Balance Magazine

"Indirect Purchase" and "Non-Canadian Corporations" under the Prohibition on the Purchase of Residential Property by Non-Canadians Act

November 28, 2023
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Scenario 1

Person A is a Canadian citizen. Person B is a non-Canadian. Persons A and B want to buy real estate together in Canada. Person B (the non-Canadian) has the means to buy the property without outside financing (a "cash deal"). Can Persons A and B proceed with their plans? Let's find out.

Direct and Indirect Purchases: Subsection 4(1) of the Act explicitly prohibits non-Canadians from purchasing residential property, either directly or indirectly​​. This means that non-Canadians are restricted from being the principal buyers or indirectly financing the purchase through other means, such as providing funds to a Canadian buyer.

Purchasing with a Canadian Spouse or Common-Law Partner: The Act does provide exemptions for non-Canadians who are purchasing residential property with a spouse or common-law partner who is not subject to the Act (i.e., a Canadian citizen, a permanent resident, or a registered Indian)​​. This specific exemption does illustrate the Act's flexibility in certain partnership scenarios.

Penalties and Enforcement: There are significant penalties for non-Canadians violating the Act and for Canadians that knowingly assist a non-Canadian in violating the Act​​. It's crucial to ensure that the transaction does not inadvertently fall under these prohibitions.

In the above scenario (where Person A is Canadian and Person B is non-Canadian, and they wish to purchase a house in Canada with all funds coming from Person B), the Prohibition on the Purchase of Residential Property by Non-Canadians Act is highly relevant. The Act prohibits non-Canadians from purchasing residential property in Canada, directly or indirectly​​. Given that Person B is non-Canadian and intends to finance the transaction entirely, this could be interpreted as an indirect method of acquiring property, which the Act aims to prevent. The Act's language is quite clear in prohibiting non-Canadians from any form of direct or indirect acquisition of residential property in Canada.

Scenario 2

Persons A, B, and C want to purchase property under a Canadian corporation where A, B, and C are shareholders and directors. Persons A and B are Canadians. Person C is a "non-Canadian". Can Persons A, B, and proceed with their plans? Let's find out.

Definition of Non-Canadian Corporation: The Act and it Regulations define a non-Canadian corporation as a corporation that is either formed outside of Canada or a Canadian corporation that is controlled by a non-Canadian​​. With respect to a corporation or entity, "control" (as defined in the Regulations) means (a) direct or indirect ownership of shares or ownership interests of the corporation or entity representing 3% or more of the value of the equity in it, or carrying 3% or more of its voting rights, or (b) control in fact of the corporation or entity, whether directly or indirectly, through ownership, agreement or otherwise.

Threshold for Control: If the non-Canadian shareholder owns 3% or more of the equity or has 3% or more of the voting rights, the corporation would be considered non-Canadian under the Act. This would mean that the corporation would be prohibited from purchasing residential property in Canada​​.

Implications for the Corporation: If the non-Canadian shareholder's stake is less than the 10% threshold, then the corporation would not be considered controlled by a non-Canadian and would not be restricted under the Act from purchasing residential property. However, it's important to consider the total influence or control the non-Canadian shareholder might have, beyond just share percentage.

If you have questions or comments on this topic or any other real estate topic, please contact us at info@nungisalaw.ca. We're here to help.

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