The Canadian government has enacted two pieces of legislation in its effort to prevent foreign speculation on Canadian real estate that, it believes, significantly contributed to the inflation of housing costs (before the recent chill on prices due to interest rate hikes).
In this alert we will underline the key aspects of the legislation that we believe will affect the Canadian relocation industry, including relocations into Canada and some relocations within Canada.
The legislation is called the PROHIBITION ON THE PURCHASE OF RESIDENTIAL PROPERTY BY NON-CANADIANS ACT. The Act will come into force on January 1, 2023.
Section 4(1) provides, in part: “it is prohibited for a non-Canadian to purchase, directly or indirectly, any residential property.”
How does this affect our clients?
The definitions of “non-Canadian” includes an individual who is neither a Canadian citizen nor a permanent resident;
This means that those coming to Canada, will not be allowed AT ALL to purchase real estate in Canada, until they become Permanent Residents. This may not affect the majority of assignees that come into Canada, but it will affect those who come on work permits, but are deemed permanent relocations, which makes up a sizeable minority.
These expatriates are told by their company that their intended relocation is permanent, and they frequently want to put down roots in their new home country right away by buying a home. Or after a year of living in Canada, they ask to stay permanently.
Now these important contributors to the Canadian economy will be banned from purchasing until they become Permanent Residents, which could take years.
The Act goes onto add another entity to the definition of a non-Canadian: a corporation that is incorporated other than under the laws of Canada or a Canadian province; a corporation that is incorporated under the laws of Canada or a Canadian province whose shares are not listed on a Canadian stock exchange and is controlled by a non-Canadian person or corporation; and a prescribed person.
This could have serious effects on the relocation industry. Right now, many American Relocation companies (and their Canadian subsidiaries) temporarily purchase homes through Guarantee Home Sale programs or under US-style tax-favourable home sale programs such as the Buyer Value Option.
In the first type of program, transferees relocating are offered a Guarantee to buy their home by the relocation company, so as to give a base level price at which the employee is guaranteed to sell their home, whether they can find a buyer or not.
These programs help encourage and foster mobility when markets are such that people cannot sell their property but still need to be at destination. In the second program (Buyer Value Option) the relocation company temporarily buys the employee’s home under a distinctly described program (see Worldwide ERC for more information on the Buyer Value Option program) in order to ensure that the sales costs (commission, mortgage penalty and legal fees) are deemed non-taxable by the IRS on cross-border relocations.
That is a mouthful, but suffice to say that these two programs help foster mobility within Canada and to the United States all the time, and under the second definition of a non-Canadian, foreign owned relocation companies will no longer be able to perform these services.
Could a Canadian-owned company buy the properties on the American Relocation company’s behalf?
No. The Act goes on to say: “and every person or entity that counsels, induces, aids or abets or attempts to counsel, induce, aid or abet a non-Canadian to purchase, directly or indirectly, any residential property knowing that the non-Canadian is prohibited under this Act from purchasing the residential property is guilty of an offence and liable on summary conviction to a fine of not more than $10,000”.
This would mean, for instance, that All Points could not perform the Guarantee Home Sale or the Buyer Value Option on behalf of an American company.
The Regulations have not yet been published
While the Act has passed the Regulations that govern the Act have not yet been published, so there is time for the industry to lobby for special exclusion from the Act of these types of transactions. Special exceptions are made in legislation all the time. They could also change the definition of the word “purchase” which might specifically exclude certain types of transactions. However, it is frequently hard for the Canadian relocation industry to get the attention of the government, because we are such a small group of actors.
All Points can help
If you have a Guarantee Home Sale program or BVO program that you wish to continue to carry out and are a Canadian company or controlled by a Canadian company, All Points is Canadian-owned and can carry out these transactions post January 1, 2023. Call us to ask us any questions about our programs.
Mention is often made of Regulations that will impact the application of the legislation. Regulations are used to clarify the administration of legislation and are established by the cabinet minister who is responsible for the administration of the Act. To date, Regulations have not been published, nor has the Minister who will administer the Act been declared. The Minister will have wide discretion in establishing the Regulations. The status of not knowing which Minister will administer the Act and the lack of Regulations raises interesting questions.-
As Regulations have not yet been prescribed, representations should be made to the government on behalf of the relocation industry. The Minister, through Regulations, has wide discretion to address special circumstances. In particular, the Minister is able to exempt certain classes of individuals from the ban and is able to change how key terms, such as “purchase”, are defined. These alterations can considerably change how the ban will work in practice. In that regard, we can report that the Canadian Employee Relocation Council has organized a group of interested professionals for the purpose of submitting representations to the government and Paul Kochberg has agreed to participate in that effort.
A second issue of interest may be a constitutional one. By the Canadian constitution, property rights are within the jurisdiction of the provinces – nor the federal government. The provinces (or other interested parties) may therefore question the constitutionality of this legislation. The federal government, however, has jurisdiction over criminal law enforcement. Because this legislation imposes a penalty for its violation, the federal government may argue that this is criminal legislation and it therefore has jurisdiction. This may be an academic discussion because, to determine it, someone would have to initiate a constitutional challenge. The issue is, however, of interest because, in order to make representations to the government, we will have to determine which department will have to be addressed. Finally, there is a question of whether this legislation is discriminatory and infringes on the Canadian Charter of Rights and Freedoms.
This legislation was drafted at a time when the real estate market throughout Canada was out of control, and it was intended as a mechanism to combat surging house prices. Ironically, the market has largely corrected itself. Moreover, it is reported that foreign buyers accounted for 1% of house purchases in Canada in 2020. It is hoped that the Minister, when appointed, will take those factors into account when considering the Regulations and possible exemptions in the application of the Act.
This legislation will have a major negative impact on the relocation industry, in particular, and on the general business community in Canada. It is hoped that the Government of Canada will recognize that negative impact and will respond to representations and efforts to mitigate the impact. At the same time, those of us who will be affected will continue to work to find workarounds.
The foregoing information is provided for general information purposes only. It is not intended to provide legal advice or legal opinions of any kind and may not be used for professional or commercial purposes. We recommend that you consult your legal/tax advisers for more detailed information.