NEW RESPONSIBILITY FOR MORTGAGE BROKERS REGARDING NON-CANADIAN CLIENTS

Steep penalties for those found guilty of violating the Prohibition on the Purchase of Residential Property by Non-Canadians Act

BY RAY BASI, J.D., LL.B., DIRECTOR OF EDUCATION FOR CMBA-BC AND MBIBC

As of January 1, 2023, under the provisions of the Prohibition on the Purchase of Residential Property by Non-Canadians Act*, non-Canadians are prohibited from purchasing, directly or indirectly, any residential property in Canada. A mortgage broker who attempted to or did counsel, induce, aid or abet a non-Canadian to violate the prohibition would be guilty of an offence and subject to a fine of up to $10,000.

The following will help mortgage brokers understand the new law.

WHY THE PROHIBITION?

The federal government indicated the Act supports its intention to address prevailing housing affordability concerns experienced by Canadians.

WHAT PROPERTY IS INVOLVED?

The prohibition applies to “residential property.” The Act defines the term very broadly and includes any property located in Canada that is: n A detached house or similar building, containing not more than three dwelling units; or n A part of a building that is a semi-detached house, rowhouse unit, residential condominium unit or other similar premises that is a separate parcel owned apart from another unit in the building.

This exemption is intended to exclude certain recreational properties from the application of the prohibition.

However, land that meets the following requirements is exempted from the definition of “residential property” and thus from the application of the prohibition: n does not contain any habitable dwelling; n is zoned for residential use or mixed use; and n is located in a community no larger than permitted by the Regulations (as the permitted community size is specific and technical, you are encouraged to refer to the wording in the Regulations).

This exemption is intended to exclude certain recreational properties from the application of the prohibition.

WHAT AMOUNTS TO A PURCHASE?

Essentially any acquisition of an interest in residential property, with or without conditions, amounts to a purchase under the Act. However, the following are excluded:

n Acquisitions by an individual resulting from death, divorce or separation, or a gift

n A tenant renting and occupying a dwelling unit

n A transfer under a trust that was created before January 1, 2023

n Foreclosures

On its face, it would appear that a nonCanadian lender secured by residential property would be acquiring an interest in property that would be prohibited by the Act.

WHO IS A NON-CANADIAN?

A non-Canadian is defined as:

n An individual who is not a Canadian citizen, a permanent resident of Canada, or registered as an Indian under the Indian Act;

n A foreign corporation;

n A private corporation incorporated in Canada but controlled by a non-Canadian;

n A foreign entity; or

n A private entity incorporated in Canada but controlled by a non-Canadian. In effect, a non-Canadian cannot purchase the property themself, or through a corporation, trust or other legal entity. However, the following are exempted from the prohibition provided they meet criteria specified in the Act and its regulations:

n A temporary resident who is a foreign student

n A temporary resident who holds a work permit

n A refugee

n Consular staff and members of international organizations residing in Canada

n Where the prohibition would conflict with Indigenous rights recognized and affirmed by the Constitution

Every non-Canadian who is found guilty of violating the Act is guilty of an offence and subject to a fine of up to $10,000.

A corporation, director, officer, manager or other who directed, authorized, assented to, acquiesced in or participated in the offence may also be liable, regardless of whether the corporation was prosecuted.

IS THE TRANSACTION INVALID?

A transaction that violates the Act remains legally binding; however, a court may order that the property be sold and the proceeds distributed in the following order:

n To the government to cover its costs of the court process, the sale, and any fines owed by the non-Canadian under the Act

n To others to cover their debts in the amounts and priority determined by the court

n To the non-Canadian (the amount is to be no greater than they paid for the property)

n To the Receiver General for Canada, the balance remaining

IS THE LEGISLATION PERMANENT?

The legislation is set to be automatically repealed in two years. Of course, this does not mean the government cannot change its mind and extend the two-year period or even make the prohibition permanent.

WHAT ABOUT EXISTING CONTRACTS?

The prohibition does not apply to contracts of purchase and sale entered into or assumed before

January 1, 2023, provided the non-Canadian became liable or assumed liability under the contract prior to this date. This could be interpreted to mean that any Agreement of Purchase and Sale signed by a non-Canadian by December 31, 2022, would be exempt from the prohibition. Given the amounts of money involved in these transactions, it is recommended that legal advice be obtained regarding any specific Agreement.

TAKEAWAY: CHANGES TO MORTGAGE BROKERING PRACTICE

The Act does not impose any additional compliance requirements (such as related to collection, processing or reporting) on mortgage brokers. However, mortgage brokers should establish prudent business practices to collect, review and document information provided by non-Canadians in the course of a business transaction, particularly regarding any claim that the non-Canadian comes within an exception/exemption. ‘Know your client’ practices, due diligence and retaining of thorough documentation (including notes) are suggested. The due diligence should include but not be limited to a signed statement from the client in the client services agreement that that they are not a nonCanadian under the Act.

This article is not intended as legal advice. You are advised to obtain legal advice in specific instances.

The legislation, the Prohibition on the Purchase of Residential Property by Non-Canadians Act, can be found at https://laws-lois.justice.gc.ca/eng/acts/P-25.2/page-1.html and the Regulations at https://canadagazette.gc.ca/rp-pr/p2/2022/2022-12-21/html/sor-dors250-eng.html.