Duties on Transfers of Immovables in Québec: Implementation of Previously Announced Amendments
On November 16, 2016, the Minister, Carlos J. Leitão, tabled Bill 112 giving effect to several fiscal measures announced in the Budget Speech delivered on March 17, 2016.
Among the measures set out in Bill 112 are the modifications announced to the Act respecting duties on transfers of immovables(CQLR c. D-15.1) (the “Act”). Bill 112 must still go before a parliamentary commission before its adoption.
The measures announced in the Budget Speech revolve around the following three main changes:
- Imposing mutation duties at the time of the transfer of an immovable, as opposed to the time of its registration in the land register – thereby imposing off-title transfers of an immovable;
- Amending the conditions of certain exemptions from payment of mutation duties, in particular in respect of transfers between closely-related parties, and introducing a requirement that the exemption conditions underlying the exemption be maintained for a period of 24 months following an exempt transfer;
- Introducing new conditions applicable to exemptions, specifically in respect of transfers between former de facto (common-law) spouses and transfers in favour of an international governmental organization that has entered into an agreement with the Government with respect to its establishment in Québec.
It is worthwhile noting that the measures will only apply to transfers of immovables occurring after March 17, 2016.
Bill 112, entitled An Act to give effect mainly to fiscal measures announced in the Budget Speech delivered on 17 March 2016, details the means by which these amendments will be implemented. One should note that Bill 112 will only come into force on the date of its passage by the National Assembly and its assent thereto by the Lieutenant-Governor.
Taxation of So-Called Off-Title Transfers
Modification of the timing of exigibility of the mutation duties
Section 6 of the Act, which currently provides that “transfer duties are payable from the registration of the transfer”, is amended by Bill 112 to provide that “transfer duties are payable from the date of the transfer of the immovable”.
The date on which the transfer duties are exigible are set out in Section 11 of the Act, which remains unchanged, and reads: “Transfer duties are exigible from the thirty-first day following the day an account therefor is sent” by the municipality.
This amendment has the effect of levying transfer duties on so-called “off-title” transfers, which, until then, were carried out in order to transfer the actual title to an immovable without, however, registering it at the Registry Office. This type of transfer was most often carried out where an agent, sometimes referred to as a nominee corporation, held the title to the immovable on behalf of the beneficial owner(s).
The measures introduced by the government do not have the effect of preventing or voiding such arrangements involving the holding of the title to an immovable through an agent, but they extend the obligation to pay transfer duties to transfers of beneficial ownership, whether or not such transfers are registered.
New duty to disclose
In order to enable municipalities to levy transfer duties with respect to transfers that are not registered at the Registry Office, the legislator has introduced an obligation incumbent on all transferees to disclose such transfers to the municipality no later than the ninetieth day following said transfer, unless the deed is registered in the land register by that date. This disclosure is made by way of a notice of disclosure which must comply with the requirements of the newly-introduced section 10.1 of the Act.
Where the transfer is made to several transferees, each of them is required to file such a notice of disclosure; however, the filing of notice by one of them on behalf of all of the transferees releases all of the transferees.
Note that Bill 112 provides that the deed evidencing the transfer must be registered in the land register by such date, and not merely submitted for registration. Transferees will, therefore, prefer to be cautious and allow for processing time at the Registry Office of the relevant Registration Division. In the event the registration of a transfer within the prescribed delays risks being problematic, the transferee may want to consider sending a notice of disclosure to the municipality to avoid the special duties applicable to late disclosures (discussed in more details below) and ensure appropriate coordination to avoid receiving two invoices from the municipality.
The provisions of Bill 112 do not provide for any measure for transfers that may be carried out with an effective date that is prior to the execution of the deed evidencing the transfer. In those cases, the transferee will want to plan carefully transfers with retroactive effects.
New Section 10.1 of the Act sets out the requirements applicable to the notice of disclosure, which must contain the following particulars and must be accompanied by a copy of the deed of transfer (which must be an authentic copy if the deed is a notarial deed en minute):
The name and contact information of the transferee, including, in the case of legal persons, corporations or other entities including the following information:
- their Québec business number or the identification number assigned to them by the Minister of Revenue;
- the name, position and contact information of each person authorized to act on their behalf; (our emphasis)
- the name of the members of a professional order who have rendered services in the course of the transfer of the immovable; (our emphasis)
- the identity of the owner of the immovable that appears in the deed registered in the land register; and
- the other particulars required by Section 9 of the Act.
