Real Estate 2024 Comparisons

Under Canada’s federal constitution, laws relating to real estate fall within provincial jurisdiction. Each Canadian province enacts its own legislation with respect to the ownership structures, use, acquisitions and dispositions, financing and development of real property. Such laws tend to be similar across most of Canada’s provinces, as well as in the three northern territories. The exception is the civil law jurisdiction of Quebec. In recent years and in response to surges in residential property prices and availability, many Canadian provinces have enacted legislation imposing increased transfer tax, owner transparency and foreign ownership restrictions and obligations; at the federal level, the Prohibition on the Purchase of Residential Property by Non-Canadians Act (see 2.11 Legal Restrictions on Foreign Investors) was recently introduced.

In Canada’s common-law jurisdictions – that is, all provinces and territories other than Quebec – common-law jurisprudence is a key component of real estate law. In addition, some real estate-related common-law principles have been codified in legislation in Canada’s common-law jurisdictions. In Quebec, the Civil Code (similar to those in use in many European countries) serves as the primary source of law, although case law clarifies issues that remain after the application of the Civil Code of Quebec.

International law is not a significant source of real estate law in Canada. Nevertheless, international treaties are occasionally reflected in Canadian real estate legislation. Orders of foreign courts are enforceable in Canada under certain conditions.

Access to Capital

Canada’s real estate market post-pandemic has experienced rising interest rates, which have slowed the exuberance in the post-pandemic deployment of capital to a degree. As interest rates have risen, the market has experienced a trend of tightened lending conditions and requirements in order to access more capital. Fluctuating market dynamics have created additional market tension, and uncertainty around valuations is expected to remain a concern for real estate companies. Going forward, access to debt and equity capital will also continue to impact real estate companies and their investment strategies.

Institutional and private funds continue to dominate the market, with active participation from new private, pooled funds. Financings and re-financings remain active, although the spike in interest rates has had a cooling effect.

ESG and Green Building Initiatives

With federal government commitments to achieve net-zero emissions by 2050 and environmental, social and governance (ESG) reporting and disclosure requirements becoming more prevalent, asset managers across several sectors, including the real estate industry, are focusing on ESG performance, strategic planning, and environmental stewardship and management. This trend is demonstrated by both the increased prevalence of green building initiatives in leases and the ongoing dialogue between owners and tenants regarding cost allocation for these initiatives. While the downtown office sector has seen tenants compressing operations and an active sublease market, rent payments have largely been kept current and many businesses are planning on, or actualising, a hybrid or full return to the office.

The Industrial, Retail and Residential Sectors

The Canadian real estate market has not yet been significantly impacted by potentially disruptive developments such as blockchain, DeFi and proptech.

The industrial sector remained strong throughout the early days of the pandemic, and has since far exceeded its pre-pandemic buoyancy. The explosive growth of online commerce, plus even greater demand due to the exponential need for logistics and distribution centres as a result of the pandemic, has sustained and increased pressure on the industrial real estate market, as major online distributors vie for scarce urban space in which to house new fulfilment centres.

The retail sector has seen something of a resurgence, with a focus on larger regional shopping centres and properties with large anchor tenants doing well.

The residential sector has shifted in focus as the demand for suburban and recreational property has enjoyed a strong boost, such that this sector has generally returned to very strong levels. In particular, multi-residential and purpose-built rentals remain strong sectors for developers.

Notable Transactions

Some of the larger real estate transactions in Canada in 2023 were:

• Allied Properties REIT sale of Toronto-based data centre portfolio to KDDI Corporation for CAD1.35 billion;
• TPG’s acquisition of a 75% interest in two Oxford Properties industrial business parks for CAD990 million; and
• the Ivanhoe Cambridge sale of a 49% interest in the Vaughan Mills shopping centre to LaSalle Management.

Legislative reform at the provincial and federal levels is driven by motivations to create affordable housing and increase transparency of ownership of real estate in Canada.

While Ontario and Quebec impose transfer taxes on unregistered (or “beneficial”) transfers of land, other jurisdictions, such as British Columbia, are considering taxing beneficial transfers, while a third group, including Alberta, do not tax either transfers of title or beneficial interest transfers. Onerous transparency and disclosure requirements are on the rise, with notable legislative implementation in British Columbia and Ontario.

Taxation

Both British Columbia and Ontario have already instituted foreign-buyer taxes in respect of certain residential properties in certain geographic areas, and in Ontario, the City of Toronto is considering a similar additional tax at the municipal level. In British Columbia and in the Cities of Toronto and Ottawa, annual taxes are imposed to target owners who own real estate that is neither their principal residence nor made available for long-term rental, to encourage rental of under-used residential properties in major urban centres. The annual tax rates in Toronto and Ottawa for 2023 were 1% of assessed value (in Toronto the rate will be 3% in 2024) and in British Columbia, the rate varies from 0.5% to 2% of the property’s assessed value. The federal government has additionally passed Bill C-8, containing the “Underused Housing Tax Act”, with a 1% annual tax on the value of certain residential property owned by non-permanent residents or non-citizens considered to be vacant or under-used, effective as of 1 January 2022.

Transparency and Disclosure Requirements

Ontario has also imposed onerous disclosure requirements as part of its land transfer tax regime, including details of shareholdings and beneficial ownership for transfers of agricultural land and certain residential properties. Similarly, in British Columbia, legislation exists to increase transparency of hidden (beneficial) ownership of real estate. A publicly accessible registry of indirect owners of land came into effect on 30 November 2020, and became accessible to the public on 30 April 2021. While certain information is publicly available on such registry, more sensitive information is only available to law enforcement/government agencies. Disclosure of these material interest-holders is required on a retroactive and ongoing basis.

Social or Affordable Housing

In Quebec, all municipalities, intermunicipal boards and transit authorities were recently given powers that used to be only available to the City of Montreal to acquire properties, notably for the purposes of social or affordable housing.

