On December 21, 2022, the Federal Government released the much-anticipated regulations that will accompany the Prohibition on the Purchase of Residential Property by Non-Canadians Act (the “Act”). For a detailed discussion of the Act, please refer to Clark Wilson’s previous article titled “Not for Sale: Canada Closes the Door to Foreign Home Buyers”.
The Prohibition on the Purchase of Residential Property by Non-Canadians Regulations (the “Regulations”) establish specific exceptions, definitions, and clarifications necessary to fully implement the Act. This article will explore some of the key regulations and their impact on developers, investors, and the general public.
Non-Canadian Prescribed Entities
The definition of “non-Canadian” in section 2 of the Act includes corporations incorporated outside of Canada. The Regulations have broadened the definition of non-Canadian to include any entity formed other than under Canadian or provincial law. Further, any entity that is formed under Canadian or provincial law, which is controlled by an entity that is not formed Canadian or provincial law, or is controlled by a non-Canadian as otherwise defined in section 2 of the Act, is prescribed as being a non-Canadian.
These prescribed inclusions have the effect of bringing other forms of business associations, such as partnerships, under the ambit of the Act.
Residential Property Exclusions
The definition of “residential property” in section 2 of the Act, to which the general prohibition contained in section 4 of the act applies, includes an exclusion for “a prescribed real property or immovable”. According to the Regulations, a property that is located in an area of Canada that is not within either a census agglomeration (“CA”) or a census metropolitan area (“CMA”) is a prescribed real property or immovable, and is as a result excluded from the prohibition. In practice, this exclusion is relatively narrow because most municipalities with sizeable real estate markets are located within a CM or CMA, with some exceptions.
CA and CMA are terms that are defined by Statistics Canada. Although there are several attributes that define CAs and CMAs, one of the key determining factors is population, with CAs typically having populations of at least 10,000, and CMAs being larger areas with populations of at least 100,000. The Statistics Canada list of CAs and CMAs published on 2022-02-09 can be found here: Statistics Canada 2022-02-09. Also note that the areas categorized as CAs and CMAs are subject to change based on fluctuations in population, regional integration, and other factors.
Developers, investors, and real estate professionals should check the most recent Statistics Canada data on CMs and CMAs when considering the applicability of the Act to a given property.
Inclusion of Vacant Land
The Regulations have also expanded the types of property that are subject to the Act. The Regulations now bring vacant land that is zoned for residential or mixed use and which is located in a CM or CMA under the definition of residential property as well.
Control of a Corporation or Entity
Previously the Act contained no definition for what level of interest in a corporation would be deemed to be “control” of that corporation. The Regulations now provide a definition of “control” with respect to a corporation or entity to mean:
- direct or indirect ownership of shares or ownership interests of the corporation or entity representing 3% or more of the value of equity in it, or carrying 3% or more of its voting rights; or
- control in fact (de facto control) of the corporation or entity, whether directly or indirectly, through ownership, agreement or otherwise.
This 3% threshold to determine control of a corporation or entity is a much lower threshold than is applied in many other instances (for example, the concepts of “control” under various corporate statutes and applicable tax legislation). The result is that there are likely to be many corporations and other entities that have shareholders, partners or interest holders with what they may consider to be small equity interests in such entities, but which will under this 3% threshold result in those entities being deemed to be non-Canadian and subject to the prohibition on purchasing residential property contained in the Act.
Given this relatively low threshold, developers and others engaged in acquiring residential property using corporations or partnerships with foreign shareholders, partners or interest holders should review their capital structure to determine if they are prohibited by the Act from acquiring residential property.
Clarification of the term “purchase”
The Act previously provided no direction on what would constitute a “purchase” of residential property. The Regulations have now clarified that “the acquisition, with or without conditions, of a legal or equitable interest or a real right in residential property constitutes a purchase.” Notably this would include the acquisition of a beneficial interest in a residential property by a new beneficiary under a trust, notwithstanding that the trustee remains the registered owner on title.
The Regulations have also clarified certain exemptions from what is considered a purchase, which include: the acquisition of an interest or real right resulting from death, divorce, separation or a gift; the rental of a dwelling unit to a tenant for its own occupancy; the transfer of residential property under the terms of a trust that was created prior to the coming into force of the Act, and a transfer resulting from the exercise of a security interest or secured right by a secured creditor.
These estate, family law, trust and secured lending exemptions capture numerous transactions that the Act was neither designed nor intended to capture.
Prescribed Conditions for Temporary Residents
Section 4(2) of the Act provides an exception from the prohibition for temporary residents who satisfy prescribed conditions. The Regulations set out these prescribed conditions for international students and work permit holders.
International students enrolled in a program of authorized study at a designated learning institution, as defined in section 211.1 of the Immigration and Refugee Protection Regulations (Canada) (the “IRP Regulations”), must satisfy the following conditions:
- they 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;
- they 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;
- the purchase price of the residential property does not exceed $500,000; and
- they have not purchased more than one residential property.
Work permit holders, as defined in section 2 of the IRP Regulations or those who are authorized to work in Canada under section 186 of the IRP Regulations, must satisfy the following conditions:
- they 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 work as defined in subsection 73(1) of the IRP Regulations;
- they 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
- they have not purchased more than one residential property.
Notably, these prescribed conditions limit who may make use of the exception from the general prohibition on the purchase of residential property to those who have established a multi-year history of residency and tax filings. Further, this exception may be used only by parties who have not purchased more than one residential property, and there is a purchase price cap applicable to international students.
The Regulations have also set January 1, 2025 as the repeal date for the Act.
The Regulations have provided clarity on the breadth and scope of the application of the Act. The Federal Government has advised that plain language information materials, including frequently asked questions and answers for individuals and industry professionals will follow. In the meantime, individuals, developers, investors, and real estate professionals should take extra caution when working with residential property purchases to ensure that they remain compliant with the Act and Regulations.