New Canadian real estate rules regarding non-resident ownership

May 2023 | EXPERT BRIEFING | SECTOR ANALYSIS

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Canada recently enacted new legislation which significantly impacts foreign ownership of Canadian residential real estate. Specifically, there is currently a two year prohibition on non-residents acquiring residential property in Canada. In addition, there is a new annual 1 percent tax on the value of residential property owned by non-residents, as well as an annual filing obligation. These rules, along with their exceptions and planning suggestions, are described below.

Prohibition on the Purchase of Residential Property by Non-Canadians Act (the PPRNA)

Scope of the PPRNA. The PPRNA prohibits non-Canadians from purchasing residential property in Canada, directly or indirectly, for a period of two years commencing on 1 January 2023. For purposes of this legislation, “non-Canadians” are defined as: (i) individuals who are not Canadian citizens, permanent residents of Canada or registered as an Indian under the Indian Act; (ii) corporations that are not incorporated in Canada; and (iii) corporations that are incorporated in Canada but are ‘controlled’ by non-Canadians.

Control of a corporation is defined to mean direct or indirect ownership of shares representing 10 percent or more of the value of the equity or carrying 10 percent or more of the voting rights of the corporation. Trusts or partnerships controlled by non-Canadians or formed outside Canada are also considered non-Canadian for purposes of this legislation. Specific rules apply to temporary residents such as individuals in Canada on a work permit or study permit.

“Residential property” is defined to mean real or immovable property situated in Canada that is a detached house or similar building containing not more than three dwelling units, a semi-detached house, row-house unit, residential condominium unit or other similar premises.

Exemptions under the PPRNA. There is an exemption for residential property located in certain non-urban areas, such that non-residents are still generally able to purchase Canadian vacation homes during the period the prohibition is in force. The PPRNA contains specific guidelines for determining whether a particular location qualifies for the exemption based on population density.

Regulations to the legislation clarify that the PPRNA does not apply to renting residential property to a tenant or acquisitions resulting from the exercise of a security interest or secured right by a secured creditor, the transfer under the terms of a trust that was created prior to 1 January 2023, or to an individual receiving the residential property following a death, divorce, separation or as a gift. There are also certain grandfathering rules for agreements entered into before 1 January 2023.

Penalties. The acquisition of residential property by a non-Canadian in contravention of the PPRNA is an offence that carries a fine of up to $10,000 for the purchaser as well as every person who participated in the commission of the offence or counselled, induced, aided or abetted in its commission. In addition, residential property acquired in contravention of the Prohibition Act can be subject to a forced sale.

Underused Housing Tax Act (UHTA)

Scope of the UHTA. The UHTA implements a new national 1 percent underused housing tax (UHT) on the “taxable value” of non-Canadian-owned residential property, payable annually. The UHTA came into force in 2022 and may have implications for foreign owners of Canadian residential real estate even if the residential property may not actually be ‘underused’ as this term is generally understood.

The definition of “residential property” for purposes of the UHTA is similar to the definition under the PPRNA. The “taxable value”, subject to certain elections, is the greater of the value established on the municipal roll and the most recent sale price on or before 31 December of the year.

The “owner” of the property is defined broadly and includes the person identified as an owner under the land registration system (or other similar applicable system) or a person who could reasonably be considered to be an owner based on such a system. It includes a life tenant under a life estate, a life lease holder and a person that has continuous possession of the land under a long-term lease, which includes a lease, licence or similar arrangement providing continuous possession of the land for 20 years or more, or which contains an option to purchase the land.

Reporting obligations. The UHTA imposes broad reporting obligations. In particular, every person who is an owner of a residential property (as defined in the legislation) on 31 December each year is required to file a UHT return for the calendar year by 30 April of the following year unless the owner is an “excluded owner”. Accordingly, returns are due by 30 April for 2022. One category of excluded owners consists of individuals who are Canadian citizens or Canadian permanent residents, provided that they own the residential property directly in their personal capacity.