Property rights fall within the jurisdiction of the provinces or territories, and differ across the country. Each jurisdiction has statutes that govern the acquisition, ownership, use, financing and development of real estate. In common-law jurisdictions, a freehold estate in real property is a right or interest that exists for an indefinite duration. Conversely, leasehold estates have a fixed duration. A fee-simple estate is the most common freehold estate in Canada and is considered absolute ownership of real property. A leasehold estate is not absolute but confers an exclusive right of possession during the lease term to the tenant.

Other non-possessory rights in land include:

• easements and rights-of-way to use a portion of land for a specified purpose; and
• restrictive covenants restricting the use of land.

Licences to use land are contractual, do not create an interest in land and generally do not grant exclusive possession.

In Quebec, real estate is generally governed by the Civil Code of Quebec, which distinguishes between personal rights and real rights.

Transfers of title are governed by provincial and territorial statute. Certain jurisdictions (Alberta, Manitoba, Prince Edward Island, Quebec and Saskatchewan) restrict the ownership of farmland or rural recreational land by non-residents. In Quebec, non-residents who are restricted from acquiring farmland include residents of other Canadian provinces or countries (in the case of individuals) and those whose directors and ultimate shareholders are not domiciled in Quebec (in the case of corporate entities). See also 2.11 Legal Restrictions on Foreign Investors regarding the federal Prohibition on the Purchase of Residential Property by Non-Canadians Act.

In common-law jurisdictions, registered (legal) title is typically transferred to the buyer upon registration of a deed or transfer in the relevant land registry office. In Quebec, ownership is transferred as soon as there is a “meeting of the minds”, but the sale may not be opposable against third parties until a deed is registered.

Land Registration Systems

There are two types of land registration systems in Canada:

• the registry system – a public record of instruments affecting land; and
• the Torrens (land title) system – which is government-operated and effectively guarantees title, subject to certain limitations.

Each province and territory uses either one or a combination of these systems. However, most common-law jurisdictions have converted or are converting to the more modern Torrens system.

Registration of Instruments

Requirements for registration of instruments affecting land differ across the various provinces and territories and may include procedural, format and content requirements. Electronic registration of instruments is increasingly available in most jurisdictions. All registered instruments in Quebec must be submitted in French only.

Title Insurance

Title insurance is commonly used in Canada, but somewhat less in provinces with a Torrens system (ie, with a statutory assurance of title). Many lenders require borrowers to obtain title insurance. Title insurance can also insure against matters otherwise typically covered by diligence, such as when a legal survey is not available, or when unusual title risks exist.

Documentation and Transactions

The pandemic has resulted in increased flexibility and new processes for documentation and completion of real estate transactions in Canada, including remote witnessing through videoconference and use of affidavits of execution for remote execution of land title documents in certain provinces. Electronic filing of documentation with government authorities has been further expanded, such as transfer tax filings and certain land registry filings which previously required paper submissions.

Typically, a buyer and seller will enter into a conditional purchase agreement, following which due diligence is conducted. If the buyer is satisfied with its investigations, it will waive its due diligence condition and the transaction will become “firm”, provided any other conditions have also been satisfied.

Real estate due diligence generally consists of:

• examining title and zoning;
• conducting inquiries with government authorities and utilities;
• reviewing leases, property contracts and surveys; and
• commissioning environmental and building condition assessments.

Typical contractual representations and warranties that a seller gives a buyer depend on market conditions and the relative bargaining power of the parties. Depending on market leverage, sellers typically seek to sell their real property on an “as is” basis, with limited warranties as to factual matters that might be difficult for a buyer to verify independently, such as the fact that the seller:

• has delivered all contracts, leases and reports in its possession or control; and
• has not received notices of legal non-compliance, environmental contamination or expropriation.

There has been no developed practice in respect of specific representations and warranties relating to the COVID-19 pandemic.

In common-law jurisdictions, no general duty of disclosure is imposed on a seller, and the principle of caveat emptor (“buyer beware”) applies to the purchaser. However, certain exceptions oblige the seller to disclose matters such as known environmental contamination or defects that render the property dangerous or uninhabitable.

In Quebec, warranties as to ownership and the absence of latent defects apply, unless excluded or limited under the deed of sale. A professional seller may not exclude or limit these warranties in respect of undisclosed defects of which it is aware or should be aware. A non-professional seller, however, may exclude or limit these warranties based on the Quebec caveat emptor equivalent. However, all sellers are bound to act in good faith under Quebec civil law, and failure to disclose a known defect would likely amount to fraud.

Across Canada, caveat emptor does not apply to fraud. A seller is liable for latent defects where the failure to disclose them amounts to fraudulent misrepresentation. In common-law jurisdictions, a seller may be liable to a buyer for innocent, negligent or fraudulent misrepresentation for which the remedies include rescission (the setting-aside of the contract) and/or damages, depending on the circumstances.

Depending on the parties’ intent expressed in their contract, a seller’s representations and warranties may either expire or survive completion for agreed periods. Survival periods tend to be limited as the market or the relevant risks permit. Liability caps are not commonly used unless the specified risks are known, but are sometimes found in larger transactions with institutional parties (often subject to certain exceptions for such cap). A purchaser’s remedies for a breach of representation and warranty will be determined by what is in the contract, and may include an unsatisfied condition to closing or the ability to pursue a claim for such breach.

Typically, the buyer has no security for the enforcement of remedies. The buyer may consider obtaining security in the form of a letter of credit, hold-back, or set-off under a vendor take-back mortgage, or obtaining a guarantee or indemnity from a related vendor party. Representation and warranty insurance has become increasingly common in Canada.

An investor will seek comfort that the value of the property and its revenue stream is retained over time. An investor will conduct investigations to determine whether any registered or unregistered agreements affect the land, and whether the land is free from undisclosed liabilities impacting use and value. Applicable zoning/land-use legislation should be reviewed to determine the current and intended uses of the land.

Transfer-tax considerations are increasingly impacting real estate transactions in most jurisdictions in Canada – see 2.10 Taxes Applicable to a Transaction.

