Canadian government partially backtracks over foreign homebuyers ban

Monday, 03 April 2023
Canada's federal government has announced amendments to the Prohibition on the Purchase of Residential Property by Non-Canadians Act (the Act), after its entry into force at the beginning of 2023 unexpectedly cast a shadow across the commercial real estate market.
House with the flag of Canada

The legislation was tabled in mid-2022 as Bill C-19 with the aim of preventing residential property prices being further inflated by foreign buyers. It introduced a two-year ban on direct or indirect purchase of homes in Canada by persons who do not have Canadian citizenship or permanent residency, or corporations not incorporated in Canada or that are controlled by foreign corporations or foreign individuals. Fines of up to CAD10,000 apply to offenders from 1 January 2023, including anyone who helps or advises them, and courts were given powers to order the sale of the acquired property. Detailed regulations were issued in December 2022, defining a corporation’s or entity’s ‘control’ to mean direct or indirect ownership of at least 3 per cent of its shares or ownership interests; or de facto control, directly or indirectly, through ownership, agreement or otherwise.

This 3 per cent threshold caught many entities in the commercial real estate industry that would not normally be considered to be non-Canadian, according to law firm McCarthy Tetrault. Moreover, the Act as originally passed did not explicitly exempt public entities such as real estate investment trusts (REITs) from this definition of 'non-Canadian', though Canadian-controlled publicly traded corporations were excluded.

In addition, definitions in the associated regulations contained a reference to 'mixed use zoning', which led to many wholly commercial or industrial properties being considered 'residential property' for the purposes of the Act. This was a source of contention and uncertainty for market participants, causing many to refuse to enter into transactions until the Act or Regulations were clarified, and resulting in a 'chilling effect' across the commercial real estate market in Canada, says McCarthy.

Since the publication of the regulations in December 2022, stakeholders have lobbied and sought clarification from the federal government. On 27 March, the Minister of Housing announced amendments to the regulations to address the objections.

The amendments raise the threshold for foreign control of a company from 3 to 10 per cent of the equity value or voting rights. They also provide an explicit carve-out for other publicly traded entities including REITs, as long as they are not controlled by a 'non-Canadian'.

The section containing the unwanted definition of 'prescribed real property' has been repealed so that urban land that does not contain any habitable dwelling is not deemed residential property. This will allow commercial transactions to proceed that were previously stalled or put off because of the mixed-used zoning of the underlying lands.

The amended regulations also clarify that a 'purchase' for the purposes of the Act does not include the acquisition by a non-Canadian of residential property for the purposes of development. This will allow land assemblies, site acquisition and other acquisitions of development sites or proposed development sites to proceed in the normal course, says McCarthy.

The firm says the new regulations provide much needed certainty and clarification, limiting the scope of the Act to what would commonly be considered residential housing and the housing market in Canada. Nevertheless, there will still be transactions and foreign investors that will be impacted by the act and regulations, it says.


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