Most would agree that the government had to try and stabilize the rapidly increasing home prices in Canada, unfortunately whenever the government gets involved with the real estate market there will intended consequences. We all know that even good intentions can have negative outcomes. REALTORS on PEI recently had training sessions on this new law and even the lawyers presenting the training pointed out the unclear wording of the act.

Late last year, the Canadian federal government implemented the “Prohibition on the Purchase of Residential Property by Non-Canadians Act,” which took effect on January 1, 2023. The law aims to increase housing affordability by prohibiting non-Canadians from directly or indirectly purchasing residential property for two years. However, the Act’s language is not as straightforward as it seems and could have unintended consequences.

The definition of “residential property” is not limited to detached, semi-detached, rows, and condos, but also includes any developed or vacant land that is zoned for residential or mixed use within a census metropolitan area, which could include many commercial real estate assets. Additionally, the definition of “non-Canadian” includes any entity with 3% or more foreign ownership, which excludes corporations whose shares are listed on a Canadian stock exchange but does not exclude real estate investment trusts (REITs). This means that the majority of publicly traded Canadian REITs are considered foreign entities.

The Act prohibits any direct or indirect purchase of a residential property by a non-Canadian, including the acquisition of a lease or mortgage tied to a residential property. Indirect purchases also cover acquisitions of units in a REIT that owns residential property, which could have unintended consequences on the commercial real estate market.

Real estate lawyers may benefit from the Act’s ambiguities, but the rest of the industry is facing real damage. Many commercial real estate deals have been canceled or put on hold, even if they have nothing to do with residential housing. Developers that rely on foreign equity cannot proceed with purpose-built developments that are effective in addressing Canada’s housing affordability crisis. REITs, which are capable of building purpose-built units, are frozen due to the Act. Private equity funds with a minority foreign investor looking to acquire shares in a business on land zoned as residential or mixed-use could also be impacted.

The Act’s unintended consequences should be addressed immediately by policymakers. The Act should focus only on single units being purchased by foreigners and exempt the development of new supply from the legislation’s impact.