If an individual owns the property through a corporation, trust or partnership, that entity is generally not an excluded owner and has a UHT filing obligation. Other types of excluded owners include Canadian and provincial governments, Canadian and provincial publicly listed corporations, mutual fund trusts, real estate investment trusts, registered charities, cooperative housing corporations, hospital authorities, municipalities, public colleges, school authorities, universities, para-municipal organisations and indigenous governing bodies.

Exemptions from the payment of tax. In general terms, exemptions from the payment of tax (but not filing obligations) are available under certain conditions. In particular, there is an exemption from the payment of tax under the UHTA where the residential property was acquired or constructed in the calendar year, and for residential properties that meet “qualifying occupancy” tests, generally consisting of continuous occupancy for periods of at least 30 days, totalling 180 days or more in the year, by an arm’s length person under a written agreement, or a non-arm’s length person where the written agreement has arm’s length terms, as well as by an individual who is the owner or the owner’s spouse or common-law partner who is in Canada for the purpose of pursuing authorised work under a Canadian work permit (and occupies the dwelling in relation to that purpose), or an individual who is a spouse, common-law partner, parent or child of the owner and who is a citizen or permanent resident.

There are also exemptions for newly constructed properties (where other conditions are met), properties that meet certain “primary place of residence” requirements, “seasonally inaccessible” properties, properties that are uninhabitable for certain periods due to disasters or renovation, and where the person becomes an owner of the residential property in the calendar year. Properties where an owner died in the current or immediately prior taxation year are also generally exempt from the payment of taxes.

A corporation is exempt from tax under the UHTA if it is a “specified Canadian corporation”, defined as a corporation incorporated or continued under the laws of Canada or a province, other than a corporation in respect of which the following persons have ownership or control, directly or indirectly, of shares of the corporation representing 10 percent or more of equity or 10 percent or more of the votes: an individual who is neither a citizen nor a permanent resident, or a corporation that is incorporated or continued outside Canada. A partnership will be exempt if all of the partners are excluded owners or specified Canadian corporations. A trustee of a trust will only be exempt if each beneficiary is an excluded owner or specified Canadian corporation.

Of significance is the exemption from tax under the UHTA for properties located in non-urban areas, provided the property is used by the owner or the owner’s spouse for at least 28 days in the year. For purposes of this exemption, the owner is generally the person on title at the land registry. Guidance released in connection with these rules indicates that since it is the person on title who must use the property, property owned through a corporation cannot meet this exemption as a corporation cannot use the property. Non-residents purchasing a Canadian vacation property should be mindful of the UHTA in structuring their acquisitions in order to fit within the available exemptions where possible.

Non-residents that were owners on 31 December 2022 of properties that are “residential properties” for purposes of the UHTA should be mindful that they may be required to file a return and, unless exempted, pay the 1 percent tax by 30 April 2023.

Concluding remarks

The PPRNA and UHTA were adopted with the stated intention of countering concerns about rising housing costs in Canada’s major cities. It remains to be seen to what extent the legislation will have the desired goal. Industry groups have raised concerns that these restrictions may lead to a further tightening in housing supply.

On 27 March 2023, the Canadian government released additional regulations addressing some of these concerns. The government reduced the scope of the PPRNA to not apply to vacant land zoned for residential use and introduced a new exception regarding the acquisition of residential property by a non-Canadian for the purposes of development.

Concerns have also been raised about the unnecessarily broad administrative burden imposed by the UHTA. The legislation currently requires reporting on a per-property basis and by taxpayers who are otherwise exempt from paying the UHT, such as corporations wholly owned by Canadians. Amendments which ease the administrative burden for both Canadians and non-Canadians would be welcome.

Elie S. Roth and Rhonda Rudick are partners and James D. Trougakos is an associate at Davies Ward Phillips & Vineberg LLP. Mr Roth can be contacted on +1 (416) 863 5587 or by email: eroth@dwpv.com. Ms Rudick can be contacted on +1 (514) 841 6525 or by email: rrudick@dwpv.com. Mr Trougakos can be contacted on +1 (514) 841 6449 or by email: jtrougakos@dwpv.com.

Elie S. Roth, Rhonda Rudick and James D. Trougakos

Davies Ward Phillips & Vineberg LLP