The laws relating to the acquisition of real property in any particular province of Canada are, as a rule, those of the province itself. With the exception of the Prohibition on the Purchase of Residential Property by Non-Canadians Act and related regulations, the federal government imposes relatively few regulations or restrictions in the field.
1.1 - Prohibition on the Purchase of Residential Property by Non-Canadians Act
The Prohibition on the Purchase of Residential Property by Non-Canadians Act and related regulations (as amended) came into force on January 1, 2023. This legislation is intended to prohibit non-Canadians from purchasing, directly or indirectly, residential property in Canada for a period of two years. The Act provides that every non-Canadian that contravenes the prohibition and every person or entity that counsels, induces, aids or abets or attempts to counsel, induce, aid or abet a non-Canadian to purchase, directly or indirectly, any residential property knowing that the non-Canadian is prohibited under the Act from purchasing the residential property is guilty of an offence and liable on summary conviction to a fine of not more than C$10,000. A court finding that a person has breached the Act and acquired residential property in violation of the prohibition in the Act can order sale of the property and the non-Canadian who has breached the Act will only receive the amount it paid to purchase the residential property and the remaining going to the Government of Canada.
The definition of “non-Canadian” means (a) an individual who is neither a Canadian citizen nor a person registered as an Indian under the Indian Act nor a permanent resident, (b) a corporation that is incorporated otherwise than under the laws of Canada or a province, (c) a corporation incorporated under the laws of Canada or a province whose shares are not listed on a stock exchange in Canada for which a designation under section 262 of the Income Tax Act (Act) is in effect and that is controlled by a person referred to in paragraph (a) or (b), and a prescribed person or entity. Prescribed entities include (i) an entity formed otherwise than under the laws of Canada or a province, and (ii) an entity formed under the laws of Canada or a province, whose shares or ownership interests are not listed on a stock exchange in Canada for which a designation under Section 262 of the Act is in effect, and controlled by an entity referred to in paragraph (a) or controlled by a person referred to in paragraph (a), (b) or (c) of the definition of “non-Canadian” in the Act. For purposes of the Act, control with respect to a corporation or entity means (A) direct or indirect ownership of shares or ownership interests of the corporation or entity representing 10% or more of its equity value or carrying 10% or more of its voting rights; or (B) control in fact of the corporation or entity, whether directly or indirectly, through ownership, agreement or otherwise.
The definition of “residential property” means any real property or immovable, other than a prescribed real property or immovable, that is situated in Canada and that is (a) a detached house or similar building, containing not more than three dwelling units, together with that proportion of the appurtenances to the building and the land subjacent or immediately contiguous to the building that is reasonably necessary for its use and enjoyment as a place of residence for individuals, (b) a part of a building that is a semi-detached house, rowhouse unit, residential condominium unit or other similar premises that is, or is intended to be, a separate parcel or other division of real property or immovable owned, or intended to be owned, apart from any other unit in the building, together with that proportion of any common areas and other appurtenances to the building and the land subjacent or immediately contiguous to the building that is attributable to the house, unit or premises and that is reasonably necessary for its use and enjoyment as a place of residence for individuals, or (c) any prescribed real property or immovable. A property located in an area of Canada that is not within either a “census agglomeration” or a “census metropolitan area” (each as defined in the Act) is a prescribed real property or immovable, the result being that the application of the Act is presently largely limited to certain urban areas in Canada.
The Act contains certain exemptions for persons and entities that would otherwise be considered “non-Canadian” under the Act, as well as exemptions of certain transactions. The Act and the related registrations should be closely reviewed with the assistance of legal counsel to determine applicability and whether any exemptions apply.
1.2 - Other laws of general application
Other than the Prohibition on the Purchase of Residential Property by Non-Canadians Act and related regulations described above, notable exceptions to the general principle that the federal government does not impose regulations or restrictions in the area of ownership of real property in Canada include: the review and regulation of foreign investment in Canada, competition matters, the regulation of bankruptcy and insolvency, the regulation of the activities of certain major lending institutions in Canada, the levying and collection of income taxes (in particular, taxes on capital gains realized by non-resident vendors) and certain sales taxes (in particular, the Goods and Services Tax or, in the province of Ontario, the Harmonized Sales Tax in connection with the sale and leasing of real property), the application of federal environmental standards, and the application of federal laws and regulations in the transportation sector such as with railway and airport lands.
