Canada’s Foreign Buyer Ban Does Not Apply to Commercial Real Estate

The federal government has introduced new rules and regulations to help cool down the Canadian real estate market. One of these measures was the Prohibition on the Purchase of Residential Property by Non-Canadians Act – the foreign buyers ban.

As of January 2023, non-citizens and non-permanent residents are restricted from acquiring residential properties across the country for two years. The initiative, which includes detached houses and semi-detached homes, was designed to prevent external competition and allow Canadians to access the housing market.

Nearly a year into the law, it is unclear if the foreign buyer ban has eased housing prices. But while market analysts comb through the data, industry observers are waiting for supporting regulations for the legislation.

One issue that requires additional confirmation is commercial real estate.

Commercial properties are essentially exempt from the law based on how the federal act was written. In other words, the foreign buyer ban does not apply to commercial real estate purchases.

Because of this uncertainty, has the Canadian commercial real estate market been affected?

Foreign Buyer Ban and Commercial Real Estate

Canadian commercial real estate investors have shown tremendous interest in the industry this year. Sales activity is off from its peak levels, but demand has been robust in many major urban centres, pushing prices. Reports suggest this will be the trend moving forward.

“A shortage of available inventory across various asset classes continues to place upward pressure on commercial values and lease rates, especially within the industrial sector,” said Christopher Alexander, president of RE/MAX Canada, in a statement.

But how will the foreign buyer ban influence the commercial real estate sector?

So far, the regulation does not officially affect the commercial real estate market, but it is having a spillover effect.

Industry and legal experts recently told The Globe and Mail that the law’s definition includes residential property on land that is zoned for residential needs or mixed-use. This component of the law covers plenty of commercial land nationwide.

Kevin Lee, the head of the Canadian Home Builders’ Association (CHBA), an organization that represents construction firms, says hundreds of commercial real estate deals have been cancelled.

“A lot of players, all of a sudden, are out of action,” he said in an interview with the newspaper. “These deals are falling through on a daily basis.”

Ostensibly, there have been two significant hurdles. The first is that many Canadian-based firms are owned by foreign investors. The second setback is that foreign buyers cannot acquire commercial real estate zoned for residential purposes and mixed-use if it is in a location that maintains a core population of at least 10,000 people.

Reports suggest that various industry lobby groups are actively engaging with the Ministry of Finance, the Ministry of Housing, and the Canada Mortgage and Housing Corporation (CMHC). Officials have stated that they are assessing the law’s implementation and how it is impacting the overall real estate market.

“We will continue to engage with stakeholders as we consider potential additional steps to ensure this measure does not have unintended impacts on communities,” said Leonard Catling, a spokesperson for CMHC.

In the meantime, there is optimism that public policymakers will eventually make the necessary adjustments to offer additional clarity, as there have been discussions surrounding amendments. Earlier this year, Kamal Khera, the Minister of Housing and Diversity and Inclusion, presented a series of amendments, such as boosting the foreign ownership threshold, expanding existing exemptions to all publicly traded firms, narrowing the definition of “residential property” and “habitable dwelling,” and exempting purchases for development purchases.

Experts say that while this was welcomed, Ottawa did not provide the opportunity for public feedback.

Taxes as a Foreign Commercial Real Estate Investor

Should foreign investors be interested in Canadian commercial real estate, becoming acquainted with the various tax implications is imperative. Indeed, there are several tax considerations to be aware of (depending on what province you are buying property).

The first is the General Sales Tax (GST) or Harmonized Sales Tax (HST). The rates will vary based on the province. In Ontario, it would be 13 per cent.

But the Canada Revenue Agency notes that there are exemptions, including “certain types of leased lands,” “farmland to related persons,” and “real property made by an individual or a personal trust with certain exceptions.”

The second is the annual commercial property tax. Municipal governments typically employ this levy to generate revenue for a wide array of public services, such as garbage collection, snow removals, roads, schools, and sewers.

Here is a look at some of the 2022 municipal property tax rates in Canada:

• Vancouver: 0.27 per cent
• Edmonton: 0.94 per cent
• Saskatoon: 1.25 per cent
• Winnipeg: 2.8 per cent
• Toronto: 0.63 per cent
• Montreal: 0.57 per cent
• Halifax: 1.15 per cent

There have been widespread concerns about a gap between commercial and residential property tax rates in Canada. A recent study by commercial real estate analytics firm Altus Group discovered that seven of the 11 major urban centres possess a commercial tax rate that is more than double the residential tax rate. Last year, the average commercial-to-residential tax ratio was 2.80 per cent, up from 2.42 per cent in 2021.

“The post-pandemic market is incredibly volatile, and governments need to be proactive to address the value shifts without increasing inequities between commercial and residential taxpayers,” said Kyle Fletcher, president of property tax for Canada at Altus Group, in a statement.

Meanwhile, it should be noted that you could face a provincial land tax if your commercial property is not situated in a municipality. For example, in Ontario, the rate for a commercial property is $300 per $100,000 of assessed value.

Staying on Top of Foreign Buyer Rules and Commercial Real Estate

In the end, whether you are a Canadian buyer or a foreign investor, it is imperative to be aware of the wide range of rules, regulations, and taxes that can impact the purchase of a commercial or residential property. Indeed, plenty of different laws are applied at all three levels of government, which could affect the total cost of your commercial acquisition. And, since adjustments could be made at the federal level, be sure to stay current on any legislation revisions, like the foreign buyer ban.