Environmental contamination and remediation of real property is governed by both federal and provincial or territorial legislation; however, enforcement is primarily at the provincial or territorial level, and clean-up requirements vary. Although responsibility and liability to regulators, buyers and third parties for remediation generally rests with the seller or person that caused the contamination, subsequent owners, occupiers and those exercising control over real property can be liable for that contamination. This generally occurs when the subsequent owner/occupier fails to perform diligence, knowingly accepts the environmental condition of the lands, and/or contractually assumes environmental liability.

Between buyers and sellers, environmental risk and liability are often allocated contractually by representations, warranties and indemnities and, in some cases, adjustment of the purchase price. However, parties cannot contract out of regulatory liability; their liability for environmental contamination is potentially unlimited, although certain provincial governments recognise the contractual allocation of liability.

Permitted uses of a parcel under applicable zoning or planning law can be ascertained through enquiries with local planning authorities and review of municipal land-use by-law regulations. For larger developments, developers must enter into agreements with the applicable municipality to facilitate the development, whether to obtain construction approvals, subdivide the land, or change the applicable land-use by-laws. These agreements commonly relate to servicing and public facilities commitments, land dedications and bonding.

Expropriation of real estate falls under both federal and provincial regulatory regimes. The federal government has authority to expropriate interests in land for public works or other public purposes, pursuant to the Expropriation Act (Canada). Each province and territory has similar legislation.

Expropriation legislation across the country sets out procedural requirements for expropriating authorities, such as prescribed notice periods. Compensation is generally based on fair market value of the subject lands and may include costs and damages.

Transfer tax is imposed at the provincial level and is typically payable upon registration of the transfer instrument in the relevant land registry. Certain municipalities (such as the City of Toronto, Ontario and various municipalities in Quebec) may levy land transfer tax in addition to the tax levied by the province. In Quebec, municipalities charge and collect transfer duties. Taxation rates vary across the country, from a high of 5% of the consideration for certain residential properties in Toronto, to no tax at all in Alberta, Newfoundland and Labrador, and parts of Nova Scotia. All provinces charge registration fees, which are generally nominal.

In Ontario and Quebec, unregistered transfers of beneficial interests in real property are also taxed, subject to some exceptions. In Ontario (but not in Quebec), the transfer of an interest in a partnership that owns land is considered a taxable transfer of beneficial interest in that land.

In most jurisdictions, the buyer is liable for the payment of land transfer tax and is typically responsible for paying the applicable sales taxes, registration fees and other expenses relating to the purchase.

Taxation on Property Transfers to Foreign Nationals/Corporations

British Columbia and Ontario impose taxes of 20% and 25%, respectively, on the transfer of certain residential properties in certain urban areas to foreign nationals, foreign corporations or trustees for a beneficial owner that is a foreign national or foreign corporation.

The federal Prohibition on the Purchase of Residential Property by Non-Canadians Act enacted on 1 January 2023 currently imposes a four-year restriction on certain persons purchasing residential property in Canada. Residential property is defined to include a detached or semi-detached (townhouse) house and a condominium unit that is located within specified urban areas, including major cities such as Toronto and Vancouver. The prohibition applies to non-Canadians, including individuals who are not Canadian citizens or permanent residents, and corporations and other entities (such as partnerships) which are controlled by a non-Canadian. Notably, control is defined as direct or indirect ownership in an entity that represents at least 10% of the value of the entity or that carries 10% or more of the voting rights, or control of that entity on a factual basis. It is currently unclear what “factual control” means for the purposes of this prohibition.

Exceptions to these restrictions include:

• certain temporary workers may purchase residential property;
• non-Canadians who purchase residential property with their spouse or common-law partner if such spouse or common-law partner is permitted to acquire residential property under this Act; and
• certain persons prescribed under the Regulations.

A purchase does not include:

• an acquisition of a right resulting from death, divorce, separation or a gift;
• rental of a dwelling unit to a tenant for that tenant’s occupation;
• transfer under a trust that existed prior to this Act coming into force;
• transfers from the exercise of a security interest or secured right by a secured creditor; or
• acquisition by a non-Canadian of residential property for the purposes of development.

Also at the federal level, the Competition Act and the Investment Canada Act require notification to, or review by, the federal government in certain circumstances involving acquisitions by non-resident purchasers. The federal Citizenship Act also permits each province and territory to enact laws restricting ownership of real property by non-residents.

At the provincial and territorial level, most jurisdictions have taken measures to preserve farm or non-urban land, and certain jurisdictions limit the amount of farmland that can be owned by non-residents. Some provinces and territories also require that non-Canadian corporations obtain an extra-provincial licence or complete certain registrations to own real estate.

For discussion of the Ontario and British Columbia foreign buyer taxes and under-used housing taxes and the federal under-used housing tax, see 1.3 Proposals for Reform.

As mentioned in 2.10 Taxes Applicable to a Transaction, British Columbia and Ontario also impose additional taxes on foreign investors.

Acquisitions of commercial real estate are typically financed through mortgage debt provided by financial institutions such as banks, insurers, trust companies, pension funds, credit unions and other entities that lend money in the ordinary course of business.

Some companies may also be able to utilise equity financing or (in the case of larger companies) corporate level financing to fund acquisitions of real estate.

Real estate financing is commonly secured by granting a mortgage and a general assignment of rents and leases (an immovable hypothec in Quebec), of the borrower’s interest in the subject real estate, along with a general security agreement (a movable hypothec in Quebec), with respect to the borrower’s personal property. These security interests are created by the execution of security documents and are perfected by registration in the applicable land title and personal property registries. Lenders may also require additional security, such as an assignment of contracts, or third-party indemnities or guarantees.

Although any person may lend money and take a mortgage (hypothec in Quebec) to secure real-estate loans, certain financial institutions are regulated by statute, with special provisions applying to foreign financial institutions, and mortgage brokerage legislation applying to lending on the security of real property in several provinces. For the registration of security, certain land title registries require foreign lenders to provide evidence of their existence and good standing. Others require foreign lenders to be extra-provincially registered with the provincial corporate registry in order to take security over real property in the province. Although mortgage interests may be exempt from restrictions on foreign ownership of land, the act of realising upon security (or the ownership of the affected land for a period of time after realising upon security) may contravene such restrictions.

