New Responsibility for Mortgage Brokers regarding Non-Canadian Clients
*This page has been updated following the federal government amendments introduced on March 27, 2023.
As of January 1, 2023, a non-Canadian is prohibited from purchasing, directly or indirectly, any residential property.
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.
We provide the following to assist mortgage brokers. This is not to be understood as legal advice but rather as our understanding as educators.
Why the Prohibition?
The federal government indicated the “Prohibition on the Purchase of Residential Property by Non-Canadians Act” (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:
- a detached house or similar building, containing not more than three dwelling units; or
- 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.
However, the prohibition does not apply to properties in an area not within the specified minimum size of municipality. This is intended to exclude certain recreational properties.
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:
- acquisitions by an individual resulting from death, divorce or separation, or a gift
- a tenant renting and occupying a dwelling unit
- a transfer under a trust that was created before January 1, 2023
- the acquisition by a non-Canadian of residential property for the purposes of development
On its face, it would appear that a non-Canadian 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 the following:
an individual who is not:
- a Canadian citizen,
- a permanent resident of Canada or registered as an Indian under the Indian Act.
- a foreign corporation
- a private corporation incorporated in Canada but controlled by a non-Canadian
- a foreign entity
- a private entity incorporated in Canada but controlled by a non-Canadian
Regarding bullets 4 and 6 above, Control means having direct or indirect ownership of shares or ownership intertest in a corporation or entity representing 10% or more of the value of the equity in it or carrying 10% or more of its voting rights. Please note that until March 23, 2023, the threshold was 3%.
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:
- a temporary resident who is a foreign student
- a temporary resident who holds a work permit
- a refugee
- consular staff and members of international organizations residing in Canada
- where the prohibition would conflict with Indigenous rights recognized and affirmed by the Constitution
What are the Penalties?
A mortgage broker who attempted to or did counsel, induce, aid, or abet a non-Canadian to violate the prohibition will be guilty of an offence and subject to a fine of up to $10,000.
Every non-Canadian who violates 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 Sale Invalid?
The sale of a residential property to a non-Canadian in violation of the Act remains legally binding, however, a court may order that the property be sold and the proceeds distributed in the following order:
- to the government to cover its costs of the court process, the sale, and any fines owed by the non-Canadian under the Act
- to others to cover their debts in the amounts and priority determined by the court
- to the non-Canadian (the amount is to be no greater than they paid for the property)
- 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 non-Canadian under the Act.