase price paid for the residential property; and finally, (4) any remaining amounts to the Receiver General for Canada.

It remains to be seen whether the Act will indeed help make housing more affordable for Canadians, and whether achieving such a goal would offset the detrimental effect of the Act on the real estate, legal and finance industries in Canada. Just like Elsa in the Disney movie “Frozen”, we have a feeling that foreign investors in Canadian real estate may find it hard to simply “let it go” and leave aspirations of owning Canadian real estate behind.