One may wonder about the scope of some of the new disclosures required, specifically as to the name of each person authorized to act on behalf of the transferor or transferee, and ask oneself what is encompassed by the reference to members of a professional order who have rendered services in the course of the transfer of the immovable. For instance, in addition to real estate brokers, lawyers or notaries, are certified professional accountants and certified appraisers to be included? What about land surveyors, engineers, professional technologists, or urban planners who may have drawn up plans or conducted studies with respect to the immovable in contemplation of the transfer transaction?
The legislator’s intent in enacting these provisions is not clear, nor are the consequences which they may trigger, including with respect to possible information requests which the tax authorities may make to such professionals.
Prior Claim; Prescription
That transfer duties have the status of a prior ranking claim on the movable property of the debtor and on the immovable being transferred, and therefore grant municipalities a right to follow the immovable into the hands of subsequent acquirers. The duties can be claimed from any person who becomes an assignee of the immovable following the person who was a party to said transfer.
Any claim resulting from transfer duties is prescribed by three years from the date of registration of the transfer or the date of filing with the municipality of the notice of disclosure of the transfer, except for that portion of the claim that is unpaid as a result of a fraudulent representation.
These provisions therefore represent a challenge for a purchaser during a due diligence review conducted in order to determine that there are no claims or potential claims with respect to transfer duties. Indeed, it may not suffice to review the land register and statements of account issued by the municipality where the immovable has been previously transferred pursuant to an off-title transfer which has not been disclosed to the municipality.
One should note that prescription will not run with respect to any off-title transfer which has not been disclosed to the municipality.
If these provisions are adopted as proposed, transferees will henceforth need to find useful means of protecting against claims by tax authorities for unpaid mutation duties by their vendors. Such claims will be possible with respect to mutation duties which the vendor has failed to pay upon its own acquisition of the immovable, and also by any other predecessor in title to the vendor.
This very real consequence underscores the importance of this change for actors in the real estate market who purchase immovables. Up to now, purchasers were only concerned with confirming the payment of mutation duties which had become exigible following prior registered transfers.
Exception – Exemption upon subsequent registration of the same transfer
Bill 112 adds a new Section 6. to the Act, exempting from the payment of transfer duties “a deed evidencing the transfer of an immovable if the transfer has been the subject of a notice of disclosure” to the municipality (our emphasis).
As drafted, however, this provision requires that the notice be in respect of the same transfer.
Hence, this exception might be of no assistance where the beneficial owner and its agent both concurrently transfer their respective registered title and beneficial ownership, even where the transfers of such interests are to the same person.
This type of transfer occurs frequently where an agent holding registered title of ownership is used to hold immovable property. In such circumstances, a transferee purchasing the immovable would often obtain from the registered owner (the agent of the beneficial owner) a transfer of registered title of ownership and, sometimes separately, a transfer of beneficial ownership from the beneficial owner, which would usually be unregistered. This purchaser may also use a similar structure, and therefore each of the two transfers may be made to different transferees.
In such a case, this is not an issue of registering subsequently an unregistered transfer previously effected, but rather concurrently effecting two transfers involving the same immovable. Hence, the above-mentioned exemption does not appear to apply and both transfers might be subject to transfer duties.
Unless such transactions are properly structured, the transferee runs the risk of being subject to mutation duties twice.
As mentioned, these provisions are applicable to transfers of immovables made after March 17, 2016.
Amendment of the conditions for exemptions
The second aspect of the amendments to the Act implemented by Bill 112 of particular interest to those in the commercial real estate market is that of exempt transfers.
Bill 112 amends the provisions dealing with exempt transfers between closely-related parties.
Threshold for Exemptions
Section 19 of the Act currently provides for certain exemptions from transfer duties between closely-related persons and requires, with respect to transfers involving legal persons, the holding of at least 90% of the issued and fully voting shares of the capital stock of the legal person.
The Act did not, however, specify whether this 90% threshold was to be determined according to the number of issued shares held or to the number of voting rights. The Act also provided that the 90% threshold could also, in certain circumstances, be determined based on the fair market value of the shares.
Bill 112 amends and clarifies the provisions of Section 19 of the Act and specifies that, in all cases, the 90% threshold is to be determined only on the basis of “the voting rights that may be exercised under any circumstances at the annual meeting of shareholders” of the transferee corporation.
In addition, the amendments to Section 19 of the Act provide that any person (other than the transferor and transferee) who has a right, under a contract or otherwise, either immediately or in the future and either absolutely or continently, to the shares (either to acquire the shares or to control the voting rights thereto, or to cause a legal person to redeem, acquire or cancel any shares of its capital stock owned by third parties) is deemed to have exercised that right at the time of the transfer, except where such right is contingent upon the death, bankruptcy or permanent disability of a person. This appears to be inspired from provisions of income tax legislation that deem a person to have the same position in relation to control as if all rights had been exercised.
