Amendments to the regulations relating to Canada's Prohibition on the Purchase of Residential Property by Non-Canadians Act (the "Act") have been made which resolve some of the most problematic aspects of this Act with respect to the production of additional housing and the development of land in Canada by non-Canadians.
We have previously identified some of the issues and problems with this Act and its regulations in our January communiqué and March Communiqué discussions regarding same.
The amendments came into force on March 27, 2023 and definitively fix the following problems:
- The unintended effect of prohibiting non-Canadians from purchasing land to develop additional residential units for Canadians to occupy. The amended regulation now specifically exempts from the prohibition the "acquisition by a non-Canadian of residential property for the purposes of development." This means non-Canadian developers will generally be able to assemble land upon which there may be residential buildings that are near the end of their life for a comprehensive redevelopment.
- The prohibition against acquiring vacant land and land upon which there may only be commercial, institutional or industrial buildings, if those lands are zoned for residential or mixed use purposes. The amending regulation deletes the provision in the original regulation which included "land that does not contain a habitable dwelling if zoned for residential or mixed used purpose" in the lands subject to the prohibition.
- The amended regulation additionally provides that all "entities" formed under Canadian law (and thus not just corporations) and listed on a public stock exchange1 will be exempted from the prohibitions, thus including real estate investment trusts ("REITs") in the exemption.
The amendment also changed the threshold level of ownership/voting rights in the test as to whether an entity is controlled by a non-Canadian entity from the remarkably low percentage of 3% to a more readily discernable level of 10%. The effect and impact of this amendment is however limited, as it will continue to impact entities which are effectively Canadian but may have some small amount of foreign ownership.
These are significant changes to this regulatory scheme, as they largely eliminate the unintended impact of prohibiting non-Canadian developers from taking steps to improve the housing situation in Canada. Combined with the original exclusion of multi-unit residential properties from the prohibition, most REITs and foreign developers will no longer face the difficult task of determining whether they should proceed with purchases that seem to advance the purpose of the Act but technically seem to be prohibited. They will no longer need to carry out the risk analysis that we have suggested is likely the most practical means of addressing the Act's implications.
Some risks remain
What may remain of concern to non-Canadian developers is whether their proposed activities constitute "development," which is not defined in the regulation. However, there have been additional questions added to the Frequently Asked Questions hosted by the CMHC, which directly address this issue, but those are of course, just indications of the intent and not necessarily binding. Fortunately, as we have discussed previously, the transaction itself is not void for contravention of the Act, so making the appropriate decision really does come down to an assessment of risk.
Development is generally described quite broadly to include "evaluating, planning and undertaking of alterations or improvements" and it lists some (but explicitly non-exhaustive) factors that indicate there is development are listed. For example seeking approvals from a land use planning regulator or an alteration that results in a change of use are recognized as good indications of there being development. It also sets out some somewhat obvious examples of what would not constitute development: (i) simply leasing the property out as a rental property, and (ii) minor alterations or renovations. There is no discussion about whether a change in the number of available residential units will be considered to be of significance in the analysis of whether there is development.
Another issue that the FAQ fails to clearly address is how quickly any development activities must commence after purchase and so that question and how to collect appropriate documentation of "a good faith intention at the time of the purchase to undertake development" remain matters that non-Canadian purchasers likely should discuss with their legal advisers.
These amendments also do not address the concern that purchasers may still have about whether they are "control[led] in fact...whether directly or indirectly, through ownership, agreement or otherwise". That determination remains one requiring consideration of all of the facts and likely a discussion about the likely risks, including prosecution and exercise of the sale right discussed in our earlier January article.
Very usefully, the FAQ now make it clear that notwithstanding the somewhat ambiguous language in the Act and the regulation that non-Canadian lenders can lend and take a mortgage, hypothec or other security over residential property.
The FAQ also does clearly address our concerns about whether a lender to a non-Canadian acquiring a residential property can be considered to have assisting the non-Canadian to purchase that property, which is an offence under the Act. The FAQ indicates that the act of making a loan can be considered such prohibited assistance (and thus subjecting both the lender and individuals holding positions within the lender to prosecution and fines) if the lender knows that the purchase is contrary to the Act. Lenders will likely wish to discuss this risk and how to address this issue during their due diligence with their legal counsel.
Similarly, builders who are selling individual homes or condominium units will still need to discuss with their legal counsel the appropriate level of due diligence about whether a purchaser is a non-Canadian.
Footnote
1. Specifically a stock exchange in Canada for which a designation under Section 252 of the Income Tax Act is in effect.
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.
