Regulatory amendments address commercial real estate industry concerns regarding federal foreign buyer ban
The federal Minister of Housing and Diversity and Inclusion has announced a series of regulatory amendments with respect to the Prohibition on the Purchase of Residential Property by Non-Canadians Act (the Act) which alleviate many of the concerns the commercial real estate industry has voiced regarding the legislation.
The Act prohibits “non-Canadians” from purchasing any “residential property” directly or indirectly for a two-year period until the end of 2024. While the legislation was originally created to assist with housing affordability in major urban centres, the release of the accompanying regulations (the Regulations) on December 21, 2022 revealed the ban’s significant and seemingly unintended consequences for commercial real estate transactions.
The amended Regulations do not entirely dispose of the issues industry experts have raised regarding the Act. Care will still need to be taken in assessing the application of the law to transactions involving properties that have existing residential uses, on a case-by-case basis.
Issues addressed in the amendments
The amendments respond to concerns raised regarding the Act in the following manner:
1. Increasing the foreign ownership threshold of “control”
The amendments have revised the definition of "control" by increasing the foreign ownership threshold to 10%, which is less than the 20% threshold the commercial real estate industry had been seeking. This change is likely to be of some assistance to many investment funds with foreign investors. This benefit is further bolstered by the narrowed definition of “residential property” and the “development” exclusion, discussed further below.
2. Expanding an existing exemption to include all publicly traded entities
Under the amended regulations, publicly traded Canadian entities (not merely corporations) listed on a Canadian stock exchange are now excluded from the definition of “non-Canadian”. This would include REITs, and likely also the affiliates or subsidiaries of the REIT. However, in relation to such affiliates or subsidiaries, we recommend consulting further with legal counsel if the 10% foreign ownership threshold is or may be exceeded at the REIT level.
3. Narrowing the definition of “residential property”
The amendments have repealed the portion of the definition of “residential property” referring to “land that does not contain any habitable dwelling, that is zoned for residential use or mixed use”. All that now remains within the definition of “residential property” in the Act are those properties that contain three or fewer residential units (or similar properties).
4. Exempting acquisitions for the purposes of development
The Regulatory amendments introduce a new subsection that exempts non-Canadians acquiring residential property "for the purposes of development” from the prohibition under the Act.
There is no definition of “development” or further guidance regarding this exemption included in the amendments. However, the amendments are accompanied by new Frequently Asked Questions on the CMHC website that offer insight as to how the Ministry may interpret this “development exemption” (it being acknowledged that the CMHC FAQs are not legally binding).
Read the full Update posted on March 30, 2023