2.1 - Laws of general application
Generally speaking, Ontario imposes no restrictions or prohibitions upon foreign investors in land, whether natural or corporate, although certain taxing, reporting and registration provisions may apply. For example, in Ontario, the Extra-Provincial Corporations Act requires corporations incorporated outside Canada to obtain licences to carry on business in Ontario, which, for the purposes of that Act, includes holding an interest, other than by way of security, in real property situate in Ontario. Quebec has a similar registration requirement, which exists under the Act respecting the legal publicity of enterprises. Also, non-residents shall not, directly or indirectly, make an acquisition of farmland except with the authorization of the Commission de protection du territoire agricole du Québec, under the Act Respecting the Acquisition of Farm Land by Non-residents.
The Business Corporations Act (British Columbia) requires that any company carrying on business in British Columbia be registered under the Act, either as a B.C. company or an extra-provincial company. Under the old Company Act, an extra-provincial company that was not registered was not capable of acquiring or holding an interest in land in British Columbia.
As that restriction is not contained in the current Business Corporations Act, the land title office requires a foreign entity to provide proof of incorporation and proof of current existence in the form of a certificate of status or affidavit from the appropriate government authority. A statutory declaration stating the entity is exempt from the extra-provincial registration requirements is no longer required. Accordingly, a company that wishes to buy or lease land, or hold a mortgage on land in British Columbia must satisfy these requirements.
Additionally, on November 30, 2020, the Land Owner Transparency Act (LOTA) came into force. LOTA requires extensive disclosure as to the identity of all entities and individuals all the way up in the ownership chain of real property including shareholders, partners, trustees, beneficial owners and other entities that have not historically been publicly disclosed. Owners of real property in B.C. prior to November 30, 2020, had until November 30, 2021, to become compliant with these new disclosure requirements.
Similar disclosure is already required on property transfer tax returns when a corporation or trust purchases a property. Individuals with shareholdings in a corporation that exceed a certain threshold, and beneficiaries of a trust, must disclose information such as name, contact information, tax numbers, social insurance numbers and citizenship, among other information.
Conversely, Alberta does restrict or prohibit certain foreign investments in Alberta land. Pursuant to the Agricultural and Recreational Land Ownership Act (Alberta), and the related Foreign Ownership of Land Regulations, no ineligible person or foreign controlled corporation may take or acquire an interest in certain controlled land, subject to various exceptions relating to certain commercial, industrial, transportation and other uses specifically enumerated in the applicable legislation. Generally, controlled land includes all privately-owned land outside urban boundaries (usually farmland or rural recreational land). In addition, any corporation that acquires or attempts to register an interest in Alberta land must be registered in Alberta (either as an Alberta corporation or as an extra-provincially registered corporation).
2.2 - How is real estate held and registered?
Investors in Ontario real estate may acquire several types of interests in land, including full ownership (a “freehold” interest), an interest for a specified period (a “leasehold” interest) or a partial interest in a freehold or leasehold interest as co-owners under a joint venture. Special legislation permits condominium ownership, under which owners have title to their individual units and a right to use the “common elements” of the condominium project (e.g., a swimming pool, landscaping, etc.). Although condominiums are most usually residential units, their use for commercial or industrial purposes is becoming increasingly more common.
Two systems of land recording co-exist in Ontario: a registry system in which the individual is responsible for the determination of the quality of title based primarily on priority in time of registration, and a land titles system based upon the Torrens System of recording where the quality of the title is determined by the recording authority with indemnities supporting that determination. Most properties in the registry system have been converted to the land titles system to facilitate the introduction of electronic production and registration of documents. Generally speaking, Ontario has a fully automated electronic searching and registration system. Both Alberta and British Columbia have a Torrens-based land titles system exclusively.
Investors in Quebec real estate should refer to Blakes Doing Business in Quebec guide for a discussion of the civil law system surrounding ownership and registration of real property, known as “immovables” in Quebec. It is also worth pointing out that recent legislative changes aimed at protecting and promoting the French language in Quebec now require that applications for registrations, documents and deeds published at the Quebec Land Registry or at the Register of Personal and Movable Real Rights be, as of September 1, 2022, drawn up in French exclusively and that all documents that are to be provided with an application for registration and which are drawn up other than in French be accompanied by a translation certified in Quebec. Stemming from these recent legislative changes are also other requirements pertaining to the use and protection of the French language, which should be taken into consideration when drafting or registering agreements for Quebec transactions.
2.3 - The agreement of purchase and sale
2.3.1 - Is a written contract required? How much is paid up-front for the deposit and agent commissions?
