Foreign Investment in Canadian Real Estate Funds

Nick Wright, BA JD MBA LLM (Tax)

Wright Business Law

Canadian private real estate funds may raise capital from investors outside Canada. A non-resident investor can potentially subscribe for limited partnership units, trust units, shares or other securities of a Canadian fund, but foreign participation introduces legal and practical considerations beyond those arising in a wholly domestic offering.

For a Canadian fund sponsor, the principal issues include the availability of a prospectus exemption, dealer registration, securities laws in the investor’s jurisdiction, Canadian tax and withholding, the Investment Canada Act, anti-money laundering and sanctions compliance, privacy, and the terms of the fund’s offering and subscription documents.

These issues should be considered when the fund and offering are structured, particularly where foreign investors are expected to represent a material portion of the fund’s capital.

Securities Law Applies to Foreign Investors

A subscription by a foreign investor for securities of an Ontario fund may still constitute a distribution subject to Ontario securities legislation.

The fund must determine whether the distribution can be made without a prospectus under National Instrument 45-106 Prospectus Exemptions (“NI 45-106”) or another applicable exemption. Common exemptions used in private fund offerings include the accredited investor exemption and, where available and appropriate, the offering memorandum exemption and other exemptions under NI 45-106.

The fact that an investor resides outside Canada does not itself establish an exemption from Canadian securities law.

The investor’s home jurisdiction must also be considered. Compliance with an Ontario or Canadian prospectus exemption does not determine whether the fund may lawfully solicit or accept an investor in the United States or another foreign jurisdiction.

A cross-border private placement may therefore require analysis of both the Canadian securities laws applicable to the issuer and the securities laws applicable where the investor is located.

Prospectus Exemptions and Investor Qualification

The fund should determine the applicable Canadian prospectus exemption and any applicable foreign securities-law requirements before accepting a foreign subscription.

Where the fund relies on the accredited investor exemption under section 2.3 of NI 45-106, the investor must satisfy an applicable accredited investor category. The subscription process should obtain the representations and information necessary to support reliance on the exemption and any prescribed risk acknowledgement required in the circumstances.

Investor qualification should be determined by reference to the conditions of the exemption actually being relied upon.

The issuer should maintain appropriate records supporting its reliance on the applicable exemption and make any required reports of exempt distribution. NI 45-106 generally requires an issuer or underwriter relying on specified exemptions to file Form 45-106F1 within 10 days after the distribution, subject to specific exceptions and alternative timing rules, including annual reporting available to certain investment funds for specified exemptions.  

Foreign investors may also require additional subscription representations addressing jurisdiction of residence, tax residency, beneficial ownership, sanctions compliance and foreign securities-law matters.

Dealer Registration and Cross-Border Distribution

Prospectus exemptions and dealer registration are separate issues.

An issuer distributing securities directly must consider whether its capital-raising activities engage the dealer registration requirement under subsection 25(1) of the Securities Act (Ontario) and National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (“NI 31-103”).

Where an exempt market dealer (“EMD”) is engaged, the dealer has its own registration and conduct obligations under applicable securities legislation.

A foreign distribution creates an additional question. Canadian dealer registration does not itself authorize an EMD or another Canadian person to conduct securities activities in a foreign jurisdiction. Where a Canadian fund or its dealer solicits investors outside Canada, the parties should determine whether dealer, broker or other registration requirements apply in the jurisdiction where those activities occur.

This is particularly important for offerings involving U.S. investors, where the applicable U.S. federal and state securities-law requirements should be considered separately.

Where an EMD is engaged, the dealer agreement should identify the jurisdictions in which the dealer may conduct distribution activities and allocate responsibility for obtaining any required foreign securities-law advice.

Structuring a Canadian Real Estate Fund for Foreign Investors

Foreign investors may be able to invest through the same vehicle used for Canadian investors, but their participation should be considered when the fund is structured.

Canadian private real estate funds are commonly organized as limited partnerships, trusts or corporations. The appropriate structure depends on the investment strategy, underlying assets, financing arrangements, investor base, tax objectives and governance requirements.

Foreign participation can affect the tax and administrative consequences of the structure. Different considerations may also arise depending on whether the investor subscribes directly into the principal fund or participates through a feeder, parallel or other investment vehicle.

