The Real Estate M&A and Private Equity Review: Canada

Overview of the market

i The Canadian landscape

Since the global economic market crash of 2008 and 2009, Canadian real estate has experienced fairly significant price increases. This is in part attributable to Canada's continued low interest-rate environment, as well as the capitalisation rate compression seen across all real estate classes and most urban geographies including Toronto, Vancouver and, more recently, Montreal. The Canadian real estate market in 2020 started off on an optimistic note, coming off a strong 2019, which saw the S&P / TSX Capped REIT Index producing returns of 23 per cent, a record high volume of equity issuances and six public real estate M&A transactions. In 2019, Canadian commercial real estate saw an exceptional level of overall volume for transactions over C$40 million coming in at C$21.3 billion.2 This optimism came to an abrupt halt following the declaration by the World Health Organization (WHO) of the global pandemic. With the immediate and long-term implications of the pandemic unknown, the remainder of 2020 activity largely reflected a market that was in the state of uncertainty. Total investment volume dropped 21 per cent3 over the prior year, equity capital issuances were down ~70 per cent to C$2.2 billion from the record breaking 2019 level of C$7.5 billion,4 volume of property transactions (greater than C$40 million) was down to C$11.0 billion, a level not seen since 2016, and the year saw only one public M&A transaction in the sector for total transaction value of C$4.9 billion in contrast to the six public transactions that occurred in 2019 for a total of C$10.2 billion. However, a continued low interest rate environment coupled with strong liquidity and market resilience following short periods of volatility, produced record supply from real estate issuers of senior unsecured debt in the Canadian debt capital markets with C$8.6 billion across 24 transactions, an increase of 41 per cent compared with 2019 and more than double the 10-year average of C$4.2 billion.5

Similar to 2019, the multifamily sub-sector captured the largest share of property level transaction volume in 2020 with acquisitions and dispositions of C$4.8 billion of real estate, representing 43 per cent of the total volume of real estate traded throughout the year.6 One of the largest multi-family transactions for the year was CAP REIT's acquisition of a portfolio of Halifax apartments for C$391 million in February 2020. The year 2020 also showed strength in the industrial sub-sector, which saw C$1.6 billion of overall activity, representing 14 per cent of total volume and exhibiting overall strong performance, outperforming the other sub-sectors, representing 66 per cent of the total real estate equity issuances.7 This is comparable to 2019 in which the industrial sub-sector had average (weighted) total returns of 32 per cent, the highest sub-sector among listed Canadian real estate investment trusts (REITS) and real estate operating companies (REOCs).8 The senior housing space was fairly quiet in 2020, with the industry focused on operations in response to the global pandemic, albeit with a slight uptick in transaction activity towards the end of the year and into 2021. Unsurprisingly, hotel activity was similarly quiet in 2020. The retail sub-sector was at near record lows for its sector in 2020, with the exception of First Capital REIT's sale of a 50 per cent interest in a portfolio of grocery-anchored centres to BMO Life Assurance at the end of 2020, together with a 100 per cent of its stake in a portion of its Place Panama development site in Montreal for a total combined price of approximately C$115 million, and the acquisition by TD Asset Management of two separate 17 per cent interests in CF Carrefour Laval in Quebec for C$253 and C$211 million, respectively. Only C$1.4 billion of retail real estate changed hands, representing 13 per cent of overall volume, further evidence of the steady decline in the retail space that has been occurring over the past five years.9 Interestingly, significant investments in office assets early in the 2020 year prior to the onset of the pandemic, including Allied Properties REIT's acquisition of the World Trade Centre of Montreal for C$276 million in January and its acquisition of the landmark Gastown office property in Vancouver for C$225 million in April, resulted in this sub-sector seeing trades of ~C$2.9 billion of volume or approximately 27 per cent of overall total volume traded during 2020, coming in second in volume only to multi-family.10 Continued notable lows in office space vacancy rates in the first quarter of 2020 nationally (14.4 per cent), and more specifically in Toronto (6.2 per cent), Vancouver (3.9 per cent) and Montreal (9.3 per cent), disappeared in the major urban centres as the pandemic impact continued to take hold in the balance of 2020 and into the first quarter of 2021. As of the first quarter of 2021, national office space vacancy rates were at 14.3 per cent, but Toronto, Vancouver and Montreal saw increases to 9.1 per cent, 6.2 per cent and 10.6 per cent, respectively. Nevertheless, downtown fundamentals of most markets remained strong in the first quarter of 2021 with Toronto and Vancouver having the tightest downtown vacancy rates in North America.11 Market conditions are improving for office assets in nearly all markets, although despite the consistent increase in vacancy in each quarter, the pace of the increases has slowed significantly.

Canada's reputation as a stable nation and attractive place to live have, in recent years, attracted significant foreign investment in Canadian real estate and put increased pressure on the demand for new housing due to the significant pace of the population growth of Canada's major metropolises such as Toronto. In fact, the addition of over 77,000 persons into Toronto for the 12 months ending July 2018 made it, in absolute numbers, the fastest-growing city in all of North America and the second-fastest growing urban region.12 This heightened demand for Canadian real estate has had a significant impact on residential properties in particular. Historically, the effect of foreign investment on the residential real estate market was most significantly experienced in Toronto and Vancouver, where residential real estate prices were accelerating at an unsustainable pace from 2015 through to 2017. It was only after the provincial governments of both cities intervened, by way of imposing a foreign buyers tax (and in Vancouver's case, a vacancy tax) and expanded rent-control rules, that a slight cooling of the markets, in the form of reduced sale volume and a tempering in the cost of a single family home, was seen. Despite this, Toronto and Vancouver remain the most expensive Canadian cities for average home prices with prices continuing to inflate at a faster pace than many large US cities, prompting many analysts to be concerned about a real estate 'bubble' and fearful of a possible 'bubble burst'.

Actual sale activity for residential real estate in Canada for 2019 increased approximately 1.2 per cent in 2019, with rising interest rates and the B-20 mortgage stress test offsetting the otherwise severe impact of continuing population growth. Year-over-year sales activity for 2019 increased in New Brunswick, Quebec and Ontario by 3.2, 2.2 and 1.4 per cent respectively. However, the year-over-year sales rates of Newfoundland, British Columbia and Nova Scotia declined by 7.1, 5.2 and 4.3 per cent, respectively.13 Following the onset of the covid-19 pandemic, as countries around the globe, including Canada, issued lockdowns and other critical emergency orders in an effort to address the spread of the virus, record lows were recorded for the volume of Canadian home sales and listings, with national home sales falling over 56.8 per cent on a month-over-month basis in April.14 While house prices in Canada were, prior to the onset of the pandemic, expected to continue to rise with an estimate of a 6.2 per cent increase in 2020 to C$531,000, the actual national average prices for 2020 surpassed expectations hitting C$570,947, representing a 12.6 per cent increase over the prior year. Overall in 2020, actual economic results were stronger than expected. Among other things, the positive results stem from record low mortgage carrying costs and the increased demand for more space. Although the year started out as seemingly slow for residential real estate activity because of the impact of the pandemic, by the end of the third quarter of 2020, home sales, average prices and new housing starts had recovered beyond pre-pandemic levels, despite the pandemic continuing and the associated risks to economic recovery.15 The year ended with a record high of nearly 350,000 homes sold in the second half of the year across the country16 and, with the exception of condominiums, strong price increases in the housing market in the fourth quarter of 2020.17 The year 2021 has continued this trend as May 2021 set a new record for the month and the year-over-year increase from May 2020 (which was the worst May since 1990) saw a 103.6 per cent increase in home sales. Additionally, March 2021 held the all-time record for home sales in one month18 and was witness to a significant increase in the average selling price of a Canadian home at C$716,000.19 While home prices are still up sharply from that seen in 2020, the gains appear to be moderating, with the figures settling a bit in the months of April and May of 2021.

Forecasts are predicting continued strong sales activity throughout 2021 with some experts predicting that record or historically strong levels of sales activity in all parts of the country will continue into 2021,20 whereas others argue that the housing market growth will be at a slower pace in 2021 than in 2020 citing the lagged impact of a softer sales environment on the pace of multi-family construction.21

Covid-19's impact on the Canadian real estate market certainly included short-term disruptions in the housing market. However, the Canada Mortgage and Housing Corporation is forecasting that economic conditions will return to pre-pandemic levels by the end of 2023, assuming that broad immunity to covid-19 takes hold by the end of 2021.22 While the threat of covid-19 remains a very real concern, especially with the continued presence of different variants of concern, the continued rollout of vaccinations and the slow lift of restrictions give many people the hope that the worst of the pandemic may soon be in our rear view mirror. Nonetheless, the longer-term impacts on all sectors of real estate in Canada remain to be seen and will be watched carefully by analysts and market participants.

ii Investors

Real estate investors in Canadian real estate can be broadly categorised as being one of three types:

  1. institutional investors, consisting primarily of Canadian pension plans and life insurers;
  2. public real estate entities, most significantly in the form of REITS with a smaller number of listed real estate operating corporations; and
  3. private entities, including family-owned businesses, that develop or manage their own properties of varying scale, and, increasingly, large-scale Canadian and foreign private equity investors or other institutional capital funds.

