Foreign Buyers Ban: Risk to developers and their sales teams

On February 4, 2024, the Federal government announced a two-year extension to the foreign ownership ban in Canada. Originally coming into force on January 1, 2023, the Prohibition on the Purchase of Residential Property by Non-Canadians Act (the “Act”) —dubbed the ‘foreign buyers ban’—prohibits non-Canadians from directly or indirectly buying or owning residential property in Canada, and was one of several federal, provincial, and municipal programs aimed at addressing housing affordability in Canada.

With this latest extension to the Act a potential risk is emerging for real estate developers in BC, particularly those operating under the ‘early marketing’ provisions of REDMA.

Verifying Eligible Buyers

In many multi-family real estate projects, a developer will secure presale contracts for all the project’s available units often years in advance of the units being ready for occupancy. An outside sales team utilizing a presentation sales centre will act as agents to secure these contracts, with the transaction being finalized once the owners take possession of the completed unit. But this is where the timing of the ‘foreign buyers ban’ could cause a problem.

If the sales team has not verified and documented a buyer’s eligibility under the ‘foreign buyers ban’ and the transaction goes through, all parties involved could face substantial penalties under the Act.

Currently, the Act states:

“Every non-Canadian that contravenes section 4 and every person or entity that counsels, induces, aids or abets or attempts to counsel, induce, aid or abet a non-Canadian to purchase, directly or indirectly, any residential property knowing that the non-Canadian is prohibited under this Act from purchasing the residential property is guilty of an offence and liable on summary conviction to a fine of not more than $10,000.” (Section 6(1))

This gap in verifying a buyer’s eligibility—between when a pre-sale contract was signed and completion of the unit—means developers and their sales teams could be exposed to a $10,000 fine for each unit sold in contravention of the Act. In large multi-family developments, that could be hundreds of thousands of dollars in penalties for each party involved in the sale.

Even if the non-eligible transactions do not close, there’s additional risk to the project’s financing. In the instance where multiple pre-sales contracts fall through because the buyers are no longer eligible, a developer could have several unsold units and have to scramble to sell them. The developer’s presentation centre would likely be closed at this point and any contract engaging a sales team would have lapsed.

Foreign Buyers Ban Best Practices

With the ‘foreign buyers ban’ extended through the end of 2026, it’s important for developers and their sales teams to verify and document a buyer’s eligibility. This verification should extend beyond a simple Canadian driver’s license. A birth certificate or passport, Permanent Resident Card, or other documentation to demonstrate an exemption from the Act should be collected. This personal information should also be stored in keeping with privacy best practices, and help ensure the developer and their sales team are not exposed to undue risk.

For more information about the ‘foreign buyers ban’ and best practices to remain compliant, please contact Hugh H. Claxton or James D. Lin of our Real Estate Group.