In Quebec, municipalities must collect what is commonly referred to as "land transfer duties" (infamously known as the "Welcome Tax" or "taxe de Bienvenue" in French), which are triggered upon the "transfer" of real property located within their territories. The ins and outs of transfer duties are set out in An Act respecting duties on transfers of immovables (the "Act"). As Quebec's regime for land transfer duties presents numerous particularities that are not found in other provinces in Canada or in the United States, the goal of this bulletin is to give the reader a better general understanding of how the tax works and highlight some of its elements that can be surprising to a foreign purchaser.
1. The Land Transfer Duties are not necessarily calculated on the amounts paid for the property
The basis for the tax is the greater of:
- the amount of the consideration given for the transfer of the immovable (excluding GST and QST);
- the amount of the consideration stipulated for the transfer of the immovable; or
- the amount of the market value of the immovable at the time of the transfer.
Given the vagaries of assessing the "market value" for a property at a given time, the Act provides that for the purposes of determining the basis of imposition, market value shall be the product of (a) the value of the immovable indicated on the property assessment roll and (b) the comparative factor then in force, yielding what is generally referred to as the "uniformized value". Therefore, where the tax is imposed based on the market value of the property, a comparative factor of the fiscal year that corresponds to the transfer date will be applied. This comparative factor can be obtained by way of request to the pertinent City.
As such, when the purchase price is lower than the municipal evaluation, a purchaser may face a surprise when calculating the land transfer duties payable upon the transfer.
As for the "consideration" for the property, it is important to note that such concept includes the amount of any assumption of debt or other obligations as well as the value of any property furnished by the transferee for the transfer.
2. The duties payable for a property located in Montreal are not the same
Unless the property is located in Montreal, where additional values are applicable, this basis is used to calculate the applicable duties, as follows:
(1) on that part of the basis of imposition which does not exceed $50,000: 0.5%;
(2) on that part of the basis of imposition which is in excess of $50,000 but does not exceed $250,000: 1%; and
(3) on that part of the basis of imposition which exceeds $250,000: 1.5%.
As for the properties located within the territory of the City of Montréal, the Act provides that the City may adopt a by-law to set a higher rate for any part of the basis of imposition which exceeds $500,000. The City of Montréal has in fact adopted by-laws to that effect, and since January 2010 and January 2012, new rates have come into force:
i) a rate of 1.5% is applicable to the basis imposition which is in excess of $250,000 but lower than $500,000;
ii) a rate of 2% is applicable to the basis of imposition between $500,000 and one million dollars; and
iii) a rate of 2.5% is applicable on the basis of imposition which exceeds one million dollars.
It should be noted that such additional rates only apply to transfers of properties located in the City of Montréal proper and therefore do not apply to transfers of immovables located in "demerged" cities.
3. Only a "transfer" triggers the calculation of the Land Transfer Duties
The Act provides that the tax is triggered upon the "transfer" of real property. The following acts and agreements are considered to be transfers triggering the imposition of land transfer duties:
(i) the transfer of the right of ownership on a property;
(ii) the establishment of emphyteusis;
(iii) the transfer of the rights of the emphyteutic lessee; and
(iv) a lease for a term exceeding 40 years (having regard to all extension periods).
Conversely, a transfer under the Act does not encompass one made for the sole purpose of securing indebtedness or for reconveyance. Merely declarative acts are also excluded. There are similarly no taxes imposed in the case of a purchase of the shares of the registered owner of a real property, except in certain circumstances where the target has acquired the property by way of an exempt transaction in the previous two (2) years.
4. The payment of the duties is not made on the closing date
As per the terms of Section 6 of the Act, duties imposed following a transfer contemplated under the Act are only payable upon registration of the transfer, rather than at the time of the transfer. There can thus be a difference between the amount determined at the time of the event giving rise to the duties and the time at which they become due. The Quebec Court of Appeal has ruled that the amount of the duties must always be determined at the moment of the transfer. In addition, since the municipalities are responsible for collecting duties on transfers of immovables, it is only when such cities issue an invoice for the payment of the duties that they will in fact be exigible. The cities will first evaluate the mandatory declaration included in any registered transfer after having received a copy of said transfer from the land registrar and will thereafter issue an invoice. As such, a few weeks (sometimes months) may elapse between the actual date of the transfer and receipt of an invoice.
It should also be noted that the transferee is the person responsible for the payment of the land transfer duties. However, the Act provides for joint and several liability of the transferor in certain circumstances, namely where the consideration given by the transferee exceeds the amount indicated in the application for registration of the transfer or where the transferor has committed an offence under the Act.
5. The Act provides for many exemptions
While the definition of "transfer" encompasses a very broad range of circumstances, the Act provides for a number of exemptions to the imposition of the duties. Main exemptions include those provided under Section 17 pertaining to transfers to governmental bodies, transfers between registered charities, transfers involving certain mining properties, transfers to a "public body" as defined under the Act, and transfers in respect of certain transactions involving municipalities under very specific circumstances, which are beyond the scope of this bulletin. It should be noted that in order to benefit therefrom the parties must expressly identify and claim the exemption in the deed of sale.
Section 18 creates exemptions for hypothecary creditors who realize on their security, as long as the creditor complies with certain conditions such as being in the business of lending money against security, and that the transfer results from an hypothecary recourse. Other exemptions include situations where the basis of imposition is of less than $5,000, or transfers between the exclusive beneficiary of a trust and the trust itself, between trusts and related persons, between parents and children, etc.
Section 19 of the Act is of particular interest. In a nutshell, the exemptions included under said section can be summarized as follows:
(a) The Act provides an exemption where a natural person (the transferor) transfers to a legal person where the transferor owns, immediately after the transfer, at least 90% of the issued and outstanding voting shares of the transferee.
(b) A similar exemption akin to the first one exists, but is set out in a reverse time order. The duties will not be triggered where the owner of at least 90% of the issued and outstanding voting shares of a transferor is the transferee.
(c) The Act also creates an exemption in the case of an amalgamation.
(d) The Act also provides for an exemption where the transfer occurs between two closely related legal persons. The expression "closely related" includes various situations, but it implies that one of the two corporations owns at least 90% of the voting shares or 90% of the fair market value of the shares of the other, and the transfer can occur in one direction or the other. It can also exist between a corporation and a qualifying subsidiary of such corporation, within the meaning of the Act.
The Act is drafted in such a way as to permit an effective "look-through" of multiple levels of corporations, in order to allow, for example, exempt transactions between "grand-parent" and "grand-child" corporations.
Section 1129.29 of the Taxation Act was enacted to ensure that the exemptions described above are not used in an abusive manner. Such section provides that when a change of control of the legal person which owns the property is done within twenty-four (24) months of an exempt transfer, a special duty of 125% is imposed. Such section has been adopted to cover situations where, for example, by using the first exemption seen above, which allows a transfer from a natural person to a legal person whose shares (at least 90%) are owned by the transferor the shares could be simply transferred to a third party, an operation which the Act does not capture.
This section has far-reaching implications for any transaction where a change of control of a corporation occurs. A prudent person who purchases shares of corporation resulting in a change of control should ensure that the seller was not part of an exempt transaction within the last twenty-four (24) months, which would attract the application of Section 1129.29 of the Taxation Act.
We hope that the foregoing sheds clearer light on the nature of the Quebec land transfer duties, the situations to which it does and does not apply and its various exemptions. In any case, prudent practice would dictate that parties to a transaction involving real estate located in Quebec consult a legal professional to determine the applicability of the duties and potential structures of a transaction.
The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.
© McMillan LLP 2014