Institutional investors

Those Canadian pension plans that invest in real estate typically comprise:

  1. large, recognisable public pensions, which make direct investments in both domestic and global real estate;
  2. smaller public plans that rely on funds and external managers for their investments; and
  3. private corporate pensions that partake in both direct and indirect investing.

Over the past three decades, Canadian pension plans have commenced, and subsequently increased, their investments in real estate, driven in part by low interest rates, changing demographics and longer life expectancy.23 The real estate allocation targets of Canadian pension funds was projected to increase anywhere from 1 to 3 per cent from 2017 to 2022,24 fuelling speculation that the trend towards continued investment by these pension plans in real estate, including Canadian real estate, will continue at a steady pace. In 2019, Canadian pension funds held $278.7 billion in property assets, a 4 per cent increase from 2018, making them the largest real estate owners in Canada.25

These large Canadian pension funds have assets across all real estate classes, with prominent investment historically focused on Class A office space, premier urban shopping centres and office tower retail spaces in the major metropolitan areas of Canada, with some indirect engagement in development activities. A number of the large public pension plans that invest on behalf of various public sector employees significantly increased their allocation to real estate by privatising several of Canada's largest real estate companies in 2000 and 2001.26 While these investments have become increasingly global in scope, the Canadian pension plans have continued to demonstrate a heavy inclination to invest in Canadian real estate. This may be in part due to the ability of pension plans to generally hold Canadian real property assets on a basis free from Canadian income tax under specific tax exemptions for certain Canadian pensions and Crown entities (such as CPPIB), or the favourable market conditions for promising returns in the Canadian real estate space.

Public real estate companies and REITs

Public real estate entities in Canada commonly exist in the form of a REIT. A REIT is a trust that, upon meeting the criteria outlined in Canada's Income Tax Act (ITA), acts as a flow-through vehicle for Canadian income tax purposes. The first Canadian public REITs emerged in the 1990s as a solution to the collapse of Canada's real estate market. In 1996, there were five publicly traded REITs on the Toronto Stock Exchange (TSX). As of 31 December 2020, there were 40 TSX-listed REITs with total market capitalisation in excess of C$60 billion.27 Three of these REITs alone exceeded a C$5.0 billion market capitalisation as of 31 December 2020. However, the damaging effects of the covid-19 pandemic left only 22 of the 40 Canadian REITs trading on the TSX with a market capitalisation above C$1 billion.28 While the Canadian REIT market remains small in comparison to its comparator market in the US, it is a continually evolving sector of the Canadian real estate landscape. In 2019, the S&P/TSX Capped REIT Index delivered an approximate 23 per cent total return, in line with the S&P/TSX Composite Index's approximate 23 per cent total return, a distinct departure from the approximate 6 per cent total return for the S&P / TSX Capped REIT Index seen in last quarter of 2018. There continues to be limited real estate IPO activity over the past few years, but in the same period, equity and debt offerings made by existing REIT's continued to be a prominent factor in the market. For example, 2019 produced a record-breaking year for the Canadian REIT market from an equity issuance perspective, with C$7.5 billion in equity raised in total (a significant increase in the total seen in 2018).29 While 2020 started out with a high degree of optimism following on the heels of a strong 2019 finish, the overall real estate market underperformed in 2020 compared with prior years, with the S&P/TSX Capped REIT Index returning to -13 per cent and public equity issuances seeing only C$2.2 billion of issuance volume, a 70 per cent decrease from 2019, all of which was likely caused by the state of uncertainty surrounding covid-19.30 Nonetheless, amid a continued low interest rate environment, the debt capital markets for senior unsecured debt from real estate issuers saw record supply with C$8.6 billion across 24 transactions, an increase of 41 percent compared with 2019.31 BCI QuadReal Realty and OMERS Realty Corporation issued C$1.1 billion in aggregate, including BCI QuadReal Realty's C$350 million inaugural green bond offering. RioCan REIT, Granite REIT and Brookfield Property Finance ULC are all examples of other issuers that initiated their green bond programs in 2020, with RioCan REIT completing both its inaugural C$350 million green bond issue in March 2020 and its subsequent C$500 million green bond issue in December 2020. From a property-acquisition perspective, public real estate issuers, although initially quiet at the onset of the pandemic, rebounded by the end of 2020, representing approximately 24 per cent of total acquisition activity. The acquisition activity was largely focused on office and multi-family real estate properties, which together represented 78 per cent of overall public issuer acquisition volume.32

The majority of Canadian REITs are the product of smaller IPOs (typically under C$300 million) as compared to their US counterparts. Interestingly, this has had the effect of attracting a number of US-based cross-border REITs to the Canadian capital markets. Canadian REITs own a full range of asset classes, such as office, retail, industrial and multi-residential. However, among the office investments, relatively few REITs own Class A office towers (which, as discussed above, are typically held by large institutional investors). REIT activity in the retail class remains largely concentrated within regional and local shopping centres. Recently, investment in multi-use developments has increased among the greater capitalised REITs.

The management of a REIT can be internally conducted through a trust's own executives and employees, or externally conducted, by way of a manager under contract. A number of Canadian REITs are externally managed and do not have their own employees. In these situations, the terms of the management agreement between a REIT and an external manager can be an important consideration in structuring an M&A transaction. Any acquirer of a REIT will have to be prepared to either assume those functions (if the management agreement is to be terminated) or make arrangements with the manager to continue in some capacity after a transaction closes. The Canadian real estate capital market tends to favour internalised arrangements, while sponsors typically prefer the fees flowing to them from an external management arrangement.

Whereas REITs make up a significant portion of public real estate entities, there are comparatively fewer public real estate companies in Canada. This is in part attributable to the fact that public real estate corporations, in order to compete with REITS in terms of cost of capital, require large-scale and sufficient tax attributes to defer taxes over an extended period of time. Consequently, real estate corporations tend to partake more actively in the development of real estate, particularly in the residential class.

Private entities

Family-based private investors in real estate have significant industrial, retail and multi-residential holdings, but tend not to hold Class A offices or premium retail properties.

Canadian private equity funds (other than pension plans or life insurers) that partake in real estate investing tend to focus their investments solely on real estate, and generally do not invest across all economic sectors. Moreover, the equity raised by these private equity funds tends to be in the hundreds of millions, as opposed to the billions seen with public pension plans, although there continues to be an upward trend of private equity dominating acquisition volume. Specifically, private equity capital was behind approximately 58 per cent of overall acquisition volume in 2020, the majority of which was made in the multi-family space, as compared with an average of 47 per cent over the prior three-year period.33

Large-scale Canadian private equity investors in real estate still remain fewer in number and tend to manage funds that have a significant pension plan backing. For example, in 2019 RBC Global Asset Management announced a partnership with pension fund manager British Columbia Investment Management Corp (BCI) and real estate developer QuadReal Property Group. The partnership has a portfolio of over 40 assets worth over C$7 billion. Historically, these pension-backed private equity investors invested in real estate that requires active management or repositioning, or that are in the office asset class (although it continues to be rare for them to hold Class A offices) or in the commercial asset class. However, the increased development of condominiums seen across Canada in the past decade has largely been driven by private equity capital and pension funds. In recent years, the Canadian real estate market has also seen an increased level of activity from foreign-based private equity investors as evidenced by Blackstone's privatisation of Dream Global REIT in 2019 for an implied value of C$6.2 billion, becoming the largest-ever Canadian REIT M&A transaction, and Deka Immobilien (Germany)'s acquisition of the Stantec Tower (office space) in Edmonton for C$518 million. With the exception of four large acquisitions made by QuadReal in the multi-family, office and industrial sub-sector, representing C$489 million of aggregate volume, 2020 was generally a quieter year for acquisitions by large-scale Canadian private investors.

