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

DENTON'S CANADA (REAL ESTATE GROUP) - Starting January 1, 2023, non-Canadians will be prohibited from purchasing residential real estate in Canada for a period of two years under the newly enacted Prohibition on the Purchase of Residential Property by Non-Canadians Act (the Act).1

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

• The prohibition will last two years, starting January 1, 2023.
• Existing agreements, where liability arose or was assumed before January 1, 2023, will likely not be impacted.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.
• People who have knowingly assisted in a contravention of the Act may be subject to monetary penalties.

This insight discusses these key points in greater 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 others deemed to be “non-Canadian.”3 Contractual obligations that arise or are assumed prior to January 1, 2023, are not impacted.

Key details that will define the precise scope of the prohibition, including the activities that will constitute a “purchase,” whether vacant land with development potential will be considered “residential real estate,” the classes of persons exempted from the prohibition, and the level of non-Canadian investment that will be permitted before a corporation will be deemed to be a non-Canadian, have not yet been finalized and released. They will be addressed in supporting regulations expected to be issued in the coming months (the Future Regulations). The Government’s initial proposals on these issues were outlined in an earlier consultation paper (the Consultation Paper), and the Future Regulations will likely take a similar approach.

Key aspects of the legislation

Who will be deemed “non-Canadian” under the Act?4

• Individuals who are not Canadian citizens or permanent residents of Canada.
• Corporations that are not incorporated in Canada.
• Corporations controlled within the meaning of the Future Regulations by foreign corporations or individuals who are not Canadian citizens or permanent residents of Canada. The Consultation Paper indicated that the threshold would be: (1) direct or indirect ownership of 3% or more of the value of equity or voting rights of a corporation, or (2) control in fact.
• Other persons and entities set out in the Future Regulations.

What types of “residential property” will be impacted?5

• A detached house or similar building containing not more than three dwelling units.
• A part of a building that is a semi-detached house, rowhouse unit, residential condominium unit, or similar premises that is intended to be owned apart from any other unit in the building.
• Other properties prescribed by Future Regulations. The Consultation Paper indicated that vacant land zoned for residential or mixed-uses in a Census Metropolitan Area or Census Agglomeration would constitute residential property for the purpose of the Act.
• The Consultation Paper indicated that recreational properties outside of Census Metropolitan Areas or Census Agglomeration would not be considered residential property.

What exemptions will be available?6

• Refugees.
• Individuals who purchase 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 satisfy conditions prescribed in the Future Regulations. The Consultation Paper indicated that students and foreign workers who meet specified criteria might be eligible.
• Other classes of persons prescribed by the Future Regulations. The Consultation Paper indicated that there would be exemptions for any persons to whom indigenous rights under Section 35 of the Constitution Act, 1982 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 contract of purchase and sale prior to January 1, 2023.
• The Future Regulations are expected to determine what future activities will be prohibited. The Consultation Paper indicated that the prohibition will 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
Significantly, the Act will not impact the underlying validity of sales of residential property that may contravene the Act.7 The implication is that purchasers and vendors will still be legally bound to comply with their obligations under contracts that contravene the Act unless contracts contain termination provisions or other protective measures. It is expected that these contracts will continue to be enforceable by usual legal means. Presumably, assignment and assumption contracts will be similarly enforceable, notwithstanding any contravention of the Act. 

The prohibition on purchases by non-Canadians does not apply to contractual obligations arising or assumed prior to January 1, 2023.8 Subject to the requirements of the Future Regulations, it is implied that conveyances are allowed during or after the two-year prohibition period if the contractual obligation to purchase arose prior to January 1, 2023. What is unclear is whether this exclusion applies to conditional contracts entered into prior to January 1, 2023, that become unconditional on or after January 1, 2023.

The Future Regulations delineate the kinds of transactions that will constitute prohibited “purchases.” The Consultation Paper indicated that a “purchase” would include both acquiring and entering into a conditional or unconditional contract to acquire a legal or beneficial interest in residential property. If that is the case, non-Canadians will be prohibited from entering into pre-sale contracts and from completing the purchase transactions (other than in respect of contracts entered into or assumed prior to January 1, 2023) during the two-year period. 

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

Enforcement and penalties
Anyone who “knowingly…counsels, induces, aids or abets” in a contravention of the Act by a non-Canadian, or attempts to do so, is guilty of an offence and liable on summary conviction to a fine of up to CA$10,000.9 Furthermore, if a corporation or entity commits an offence, its directors, officers, managers, supervisors, agents, and others who have directed authorized, assented to, acquiesced in, or participated in the contravention may be personally liable.10

This broadly-worded offence provision will have a wide reach. Liability could arise not only for non-Canadian purchasers but also for developers and vendors, assignors, lawyers and professional advisors, and others involved in the contravention. For instance, a vendor who enters into an impugned contract or consents to an assignment of a contract to a non-Canadian may be “aiding” or “abetting” the impugned purchase. Furthermore, services ordinarily offered in connection with residential conveyancing by real estate agents, notaries, lawyers, mortgage brokers, and other professional advisors may constitute “counseling” or “aiding” in a purchase by a non-Canadian. 

An issue may arise where it is later discovered that a purchaser under a binding contract is a non-Canadian. Completing the conveyance in accordance with the purchase contract, and providing services in connection with the conveyance, may be an offence under the Act. At the same time, refusing to complete or advise in the completion of the conveyance may be a breach of contractual and possibly professional obligations.

In addition to imposing penalties, the Minister may apply to the court for an order to sell a property that has been purchased in contravention of the Act.11 The manner and conditions for this type of sale remain to be set by the Future Regulations. The Act provides that in no event may the seller recover more from the sale of the property than what they paid for it.

Next steps
People participating in the residential real estate market may wish to consider whether purchase and sale contracts ought to include protective provisions, such as representations and warranties from purchasers regarding whether they are non-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. 

Developers, in particular, should train sales staff regarding the requirements of the Act and should ensure that sales staff undertake reasonable inquiries as to whether purchasers are non-Canadians. This will protect developers from being found to have entered into contracts with non-Canadians knowingly or with wilful blindness.

Many key details remain to be determined by the Future Regulations, and Dentons will continue to monitor further developments relating to the Act. For more information, please contact a member of Dentons’ Real Estate group.
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Special thanks to Susannah Blary, Student-at-Law, who assisted in preparing this insight.

1 Prohibition on the Purchase of Residential Property by Non-Canadians Act, SC 2022, c 10, s 235 [Act]. The Act is repealed on the second anniversary of its in force date: see Bill C-19, An Act to implement certain provisions of the budget tabled in Parliament on April 7, 2022 and other measures, 1st Sess, 49th Parl, (assented to June 23, 2022), ss 236 and 237. 
2 As discussed further below, this is subject to how the Future Regulations will apply to conditional contracts that become unconditional after January 1, 2023.
3 See Act, s 4(1).
4 Ibid, s 2, definition of non-Canadian.
5 Ibid, s 2, definition of residential property.
6 Ibid, s 4(2).
7 Ibid, s 5.
8 Ibid, s 4(5).
9 Act, supra 1, s 6(1).
10 Ibid, s 6(2).
11 Ibid, s 7.