The Canadian commercial real estate market is strong. We are seeing promising trends in the industrial, multi-use and multi-family and some bounce-back in the retail market. As a result, commercial mortgage lending continues to be an attractive market for lenders, including foreign financial institutions and private commercial mortgage lenders.
However, foreign lenders seeking to provide commercial mortgage loans secured by Canadian real estate must navigate a complex regime of federal and provincial rules and regulations.
The applicable regulatory requirements depend on:
- The type of lending entity (e.g., financial institution vs. private lender),
- The provinces or territories in which the lender seeks to operate, and
- The type of activities the lender seeks to engage in.
This article provides a high-level overview of the federal and (common law) provincial regulations that foreign lenders must consider when entering the Canadian commercial mortgage lending market. This article does not address the considerations for operating in Quebec, Canada’s only civil law province, which the firm will address in a further publication.
Federal licensing and approval requirements for commercial mortgage lenders
Financial institutions
Certain types of lenders are regulated and require approval at the federal level, regardless of whether they lend on the security of mortgages. These include:
- Banks,
- Federal credit unions, and
- Federal trust and loan companies.
Banks and federal credit unions are governed by the Bank Act (Canada), while federal trust and loan companies are governed by the Trust and Loan Companies Act (Canada). All federally regulated financial institutions are overseen by the Office of the Superintendent of Financial Institutions (“OSFI”). None of these entities may operate in Canada without the proper approvals, subject to a few limited exceptions.
The process to establish a financial institution in Canada, namely a Canadian-incorporated bank, a Canadian-incorporated subsidiary of a foreign bank, a federal credit union, or a federal trust or loan company, is extensive, but applicants must apply for and receive two primary approvals:
- An order of the Minister of Finance issuing letters patent of incorporation establishing the financial institution; and
- An order of OSFI authorizing it to commence and carry on business in Canada.
Foreign bank
A foreign bank, or any other entity associated with that foreign bank, wishing to lend in Canada has additional options available to them pursuant to the Bank Act, though the application process is also extensive and their permitted activities are more restricted:
- Establish a foreign bank branch. A foreign bank may apply for (i) authorization from the Minister of Finance to establish a foreign bank branch in Canada to carry on business in Canada (i.e. apply to become a Schedule III bank under the Bank Act), and (ii) approval of OSFI to commence and carry on business in Canada;
- Incorporate a Canadian foreign bank subsidiary. As noted above, a foreign bank may, (i) on application to the Minister of Finance, incorporate a Canadian subsidiary of such foreign bank (i.e. incorporate a Schedule II Bank under the Bank Act), and (ii) on application to OSFI, obtain an order authorizing that subsidiary to commence and carry on business in Canada; or
- Establish a representative office in Canada and refrain from “carrying on business” in Canada. A foreign bank may apply to OSFI for registration of a representative office. Upon approval, it must carefully structure its activities so that it is only engaging in activities that fall within narrowly prescribed parameters and not “carrying on business” in Canada. Taking a mortgage of Canadian real estate would likely constitute “carrying on business” in Canada.
Private commercial mortgage lenders
Private commercial lenders are not specifically regulated on the federal level, however certain provincial regulations will apply to private commercial lenders who lend on the security of mortgages of Canadian real estate.
Provincial licencing and approval requirements
There are no provincial regulations specifically governing banking institutions, however other types of lenders can be subject to provincial regulation. These include:
- Credit unions
- Trust and loan companies
- Private lenders (specifically those who lend on security of commercial mortgages)
Credit unions
Unlike banks, credit unions may be incorporated at the provincial or territorial level under the applicable legislation governing credit unions in the respective province. However, for foreign commercial mortgage lenders, incorporating a provincial or territorial credit union may not always be an option, as certain provinces limit eligibility to Canadian residents and in some cases, residents of the province. Provincial financial services regulators oversee credit unions incorporated or continued in their jurisdiction.