Recent market activity

Activity in the real estate market driven by REITs, private equity firms, institutional investors and foreign investors has continued to be a characteristic of the Canadian market for the past few years. Total property level transaction volume for Canada (for assets over C$40 million) flourished to record-breaking levels in 2019 at C$21.3 billion; however, it fell to C$11.0 billion in 2020. Similarly, total investment volume in 2020 fell substantially to C$37 billion, representing a drop in 21 per cent from 2019, with many attributing the drop to the impact of the pandemic.34 Although transaction activity by public issuers accounted for C$7.5 billion in 2019 (an increase from C$3.6 billion-worth of transaction volume in 2018), 2019's purchasing activity was still dominated by private equity purchasers, which comprised approximately 49 per cent of the total acquisition volume for the year (or C$10.4 billion).35 Furthermore, while the beginning of the pandemic was not promising for public issuer acquisition activity, it rebounded rapidly and ended up representing 24 per cent of acquisition activity over the entirety of the year. For public issuer acquisition in 2020, investment in multi-family and office real estate assets took first and second place respectively among all asset types, with acquisition volume of C$1.1 billion and C$777 million, respectively, amounting to 78 per cent of total public issuer acquisition volume.36 This is consistent with 2019 trends where office and multifamily lead with the most activity for public real estate M&A transactions, with annual transaction values of C$5.8 billion and C$3.4 billion, respectively.37 Office real estate saw several sizeable deals early in the 2020 year, including Allied Properties REIT's acquisition of the World Trade Centre of Montreal for C$276 million and of the landmark Gastown office property 375 Water Street in Vancouver for C$225 million. In 2020, private equity maintained its increasingly dominant position with acquisition volume at 58 per cent, the majority of which was allocated to multi-family assets with C$3.1 billion in activity.38 Notwithstanding the continued activity in the real estate market from a property-level perspective, 2020 was a quiet year in the public real estate M&A space with only one transaction, notably the acquisition in November 2020 of Northview Apartment REIT by Starlight Investments and KingSett Capital for a total value of C$4.9 billion.39

In 2019, the S&P/TSX Capped REIT Index delivered a 23 per cent total return over the year,40 which fell in line with the S&P/TSX Composite Index's total return of 23 per cent, but was slightly below the S&P 500 Index and MSCI US REIT, which returned 31 per cent and 26 per cent, respectively.41 Canadian real estate equities underperformed the broader market during 2020, with the S&P / TSX Capped REIT Index returning -13 per cent, which was in line with the MSCI US REIT Index's return of -8 per cent, but was well below the S&P / TSX Composite Index and the S&P 500 Index with returns of 6 per cent and 18 per cent, respectively,42 evidencing the disproportionate impact that the pandemic had on the real estate sector throughout 2020. The industrial sector was the strongest-performing sub-sector in 2019, delivering an approximate 32 per cent average total return, followed by the office and hotels sectors, each with an average total return of about 26 per cent.43 Although 2020 was without any industrial 'mega deals' at the property level, with most activity in mid-sized level acquisitions, Summit Industrial Income REIT led acquisitions in the space acquiring over C$258 million of industrial real estate across the country in 2020. In the data centre space, NASDAQ-listed Equinix REIT made two large acquisitions in the Greater Toronto Area (GTA), for a total of C$342 million and in cold storage, Americold Realty Trust acquired the assets of Nova Cold for C$337 million in January. These two 'industrial-adjacent' acquisitions represented the majority of foreign interest in Canadian commercial real estate in 2020.44 Retail real estate investment was at the low end in 2020, with only C$1.4 billion of acquisition activity, representing 13 per cent of overall volume, further evidencing the steady decline in the retail space that has been occurring in recent years.

In the past five years, Canadian real estate entities have increased their focus on real estate development opportunities, as opposed to solely being engaged on acquisitions of existing properties. In 2018 and 2019, several large public REITs and pension funds, indirectly through their corporate real estate arms, began or completed the building of office towers or mixed-use projects throughout the downtown Toronto core. Cadillac Fairview, which is controlled by the Ontario Teachers' Pension Plan, began construction of its expected C$1 billion downtown Toronto office tower in 2019 and Allied Properties REIT and RioCan REIT continue to proceed with full development of The Well, a mixed-use residential, commercial and retail development located in Toronto, which now has executed leases for approximately 110,000 square feet (or more than one-third) of available leasing space, the first possession of which is expected for 2022. In the second half of 2019, RioCan REIT also completed its acquisition from KingSett Capital of the remaining 50 per cent interest in the Yong-Sheppard Centre in Toronto, a 1 million square foot mixed-use asset, for C$358 million, representing another step forward in RioCan's transformation to a major market, mixed-use focused REIT.

Beyond the development of real estate, real estate entities continue to engage in meaningful acquisitions. In addition to the acquisitions by Allied Properties and CAP REIT noted previously, other examples include Devonshire Properties' acquisition of The Beach Towers in Vancouver for C$305 million, QuadReal's acquisition of three multi-family properties in Southwestern Ontario for C$300 million, Groupe Mach's acquisition of 1100 René-Lévesque West in Montreal, Quebec with Groupe Petra for C$225 million, Choice Properties REIT's acquisition of the Weston Centre and West Block in Toronto for C$206 million, Timbercreek/Starlight Investments' acquisition of a seven property portfolio in Toronto for C$193.7 million and the acquisition of the Don Valley Hotel and Suites in Toronto by Fengate Asset Management and Freed Developments for C$102 million.

Foreign investment into Canadian real estate is not new. An increased presence of US investors in Canadian real estate continued in 2018 with the C$3.8 billion acquisition of PIRET, a Canadian REIT, by Blackstone, one of the largest real estate private equity firms in the world based out of the US, and the acquisition of Milestone Apartments REIT, a Canadian REIT with US assets, for C$1.7 billion by Starwood Capital, a US investment firm. In the first six months of 2019, foreign investment in the Canadian commercial real estate market was down approximately 70 per cent with transactions totalling C$1.5 billion, in contrast to the C$5 billion in 2018. However, the investment by US-based Ventas Inc. of C$2.4 billion in senior housing in Quebec, the acquisition of Pure Multi-Family REIT LP, another Canadian REIT with US assets, by Cortland Partners LLC for about C$1.6 billion, the details of which are discussed further below, and the previously mentioned acquisition of Dream Global REIT by Blackstone for an implied value of C$6.2 billion (C$5.8 billion excluding the management agreement fee) in the second half of 2019 increased the amount of foreign investment total significantly in 2019 and confirmed that foreign investment remains a factor in the Canadian landscape under the right circumstances.45 The two previously referenced acquisitions made by Equinix REIT and Americold Realty Trust made up a significant portion of the foreign interest in Canadian commercial real estate matters for 2020.

i M&A transactions

Canada's REIT market remains robust, with over 40 publicly traded REITs with an aggregate market capitalisation in excess of C$180 million, fuelling a significant portion of M&A activity in the Canadian real estate space over the past few years. The year 2019 saw similar activity levels to 2018 in the real estate M&A market, with six transactions together totalling C$10.2 billion (as compared with three transactions totalling C$10.3 billion in 2018).46 On the contrary, 2020 was a quieter year in the M&A landscape, producing only one public M&A transaction valued at C$4.9 billion.

The real estate M&A market in 2019 started strong, with NWH Australia AssetCo Pty Ltd, as trustee for a controlled entity of NorthWest Healthcare Properties Real Estate Investment Trust, announcing the completion of an arrangement agreement to acquire 11 freehold hospital property assets from ASX-listed Healthscope Limited and its affiliates for approximately C$1.2 billion as part of a sale and leaseback transaction. In June 2019, Tricon Capital Group Inc (Tricon) closed an all-share transaction, with an implied total value of US$1.4 billion, whereby Tricon acquired Starlight US Multi-Family (No. 5) Core Fund (Starlight US). The implied value per Class A unit and Class U unit of Starlight US represented premiums of 26.4 and 33.4 per cent respectively, to the 20-day vwap.

In the second half of the year, as referred to above, Cortland Partners, LLC launched a privatisation bid for Pure Multi-Family REIT LP in an all-cash transaction at a price of US$7.61 per unit for a total value of US$1.2 billion, representing an approximate 14 per cent premium over the 20-day vwap and a cap rate of 5 per cent. The year 2019 was also witness to the acquisition of Holloway Lodging Corporation by Clarke Inc. at a value of C$265 million, Partners Real Estate Investment Trust by McCowan & Associates at a value of C$102 million and Temple Hotels Inc. by Morguard Corporation at a value of C$514 million.

As discussed already, the year 2019 was capped with the completion of the privatisation of Dream Global REIT by Blackstone, the largest-ever REIT M&A deal in Canada, in an all-cash transaction for consideration of C$16.79 per unit and an implied total value of C$6.2 billion, representing an approximate 17 per cent premium over the 20-day vwap and a cap rate of 6.8 per cent.

As previously noted, 2020 gave us the acquisition by Starlight Investments and KingSett Capital of Northview Apartment REIT in a cash and stock transaction pursuant to which Starlight and KingSett would acquire the outstanding units (other than Starlight's existing interest) of Northview for C$36.25 per unit. As consideration for the transaction, unitholders of Northview were given the choice of either cash or units (or both) in a new, multi-residential fund that would own a geographically diverse portfolio of Northview properties located in six Canadian provinces and two territories. The bid price represented a ~17 per cent premium over Northview's 30-day vwap, a 25 per cent premium to consensus analyst net asset value per unit and implied a total transaction value of C$4.9 billion.

ii Capital markets activity – public offerings

The Canadian REIT IPO market was relatively tame in 2018 and 2019. However, there were a few new REITs introduced to the space through initial listings on the TSX during this time. The year 2020 remained a slower year in the REIT IPO market, with only a few new issuers being introduced to the market space. Although 2020 may have been an opportunistic time to raise equity or debt in certain sectors, overall it was a poor performing year compared with past years.