As oral agreements for the purchase and sale of land are generally unenforceable or their existence is extremely hard to prove in a legal proceeding, most acquisitions of real property begin with an agreement of purchase and sale. Such an agreement is often initiated by the purchaser signing an offer to purchase which, when accepted by the vendor, becomes the agreement of purchase and sale. Although certain legal rights and obligations arise from that agreement, the actual transfer of title (ownership) usually takes place at a later time upon the completion or “closing” of the transaction.
It is usual for the purchaser to provide a deposit as “earnest money” which is held in trust by the agent for the vendor or by one of the law firms involved in the transaction pending closing. Generally speaking, the size of the deposit ranges from 1 to 5% of the purchase price.
Most real estate transactions in Canada involve the services of an agent or broker, generally licensed under provincial legislation. The agent or broker should have expertise as to the market, the availability of properties for sale and prospective purchasers and the terms of sale that may be acceptable to the parties. Agents and brokers are usually paid a commission of 5% or 6% (but sometimes a lower percentage) of the purchase price on smaller properties and 10% on recreational properties.
Those percentages are usually reduced on larger properties and commercial properties. The agent or broker is usually hired, and paid, by the vendor (or the landlord in leasing transactions) with the duty to obtain for the vendor (or landlord) the highest price or rent and best conditions available. The purchaser who wishes the assistance of an agent should retain one by specific contract expressly defining the agent’s duties to the purchaser.
2.3.2 - What services does a lawyer provide?
Before signing an offer to purchase or a more fulsome agreement of purchase and sale, a purchaser should obtain legal advice from a lawyer practising in the province in question, to ensure the offer or agreement contains appropriate representations, warranties, conditions and other provisions. The purchaser’s lawyer will conduct various searches and enquiries to verify that the vendor has good title to the property, that there is no prior lien or other claim by others affecting title, and to verify certain off-title matters. In the acquisition of commercial properties (such as office buildings), the purchaser’s counsel may conduct other due diligence investigations (for example, reviewing the terms of leases in the building). The offer should specify the purchaser’s right to search the title, make off-title requests and searches with government authorities, and conduct various inspections and investigations prior to completing the sale. In Canada, title insurance companies are not generally involved in the title due diligence process, and this is the responsibility of the purchaser’s lawyer.
2.3.3 - What are the usual conditions for the purchaser’s benefit?
It is usual in commercial transactions for the purchase agreement to contain a “due diligence” condition allowing the purchaser to inspect the property (with or without professional assistance) and permitting termination if the purchaser is not satisfied with its searches and examinations, the state of the property or the rental income. In exchange, however, the vendor will generally resist giving warranties and representations as to quality of construction, state of repair, or suitability to the purchaser’s needs, as such may be matters not within the vendor’s knowledge and are matters in respect of which the purchaser will be advised to satisfy itself through its due diligence.
From a real estate investor’s point of view, other conditions will likely be included in the agreement of purchase and sale relating to the state of the title and, in the case of income properties, the amount of any income (e.g., rental income or royalties) being derived from the property. Of central importance are representations and conditions relating to the environmental history and standing of the property.
Other typical conditions might relate to satisfaction with zoning, the terms of any existing leases, the terms of any mortgage to be assumed by the purchaser or the availability of suitable financing for the transaction. Unless otherwise dealt with in the agreement, the concept of “caveat emptor” — let the buyer beware — generally governs.
Many purchasers (or their lender) require the vendor to produce a current survey or real property report (also referred to in Quebec as a “certificate of location”) prepared by a land surveyor showing the footprint of any buildings situated on the property. Such a survey would confirm the identity of the land, whether the land is subject to or benefited by easements, that the buildings and other improvements do not encroach onto neighbouring land and that the buildings are “set back” the appropriate distances from the boundaries of the property in accordance with zoning requirements. It will also show whether the buildings, fences or other improvements belonging to neighbouring owners encroach on the property to be purchased. If the vendor does not have a recent survey to deliver to the purchaser, or is not required to have one prepared for the purchaser’s benefit, the purchaser will usually be well advised to arrange for an up-to-date survey as part of its due diligence investigations.
2.3.4 - The closing and beyond — what remedies are available upon a breach of the agreement?
The closing of a transaction of purchase of real property generally involves lawyers for the purchaser and vendor exchanging documents and closing funds which are released upon successful registration of title documentation, such as the transfer/deed and any security being granted. Notaries may also be used in Quebec and British Columbia. In Ontario and British Columbia, the purchaser normally pays the transfer tax (called the land transfer tax in Ontario, the municipal land transfer tax in the City of Toronto (which is payable in addition to the Ontario land transfer tax in respect of properties situate within the boundaries of the City of Toronto), the property transfer tax in British Columbia and transfer duties in Quebec) and any provincial or federal sales tax payable on the purchase. In Alberta, there is no land or property transfer tax or provincial tax payable pursuant to a real estate transaction.
