When the Prohibition on the Purchase of Residential Property by Non-Canadians Act -- aka the foreign buyer ban -- came into effect on January 1, the real estate industry's efforts to get it amended had already begun.
Many in the industry were unhappy that the Government of Canada did not officially reveal the full extent of the regulations until December 21, 2022, the final hour before the holiday season. While Friday News Dumps often work, the media strategy tends to have a negative effect when it's something as big as this, and these days, it's difficult to have a conversation about the foreign buyer ban with somebody in the industry without its poor rollout coming up -- oftentimes unprompted.
"When the government published the regulations a couple of days before Christmas (to come into effect 10 days later), with terms that were not expected and which threatened a lot of commercial activity, that's when everyone realized what a massively negative impact this was going to have on the ability to build new housing," Mark V. Lewis tells STOREYS.
Lewis is a Partner at the Vancouver office of the Bennett Jones LLP law firm, Co-Head of the firm's national Commercial Real Estate Group, and is also the Chair of the Urban Development Institute's (UDI) Legal Issues Committee in British Columbia. His practice is predominantly focused on the supply side of real estate and infrastructure development projects, where he often works with developers, lenders, and other project proponents.
"Our clients were not anticipating that the legislation was going to impact the supply side of the development equation; the government's messaging when the Act was introduced was that it was to be focused only as a demand-side measure to reduce the competition for Canadians to buy residential property. As a result, the impact of this legislation was an immediate shock to the sector, in particular when the federal government published the regulations under the Act on December 21, 2022," he says.
Lewis says that the federal government did a poor job of communicating and engaging with industry stakeholders, and that the development sector "took the government at its word" that the regulations would target demand and not supply.
Michael Bourque, CEO of the Canadian Real Estate Association (CREA), tells STOREYS that CREA's advocacy began as early as after the 2021 election campaign, "because we recognized that the ban had support from a number of parties in Parliament and we wanted to ensure that the ban would live up to its stated intent of cracking down on foreign speculators that drive up housing prices, while exempting immigrants and housing developments that are essential to the Canadian economy."
After it was revealed that the federal 2022 budget would include the foreign buyer ban, Bourque says CREA was immediately concerned about the unintended consequences, and raised those concerns during the "very rushed CMHC consultation process" and in meetings with officials and parliamentarians, including during a Parliamentary Committee appearance on December 6.
As soon as the Act and its regulations came into effect, the industry entered the new year reinvigorated, with their sights set on identifying the ramifications and, subsequently, getting the legislation changed.
"There were immediate efforts initiated in early January to ensure that the legislation was properly understood," Lewis says. "An ad hoc group of experienced commercial real estate lawyers started discussions locally and I know that similar discussions were initiated in Toronto, and I assume in other major Canadian cities. Those discussions, along with discussions involving industry groups -- in Vancouver, the UDI; and in Toronto, the Canadian Home Builders Association, the Building Industry and Land Development Association, and Real Property Association of Canada, to name three -- were very helpful in identifying key concerns."
The biggest concerns, from what Lewis saw were, in no particular order:
- "Applying the prohibition to census areas as small as 10,000 people, which captures a lot of resort and recreational property areas that rely on visitors for jobs and economic benefits;
- Setting the foreign control threshold for determining whether an entity is non-Canadian at 3%;
- Capturing commercial use property in the definition of 'residential property';
- Not recognizing the need to acquire land for supply-side (development) purposes;
- Capturing mortgages in the definition of 'purchase';
- Disrupting normal course commercial activities on existing land ownership (e.g. an owner, who has 10% foreign control, of a 50% interest in a development site that is a 'residential property,' wanting to buy out its 50%-partner on the property in order to proceed with development, but now being prohibited from doing so);
- A lack of clarity around what a 'residential property' is."
Clark Kassian and Brigham Jagger, Partners at Dentons Canada LLP with hands-on experience working with a variety of real estate clients, tell STOREYS that they largely heard the same gripes with the regulations, including the rollout.