Minto Apartment REIT completed its initial public offering (IPO) in July 2018, raising gross proceeds of C$230 million (including the full exercise of the underwriters' over-allotment option), comprised of an issuance of 15.863 million trust units at a price of C$14.50 per unit. In connection with the offering, Minto Apartment REIT indirectly acquired a portfolio of 22 high-quality income-producing multi-residential rental properties in Canada, with 4,279 suites, from Minto Properties Inc., one of The Minto Group of companies. The net proceeds of the offering were used by the REIT to fund the indirect acquisition of the properties and reduce Minto Properties' retained interest. Following completion of the offering (including the exercise of the over-allotment), Minto Properties Inc. indirectly held a retained interest of approximately 56 per cent of the REIT.

BSR REIT, a Canadian REIT with US assets, completed its IPO in May 2018, issuing an aggregate of 13.5 million trust units at a price of C$10 per unit, raising gross proceeds of C$135 million. In connection with the offering, the REIT indirectly acquired a 48 property portfolio held indirectly by BSR Trust, LLC. The portfolio consisted of multifamily residential properties located across five bordering states in the Sun Belt region of the US. The net proceeds of the offering were used by the REIT to repay approximately C$122.3 million of indebtedness owing by BSR.

In March of 2019, NexPoint Hospitality Trust announced it had completed its IPO of 917,700 trust units at a price of C$5 per unit. The offering raised gross proceeds of C$4,588,500. NexPoint was created to acquire an initial portfolio of 11 hospitality assets located in the US and to raise capital to acquire hospitality assets in the US.

In October 2019, Continuum REIT announced their intention to conduct an IPO, planning to offer 18.65 million units at between C$15.50 and C$16.50, with the goal of raising upwards of C$300 million. However, after receiving an offer of C$1.7 billion from Starlight Investments, Continuum REIT accepted the takeover offer and withdrew their IPO.

The start of 2020, prior to the market crash resulting from the covid-19 pandemic emergency orders, also gave witness to the completion by Subversive Real Estate Acquisition REIT LP, a limited partnership and a cannabis-focused special purpose acquisition corporation, of its IPO on the NEO exchange, which raised US$225 million (including over the over-allotment that was exercised). In October 2020, Flagship Communities Real Estate Investment Trust completed its IPO raising gross proceeds of US$93.75 million, comprising an issuance of 6.25 million trust units at a price of US$15.00 per unit. The REIT was formed to own and operate a portfolio of 45 income-producing manufactured housing communities in the states of Kentucky, Indiana, Ohio and Tennessee, together with a fleet of manufactured homes for lease to residents of such communities.

Despite limited IPO activity, 2019 was a record-breaking year for public offering activity for existing publicly traded REITs with an all-time high total equity issuance amount of C$7.5 billion. This included two of the largest Canadian real estate equity issuances ever, with First Capital Realty raising C$453 million in February (as a secondary offering) and CAP REIT raising C$489 million in November (used for acquisitions and to repay debt). The year 2020 saw much lower levels of equity capital issuance with only C$2.2 billion of issuance volume, but with record levels of issuances in the senior unsecured debenture market. The 2020 issuance volume included 13 equity offerings, two convertible debenture offerings and 29 offerings of senior unsecured debentures. The largest equity offering of 2020 was WPT Industrial REIT's C$310 million issuance of subscription receipts launched in February.47 The 2020 unsecured debenture offerings raised an aggregate of C$8.5 billion, with issuers such as RioCan REIT, Granite REIT, Brookfield Property Finance ULC and Choice Properties REIT all completing multiple separate issuances throughout the year, many of which were in excess of C$500 million in proceeds each.

iii Investor activism

As previously noted, most publicly listed real estate entities in Canada exist in the form of a REIT. Most REITs, because they are trusts, do not provide to their unitholders those same rights and remedies as would be typically available to a corporate shareholder. However, the inability of unitholders to access such things as the oppression remedy, dissent rights and rights to call meetings or make proposals has not gone unnoticed. Institutional governance groups have and continue to pressure REITs to adopt more uniform trust declarations with rights comparable to those of a corporate shareholder. In light of this mounting pressure, some REITs are adopting some of those rights; however, a majority of REITs still have not moved to do so.

Canadian corporate law allows shareholders with a 5 per cent stake in a company to call for a special meeting, compared to the 10 per cent required under US law. Furthermore, in Canada, a shareholder can solicit votes from 15 other investors without issuing a proxy circular under what is referred to as the quiet solicitation exemption under the applicable rules. This allows a relatively small shareholder to gather powerful allies behind closed doors. Taken together, these circumstances give activists a more accessible basis from which to launch their campaigns. Canada's friendliness to shareholder activism helps explain why activism within the real estate market has been undergoing a paradigm shift in recent years.

Historically, the REIT market has seen a limited amount of unitholder activism, and it is driven largely by private equity where it has occurred.

With activism continuing its ramp up in the Canadian marketplace in recent years, there continue to be a number of prominent public unitholder activist campaigns launched against REIT management. For example, following significant public pressure from investors, and in an effort to avoid a costly proxy contest, Agellan Commercial REIT reached a settlement agreement with Sandpiper Group, one of the more prominent activist investors in the Canadian real estate space, and ELAD Canada Inc. in 2017, which involved board membership changes and the internalisation of management functions. In 2018, Sandpiper Group was granted a seat on the board of Artis REIT pursuant to a voting support agreement entered into with the REIT.

Following these events, in January 2019, Sandpiper Group announced it had identified five publicly traded Canadian real estate entities that it plans to actively pursue. While Sandpiper Group did not announce the names, or even identify the type of real estate entities that it intends to pursue, it did make clear that it was prepared to bridge the value gap created by underperforming REITs and further highlighted the expected level of activist activity REITs may face in the coming years. It followed up on this announcement by negotiating to have two of its nominees, including Sandpiper's CEO, appointed to the board of Extendicare Inc. and in November 2020, Artis REIT announced a settlement agreement with Sandpiper, which saw a retirement of the REIT's CEO and CFO and a refreshment of a majority of its board of trustees. Sandpiper Group also announced in February 2020 that it had acquired a 10 per cent position in Dream Office REIT, citing its belief that the units of Dream Office are undervalued and represent an attractive investment opportunity.

Another form of activism that has been utilised in Canada involved institutional investors joining forces to demand higher prices in takeover bid transactions. This is what transpired when unitholders of Milestone Apartments REIT demanded an increased premium from Starwood Capital Group in the context of the takeover bid launched by Starwood, and was eventually given an attractive 16 per cent premium over market. In 2019, a proposal by the executive chair of Hudson's Bay Company (which owns Saks Fifth Avenue and other department stores) to take the company private came under heavy criticism by activist investors (including Land & Buildings Investment Management), who believed that the offer price of C$9.45 per share was inadequate and did not properly recognise the value of the company's significant real estate holdings. Hedge fund Catalyst Capital mounted a public challenge opposing the transaction. Catalyst's tactics involved amassing shares, complaining to the Ontario Securities Commission about the process, and ultimately launching its own bid at C$11 per share. Ultimately, Catalyst's efforts paid off, resulting in a privatisation of the company in March 2020 by a consortium of certain continuing shareholders at C$11 per share.

REITs are vulnerable to activists in part because they are not governed by corporate statutes, but rather by their own declaration of trusts. Consequently, in response to increased shareholder activism in recent years, a large number of REITs have adopted an array of important corporate governance enhancements.48 In the wake of the current coronavirus market uncertainty, REITs need to take particular proactive measures to ensure they are prepared to deal with activist investors that could emerge once the dust settles.

M&A transactions

i Legal framework and deal structures

There are numerous methods by which a public Canadian company can be acquired. With respect to M&A transactions in the real estate market, the two most commonly seen are structured either as a plan of arrangement or a takeover bid. An overview of these transaction structures, which are not unique to the public real estate M&A, is provided below.

Plans of arrangement

A statutory plan of arrangement is a voting transaction that can be effected by a Canadian corporation according to the laws of the jurisdiction in which the company was incorporated. A plan of arrangement is unique in that it can permit a buyer to acquire 100 per cent of the shares of a target company without having to require a buyer to make an offer, or enter into a share purchase agreement, with each and every shareholder of the target company. Instead, the purchaser is required to enter into an arrangement agreement with the target company, and when the plan of arrangement is completed, the purchaser acquires all of the outstanding securities of the target company in a single step. As such, it is unsurprising that a plan of arrangement is frequently utilised in friendly, non-hostile acquisitions.

