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, including at the federal level with the recent Prohibition on the Purchase of Residential Property by Non-Canadians Act (see 2.11 Legal Restrictions on Foreign Investors).
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 continental European countries) serves as the primary source of law, although case law clarifies issues that remain after the application of the Civil Code.
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.
The real estate industry experienced palpable change in 2022 as the global economy emerged from the restrictions and habits created by the global COVID-19 pandemic. The real estate market has been particularly impacted by ongoing shifts in interpersonal workplace dynamics and related residential demands. As Bank of Canada interest rates have risen, the market has experienced a trend of tightened lending conditions and requirements in order to access more capital. Rising interest rates combined with fluctuating market dynamics have created additional market tension and a resettling of pricing expectations and valuations, which are advantageous for some players with capital on reserve, while more conservative groups await greater market stability. Regarded by many as a post-pandemic “cooling phase”, long-term and ongoing decreases in sales and valuations are not generally predicted. Overall, however, favourable projects are proceeding based on a positive long-term market view, and several months into 2023, optimism as to stabilised interest rates and the availability of capital has risen.
Focus on the Environment and ESG
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 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, hybrid working or a full return to the office.
The industrial sector remained strong throughout the early days of the pandemic, and has since far exceeded its pre-pandemic buoyancy, gaining additional traction due to increased demand in the logistics sphere.
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, British Columbia has experienced unprecedented market lifts with robust demand pushing this sector throughout the province to new heights.
On the public market front, significant activity has been trending, including two notable takeovers of publicly traded REITs.
Institutional and Private Funds
Rising interest rates have only slowed the exuberance in the post-pandemic deployment of capital to a marginal degree. Institutional and private funds continue to dominate the market, with active participation from new private, pooled funds. Financings and refinancings remain active, although the spike in interest rates has had a cooling effect.
The Canadian real estate market has not yet been significantly impacted by potentially disruptive developments such as blockchain and proptech. The long-term transformative effects of the COVID-19 pandemic on the office (including parking), hotel and hospitality sectors are still prompting public and legislative responses to the pandemic and post-pandemic periods. The post-pandemic era is witnessing shifts, and re-shifts in office, retail and residential demand from urban centres to suburban areas, and potential reductions in demand for office space (with increased numbers working from home). Demand for vacation and recreational properties spiked during the pandemic, but is now cooling in some areas. The explosive growth of online commerce, where demand for logistics and distribution centres increased exponentially as a result of the pandemic, has sustained and increased pressures on the industrial real estate market as major online distributors vie for scarce urban space in which to house new fulfilment centres. The post-pandemic phase has seen some stabilisation in this sector, but with strong and sustained demand.
Legislative reform at the provincial and federal levels is driven by motivation to create affordable housing and increase transparency of ownership of real estate in Canada.
While the largest Canadian jurisdictions of 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, does 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.
Both British Columbia and Ontario have already instituted foreign-buyer taxes in respect of certain residential properties in certain geographic areas. In British Columbia and in the City of Toronto, 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 underused residential properties in major urban centres. The tax rate in Toronto is 1% 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% tax on the value of certain residential property (owned by non-permanent residents or non-citizens) considered to be vacant or underused, effective as of 1 January 2022.
Ontario has also imposed onerous disclosure requirements, 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.
On 28 November 2022, the Ontario Government passed the More Homes Built Faster Act, 2022 (Bill 23) as part of its “More Homes, Built Faster” Housing Supply Action Plan (2022–2023), which aims to introduce 1.5 million new homes over a ten-year period. Bill 23 introduced sweeping legislative changes to the planning and development regime, all to further the Ontario government’s aim of increasing housing supply and attainable housing options. Changes include permitting up to three residential units “as of right” on most single-family zoned land in residential areas; imposing timelines on municipalities to update zoning by-laws to meet minimum density targets in certain urban areas; shifting planning responsibilities; removing specified appeal rights for certain planning decisions; reducing the scope of site plan control; introducing changes, caps and incentives to parkland dedication; development charges and community benefits charges; as well as changes to heritage listing and designation processes.
