Real estate industry braces for foreign buyer ban

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With financial markets roiling and house prices tumbling, investors in countries around the globe appear to have a diminished zeal for buying real estate outside of their own borders.

Even so, Canadian real estate mavens are brushing up on the temporary foreign buyers’ ban, which is set to come into effect on Jan. 1.

John Zinati, lawyer with Zinati Kay Barristers and Solicitors, warns that fines of up to $10,000 may be coming to any industry player working with a foreign buyer.

“We’re going to be the ones subject to the fine,” says Mr. Zinati, including lawyers in that cohort – along with agents, brokers and developers.

Parliament passed the Prohibition on the Purchase of Residential Property by Non-Canadians Act earlier this year after the Trudeau government unveiled the plan in the 2022 federal budget.

The two-year ban applies to foreign corporations and individuals who are not citizens or permanent residents of Canada and includes direct and indirect purchases.

Mr. Zinati says many details are still unclear but the information provided so far suggests that people who knowingly assist in a contravention of the law may be subject to monetary penalties on conviction.

“For every transaction after January 1, we’re going to be asking for proof” of Canadian citizenship or permanent resident status,” Mr. Zinati says of his firm.

The rules allow some exemptions, Mr. Zinati adds. Refugees, students and an individual purchasing with a spouse or common-law partner who is not subject to the ban may be eligible, for example.

Buildings with more than three units are not covered by the ban.

One aspect Mr. Zinati is keenly watching for is more information on how the rules will be enforced and whether the final regulations will be less stringent than the government’s original stance appeared to be.

“On the face of it, we could be subject to a fine, which is pretty aggressive,” he says.

Mr. Zinati points out that the Federation of Ontario Law Associations has raised concerns with the legislation. Some lawyers also believe the law may be challenged on the grounds that property rights fall under provincial government jurisdiction.

Interestingly, a sales agreement signed in violation of the law won’t be invalid, explains Mr. Zinati. The seller and the buyer would still be required to stick to the contract.

After that, the federal government would have the task of asking a court in the province where the property is located to order the property sold. The foreign buyer would not be allowed to profit from that sale.

Mr. Zinati says the process of enforcement would be so onerous, he wonders if the act will mostly serve as a deterrent.

“They may be relying on people in the industry to be afraid to do deals with foreign buyers.”

Mr. Zinati adds that the regulations will not apply to agreements signed in the remaining weeks of 2022, even if the deal closes in 2023.

Mr. Zinati says purchases by foreign buyers who have no ties to this country are rare. Looking at his own firm, lawyers are aware of the occasions when they need to remit Ontario’s foreign buyers’ tax on behalf of a buyer.

“That is not a very common instance.”

Mr. Zinati also believes the new ban will have little impact because the market has fallen since the spring when the budget was announced.

“This came about when the market was hot,” he says. “We have the not uncommon phenomenon – trying to calm a market that by all accounts is calming on its own.”

Mr. Zinati adds that the Ontario government recently raised the province’s foreign buyers’ tax to 25 per cent from 20 per cent.

Clients have been calling to ask him why the tax is being raised if purchases by foreign buyers are banned. The two levels of government are not working in tandem, he points out.

The City of Toronto also plans to implement a vacant homes tax. The annual tax will be levied on unoccupied homes beginning in 2023.

All residential property owners will be required to submit a declaration of their property’s occupancy status for the previous year.

For its part, the Canadian Real Estate Association (CREA) says the experience in British Columbia, which introduced a foreign buyers’ tax in 2016 and a speculation and vacancy tax in 2018, suggests that such measures have a small and temporary effect on real estate markets, housing availability and affordability.

The effects are largely isolated to large, metropolitan markets, with no statistically significant impact in smaller communities, according to CREA.

CREA made several recommendations, including a suggestion that the ban include an exemption for buyers from the United States and Mexico in order to avoid a reciprocal response from Canada’s trading partners.

The association is also watching for clarifications and definitions in the regulations when they are released. The legislation may be complicated, CREA cautions, so it is advising members to consult a lawyer for guidance and advice.

Simson Chu, real estate agent with Chestnut Park Real Estate Ltd., has not seen any signs of a rush to buy from overseas investors before the ban comes into effect on Jan. 1.

Mr. Chu adds that the ban is aimed at buyers who have no connection to Canada, and very few buyers land in that category.

Mr. Chu keeps an eye on the global real estate market, and he sees the slowdown permeating many economies as buyers wait for deals and further declines in prices.

At Capital Economics, chief global economist Jennifer McKeow, is forecasting widespread recessions next year, including shallow dips for Canada and the United States.

The economist notes that several countries are facing headwinds from tighter money policy and a move by banks to tighten their lending criteria.

“One consequence of this is that housing activity, which has already weakened, is set to deteriorate further and we anticipate declines in house prices across several major advanced economies,” Ms. McKeown says in a note to clients.