The arrangement agreement is first negotiated with a target company's board of directors. Once the board of directors approves it, the target will apply to a court to begin the process of approving and effecting the arrangement. The initial appearance before a court will be to secure an interim order, which sets the procedural rules for the arrangement, including the manner in which the meeting of securityholders will be called and held, setting out those classes of securityholders that are entitled to vote and the requisite levels required to approve the arrangement. The interim order is usually uncontested.

Once an interim order is provided, the plan of arrangement is presented to the target company's shareholders for their approval. The details of the transaction, including the specific steps contemplated by the plan of arrangement, are set forth for shareholders in an information circular, the content and form of which are governed by applicable securities laws. Although the requisite shareholder approval threshold is determinable by a court under an interim order, acquirers typically propose that they be obliged to seek the same approval threshold as would be required under the applicable corporate law statute governing the target company involved in the transaction if the transaction were effected outside the arrangement process. In most Canadian jurisdictions, the relevant corporate law statutes set out a threshold of two-thirds of the votes cast at the meeting of the target company's security holders. Convertible securities, such as warrants and convertible debentures, are typically not given the right to vote in a plan of arrangement, unless the rights of these securities holders are being altered by the arrangement in a manner that is unfair or is unreasonable.

If the requisite majority of shareholder approval is obtained, then the arrangement is presented to the court for its final approval. Disaffected stakeholders can, at this time, appear before the court to challenge the arrangement, although practically speaking, the vast majority of arrangements are presented to a court without opposition. The court, in reviewing the plan of arrangement, is guided by considerations of fairness and reasonableness, with respect to the effect of the transaction on shareholders. If the plan of arrangement is approved by the court, it then becomes binding on all shareholders of the target company.

Given that plans of arrangement are voting transactions effecting corporations, the REIT-to-REIT M&A context necessitates the presence of a corporation somewhere in the REIT structure. To date, courts have been accommodating in the flexible use of the plan-of-arrangement structure, even where a transaction is primarily a REIT-to-REIT M&A transaction. Moreover, a unique feature of REIT-to-REIT mergers is that to achieve a tax deferral, the requirements in Section 132.2 of the ITA must be met, which is generally facilitated by structuring the transaction to be implemented with a plan of arrangement.

Takeover bid

A takeover bid, the substantive equivalent of a tender offer under US securities laws, is a transaction in which a purchaser makes an offer for the securities of a target company directly to the target company's securities holders. As the support of the target directors is not legally required, a takeover bid is the only practical means to effect an unsolicited or hostile acquisition.

Each Canadian province and territory has adopted a uniform regime under which takeover bids are regulated. The relevant legislation requires that a takeover bid be made to all registered holders of the class of voting or equity securities being purchased, and that the offer be sent to all registered holders of securities convertible into or exercisable for such voting or equity securities. Additionally, the offeror must make the same purchase offer to each securities holder in the class.

A takeover bid circular, delivered to all requisite securityholders, must contain prescribed information about the offer, the offeror and the target company. Where the consideration offered in exchange for the solicited securities consists, in whole or in part, of the securities of the offeror, the disclosure document must also include prospectus-level disclosure about the offeror. While the uniform regime adopted by the securities regulators in Canada sets out the minimum standards relating to the conduct of the bid, including disclosure requirements, it is generally unnecessary for an offeror to present the contents of its disclosure documents to securities regulators; nor is it likely that the takeover bid circular, unless a complaint is made, will be reviewed by the regulators once filed.

Once a takeover commences, the board of directors of the target company, or the trustees of the target REIT, have a duty to consider the offer and an obligation to make a recommendation to security holders regarding the adequacy of the offer. However, the ultimate determination as to whether to accept or reject a takeover bid is made by the securities holders.

The determination as to whether a triggering event for a takeover bid has occurred is based on objective factors. The most important factors, however, are the percentage of voting or equity securities beneficially owned or controlled by the offeror (and any of its joint actors) and the number of additional securities subject to the takeover bid. The threshold for triggering a takeover bid is 20 per cent of any class of voting or equity securities. When determining whether the threshold for triggering a takeover bid will be met, the number of securities beneficially owned by the offeror is interpreted to include both those securities that the offeror has a right or obligation, through options, warrants or convertible securities, to acquire within 60 days, as well as any securities held by affiliates or joint actors in the takeover bid.

Effective 9 May 2016, changes were made to the Canadian takeover bid regime. Under this new regime, all non-exempt takeover bids (including partial bids) are subject to the following requirements:

  1. a mandatory, non-waivable minimum tender requirement of more than 50 per cent of the outstanding securities of the class that are subject to the bid, excluding those that are beneficially owned, or over which control or direction is exercised by the bidder and its joint actors (the minimum tender requirement);
  2. following the satisfaction of the minimum tender requirement and the satisfaction or waiver of all other terms and conditions, takeover bids will be extended for at least an additional 10-day period (the 10-day extension requirement); and
  3. takeover bids must remain open for a minimum of 105 days, unless the target agrees to a lesser period for the bid or another transaction.

These updated provisions, by increasing the amount of time afforded to a target company to respond to a takeover bid, have important implications for strategic shareholder rights plans and will likely continue to influence how M&A activity is structured.

Takeover bids are infrequently utilised for friendly transactions in Canada. Among REIT-to-REIT transactions, they are even rarer. This is because most REIT-to-REIT transactions involve equity consideration, and cannot be effected on a tax-deferred basis unless they meet the requirements of Section 132.2 of the ITA, which is generally facilitated by structuring the transaction to occur by way of a plan of arrangement. As a result, nearly all REIT-to-REIT transactions occur by way of a plan of arrangement. Even the rare M&A deal that starts out being hostile generally ends up becoming a negotiated plan of arrangement transaction, albeit for an increased price.

ii Acquisition agreement terms

The overwhelming majority of real estate transactions and deals take place by way of a plan of arrangement. Conditions in public real estate mergers are typically similar to any public merger transaction.

One common deal protection, typical to most public merger transactions, is a non-solicitation (no shop) provision. By adopting this provision, a target company not only is obliged to recommend a transaction to its securities holders, but also agrees not to solicit or negotiate other acquisition offers and to pay a break fee if the agreement is terminated in certain circumstances. In accordance with the exercise of its fiduciary duties, however, a board of directors is permitted, despite the existence of a non-solicitation provision, to change its recommendation, engage with a rival bidder that makes an unsolicited acquisition proposal that is likely to result in a superior offering, or enter into an agreement that supports a superior offering. The determination as to what constitutes a superior offering is a matter of negotiation; although it is almost invariably defined according, at least in part, to whether the proposal is more favourable from a financial perspective to securities holders than is the existing transaction. Break fees are permissible in Canada, provided that they permit a reasonable balance between their negative effect as an auction inhibitor and their potential positive effect as an auction stimulator (including if the fee was necessary to induce a bid). Reasonable break fees are typically understood to range from 1 to 5 per cent of deal equity value.

When a target board of directors seeks to defend a company from a takeover bid, a number of defensive tactics are available. The most common is the use of a poison pill or shareholders' rights plan. However, as discussed above, under the new legislation these types of plans will be void after 105 days. Additional defensive tactics include issuances of securities to dilute the bidder or potential bidder (often by placing the securities in friendly hands), a sale of assets, recapitalisations, the acquisition of a white knight and asset lock-ups.

iii Financing considerations

Considerations and conditions in public real estate transactions are typically similar to other public merger transactions. One distinct difference often found in real estate transactions, which would not be found in non-real estate transactions, is the potential presence of a condition addressing the necessary percentage level of mortgagee consents to the assumption of mortgages.

To finance their real estate merger transactions, private equity acquirers will often draw from the equity commitments of their limited partnerships. Pension funds, however, often finance the equity portion of their real estate transactions by drawing on their vast reserves of liquid securities and assuming underlying mortgages. For the most part, mortgagers tend to consent to the assumption of their mortgages, particularly where the acquirer is well regarded as a significant player in the real estate market. Where mortgages have a provision requiring repurchase upon a change of control, which is common, credit lines or fresh mortgage alternatives must be available to the acquirers.

The nature of the Canadian bought deal underwriting structure, in which underwriters agree to purchase all the offered securities under a prospectus, offers certainty of funding to a public REIT acquirer. As a result, a publicly traded REIT acquirer will often arrange a bought deal financing concurrently with the announcement of their acquisition transactions. Because bought deals can be through a subscription receipt structure, the acquirer's financing becomes contingent on the closing of the corresponding acquisition.

Public REIT-to-REIT merger transactions are typically in the form of unit-for-unit deals, with an assumption of the underlying mortgages of the target REIT. The equity portion of such a transaction can be sourced by way of available liquid funds, or can be financed through a bank facility, which would be subsequently repaid through a public debenture or the issuance of equity.

iv Directors' duties

Canadian corporate statutes impose two duties on directors: a duty of care and a duty of loyalty.