Where material foreign investment is anticipated, the sponsor should obtain appropriate Canadian tax advice when establishing the fund rather than attempting to address foreign-investor issues solely through the subscription agreement.

The offering materials should also accurately describe any material restrictions or consequences applicable to non-resident investors.

Canadian Tax and Withholding Considerations

Foreign investment in a Canadian real estate fund can create Canadian tax and withholding considerations.

The consequences depend on factors including the legal form of the fund, the nature of its investments and income, the character of distributions made to investors, the investor’s jurisdiction and status, and the application of any relevant tax treaty.

Potential issues can include Canadian withholding tax, taxable Canadian property rules, partnership or trust reporting, disposition consequences and other reporting obligations.

An offering memorandum or private placement memorandum should avoid suggesting that the Canadian tax treatment applicable to a resident investor necessarily applies to a non-resident investor.

Where foreign investors are contemplated, the offering document should appropriately disclose that the tax consequences of an investment depend on the investor’s particular circumstances and that prospective investors should obtain independent Canadian and foreign tax advice.

The subscription documentation should also obtain the tax residency and other information required for applicable reporting and withholding purposes.

Investment Canada Act Considerations

The Investment Canada Act (“ICA”) should be considered separately from the securities-law analysis.

The ICA establishes distinct notification, net benefit review and national security review regimes for investments by non-Canadians.

Subject to applicable exemptions, an investment by a non-Canadian to establish a new Canadian business, or to acquire control of an existing Canadian business where the investment is not reviewable, is generally subject to notification under Part III of the ICA. Section 11 expressly identifies the establishment of a new Canadian business and non-reviewable acquisitions of control as investments subject to notification.  

Certain acquisitions of control of Canadian businesses are instead reviewable under Part IV where the applicable requirements and review thresholds are met. The relevant thresholds and valuation methodology depend on factors including the nature and nationality of the investor and whether the investor is a state-owned enterprise.  

Whether control has been acquired is itself governed by the ICA. Section 28 addresses acquisitions of control through voting shares or other voting interests and acquisitions of substantially all of the assets used in carrying on a Canadian business.  

The national security regime is broader. Part IV.1 extends to specified investments by non-Canadians, including certain investments that do not involve an acquisition of control. The federal government states that national security review can apply regardless of the value of the investment and whether the investment is otherwise subject to mandatory filing requirements. Minority investments can therefore fall within the national security regime.  

Accordingly, a passive foreign investor’s acquisition of a minority interest in a Canadian real estate fund should not automatically be characterized as an acquisition of control of a Canadian business. Equally, the absence of an acquisition of control does not necessarily end the ICA analysis because the national security regime has a broader scope.

The particular fund structure, rights attached to the investment, identity and characteristics of the investor, underlying Canadian business and assets, and other relevant circumstances should be considered before determining the ICA implications.

Specific ICA advice may be appropriate where foreign participation is significant, an investor is state-owned or state-influenced, the transaction could result in foreign control of a Canadian business, or the investment otherwise presents potential national security considerations. The federal government’s national security guidelines were revised in March 2025 and identify a range of factors relevant to national security review.  

Provincial Real Estate and Foreign Ownership Rules

Provincial and other laws applicable to the underlying real estate should be considered separately.

These requirements are distinct from the securities-law treatment of a subscription for fund securities. Depending on the province, location and type of property and ownership structure, foreign participation may raise additional land ownership, taxation, registration or disclosure considerations.

The legal structure of the investment matters. A foreign investor acquiring a limited partnership interest in a fund is different from that investor directly acquiring title to Canadian real property, although indirect ownership or control may be relevant under particular legislation.

A fund acquiring real estate in multiple provinces should therefore consider applicable property and foreign ownership rules on a jurisdiction-specific basis.

AML, Sanctions and Investor Onboarding

Foreign investors may require additional diligence during the subscription process.

The fund, its administrator, EMD and other service providers should determine their respective obligations concerning investor identification, beneficial ownership information, source-of-funds information, sanctions screening and other applicable compliance requirements.

The subscription process should be capable of identifying the investor’s legal and beneficial ownership where required rather than relying solely on the name of the subscribing entity.