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:
Licences to use land are contractual, do not create an interest in the 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.
There are two types of land registration systems in Canada:
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.
Requirements for the 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 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.
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:
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:
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 relevant risks permit, and liability caps are rare unless the specified risks are known.
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 failed to perform diligence, knowingly accepted the environmental condition of the lands and/or contractually assumed 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 land 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 in 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.
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 new federal Prohibition on the Purchase of Residential Property by Non-Canadians Act imposes a two-year restriction commencing 1 January 2023 on certain persons purchasing residential property in Canada. Residential property is defined as a detached house or semi-detached townhouse, as well as land that does not contain any habitable dwelling, that is zoned for residential use or mixed use, and that is located within specified urban areas, including most notably portions of the cities of 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 was initially defined as direct or indirect ownership in an entity that represents at least 3% of the outstanding votes or value of that entity, or control of that entity on a factual basis. It is currently unclear what factual control means for the purposes of this prohibition.
To correct initial unintended effects from this broad legislation, regulations were swiftly enacted to narrow and better define the application of the prohibition including:
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 British Columbia “speculation tax” and the federal “underused housing tax”, see 1.4 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.
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 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.
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 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.
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. 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 were granted by a borrower on a legitimate bona fide basis, for good consideration, the subsequent insolvency of the borrower generally does not 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.
The impact of the expiry of the London Inter-bank Offered Rate (LIBOR) on borrowers has mainly been limited to amending credit agreements with LIBOR-based loans to include language to establish replacement benchmark rates.
Provincial governments are responsible for land-use planning (other than 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 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 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.
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.
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.
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”:
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, 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).
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.
There is no minimum capital requirement for any of the aforementioned entities.
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.
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.
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 are typically governed by the trust deed, under which the trustee’s 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 may not grant exclusive possession, and do not constitute an interest in land.
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 are generally long-term, with few landlord obligations and the tenant’s right or obligation 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 are freely negotiable, with the exception that the Quebec Civil Code caps the term at 100 years. In response to COVID-19, 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. The COVID-19 pandemic did not result in material changes to commercial lease provisions. While force majeure clauses may be updated to cover future pandemics, their application will continue to exclude breaches-of-payment obligations.
As a result of the COVID-19 pandemic, 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:
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 engaged in 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 may be due at the commencement of a lease. In some jurisdictions, transfer tax may be triggered if the lease term exceeds certain thresholds.
Tenants occupying leased 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 its fixtures, trade fixtures and their 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 has generally not resulted 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, subject to land use, zoning and planning laws. The use of real estate may 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 could affect the structure of the leased premises or could affect or disturb 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 the 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 COVID-19 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 the landlord to terminate the lease; however, bankruptcy legislation would apply to the tenancy relationship.
A landlord may require a tenant to pay a security deposit 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.
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 lease term).
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.
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 be payable 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 for paying 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.
Canadian construction contracts generally adopt one or more of the following structures:
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.
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.
Schedule-related risks are generally managed through the contract, which will stipulate which party bears responsibility for different types of schedule impacts and delays. 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 a delay and not a penalty to the contractor, as Canadian law limits the enforcement of penalty clauses. 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 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:
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, and the 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 1.4 Proposals for Reform.
See also the description of the federal Underused Housing Tax in 1.4 Proposals for Reform.
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 would constitute a business.
Rental Business Income
If the rental income constitutes carrying on a 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).
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 property). The rate of tax payable is the same as that paid by Canadian resident corporations.
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 taxing authorities about a disposition of TCP either before they dispose of the property or within ten days following the disposition.
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 generally allowed 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; however, this rule has been effectively suspended for most types of property acquired prior to 2024, with a phased resumption of the half-year rule between 2024 and 2028.