The Canada Business Corporations Act (CBCA) requires every director of a corporation, in exercising his or her powers and discharging his or her duties, to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. The applicable standard utilised by courts to determine whether a director has satisfied his or her duty of care is both objective and subjective in nature. Objectivity is used to determine how a reasonably prudent person ought to have acted; however, the circumstances surrounding the exercise of a director's duties modify the objectively reasonable person standard to account for the specific facts of a situation, as well as the subjective knowledge and experience of the particular director.

The duty of care imposed upon directors does not rise to the level of perfection. Rather, courts have generally deferred to the business decisions of directors where they have been satisfied that the directors exercised an appropriate degree of prudence and diligence. This deferential approach to directors' decisions has become known as the business judgement rule (BJR). The BJR is a legal presumption that insulates directors from legal liability, so long as they act in an informed, prudent and diligent matter. In instances where the BJR is challenged, the onus is on the claimant to show that a director's decision is fraudulent or illegal, or represented a conflict of interest. Some of the factors that courts have considered to determine whether a director's decision should be reviewed are whether:

  1. an independent committee was used;
  2. an outside valuation was obtained;
  3. professional advice was sought;
  4. the decision was made over a sufficient amount of time;
  5. alternatives were considered;
  6. the transaction was negotiated; and
  7. proper documentation was prepared.

The theme behind these factors is that they reflect the court's tendency to focus on the processes behind, rather than the outcome of, directors' decisions. The courts have maintained that the judiciary should not seek to substitute its judgment for that of a board of directors, unless the circumstances surrounding a decision are so unusual and extreme as to warrant such intervention. Consequently, if a director can demonstrate that his or her business decision was reasonable, in light of all the circumstances about which he or she knew or ought to have known, it is unlikely a court will have found him or her to have breached his or her duty of care. In fact, a director's failure to meet his or her duty of care often arises in situations where the director shows passivity to, and inattention towards, the business' activities.

The statutory duty of loyalty requires directors to 'act honestly, in good faith, and with a view to the best interests of the corporation'. A director's duty of loyalty is owed exclusively to the corporation, as a whole, rather than any individual group of stakeholders. In fact, the Supreme Court of Canada has held that directors, in determining what is in the best interests of a corporation, may look to the interests of, among others, shareholders, employees, creditors, consumers and governments. While this approach encourages directors to consider the effect of their decisions on different groups of stakeholders within a corporation, it continues to remain the case that the interests of equity security holders are given significant weight. Accordingly, the determination of whether an acquisition proposal delivers the best value reasonably available to equity security holders remains a central focus in director deliberations.

Directors cannot contract out of their duties and can be held personally liable for a breach of their duties. Although REITs are trusts, and therefore not governed by the CBCA or its provincial equivalents, it is the case that common law applies a similar, if not higher, standard of care and loyalty to a REIT's trustees than it does to corporate directors. Moreover, REITs, in their trust instruments, have generally adopted similar standards of care and loyalty to those in Canada's corporate legislation. Furthermore, although no definitive decision on the matter has been made, Canadian courts have typically held trustees of public REITs to the standards expected of the directors of public companies.

v Income tax considerations

Carrying on business in Canada

Income taxation in Canada is governed primarily by the ITA, a federal statute, as well as by sales tax, and provincial and territorial tax laws. The ITA imposes an annual income tax on the taxable worldwide income of every person resident in Canada (including corporations). Non-residents of Canada are also subject to income tax under the ITA if they are carrying on business in Canada. The determination as to whether an activity constitutes carrying on a business in Canada is a question of fact, generally determined by the types and the amount of activity carried on in Canada by the non-resident.

As of January 2021, the basic Canadian combined federal and provincial tax rate for income earned by a corporation ranged from 23 per cent (Alberta) and 26.5 per cent (Northwest Territories, Ontario and Quebec) to 31 per cent (Prince Edward Island (PEI).

Disposing of taxable Canadian property

Non-residents of Canada are also subject to tax under the ITA if they dispose of 'taxable Canadian property'. Taxable Canadian property generally includes:

  1. Canadian real property;
  2. shares of corporations that are not listed on a designated stock exchange that derive (or derived at any time in the previous 60 months) more than 50 per cent of their value, directly or indirectly, from Canadian real property; and
  3. shares of corporations listed on a designed stock exchange or units of a mutual fund trust (including REITs) if at any time in the previous 60 months, a non-resident (together with persons with whom it does not deal at arm's length and partnerships of which the non-resident or a non-arm's length person are a member) owned 25 per cent or more of the issued shares of any class of the corporation or units in the trust and more than 50 per cent of the value of the corporation or the trust was derived from Canadian real property.

Rental and other non-business income

Under the ITA, certain payments by Canadian residents to non-residents are subject to withholding tax at a rate of 25 per cent (subject to applicable treaty relief). In particular, payments received by a non-resident from renting real property in Canada are subject to 25 per cent withholding tax on the gross rent received. There is no reduction to this rate under Canada's treaties. In certain circumstances, it is possible for a non-resident who is earning income from renting real property in Canada to elect to be taxed as if it were carrying on business in Canada in lieu of being subject to withholding tax. This allows the non-resident to pay tax on net income rather than being subject to withholding tax on the gross rental revenue. Other payments to non-residents that are subject to withholding tax include interest paid to non-arm's length parties, participating interest, interest subject to the 'thin-capitalisation' rules in the ITA, certain administration/management fees, royalties and dividends.

The applicable rate of withholding is often reduced under a treaty. Many treaties reduce the withholding tax rate on dividends to 15 per cent or 5 per cent in situations where a non-resident recipient that is a corporation holds at least 10 per cent of the voting shares of the dividend-paying corporation. Most interest payments payable under a traditional loan held by an arm's-length non-resident lender are exempt from withholding tax under the ITA. However, loans between non-arm's-length parties are subject to withholding tax under the ITA. The rate of withholding tax on non-arm's-length interest is reduced to 10 per cent or 15 per cent under many of Canada's tax treaties, and withholding tax on non-arm's-length interest is eliminated under the Canada–US Tax Treaty. Interest that is subject to Canada's thin-capitalisation rules may also be deemed to be a dividend and subject to withholding tax as described above.


REITs are designed to act as flow-through entities. Generally, a REIT will not be liable for Canadian income tax as long as it distributes its income to its unitholders. Distributions of REIT income to non-residents are subject to withholding tax at a rate of 25 per cent (subject to applicable treaty relief). Distributions by a REIT that are returns of capital may also be subject to withholding tax at a rate of 15 per cent. Generally, the gain realised upon the disposition of REIT units is not subject to Canadian tax so long as the unitholder and non-arm's-length persons hold less than 25 per cent of the units of the REIT (see 'Disposing of Taxable Canadian Property', above).

Value added taxes

The federal government imposes a value-added tax, known as the Goods and Services Tax (GST), at a rate of 5 per cent, on goods and services purchased in Canada. GST generally applies to the sale and rental of non-residential real estate. Sales of never-before-occupied residential real property are also subject to GST. Special rules require owners of residential real property held for rent to pay GST on the fair market value of the property when it is first occupied by an individual as a place of residence. Sales of previously occupied residential real property are not subject to GST. If GST is levied on a sale or rental of real estate, the buyer or tenant may be able to recover the GST through input tax credits if the real estate was acquired in connection with a commercial activity (generally, a business) and the buyer is registered for GST.

Several provinces, including Ontario, have harmonised their provincial sales tax with the GST. The combined tax is called the harmonised sales tax (HST). In 2020, the rate of HST in Ontario is 13 per cent (which includes the 5 per cent GST). Generally, the application of HST mirrors that of GST. In those provinces and territories where HST is not applied, provincial sales tax is not applied to the purchase of real estate.

A non-resident of Canada who carries on business in Canada, and who makes taxable supplies in the course of that business, is required to register under Canadian GST legislation and to collect and remit GST. Moreover, if the non-resident does not have a permanent establishment in Canada, it must post security with the Canada Revenue Agency in respect of its collection and remittance obligations.

Other transfer taxes

Land transfer tax is a form of provincial (and in some cases municipal) tax payable by the purchaser of real property. The purchase of real estate in Ontario is generally subject to land transfer taxes of various forms. Subject to certain exemptions, land transfer tax in Ontario is payable on every conveyance of land tendered for registration in the provincial land registry systems and every unregistered disposition of a beneficial interest in land. The rate of land transfer tax is determined according to the type of property being transferred and the total value of consideration paid. Generally, the maximum rate of tax is 2 per cent on the value of the consideration in excess of C$400,000. However, in certain circumstances, including transactions involving leases with an unexpired term of 50 years, land transfer tax is payable on the fair market value of the real property, rather than on the total value of the consideration paid. Purchases of land in the city of Toronto are generally subject to an additional land transfer tax. The maximum rate of the Toronto tax is generally also 2 per cent on the value of the consideration in excess of C$400,000. Exemptions from Ontario land transfer tax include, but are not limited to, certain transfers: between spouses, between an individual and his or her family business corporation, between family members whose farmed land is being conveyed, and between affiliated corporations.

