Canada: Duties On Transfers Of Immovables In Québec: Major Changes Introduced By The 2016 Québec Budget

On March 17, 2016, Québec Finance Minister Carlos Leitão tabled his budget (Budget 2016) and announced major changes to An Act Respecting Duties on Transfers of Immovables (the Act). Budget 2016 characterizes the impetus behind these changes as an effort to ensure the integrity and fairness of the regime governing transfer duties on immovables (essentially the civil law equivalent of real property) by tightening the exemption requirements to make it harder for transferees who owe transfer duties to avoid paying them. That said, the amendments could lead to transfer duties being payable on legitimate transactions that were not otherwise subject to duties. These substantial changes have been applicable since March 18, 2016, and therefore may affect all transfers of real estate made since that date. In short, the following amendments were announced: 

  • a change as to when the transfer duty becomes payable, making it payable when the immovable is transferred, not upon the registration of the transfer in the land register, and the introduction of an obligation to report transfers of immovables not included in the land register to the municipality where the immovable is located within 90 days following the transfer  
  • the revocation of some exemptions applicable to transfers of immovables between two closely related legal entities
  • an obligation to maintain exemption conditions for a certain period for some transactions that are exempt from transfer duties
  • clarifications to the method of calculation of share ownership for the purposes of certain exemption conditions

To mitigate some inequitable treatment, the Minister also announced the introduction of an exemption from transfer duty when an immovable is transferred between de facto spouses who are separating, along with a change to give effect to certain agreements between the Québec government and some international governmental organizations.

The changes also include reporting mechanisms which, if no notice is produced by the prescribed deadline, could trigger an obligation to pay an amount equal to 50% of the transfer duty, in addition to the amount corresponding to the transfer duty or to the amount corresponding to the additional duty of 150% of the transfer duty ordinarily payable, as discussed below.

Due date of the transfer duty and new reporting mechanism for transfers of immovables not registered in the land register

The law requires municipalities to charge transfer duty on the transfer of any immovable within its territory, but had suspended the collection fee until the transfer was registered in the land register. For commercial reasons, some immovable transfers were not registered, and the due date for the transfer duty was postponed indefinitely.

Budget 2016 changed the timing at which the transfer duty becomes payable, to make it due when the immovable is transferred, rather than when it is registered in the land register. To ensure payment of the transfer duty, the law will be amended to oblige all immovable transferees to report the transfer to the municipality when the deed of transfer is not registered within 90 days following the transfer date.

The transfer duty resulting from a transfer not registered in the land register is now payable before the 31st day after the municipality sends the invoice to the transferee. A transferee who pays the transfer duty subsequent to reporting the transfer of an immovable not registered in the land register within the 90-day period will not have to pay an additional duty when the transfer is later registered.  

The Taxation Act will be amended to require a transferee to pay the Minister of Revenue an additional duty of 150% of the duty payable on a transfer of an immovable if the notice of transfer is not filed with the municipality by the deadline. The amount will bear interest as of the date the transferee is in breach of the obligation to produce the notice until the Minister of Revenue receives payment of the additional duty. Generally, the transfer duty resulting from the transfer of an immovable will not be payable in addition to the above-mentioned additional duty of 150%. However, if the transferee pays the duty resulting from the transfer outside of the time frame allotted for producing the notice, the transferee will be required to pay an additional duty corresponding to 50% of the duty that would be payable with respect to the transfer, even if the transfer could be exempt.

Budget 2016 does not anticipate applying a transfer duty to unregistered transfers that occurred before March 18, 2016. However, transactions completed after March 17, 2016 which are intended to regroup the registered owner and the beneficial owner of the immovable into a single entity will have to be stringently reviewed to confirm the exemption applicable under the new rules and avoid paying the transfer duty twice.

Elimination and tightening of some provisions granting a transfer duty exemption

The law includes a transfer duty exemption where the transfer of an immovable is made by a transferor who is a natural person to a transferee who is a legal person, and at least 90% of the issued full voting shares of the transferee's capital stock are owned by such transferor immediately after the transfer. This exemption also applies, mutatis mutandi, to upstream transfers, that is, when the transfer of an immovable is made by a transferor that is a legal person to a natural person, if such person is, immediately before the transfer, the owner of at least 90% of the issued full voting shares of the capital stock of the transferor.

