New Legislation in Canada may Prevent Property Purchases by Non-Canadians and may Make Non-Canadians Subject to New Taxes

In an effort to stem the steep rise in prices for Canadian homes that was so prominent in 2020 and 2021, new legislation has been passed in Canada prohibiting the purchase of residential real property by non-Canadians and imposing a new tax on “underused” properties owned by non-Canadians.?However, the main goal of these laws may well have been accomplished well before they took effect as the rise in prices that occurred in 2020 and in 2021 reversed in 2022, well before the laws took effect.?Average home prices in Canada peaked in February 2022 and have fallen steadily since according to the Canadian Real Estate Association.?

Despite the drop in housing prices, the Canadian federal government has implemented certain legislation (a) prohibiting the purchase of residential property in Canada by non-Canadians, and (b) imposing a tax on “underused housing”.?

Prohibition on the Purchase of Residential Property by Non-Canadians.?

The Prohibition on the Purchase of Residential Property by Non-Canadians Act (the “Act”) was adopted by the Canadian Parliament on June 23, 2022.?On December 21, 2022 regulations relating to the Act were released.?

Under the Act, non-Canadians may not purchase residential property in Canada for a two-ear period starting on January 1, 2023.?“Non-Canadians” under the Act generally means individuals who are not Canadian citizens, permanent residents of Canada, or registered as an Indian under the Indian Act, or corporations not incorporated in Canada, and corporations incorporated in Canada but “controlled” by non-Canadians.?

Note the following:?

• A “purchase” includes the acquisition of any right (legal, equitable, or real) in a residential property and can therefore apply to rights less than outright ownership.?
• “Control” of an entity includes direct or indirect ownership interest representing 3% or more of the equity value or carrying 3% or more voting rights.?
• “Residential property” includes vacant land if located in an urban area and zoned for residential or mixed use.
• Certain residential properties located in non-urban areas are excluded from the prohibition.?
• The Act does not apply to non-Canadian purchasers who became liable or assumed liability under an agreement of purchase and sale before January 1, 2023.?

If you are a non-Canadian citizen, not a permanent resident of Canada or registered as an Indian under the Indian Act in Canada and you are thinking of purchasing property in Canada you should consult with a Canadian legal advisor before doing so.?

Underused Housing Tax

The Underused Housing Tax (the “Tax”) is a new Canadian national one percent (1%) tax imposed annually on the value of non-Canadian-owned residential property that is considered by the legislation to be “underused.”?The new rules were in force for the 2022 tax year and have implications for certain owners of Canadian residential real estate.?Note that even if the residential property is not “Vacant” or “underused” in the common-sense use of those words, the Tax may still apply.?

Required Filing.?Every person who owns residential property as defined in the legislation on December 31 of a calendar year is required to file an Underused House Tax return by April 30 of the following calendar year.?There are, however, certain exceptions to the filing requirements for “excluded owners” including Canadian citizens or permanent residents who own the residential property directly in their personal capacity.?Note that for individual owners who own property through a corporation, trust or partnership, that entity is generally not an excluded owner and must file a return even if the property is not underused for purposes of the Tax.?

Tax Calculation. ?All owners of residential property on December 31 of a calendar year who do not qualify for an exemption under the Tax legislation owe a 1% tax on the ‘taxable value” of the residential property.?Exemptions are available under certain conditions for Canadian ownership, new owners, residential property that meets “qualifying occupancy” requirements, “seasonally inaccessible” residential properties, residential properties that are uninhabitable for certain periods due to disasters or renovation, and vacation properties in non-urban areas.?There are also exemptions that apply depending on the moment in the calendar year that construction of a residential property was substantially completed.?

Owners of residential property under the Tax legislation should contact their Canadian tax or legal advisor to determine whether they are required to file an Underused Housing Tax return and pay the tax by April 30, 2023.??

David J. Luzon is not licensed in Canada and provides this material for informational purposes only.