On November 28, 2022, we published an explanation of the federal government’s new Prohibition on the Purchase of Residential Property by Non-Canadians Act (the “Act”). At that time, the federal government had yet to fully detail how the prohibition would be applied and what kind of exemptions would be carved out.
On December 21, 2022, the Regulations accompanying the Act were released, clarifying a number of details. This article will build on our earlier explanation by discussing what the Regulations have revealed.
Non-Canadian Entities.
The Regulations expand on the definition of what constitutes a non-Canadian under the Act and the exemptions to the class of non-Canadians.
Prior to the release of the Regulations, section 2 of the Act classified corporations incorporated outside of Canada or a Canadian province as “non-Canadian.” However, the Regulations have expanded on the definition of non-Canadian “entity” to include “an entity formed otherwise than under the laws of Canada or a province” as well as any entity that is controlled by an entity that is not formed in Canada or a Canadian province, or is controlled by a non-Canadian as defined in section 2 of the Act.
Consequentially, the definition of non-Canadian is not limited to individuals and corporations but now captures other company structures, including partnerships.
The Definition of Control.
One definition that was missing in the original legislation was what the government would consider “control” of a corporation or entity. The Regulations have now illuminated what particular threshold constitutes control under the Act. The Regulations define “control” of a corporation or entity as:
“(a) direct or indirect ownership of shares or ownership interest of the corporation or entity representing 3% or more of the value of the equity in it, or carrying 3% or more of its voting rights, or
(b) control in fact of the corporation or entity, whether directly or indirectly, through ownership, agreement or otherwise.”
In comparison to other areas of law, a 3% control threshold is significantly lower and creates a circumstance where many companies considering purchasing residential real estate should carefully consider their ownership and equity structures to ensure they do not violate the Act’s prohibition.
Residential Property Exclusion
As with the definition of non-Canadian, the definition of “Residential Property” outlined in the Act left a number of questions, including what would constitute exempted “prescribed real property or immovables.”
The Regulations set out that property located in an area of Canada that is not either a census agglomeration (“CA”) or a census metropolitan area (“CMA”) is considered a prescribed property or immovable and is not subject to the prohibition under Act. Practically speaking, this means that some common recreational property locations (such as Big White) appear to be excluded from the prohibition for the time being.
Statistics Canada determines the definitions and boundaries of CAs and CMAs. The boundaries of a CA or CMA may vary over time, meaning that properties excluded from the Act’s prohibition in 2023 may not be excluded in 2024. Thus, it is important for developers, investors, and real estate professionals working with non-Canadians to consult the latest Statistics Canada determinations to see what properties may have become exempt.
Vacant Land.
The Regulations have also expanded the definition of Residential Property to include land without a dwelling located within a CA or CMA that is zoned for residential use or mixed-use. As a result, non-Canadians will be prohibited from purchasing vacant land within a CA or CMA, depending on the zoning.
What constitutes a “purchase.”
Before the Regulations’ release, it was noted that the Act did not define what precisely was meant by the term “purchase,” this has been remedied by the Regulations.
Section 4 of the Regulations defines “purchase” as:
“the acquisition, with or without conditions, of a legal or equitable interest or a real right in a residential property.”
This means that any acquisition, whether for a legal interest or a beneficial interest acquired by a new beneficiary under a trust, would constitute a purchase under the Act. As a result, the transfer of beneficial ownership of a property to a non-Canadian under a trust may be prohibited, regardless of whether the trustee is a Canadian citizen or permanent resident.
However, the Regulations also create exemptions for activities that would otherwise constitute a purchase. Namely, that a purchase will not include:
“(a) the acquisition by an individual of an interest or a real right resulting from death, divorce, separation or gift;
(b) the rental of a dwelling unit to a tenant for the purpose of its occupation by a tenant;
(c) the transfer under the terms of a trust that was created prior to the coming into force of the Act; or
(d) the transfer resulting from the exercise of a security interest or secured right by a creditor.”
Conditions for Temporary Residents
Our previous article noted that students and temporary workers in Canada on valid work permits would be excluded from the prohibition on purchasing residential real estate. The Regulations clarify what conditions a temporary resident must fulfill to qualify for the exemption, including a restriction on the number of properties that international students and temporary foreign workers may purchase and the value of the property that an international student may purchase.
International students enrolled in a program of study at a designated learning institution must satisfy the following:
“(i) 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,
(ii) 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,
(iii) the purchase price of the residential real property does not exceed $500,000, and
(iv) they have not purchased more than one residential property.”
Similar conditions are outlined for temporary residents working in Canada under a valid work permit. Temporary workers who hold a valid work permit or are authorized to work in Canada under the Immigration and Refugee Protection Regulations will be exempted from the Act’s prohibition if they satisfy the following conditions:
“(i) 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 Immigration and Refugee Protection Regulations,
(ii) 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
(iii) they have not purchased more than one residential property.”
The Regulations have delivered a more precise understanding of how the federal government plans to apply the Act and the prohibition on the purchase of residential real estate by non-Canadians. Furthermore, it has set a repeal date of January 1, 2025, when the Act will no longer be in force. Real estate professionals, developers and investors must exercise a great deal of caution, especially regarding business ownership structures, to prevent running afoul of the Act’s prohibitions.
For more information, please contact Rebecca Dickson at [email protected] or Kyle Ramsey at [email protected].