Where the vendor breaches his or her obligations in the agreement of purchase and sale, the purchaser may proceed with the transaction and apply to the court for an order for “specific performance,” compelling the vendor to complete the transaction. Alternatively, the purchaser may terminate the agreement, have the deposit returned to him or her and sue the vendor for any damages resulting from the vendor’s breach of contract.
If the purchaser does not perform his obligations under the contract, the vendor may either affirm the contract or seek specific performance and ancillary damages, or terminate the contract and retain the purchaser’s deposit. The vendor’s and the purchaser’s respective rights and remedies in the event of purchaser default may also be limited by the terms of the agreement of purchase and sale.
2.4 - Restrictions on use or sale — what types of consent are needed?
As with many areas of the world, all provinces regulate the development, use and disposition of real property. For example, the Planning Act (Ontario) prohibits, with certain exceptions, the disposition of less than the whole of a parcel of land held by any owner. Therefore, an owner is not entitled to sell or mortgage, or lease for a term of more than 21 years, parts of his or her holdings while retaining abutting property, without first obtaining consent from a local planning committee. A transfer or mortgage that violates this legislation, even inadvertently, will be void.
Although there is no equivalent legislation in British Columbia to the provisions of the Planning Act (Ontario) referred to above, the Land Title Act (British Columbia) does impose certain restrictions on the leasing of less than an entire legal lot (the lease of less than an entire building is permitted), unless the subdivision requirements of the Land Title Act are complied with. As a result, in certain circumstances, a leasehold subdivision plan is required to be approved by the appropriate authority.
In Alberta, the Municipal Government Act prohibits the registration of an instrument that may have the effect of subdividing a parcel of land unless the subdivision has been approved by the appropriate authority. For example, certain long-term leases may constitute a subdivision and therefore may require approval by the subdivision authority prior to being able to be registered on title to the leased lands pursuant to this provision.
Similarly in Quebec, parts or fractions of a lot cannot be transacted upon unless such lot is subdivided, so that such parts or fractions have their own lot number. The subdivision process will usually required the municipality’s approval and the preparation and filing of subdivision plans by a land surveyor.
Ontario also has in place family law legislation that gives spouses an equal right to possession of the couple’s matrimonial home, even though it may be owned by only one of them. Thus the spouse of the owner of the matrimonial home is a necessary party to the transaction, for the purpose of consenting to any sale or mortgage of the property, and must execute both the agreement and the transfer or mortgage in question.
Likewise, in Quebec, spouses have certain rights in the family residences or the rights which confer use of them, as in Quebec, a marriage or civil union entails the establishment of a family patrimony consisting of certain property of the spouses, regardless of which of them holds a right of ownership in that property.
Family law legislation in British Columbia also provides certain protections to a spouse who may have an unregistered interest in land. Accordingly, care must be taken if there is any indication of marital problems between a seller of real estate and his or her spouse.
In Alberta, the Dower Act prohibits a married person from disposing of a homestead without consent of the non-title spouse. A disposition includes, among others, a transfer, a mortgage and a lease over three years.
2.5 - Provincial and municipal transfer taxes, provincial sales taxes and other taxes
In Ontario, a land transfer tax is payable in most cases upon the transfer of ownership of real property interests. This land transfer tax is imposed at graduated rates but for most commercial transactions is slightly less than 2% of the total consideration for the transfer. For real property situate within the boundaries of the City of Toronto, in addition to the Ontario land transfer tax, a municipal land transfer tax is also payable in most cases upon the transfer of ownership of real property interests. The municipal land transfer tax is also imposed at graduated rates but for most commercial transactions is slightly less than 2% of the total consideration for the transfer. The purchase of real estate is often accompanied by the purchase of certain goods, such as furniture, appliances or equipment. In Ontario, harmonized sales tax is payable by a purchaser at the rate of 13% of the value of all tangible personal property purchased. Quebec also levies a graduated land transfer tax (and the municipalities have certain powers to implement certain graduations in addition to the minimum ones established under Quebec laws) and a sales tax. As previously mentioned, these taxes do not apply in Alberta, though there are land registration charges (the fees are C$50 per transfer, plus C$2 per C$5,000 of value) and federal goods and services tax payable on certain real property interests at a rate of 5%.