"One of the most common complaints that we heard from the community was the manner in which this legislation was developed," Kassian and Jagger said. "Many were frustrated at the government's apparent lack of consultation with industry on how this legislation could affect the development of new housing supply, or commercial real estate transactions. And once the unintended consequences of the Act were understood, many in the development community felt like they were effectively left in the dark and their transactions were effectively put on hold for three months until these new amendments were published."
Leona Savoie, Senior Vice President of Residential at Dorsay Development Corporation, tells STOREYS that her company was monitoring the foreign buyer ban since the summer, as Dorsay is based in Toronto but 100% financially backed by individuals in Switzerland, meaning Dorsay would likely be subject to the ban. "Our company was involved from Day One," Savoie said. "We talked to the Ministry of Finance, and even suggested language [for the legislation], but when the regulations were announced on December 21, it went from bad to worse."
Savoie, who is also the Chair of the NAIOP's Government Relations Committee in Toronto, confirms that there was indeed widespread shock within the industry after the regulations were revealed, that it took about four to six weeks for the industry to really grasp the ramifications, and that the legal community played a critical role in that process.
Sources tell STOREYS that many developers had to get legal counsel to review projects against the regulations, and whether potential investors would be deemed "non-Canadian" under the ban. Furthermore, because of the broad terms of the legislation, many commercial real estate projects that had nothing to do with housing were also caught by the legislation.
As the ramifications of the regulations became clearer, what needed to be changed also came into focus. Numerous industry groups submitted formal feedback to the government. The aforementioned sources told STOREYS that those groups included developers, real estate investment trusts, and the Canadian Bar Association, among others, but Lewis, of Bennett Jones LLP, says it was the Canadian Home Builders Association (CHBA), the Building Industry and Land Development Association (BILD), and Real Property Association of Canada (REALPAC) in Ontario that "played the biggest roles interfacing with the federal government and CMHC, which I understand took the lead on the policy development for the legislation."
Savoie said that from her understanding, BILD President and CEO David Wilkes was in contact with the CHBA and the office of the Minister of Housing and Diversity and Inclusion, Ahmed Hussen. In an interview with STOREYS, Wilkes confirmed this, saying that BILD started to get calls between Christmas and New Year's and subsequently reached out to Hussen's office to express the widespread concerns that the regulations would affect housing supply, and not just demand, as the Government of Canada intended.
Bourque, from CREA, also highlighted the gap between the government's stated intent with the ban and the actual regulations. "The exemption criteria had been set at an unreasonable level, essentially banning exempted individuals, such as immigrants and foreign students, from purchasing property in Canada. Moreover, it was disincentivizing or in some cases completely halting housing supply development."
On Monday, March 27, CMHC announced four amendments to the foreign buyer ban regulations, which increased the foreign control threshold from 3% to 10%, removed the restriction on acquiring land for development purposes, revised the regulation that applied to all lands zoned for residential and mixed use, and opened up purchasing to more work permit holders.
All the sources STOREYS spoke to say that the government had previously signaled, but not confirmed, that changes were likely coming. Kassian and Jagger, of Dentons Canada LLP, said that it was "widely expected" but that the timing of the announcement may have been a surprise to many, which Savoie and Wilkes both confirmed. Lewis said that industry associations were told in early February that changes could be coming around the time of the federal budget, which came on March 28, but that there had been radio silence for several weeks.
"The CMHC FAQ page had also been updated a couple of times over the last month, which was an indicator that the government was actively looking at the legislation and addressing questions/issues," Lewis said. "We had also been told that there would be better consultations and a draft circulated in advance, but that did not happen."
Processes aside, the amendments themselves appear to have resolved most of the industry's concerns in one fell swoop.
The concern that drew some of the most attention prior to the changes was the 3% foreign control threshold, which has now been upped to 10%. The general consensus regarding this change appears to be that while the development industry would have preferred no threshold at all, they also recognize that 10% is better than 3%, and are content with the overall set of amendments, some of which render the threshold less of an issue.