Nominal registration fees apply to the registration of a mortgage, an assignment of rents, a hypothec or any other registered real property security.

Apart from typical legal and other enforcement costs, there are no specific registration fees payable in connection with the enforcement of security over real property.

While giving financial assistance has traditionally been legally restricted or prohibited, many Canadian jurisdictions have recently eased or eliminated the requirements. However, legislation in some provinces still contains express disclosure and reporting requirements. Even where financial assistance is not directly prohibited or restricted by statute, directors must observe their fiduciary duty to act in the best interest of the corporation when approving such arrangements.

In addition, when dealing with non-individuals (ie, corporations, trusts, partnerships), the organisational documents may contain restrictions or limitations on certain activities.

Available Remedies

In the common-law provinces, remedies for mortgage lenders generally include foreclosure, action on the covenant, appointment of a receiver, judicial sale, power of sale and possession. Power of sale is a sale of the mortgaged property by the mortgage lender without court proceedings or supervision, pursuant to either the provisions of the mortgage which expressly grant the lender the power to sell the mortgaged property upon default, or the applicable mortgage legislation (a power of sale is not available as a remedy in all common-law provinces). In Quebec, analogous remedies include a personal right of action against the debtor, as well as the hypothecary rights of taking in payment, sale by a secured creditor, sale by judicial authority and taking possession for the purposes of administration.

A lender is obliged to give “reasonable notice” before making a demand for payment and will generally be required to send notices under federal bankruptcy legislation before seeking to enforce its security over the interest in land. In Ontario, New Brunswick, Prince Edward Island and Quebec, the lender is free to sell the property privately by a prescribed process, while reserving the right to sue the borrower for any deficiency in the sale proceeds. In British Columbia, Alberta, Ontario and Quebec, the lender can sue for foreclosure (resulting in title to the property passing to the lender in full satisfaction of the debt). More commonly, most provinces also permit a lender to apply to court for a judicial sale of the property, with the borrower remaining liable for any resulting deficiency.

While lenders will often seek to find a commercial solution for problematic loans (including by way of forbearance), in an environment of higher interest rates and reduced access to capital for some real estate investors, it appears that lenders are more willing in the current climate to pursue enforcement of their security.

Timeframe

The range of time for a lender to successfully enforce and realise on real property security will be highly fact-dependent, however, three to six months would not be unusual in uncontested cases where there is little to no equity in the project. While court closures and access restrictions resulting from the pandemic may have resulted in enforcement delays, legislation restricting a lender’s ability to foreclose or realise on collateral has not been implemented.

Certain statutory liens for property taxes, pension deficits, construction liens or other statutory remittance obligations may have priority over secured debt, even if the secured debt was registered/perfected prior to creation of the lien. Otherwise, debt secured by registration may generally only be subordinated to new debt by agreement of the existing secured party.

Holding security will not generally expose a lender to environmental liability, although the value of the secured asset could be reduced if that liability arises during the term of the loan. Upon realising on the security and taking possession or control of the subject lands, a lender (or its receiver) could be exposed to environmental liability.

If security interests are granted by a borrower on a legitimate bona fide basis, for good consideration, the subsequent insolvency of the borrower will not generally affect the enforceability of the security interest. However, the secured party’s enforcement proceedings may then be subject to court oversight and associated delays. If security was granted for little or no consideration, or on any basis where the intent of the grant of security was to prefer certain debts over others, federal legislation imposes “claw-back” rules that could impair or invalidate the security.

As discussed in 3.4 Taxes or Fees Relating to the Granting and Enforcement of Security, nominal registration fees apply to the registration of a mortgage, an assignment of rents, a hypothec or any other registered real property security. 

Provincial governments are responsible for land-use planning (other than on federal lands), but delegate most planning and zoning functions to municipalities. Much of the regulation of real property is in the form of zoning by-laws and building by-laws (informed by provincial policies and plans, municipal official plans and plans d’urbanisme).

Municipal by-laws regulate nearly all aspects of land use, the nature of buildings thereon, and the size and intensity of development of land. Building permits are required for construction and for additions/alterations to buildings. Building-permit fees are typically calculated based on the floor area of the proposed building or the value of the proposed construction, and the type and use of the building. Building by-laws, building-permit requirements and building-code standards govern the building materials, heating and ventilation systems, electrical systems, sewerage and water systems, fire safety, access and inspection. The National Building Code of Canada has largely been adopted by the municipalities of most provinces, resulting in a trend towards building regulation uniformity. Regulations may restrict redevelopment of a building having heritage value. For developments in specialised urban areas, additional design approvals may also be required.

Most provincial planning and zoning functions have been delegated to municipalities. Zoning and building by-laws designate geographic zones within the municipality and prescribe the uses allowed in each zone, limit density, dictate height and parcel size, and impose minimum building setbacks and parking requirements.

Development projects typically require applications for subdivision, re-zoning and development permits. Each municipality has differing eligibility, procedural and documentary requirements for each category of development permissions, which range from applying and paying fees to meeting with municipal committees or the public, submitting plans and seeking the approval of municipal councils. Third parties (particularly neighbours) may have the right to be given notice of the application and to participate at a public hearing.

Certain developments may require consultation with affected indigenous peoples. While the Crown is constitutionally required to conduct such consultation, procedural aspects are often delegated to the proponent of the development.

The availability of a right of appeal in these matters varies. In some provinces, such as Alberta and Ontario, the decision of a municipality may be appealed to a specialised tribunal. In others, such as British Columbia, there is no such tribunal and municipal council decisions are not subject to judicial review on their merits (although they may be reviewable on formal grounds such as lack of jurisdiction, procedural fairness or natural justice).

Large-scale developments by private real estate developers will typically require agreements with the municipality, setting out the terms and conditions for the development to proceed, relating to the construction of public facilities, land dedications, servicing commitments and financial obligations.