This provision is intended to prevent the transfer duties from being avoided by way of an arrangement attempting to confer upon a person indirect control of the transferee corporation.
Transfer by a legal person to a closely-related natural person
In the event of a transfer by a legal person to a transferee who is a natural person that is closely related to this legal person, the Act adds a requirement to avail oneself of the exemption applicable to transfers between closely-related parties.
Indeed, the amendments to paragraph 19(b) of the Act require the natural person to have held 90% of the voting rights attaching to the shares of the legal person for a period of 24 months prior to the date of the transfer (or, if the legal person has been incorporated for less than 24 months, throughout the entire period since its incorporation).
This provision prevents a transferee from acquiring the shares of a legal person holding an immovable for the sole purpose of effecting an exempt transfer thereafter within a time period of less than 24 months following the acquisition of these shares.
Duty to maintain the condition underlying the exemption
Bill 112 introduces new Sections 4.1 to 4.3 into the Act, which impose transfer duties to any transfer exempted pursuant to the provisions relating to transfers between closely-related persons, where the conditions for exemption cease to be met during a period of 24 months following the date of the transfer.
Hence, where the transferor ceases to hold 90% of the voting rights of the transferee (as adapted to take into account the nature of the relationship between the closely-related persons that are parties to the transfer) during this 24-month period, the latter is then required to pay the transfer duties.
In the event of the death of a transferor who is a natural person, the 24-month period is shortened accordingly.
To this end, pursuant to new Section 6.1 of the Act, the transferee is required to file a notice of disclosure with the municipality in whose territory the immovable is located no later than 90 days following the date referred to in the applicable paragraph of Section 4.1.
The contents of said notice of disclosure are set out in Section 10.2 of the Act, which is similar to the provision summarized above with respect to unregistered transfers.
Limited application to natural persons and legal persons
It is noteworthy that Bill 112 did not extend the scope of the exemptions, and thus exempted transfers between closely-related persons are restricted to those involving natural persons or legal persons (or, in certain cases, between a natural person and a trust).
No exemption is available for a transfer involving a partnership (such as a limited partnership) or any other unincorporated entity.
Special Duties Pursuant To The Taxation Act
Section 381 of Bill 112 amends Section 1129.29 of the Taxation Act (CQLR c. I-3), which provided for special duties in the amount of 125% in the event of a change of control of a corporation that had availed itself of an exempt transfer of an immovable under certain circumstances, in order to ensure that this section only applies to transfers made prior to March 18, 2016.
New Sections 1129.33.01 and ss. were added to the Taxation Act with respect to transfers after March 17, 2016. These provisions require the payment of special duties equal to 150% of the amount of the transfer duties if a transferee fails to file the notice of disclosure of a transfer with the municipality (both with respect to an unregistered transfer and to the failure to remain eligible for an exemption for a transfer between closely-related parties), with interest to run from the date upon which the notice of disclosure ought to have been filed to the date of payment.
It should be noted that the special duty becomes payable upon the failure to file a notice of disclosure or to register such transfer within the delay provided by section 6 of the Act.
Pursuant to section 1129.29, the special duties apply where an exempt transfer occurred and it may reasonably be considered that the transfer was made in contemplation of the acquisition of control of the transferee corporation within the 24-month period following such exempted transfer. This intention criteria was not carried over into the new provisions.
As well, the remedial provision at section 19.1 of the Act has not been extended to the special duties introduced by Bill 112.
Under section 19.1 of the Act, a transferee was relieved from the payment of special duties where such person voluntarily paid the mutation duties to the municipality prior to being assessed for the special duties.
New provisions 1220.127.116.11 and 118.104.22.168 provide that where a transferee files a notice of disclosure beyond the prescribed delay, such person will be liable for the special duties even where it has previously paid the regular mutation duties. The only relief is a reduction of the amount of the special duties by an amount equal to the transfer duties. The penalty of the additional 50% continues to be applicable.
Two-thirds of these additional duties collected are paid to the Minister of Municipal Affairs, Regions and Land Occupancy, who forwards the amount to the applicable municipality.
Bill 112 also makes several other smaller amendments to the Act with respect to international governmental organizations and to transfers between former de facto spouses.
Since these amendments are more restricted in scope, we will not conduct a detailed analysis thereof for the purposes of this Bulletin.