The law also provides for an exemption where an immovable is transferred between two closely related legal persons and, at the time of the transfer, one of the following situations applies:

  • at least 90% of the issued shares having full voting rights of the capital stock of the legal person are owned by the particular legal person, a qualifying subsidiary of the particular legal person, a legal person of which the particular legal person is a qualifying subsidiary, a qualifying subsidiary of a legal person of which the legal person is a qualifying subsidiary or any combination of such legal persons or subsidiaries (referred to as the "vote test")
  • at least 90% of the fair market value (FMV) of all the issued and outstanding shares of the capital stock of the legal person are owned by the particular legal person or at least 90% of the FMV of all the issued and outstanding shares of the capital stock of the legal person and of the particular legal person are owned by one and the same legal person or group of legal persons (referred to as the "FMV test")

The provision granting an exemption from payment of the transfer duty under the FMV test will be repealed due to the difficulty in ensuring compliance with its parameters. The FMV test was introduced in 2002 to allow the transfer of immovables between two corporations that are part of a complex corporate group without having to engage in numerous transactions. The removal of this exemption could mean that immovable transfers within a corporate group could be subject to transfer duties, and it may not be possible to engage in a series of transfers (which was common practice prior to 2002) to benefit from an exemption, due to the new rule on maintaining exemption conditions discussed below.

The law will also be amended to stipulate that the percentage indicated above in the context of the vote test must be determined by considering the number of votes attached to the capital stock of the legal person, and not the number of shares with full voting rights.1

Introduction of a requirement to maintain the exemption condition for some immovable transfers

The Act will be amended to add a requirement to maintain the exemption condition for at least 24 months after the immovable transfer date. If the exemption condition ceases to be met before the minimum period ends, the transferee will be required to pay the transfer duty that would have been payable if the exemption had not been applicable on the date on which the condition was no longer applicable for the first time.

The new requirement could make transfer duty payable on an immovable transfer made after March 17, 2016, as a result of a corporate restructuring, an issuance of shares or another operation affecting the transferor or transferee.

Furthermore, when a legal person makes a transfer to a natural person, the law will be amended to add a requirement to maintain the exemption condition for at least 24 months immediately prior to the transfer date. If the transferring corporation was formed less than 24 months prior to the transfer of the immovable, the transfer duty payment exemption will apply if the exemption condition is met as of the date on which the corporation was formed until the time immediately before the transfer.

Rules will also be introduced to protect the measure's integrity so that, under certain circumstances, a person who is entitled to acquire, to control voting rights of or to require the redemption, acquisition or cancellation of shares of a corporation held by other shareholders will be deemed to have acquired these shares.

Due to the new requirement to maintain the exemption condition, the anti-avoidance rule, which targeted corporations that acquired an immovable in anticipation of the acquisition of control of the corporation and imposed an additional duty of 125% of the exempted transfer duty, will be repealed.

Introduction of a disclosure mechanism when the exemption condition is no longer met

To ensure that the transfer duty is collected when the exemption condition is no longer met, every transferee whose transfer was exempt from payment of transfer duty will be required to notify the municipality in which the immovable is located within 90 days after the date on which the exemption condition ceased to be met. The transfer duty resulting from cessation of compliance with the exemption condition will be payable prior to the 31st day after the municipality sends the invoice to the transferee.

The Taxation Act will be amended to require a transferee to pay the Minister of Revenue an additional duty of 150% of the duty payable on the transferred immovable if the notice of transfer is not filed with the municipality by the deadline. The amount will bear interest as of the date the transferee is in breach of the obligation to produce the notice until the Minister of Revenue receives payment of the additional duty. Generally, the transfer duty resulting from the transfer of an immovable will not be payable in addition to the above-mentioned additional duty of 150%. However, if the transferee pays the duty resulting from the transfer outside of the time frame allotted for producing the notice, the transferee will be required to pay an additional duty corresponding to 50% of the duty that would be ordinarily payable with respect to the transfer.  

Introduction of an exemption from transfer duty when an immovable is transferred between former de facto spouses

The Act will be amended to add an exemption from transfer duty where an immovable is transferred between former de facto spouses within 12 months following the date on which they ceased to be spouses due to the failure of their union.

Amendment to give effect to certain government agreements

The agreements between the Québec government and international governmental organizations established in Québec call for the organizations to be exempt from the transfer duty and additional duty on transfers of immovables located in Québec. Under the circumstances, the Act will be amended by declaration to give effect to these agreements.

Footnotes

1 This change is being made due to a lack of consistency in interpreting the vote test. In fact, as the municipalities administer the Act, they could interpret the vote test inconsistently, which would have a big impact on the predictability of this tax measure. In Lebco Gestion inc. v. Laval (Ville de), 2015 QCCS 1704, the transferee considered that the transfer was exempt from application of the vote test due to the number of voting shares owned by the transferor, as the wording of the clause might suggest, while another entity controlled the transferee by means of multiple voting shares.

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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