Prohibition on the Purchase of Residential Property

• 
  Brent Pickard
  Lawyer

Introduction 

A significant change to the world of residential real estate in Canada was the recent introduction of the Prohibition on the Purchase of Residential Property by Non-Canadians Act (the Act). This Act places criminal sanctions on “non-Canadians” who purchase property between January 1^st, 2023 and January 1^st, 2025. Despite the broad scope of this law, a lot of confusion remains regarding its substance. To further complicate this matter, many of the Act’s finer details are in regulations, making it more difficult to understand exactly who is prohibited from doing what.  

This article will seek to answer five of the most common questions regarding this Act. First, who is designated as a non-Canadian under the Act? Second, if someone is a non-Canadian, can they still be found liable under this Act? Third, what does the Act specifically prohibit? Fourth, what are the sanctions? Finally, are there any exemptions to the law that may need to be considered by those purchasing property? 

Who is a “non-Canadian” Under the Act? 

Section 2 of the Act designates four categories of legal persons as “non-Canadians”. These categories include: 

• “(a) an individual who is neither a Canadian citizen nor a person registered as an Indian under the Indian Act nor a permanent resident; 
• (b) a corporation that is incorporated otherwise than under the laws of Canada or a province; 
• (c) a corporation incorporated under the laws of Canada or a province whose shares are not listed on a stock exchange in Canada for which a designation under section 262 of the Income Tax Act is in effect and that is controlled by a person referred to in paragraph (a) or (b); and 
• (d) a prescribed person or entity.”  

The Act utilizes the same definition of permanent resident found in the Immigration and Refugee Protection Act.

Subsection (c) is perhaps the most confusing of these provisions. The face of the Act does not make clear what “control” or “listed on a stock exchange in Canada” means. However, the Act’s corresponding regulations defines two thresholds for “control” of a corporation. The first of these definitions involves formal control, with the non-Canadian owning enough shares or ownership interests in the company to maintain 10% or greater of the value of the company’s equity or the company’s voting rights. The second definition, by contrast, focuses on informal control, with the non-Canadian controlling the corporation “in fact” by using ownership, an agreement, or “otherwise”. Given the breadth of this language, Parliament likely intended this provision to empower courts to punish corporations that attempt to use technicalities to designate themselves as Canadian, while acquiring property or entities that would otherwise be considered as non-Canadians. 

“Listed on a stock exchange in Canada” is more unclear, as “in Canada” can refer to a stock market that is Canadian in origin or any market that is open for Canadians to trade in. This difference is significant, as the former would mean only stocks traded in the five Canadian markets designated under section 262 of the Income Tax Act are automatically exempt from the Act. If the latter applies, any stock exchanged on a market designated under section 262 is exempt, regardless of the location of that market. It is likely that a judicial authority would utilize the latter interpretation of “in Canada”. The presumption of no extraneous words in statutory interpretation holds that all language within a statute serves a distinguishable purpose from the components of that same statute. If Parliament did intend for “in Canada” to refer to stock markets based in Canada, this would presumably be to prevent foreign companies that do not meet the federal and provincial standards necessary to list on a Canadian exchange from buying land. However, these companies would already be captured under subsection (b)’s designation that companies incorporated outside of Canada are non-Canadian. By contrast, if “in Canada” refers to any market open to Canadians generally, this language would capture private corporations owned by non-Canadians that are incorporated in Canada. This group would otherwise not be captured by the regulations. Nevertheless, it is impossible to state with certainty how this provision will be interpreted until a judicial authority reviews this subsection and makes a precedent-setting determination. 

Presently, two additional groups have been classified as non-Canadians by the Minister of Housing and Diversity and Inclusion under subsection (d); “entities” formed outside of Canadian law and “entities” formed under Canadian law that do not list their shares or ownership interests on a stock exchange under Section 262 of the Income Tax Act. Entity is not defined in the Act or its corresponding regulations, so it is unclear what fits under this provision. However, the provision of the Act’s regulation introducing these groups is identical to sections 2(b) and (c) of the Act. Therefore, it can be inferred that “entity” likely encompasses non-corporate organizations. 

In sum, non-Canadians under the Act can best be defined as any individual or organization that does not fall into one of the following groups: 

• Canadian Citizens; 
• People registered under the Indian Act; 
• Public corporations and organizations formed within the Canadian legal system; 
• Private corporations and organizations formed within the Canadian legal system where a non-Canadian party does not maintain 10%+ of the organization’s value derived from equity or the organization’s voting rights; and  
• Private corporations and organizations formed within the Canadian legal system that are judged by a court to not be substantially controlled by a non-Canadian party. 

Can Canadians Still be Sanctioned Under the Act? 

Yes, section 6(1) of the Act can impose liability on any Canadian that knowingly “counsels, induces, aids or abets” a non-Canadian in acquiring residential property. Additionally, section 6(2) imposes personal liability on officers, directors, agents, mandataries, senior officials, and other parties operating in a managerial or supervisory function if the organization they work for contravenes the Act. 

