Foreign Buyer Ban and Anti-House Flipping Laws Implemented in 2023

The Foreign Buyer Ban [see July 9, 2023 update article on recent amendments lifting some restrictions]

If you have been trying to buy a house over the last few years, you may feel it’s impossible to get one for a reasonable price. Many investors are buying older houses and renovating them for a quick profit, and some foreign buyers can spend more money than many Canadians trying to purchase their first home. The Canadian government has implemented laws to help cool the housing market as of 2023, specifically around banning foreign buyers and preventing house flipping. Here’s what you need to know.

Banning foreign buyers

Bill C-19 was introduced in April 2022, which focuses on prohibiting the purchase of residential properties by non-Canadians. As of January 1, 2023, under the Prohibition on the Purchase of Residential Property by Non-Canadians Act (the “Act”), it is prohibited for any non-Canadian to purchase any residential property that contains 3 or less dwellings as one building or one unit, or that is land located in a census agglomeration or a census metropolitan area (Definition) and zoned residential or mixed use, either directly or indirectly, and for which the purchase agreement was entered into after January 1, 2023. This law will be in effect for a minimum of 2 years before it can be repealed – if it ever is.  Although unclear, as written in the Act and its regulations as of the date of this post, property that is zoned residential but doesn’t include an actual dwelling is not included in this prohibition.

What constitutes a “purchase” for the purposes of this Act?

Although not exactly clear, the language in the Act does not specify as a requirement that “ownership” be transferred, such as titled ownership by way of a deed, or “possession” be granted, such as the ability to occupy or lease the residential property to another.  One can therefore assume that ownership or possession may not be required to be in contravention of this prohibition.  Some guidance can be implied from Subsection 4(5) which reads:

Non-application (of subsection 4(1) the prohibition of the purchase)

4(5) Subsection (1) does not apply if the non-Canadian becomes liable or assumes liability under an agreement of purchase and sale of the residential property before the day on which this Act comes into force (i.e. January 1, 2023).

The corollary would mean that if a non-Canadian becomes liable or assume liability under an agreement of purchase and sale of a residential property on or after January 1, 2023, then Subsection 4(1) would apply as follows (i.e. its prohibited):

4 (1) Despite section 34 of the Citizenship Act, it is prohibited for a non-Canadian to purchase, directly or indirectly, any residential property.

The regulations further go on to define “purchase” as:

Purchase

4 (1) For the purposes of the Act, the acquisition, with or without conditions, of a legal or equitable interest or a real right in a residential property constitutes a purchase.

Again, no mention of ownership or possession, but rather a purchase is the acquisition of a “legal” or “equitable” interest in or a “real” right to a residential property.  Although for most it may not appear obvious, the language here appears to include in the definition of a “purchase”, the rights acquired by entering into a contract to purchase a residential property (e.g. a preconstruction condo agreement of purchase and sale)? Contracts create legal rights as between the contracting parties.  The term “equitable” further expands the types of contracts that could be characterized as something other than an agreement of purchase and sale, but that would lead to the acquisition of an interest in or real right to the subject residential property.  A “real” right would narrow down the types of rights to those akin to an estate right, such as some kind of legal property estate right to acquire a freehold interest (e.g. as seen typically in the type of ownership interest when buying a residential property in Ontario).  Safe to say, a non-exempt, non-Canadian buyer should not be entering into agreements of purchase and sale for residential properties over the next two years.

For this law, a non-Canadian is defined as:

1. A person who is neither a Canadian citizen nor a permanent resident, nor a person registered as an Indian under the Indian Act, or
2. Any entity, such as a partnership, trust or corporation that is formed or incorporated in a way other than the laws of Canada or one of its provinces, or that is controlled, directly or indirectly by a non-Canadian either by owning 3% or more of the equity or voting rights or by de facto control, or where the entity or corporation, formed in Canada or any of its provinces, is listed on a public exchange that is not Canadian.

Exceptions on banning foreign buyers

There are a few exceptions to this law, including:

• People who are temporary residents under the Immigration and Refugee Protection Act, and:
  1. Have a student visa, enrolled in a program and have:
     • Filed their tax returns for each of the previous 5 tax years, were physically present for at least 244 days in each of the previous 5 calendar years, the purchase price for the house does not exceed $500,000, and they have not purchased more than one residential property; or
  2. Have a work permit, having worked in Canada full-time for at least 3 out of the 4 previous years and have:
     • Filed their tax returns for at least 3 out of the 4 previous tax years, and they have not purchased more than one residential property

• People who are non-Canadians but are purchasing the house with a Canadian spouse or common law partner (i.e. one who is a Canadian Citizen, Permanent Resident or registered Indian under the Indian Act). (a common law partner is where you have cohabited in a conjugal relationship for at least one year)
• People who are foreign diplomat or similar acceptable to the Canadian Department of Foreign Affairs, Trade and Development.
• People who made a claim for refugee protection and have been found eligible under the Immigration and Refugee Protection Act.
• People who have been granted temporary resident status issued under an exemption pursuant to section 25.2 of the Immigration and Refugee Protection Act.
• People who acquired the house as a result of their inheritance, a death, a gift, separation or divorce.
• People who acquired the house as beneficiaries to a trust that was created prior to January 1, 2023 (ps. Do you see a loophole here?).
• People who acquired the house as a secured creditor and as a result of enforcement proceedings or the exercise of a right under the security pledged, such as in a foreclosure.
• Corporations (not partnerships or trusts such as a REIT) whose shares are listed on a Canadian stock exchange even if otherwise would have been considered a non-Canadian entity pursuant to the definition in this Act.

Penalties for circumventing the ban on foreign buyers

If any person or couple deemed foreign buyers is found to have violated this law, they could be subject to a fine of up to $10,000, or a judge could order the sale of the property they just purchased and that the seller only keep up to the original purchase price from the sale proceeds (i.e. forfeiture of any profits). Furthermore, anyone knowingly assisting, counseling, inducing, aiding or abetting a non-Canadian to purchase a house as described, can also each be fined up to $10,000 (e.g. real estate agents, mortgage brokers, lawyers, law clerks etc…); this also includes anyone attempting to do the forgoing (i.e. the actual purchase is never completed).

Anti-Flipping Income Tax Rules

 Anti-flipping taxes

Another barrier to those trying to purchase their first home is investors buying homes to flip them for a profit since this drives up house prices.

Before January 1, 2023, it was up to the Canadian Revenue Agency (CRA) to prove that the individual has a business involving house flipping. Now that burden of proof is removed from the CRA, any profits made on the sale of residential property owned less than 365 days will be counted as business income and, therefore, subject to the applicable progressive tax rates and not as capital gains (i.e. higher taxes). Also, if you sell your house within 365 consecutive days of acquisition, it is more likely that the principal residence exemption will automatically be reassessed as a flip unless it falls under a legitimate exception.

Exceptions for taxes on houses owned less than a year

Exceptions to the anti-flipping tax will be made for circumstances that arise as a result of a death, loss of job and relocation due to a career, a divorce or separation, and bankruptcy. If you find yourself having to move for a legitimate reason less than a year after you purchased your home, then you won’t have to pay taxes on any profits from the sale of your home as your principal residence exemption.

Impact for 2023 and forward

These measures aim to cool the housing market and make it possible for more Canadians to buy a home. Over the past several years, home ownership has become less attainable for many Canadians, and these measures seek to reverse that trend.  However, these measures are in addition to many others that are similarly impacting affordability at opposite ends such as increasing interest rates.

Contact Levy Zavet Lawyers today

If you have questions about how these new measures might affect you, contact us today to speak to a lawyer.