Canada: Sale By Judicial Authority: Bye Bye To The Welcome Tax

Last Updated: July 25 2001

On July 3, 2000, the Quebec Court of Appeal rendered a decision by which any hypothecary creditor which acquires a property sold by judicial authority is now exempt from the payment of the transfer duties (Welcome Tax) to the municipality where the property is located. The decision of Banque Nationale du Canada vs. Ville de Québec can be considered as a change of position by the Court of Appeal regarding the obligation of the hypothecary creditor to pay this tax, more specifically considering the fact that this Court had adopted the opposite position under the Civil Code of Lower Canada.

The facts of this decision are simple and uncontested. Banque Nationale du Canada (the "Bank") had granted to Compagnie de Gestion G.R.C. Inc. (the "Company") a loan in the amount of $660,000 which was secured by an immovable hypothec on various properties. After the Company ceased its payments, the Bank obtained from the Superior Court in 1997 a judgment ordering the forced surrender and the sale by judicial authority of the properties. When the properties were sold by judicial authority on September 30, 1997, the Bank acquired these properties for the amount of the upset price which was $345,250. The City of Quebec claimed from the Bank the transfer duties with respect to the sale of these properties.

In its appeal, the Bank argues that it qualifies for the exemption from the payment of the transfer duties under Article 18a) of An Act respecting duties on transfers of immovables (L.R.Q., c. D-15.1) (the "Act") which reads as follows:

"18. There shall be an exemption from the payment of transfer duties where the business of the transferee consists in the lending of money on the security of real property and the following conditions have been fulfilled:

a) The transfer of an immovable to the transferee must result from the exercise of a right to take in payment or must have been effected in any other manner for the purpose of extinguishing a debt secured by real property or ensuring the protection of such security or of any claim; [...]" [our underlines]

In its decision, the Court of Appeal had to determine if the fact that a hypothecary creditor acquires a property sold by judicial authority can constitute the protection of its security or claim under Article 18a) of the Act. Article 18a) was modified in 1993 to reflect the new provisions of the Civil Code of Quebec relating to hypothecary recourses.

First, the Court of Appeal studies the legislative changes which occurred since the enactment of the Civil Code of Quebec and, more specifically, regarding the transformation by the legislator of a judicial sale into a sale by judicial authority. Such sale is now regulated by the provisions of the Code of Civil Procedure relating to the sale of the property of others and which allows the hypothecary creditor to suggest to the Court certain terms and conditions of sale.

The Court of Appeal also analyses its own decision rendered in 1987 in the case of Assurance-vie Desjardins vs. Ville de Québec where it decided that the exemption from the payment of the transfer duties under Article 18a) of the Act could not apply to a hypothecary creditor following a judicial sale. Finally, the Court of Appeal studies the new mechanism of sale by judicial authority enacted by the Civil Code of Quebec and concludes:

"[Translation] It is therefore possible to think that when a hypothecary creditor acquires a property hypothecated in its favour in the course of a hypothecary recourse that it had itself initiated and that no other potential buyer came forward on the date of the sale, the hypothecary creditor acquires the property for the sole purpose of ensuring the protection of its security or claim. With the sale by judicial authority, a "transfer of a property to an assignee" therefore occurs within the meaning of Article 18 as modified, since the person responsible for the sale of the property is acting on behalf of the owner and that this transfer is made "for the purpose of ensuring the protection of its security or claim. It seems to me that any other interpretation would have the effect of limiting the application of this Article to only one hypothecary recourse, namely the taking in payment of a property."

Therefore, the Court of Appeal allows the appeal from the Bank and concludes that it is exempt from the payment of any transfer duties to the City of Quebec.

So, let it be known:

Farewell to the welcome tax when a hypothecary creditor acquires the property it sold in a sale by judicial authority!

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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