"The change is certainly helpful," Lewis said, "but as one client said to me on Monday, 'I needed it to go to 11%!' Development -- whether it is for rental or strata lot purposes -- requires investment and we are in a market with a limited capital pool. Many local developers, including developers who were founded in BC and have been operating here for decades, have regular non-Canadian investors who provide the required equity to get housing projects off the ground. Any limitation on investment will shrink the pool of available capital and, therefore, the pool of developers who are able to help provide the housing supply that is so badly needed in many places across the country."
On the investor side of things, Ari Silverberg, President of Harbour Equity Capital Corp, tells STOREYS that although Harbour Equity is a Canadian entity and wasn't directly affected by the foreign control threshold, they occasionally sell developable properties and that the regulations have indeed reduced the pool of potential buyers. "At a time where housing is in such short supply, those provisions really didn't make any sense," Silverberg says, "and it couldn't have been a worse time."
Lewis says that submissions regarding the threshold that were made by the industry to the government, that he is aware of, were in the 20% to 25% range. Kassian and Jagger add that a 10% threshold will still keep many entities on the outside looking in, despite being "majority-owned by Canadians, managed by Canadians, and ordinarily thought of as being Canadian," but that "given the other changes that were made to the legislation, this threshold will no longer be as much of a concern as it was."
Asked which of the four changes was the biggest win for the development industry, Lewis, Kassian, Jagger, Savoie, and Wilkes all pointed to the development purposes exemption, which now allows non-Canadian entities to purchase land for the purposes of development, after the original regulations only allowed this for publicly-traded corporations. All agreed that while there are still some flaws, the amendments were exactly what the industry needed, and that they aren't aware of any concrete efforts seeking further changes at the moment.
"I think there's an expectation that the federal government will not have the appetite to consider further amendments at this time," Lewis said. "The foreign control threshold is the easiest target for the development community to identify for change, but I think we'll need some data to convince the federal government that a further change is required."
Added Kassian and Jagger: "There are still a few unresolved questions relating to the unexpected application of this legislation to some commercial transactions. In its current form, the foreign buyer ban may still apply to some ordinary commercial transactions involving agricultural land. As well, it may be problematic in [merger and acquisition] transactions where someone wants to buy a company that happens to own some residential property, because the legislation captures direct purchases as well as indirect purchases."
Kassian and Jagger say that they aren't aware of any current specific industry efforts on this front, but that these flaws can be resolved with further amendments, or more guidance from the government. Separately, Lewis said producing more "binding interpretative guidance on which the sector can rely definitely going forward" would be welcome and could also benefit the lending community.
On the individual homeowner side, however, Bourque says that CREA still has several concerns and had previously proposed including a Canada-United States-Mexico Agreement (CUSMA) exemption that would have treated property owners from the United States and Mexico in a similar fashion to Canadians, and would also avoid a reciprocal response. Additionally, CREA also recommended a mechanism that would give provinces and territories some authority to tailor the ban according to their market dynamics, as well as include considerations for existing measures at the provincial/territorial and municipal level, and that the ban be re-evaluated after the reviews of the Underused Housing Tax and other policies.
Asked whether CREA will continue advocating for further amendments, Bourque said, "Yes, we have outstanding concerns regarding CUSMA implications, foreign students, the messiness of the CMA/CA determination and lack of clear tools to make determination of what properties are in scope. The prohibition was unnecessarily targeting immigrants living in Canada that are essential to the Canadian labour force and preventing housing developments that are desperately needed to increase housing supply across the country. It is having a very negative impact on the relocation of workers, and is working against our interests to attract and retain talent and skills."
Then, of course, there is the question that many in the industry have quietly thought about, but perhaps reluctantly so: what's stopping the Government of Canada from extending the foreign buyer ban after the two-year period?
"It is most definitely a concern," Lewis says. "The repeal language, sometimes referred to as a sunset clause, is included in the 2022 federal budget implementation legislation, so it would require Parliament, and not the federal Cabinet, to amend that statute to effect the change. My personal view is that in today's current federal political climate with a minority government, it's unlikely that an extension would find favour, especially knowing the problems with the legislation and that people had relied on the sunset clause in connection with material commercial activity. Unfortunately for the development industry, there's no guarantee that the winds won't shift."