Provincial legislation generally provides for fines and penalties for contravention of applicable zoning and building by-laws. Municipalities may also take direct enforcement action against an offender to bring about compliance, and may pursue injunctions and court orders.

Legal persons (corporations and natural persons) may hold real property in Canada by way of direct ownership by an individual or through ownership of shares in a corporation that owns real estate. Relationships may also be established for the ownership of land, such as co-ownerships, partnerships and trusts, largely based on tax consequences, liability concerns and business considerations. Corporations, partnerships, co-ownerships and trusts are the most popular real estate investment vehicles in Canada.

Corporations

Corporations are legal entities distinct from their shareholders. While corporations provide the benefit of limited liability for shareholders, the income, losses, gains and capital cost allowances of the corporation are taxed or deducted at the corporate level, followed by the taxation of dividends in the hands of the shareholders.

Partnerships

By contrast, a partnership is not a distinct legal entity, and constitutes a legal relationship among its partners and is governed by common law and/or statute. Under Canadian law, there are two principal types of partnership – “general” and “limited”:

• in a general partnership, all partners can participate in management and are subject to unlimited joint and several personal liability for the partnership’s obligations; and
• in a limited partnership, partners are divided into “general” and “limited” partners, with the latter’s liability being limited to the amount of their capital contributions, on the condition that they do not participate in the management of the business of the partnership.

A significant advantage of investment via a partnership is the tax treatment – although income and losses are calculated at the partnership level, they are taxed and deducted at the partner level.

Co-ownerships

Co-ownerships, like partnerships, are not separate legal entities but constitute a contractual relationship between landowners. Income and losses pass through to the co-owners, who may claim tax deductions separately from the other co-owners. Accordingly, co-ownership agreements must be drafted to avoid the possibility of the relationship being construed as one of partnership (where, for example, each partner can bind all the other partners) rather than co-ownership.

Trusts

Trusts are also not separate legal entities and constitute a relationship whereby a person holds property as a trustee for the benefit of others. Both trustees and beneficiaries can be personally liable in connection with the trust property, subject to indemnification. Additionally, publicly traded real estate investment trusts have certain legislative protections in this regard. Income may be taxed at the trust or beneficiary level.

Real estate investment trusts (REITs) are available to be used in Canada, and may be publicly traded or privately held. Foreign investors may invest in real estate in Canada through ownership of units in a REIT, subject to the restrictions noted in 2.11 Legal Restrictions on Foreign Investors and 2.10 Taxes Applicable to a Transaction.

The use of REITs permits individual investors to participate in real estate investment in multiple sectors without having direct ownership of real estate. However, income earned by a REIT is passed to the unitholders, giving investors similar investment income to that of direct ownership. An owner of real property may wish to establish a REIT as a means of attracting equity investment.

There is no specific legislation governing the organisational structure of a REIT. Principles of contract law and trust law will govern the REIT (see 5.5 Applicable Governance Requirements). Both publicly traded and private REITs will be subject to securities laws requirements that will regulate the issuance and sale of units in REITs, although the sale of interests in private REITs may have additional transfer, redemption and sale restrictions. A REIT may wish to be a “mutual fund trust” under the Income Tax Act and, as such, would need to meet the requirements to qualify as such.

There is no minimum capital requirement for any of the aforementioned entities.

Corporations

Corporations can be incorporated either federally or provincially, and are required to file articles of incorporation. A corporation’s governance framework can be shaped by its shareholders through its articles, shareholder agreements and corporate by-laws. The articles provide basic details such as the corporation’s business name, registered office, first director(s), share capital and share provisions. By-laws are used to add to, or supplant, default provisions set out in the corporation’s governing statute. Shareholder agreements may regulate how shares are sold, specify procedures by which important decisions are made, and provide protection for minority shareholders. Federal or provincial statutes stipulate corporate requirements such as the number and residency of the directors and fiduciary duties. Public corporations are also subject to applicable securities law requirements.

Partnerships

While partnership legislation may impose basic governance rules, most sophisticated parties enter into partnership agreements setting out matters of governance in detail. The agreement typically addresses capital contributions, business operations, profit/loss distributions and addition or removal of partners.

Co-ownerships

Based on the contractual nature of a co-ownership, governance requirements vary depending on the agreement between the parties, which may establish rights and restrictions relating to the underlying land, determine profit-sharing and delegate management responsibilities.

Trusts

Trusts are typically governed by the trust deed, under which the trustees’ powers may be limited to merely holding title at the behest of the beneficial owner, or may extend to allowing the trustee to exercise full discretion over dealings with the subject lands. In all cases, the trustee holds all benefits derived from the land for the beneficial owner/beneficiary.

Annual legal costs for entity maintenance are typically less than CAD1,000.

Leases and licences are contracts that permit the occupancy and use of real estate for a period of time, without buying it outright. While leases provide for exclusive possession over a specific area for a limited period of time, licences might not grant exclusive possession, and do not constitute an interest in land.

Commercial Leases

The most common categories of commercial lease include commercial/office leases, retail leases, and industrial/warehouse leases.

Commercial leases may be further categorised into “net leases” and, rarely, “gross leases”. Under a net lease, all operating costs and expenses relating to the property are passed on to the tenant in addition to the payment of base rent, although responsibility for capital expenses may remain with the landlord. Under a gross lease, tenants are charged an “all-in” fixed gross rent to cover the landlord’s operating and capital costs and expenses, while providing the tenant certainty as to its financial obligations.

Ground Leases

Ground leases are generally long-term, with few landlord obligations and often include the right or obligation of the tenant to construct and control the improvements on the land. In Quebec, “emphyteutic leases” (a conveyance of a dismemberment of ownership for a term) are analogous to ground leases. Ground leases allow the tenant to invest in, and enjoy the depreciation of, the buildings on the land. Accordingly, the landlord will enjoy a low threshold of oversight and control, while the tenant will have greater contractual certainty to protect and finance its investment.

