In recent years, the landscape of Canadian real estate ownership has seen significant changes, especially concerning foreign investors. Multiple federal, provincial, and municipal legislative frameworks have been introduced to regulate and, in some cases, restrict foreign ownership of Canadian real estate. This article provides a comprehensive overview of these changes, focusing on the implications for non-Canadian buyers and the measures they must be aware of to successfully navigate today’s Canadian residential real estate market.
The Prohibition on the Purchase of Residential Property by Non-Canadians Act
One of the most notable measures is the Prohibition on the Purchase of Residential Property by Non-Canadians Act (Prohibition Act), which went into effect on January 1, 2023. This Act, a temporary measure set to expire on January 1, 2025, prohibits “non-Canadians” from purchasing residential property in Canada either directly or indirectly. On February 4, 2024, the Government of Canada announced its intention to extend the existing ban on foreign ownership of Canadian housing for an additional two years, to January 1, 2027. The primary goal of this Act is to curb the influx of foreign investments in Canadian housing, thereby addressing housing affordability issues for Canadians.
Definition and Scope:
- Residential Property: The Prohibition Act broadly defines “residential property” as detached houses, semi-detached houses, rowhouse units, residential condominium units, and similar premises. The definition includes adjunct lands and common areas essential for the use and enjoyment of these residences.
- Non-Canadians: This category includes individuals who are not Canadian citizens, permanent residents, or registered Indians under the Indian Act, as well as foreign corporations and entities controlled by foreign individuals or corporations. Control is met by 3% of votes or value or de facto control.
Exceptions:
Certain groups are exempt from the Prohibition Act, including:
- Temporary residents enrolled in authorized study programs
- Temporary residents with valid work permits
- Refugees and protected persons
- Diplomats and other foreign officials
- Individuals purchasing residential property jointly with a Canadian spouse or common-law partner
The Prohibition Act also provides exceptions for properties acquired through inheritance, divorce, separation, or as a gift, and for non-Canadians purchasing property for development purposes (this only applies if outside of a metropolitan area).
Penalties: Violations of the Prohibition Act can result in fines up to $10,000 to the purchaser of the property and their advisors, as well as a Court-ordered sale of the property. Additionally, if a non-Canadian is found guilty of purchasing residential property, the court may order the sale of the property with the non-Canadian only able to recover the original purchase price, preventing any profit from the contravention.
Federal Underused Housing Tax Act (UHTA)
The UHTA, effective from January 1, 2022, imposes an annual 1% tax on the taxable value of underused or vacant residential properties owned by non-residents and certain entities. This tax aims to discourage property speculation and ensure more residential properties are available for Canadians.
However, the following persons may be exempt from the UHTA for a calendar year:
- a specified Canadian corporation
- a partner of a specified Canadian partnership
- a trustee of a specified Canadian trust
- a new owner in the calendar year
- a recently deceased owner
- a personal representative of a recently deceased owner
- a person that was a co-owner with a recently deceased owner
Owners of the following types of property may be exempt from the UHTA for a calendar year:
- property not suitable for year-round use
- property seasonally inaccessible
- property uninhabitable for 60+ days because of a disaster or hazardous condition
- property uninhabitable for 120+ days because of renovation
- when construction of the property was not substantially completed before April of the year
- when construction of the property was substantially completed in January, February or March of the year + the property was offered to the public for sale and was never occupied as a place of residence/lodging
Key Provisions:
- Filing Requirements: All owners, except “excluded owners,” must file an annual return (Form UHT-2900) by April 30th of the following year, detailing the use of their residential property. There is a minimum late filing penalty of $5,000 if the owner is an individual ─ or $10,000 otherwise. The Canada Revenue Agency will also refuse to issue a Section 116 Certificate on the sale of the property if there is non-compliance under the UHTA.
- “Excluded Owners”: These include Canadian citizens or permanent residents, Canadian publicly listed corporations, registered charities, and other specified entities. The excluded owner test is on December 31st of the taxation year. Excluded owners do not need to file an annual Form UHT-2900.
Non-Resident Speculation Tax (NRST) in Ontario
The NRST is an additional tax levied on the purchase of residential property throughout all of Ontario by foreign nationals, foreign corporations, and taxable trustees. Initially set at 15%, it was increased to 25% as of October 25, 2022.
