Prohibition on Non-Canadians purchasing residential property – Potential unexpected commercial impacts
On January 1, 2023, the Prohibition on the Purchase of Residential Property by Non-Canadians Act (the “Act”) came into force along with regulations, Prohibition on the Purchase of Residential Property by Non-Canadians Regulations (the “Regulations”). Much of the press regarding this new federal statute has concerned its impact on residential transactions and the housing market in Canada, however, because of certain provisions included in the regulations, which were only released on December 21, 2022, there are potentially significant consequences on commercial transactions.
The stated intention of the Act is to make residential homes more affordable for Canadians. To that end, Section 4 of the Act provides that “it is prohibited for a Non-Canadian to purchase, directly, or indirectly, any residential property.”
The Act defines Non-Canadian as:
- an individual who is neither a Canadian citizen nor a person registered as an Indian under the Indian Act nor a permanent resident;
- a corporation that is incorporated otherwise than under the laws of Canada or a province;
- a corporation incorporated under the laws of Canada or a province whose shares are not listed on a stock exchange in Canada and that is controlled by a person referred to in paragraph (1) or (2); and
- a prescribed person or entity,
The Act defines “residential property” as:
- 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 unit, residential condominium unit or other similar premises;
- prescribed real property or immovable,
Section 6 of the Act makes it an offence for a Non-Canadian to purchase residential property covered by the Act. It also creates an offence for every individual that counsels, induces, aids or abets a non-Canadian to purchase any residential property covered by the Act knowing that the non-Canadian is prohibited. All such persons are liable on summary conviction to a fine of not more that $10,000.
The Regulations and Scope of Potential Application in Commercial Transactions
The Regulations were released on December 21, 2022, 10 days before the Act and Regulations came into force. Three parts of the Regulations significant expand the potential application of the Act in commercial transactions.
First, the Regulations defined “control” to include “direct or indirect ownership of shares or ownership interests of the corporation or entity representing 3% or more of the value of the equity in it, or carrying 3% or more of its voting rights.” It is unclear whether this means that an individual foreign owner must control more than 3% of the equity, or whether total foreign ownership of 3% is sufficient to make the entity “controlled” by a Non-Canadian. In either case, many entities in the commercial real estate industry would likely meet this test, which may not intuitively be considered to be “Non-Canadian”.
Second, the Regulations provide that a “purchase” includes “the acquisition, with or without conditions, of a legal or equitable interest or a real right in a residential property”. This broad definition applies to almost any direct or indirect acquisition, including the acquisition of shares, limited partnership interests, or other interests in an entity which owns “residential property”. Certain exemptions are provided, but they are unlikely to apply in most commercial contexts.
Third, the Regulations provide that residential property includes all 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.” This means that any vacant land that is zoned for mixed use in any major population centre in Canada is residential property and cannot be “purchased” by a “Non-Canadian”, directly or indirectly. In addition, the requirement that the lands not contain any habitable dwelling, as opposed to a requirement that the lands be vacant, may result in many commercial properties (e.g. retail plazas) which are zoned for mixed use being considered “residential property” which cannot be “purchased” by a “Non-Canadian”. While “habitable dwelling” is not defined in the Act or the Regulations, “dwelling unit” is defined to mean a residential unit that contains private kitchen facilities, a private bath, and a private living area. The vast majority of commercial properties will not contain any “dwelling unit” and so would appear to be captured in the definition of “residential property” as a result.
This definition of “residential property” will also have significant impact on parties intending to complete land assemblies in anticipation of a development and may make certain land assemblies impossible to complete.
This definition does not capture lands located outside of a census agglomeration or census metropolitan area, meaning that certain recreational property and land zoned for residential or mixed use, which is outside of these areas, will not be considered “residential property” and therefore not subject to the prohibitions set out in the Act.
The Regulations significantly expand the scope of the Act and appear to prohibit many transactions that would have little to do with the buying and selling of residential homes in Canada. Although there is an exception for publically traded corporations, it would not apply to private corporations, public or private mutual fund trusts or limited partnerships, joint ventures, and other entities that may have minority foreign equity ownership.
The broad expansion of “purchase” and the inclusion of lands with mixed zoning in the definition of residential property, significantly expand the prohibition in the Act. For example, it would be prohibited for a “Non-Canadian” to acquire any corporation that owns a vacant development property in any major population centre in Canada. This appears to be intentional as the federal government’s Regulatory Impact Analysis Statement comments that “[s]ome stakeholders raised questions or made proposals related to… the application of the prohibition to vacant land.” However, the Regulatory Impact Analysis Statement subsequently concluded that “[a] proposed exception for vacant land purchased for development purposes was considered but assessed as being too administratively complex.” It is unclear whether the broad scope of the words “which does not contain any habitable dwelling”, which could apply to commercial properties zoned for mixed use, was considered.
The legislation does not contain an exemption for investors from the United States, the European Union, the United Kingdom or any other of Canada’s major trade and investment partners thus raising the possibility of retaliation against Canadians considering residential property investments in other countries.
Notably, Canada’s most significant trade and investment agreements, including the Canada-United States-Mexico Agreement (CUSMA), the Canada-EU Comprehensive Economic and Trade Agreement (CETA), the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), and the Canada-United Kingdom Trade Continuity Agreement, as well as many of Canada’s bilateral investment treaties, contain broad investment protection obligations. These include national treatment which generally prohibits discriminating against investors on the basis of their nationality, i.e., Canada must provide to investors of its treaty partners treatment no less favourable than that it accords, in like circumstances, to its own investors with respect to the establishment, acquisition, expansion and sale of investments, including those relating to real property. In addition to government-to-government dispute mechanisms, many of these treaties also contain investor-state dispute mechanisms that allow foreign investors to sue the Canadian government for damages arising out of the government’s breach of its investment obligations. The legislation may raise questions about Canada’s compliance with these international trade and investment agreements.
Given the significant uncertainty about the application of the Act and Regulations, it is strongly recommended that anyone who is potentially impacted seek legal advice immediately. The McCarthy Tétrault real property, and trade groups are available to assist parties across Canada and can be reached at the contacts below.
 Regulatory Impact Analysis Statement on the Prohibition on the Purchase of Residential Property by Non-Canadians Regulation, SOR/2022-250, online: Canada Gazette, Part 2, Volume 156, Number 26: Prohibition on the Purchase of Residential Property by Non-Canadians Regulations