The Quebec Minister of Finance presented the budget speech for the 2016–2017 financial year on March 17, 2016 (2016–2017 Budget), which modified the system of duties on transfers of immovables (please see our March 2016 Blakes Bulletin: Significant Proposals to Duties on Transfers of Immovables). These amendments were integrated into Bill 112, which was introduced on November 15, 2016, and assented to on February 8, 2017. However, the date of coming into force of these amendments remains unchanged and as such, they apply to transfers of immovables made after March 17, 2016.
The introduction of these amendments has raised questions about the scope of their application. The relevant authorities have been addressing questions raised by industry since the unveiling of the 2016–2017 Budget. New amendments have been proposed since and furthermore, the Department of Finance recently announced its intention to introduce further amendments in order to correct certain 2016–2017 Budget measures.
The system of duties on transfers of immovables in Quebec is therefore the subject of an important reshuffling. The relevant authorities have likely focused their attention to the system due to the recent reorganization of municipal financing initiated by the Quebec government.
This bulletin reviews the recent developments and communications released by the relevant authorities since the unveiling of the 2016–2017 Budget.
QUEBEC REVENUE AGENCY’S POSITION
The Direction générale de la législation of the ministère du Revenu (Revenu Québec) was called to speak on the scope of certain measures laid out in the 2016–2017 Budget. Some of these interpretations were made public, while others remained confidential.
Roundtable Discussion – APFF 2016 Conference
During a roundtable discussion held in October 2016, the relevant authorities expressed their positions on the following:
- Whether the introduction of new measures that would permit an exemption for duties on transfers of immovables in the case of a transfer involving a general or limited partnership is considered;
- Considering the new rules introduced in the 2016–2017 Budget, whether an exemption would apply for transfer duties on the transfer of immovables held by a nominee corporation to its beneficial owner.
With respect to the first issue, the Department of Finance indicated that it did not intend to adopt new measures permitting an exemption for duties on transfers of immovables in cases of transfers of immovables to a partnership. However, in June 2017, l’Institut de développement urbain du Québec announced that this subject was discussed over the course of a meeting with the Department of Finance. Therefore, the matter may not be closed.
As to the second issue, Revenu Québec has indicated that the situation described did not refer to a transfer within the meaning of the Act respecting duties on transfers of immovables (Act) given that the immovable in question remains the property of the same owner despite the name change in the land register. Consequently, there should be no transfer duties applicable in such a case. However, Revenu Québec added the following in regards to the presence of a nominee in the land register:
“[…] there are situations where a municipality could be justified in availing itself of the apparent act, even if there is no transfer of ownership interest. This could be the case, for example, where a taxpayer demonstrates legal expediency by trying to play multiple sides or in the case where the true nature of a transaction was not disclosed in a timely manner.
For example, a taxpayer can avail himself of a nominee contract when acquiring an immovable, without disclosing its existence to the municipality. Thus, it would appear that the act concerns the acquisition of shares in a subsidiary holding an immovable, by the taxpayer. However, the actual or hidden transaction made by the taxpayer would be the acquisition of an immovable owned by a third party, thus it would be a transaction that normally allows a municipality to charge a transfer duty, contrary to the apparent transaction. Subsequently, this same taxpayer wishes to “transfer” the immovable held by the nominee corporation to himself, in recognition of the ownership right that he acquired in the framework of the actual transaction, which was never disclosed to the municipality.
In such a situation, if the previous transfer is registered, the duties will apply.
Moreover, it would also be possible to contemplate the application of section 23 of the Act, in order to argue that the taxpayer displayed legal expediency by playing multiple sides and that the true nature of the transaction was not disclosed in a timely manner.” (emphasis added)
This comment may warrant an examination of situations in which a nominee appears in the land register, so as to properly consider the issues, if any, that this may raise for beneficial owners.
In November 2016, Revenu Québec was asked to determine if the merger of multiple corporations involving an immovable constituted a transfer within the meaning of the Act, such that the transaction would be subject to the obligation of the new disclosure mechanism for transfers of immovables when land titles are registered in the name of a nominee. Revenu Québec confirmed that multiple acts concerning Canadian corporations, namely the Canada Business Corporations Act and the Business Corporations Act (Quebec) support the position that the amalgamated corporation is the continuation of the predecessor corporations and that these acts do not provide for the transfer nor the sale of assets of the amalgamating corporation to the amalgamated corporation for the purpose of constituting a transfer of property. These mergers do not cause the corporate entities of the merging corporations to disappear. They therefore do not constitute a transfer within the meaning of the Act, and the disclosure mechanism for transfers of immovables not registered in the land register does not apply to such transactions. Consequently, in the case of a merger that is not subject to an act respecting corporations, similar to the federal or Quebec act, the beneficial owner could take advantage of the exemption provided for in section 19 of the Act and can thus avoid the payment of duties, but the disclosure mechanism will apply. Revenu Québec, on the other hand, specified that the merger under the federal or Quebec act, of a nominee corporation holding land titles with the beneficial owner does not have the effect of regularizing past transactions, especially in situations where the nominee corporation was originally used to mask a real transfer of ownership.