Rents and lease terms for commercial leases are freely negotiable, with the exception that the Quebec Civil Code caps the term at 100 years.

In response to the pandemic, temporary measures were introduced, such as the Canada Emergency Commercial Rent Assistance Program; Canada Emergency Rent Subsidy, Tourism and Hospitality Recovery Program; and the Hardest-Hit Business Recovery Program. These temporary measures have ended and there are no ongoing measures in place.

An initial lease term typically ranges between five and ten years, subject to a tenant’s option to extend for one or more additional periods. A ground lease, in which the tenant will have financed and constructed the buildings on the land, will have a longer initial term and options to extend. In a typical multi-tenant complex, the tenant will commonly be responsible for repair and maintenance of the premises and leasehold improvements, while the landlord may remain responsible for repair and maintenance of the building (including structural items) and the common areas (typically subject to some cost reimbursement through the operating cost provisions – see 6.9 Payment of Maintenance and Repair). In a single-tenant project, the landlord and the tenant may negotiate different repair and maintenance obligations. Rent is most commonly paid on a monthly basis.

As a result of COVID-19, both landlords and tenants have revisited limited lease provisions, including the definition and effect of force majeure provisions and quiet enjoyment covenants. However, landlords have typically not entertained rent abatements in the event of future pandemics, nor have landlords accommodated potential delays in construction build-out or supply chain issues.

For commercial leases, rent is based on market conditions and negotiated prior to settling the lease agreement. Market conditions will determine whether there will be a fixed rental rate for the term, or whether the rental rate will increase throughout the term.

Rent is commonly increased during renewal terms. The rent payable for an extension or renewal can be:

• fixed through negotiation between the landlord and tenant;
• set at the market rate for a comparable property at the time of extension or renewal; or
• increased based on an index (such as the Canadian Consumer Price Index).

Goods and services tax (GST), harmonized sales tax (HST) or Quebec sales tax (QST) is payable on rent and must be collected by landlords. If the commercial tenant is registered for GST/HST/QST purposes and is incurring the rent payments in the course of its commercial activities, up to 100% of those taxes should be recoverable by the tenant. GST/HST/QST paid by commercial landlords on their expenses is generally recoverable, whereas GST/HST/QST paid by residential landlords is not.

A security deposit or other security may be due at the commencement of a commercial lease. In some jurisdictions, transfer tax may be triggered if the lease term exceeds certain thresholds.

Tenants occupying leased commercial premises in a multi-tenanted development will typically pay a pro rata share of the expenses for maintaining and repairing common areas, as additional rent. In more landlord-friendly markets, responsibility for maintenance, repair and replacement costs will be allocated to the tenants, including for structural matters. However, major capital costs are often allocated to the tenant on an annual amortised/depreciated basis, so that the tenant’s proportionate share of such major costs is not charged to the tenant all at once.

Tenants are typically responsible for the cost of their own utilities and telecommunications services, plus a proportionate share of such costs for common areas.

Landlords typically insure the buildings of a leased development, whereas tenants are responsible for insuring fixtures, trade fixtures and personal property. Insurance premiums paid by the landlord are typically recovered from tenants as additional rent. Tenants must typically carry “all-risks” physical damage insurance and general liability insurance.

The interpretation of business-interruption insurance provisions generally did not result in tenants being covered as a result of office closures during the COVID-19 pandemic.

Landlords may impose restrictions on how a tenant uses the real estate, in addition to generally applicable land use, zoning and planning laws. The use of real estate can also be affected by restrictive covenants.

The terms and conditions of a lease will determine whether a tenant is permitted to alter or improve leased premises or install tenant trade fixtures. Landlords often restrict work that affects the structure of the leased premises or affects or disturbs other tenants. Tenants will usually be responsible for the repair and maintenance of such work and, upon termination, the lease will dictate whether the work must be removed and the leased premises restored to their original state by the tenant, whether reasonable wear and tear is excepted, and whether improvements will become the property of the landlord.

All Canadian provinces and territories have residential tenancy legislation; in Quebec, it is included in the Civil Code. Some provinces and territories also have legislation governing commercial tenancies generally, without specific provisions in respect of any particular category of commercial property.

Where legislation does not exist or does not address an issue, common-law principles apply. During the pandemic, rent-subsidy programmes and eviction moratoriums applied to commercial and residential tenancies, respectively.

Subject to the specific terms and conditions of a lease, a tenant’s insolvency would likely trigger an event of default under the lease and permit a landlord to terminate the lease; however, bankruptcy legislation would apply to the tenancy relationship. In Alberta, the Landlord’s Rights on Bankruptcy Act contains specific rules as to what may happen with a lease or sublease upon bankruptcy.

A landlord may require a tenant to pay a security deposit (which is typically paid in cash, but may be provided through a letter of credit) and may require the tenant to grant the landlord security over the tenant’s personal property. Landlords may also require a third-party guarantee from a parent company or subsidiary of the tenant.

Commercial tenants generally do not have the right to continue to occupy the relevant real estate after the expiry or termination of the lease term. However, leases often contain an “overholding” clause whereby a tenant may remain in possession on a monthly basis, usually at increased rent (up to 200% of the monthly rent payable during the term). 

If a tenant continues in possession after the expiry or termination of the lease term, the landlord may be entitled to obtain a court order for delivery of possession.

Most leases provide that the landlord must first consent to any assignment of a lease, any subletting of the leased premises, or any change of corporate control of the tenant. The lease will dictate whether that consent may or may not be unreasonably withheld and will state the conditions for that consent. Most common-law jurisdictions dictate certain circumstances under which the landlord may withhold consent. Commercial leases may also give the landlord the right to terminate the lease upon a request for assignment, sublet or change of control, or to otherwise impose conditions on the granting of a consent.

A landlord will typically have the right to terminate a lease upon the tenant’s failure to pay rent, upon another material breach that is not cured within a specified time, upon the tenant’s insolvency, and upon substantial damage or destruction of the leased premises/building. Tenants typically either have no right to terminate a lease or may only do so in limited circumstances, such as upon damage or destruction of the leased premises. Where a tenant negotiates an early termination right, fees will often be payable, including for example based on the unamortised value of leasehold improvements paid for by the landlord.