Ontario and British Columbia have introduced a foreign buyer land transfer tax. Generally, this surtax is paid by non-Canadian purchasers of Canadian residential property. British Columbia's 20 per cent foreign buyer land transfer tax applies to properties purchased in the Metro-Vancouver area, and certain other regions of British Columbia. In Ontario, the 15 per cent non-resident speculation tax applies to certain residential property purchased by non-Canadians in the Greater Golden Horseshoe Area, which includes the City of Toronto and its surrounding areas. British Columbia has also instituted a speculation and vacancy tax that applies to certain owners of residential property in certain regions of British Columbia, including Metro Vancouver. This tax generally applies at an annual rate of 0.5 per cent of the value of the property for Canadians, and 2.0 per cent for non-residents. Vancouver has also instituted an empty homes tax of 3 per cent annually, which was introduced to return empty or under-used properties to the rental market in Vancouver.

Property tax

In Ontario, municipalities are entitled to levy annual property taxes under the Municipality Act. In exchange for these taxes, municipal governments provide many city-based services. The calculation of municipal tax is dependent on the value of the property compounded by the 'mill rate', which is determined annually and based on the financial needs of the municipality. In the past decade, some municipalities such as Toronto and Montreal have introduced a municipal land transfer surtax. This municipal land transfer tax is paid, by the purchaser of real property, in addition to provincial land transfer taxes.

Investment in real estate in Canada (whether directly or indirectly, by a Canadian resident or non-resident) will have significant tax implications that vary depending on the individual or specific circumstances relevant to the particular situation. Investors (and real estate entities) are advised to seek independent tax advice in connection with any potential investments or dispositions.

vi Regulatory considerations

Foreign ownership

Property ownership falls under provincial, rather than federal, jurisdiction in Canada. Newfoundland, Nova Scotia and New Brunswick are the only remaining provinces in which there are no restrictions on foreign ownership of land.

Manitoba, Saskatchewan, Alberta and Quebec have legislation restricting foreign ownership of parcels of farm land. Manitoba restricts foreign ownership of farmland to 40 acres. Saskatchewan restricts the purchase of farmland by non-residents to 10 acres. Alberta legislation caps foreign ownership of agricultural land at two parcels containing 20 acres; however, the legislation does not apply to certain commercial uses of land. Quebec's legislation, the most restrictive of the bunch, prohibits non-Quebec residents from acquiring more than four adjacent hectares of farmland (roughly 10 acres). PEI restricts non-PEI residents (defined as persons who have not lived in PEI for at least 365 days over 24 months) from purchasing more than five acres of land, or 165 feet of shoreline. In 2016, British Columbia implemented an additional property transfer tax of 15 per cent on Metro Vancouver homes purchased by foreign buyers. When this foreign buyers' tax was initially introduced, however, there were concerns that it was too sweeping, penalising those recruited to Vancouver on work permits. As a result, the tax was amended in 2017. Since then, it has also been raised to 20 per cent. In 2017, Ontario, following in the footsteps of British Columbia, introduced a 15 per cent non-resident speculation tax on residential property purchased in the Greater Golden Horseshoe Area by anyone who is neither a citizen nor permanent resident of Canada.

Competition Act

Under Canada's Competition Act, mergers and acquisitions of all sizes and in all sectors of the economy are subject to review by the Commissioner of Competition. The Competition Act requires companies to notify the Commissioner of Competition, by way of a pre-acquisition filing, if a proposed transaction meets, or exceeds, certain asset size or revenue criteria. Generally, a pre-acquisition filing must be submitted if:

  1. the aggregate value of target's assets in Canada or revenues from sales in or from Canada exceeds C$93 million (in 2021); and
  2. the parties to the transaction, together with their affiliates, have either assets in Canada, or annual gross revenues from sales in, from or into Canada, exceeding C$400 million.

Upon receipt of the filing, the Commissioner of Competition has 30 days, although extensions are common, to review the filing so as to narrow and refine issues and to determine what, if any, additional information is required from the parties to assess anti-competition concerns. In particular, the Commissioner will consider what additional information is required to determine whether the proposed transaction is likely to lessen or prevent competition substantially. Real estate, historically, has not been a sector in which the Commissioner has given refusals or divestiture orders.

Investment Canada Act

Under Canada's Investment Canada Act (ICA), certain acquisitions by non-Canadians of Canadian businesses are subject to pre-closing review. The application of the ICA is limited to those investments made by non-Canadians that involve an acquisition of control over a Canadian business. Whether a pre-closing filing for a control transaction will need to be submitted to the Minister of Industry will depend on:

  1. the enterprise value of the Canadian business (if the acquirer is not a state-owned entity);
  2. the book value of the Canadian business (if the acquirer is a state-owned enterprise, or is not a World Trade Organization (WTO) Member State); and
  3. whether the business is in a sensitive sector.49

For acquirers who are not a state-owned entity, the financial threshold that triggers the requirement for a pre-closing review under the ICA depends on the nationality of the investor. Nationals of a specified free trade party50 that directly acquire control of a Canadian business are only subject to a pre-closing review under the ICA if the enterprise value51 of the Canadian business exceeds C$1.565 billion (in 2021). Investors who hail from WTO Member States are subject to a pre-closing review under the ICA if the enterprise value of the Canadian business exceeds C$1.043 billion (in 2021).

For acquirers who are state-owned entities, the book value threshold required to trigger a pre-closing review will depend on the nationality of the state-owned entity. State-owned entities from WTO nations are only required to file a pre-closing review under the ITA if the book value of the Canadian business that they are acquiring meets or exceeds C$415 million (in 2021). Non-WTO Member States directly purchasing Canadian businesses are required to submit a pre-closing review if the book value of the Canadian business exceeds C$5 million. An indirect control transaction by a non-WTO Member State for a Canadian business will require a pre-closing review only if the book value of the business exceeds C$50 million.

In those transactions where a non-Canadian investor gains control of a Canadian business that does not meet nor exceed the financial threshold required to trigger the submission of a pre-closing filing, a notice of investment must be filed within 30 days of closing.

The ICA reserves a residual right to review any non-resident acquisition of a Canadian business on nation security grounds. This right of review is unique in that it is not conditional on value or quality thresholds being met. As such, even investments that do not involve high asset values, or an acquisition of control over a business, may be subject to review on national security grounds.

The ICA defines a Canadian business to mean:

  1. a business carried on in Canada that has a place of business in Canada;
  2. an individual, or individuals, in Canada who are employed, or self-employed in connection with the business; and
  3. assets in Canada used in carrying on the business.

Whether Canadian real estate assets can be considered a Canadian business for this purpose is a question of fact, determined primarily by the second criterion – specifically, whether there are individuals employed in connection with the real estate. Consequently, a hotel that has employed staff in Canada to render their services would be considered to be carrying on a business, whereas an office tower that has outsourced all of its services would not.


Although 2019 was marked by a deceleration in the global economy, stemming in part from disruptions to trade and weaknesses in foreign economies, the Canadian real estate sector had a strong year. The year 2019 produced record levels of equity and senior unsecured debt issuances for existing real estate public entities, an active M&A landscape and record transaction volumes in the underlying property markets. It also became evident that real estate entities started to redirect additional development funds to the US, where taxes are lower, regulations are fewer and markets are larger.52

While the start of 2020 was fuelled with optimism following on the strength of the 2019 year, with the onset of the pandemic, 2020 was marked by uncertainty across the industry and a pause of several of the trends that had been continuing to that point. Real estate owners began to second guess the recent trend towards reduced space requirements and increased densification with the rise of open-concept offices and co-working environments in favour of considering whether increased space will be necessary in a return to work environment that includes maintained physical-distancing measures. Heading into 2021, there were also discussions about where people will want to live, particularly around whether suburbanisation will gain traction in a world of continued (even partially) remote working, affordability concerns and pandemic-related worries about dense environments and the use of mass transit.53 As many parts of the country and global markets continue to re-open amid the lift of certain pandemic restrictions, analysts will be looking to see what former trends re-emerge and what new trends are spawned following this once in a generational type of global event.