Additionally, Canadians under the Act may still be subject to Ontario’s Non-Resident Speculation Tax. The Act and the Non-Resident Speculation Tax utilize different definitions of non-Canadian and certain parties may be captured under one definition but not the other. For a detailed breakdown on the Non-Resident Speculation Tax please visit this article. 

What Actions are Prohibited Under the Act? 

Under the Act, non-Canadians are prohibited from purchasing any residential property located within a census agglomeration or census metropolitan area designated under the Standard Geographical Classification  2021 (SGC). Under the SGC, census metropolitan areas consist of any city with a population equal to or greater than 100,000, with 50,000 living in the city’s core. Census agglomerations consist of any community with a population equal to or greater than 10,000. 

Not all residential properties are captured under the Act. The Act only applies to the acquisition of a legal or equitable interest or real right in a detached house, a unit in a semi-detached home, a unit in a boathouse, and similar premises to these first three articles. Purchasing a building with more than three dwelling units, or purchasing a unit within such a building, does not contravene the Act. Adjacent land and appurtenances (garages, sewers, etc.) necessary to fully use and enjoy the property are also part of a residential property under the Act. Common areas shared amongst multiple dwelling units are also included in the Act’s definition of residential property if the right to access this common area flows from a residential property under the Act. Mobile homes and similar dwellings may also qualify as residential properties under the Act if they are affixed to the land in a way that makes them unmovable.  

Furthermore, certain methods of acquiring property are exempted from the Act. Acquisition of an interest or right to property will not contravene the Act if that interest or right arose from an inheritance, divorce, separation or gift. Non-Canadians can also lease property if the lease’s purpose is for the non-Canadian to occupy the building. 

What Happens if Someone Breaks the Act? 

As a criminal statute, legal sanctions for the violating the Act will only follow after the offender has been formally charged by the Crown and gone through the relevant criminal proceedings. Under the Act, those found liable for purchasing residential property as a non-Canadian or aiding and abetting a non-Canadian in purchasing property may receive a fine of up to $10,000. 

Alternatively, the Minister of Housing and Diversity and Inclusion may file an application with Superior Court of Justice to sell the property. The non-Canadian must own the property at the time of the order and all parties that may receive a portion of the sale must be given notice for an order to sell to be valid. Additionally, the Superior Court must determine that the order is not disproportionate relative to the nature, severity, and surrounding circumstances of the offense. Upon selling the property, the proceeds will first be used to cover the costs of the sale and to pay off any fines amassed by the offender. The remaining funds will then be distributed to any parties that the Court identifies as being entitled to some of the proceeds, the offender, and the Receiver General in that order. Additionally, the offender’s portion of the proceeds is capped at the purchase price that they paid for the property.  

Exemptions 

Real Estate Investment Trusts are not subject to the Act if the Trust is formed inside the Canadian legal system, a non-Canadian entity does not maintain 10% or more of the Trust’s value derived from equity or the Trust’s voting rights, and a court does not determine that a non-Canadian substantially controls the Trust. 

Non-Canadian status has no effect on the validity of a sale of residential property. The Act does not apply retroactively; agreements entered into prior to 2023 will not be effected by the Act regardless of the Non-Canadian status of any parties. 

Some foreign nationals that would otherwise qualify as non-Canadians are statutorily exempted under the Act’s regulations, including: 

• Those designated with diplomatic, consulate, official representative status, or special representative status by the Department of Foreign Affairs, Trade, & Development. 
• Those granted temporary resident status or a temporary resident visa by the Minister of Citizenship and Immigration under section 25 of the Immigration and Refugee Protection Act if granting the exemption provides safe haven to those fleeing conflict. 
• Those inside Canada that have made a claim for refugee protection under section 99(3) of the Immigration and Refugee Protection Act if the claim has been referred to the Refugee Protection Division under section 100(1) of this same act. 

Temporary residents may purchase one residential property in total during the prohibitionary period if certain conditions are met, with these required conditions varying between students and workers.  

• For students, the temporary resident must be enrolled in a primary school, secondary school, or a post-secondary school that has been designated by the provincial/territorial government to host international students. Students must also have filed income tax returns for the 5 years preceding the purchase, resided in Canada for at least 224 days for each of the 5 years preceding the purchase, and the property’s value cannot exceed $500,000. 
• For workers, the temporary resident must have a valid work permit or authorization to work under section 2 or section 186 of the Immigration and Refugee Protection Regulations respectively. This permit or authorization must have at least 183 days of validity remaining as of the time of purchase.   

As of March 27, 2023, residential properties purchased for the purpose of development are not subject to the Act. Whether modifications will qualify as development is a fact-specific inquiry and the exact necessities to qualify as developing a property will vary from case to case. Converting a personal use property into a rental property does not qualify as a development.

For further inquiries regarding whether a planned use of land is a development or with any other contents contained in this article, please contact the offices of McKenzie Lake Lawyers LLP. 

This article was written by Lawyer, Brent Pickard and Summer Student, Garrett Van Lowe. For additional information, please do not hesitate to contact brent.pickard@mckenzielake.com. 

If you require assistance with any legal matter, speak to a lawyer at McKenzie Lake Lawyers LLP by calling (519) 672-5666.