On March 17, 2016, Quebec's Minister of Finance unveiled the 2016-2017 provincial budget (Budget) in which significant proposals to the system of duties on transfers of immovable properties were announced. This bulletin follows our March 2016 Blakes Bulletin: Quebec 2016-2017 Budget: Continued Fiscal Discipline.
Despite the fact that the legislative changes arising from this Budget are not expected for several months, the announced measures apply to all commercial and residential immovable transfers made after the day of the Budget speech.
The Act Respecting Duties on Transfers of Immovables (Quebec) (Act) stipulates that every municipality must collect duties on the transfer of any immovable located within its territory. Apart from certain exemptions in the Act, the transferee(s) of the immovable must pay transfer duties. The transfer duties amount is established according to the tax base of the transfer duties, as defined by the Act, being the greatest of the following amounts: (1) the consideration amount provided for the immovable's transfer; (2) the consideration amount stipulated for the immovable's transfer; or (3) the immovable's market value amount at the time of its transfer.
Under the terms of the Act, the "market value" is the product obtained by multiplying the value entered on the roll for the unit or part corresponding to the transferred immovable by the factor of the roll established in accordance with the Act Respecting Municipal Taxation (Quebec).
Finally, the concept of transfer refers to the transfer of the right of ownership on a property and includes the establishment of emphyteusis and the transfer of the rights of the emphyteutic lessee as well as a lease agreement with a term exceeding 40 years.
The Budget announced that the new measures were justified considering that certain schemes were used as means for unduly applying exemptions or to defer payment of transfer duties indefinitely. Unfortunately, this exercise did not lead to a revision of the Act or, at the very least, of the exemptions that are not well adapted to deal with the different legal entities commonly used. Therefore, it remains relevant to closely monitor the Act's evolution and the legislative changes to come in the following months.
CHANGES CONCERNING EXEMPTIONS
The Budget addresses exemptions based on fair market value of the issued full voting shares of the capital stock of a legal person and exemptions based on ownership of the issued full voting shares of the capital stock of a legal person.
Rules that Prevailed Before the Budget
Before the Budget was tabled, the Act provided the transferee with the following exemptions from payment of transfer duties normally payable following the transfer of an immovable:
- The transfer is made by a transferor who is a natural person to a transferee that is a legal person of which at least 90 per cent of the issued shares of the capital stock to which are attached full voting rights are owned by the transferor immediately after the transfer
- The transfer is made by a transferor who is a legal person to a natural person who, immediately before the transfer, owns at least 90 per cent of the issued full voting shares of the capital stock of the transferor
- The transfer occurs between two closely related legal persons.
In the latter, a legal person is closely related to a particular legal person if, at the time of the transfer, one of the following situations applies:
- At least 90 per cent of the issued full voting shares 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
- At least 90 per cent of the fair market value of all the issued and outstanding shares of the capital stock of the legal person is owned by the particular legal person
- At least 90 per cent of the fair market value of all of the issued and outstanding shares of the capital stock of the legal person and of the particular legal person is owned by the same legal person or group of legal persons.
These rules enabled the creation of schemes to avoid the obligation to pay transfer duties, such as the sale of an immovable to a legal person of which the transferor owned more than 90 per cent (in number) of the issued full voting shares and the transferee owned shares giving more than 50 per cent of the voting percentage in order to benefit from the exemption while circumventing the anti-avoidance rule established in 1993. This anti-avoidance rule provided that a special duty was payable by the transferee when more than 50 per cent of its voting power had been acquired in the 24 months following the transfer of the immovable covered by an exemption and that it was reasonable to believe that the transfer of the immovable was done in anticipation of the control acquisition of the legal person receiving the transfer.
New Rules Unveiled by the Budget
The formulation "at least 90 per cent of the issued full voting shares" referred to above as the threshold could lead to confusion. Therefore, the Budget states that the 90-per-cent threshold will be determined by calculating the percentage of the number of votes attached to the shares of the capital stock of the legal person concerned. This excludes any interpretation whereby the calculation is based on the number of voting shares of a legal person.
In addition, the Budget repeals the aforementioned exemptions based on the fair market value of shares of a legal person and specifies that this exemption was repealed because of the fact that it was difficult to ensure that the valuation condition was respected in practice.
Therefore, subject to legislation consistent with the measures announced in the Budget, two legal persons will be considered as being closely related only if the issued full voting shares representing at least 90 per cent of the voting rights 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.
Finally, given the introduction of the new rules, the Budget repealed the aforementioned anti-avoidance rule introduced in 1993.
