The Court of Appeal of Quebec1 recently settled an ongoing debate as to whether rent paid under a lease, which is subsequently applied against the eventual purchase price in a sale, should be taken into consideration when calculating the transfer duties payable in connection with the transfer of the property.
In this case, the tenant benefited from an option to purchase the property it was leasing for a purchase price of $2,944,000. The lease also provided that any amount paid as rent would be deducted from the purchase price.
It should be noted the provision was truly an option in favour of the tenant as there was no obligation for it to proceed with the purchase of the property at any time. Nine years into the lease and after paying a total rent of $1,944,000, the tenant elected in 2007 to purchase the property and the deed of sale specified a purchase price of $1 million (the difference between the option price of $2,944,000 and the $1,944,000 rent paid by the tenant).
Dispute over purchase price
Since the municipal evaluation of the property was $1,642,240, the tenant paid the transfer duties based on the municipal evaluation as it was greater than the purchase price set forth in the deed of sale. In 2008, the city became aware of the lease provision setting forth the option to purchase the property for $2,944,000 and sent a revised notice regarding the amount of transfer duties payable by the tenant, specifying that the amount of $2,944,000 should have been the basis of imposition and not the $1,642,240 that was used. While the tenant had paid $19,526.40 in transfer duties using a basis of $1,642,240, the revised notice for transfer duties was $42,660.
The tenant contested the fact the basis of imposition should be the full amount of $2,944,000 as it was of the view that the rent could not magically be converted into a deposit. The rent paid under the lease, the tenant argued, could never be reimbursed and the lease did not qualify the rent as a deposit on the eventual purchase price.
The tenant further argued that An Act respecting duties on transfers of immovables (the Act) does not mention rent as a consideration and that only leases with a term exceeding 40 years are deemed a transfer subject to the Act. Conversely, and according to the tenant, a lease with a term of less than 40 years could not be deemed a transfer. Consequently, the rent should not be considered as consideration for the purchase of the property.
Consideration vs. purchase price
The city argued the notion of consideration under the Act includes all the elements of the consideration exchanged between the parties. One must be able to demonstrate that the consideration exchanged was used for the purchase of a property. In light of the lease provisions, the city argued the payment of the rent could not be separated from the payment of the purchase price and the payment of rent played an essential part of the consideration paid for the property.
The city maintained that the total amount of consideration should not be limited to what was paid at the moment of the transfer of the property but should also take into account any amounts paid prior thereto.
The Court of Appeal agreed with the city's position. The court concurred with the trial judge's conclusion to the effect that the rent paid under the lease served two purposes: it was rent payable under the lease but also served as a deposit on the purchase price once the option to purchase was exercised.
By exercising the option to purchase under the lease, the parties converted the rent into a deposit on the purchase price. The court went on to say the Act does not refer to purchase price but rather consideration, which demonstrates the legislator wanted to give a broad definition to consideration and that if the basis of calculating transfer duties was to be limited to the purchase price, the legislator would have said so.
This case serves as a reminder that rent payable under a lease or other forms of consideration that are paid and applied against the ultimate purchase price are to be taken into consideration when calculating the global consideration for the purposes of calculating transfer duties under the Act.
Income tax implications
Although not dealt with in this decision, section 13 (5.2) of the Income Tax Act (Canada) provides that where rent is applied against a purchase price, the taxpayer is to use as its cost base for the property purchased the lesser of (i) the cost plus the rent applied to the purchase price or (ii) the fair market value of the property at the time of the transfer.
This section of the Income Tax Act addresses the issue created by the fact an expense claimed by a taxpayer (in this case, the rent) can also be applied to the cost base of the acquisition of real estate. Without such a provision, it would be much more difficult to permit the rent to form part of the "consideration" since the taxpayer would be unfairly prejudiced from an income tax perspective. More specifically, it would have a reduced cost base if the rent was not taken into account for the total consideration.
1. Carrière St-Eustache v. Boisbriand (Ville de) 2014 QCCA 2233
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