In common-law jurisdictions, tenants are typically permitted to register evidence of their lease against title to the subject lands in the relevant land registry, although, other than in Quebec, the lease may allow the landlord to prohibit registration. Depending on the jurisdiction, the actual lease agreement, a caveat/notice of lease or a short form of lease can be recorded on title to the subject lands. Upon the registration of a lease, transfer tax may be payable in British Columbia and Ontario. Generally, the tenant is responsible to pay such transfer taxes. In Quebec, a lease with a term that exceeds 40 years, inclusive of renewals, triggers transfer duties.

A tenant may be forced to vacate leased premises in the event of default. Leases often provide that a breach must be material and go uncured beyond a specified grace period before the tenant can be dispossessed. In addition, in most jurisdictions a landlord is required to serve notice, specifying the breach and allowing a reasonable period to remedy the breach before they may re-enter the premises.

In response to the COVID-19 pandemic, eviction moratoriums were also instituted by most provinces, all of which have now concluded.

A lease may be terminated by government or municipal authorities pursuant to legislative authority relating to expropriation (ie, public taking) or condemnation of land. In such cases, compensation will depend on the relevant legislation and both the landlord and tenant may be compensated.

In some jurisdictions, a lease for a term longer than three years may become invalid, and therefore terminated, if a bona fide third party acquires a landlord’s interest for value without notice of the lease. In such instances, however, equitable considerations may prevent an outright termination.

In the event of a breach of a commercial lease, a landlord typically has four primary remedies:

• to refuse to accept the repudiation or breach and insist on performance of the lease, in which case the landlord may sue the tenant for rent or damages while the lease exists;
• to accept the tenant’s repudiation of the lease and terminate the lease, retaining the right to sue for rent due until such termination, or for damages accrued up to the date of termination for previous breaches;
• to give notice to the tenant that the landlord wishes to re-let the premises on the tenant’s account and re-possess the property on that basis, and sue for shortfall in rent where it occurs; and
• to terminate the lease on notice and re-possess the property while reserving the right to sue for prospective damages for the unexpired term of the lease (including unpaid future rent).

The exercise of the remedies available to the landlord is subject to the principles of common law.  The primary restriction on the landlord is its duty to mitigate damages. In addition to common-law requirements, legislation in some jurisdictions also restricts how a landlord can exercise its right to distrain, prescribes notice requirements, and may provide a tenant relief from forfeiture.

A landlord will often hold a security deposit to secure future payment and performance of obligations under a lease. As noted in 6.16 Forms of Security to Protect Against a Failure of the Tenant to Meet Its Obligations, that is typically provided as cash but may also be a letter of credit.

Canadian construction contracts generally adopt one or more of the following structures:

• fixed price – a predetermined, stipulated or lump-sum price;
• cost-plus – based on the contractor’s actual costs, plus a percentage or fixed fee applied to actual costs, potentially subject to an overall guaranteed maximum price; or
• unit price – a predetermined fixed amount for each specified unit of work performed, which is multiplied by the measured quantity of work performed for each specified unit.

The allocation of responsibility for design and construction of Canadian construction projects is determined by the project delivery model, and the form of construction contract used by the owner.

Design-Build

The owner engages a single design-builder, who assumes overall responsibility for the design and construction of the project, including price, schedule and performance. The owner generally retains the risks associated with changes or unexpected conditions. Should the owner enter into separate contracts with the designer and the general contractor, the owner will assume the risk associated with co-ordination and conflict issues arising between those counterparties.

Owner and Multiple Contractors

The owner enters into separate contracts with different contractors for each portion of the work to be completed. This assigns the risk evenly among the contractors and creates a direct contractual relationship with each of them. The responsibility and risk associated with co-ordination and conflicts remains with the owner. Accordingly, an owner may engage a construction manager to enter into direct contracts with the contractors on the owner’s behalf to help to manage or reallocate such risks.

Generally, construction risks are managed through the construction contract, by way of indemnities, warranties, retentions, liquidated damages, termination rights, exclusions, limitations and waivers of liability, force majeure and insurance requirements. Risk may also be managed using bonds, letters of credit or guarantees.

Any risk mitigation devices are subject to negotiation between the parties, and principles of common law (including relating to the enforceability of penalties – see 7.4 Management of Schedule-Related Risk).

Responsibility

Schedule-related risks are generally managed through the contract, which will stipulate which party bears responsibility for different types of schedule impacts and delays.

Compensation

The parties may incorporate liquidated damage provisions such that an owner is entitled to compensation or set-off rights if certain milestone and completion dates are not achieved, subject generally to force majeure and owner-caused delays. The amount of the compensation must represent a genuine pre-estimate of the actual cost or loss to the owner attributable to such delay and not a penalty to the contractor, as Canadian law limits the enforcement of penalty clauses.

Incentives and Bonuses

Payment incentives and early-completion bonuses are also common features of construction contracts.

While ultimately dependent on the nature and scope of the applicable construction project, as well as the parties involved, it is common for owners to seek additional types of security from a contractor. That security is most commonly in the form of labour, material and performance bonds, and letters of credit, although in some cases an owner may insist on some form of corporate guarantee.

Each of the Canadian provinces gives statutory construction, builders’ or mechanics’ lien rights to those providing work, materials and/or services supplied to a construction project. The applicable legislation sets out the applicable rights and procedures. Generally, construction liens are registered against the project lands, with owners having the ability to remove the lien in two ways:

• by discharging the lien, which requires the lien claimant to deliver and register a release (typically following payment of the amount owing under the lien), or requires the owner to obtain a court order that the lien is invalid (ie, because the lien claimant has failed to meet the prescribed time periods for preserving and/or perfecting the lien); or
• by vacating the lien, which requires the owner (or the general contractor on their behalf) to pay, or to provide a bond or letter of credit for, the full amount of the claim for the lien to the court (such monies will stand as security for the claim in lieu of the property and the lien will be removed from the title to the project.