It is impossible to ignore the role that covid-19 has had on the global economy and the domestic real estate market. The pandemic has caused notable disruptions across virtually every industry, and the Canadian real estate market is not exempt. Increased global and Canadian unemployment and social distancing measures have at least temporarily caused uncertainty regarding which commercial real estate sectors will be hit hardest, and which sectors could potentially come out on top. Certain sectors such as industrial, life sciences, cold storage and data centres have flourished during the pandemic, whereas others such as office, retail and hotels have struggled.54 Investors are increasingly looking at newer groups of these niche assets that show promise, including single-family rental housing, self-storage and even TV and film production given the increased popularity of streaming services.55 With the increase in vaccination rollout and the slow re-opening of the economy, the expectation is that we will slowly return to a more normalised level of economic activity near the end of 2021; however, the key question remains which of these real estate sub-sectors will feel the lasting effects of the pandemic and the duration of the restrictions, which have existed throughout 2020 and into 2021, and which sub-sectors will return to pre-covid-19 'normal'.

The multi-family sector remained a leader throughout the remainder of 2020, which will likely continue throughout 2021 and beyond. Multi-family investment volumes in Canada hit a record of C$11 billion in 2020, surpassing the record set in 2019. Considering how borrowing rates are expected to remain near all-time lows throughout 2021, it is forecasted that multi-family investment will continue to grow and hit C$11.8 billion nationally in 2021.56 Although national vacancy rates rose by 150 bps to 3.8 per cent in 2020 and rent growth decelerated for the first time since 2016, the driving factors that led the sector's strong performance prior to the pandemic including strong population growth, limited supply and rising costs in homes remain intact. Accordingly, the multi-family sector is projected to remain stable, vacancy rates are expected to decrease to 3.2 per cent in 2021 and the sub-sector is likely to continue thriving when a new normal begins to establish itself.57

With an increasing demand for online shopping, and following a strong year in 2019 where the industrial sector was the strongest performing sub-sector with average total returns of approximately 32 per cent,58 this sector also stood out in 2020 and is expected to have a pivotal year in 2021. As of the first quarter of 2021, the top 10 tightest industrial markets in North America were in Canada, with the top three being Toronto, Montreal and Vancouver. However, the largest quarterly compressions were recorded in Calgary (-140bps) and Ottawa (-90 bps).59 The race for space is only likely to continue as e-commerce and giant delivery corporations continue to benefit from increased service use during the pandemic and the limited in-person retail opportunities that come hand in hand. National net absorption in industrial real estate assets in 2020 totalled 10.4 million square feet,60 which ranks as one of the largest quarterly figures in Canadian history. If continued, this level of absorption is expected to lead several Canadian cities to run out of industrial space before the year's end.

As mentioned previously, the senior housing space was relatively quiet in 2019 and 2020. However, the end of 2020 saw a slight uptick in transaction activity, which has continued to build in 2021. In the long term, seniors housing industry professionals are maintaining a positive outlook and expect this sector to account for a growing share of the capital allocated to real estate in the coming years as the demand from the baby boomer cohort continues to takes effect.

The office sector has seen considerable changes in 2020. After a strong year in 2019, with an average total return of approximately 26 per cent61 and continued low vacancy space in most major cities, this sector was poised to have a strong 2020. However, following government guidelines and restrictions on entering office workspaces as a result of the pandemic, many offices moved to virtual workplaces. This change may be temporary, but some employers are starting to question mandatory in-office policies, and particularly those in tech spaces. Although remote work has turned out to be productive for many, there has also been strong feeling from certain employers that face-to-face interaction remains a vital aspect of the working environment, especially in terms of developing organisation culture.62 It will remain to be seen what the 'return-to-work' landscape looks like as employers develop plans that are appropriate to meet the needs of the business, its employees and a shift in overall culture where it concerns working from home. It is likely too soon to make sweeping claims based on a few actions, especially given the strength of the office sector going into 2020 and the continued leasing of significant space by large companies, including Google's February 2020 agreement to a major long-term lease at 65 King Street East in downtown Toronto under which Google will occupy 400,000 square feet of office space across 18 floors in Toronto's newest, next-generation office development. However, a decrease in demand for significant office space by some employers could be a new reality where office-centricity has become less of a priority, and the realisation, in light of covid-19, that such employers can still run their operations effectively out of office. What the new normal looks like following the pandemic and a return to the workplace, including whether physical distancing becomes a general requirement or a new cultural phenomenon, will play a role in how well the old office model withstands this test and what changes are made in the way employers utilise office space in a post-covid environment, and how the office real estate subsector adjusts accordingly.

As the pandemic continues to make its way to our rear view mirror, hopefully without a resurgence, analysts are hopeful that the strong upward trends of late 2019 will resume in the short term. What remains is the possibility that the effects of covid-19 could be more profound, and said trends may not be seen again for some time to come.


1 Brenda Gosselin and Stephen Pincus are partners at Goodmans LLP. They wish to thank Jaclyn Jesin Neuberger, legal summer student, for her assistance in the preparation of this chapter.

2 CIBC 'Canadian Real Estate Investment Banking – 2020 Year in Review' (CIBC 2020 Report).

3 Jones Lang LaSalle (JLL) 'Canada Investment Outlook – Year-End 2020' (JLL 2020 Report).

4 CIBC 2020 Report.

5 CIBC 2020 Report.

6 CIBC 2020 Report.

7 CIBC 2020 Report.

8 CIBC 'Canadian Real Estate Investment Banking – 2019 Year in Review' (CIBC 2019 Report).

9 CIBC 2020 Report.

10 CIBC 2020 Report.

11 CBRE Canada Q1 Quarterly Report (2021) (CBRE Q1 Report).

12 Clayton, Frank and Hong Yun (Eva), Shi. 'WOW! Toronto Was the Second Fastest Growing Metropolitan Area and the Top Growing City in All of the United States and Canada'. (31 May 2019) Ryerson Centre for Urban Research and Land Development.

13 Canadian Real Estate Association, 'Quarterly Forecast- Q1 2019' (14 June 2019).

14 Huebl, Steve. 'Record Decline in Home Sales and Listings in April: CREA'. Canadian Mortgage Trends (17 May 2020).

15 CMHC 'Housing Market Insight – Canada's Major Markets' (February 2021).

16 Canadian Real Estate Association, 'Quarterly Forecast- Q1 2021' (15 March 2021) ('Quarterly Forecast – Q1 2021').

17 JLL 2020 Report.

18 The Canadian Real Estate Association, National Statistics, (15 June 2021).

19 'Record home sales in March 2021, new supply increases', Canadian Real Estate Association (CREA) news release (15 April 2021).

20 Quarterly Forecast – Q1 2021.

21 CIBC 2020 Report.

23 JLL, 'Canadian pension funds eye further real estate allocations' (29 January 2018).

24 ibid.

25 Keidan, Maiya. 'Canadian pension funds hunt for pandemic real estate bargains' (21 January 2021).

26 Specific examples include the privatisation of Oxford by OMERS; and Cadillac Fairview by Ontario Teachers' Pension Plan.

27 CIBC 2020 Report. Toronto Stock Exchange (

28 Best Canadian REITs (18 May 2021)

29 CIBC 2019 Report.

30 CIBC 2020 Report.

31 CIBC 2020 Report.

32 CIBC 2020 Report.

33 CIBC 2020 Report.

34 JLL 2020 Report.

35 CIBC 2019 Report.

36 CIBC 2020 Report.

37 CIBC 2019 Report.

38 CIBC 2020 Report.

39 CIBC 2020 Report.

40 JLL 'Canada Investment Outlook – Q1 2019 Report'.

41 CIBC 2019 Report.

42 CIBC 2020 Report.

43 CIBC 2019 Report.

44 CIBC 2020 Report.

45 Dream Global Real Estate Investment Trust Announces Closing of Blackstone Acquisition' (10 December 2019) Bloomberg Business.

46 CIBC 2019 Report.

47 CIBC 2020 Report.

48 Wes Hall et al, '2018 Proxy Season Review: Encountering the Changing Expectations of Investors', Kingsdale Advisors, 2018.

49 Real estate is not a sensitive sector under the Investment Canada Act.

50 The European Union, the United States, Mexico, Chile, Colombia, Honduras, Panama, Peru, South Korea, Japan, Vietnam, Singapore, Australia or New Zealand.

51 The enterprise value of a business is calculated differently.

52 PricewaterhouseCoopers, 'Emerging Trends in Real Estate 2019' (2019).

53 PricewaterhouseCoopers, 'Emerging Trends in Real Estate 2021' (2021) (PWC 2021 Report).

54 CBRE Canada Real Estate Market Outlook 2021' (2021).

55 PWC 2021 Report.

56 CBRE Canadian Real Estate Market Outlook 2021' (2021) (CBRE Canada Market Outlook 2021).

57 CBRE Canada Market Outlook 2021.

58 CIBC 2019 Report.

59 CBRE Canada Market Outlook 2021.

60 CBRE, 'Office Vacancy Moderates in the First Quarter while a Nationwide Logistics Crunch Looms', article (6 April 2021)

61 CIBC 2019 Report.

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