Canada: The Non-Canadian Residential Property Purchase Prohibition – Three Primary Areas Of Concern

Many readers are already aware that the Canadian government has banned, as of January 1, 2023, the purchase of residential property in Canada by non-Canadians. The Prohibition on the Purchase of Residential Property by Non-Canadians Act  (the “Act”)¹ itself dates back to June 23, 2022, but relies upon regulations to fully flesh it out. Those have now been introduced.

Broadly speaking, the Act  addresses housing affordability and availability challenges by ensuring more housing is available for Canadians by prohibiting non-Canadians from buying housing. Much has been written about the specific exceptions to the prohibition and this article will not describe the exemptions which are applicable. One place to begin understanding the primary provisions of the Act and Regulation is Canada Mortgage and Housing Corporation's (“CMHC”) article: https://www.cmhc-schl.gc.ca/en/media-newsroom/notices/2022/ensuring-housing-owned-canadians

Our article looks at three critical concepts found in the Act and its primary regulation, SOR/2022-250², which came into force on January 1, 2023. The Regulation answers the primary question of what real property is subject to the ban. However, the approach taken by the Regulation will raise significant concerns for many of our clients given the unexpectedly broad application of the ban to property that is not immediately or obviously residential in nature. It also provided criteria for determining what level of foreign control brings a purchaser within the ambit of the ban, and those are also broader than many anticipated. This article also looks at the potential for prosecution of those engaged in assisting someone who may or may not be a non-Canadian in a purchase of residential property. Unfortunately, the current language of the Regulations results in some significant ambiguity and what we believe are unintended consequences. The primary author of this article and others at Miller Thomson LLP are involved in an initiative to clarify and hopefully correct any unintended consequences and Miller Thomson will update our readers periodically.

Overly broad definition of residential property

The ban applies to “residential property”, which is defined fairly clearly in the Act to include any condominium units (and common areas) and buildings that contain three or less dwelling units; essentially single family homes, duplexes and triplexes. The Regulations however adds to the statutory prohibition the purchase of any “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”.

The Regulation thus apparently prohibits the purchase of either a vacant lot or a commercial/industrial or institutional building on land that is zoned for “residential use or mixed use.” There is no clear exemption for existing commercial/industrial/institutional-only buildings in mixed use zones where residential uses could be introduced, whether immediately or only upon significant redevelopment, as there is for multi-unit residential buildings. The Regulation only asks whether the land contains a habitable dwelling, which almost all office buildings, factories and warehouses do not. This result is likely not intentional since the CMHC, with whom the government consulted prior to promulgating the Regulation, notes in its press release that the Regulations prohibit applies to “vacant land that does not contain any habitable dwelling, that is zoned for residential use or mixed-use” despite the regulation itself not containing that word “vacant.”

Even if the prohibition only applies to vacant land, it has the effect of applying even if the lot is intended to be redeveloped for a multi-unit residential purpose, such as a rental apartment building or condominium. This is despite the fact that if those multi-unit buildings already existed, the property would be exempt. Redevelopment that increases the number of housing units available in Canada should be seen as actually advancing  the purposes of the Act, by increasing housing accessibility. To prohibit the purchase of vacant land that will be developed into multi-dwelling units, is an unexpected action from the government, and one that seems counter-productive to the very purpose of the Act.

The Regulation's reference to lands zoned for “mixed use” is unfortunately ambiguous. Our expectation is that the Canadian government intended the term “mixed use” to mean only zoning where a residential use is one of the permitted uses, despite the lack of clarity. Almost all municipalities zone some areas for a mixture of commercial, institutional and industrial uses while prohibiting residential uses. It is not clear that those lands are not captured by the term “mixed use”. There are even zoning by-laws that provide for very limited residential uses in industrial zones, for example for a caretaker of large industrial facilities, which would even on a purposive interpretation of that provision be captured by the ban.

