Clients, their advisors, and estate planners need to be careful about Canada’s new foreign homebuyer ban.
The Prohibition on the Purchase of Residential Property by Non-Canadians Act, S.C. 2022, c. 10, s. 235 (the “Act”) came into force on January 1, 2023. It is set to expire on January 1, 2025.
The Act imposes a $10,000 fine on any non-Canadian who acquires certain residential property in Canada.[1] It also imposes the same fine on any person or entity that knowingly “counsels, induces, aids or abets” the offending non-Canadian or attempts to do so. That latter category includes lawyers and other professional advisors and it could also include sellers, executors, and trustees.
My colleague David Tang has already written about the original Act and Regulations and Parliament’s recent amendments. I encourage you to read his excellent summaries and learn about our continued concerns with the ban.
Building on what real estate lawyers like David have written, I wish to share some thoughts about the Act from an estate planner’s perspective—and to highlight a few concerns of my own.
Estate purchases: The case of Aidan
The Act comes with many exceptions. Not all properties in Canada are affected, not all “non-Canadians” are affected, and not all transactions are affected.
Estate planners and advisors were relieved to learn that the ban does not affect non-Canadians who acquire property as a result of death or a gift. Specifically, the Act carves an exemption for non-Canadians who acquire “an interest or a real right resulting from death, divorce, separation or a gift.” Homeowners can continue to make gifts of residential property to non-Canadians during or after their lifetimes without their recipients facing sanction.
However, grey areas remain. Consider two situations involving Aidan, a non-Canadian:
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- Aidan hears about an estate sale in Kitchener, Ontario. Aidan does not know the deceased or the estate trustees. Can Aidan buy the house from the estate sale, without penalty?
- Aidan’s uncle, a Canadian, dies. His uncle’s will leaves the residue of his estate to his three nephews equally, without any further details or wishes. The estate includes a house in Waterloo, Ontario. Can Aidan acquire the house in-kind to satisfy his residual share of his uncle’s estate, without penalty? Would the answer change if the two other nephews are Canadian and/or if Aidan is the sole executor who decides who gets the house? Would the answer change if the house were the estate’s only asset and if Aidan bought out the other two nephews’ interests to acquire the house from the estate for himself?
In both instances, it could be argued that Aidan should not be penalized under the Act because he is acquiring an “interest” in property “resulting” from death.
However, it could also be argued that either transfer offends the spirit and intent of the exemption. The Canada Mortgage and Housing Corporation (the agency that led consultations on the ban) has explained that the death exemption exists to exclude “unexpected and transitional life situations,” like the “succession process following a death…to avoid undue hardship.” Could Aidan be penalized in situation (A) (because he is not a beneficiary of the estate in question) and in situation (B) (because Aidan could easily choose not to acquire the house)? It is not clear what position Ottawa will take.
Beneficiaries of discretionary trusts: The case of Harpreet and Jyoti
The Regulations define a “purchase” to include acquisitions of an “equitable interest” in a residential property. This broad definition will affect non-Canadians who become a beneficiary, even a discretionary beneficiary, of a trust. Consider two alternative scenarios with Harpreet and her adult granddaughter Jyoti:
Harpreet settled a family trust that is resident in Canada. The trust’s main asset is a house in Edmonton. The trust has a class of discretionary beneficiaries. The trust terms give Harpreet the power to add and remove beneficiaries at Harpreet’s sole discretion.
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- Let’s say the discretionary beneficiaries of the trust include Jyoti, who was a Canadian at the time the trust was settled. However, in 2023, Jyoti becomes a non-Canadian.
- Alternatively, let’s say Jyoti was always a non-Canadian and the class of discretionary beneficiaries of the trust did not include Jyoti. In 2023, Harpreet adds Jyoti as a beneficiary of the trust.
In either scenario, Jyoti arguably breaches the Act because she, as a non-Canadian in 2023, acquires an equitable interest in the house that the trust owns. (Harpreet could also be in breach in scenario (B) if she had knowingly “aided and abetted” Jyoti to breach of the Act).
This result seems unfair because the trustees, not Jyoti, remain the legal owners of the house after Jyoti is added as a beneficiary or becomes a non-Canadian. Further, Jyoti might not ultimately receive the property from the trust. The result also seems unfair because, had Harpreet owned the house personally and gifted it outright to Jyoti, neither Harpreet nor Jyoti would be penalized under the Act.
Harpreet and Jyoti might have a defence in scenario (B) if Harpreet had settled the trust before 2023. The regulations exempt “transfers…under the terms of a trust that was created before January 1, 2023”. But would adding a beneficiary here constitute a transfer under the terms of a trust? There might be a good argument that it does, based on existing Canada Revenue Agency interpretations.[2] Unfortunately once again, the Act and the regulations do not provide a clear answer.
Inadvertent factual control: The case of Kwaku and Amma
The Act defines a “Non-Canadian” to include any Canadian private company that is legally or factually controlled by a non-Canadian. Legal control means owning 10% or more of the votes or value of the company.
Most commentators have focused on the Act’s definition of legal control. But factual control is an equally important consideration. Consider the example of Kwaku and his childhood friend Amma, who were both Canadians at one point in time:
Kwaku is the sole shareholder and director of a BC corporation that owns a house in Vancouver. Years ago, Kwaku made a springing enduring power of attorney appointing Amma as his attorney for property. Years later, unbeknownst to Kwaku, Amma surrendered her Canadian citizenship when she moved to the US for work. In March 2023, Kwaku’s doctor determined that Kwaku was not capable of managing property.
If Amma’s appointment as attorney takes effect on Kwaku’s incapacity or if Amma accepts her appointment, Kwaku’s company will be liable to pay the $10,000 penalty under the Act because a non-Canadian (Amma) now factually controls the company.
This unintended result might have been avoided (1) if Kwaku had appointed a Canadian back-up attorney (which would have made it easier for Amma to resign and allow the alternate attorney to act), (2) if Amma did not formally accept her appointment, whether at the time when Kwaku made the power of attorney or at the time when Kwaku became incapable, and/or (3) if Kwaku regularly updated his estate plan to reflect his changing circumstances and wishes and the changing circumstances of his attorneys. Estate planners and their clients would be wise to consider taking one or more of these steps.
Concluding thoughts
With its goal of increasing the housing supply for Canadians, the Act was probably not intended to capture and penalize the likes of Aidan, Jyoti, Harpreet, or Kwaku’s company in their respective situations. However, even with its exemptions for property transfers resulting from death, gift, or the terms of certain trusts, the Act contains many grey areas–and potential pitfalls–for the unwary or unscrupulous client or estate planner.
Some relief and comfort might be found in the fact that the Act sunsets in 2025. Absent further clarification from Ottawa or the CMHC before then, clients and their advisors could “wait it out” and delay carrying out their property transfers until 2025. But with a federal election scheduled for 2025 and with no correction in the housing market (currently) in sight, planners should also brace for the possibility of Parliament extending or renewing the Act—and get used to the idea of their clients living with a more permanent ban.
Questions? Please feel free to contact Stephen at shsia@millerthomson.com or another member of Miller Thomson LLP’s leading Private Client Services team.
[1] The Act also gives the federal Minister of Housing the power to apply to the courts to force a sale of any property acquired by the offending non-Canadian.
[2] See e.g. CRA document number 2012-0451791E5, dated February 11, 2013; and CRA document number 2001-0111303, dated January 1, 2002.