Additional diligence may be appropriate where an investor has a complex ownership structure, presents sanctions or source-of-funds concerns, or otherwise requires enhanced review under the compliance framework applicable to the relevant person.

Responsibilities among the fund, EMD, administrator, financial institution and other service providers should be clearly understood. Due diligence conducted by one participant does not necessarily satisfy obligations independently applicable to another.

Privacy and Investor Information

Cross-border subscriptions can involve the collection and transfer of significant personal and financial information.

Subscription documentation may require information concerning an investor’s identity, residence, beneficial ownership, financial status and tax residency.

The fund should consider how this information will be collected, used, retained and disclosed among the fund, general partner, manager, EMD, administrator, legal counsel, accountants, financial institutions and other service providers.

Where investor information is transferred across borders, the fund should consider applicable privacy requirements and ensure that its privacy disclosures and contractual arrangements accurately describe its information-handling practices.

Offering Memorandum and Subscription Agreement

A fund expecting foreign investors should ensure that its offering and subscription documents contemplate their participation.

Depending on the offering, relevant provisions may address:

• jurisdictions in which subscriptions may be accepted;
• the investor’s residence and legal capacity;
• qualification under the applicable Canadian prospectus exemption;
• foreign securities-law representations;
• tax residency and withholding;
• beneficial ownership and required compliance information;
• sanctions representations;
• additional information that may be required from foreign investors;
• the fund’s right to reject a subscription;
• restrictions on transfers to persons in particular jurisdictions; and
• the investor’s responsibility for obtaining independent legal and tax advice.

The subscription agreement should permit the fund to request additional information reasonably required to comply with applicable securities, tax, sanctions and other legal requirements.

The provisions should correspond to the fund’s actual subscription and compliance procedures. Representations in a subscription agreement are less useful if the fund does not collect, review and retain the information necessary to support the relevant legal requirements.

Coordination with the EMD and Fund Administrator

Where an EMD or administrator participates in the offering, responsibilities should be allocated before foreign investors are solicited or accepted.

The parties should determine who is responsible for identifying permitted jurisdictions, collecting investor information, reviewing prospectus-exemption documentation, conducting applicable onboarding, processing subscription funds, preparing regulatory filings and maintaining supporting records.

An escalation process should also be established for subscriptions presenting unusual issues.

For example, a subscription should receive additional review where investor eligibility under a prospectus exemption is unclear, the investor’s ownership structure raises sanctions concerns, or the investor’s jurisdiction presents an unresolved foreign securities-law issue.

The dealer agreement, administration agreement, subscription agreement and offering materials should reflect a consistent operational model.

Practical Considerations for Fund Sponsors

A Canadian real estate fund expecting foreign investment should address cross-border participation during fund formation.

The sponsor should identify the jurisdictions from which investors are expected, determine the Canadian prospectus exemptions available for the offering, assess dealer registration requirements and obtain foreign securities-law advice where appropriate.

The fund structure should also be reviewed from a Canadian tax perspective before material foreign capital is accepted. Depending on the structure and investors involved, the sponsor should consider whether the ICA, provincial real estate rules, sanctions, AML, privacy or other requirements require additional analysis.

Finally, the offering memorandum, subscription agreement, EMD agreement and administrative procedures should be reviewed together. The legal assumptions reflected in the offering documents should correspond to the subscription and distribution processes actually used by the fund.

Conclusion

Foreign investors can provide an important source of capital for Canadian private real estate funds, but cross-border participation introduces issues beyond ordinary investor onboarding.

A fund accepting foreign investors should consider the Canadian prospectus exemption applicable to the distribution, dealer registration and foreign securities-law requirements, Canadian tax and withholding consequences, potential Investment Canada Act considerations, provincial rules affecting the underlying real estate, and applicable onboarding, sanctions, privacy and documentation requirements.

The significance of each issue depends on the investor, fund structure, underlying investments and jurisdictions involved. Where material foreign participation is anticipated, these matters are best addressed when the fund and offering are structured rather than after subscriptions have been received.

Book a Consultation

If you are forming or operating a Canadian private real estate fund, raising capital from foreign investors, or require advice concerning the Canadian securities-law aspects of a cross-border private placement, contact us to schedule an initial consultation with Nick Wright.