Most provincial construction lien statutes protect owners who abide by the hold-back provisions of the statute and retain the specified percentage (usually 10%) from each progress payment under the construction contract. These hold-back funds can be paid into court if a lien is registered against an owner’s lands, to have the lien discharged from title to the lands. In so doing, the owner’s liability is capped, provided the owner had no direct contractual obligations to the lien claimant.

In Quebec, construction liens (legal hypothecs) are governed by the Civil Code and subsist without registration for 30 days after the end of the work, after which they must be registered. There are no hold-back provisions in the Civil Code, and such legal hypothecs secure the value added by the work, services or supplied materials.

In most cases, an occupancy permit or final approval, based on compliance with building codes and other applicable regulations/standards, must be issued by the local municipality before a project can be inhabited or used for its intended purpose.

Goods and services tax (GST), harmonized sales tax (HST) and Quebec sales tax (QST) constitute all applicable VAT in Canada. Rates range from 5% to 15%, depending on the jurisdiction within Canada in which the transfer takes place.

GST/HST/QST generally apply to the transfer of commercial real property, as well as new residential real property. The seller is responsible for collecting the applicable VAT from the buyer, except where the buyer is entitled to self-assess VAT (ie, buyers that are registered for VAT purposes and acquire real estate in the course of their commercial activities). Used residential real estate is generally exempt from VAT. Additionally, transfers of real property in the context of the sale of a business may be exempt from GST/HST/QST.

Where land transfer tax is imposed, it typically applies to the transfer of real estate and not to transfers of shares of a corporation or (with certain exceptions, including in Ontario and Quebec) interests in a partnership that owns real estate. In some jurisdictions, land transfer tax is payable on the conveyance of a leasehold interest in land if the lease term exceeds specified thresholds.

In British Columbia, property transfer tax is currently only payable on registered transfers of real property. Transfers of a beneficial interest in real estate do not trigger payment of property transfer tax. As a result, owners of commercial real estate often structure their ownership as a bare trust, with a nominee company holding the legal or registered title to the real estate in trust for the “real” or beneficial owner of the real estate. On closing, the seller transfers the shares of the nominee company and the beneficial interest in the property to the buyer, avoiding registration of a legal transfer of title in the Land Title Office. However, such transactions are anticipated to incur tax in the near future, as the British Columbia provincial government has established a beneficial ownership registry, as discussed in 1.3 Proposals for Reform.

See also the description of the federal underused housing tax in the same section.

Municipal property taxes are payable by the owner of the property and are generally passed on to tenants. These taxes are typically calculated based on the use and assessed value of the property. Some municipalities provide exemptions for public and/or non-profit organisations, or for geographical areas in which the municipality wishes to provide an incentive for development.

The taxation of rental income for a non-resident of Canada directly invested in Canadian real property depends partly on whether such income is characterised as income from property or income from carrying on a business. Generally, the more effort expended in respect of the property, the higher the likelihood it will constitute a business.

Tax on a Business

If the rental income constitutes carrying on business in Canada, the non-resident will generally be subject to tax on their net income attributable to that rental business. The rate of tax paid is generally the same as that which is paid by Canadian resident corporations (approximately 26.5%). In addition to the mainstream Canadian tax on Canadian-source income, the non-resident will also be liable to pay a branch tax of 25% on its after-tax Canadian profits that are not reinvested in its Canadian business. The branch tax can be limited to 5% if the non-resident’s members are corporations that are entitled to the benefits of the Canada-US Tax Treaty (with the first CAD500,000 of earnings being exempt from the branch tax).

Tax on Passive Payments

Passive payments such as dividends, interest, royalties and rent made by a Canadian resident to a non-resident are subject to Part XIII Canadian gross withholding tax of 25%, which may be reduced by virtue of a tax treaty between Canada and the state of residence of the non-resident.

As an alternative to the 25% gross withholding tax regime, a non-resident can make an election in respect of its passive rental income (a “Section 216 election”) that will allow it to file a Canadian income tax return and be taxed on a net basis (ie, after deducting its expenses associated with the property). The rate of tax payable is the same as that paid by Canadian resident corporations (ie, approximately 26.5%).

Tax on Disposal of Taxable Canadian Property (TCP)

Non-residents are subject to Canadian income tax under the Canadian Income Tax Act (ITA) if, among other things, they dispose of taxable Canadian property (TCP). For these purposes, TCP includes a direct interest in real property or an interest in a private corporation, partnership or trust where, at any time in the last 60 months prior to the date of disposition, more than 50% of the value of the interest is derived primarily from real property situated in Canada. Relief may be available under an applicable income tax treaty if the sale of an interest in a corporation, partnership or trust does not, at the time of sale, derive more than 50% of its value primarily from real property situated in Canada.

Where a non-resident of Canada proposes to sell TCP, the purchaser may be required to withhold 25% (for non-depreciable capital property) or 50% (for depreciable property) from the purchase price, unless the non-resident applies for and is granted a clearance certificate by the Canada Revenue Agency in advance of the date the property is disposed of. In addition, a non-resident must notify the Canadian tax authorities about a disposition of TCP either before they dispose of the property or within ten days following the disposition.

VAT on Rent

For a discussion of VAT on rent, see 6.7 Payment of VAT.

In computing net rental income (ie, where income is earned by a resident entity, where rental income earned by a non-resident constitutes business income, or where a Section 216 election has been made by a non-resident earning property income), certain expenses incurred in earning such income may generally be deducted for the purposes of calculating Canadian income tax, including operating expenses, reasonable financing costs and tax depreciation.

Tax depreciation may be claimed on buildings and other depreciable property used to earn rental income. Tax depreciation is allowed generally at rates varying from a 4% to 10% declining-balance rate on buildings and other structures. The amount claimed is discretionary, and claims may be made in whole or in part, although tax depreciation generally cannot be used to create or increase a rental loss. The rate in the year of acquisition is generally one half of the rate otherwise available.