A very interesting development snuck through at the back end of 2022 when Canada placed a prohibition on foreigners purchasing any residential property (including vacant land) in Canada. The prohibition took effect on 1 January 2023 and will be in place for two years, initially at least. This is interesting in today’s globalised world where many countries are concerned about rich foreigners owning the best property, and is linked to various countries ceasing their “golden passport” regimes based on property ownership, notably Ireland and Portugal. It’s also linked to the social and political concerns raised when swathes of the most desirable properties are owned by foreigners who don’t live there, which in turn has led to the non-resident landlord registrations in the UK, or the special withholding tax on property sales by non-residents in South Africa. So what’s happened in Canada and why should we care?
Understanding the scope of the prohibition
The prohibition extends to direct and indirect purchases of residential property. Thus, a direct purchase of residential property by a foreign individual, or an indirect purchase via a corporation, trust, partnership, etc, whether foreign or foreign-owned, are all prohibited. The ban applies to residential properties with three units or less, as well as parts of semi-detached homes and condominiums that are in census metropolitan areas (basically an area with a large population).
The prohibition also extends to entities formed/incorporated in Canada but which are “controlled” by a foreign individual/entity. Control for these purposes is specifically defined to include:
- Any direct or indirect ownership by any foreigner of 3% or more of the participating or voting rights shares in the Canadian entity (a very low threshold indeed!); and
- De facto control of the Canadian entity by a foreigner, including any indirect or substantive control by foreigners.
The exceptions to the prohibition
Some key exceptions to the new prohibition include:
- A non-Canadian who permanently resides in Canada (so ok if you validly emigrate);
- International students who are part a designated learning institution (DLI);
- Refugees;
- Non-Canadians who purchase residential property in Canada with their spouse or common-law partner, if the spouse or common-law partner is a Canadian citizen, a person registered as an Indian under the Indian Act, or a permanent resident of Canada.
Bear in mind that (surprise, surprise) even the exceptions have exceptions.
Tackling some of the exceptions to the exceptions
Students who are completing their studies at a designated learning institution, will be able to purchase residential property provided they fulfill each of the requirements below:
- All income tax returns have been filed for each of the five tax years preceding the year in which they purchase a house;
- Physical presence in Canada for at least 244 days in each of the five calendar years preceding the year in which they purchase a house;
- The purchase price of the residential property does not exceed CAD500 000; and
- Limited to the purchase of one property.
Furthermore, individuals who have a Canadian work permit and refugees who have obtained the necessary and correct legal authority to work in Canada will be allowed to buy a residential property if the requirements below are met:
- They’ve been in full time employment in Canada for at least three of the four preceding years;
- Income tax returns have been filed for at least three of the four preceding tax years; and
- Limited to the purchase of one property.
What does this mean?
Well we can see from the rules that Canada is happy for foreigners to own Canadian property there if they’re really living there, i.e. they don’t want non-resident landlords (hello London) but they’re happy to have Canadian resident non-citizens buy (hello Mauritius, where non-citizens, even if permanently resident there, are restricted in terms of the property that they can buy). If you are a foreigner looking to buy property in Canada then you may be well advised to consider how this prohibition may affect your plans! Also, even if you’re exempted from the ban you can expect the process to be more onerous as additional documentation will undoubtedly have to be provided to the seller or realtor in Canada.
Going forward, it will be interesting to see what other countries bring in similar restrictions over the next few years, and how it will impact the tax residence of buyers and the tax compliance on property sales. Watch this space!
If you’d like to discuss how this could impact you, contact us today.
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