Canadian government enacts two-year ban on purchases of residential real estate by non-Canadians

Effective January 1, 2023, non-Canadians will be prohibited from purchasing residential real estate in Canada for a period of two years under the new law Prohibition on Purchase of Residential Property by Non-Canadians Act (the act).1

Developers and vendors should familiarize themselves with the requirements of the new legislation. Here are the key points to keep in mind:

  • The ban will last for two years, starting January 1, 2023.
  • Existing agreements, for which responsibility arose or was assumed before January 1, 2023, are unlikely to be affected.2
  • The prohibition will not apply to Canadian citizens, permanent residents of Canada or companies incorporated in Canada that are not controlled by non-Canadians.
  • The validity of sales will not be impacted.
  • The people who have knowingly assisted in a breach of the Act may be subject to monetary penalties.

This overview discusses these key points in more detail and will suggest next steps for developers and vendors.

An overview of the legislation

The Act prohibits direct and indirect purchases of residential real estate by individuals who are not Canadian citizens or permanent residents, foreign corporations and other persons considered “non-Canadian”.3 Contractual obligations arising or assumed before January 1, 2023 are not affected.

Key details that will define the precise scope of the ban, including activities that will constitute a “purchase”, whether vacant land with potential for development will be considered “residential real estate”, categories of people exempt from the prohibition and the level of non-Canadian investment that will be permitted before a company is deemed to be a non-Canadian, have not yet been finalized and published. They will be addressed in the supporting regulations that are expected to be released in the coming months (the future regulations). The Government’s initial proposals on these issues were outlined in an earlier consultation document (the Consultation Document), and future regulations will likely take a similar approach.

Main aspects of the legislation

Who will be considered “non-Canadian” under the Act?4
  • Persons who are not Canadian citizens or permanent residents of Canada.
  • Companies that are not incorporated in Canada.
  • Companies controlled within the meaning of the future regulations by foreign companies or individuals who are not Canadian citizens or permanent residents of Canada. The consultation paper said the threshold would be: (1) direct or indirect ownership of 3% or more of a company’s equity or voting value, or (2) de facto control.
  • Other Persons and Entities Set Out in Future Regulations.
What types of “residential property” will be impacted?5
  • A detached house or similar building containing no more than three dwellings.
  • A part of a building that is a semi-detached house, townhouse, residential condominium unit or similar premises that is intended to be owned separately from any other unit in the building.
  • Other properties prescribed by future regulations. The consultation document stated that vacant land zoned for residential or mixed-use purposes in a census metropolitan area or census agglomeration would constitute residential property for the purposes of the Act.
  • The consultation document indicated that recreational properties outside census metropolitan areas or census agglomerations would not be considered residential properties.
What exemptions will be available?6
  • Refugees.
  • Individuals purchasing residential property with their spouse or common-law partner if the spouse or common-law partner is eligible to purchase residential property in Canada.
  • Temporary residents in Canada who meet the conditions prescribed in the future regulations. The consultation document indicated that foreign students and workers who meet specific criteria may be eligible.
  • Other categories of persons prescribed by future regulations. The consultation document indicated that there would be exemptions for anyone with Aboriginal rights under section 35 of the Constitution Act 1982 to apply.
How will pre-existing and future contracts be impacted?
  • The prohibition does not apply where a non-Canadian becomes liable or assumes liability under a purchase and sale agreement before January 1, 2023.
  • Future regulations should determine which future activities will be prohibited. The consultation paper said the prohibition would apply to acquisitions and entering into a conditional or unconditional contract to acquire legal or beneficial interests in land.

Impacts on existing and future contracts

It is important to note that the Act will not affect the underlying validity of residential property sales that may violate the Act.seven The implication is that buyers and sellers will still be legally bound to comply with their obligations under contracts that violate the law, unless the contracts contain termination provisions or other safeguards. It is expected that these contracts will continue to be enforceable through normal legal channels. Presumably, assignment and assumption agreements will also be enforceable, notwithstanding any contravention of the Act.

The ban on purchases by non-Canadians does not apply to contractual obligations arising or assumed before January 1, 2023.8 Subject to future rule requirements, it is implied that transfers are permitted during or after the two-year blackout period if the contractual obligation to purchase arose before January 1, 2023. What is unclear , is whether this exclusion applies to conditional contracts concluded before January 1, 2023, which become unconditional on or after January 1, 2023.

Future regulations define the types of transactions that will constitute prohibited “purchases”. The consultation paper stated that a “purchase” would include both the acquisition and entering into a conditional or unconditional contract to acquire a legal or beneficial interest in residential property. If so, non-Canadians will be prohibited from entering into pre-sale contracts and entering into purchase transactions (except with respect to contracts entered into or assumed before January 1, 2023) during the two years.

There is currently no indication that the ban will be extended beyond two years.

Enforcement and Penalties

Anyone who “knowingly … counsels, instigates, aids or abets” a violation of the Act by a non-Canadian, or attempts to do so, is guilty of an offense and liable on summary conviction to a fine. up to CA$10,000.9 In addition, if a company or entity commits a violation, its directors, officers, managers, supervisors, agents and others who ordered, authorized, consented to, acquiesced in or participated in the violation may be personally liable.ten

This broadly drafted offense provision will be far-reaching. Liability could be incurred not only for non-Canadian buyers, but also for promoters and sellers, assignors, lawyers and professional advisers, and others involved in the contravention. For example, a seller who enters into a disputed contract or consents to the assignment of a contract to a non-Canadian may “aid” or “abet” the disputed purchase. In addition, services customarily provided in connection with a residential conveyance by real estate agents, notaries, lawyers, mortgage brokers and other professional advisers may constitute “advice” or “assistance” in a purchase by a non- -Canadian.

A problem can arise when it is later discovered that a purchaser under a binding contract is a non-Canadian. Performing the assignment in accordance with the purchase agreement and providing services related to the assignment may constitute an offense under the Act. At the same time, the refusal to carry out or to advise in the carrying out of the assignment may constitute a breach of contractual and possibly professional obligations.

In addition to imposing penalties, the Minister may ask the court to order the sale of property purchased in contravention of the Act.11 The terms and conditions of this type of sale remain to be determined by the future regulations. The law provides that under no circumstances can the seller recover more from the sale of the property than he paid for it.

Next steps

People participating in the residential real estate market may want to consider whether purchase and sale contracts should include protective provisions, such as representations and warranties from buyers as to whether they are -Canadians under the Act, restrictions on assignments to non-Canadians and other remedies (for example, indemnities or termination rights) that apply if the purchaser is a non-Canadian.

Promoters, in particular, should train sales staff on the requirements of the Act and should ensure that sales staff make reasonable inquiries as to whether purchasers are non-Canadians. This will prevent promoters from being found guilty of entering into contracts with non-Canadians knowingly or with willful blindness.