All these new measures are applicable to transfers of immovable properties made after March 17, 2016.
Two Years' Detention
With respect to exemptions based on ownership of at least 90 per cent of the voting rights (Voting Exemption), the Budget presents the obligation to maintain the Voting Exemption condition when realizing transfers of immovable properties.
For the transfer of an immovable, for which the Voting Exemption is claimed, both between a legal person and between a natural person and a legal person, the transferee will have to maintain the condition for the Voting Exemption for a minimum period of 24 months following the date of the immovable's transfer. Unless the transferee complies with this condition, it will be required to pay the transfer duties that would have been payable following the transfer had the Voting Exemption not been applicable.
The Budget also states that the condition for the Voting Exemption must have been maintained during the 24 months preceding the transfer of an immovable when the transfer is made to a transferor that is a legal person to a transferee who is a natural person. In case the legal person is constituted less than 24 months before the immovable's transfer, the exemption from payment of the transfer duties will be granted for the transfer if the legal person meets the exemption condition from the time of its constitution until immediately before the transfer in favour of the legal person.
In order to counter certain abusive situations, the Budget introduces a rule similar to the one for income tax matters. Therefore — save for rare exceptions — the mere possession by a person of a right to acquire, to control the voting rights or to compel the legal person to acquire its own shares will place that person, for the purposes of the Voting Exemption, in the same position had such right been exercised.
It is somewhat unfortunate that such a condition be added in substitution of the anti-avoidance rule adopted in 1993 whereby a test of intention could enable a person to maintain the right to exemption if the subsequent sale of the shares of the legal person turned out to be entirely fortuitous. For example, following the exercise of the usual protection clauses contained in a shareholders' agreement, partnership agreement or joint venture agreement (such as the clauses providing for a forced sale following a default). From now on, each subsequent sale within a period of two years shall be scrutinized and may trigger retroactive transfer duties.
These measures are applicable to the transfer of immovable properties made after March 17, 2016.
The Budget also introduces a disclosure mechanism in order to require the transferee to notify the municipality when the condition for Voting Exemption ceases to be met during the period of two years following the exempted transfer. The disclosure must take place within 90 days following the date that the condition for the Voting Exemption ceases to be met. The Budget provides a list of information that must be contained in the notice to the municipality. If the latter fails to file the transfer's disclosure notice, it will be required to pay special duties equal to 150 per cent of the transfer duties payable regarding the immovable's transfer (plus interest).
All of the new measures mentioned above are applicable to transfers of immovable properties made after March 17, 2016.
EXIGIBILITY OF TRANSFER DUTIES
Since the Act came into force, a claim relating to transfer duties arises at the time of an immovable's transfer. However, before the Budget was tabled, the claim was not payable until the immovable's transfer was registered in the land register.
This enabled the parties to circumvent the requirement to pay transfer duties on the transfer by way of simulation. The existence of two distinct and complementary contracts — an apparent contract and a true secret contract under private writing between the registered owner and the real owner — allowed the parties to transfer ownership of an immovable and avoid the publication of such transfer in the land register. Indeed, the registered owner remained the same. This situation allowed one to never be subject to request for payment of transfer duties, given that this claim is only payable at the transfer's time of publication.
In response to this situation, the Budget provides that from now on, the transfer duties will be payable as of the date of an immovable's transfer. The date of an immovable's transfer will be brought to the attention of the municipality in whose territory the immovable is located through the new disclosure mechanism discussed above.
This amendment applies to the transfers of immovable properties made after March 17, 2016.
Previously, the payment of transfer duties was contingent to the registration of the transfer in the land register and the municipalities relied on it to levy such duties.
As the new rules in the Budget now rely on information that is not, by its nature, communicated to public authorities, Quebec introduced a disclosure mechanism that applies when the immovable's transfer is not registered in the land register. This mechanism resembles in many aspects the disclosure mechanism applicable to the Voting Exemption mentioned earlier.
The disclosure notice must be filed with the municipality within 90 days following the date of the immovable's transfer. If the transferee fails to file the transfer's disclosure notice, it will be required to pay special duties equal to 150 per cent of the transfer duties payable in respect of the immovable's transfer, plus interest calculated from the date the transferee failed to provide a disclosure notice.
Both of these amendments apply to the transfers of immovable properties made after March 17, 2016.
All of the new measures pertaining to the exigibility of transfer duties directly influence all situations where simulation was employed and will undoubtedly disturb future acquisition structures. For now, it is prudent to revisit these situations to ensure that appropriate actions are taken when necessary.
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.