In addition, the Government of Ontario imposes a 15% “non-resident speculation tax” (NRST) payable on the value of the consideration for a transfer (including a beneficial transfer) of residential property located in the Greater Golden Horseshoe, an area comprising the City of Toronto and certain regions and counties surrounding or geographically near to the City of Toronto. The NRST is imposed on foreign nationals, foreign corporations and certain taxable trustees, and applies to a transfer of land that contains at least one and not more than six family residences. The NRST does not apply to purchases of multi-residential rental apartment buildings with more than six units or to agricultural land, commercial land or industrial land. Also, beginning in 2023, the City of Toronto is levying a “vacant home tax” of 1% of a residential property’s current value assessment. Subject to certain exceptions, a residential property is considered vacant if it was not used as the principal residence by the owner(s) or any permitted occupant(s), or was not occupied by tenants for a total of six months or more during the previous calendar year. Properties may also be deemed (or considered to be) vacant if an owner fails to make a declaration of occupancy status as outlined in the applicable by-law.
A property transfer tax is payable in British Columbia upon the registration of a transfer of land. The transfer tax is calculated at 0.1% of the first C$200,000 of fair market value, 2% on the value between C$200,000 and C$2-million, 3% on the value between C$2-million and C$3-million and, 2% on the value over C$3-million. As well, there is a federal goods and services tax payable on some real property interests at a rate of 5% and, in addition, a provincial sales tax payable on most tangible personal property at a rate of 7%.
An additional 20% property transfer tax is also payable in B.C. by “foreign buyers” of properties located in certain prescribed geographical areas of British Columbia, that are assessed as residential properties. As the residential assessment of a property is one of the triggers of the tax, this can result in some transactions being subject to the tax, that may typically be considered as a “commercial transaction”.
The City of Vancouver and the Province of British Columbia each impose a vacancy tax to discourage individuals from leaving houses empty. The City of Vancouver imposes a tax of 3% of the property’s assessed taxable value (it was 1.25% in 2020 and 1% for prior years). The rate of the tax imposed by the Province of British Columbia is dependent on a number of criteria including the individual’s residency and where they pay income tax, ranging from 0.5 % to 2% of assessed value. The provincial tax applies to houses in certain geographic regions, which are not used as a principal residence or are not rented out for at least six months of the year. There are some exemptions to these taxes. However, when one may apply for an exemption or certain tax credits depends on the specific facts relating to the owner and the property.
2.6 - How are leasehold interests regulated?
Long-term ground leasehold interests are more common in the United Kingdom and Europe than in North America. Nevertheless, increasingly, parcels of land in Ontario are held pursuant to long-term ground and building leases as an alternative to freehold ownership in arrangements often structured for tax purposes or to permit differing degrees of participation and liability.
In Ontario, with few exceptions, any lease in excess of 21 years is treated as a conveyance for the purposes of the Planning Act and any lease with a term (including renewals) in excess of 50 years will attract land transfer tax and municipal land transfer tax (for leases of land in the City of Toronto) calculated on the market value of the land. Quebec also has analogous provisions, under the Act Respecting Duties on Transfers of Immovables, where a lease and an emphyteusis with a term in excess of 40 years is deemed to be a transfer for the purpose of the Act. The registration of a lease in British Columbia with a term (including renewals) in excess of 30 years will attract property transfer tax calculated on a formula set out in the Property Transfer Tax Act.
2.7 - How are landlords regulated?
If a purchaser is interested in acquiring a property that is occupied by residential tenants, a number of additional considerations become relevant. In Ontario, in addition to reviewing the terms of the leases, the purchaser should be aware that the Residential Tenancies Act and certain other legislation dealing specifically with residential tenancies, limit the rights of a landlord to evict existing tenants of residential premises, limit the landlord’s ability to increase rents beyond specified statutory limits, and permit rent reductions in certain cases where substandard levels of landlord maintenance persist. Quebec also has generous residential tenant protection legislation (which includes rent control and restrictions on the sale of an immovable situated in a housing complex), as does Alberta. In British Columbia, the Residential Tenancies Act accords certain protections to residential tenants, and some municipalities have policies to protect residential tenants in certain situations.
2.8 - Joint ventures
Real estate investors in Canada often enter into joint venture arrangements with other investors. There are many ways in which a joint venture may be organized, including joint venture corporations, partnerships, co-ownerships and sale and leaseback arrangements. Often the selection of the appropriate structure will depend on the tax or other legal ramifications of the proposed joint venture.