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The Quebec real estate market experienced significant economic and regulatory changes in 2022, which will undoubtedly shape the 2023 landscape. The year was characterised by significant increases in interest rates, elevated construction costs, a shift in consumer trends, and the adoption of several laws and regulations affecting real estate transactions in the province.
With respect to the performance of certain asset classes, a 2022 Altus Group report of the Montreal and Quebec market indicated that the top three asset classes for investors through Q4 remained industrial, apartment, and food-anchored retail strips. A report by commercial real estate services and investment company, CBRE, on 2023 market trends predicts:
Keeping these predictions in mind, below is an overview of some of the most impactful legal trends which have affected, and will continue to affect, the Quebec real estate market.
Prohibition on the Purchase of Residential Property by Non-Canadians
According to a 2022 report by the National Bank of Canada, the average residential mortgage payment as a percentage of income (“MPPI”) is registered at 64.6%, the second highest level since 1981, meaning that in order to purchase an average house, a household would have to devote 64.6% of its disposable income to mortgage payments. The Canada Mortgage and Housing Corporation (CMHC) has recently reported that the last time housing was affordable in Canada was in 2003 and 2004. Housing affordability remains a major issue for Canadians and has been facing considerable political and regulatory scrutiny. As a result, during the last federal election campaign in 2021, three of the main political parties made promises with regards to limiting or heavily taxing foreign investors looking to purchase residential property in Canada.
As a result of this political and economic pressure on the Canadian housing market, on 23 June 2022, parliament passed the Prohibition on the Purchase of Residential Property by Non-Canadians Act (the “Prohibition Act”) which was followed by accompanying regulations entitled Prohibition on the Purchase of Residential Property by Non-Canadians Regulations (the “Regulations”), both of which came into force on 1 January 2023. The Prohibition Act essentially imposes a two-year moratorium on the direct or indirect purchase of residential property in Canada by non-Canadians, subject to certain exceptions. The intention of the Prohibition Act is to make residential homes more accessible for Canadians and in turn, to disincentivise foreign investors from making speculative investments.
The scope of the Prohibition Act and the Regulations, as well as the ambiguity of the definitions contained therein, caused uncertainty and worry with regards to their potential effects on commercial transactions, leading to an uproar in the real estate industry. One of the concerns was that the definition of “residential property” in the Prohibition Act included mixed-use land which could indirectly capture properties used purely for commercial purposes but that had mixed-use zoning. Another issue raised by the industry was that the definition of a “non-Canadian” might be based on that applied to corporations and other legal entities where a threshold of 3% ownership by non-Canadians resulted in such entities being considered “non-Canadian”. The practical effect was that widely held, publicly traded entities such as real estate investment trusts (REITs) were susceptible to being captured by this characterisation. Although initially alarming, a nuance to consider is that the Prohibition Act targets properties that are composed of three dwelling units or less, meaning that apartment buildings composed of four or more dwelling units are not affected by the Prohibition Act. In fact, CBRE reported that the top ten biggest commercial real estate transactions in Montreal in 2022 were acquisitions by REITs, three of which concerned multi-residential rental acquisitions, such as Centurion Apartment REIT’s acquisition of a portfolio of 30 apartment buildings located in the greater Montreal area for CAD950 million, CAPREIT’s acquisition of six apartment buildings for CAD281 million, and Allied Properties REIT’s acquisition of a seven-storey building for CAD121.4 million. The qualification of “residential property” within the Prohibition Act therefore shifts the issue towards one of new development as it relates to raw land, as well as one of acquiring empty units which have already been “condominiumised”.
In response to the industry’s reaction, parliament passed amendments to the Regulations that came into force on 27 March 2023 (the “Amendments”) to ease some of the restrictions imposed, and to expand on the exceptions to the ban on non-Canadians purchasing residential real estate. These exceptions are:
Furthermore, properties that are not located in a census agglomeration (CA) or census metropolitan area (CMA), such as Mont-Tremblant, would not be covered by the Prohibition Act. Mont-Tremblant has the lowest percentage of non-Canadian owners, reported to be 3.2% in 2022. The Amendments are therefore likely to drive investors towards places like Mont-Tremblant.
