At the beginning of the year, a new statute was introduced to address housing supply woes for Canadian citizens.
However, after a few short months, the legislation has inadvertently sunk a number of development and real estate investment deals and has led to other unforeseen consequences which are inconsistent with its purpose.
The Prohibition on the Purchase of Residential Property by Non-Canadians Act, S.C. 2022, c. 10, s. 235 (the “Act”) came into effect on Jan. 1, 2023 and will remain in force for a period of two years. The Act was introduced as a means of helping Canadians purchase residential properties by curtailing foreign purchasers.
Please see my previous column on the Act for more information on the prohibitions it introduced.
Act had adverse effects on CRE investment
Though well-intentioned, the Act ended up having unforeseen adverse effects on commercial real estate deals and development projects.
The main reason for this is that the definition of “residential property” under the Act includes land which is zoned for residential or mixed-use. This has resulted in real estate investors having to turn down many potential purchases because the land was zoned for mixed-use purposes.
Examples of this include American funds being precluded from purchasing portfolios of retail stores in Canada because many of the assets were located on mixed-use land.
Also, the Act prohibits corporate entities from purchasing real estate if they are owned in very small part by non-Canadians. Consequently, Canadian developers which are owned by foreign investors have been stifled from carrying out projects despite the fact that they have been operating in Canada for decades.
Foreigners moving to Canada were also affected by the Act because some of them had not obtained permanent residency status to allow them to buy residential real estate.
These setbacks were never intended given that compromising commercial deals has nothing to do with controlling foreign-owned residential real estate and is therefore inconsistent with the purpose of the Act.
Amendments address shortcomings
Fortunately, these issues have been addressed and the Act has been amended to control its unforeseen consequences.
On March 27, 2023, the Hon. Ahmed Hussen, Minister of Housing and Diversity and Inclusion, announced four amendments to the Act, which came into force that same day.
The news release stated the purpose of the amendments is to “enhance the flexibility of newcomers and businesses looking to add to Canada's housing supply”, to “expand exceptions to allow Non-Canadians to purchase a residential property in certain circumstances”, and to “further support individuals and families seeking to build a life in Canada by pursuing home ownership in their communities sooner and address housing supply issues”.
The amendments are summarized as follows:
- The first amendment will allow people who hold work permits or are authorized to work in Canada under the Immigration and Refugee Protection Regulations to buy residential real estate. People will be eligible for this exemption if there are at least 183 days of validity left on their work permit or work authorization at the time they purchase a residential property. However, they will not be eligible if they have bought more than one residential property.
- Section 3(2) of the regulations to the Act is being repealed, which prohibited the purchases of all lands which are zoned for residential and mixed-use. Accordingly, non-Canadians can now buy land that is vacant and zoned for both purposes. If such land is purchased by a non-Canadian, they are now entitled to use it for residential development or any other purpose.
- An exception to the terms of the Act will now allow non-Canadians to purchase residential real estate for development purposes. This exception will also apply to publicly traded companies formed under Canadian laws but controlled by non-Canadians.
- When the Act was introduced, privately held companies were prohibited from purchasing residential properties if a non-Canadian controlled over three percent of the company. That threshold will now be increased to 10 percent under the new amendments.
At this point, it is still unclear whether the Act will fulfill its stated purpose of making it easier for Canadians to purchase housing.
However, the new amendments will hopefully cure some of the issues that were unintentionally created by the Act and development and investment will no longer be stifled.