In April 2017, Revenu Québec considered if, in the context of the liquidation of a wholly owned subsidiary into its parent company, an immovable were to be considered as transferred to the parent company and the exemption between closely related legal entities was to be claimed, the dissolution of the subsidiary in the following weeks would cause it to lose its right of exemption. Revenu Québec confirmed that in such a context, there would be a violation of sections 4.1 and 4.2 of the Act with respect to the maintenance of relationships between closely related legal entities for a period of 24 months and that the notice of disclosure and the payment of duties would therefore be due. There is reason to believe that Revenu Québec communicated this position to the Department of Finance, because the latter is planning to make the changes described below.
LEGISLATIVE PROPOSALS FROM THE DEPARTMENT OF FINANCE
In addition to the amendments laid out in the 2016–2017 Budget, the following legislative proposals were introduced and assented to, which aim to:
- Permit all municipalities to set a rate higher than 1.5 per cent for any portion of the tax base bracket that is greater than C$500,000 not to exceed three per cent (this limit does not apply to the City of Montréal);
- Annually index the threshold amounts of each of the three tax base brackets according to a formula that is based on the consumer price index for Quebec. Prior to August 1, 2017, before the beginning of the fiscal year in question, the Minister of Municipal Affairs, Regions and Land Occupancy shall publish a notice indicating any new amounts, in the Gazette officielle du Québec.
The Gazette officielle du Québec (Part 1), released on July 22, 2017, set the growth rate for the municipal fiscal year of 2018 at 0.7 per cent. The amounts of C$50,000 and C$250,000 will increase to C$50,400 and C$251,800, respectively. Although fiscal year is not defined in the Act, it normally corresponds to a calendar year.
PRESS RELEASE FROM THE DEPARTMENT OF FINANCE
On July 13, 2017, the Department of Finance announced changes to the proposals laid out in the 2016–2017 Budget. These changes aim to:
- Remove the obligation to disclose the names of members of a professional order that may have been involved in the transfer of an immovable, when filing the notice of disclosure introduced in the 2016–2017 Budget.
- Put in place exceptions to the obligation of filing the applicable notice of disclosure when the 24-month exemption condition ceases to be satisfied in the context of the merger or dissolution of a legal person.
- Maintain the right to exemption for the transfer of an immovable made by a legal person to a natural person, even if voting shares carrying at least 90 per cent of the voting rights of the legal person were transferred as a result of death to the natural person within the 24 months immediately preceding the date of the transfer by the legal person to the natural person.
With respect to the exceptions concerning the obligation to file the notice of disclosure in the context of a merger or liquidation, the Department of Finance is sympathetic to cases where transfer duties become payable as the result of a breach of the holding requirement related to the percentage of voting rights for a minimum period of 24 months following the date of the transfer of the immovable that enabled its acquirer to benefit from the exemption of payment of transfer duties (minimum holding requirement).
The Department of Finance announced that if a natural person transferring an immovable to a legal person, while being exempt from transfer duties, fails to comply with the minimum holding requirement, they will suffer no consequences in situations where this failure to comply results from either:
- The merger of the legal person with one or more legal persons where at least 90 per cent of the voting rights that can be exercised at any time at the annual meeting of shareholders of the amalgamated corporation are owned by the transferring natural person immediately after the merger and for the entirety of the rest of the 24-month period following the date of the transfer of the immovable.
- The dissolution of the transferring corporate entity.
The other exception concerns the exemption of transfer duties in the case of the transfer of an immovable between two closely related legal entities. In such a situation, no transfer duty will be levied if the minimum holding requirement is no longer satisfied because the parties to this transfer have ceased to be closely related legal entities following either:
- Their merger;
- The merger of the transferor or transferee, as applicable, with another legal person where the amalgamated corporation is closely related to the transferee or transferor, as applicable, immediately after the merger and for the entirety of the rest of the 24-month period following the date of the transfer of the immovable; or
- The dissolution of the transferor or transferee.
Once assented to, all of these measures will apply to the transfer of immovables made after March 17, 2016.