Trust and loan companies
Certain provinces allow trust and loan companies to be incorporated under provincial legislation equivalents of the Trust and Loan Companies Act (Canada). Some provinces also allow for another category of lender, called a “financing corporation” (for example, in Saskatchewan) which does not have a federal equivalent. Regardless of whether a trust or loan company is federally or provincially incorporated, it must also be licenced by or registered with the applicable provincial financial services regulator in order to carry on business in such jurisdiction(s). A financing corporation must be licenced in Saskatchewan.
Notably: Banks (either as defined in the Bank Act or to which the Bank Act applies) and credit unions are generally exempt from the provincial trust and loan company licencing requirements.
Private commercial mortgage lenders
Private commercial lenders are not specifically regulated on the provincial level, unless engaged in lending on the security of a mortgage of Canadian real estate or otherwise dealing in mortgages. Private commercial mortgage lenders will, in some provinces, be caught by provincial licencing or registration requirements for mortgage brokers, mortgage administrators or mortgage lenders, as the case may be.
Regulation specific to commercial lending on the security of mortgages of Canadian real estate
Regulations vary by jurisdiction. In some provinces, lending on the security of a mortgage is sufficient to trigger licencing or registration requirements for mortgage brokers, mortgage brokerages or and/or mortgage lenders. In others, only those engaged in specific mortgages-related activities on behalf of third parties, are required to be licensed.
The following table summarizes the provincial and territorial licensing and registration requirements for commercial mortgage lenders lending on their own behalf:
| Jurisdiction | Licencing or registration requirement to lend on security of a mortgage on its own behalf? |
|---|---|
| Alberta | No. |
| British Columbia | Yes. Mortgage broker licence required from BC Financial Services Authority is required unless an exemption applies. |
| Manitoba | No. |
| New Brunswick | No. |
| Newfoundland and Labrador | No. However, any “non-resident mortgagee”, i.e. any corporation with its head office outside of Newfoundland and Labrador, must have and maintain in Newfoundland and Labrador an attorney who is authorized to execute releases of such mortgage on its behalf and must register the power of attorney in the Registry of Deeds. |
| Nova Scotia | Yes. Mortgage lender licence from Service Nova Scotia, Business Licensing Section is required unless an exemption applies. |
| Ontario | Yes. Mortgage brokerage licence from Financial Services Regulatory Authority of Ontario is required unless an exemption applies. |
| Prince Edward Island | No. |
| Saskatchewan | No. |
| Northwest Territories | No. |
| Nunavut | No. |
| Yukon | No. |
Persons who engage in prescribed activities on behalf of another person (including individuals doing so as agent, employee or otherwise) will be subject to licencing or registration requirements.
Where limited exemptions apply, these are generally reserved for banks, credit unions and in some cases, authorized foreign banks, trust or loan companies, or financing companies.
Additional regulatory considerations
Acquiring ownership of Canadian real estate by foreclosure
Additional considerations apply in the event a foreign commercial lender forecloses on Canadian real estate, since certain provinces have imposed regulations limiting foreign acquisition and ownership of certain types of land (including agricultural and, in some cases, recreational or shorefront land) which may impact a foreign commercial lender trying to take a mortgage or realize on security against Canadian real estate. The provinces which have such restrictions include:
- Alberta
- Saskatchewan
- Manitoba
- Prince Edward Island
Where limited exemptions apply, these are typically limited to Canadian banks (i.e. Schedule I banks under the Bank Act) and Canadian-incorporated subsidiaries of foreign banks (i.e. Schedule II banks).
General
Additional regulatory approvals, licencing and/or registration requirements will apply if the lender accepts deposits, acts as a trustee, carries on the business of a trust corporation, offers high cost or payday loans, or carries on any other business in Canada other than lending money on the security of a mortgage of Canadian real estate, or if it carries on business in Quebec. In all cases, consumer protection and anti-money laundering rules and regulations will also apply, but are outside of the scope of this article.
Conclusion
The Canadian regulatory landscape for commercial mortgage lenders is complex and varies by jurisdiction. Foreign lenders wishing to enter this commercial lending market will need to understand the legal requirements not only for providing financial services in Canada, but also for taking security on mortgages of Canadian real estate and enforcing it. Our experienced and knowledgeable Financial Services team is a key asset in navigating this landscape.