Finally, if a non-Canadian, or anyone (eg, lawyers, notaries or brokers) who knowingly assists a non-Canadian, is convicted of violating the Prohibition Act, they will be fined up to CAD10,000 and a court may order the sale of the property deemed to be residential under the Prohibition Act.
A Quebec Superior Court ruling confirmed that purchasers could still proceed with a purchase if they entered into a binding offer to purchase a residential property prior to 1 January 2023, even if the transaction only closed after the Prohibition Act came into effect.
The Canadian government’s willingness to relax restrictions with respect to the Prohibition Act should reassure foreign investors that the Quebec commercial real estate market remains an attractive business opportunity.
New French Language Restrictions
Since 1 September 2022, the coming into force of an Act respecting French as the official and common language of Quebec has altered the real estate regulatory environment through the introduction of certain mandatory language requirements, as they concern contracts and public registries.
In particular, all documents that are to be registered at the Quebec Land Registry and/or the Register of Personal and Movable Real Rights must be drafted exclusively in French, or, if in English, the documents must be accompanied by a certified French translation. Among the documents targeted are those essential to real estate transactions, such as deeds of sale, deeds of hypothecs (mortgages), legal hypothecs, co-ownership agreements, deeds of servitudes (easements), lease notices, etc.
Moreover, as of 1 June 2023, to the extent that a contract can be qualified as a contract of adhesion (an agreement in which the main clauses have been imposed by one party and are non-negotiable), such documents must also be drafted in French. The French version must be presented to the co-contracting party prior to such party expressing its wish to have the contract drawn up in English or in another language. Potential consequences of non-compliance may include fines, orders to comply, damages and/or nullity of the contract in whole or in part. Potential real estate-related contracts that may end up in front of the courts are insurance contracts and standard form leases that are typically imposed upon landlords by anchor tenants or upon smaller tenants by landlords. It will be interesting to see how the law will be applied and interpreted by the Quebec judiciary.
Municipalities’ Pre-emptive Right
On 9 June 2022, an Act to Amend Various Legislative Provisions Mainly with Respect to Housing (the “Act”) was adopted which granted any municipality in Quebec a pre-emptive right on immovable property in respect of which the municipality has complied with the formalities described below, in all or part of its deemed territory. The owner of a property encumbered by a pre-emptive right must present any offer to purchase it is willing to accept from a potential buyer to the municipality in question. The latter then benefits from an option to acquire the property for the same price and conditions as the offer within 60 days.
For the pre-emptive right to exist, a municipality must:
Before the adoption of the Act, similar pre-emptive rights existed only in favour of the City of Montreal. Since its adoption, additional municipalities in Quebec have taken the above-mentioned steps to acquire a right of first refusal on properties in their territories. Such right threatens to change the scope of real estate transactions in the province as potential real estate buyers of affected properties are now faced with a new uncertainty when trying to acquire a property encumbered by such right. Buyers may be less inclined to incur fees associated with the preparation of an offer to purchase and the due diligence work that follows knowing that the municipality may opt to purchase the property within 60 days. In this respect, it is important to note that the Act provides that the municipality must compensate the buyer with respect to certain costs if it chooses to exercise its pre-emptive rights, but it is unclear at this time what amount the buyer could successfully claim.
Buyers in the province have begun to look for alternative avenues to acquire properties burdened by a pre-emptive right, such as through acquiring the shares of the company which owns the property it intends to purchase. This type of acquisition, however, opens a host of new uncertainties for potential buyers, especially for real estate investors not accustomed to acquiring entire businesses and the liabilities that accompany them. As 2023 progresses, it is expected that buyers will proceed with caution when a pre-emptive right is involved.
Despite the economic and regulatory challenges, Quebec has proved to be resilient and continues to be a sought-after market for real estate investors. Reports show continuous momentum in the industrial, retail and multi-residential spaces and these trends are expected to continue throughout 2023.
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