Applicability:
- The tax applies to residential properties containing one to six single-family residences.
- Certain exemptions exist, including purchases made with a Canadian spouse, refugees, and international students meeting specific criteria.
Non-Resident Speculation Tax (NRST) and Speculation and Vacancy Tax (SVT) in British Columbia
The NRST is an additional 20% tax levied on the purchase of residential property in specific areas of British Columbia by foreign nationals, foreign corporations, and taxable trustees. British Columbian homeowners are exempted from the NRST if their property is their primary residence. Another popular exemption for owners of non-principal residences is to rent them out. The home must be rented for at least six months each year and short-term rentals of less than one month’s duration do not contribute toward the six-month total. Individual and commercial exemptions are available for situations such as extensive house renovations and life events like divorce, hospitalization, or extended absence.
The SVT is an annual tax of up to 2% of the property’s assessed value, based on how owners use residential properties in the affected areas of British Columbia. Residential property owners in the designated taxable areas of British Columbia must file an annual declaration by March 31st of the following year for the SVT, even if there is no change to their information. Any SVT payable is due on the first business day of the following July. There are various exemptions for individual owners, land under development, and corporate/trustee/partnership owners. There are also annual tax credits available for British Columbian tax residents and foreign owners.
Municipal Vacancy Taxes
Several municipalities including Toronto, Ottawa, and Hamilton, have introduced or have publicly announced that they are planning to introduce vacancy taxes on unoccupied residential properties. These taxes aim to increase the availability of housing by incentivizing owners to rent or sell vacant properties.
Toronto’s Vacancy Tax:
- Effective from January 1, 2022 onwards, this tax imposes a 1% tax on the current value assessment of vacant properties.
- Owners must declare the status of their property annually by May 1st of the following year, with penalties for false declarations.
Ottawa’s Vacancy Tax:
- Effective from January 1, 2022 onwards, this tax imposes a 1% tax on the current value assessment of vacant properties.
- Owners must declare the status of their property annually by June 15th of the following year, with penalties for false declarations.
Vancouver’s Empty Homes Tax:
- Effective from January 1, 2017 onwards, this tax imposes a 3% tax on the current value assessment of vacant properties.
- Owners must declare the status of their property annually by February 2nd of the following year, with penalties for false declarations.
Anti-Flipping Rules
This is a Canadian federal rule effective from January 1, 2023 onward that reclassifies gains from dispositions of “flipped property” to be taxed as business income (fully taxable) instead of as a capital gain (1/2 or 2/3 taxable) and will not allow the Principal Residence Exemption to be reported. “Flipped property” is defined as a housing unit (or a right to acquire a housing unit) in Canada that is owned for less than 365 consecutive days prior to its disposition. Note that no definition of “housing unit” has been provided at this time. There are various exemptions, such as:
- Death of a taxpayer or a related person
- Addition of one or more related persons to the taxpayer’s household or the taxpayer becoming a member of the household of a related person
- Breakdown of a marriage or common-law partnership of the taxpayer, where the taxpayer has been living separate and apart from their spouse or common-law partner for at least 90 days prior to the disposition
- A threat to the personal safety of the taxpayer or a related person
- Taxpayer or a related person suffering from a serious illness or disability
- An eligible relocation of the taxpayer or the taxpayer’s spouse or common-law partner
- An involuntary termination of the employment of the taxpayer or the taxpayer’s spouse or common-law partner
- Insolvency of the taxpayer
- The destruction or expropriation of the property
Conclusion
Navigating the complexities of foreign ownership of Canadian real estate requires understanding multiple layers of regulations. Non-Canadians interested in purchasing property in Canada must be aware of the Prohibition Act, the UHTA, and the NRST, among other regulations. These measures reflect a broader strategy to stabilize the housing market, ensure affordability for Canadians, and curb speculative investments by foreign buyers.
It is crucial that prospective buyers consult with real estate and tax professionals to understand the full implications of these regulations and to ensure compliance in order to avoid significant penalties and potential legal consequences.
By staying informed and compliant, non-Canadian investors can navigate the Canadian real estate market effectively, while contributing to the overall health and stability of the housing sector. Please contact Cardinal Point to analyze your unique situation.