Corporations and the importance of “control”

Corporations and other entities are subject to the ban if they fall within the definition of “non-Canadian” found at section 2 of the Act. Corporations incorporated pursuant to Canadian corporate law can be subject to the “ban.” The test is whether the corporation or entity is controlled  by a non-Canadian entity. The Regulations have provided the following definition of “control”:

The extremely low threshold of a less than 3% direct or indirect ownership interest, equity value or voting rights in a Canadian corporation by any non-Canadian entity may snare many potential buyers.

The second “control” test, “control in fact”, is not defined in the Act  or Regulations and many purchasers will need to carefully discuss with their legal counsel whether their purchase of residential property contravenes this Act. The meaning of “control in fact” will need to be determined on a case-by case fact-specific basis even if some guidance can be found in case law and experience interpreting section 256(5.1) of the Income Tax Act and other provisions in the Investment Canada Act, where that term is also used in arguably similar policy circumstances.

Penalty provisions for collaborators and purchaser

The Act  carefully avoids invalidating contravening sales, focusing on imposing penalties and allowing for subsequent enforcement actions against the purchaser. Indeed, it explicitly provides that the sale is not invalidated by a contravention to avoid the chaos potentially voidable sales would create.

Instead, contravention is punishable by a maximum fine of $10,000 but applies broadly to “every person or entity that counsels, induces, aids or abets or attempts to counsel, induce aid or abet a non-Canadian to purchaser, directly or indirectly, any residential property knowing that the non-Canadian is prohibited under this Act from purchasing the residential property. Individuals with managerial or supervisory functions of a corporation, along with “senior officials”, officers, directors or agents or mandataries of the entity are individually liable. A $10,000 fine represents a real deterrent to the purchase of the types of homes that we expect the Act is designed to ensure are made available to individual Canadian families.

However, in addition to the monetary fines, section 7(1) of the Act permits a court to order a residential property purchased by a non-Canadian in contravention of the Act be sold. This remedy is what we expect will be the real teeth of the Act in the case of larger transactions. This approach prudently allows discretion on the part of the government about whether to pursue the remedy based upon the circumstances of the purchase. The Act further mandates judicial consideration of the value or merit of imposing this significantly more draconian remedy. The court making the sale order must be “satisfied that the impact of the order would not be disproportionate to the nature and gravity of the contravention”. Once made, however, the order would penalize the non-Canadian purchaser by deducting the costs of the sale and the Minister in bringing the application fro the order, any fines from the proceeds along with scooping any increase in value above the purchaser price, which would be paid to the Receiver General. If a sale is ordered, the consequence is the loss of any commercial viability of the purchase.

The primary uncertainty at this time is which other players will be liable for prosecution for participating in some way in such a purchase. The charging language is quite broad. It likely includes any person acting for the purchaser in any sort of agency relationship, such as real estate agents, who has knowledge of the status of the purchaser. The question of whether others, such as lawyers, mortgage brokers, lenders and even the vendor of the property (and its agents etc.) are captured by the language in section 6 of the Act and whether there will be rigorous prosecution is much more difficult to answer. Careful consideration of the facts to determine the risk will be required in many cases.

While legal advisors will be able to provide some of these players with tools or solutions to minimizing the risk of prosecution, the question remains whether those measures create an unreasonable disincentive to the transaction. Particularly where the transaction was to further the public objective of the Act of improving access to housing (as would be the case in the case of a purchase of vacant residentially-zoned lands for the development of new housing), the question remains whether the risks will prove a significant deterrent to these transactions.

Conclusion

These are just some of the issues and challenges that will arise as this Act is interpreted and enforced. Fortunately, the government has indicated that it will provide answers to concerns as they arise. Miller Thomson LLP is part of an initiative to encourage the government to clarify some parts of the Act  and its regulations and we will continue to provide updates as they become available. We will also be monitoring whether there are challenges to the constitutionality of the regime based upon the separation of powers between Canada and the Provinces.

Footnotes

1 S.C. 2022, c. 10, s. 235.

2 Prohibition on the Purchase of Residential Property by Non-Canadians Regulations, SOR/2022-250 (“Regulations”).

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.